12liability of warranty

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

☒

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

For the Fiscal Year Ended December 31, 2022

☐

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

1934

For the Transition Period from

to

Commission file number 000-41446

ADTRAN Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

87-2164282

(State of Incorporation)

(I.R.S. Employer Identification Number)

901 Explorer Boulevard

Huntsville, Alabama 35806-2807

(256) 963-8000

(Address of principal executive offices, including zip code)

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.01

ADTN

The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

PricewaterhouseCoopers LLP; PCAOB Firm ID: 238; Birmingham, Alabama

1

EXPLANATORY NOTE

ADTRAN Holdings, Inc. (“ADTRAN,” the “Company,” “we,” “us” or “our”) is filing this Amendment No. 1 on Form 10-K/A (this

“Amendment No. 1”) to amend and restate certain portions of the Company’s Annual Report on Form 10-K for the year ended December

31, 2022 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 1, 2023 (the “Original Filing”)

As previously disclosed in the Company’s Current Report on Form 8-K filed on August 10, 2023, subsequent to the Company’s second

fiscal quarter earnings call on August 8, 2023 and during the preparation of its unaudited condensed consolidated financial statements

to be included in the Company’s Form 10-Q for the second fiscal quarter ended June 30, 2023, the Company determined that the principal

amount of indebtedness outstanding under the Company’s revolving credit facility with a syndicate of banks, including Wells Fargo

Bank, National Association (“Wells Fargo”), should be classified as noncurrent liabilities on the Company’s consolidated balance sheet.

Therefore, the outstanding Wells Fargo revolving credit facility balances for the following prior periods were misclassified and have

been adjusted from current to noncurrent liabilities on the balance sheets as follows: $60.0 million as of September 30, 2022, $60.0

million as of December 31, 2022, and $180.0 million as of March 31, 2023. Furthermore, the Company is also correcting certain errors

related to the presentation of deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) in the Original Filing’s consolidated

balance sheets that were previously assessed as immaterial errors.

On August 10, 2023, the Audit Committee of the Board of Directors (the “Audit Committee”) of the Company concluded, after

considering the recommendations of management and discussing with the Company’s independent registered public accounting firm,

PricewaterhouseCoopers LLP (“PwC”), that (i) the Company’s unaudited condensed consolidated financial statements as of and for the

quarter and year-to-date period ended September 30, 2022 included in the Company’s Quarterly Report on Form 10-Q for the fiscal

quarter ended September 30, 2022, (ii) the Company’s audited consolidated financial statements as of and for the year ended December

31, 2022 included in the Original Filing, and (iii) the Company’s unaudited condensed consolidated financial statements as of and for

the quarter ended March 31, 2023 included in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,

2023, respectively (collectively, the “Non-Reliance Periods”), should not be relied upon. Additionally, the Audit Committee concluded

that management’s report on internal control over financial reporting as of December 31, 2022, the opinion of PwC on the Company’s

consolidated financial statements as of and for the fiscal year ended December 31, 2022 and the opinion of PwC on the effectiveness of

the Company’s internal control over financial reporting as of December 31, 2022, should also no longer be relied upon.

As a result of the above described misclassification and the identification of the material weakness (described further in Item 9A), the

Company is filing this Amendment No. 1 to (i) restate the disclosure on the effectiveness of the Company’s disclosure controls and

procedures and restate management’s report on internal control over financial reporting in Part II, Item 9A of the Original Filing, to

reflect management’s conclusion that the Company’s internal control over financial reporting and disclosure controls and procedures

were not effective as of

December 31, 2022, (ii) restate the Company’s consolidated financial statements to reflect the adjustment as of

December 31, 2022 of $60.0 million of short-term indebtedness to long-term indebtedness, as well as to correct the presentation of

DTAs and DTLs as of December 31, 2022, (iii) add two additional risk factors related to the material weakness and restatement,

(iv)restate the cash requirements table within Part II, Item 7, MD&A, of the Original Filing to reflect the adjustment as of December 31,

2022 of $60.0 million of short-term indebtedness to long-term indebtedness, (v) reissue the Report of the Independent Registered Public

Accounting Firm, which appears in Part II, Item 8 of the Original Filing, and (vi) amend Part IV – Item 15 Exhibits and Financial

Statement Schedules of the Original Filing to include currently dated certifications from the Company’s Chief Executive Officer and

Chief Financial Officer as required by Section 302 and 906 of the Sarbanes-Oxley Act of 2002, as well as to fix certain immaterial

errors.

Pursuant to Rule 12b-15 promulgated by the SEC under the Securities Exchange Act of 1934, as amended, the Company has included

the entire text of Part I, Item 1A, as well as Part II, Items 7, 8 and 9A, of the Original Filing in this Amendment No. 1.

There have been

no changes to the text of Part I, Item 1A or Part II, Items 7, 8 and 9A other than the changes stated in the immediately preceding

paragraph.

Other than as described above and through the inclusion with this Amendment No. 1 of new certifications by management,

a new consent of PwC, and amendments to the list of exhibits contained in Part IV, Item 15 of the Original Filing, this Amendment No.

1 speaks only as of the date of the Original Filing and does not amend, supplement, or update any information contained in the Original

Filing to give effect to any subsequent events (including with respect to the cover page of the Original Filing, which has been updated

only to present this filing as Amendment No. 1 and to delete the reference to documents incorporated by reference into the Original

Filing). Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and the Company's reports (including

any amendments thereto) filed with the SEC subsequent to the Original Filing.

2

ADTRAN Holdings, Inc.

Annual Report on Form 10-K/A

For the Fiscal Year Ended December 31, 2022

Table of Contents

Page

Number

Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary

3

PART I

Item 1A.

Risk Factors

6

PART II

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

.......................

26

Item 8.

Financial Statements and Supplementary Data

............................................................................................

45

Item 9A.

Controls and Procedures

...............................................................................................................................

97

PART IV

Item 15.

Exhibits and Financial Statement Schedules

...............................................................................................

100

SIGNATURES

3

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on our behalf.

We and our representatives may from time to time make written or oral forward-looking statements, including statements contained in

this report, our other filings with the Securities and Exchange Commission (the “SEC”) and other communications with our stockholders.

Any statement that does not directly relate to a historical or current fact is a forward-looking statement. Generally, the words “believe”,

“expect”, “intend”, “estimate”, “anticipate”, “would”, “will”, “may”, “might”, “could”, “should”, “can”, “future”, “assume”, “plan”,

“seek”, “predict”, “potential”, “objective”, “expect”, “target”, “project”, “outlook”, “forecast” and similar expressions identify forward-

looking statements. We caution you that any forward-looking statements made by us or on our behalf are subject to uncertainties and

other factors that could affect the accuracy of such statements. Forward-looking statements are based on management’s current

expectations, as well as certain assumptions and estimates made by, and information available to, management at the time the statements

are made. Those statements are based on general assumptions and are subject to various risks, and because they also relate to the future,

they are likewise subject to inherent uncertainties and other factors that may cause actual results to differ materially from the views,

beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to, the risks

identified in Item 1A. “Risk Factors” of this Amendment No. 1 and those described below:

Risks related to the Business Combination and DPLTA

•

We may fail to realize the anticipated strategic and financial benefits sought from the Business Combination.

•

We have experienced operational challenges as a result of the Business Combination and may also experience negative

synergies and loss of customers.

•

The terms of the DPLTA may have a material adverse effect on our financial results and condition.

•

We are exposed to additional litigation risk and uncertainty with respect to the remaining minority shareholders of ADVA,

which litigation may require us to pay a higher purchase price for additional ADVA shares than the amount provided for

under the DPLTA.

•

We have incurred and expect to continue to incur significant transaction fees and costs in connection with the Business

Combination and post-closing integration efforts.

•

We incurred a substantial amount of indebtedness in connection with the Business Combination and DPLTA. Our failure

to meet our debt service obligations could have a material adverse effect on our business, financial condition and results of

operations.

•

We may be unable to successfully retain and motivate our personnel, including personnel at ADVA.

•

The terms of our and ADVA's credit agreements restrict our current and future operations, particularly our ability to respond

to changes or to take certain actions.

•

Negative publicity related to post-closing integration measures may adversely affect us.

Risks related to our financial results and Company success

•

Our revenue for a particular period can be difficult to predict, and a shortfall in revenue may harm our operating results.

•

The lengthy sales and approval process required by service providers for new products could result in fluctuations in our

revenue.

•

We depend heavily on sales to certain customers; the loss of any of these customers or a significant project would

significantly reduce our revenue and net income.

•

Our exposure to the credit risks of our customers and distributors may make it difficult to collect accounts receivable and

could adversely affect our operating results, financial condition and cash flows.

•

We expect gross margins to continue to vary over time, and our levels of product and services gross margins may not be

sustainable.

•

Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in various international

regions may result in us not meeting our cost, quality or performance standards.

•

Our dependence on a limited number of suppliers for certain raw materials, key components and ODM products, combined

with supply shortages, have prevented and may continue to prevent us from delivering our products on a timely basis, which

4

has had and may continue to have a material adverse effect on operating results and could have a material adverse effect on

customer relations.

•

We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and

market share.

•

Our estimates regarding future warranty obligations may change due to product failure rates, installation and shipment

volumes, field service repair obligations and other rework costs incurred in correcting product failures. If our estimates

change, our liability for warranty obligations may increase or decrease, impacting future cost of revenue.

•

Managing our inventory is complex and may include write-downs of excess or obsolete inventory.

•

The continuing growth of our international operations could expose us to additional risks, increase our costs and adversely

affect our operating results, financial condition and cash flows.

•

Our success depends on attracting and retaining key personnel.

•

If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and

financial statements could be materially impacted.

•

The terms of the credit agreement governing our senior credit facility restrict our current and future operations, particularly

our ability to respond to changes or to take certain actions.

•

We are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which

could harm our financial results and cash flows.

•

We will require a significant amount of cash to service our indebtedness, our potential payment obligations to ADVA

shareholders under the DPLTA, and other obligations.

•

We could be required to recognize impairment charges related to goodwill and other intangible assets.

•

We may be unable to successfully and effectively manage and integrate acquisitions, divestitures and other significant

transactions, which could harm our operating results, business and prospects.

Risks related to COVID-19

•

The ongoing COVID-19 pandemic has impacted and may continue to impact our business, results of operations, financial

condition and cash flows, particularly our supply chain.

Risks related to our control environment

•

Breaches of our information systems and cyber-attacks could compromise our intellectual property and cause significant

damage to our business and reputation.

•

We have had to restate our previously issued consolidated financial statements and, as part of that process, have identified

a material weakness in our internal control over financial reporting commencing September 30, 2022 and continuing as of

the date hereof. If we are unable to develop and maintain effective internal control over financial reporting, we may not be

able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and

may adversely affect our business, financial condition and results of operations.

•

We may face litigation and other risks as a result of the restatement as described in the “Explanatory Note” within this

Amendment No. 1 and material weakness in our internal control over financial reporting.

Risks related to the telecommunications industry

•

We must continue to update and improve our products and develop new products to compete and to keep pace with

improvements in communications technology.

•

Our failure or the failure of our contract manufacturers to comply with applicable environmental regulations could adversely

impact our results of operations.

•

If our products do not interoperate with our customers’ networks, installations may be delayed or canceled, which could

harm our business.

5

•

We engage in research and development activities to develop new, innovative solutions and to improve the application of

developed technologies, and as a consequence may miss certain market opportunities enjoyed by larger companies with

substantially greater research and development efforts and which may focus on more leading-edge development.

•

Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in various international

regions may result in us not meeting our cost, quality or performance standards.

•

Our failure to maintain rights to intellectual property used in our business could adversely affect the development,

functionality and commercial value of our products.

•

Software under license from third parties for use in certain of our products may not continue to be available to us on

commercially reasonable terms.

•

Our use of open source software could impose limitations on our ability to commercialize our products.

•

We may incur liabilities or become subject to litigation that would have a material effect on our business.

•

If we are unable to successfully develop and maintain relationships with SIs, service providers and enterprise VARs, our

revenue may be negatively affected.

Risks related to the Company's stock price

•

Our operating results may fluctuate in future periods, which may adversely affect our stock price.

•

The price of our common stock has been volatile and may continue to fluctuate significantly.

Risks related to the regulatory environments in which we do business

•

We are subject to complex and evolving U.S. and foreign laws, regulations and standards governing the conduct of our

business. Violations of these laws and regulations may harm our business, subject us to penalties and to other adverse

consequences.

•

Changes in trade policy in the U.S. and other countries, including the imposition of additional tariffs and the resulting

consequences, may adversely impact our gross profits, gross margins, results of operations and financial condition.

•

New or revised tax regulations, changes in our effective tax rate, recognition of a valuation allowance or assessments arising

from tax audits may have an adverse impact on our results.

•

Central Banks' monetary policy actions could increase our costs of borrowing money and negatively impact our financial

condition and future operations.

•

Rising inflation could negatively impact our revenues and profitability if increases in the prices of our products and services

or a decrease in customer spending result in lower sales.

•

Expectations relating to environmental, social and governance considerations expose the Company to potential liabilities,

increased costs, reputational harm, and other adverse effects on the Company’s business.

We caution investors that other factors may prove to be important in the future in affecting our operating results. New factors emerge

from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor, or a combination

of factors, may have on our business. You are further cautioned not to place undue reliance on these forward-looking statements because

they speak only of our views as of the date that the statements were made. We undertake no obligation to publicly update or revise any

forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

6

PART I

ITEM 1A. RISK FACTORS

Our business involves substantial risks. Any of the risk factors described below or elsewhere in this report could significantly and

adversely affect our business prospects, financial condition and results of operations. The risks described below are not the only ones

facing us. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial may also adversely

affect us.

Risks related to the Business Combination and DPLTA

We may fail to realize the anticipated strategic and financial benefits sought from the Business Combination.

We may not realize all of the anticipated benefits of the Business Combination. The success of the Business Combination will depend

on, among other things, our ability to combine our business with ADVA’s business in a manner that facilitates growth as a provider of

fiber networking solutions and realizes anticipated cost savings. We believe that the Business Combination provides an opportunity for

revenue growth in optical transport solutions, fiber access solutions and subscriber solutions.

Additionally, our ability to realize anticipated benefits of the Business Combination could be affected by a number of other factors,

including: the need for greater than expected cash or other financial resources or management time in order to integrate ADVA; increases

in other expenses related to the Business Combination, including restructuring and other exit costs; the timing and impact of purchase

accounting adjustments; accounting for IFRS to U.S. GAAP adjustments; difficulties in employee or management integration; the impact

of appraisal proceedings in connection with the DPLTA; and unanticipated liabilities associated with the Business Combination. Any

potential cost-saving opportunities may take several years following the Business Combination to implement, and any results of these

actions may not be realized for several years thereafter, if at all.

However, we must successfully combine the business in a manner that permits these anticipated benefits to be realized. In addition, we

must achieve the anticipated growth and cost savings without adversely affecting current revenues and investments in future growth.

Further, providing integrated fiber networking solutions can be highly complex and can involve the design, development,

implementation and operation of new solutions and the transitioning of clients from traditional platforms to new platforms. If we are not

able to effectively provide different solutions and successfully achieve the growth and cost savings objectives, the anticipated benefits

of the Business Combination may not be realized fully, or at all, or may take longer to realize than expected.

We have experienced operational challenges and may also experience negative synergies and loss of customers.

Integrating the operations and personnel of the ADTRAN and ADVA businesses involves complex operational, technological and

personnel-related challenges. This process has been and will continue to be time-consuming and expensive, and it has and may continue

to disrupt our business. Difficulties in the integration of the business, which may result in significant costs and delays, include:

•

managing a significantly larger company;

•

integrating and unifying the offerings and services available to customers and coordinating distribution and marketing

efforts;

•

coordinating corporate and administrative infrastructures and harmonizing insurance coverage;

•

unanticipated issues in coordinating accounting, information technology, communications, administration and other

systems;

•

difficulty addressing possible differences in corporate cultures and management philosophies;

•

challenges associated with converting ADVA's financial reporting from international financial reporting standards (IFRS)

to accounting principles generally accepted in the U.S. (U.S GAAP) and compliance with the Sarbanes-Oxley Act of

2002, as amended, and the rules promulgated thereunder by the SEC;

•

legal and regulatory compliance;

•

dual market filing and publications obligations;

•

creating and implementing uniform standards, controls, procedures and policies;

•

litigation relating to the transactions contemplated by a reorganization, including shareholder litigation;

•

diversion of management’s attention from other operations;

•

maintaining existing agreements and relationships with customers, distributors, providers and vendors and avoiding delays

in entering into new agreements with prospective customers, distributors, providers and vendors;

7

•

realizing the benefits from our restructuring programs;

•

unforeseen and unexpected liabilities related to the Business Combination, including the risk that certain executive

officers may be subject to additional fiduciary duties and liability;

•

identifying and eliminating redundant and underperforming functions and assets;

•

effecting actions that may be required in connection with obtaining regulatory approvals; and

•

a deterioration of credit ratings.

We have and may continue to lose customers or our share of customers’ business as entities that were customers of both ADTRAN

and AVDA seek to diversify their suppliers of services and products.

The terms of the DPLTA may have a material adverse effect on our financial results and condition.

On January 16, 2023, the DPLTA with ADVA became effective. The DPLTA allows us to issue binding instructions to the management

board of ADVA, which could be disadvantageous to ADVA and result in a decline in the business and earnings power of ADVA. This

could have a material adverse effect on the assets, financial position and income of ADVA, which in turn could have a material adverse

effect on our financial condition.

Additionally, pursuant to the terms of the DPLTA, each ADVA shareholder (other than the Company) has received an offer to elect

either (1) to remain an ADVA shareholder and receive from us an Annual Recurring Compensation payment, or (2) to receive Exit

Compensation. Assuming all of the minority holders of currently outstanding ADVA shares were to elect the second option, we would

be obligated to make aggregate Exit Compensation payments of approximately EUR 310.6 million or approximately $333.2 million.

based on an exchange rate as of December 31, 2022. Shareholders electing the first option of Annual Recurring Compensation may later

elect the second option. The opportunity for outside ADVA shareholders to tender ADVA shares in exchange for Exit Compensation

expires on March 16, 2023 (subject to appraisal proceedings). Our obligation to pay Annual Recurring Compensation under the DPLTA

would lead to a continuing payment obligation, which would amount to approximately EUR $10.6 million, or $11.4 million based on

the current exchange rate, per year assuming none of the minority ADVA shareholders were to elect Exit Compensation. The foregoing

amounts do not reflect any potential increase in payment obligations that we may have depending on the outcome of ongoing appraisal

proceedings in Germany.

The amount of this Annual Recurring Compensation payment obligation pursuant to the DPLTA could exceed the amount of dividends

that otherwise might be distributed by ADVA to minority shareholders and would even have to be paid if ADVA incurs losses, which

could have a material adverse impact on our financial results and financial condition.

We are exposed to additional litigation risk and uncertainty with respect to the remaining minority shareholders of ADVA, which

litigation may require us to pay a higher purchase price for additional ADVA shares than the amount provided for under the DPLTA.

As a result of the Business Combination, we continue to be exposed to litigation risk and uncertainty associated with the remaining

minority shareholders of ADVA. The terms of the DPLTA, including the adequacy of compensation payments to minority ADVA

shareholders under the terms of the DPLTA, have been challenged by minority shareholders of ADVA by initiating court-led appraisal

proceedings under German law. We cannot rule out that the competent court in these appraisal proceedings may adjudicate higher Exit

Compensation or Annual Recurring Compensation payment obligations (in each case, including interest thereon) than agreed upon in

the DPLTA, the financial impact and timing of which is uncertain.

We have incurred and expect to continue to incur significant transaction fees and costs in connection with the Business Combination

and post-closing integration efforts.

We have incurred and expect to continue to incur a number of significant non-recurring implementation and restructuring costs

associated with combining the operations of ADTRAN and ADVA. In addition, we have incurred significant banking, legal, accounting

and other transaction fees and costs related to the Business Combination. As of December 31, 2022, we have incurred $26.1 million of

transaction costs related to the Business Combination.

We expect to incur additional integration costs, as well costs associated with the implementation of the DPLTA and such costs are

expected to be material.

Any cost savings or other efficiencies related to the integration of the businesses that could offset these transaction- and combination-

related costs over time may not be achieved in the near term, or at all. In addition, the timeline in which cost savings are expected to be

realized is lengthy and may not be achieved. Failure to realize these synergies and cost reductions and other efficiencies in a timely

manner or at all could have a material adverse effect on our business and cash flows, financial condition and results of operations.

8

We incurred a substantial amount of indebtedness in connection with the Business Combination and the DPLTA. Our failure to

meet our debt service obligations could have a material adverse effect on our business, financial condition and results of operations.

Subsequent to the closing of the Business Combination, we entered into a new credit facility providing for borrowings of up to $400

million and under which we have incurred $60.0 million of indebtedness as of December 31, 2022. Subsequent to the closing of the

Business Combination, ADVA entered into a new revolving line of credit with Norddeutsche Landesbank - Girozentrale which it

subsequently repaid and terminated, and a revolving line of credit with DZ Bank. As of December 31, 2022, ADVA had borrowings of

$16.1 million and $9.1 million of borrowings under the two revolving lines of credit, respectively. Additionally, subsequent to December

31, 2022, the Company borrowed an additional $127.5 million under the new credit facility, a portion of which was used to pay down

and retire ADVA's notes payable and credit facility agreements except for ADVA's new revolving line of credit with DZ Bank, which

remains outstanding. S

ee “Cash Requirements” in Part I, Item 7 of this report for additional information.

Our increased indebtedness could adversely affect our operations and liquidity. Our level of indebtedness could, among other things:

•

make it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry

conditions because we may not have sufficient cash flows to make its scheduled debt payments;

•

cause us to use a larger portion of our cash flow to fund interest and principal payments, reducing the availability of cash to

fund working capital, capital expenditures, research and development and other business activities;

•

make it more difficult for us to continue to pay the current dividend or cause us to reduce the dividend paid to the Company's

stockholders;

•

limit our ability to take advantage of significant business opportunities, such as acquisition opportunities, and to react to

changes in market or industry conditions;

•

cause us to be more vulnerable to general adverse economic and industry conditions;

•

cause us to be disadvantaged compared to competitors with less leverage; and

•

limit our ability to borrow additional money in the future to fund working capital, capital expenditures, research and

development and other general corporate purposes.

Our ability to satisfy our debt obligations and renew the credit facility is dependent upon our future performance and other risk factors

discussed in this section. However, there can be no assurance that we will be able to manage any of these risks successfully. In addition,

the credit agreement governing our indebtedness contains restrictive covenants that limit our ability to engage in activities that may be

in our long-term best interest. Our failure to comply with those covenants could result in an event of default that, if not cured or waived,

could result in the acceleration of all its debt.

We may also incur additional long-term debt and working capital lines of credit to meet future financing needs, which would increase

our total indebtedness. Although the terms of its existing and future credit agreements and of the indentures governing its debt contain

restrictions on the incurrence of additional debt, including secured debt, these restrictions are subject to a number of important exceptions

and debt incurred in compliance with these restrictions could be substantial. If we or our restricted subsidiaries incur significant

additional debt, the related risks that we face could intensify.

We may be unable to successfully retain and motivate our personnel, including personnel at ADVA.

The success of the Business Combination and our post-closing integration efforts depends, in part, on our ability to retain the talents and

dedication of key employees, including key decision-makers, currently employed by ADTRAN, Inc. and ADVA. Some of our employees

have decided and others may decide not to remain with us as a result of the Business Combination. If key employees terminate their

employment, or if an insufficient number of employees are retained to maintain effective operations, our business activities may be

adversely affected and management’s attention may be diverted from successfully integrating ADTRAN and ADVA to hiring suitable

replacements, all of which may cause our business to deteriorate. We may not be able to locate suitable replacements for any key

employees who leave or offer employment to potential replacements on reasonable terms. In addition, we may not be able to motivate

certain key employees due to organizational changes, reassignments of responsibilities, the perceived lack of appropriate opportunities

for advancement or other reasons. If we fail to successfully retain and motivate our employees, relevant capabilities and expertise may

be lost which may have an adverse effect on our cash flows, financial condition, results of operations and the business operations in

general.

9

The terms of our and ADVA's credit agreements restrict our current and future operations, particularly our ability to respond to

changes or to take certain actions.

Our Credit Agreement and ADVA's revolving line of credit with DZ Bank contain a number of restrictive covenants that impose

significant operating and financial restrictions on us and/or our subsidiaries and may limit our ability to engage in acts that may be in

our long-term best interest, including restrictions on our and/or our subsidiaries' ability to:

•

incur additional indebtedness and guarantee indebtedness;

•

pay dividends or make other distributions or repurchase or redeem capital stock;

•

prepay, redeem or repurchase certain debt;

•

issue certain preferred stock or similar equity securities;

•

make loans and investments;

•

sell assets;

•

incur liens;

•

enter into transactions with affiliates;

•

alter the businesses we conduct; and

•

consolidate, merge or sell all or substantially all of our assets.

In addition, the restrictive covenants in such credit facilities require us and/or our subsidiaries to maintain specified financial ratios and

satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control,

and we may be unable to meet them.

A breach of the covenants or restrictions under such credit facilities could result in an event of default. Such a default may allow the

creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default

provision applies. In addition, an event of default under such credit facilities would permit the lenders to terminate all commitments to

extend further credit under the applicable facility. Furthermore, if we were unable to repay the amounts due and payable under such

credit facilities, those lenders could proceed against the collateral granted them to secure that indebtedness. In the event our lenders or

noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that

indebtedness. As a result of these restrictions, we may be:

•

limited in how we conduct our business;

•

unable to raise additional debt or equity financing to operate during general economic or business downturns; and

•

unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, our substantial

indebtedness and our credit ratings could adversely affect the availability and terms of our financing.

We could be required to recognize impairment charges related to goodwill and other intangible assets.

The Business Combination added a significant amount of goodwill and other intangible assets to our consolidated balance sheets. In

accordance with U.S. GAAP, management periodically assesses these assets to determine if they are impaired. Significant negative

industry or economic trends, disruptions to our business, the inability to effectively integrate acquired businesses, the underperformance

of our business as compared to management’s initial expectations, unexpected significant changes or planned changes in use of the

assets, divestitures, and market capitalization declines may impair goodwill and other intangible assets. Any charges relating to such

impairments could materially adversely affect our business, financial condition and results of operations in the periods recognized.

10

Negative publicity related to integration measures may adversely affect us.

Political and public sentiment in connection with post-closing integration measures following the Business Combination may

result in

a significant amount of adverse press coverage and other adverse public statements. Adverse press coverage and public statements,

whether or not driven by political or popular sentiment, may also result in legal claims or in investigations by regulators, legislators and

law enforcement officials. Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceedings, can

divert the time and effort of senior management from operating the business. Addressing any adverse publicity, governmental scrutiny

or enforcement or other legal proceedings could be time-consuming and expensive and, regardless of the factual basis for the assertions

being made, could have a negative impact on our reputation, on the morale and performance of our employees and on our relationships

with regulators, suppliers and customers. It may also have a negative impact on our ability to take timely advantage of various business

and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may

have a material adverse effect on our business, cash flows, financial condition and results of operations.

Risks related to our financial results and Company success

Our revenue for a particular period can be difficult to predict, and a shortfall in revenue may harm our operating results.

As a result of the many factors discussed in this report, our revenue for a particular quarter is difficult to predict and will fluctuate from

quarter to quarter. Typically, our customers request product delivery within a short period following our receipt of an order.

Consequently, we do not typically carry a significant order backlog and are dependent upon obtaining orders and completing delivery

in accordance with shipping terms that are predominantly within each quarter to achieve our targeted revenue. Supply of semiconductor

chips and other components of our products has become constrained resulting in extended lead times and increased costs. Transportation

constraints, including shortages for both air and surface freight, as well as labor shortages in the transportation industry, have also

affected the timing and the cost of obtaining raw materials and production supplies. As a result, our gross margin percentage declined

in the second half of 2021 and throughout 2022. If supply chain constraints and transportation constraints continue, it could cause our

net revenue and gross profit to decline or to grow at a slower rate than in previous quarters. Our deployment/installation cycle can also

vary depending on the customer’s schedule, site readiness, network size and complexity and other factors, which can cause our revenue

to fluctuate from period to period. Our ability to meet financial expectations could also be affected if the variable revenue patterns seen

in prior quarters recur in future quarters. We have experienced periods of time during which manufacturing issues have delayed

shipments, leading to variable shipping patterns. In addition, to the extent that manufacturing issues and any related component shortages

continue to result in delayed shipments in the future, and particularly in quarters in which we and our subcontractors are operating at

higher levels of capacity, it is possible that revenue for a quarter could be adversely affected, and we may not be able to remediate the

conditions within the same quarter. Currently, our revenue growth and profitability in the near-term are being impacted by supply chain

constraint issues. While we are working closely with our suppliers and customers to address the near-term supply chain challenges

facing the industry and believe these challenges will continue to lessen and will begin to normalize during 2023, there can be no

assurance this will be the case.

In the past, under certain market conditions, long manufacturing lead times have caused our customers to place the same order multiple

times. When multiple ordering occurs, along with other factors, it may cause difficulty in predicting our revenue and, as a result, could

impair our ability to manage inventory effectively.

We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-term

commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations

because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.

The lengthy sales and approval process required by service providers for new products could result in fluctuations in our revenue.

In the industry in which we compete, sales and approval cycles are often lengthy. Selling efforts often involve a significant commitment

of time and resources by us and our customers that may include extensive product testing, laboratory or network certification, or region-

specific product certification and homologation requirements for deployment in networks. Additionally, a supplier must first obtain

product approval from a major or other service provider to sell its products to these service providers. This process can last from six to

eighteen months, or longer, depending on the technology, the service provider and the demand for the product from the service provider’s

subscribers. Consequently, we are involved in a constant process of submitting for approval succeeding generations of products, as well

as products that deploy new technology or respond to new technology demands from a major or other service provider. We have been

successful in the past in obtaining these approvals; however, we cannot be certain that we will obtain these approvals in the future or

that sales of these products will continue to occur. Any attempt by a major or other service provider to seek out additional or alternative

suppliers, or to undertake, as permitted under applicable regulations, the production of these products internally, could have a material

adverse effect on our operating results. Furthermore, the delay in sales until the completion of the approval process, the length of which

is difficult to predict, could result in fluctuations of revenue and uneven operating results from quarter to quarter or year to year. Further,

once customer approval or certifications are met, our supply chain customers typically do not guarantee us a minimum, or any, volume

of sales. We are dependent on individual purchase orders as discussed elsewhere in this report.

11

We depend heavily on sales to certain customers; the loss of any of these customers or a significant project would significantly reduce

our revenue and net income.

Historically, a large percentage of our revenue has been made to major service providers and larger independent communications

companies. As long as the major and larger independent communications companies represent such a substantial percentage of our total

revenue, our future success will significantly depend upon certain factors which are not within our control, including:

•

the timing and size of future purchase orders, if any, from these customers;

•

changes in strategic plans and capital budgets of these customers;

•

the product requirements of these customers;

•

the subscriber take rate, including subscriber loss or churn, of our customers;

•

the financial and operational success of these customers;

•

the impact of legislative and regulatory changes on these customers;

•

consolidation, acquisition of, or corporate reorganization among these customers;

•

the success of these customers' services deployed using our products; and

•

the impact of work stoppages at these customers.

In the past, revenue to our large customers have fluctuated, and may fluctuate in the future, significantly from quarter to quarter and

year to year. The loss of, or a significant reduction or delay in, revenue to any such customer or the occurrence of revenue fluctuations

could have a material adverse effect on our business and results of operations. Further, any attempt by a major or other service provider

to seek out additional or alternative suppliers or to undertake, as permitted under applicable regulations, the production of these products

internally, could have a material adverse effect on our operating results.

There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies

attempt to strengthen or hold their market positions or are unable to continue operations. This could lead to variability in our operating

results and could have a material adverse effect on our business, operating results, financial condition and cash flow. In addition,

particularly in the service provider market, rapid consolidation will lead to fewer customers, with the effect that a loss of a major

customer could have a material impact on our results that we would not have anticipated in a marketplace composed of more numerous

participants.

Our exposure to the credit risks of our customers and distributors may make it difficult to collect accounts receivable and could

adversely affect our operating results, financial condition and cash flows.

Most of our revenue is made on an open credit basis, generally with payment terms of 30 to 45 days in the U.S. and typically 45 to 60

days in many geographic markets outside the U.S. As our international revenue grows, our total accounts receivable balance has

increased and will likely continue to increase. Our DSO could also increase as a result of a greater mix of international revenue.

Additionally, international laws may not provide the same degree of protection against defaults on accounts receivable as provided under

U.S. laws governing domestic transactions; therefore, as our international business grows, we may be subject to higher bad debt expense

compared to historical trends. Overall, we monitor individual customer and distributor payment capability in granting such open credit

arrangements, seek to limit such open credit to amounts that we believe customers and distributors can pay and maintain reserves we

believe are adequate to cover exposure for credit losses and other macroeconomic indicators. In the course of our sales to customers and

distributors, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible

accounts receivable due to various reasons, including potential declining operating cash flows or bankruptcy filings. While we attempt

to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, there are no

assurances we can avoid write-downs and/or write-offs of accounts receivable as a result of declining financial conditions for our

customers, including bankruptcy. Such write-downs or write-offs could negatively affect our operating results for the period in which

they occur and could potentially have a material adverse effect on our results of operations, financial condition and cash flows.

We expect gross margins to continue to vary over time, and our levels of product and services gross margins may not be sustainable.

Our level of gross margins may not be sustainable and has been and may continue to be adversely affected by numerous factors,

including:

•

changes in customer, geographic or product or services mix, including software and the mix of configurations and

professional services revenue within each product segment;

•

mix of domestic versus international revenue;

•

introduction of new products by competitors, including products with price-performance advantages;

12

•

our ability to reduce product cost;

•

increases in labor or material cost, including increases in material costs resulting from inflation or tariffs;

•

foreign currency exchange rate movements;

•

expediting costs incurred to meet customer delivery requirements;

•

excess inventory and inventory holding charges;

•

excess and obsolescence charges;

•

changes in shipment volume;

•

our ability to absorb fixed manufacturing costs during short-term fluctuations in customer demand;

•

loss of cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts

ordering does not correctly anticipate product demand;

•

lower than expected benefits from value engineering;

•

increased price competition, including competitors from Asia, specifically China;

•

changes in distribution channels;

•

increased warranty cost or quality issues;

•

liquidated damages costs relating to customer contractual terms;

•

our ability to manage the impact of foreign currency exchange rate fluctuations relating to our revenue or cost of revenue;

•

slowdowns, recessions, economic instability, political unrest, armed conflicts (such as the ongoing military conflict in

Ukraine), or outbreaks of disease, such as the COVID-19 pandemic, around the world; and

•

Business Combination purchase price allocations.

For example, since the third quarter of 2021 and continuing throughout 2022, we have incurred and may continue to incur supply chain

constraint expenses, including price inflation for certain electronic components, semiconductor chips and transportation related costs,

which have lowered our gross margins and decreased our profitability.

Our dependence on a limited number of suppliers for certain raw materials, key components and ODM products, combined with

supply shortages, have prevented and may continue to prevent us from delivering our products on a timely basis, which has had and

may continue to have a material adverse effect on operating results and could have a material adverse effect on customer relations.

The fact that we are reliant on our extended supply chain could have an adverse impact on the supply of our products and on our business

and operating results. The financial problems of our suppliers and industry consolidation occurring within one or more component

supplier markets, such as the semiconductor market, in each case, could either limit supply or increase costs.

A reduction or interruption in supply, including disruptions on our global supply chain, caused in part by public health emergencies

(including the COVID-19 pandemic), geopolitical tensions (including as a result of the ongoing conflict in Ukraine and China-Taiwan

relations) or a significant natural disaster (including as a result of climate change); a significant increase in the price of one or more

components (including as a result of inflation); a failure to adequately authorize procurement of inventory by our contract manufacturers;

a failure to appropriately cancel, reschedule, or adjust our requirements based on our business needs; or a decrease in demand for our

products could materially adversely affect our business, operating results, and financial condition and could materially damage customer

relationships. Furthermore, as a result of binding price or purchase commitments with suppliers, we may be obligated to purchase raw

materials or components at prices that are higher than those available in the current market. In the event that we become committed to

purchasing raw materials or components at prices in excess of the current market price when the raw materials or components are

actually used, our gross margins could decrease.

In addition, certain raw materials and key components used in our products are currently available from only one source, and others are

available from only a limited number of sources. The availability of these raw materials and supplies may be subject to market forces

beyond our control, such as inflation, merger and acquisition activity of our suppliers and consolidation in some segments of our supplier

base. We have experienced and expect to continue to experience increased inflationary pressures on input costs, such as, raw materials,

supplies, labor and distribution costs to increase. Our attempts to offset these cost pressures, through increases in the selling prices of

some of our products, may not be successful and could negatively affect our operating results. In addition, from time to time, there may

not be sufficient quantities of raw materials and supplies in the marketplace to meet customer demand. For example, wafer foundries

that support chipmakers have not invested enough in recent years to increase capacities to the levels need to support demand from all of

13

their customers and wafers have a long lead time for production, in some cases in excess of 30 weeks, which has led to a recent shortage

in chip supplies. Many companies utilize the same raw materials and supplies that we do in the production of their products. Suppliers

may be under pressure to allocate product to certain customers for business, regulatory or political reasons, and/or demand changes in

agreed pricing as a condition of supply. As a result, companies with more resources than our own may have a competitive advantage in

obtaining raw materials and supplies. These factors have resulted in reduced supply, higher prices of raw materials and delays in the

receipt of certain of our key components, which in turn has generated increased costs, lower margins and delays in product delivery,

with a corresponding adverse effect on revenue. Delays in product deliveries and corresponding product price increases may likewise

have an adverse effect on customer relationships. We attempt to manage these risks through developing alternative sources, by staging

inventories at strategic locations, through engineering efforts designed to obviate the necessity of certain components and by building

long-term relationships and close contact with each of our key suppliers; however, we cannot assure that delays in or failures of deliveries

of key components, either to us or to our contract manufacturers, and consequent delays in product deliveries, will not continue to occur

in the future.

In addition, our supply chain challenges are forcing us to devote a substantial portion of our research and development

expenses to redesign existing products, reducing our capacity to develop new products. For a discussion of the impact of the COVID-

19 pandemic on our supply chain,

see

“- The ongoing COVID-19 pandemic has impacted and may continue to impact our business,

results of operations and financial condition, particularly our supply chain and workforce.”

We believe that we may be faced with the following challenges in the future: new markets in which we participate may grow quickly,

which may make it difficult to quickly obtain significant raw materials and/or components; as we acquire companies and new

technologies, we may be dependent on unfamiliar supply chains or relatively small supply partners; and we face competition for certain

raw materials or components that are supply-constrained from existing competitors and companies in other markets.

We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market

share.

The markets for our products are intensely competitive. New manufacturers have entered the markets in recent years to offer products

in competition with us. Additionally, certain companies have, in recent years, developed the ability to deliver competing products using

coaxial cable and cellular transmission, especially in high-density metropolitan areas. Competition will further increase if new

companies enter the market or existing competitors expand their product lines. Some of these potential competitors may have greater

financial, technological, manufacturing, sales and marketing, and personnel resources. As a result, these competitors may be able to

respond more rapidly or effectively to new or emerging technologies and changes in customer requirements, withstand significant price

decreases, or devote greater resources to the development, promotion and sale of their products.

In addition, our present and future competitors may be able to enter our existing or future markets with products or technologies

comparable or superior to those that we offer. An increase in competition could cause us to reduce prices, decrease our market share,

require increased spending by us on product development and sales and marketing, or cause delays or cancellations in customer orders,

any one of which could reduce our gross profit margins and adversely affect our business and results of operations.

Our estimates regarding future warranty obligations may change due to product failure rates, installation and shipment volumes,

field service repair obligations and other rework costs incurred in correcting product failures. If our estimates change, our liability

for warranty obligations may increase or decrease, impacting future cost of revenue.

Our products are highly complex, and we cannot ensure that our extensive product development, manufacturing and integration testing

will be adequate to detect all defects, errors, failures and quality issues. Quality or performance problems for products covered under

warranty could adversely impact our reputation and negatively affect our operating results, financial position and cash flows. The

development and production of new products with high complexity often involves problems with software, components and

manufacturing methods. If significant warranty obligations arise due to reliability or quality issues arising from defects in software,

faulty components or manufacturing methods, our operating results, financial position and cash flows could be negatively impacted by:

•

costs associated with fixing software or hardware defects;

•

costs associated with internal or third-party installation errors;

•

high service and warranty expenses;

•

costs associated with recalling and replacing products with software or hardware defects, including costs from writing-off

defective products recalled;

•

high inventory obsolescence expense;

•

delays in collecting accounts receivable;

•

payment of liquidated damages for performance failures;

14

•

extended performance bond expenses; and

•

a decline in revenue to existing customers.

Managing our inventory is complex and may include write-downs of excess or obsolete inventory.

Managing our inventory of components and finished products is complicated by a number of factors, including the need to maintain a

significant inventory of certain components that are in short supply, that have been discontinued by the component manufacturer, that

must be purchased in bulk to obtain favorable pricing or that require long lead times. These issues may result in our purchasing and

maintaining significant amounts of inventory, which if not used or expected to be used based on anticipated production requirements,

may become excess or obsolete. Any excess or obsolete inventory could also result in sales price reductions and/or inventory write-

downs, which could adversely affect our business and results of operations.

The continuing growth of our international operations could expose us to additional risks, increase our costs and adversely affect

our operating results, financial condition and cash flows.

We are expanding our presence in international markets, which represented 49.5%, 33.5% and 30.5% of our net revenue for the years

ended December 31, 2022, 2021 and 2020, respectively, and as a result, we anticipate increased revenue and operating costs in these

markets. This international expansion has increased and may continue to increase our operational risks and impact our results of

operations, including:

•

exposure to unfavorable commercial terms in certain countries;

•

the time and cost to staff and manage foreign operations, including the time and cost to maintain good relationships with

employee associations and work councils;

•

the time and cost to ensure adequate business interruption controls, processes and facilities;

•

the time and cost to manage and evolve financial reporting systems, maintain effective financial disclosure controls and

procedures, and comply with corporate governance requirements in multiple jurisdictions;

•

the cost to collect accounts receivable and extension of collection periods;

•

the cost and potential disruption of facilities transitions required in some business acquisitions;

•

risks as a result of less regulation of patents or other safeguards of intellectual property in certain countries;

•

the potential impact of adverse tax, customs regulations and transfer-pricing issues;

•

exposure to increased price competition from additional competitors in some countries;

•

exposure to global social, political and economic instability, changes in economic conditions and foreign currency exchange

rate movements;

•

potential exposure to liability or damage of reputation resulting from a higher incidence of corruption or unethical business

practices in some countries;

•

potential regulations on data protection, regarding the collection, use, disclosure and security of data;

•

potential trade protection measures, export compliance issues, domestic preference procurement requirements, qualification

to transact business and additional regulatory requirements;

•

potential exposure to natural disasters, epidemics and pandemics (and government regulations in response thereto) and acts

of war or terrorism; and

•

potential exposure to ongoing military conflict in Ukraine. The U.S. and certain other countries imposed sanctions on Russia

and could impose further sanctions against it, which could damage or disrupt international commerce and the global

economy. Other potential consequences include, but are not limited to, a heightened risk of cyber-warfare, biological warfare

or nuclear warfare, growth in the number of popular uprisings in the region, increased political discontent, especially in the

regions most affected by the conflict or economic sanctions, continued displacement of persons to regions close to the areas

of conflict and an increase in the number of refugees, among other unforeseen social and humanitarian effects which could

impact our business, customers, and suppliers.

In February 2022, armed conflict escalated between Russia and Ukraine. The U.S. and certain other countries have imposed sanctions

on Russia and could impose further sanctions, which could damage or disrupt international commerce and the global economy. We are

complying with a broad range of U.S. and international sanctions and export control requirements imposed on Russia.

15

If we are unable to successfully address the potential risks associated with our overall international expansion, our operating results,

financial condition and cash flows may be negatively impacted.

Our success depends on attracting and retaining key personnel.

Our business has grown significantly since its inception. Our success is dependent in large part on the continued employment of our

executive officers, including Thomas R. Stanton, our Chief Executive Officer, and other key management personnel. The unplanned

departure of one or more of these individuals could adversely affect our business. In addition, for ADTRAN to continue as a successful

entity we must also be able to attract and retain key engineers and software developers and architects whose expertise helps us maintain

competitive advantages. We believe that our future success will depend, in large part, upon our ability to continue to attract, retain, train

and motivate highly-skilled employees who are in great demand. Stock awards are designed to reward employees for their long-term

contributions and to provide incentives for them to remain with us. Changes to our overall compensation program, including our stock

incentive program, may adversely affect our ability to retain key employees. Properly managing our continued growth, avoiding the

problems often resulting from such growth and expansion and continuing to operate in the manner which has proven successful to us to

date will be critical to the future success of our business.

If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and financial

statements could be materially impacted.

We are exposed to financial market risks, including changes in interest rates and prices of marketable equity and fixed-income securities.

The global macroeconomic environment has been challenging and inconsistent due to uncertainty in the global central bank monetary

policy and uncertainty in global credit markets and the geopolitical environment in many areas of the world. The primary objective of

the majority of our investment activities is to preserve principal while at the same time achieving appropriate yields without significantly

increasing risk. To achieve this objective, a majority of our marketable securities are investment grade corporate and municipal fixed-

rate bonds, U.S. government bonds and municipal money market instruments denominated in U.S. dollars. While we do invest a portion

of our investment portfolio in equities, which are subject to market risks, including the loss of principal, our equity investments are

generally invested in professionally-managed portfolios with the objective of exceeding the performance of their underlying

benchmarks.

We have significant investments in corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds,

U.S. government bonds and foreign government bonds. Through December 31, 2022, we have not been required to impair any of these

investments; however, we have and may continue to experience a reduction in value or loss of liquidity in these investments, which may

have an adverse effect on our results of operations, liquidity and financial condition. Fixed-rate interest securities may have their fair

value adversely impacted due to a rise in interest rates, while variable-rate securities may produce less income than expected if interest

rates fall. Our investments are subject to general credit, liquidity, market and interest rate risks, which may increase because of conditions

in the financial markets and related credit liquidity issues. Consequently, our future investment income may fall short of expectations

due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in fair value due to

changes in interest rates.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in

Part II, Item 7 of this report, “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of this report and Note

6 of Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for more information about our investments.

We are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which could

harm our financial results and cash flows.

We are exposed to changes in foreign currencies relative to the U.S. dollar, which are references to the differences between the foreign-

exchanges rates we use to convert the financial results of our international operations from local currencies into U.S. dollars for financial

reporting purposes. This impact of foreign-exchange rate changes is calculated based on the difference between the current period’s

currency exchange rates and that of the comparable prior period. Our primary exposures to foreign currency exchange rate movements

are the Euro and the British pound sterling. As a result of our global operations, our revenue, gross margins, operating expense and

operating income in some international markets have been and may continue to be affected by foreign currency fluctuations.

We will require a significant amount of cash to service our indebtedness, our potential payment obligations to ADVA shareholders

under the DPLTA, and other obligations.

Our ability to generate cash depends on many factors beyond our control and any failure to service our outstanding indebtedness could

harm our business, financial condition and results of operations. Furthermore, we have entered into a DPLTA with ADVA. Additionally,

pursuant to the terms of the DPLTA, each ADVA shareholder (other than the Company) has received an offer to elect either (1) to

remain an ADVA shareholder and receive from us an Annual Recurring Compensation payment, or (2) to receive Exit Compensation.

Any failure to satisfy our payment obligations under the DPLTA could harm our business, financial condition and results of operations.

16

S

ee “Risk Factors - The terms of the DPLTA may have a material adverse effect on our financial results and condition" in Part I, Item

1A of this report for additional information.

Our ability to make payments on and to refinance our indebtedness, to cover our payment obligations under the DPLTA, and to fund

working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent,

is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control. If

our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient

to enable us and our subsidiaries to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion

of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital,

any of which could have a material adverse effect on us.

In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to

restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time.

Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could

further restrict our business operations. The terms of existing or future debt instruments or preferred stock may limit or prevent us from

taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness

or dividend payments on our outstanding shares of preferred stock would likely result in a reduction of our credit rating, which could

harm our ability to incur additional indebtedness or otherwise raise capital on commercially reasonable terms or at all. Our inability to

generate sufficient cash flow to satisfy our debt service, payment obligations to ADVA shareholders under the DPLTA, and other

obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect,

which could be material, on our business, financial condition and results of operations.

Furthermore, if we raise additional funds through the issuance of equity or securities convertible into equity, or undertake certain

transactions intended to address our existing indebtedness, our existing stockholders could suffer dilution in their percentage ownership

of the Company, or our leverage and outstanding indebtedness could increase. Current capital market conditions, including the impact

of inflation, have increased borrowing rates and can be expected to significantly increase our cost of capital as compared to prior periods

should we seek additional funding.

We may be unable to successfully and effectively manage and integrate acquisitions, divestitures and other significant transactions,

which could harm our operating results, business and prospects.

As part of our business strategy, we frequently engage in discussions with third parties regarding possible investments, acquisitions,

strategic alliances, joint ventures, divestitures and outsourcing arrangements, and we enter into agreements relating to such transactions

in order to further our business objectives. In order to pursue this strategy successfully, we must identify suitable candidates, successfully

complete transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired

companies or employees and the divestiture of combined businesses, operations and employees. Integration, divestiture and other risks

of these transactions can be more pronounced in larger and more complicated transactions, or if multiple transactions are pursued

simultaneously. If we fail to identify and successfully complete transactions that further our strategic objectives, we may be required to

expend resources to develop products and technology internally. This may put us at a competitive disadvantage and we may be adversely

affected by negative market perceptions, any of which may have a material adverse effect on our revenue, gross margin and profitability.

Integration and divestiture issues are complex, time-consuming and expensive and, without proper planning and implementation, could

significantly disrupt our business. The challenges involved in integrating and divesting include:

•

combining service and product offerings and entering into new markets in which we are not experienced;

•

convincing customers and distributors that any such transaction will not diminish client service standards or business focus,

preventing customers and distributors from deferring purchasing decisions or switching to other suppliers or service

providers (which could result in additional obligations to address customer uncertainty), and coordinating service, sales,

marketing and distribution efforts;

•

consolidating and rationalizing corporate information technology infrastructure, which may include multiple legacy systems

from various acquisitions and integrating software code;

•

minimizing the diversion of management attention from ongoing business concerns;

•

persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees,

integrating employees into our company, correctly estimating employee benefit costs and implementing restructuring

programs;

•

coordinating and combining administrative, service, manufacturing, research and development and other operations,

subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while

maintaining adequate standards, controls and procedures;

17

•

our responsibility for the liabilities of the businesses we acquire, some of which we may not anticipate, including costs of

third-party advisors to resolve disputes;

•

achieving savings from supply chain and administration integration; and

•

efficiently divesting combined business operations which may cause increased costs as divested businesses are de-integrated

from embedded systems and operations.

We evaluate and enter into these types of transactions on an ongoing basis. We may not fully realize all of the anticipated benefits of

any transaction and the time frame for achieving benefits of a transaction may depend partially upon the actions of employees, suppliers

or other third parties. In addition, the pricing and other terms of our contracts for these transactions require us to make estimates and

assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not identify all of the factors

necessary to estimate costs accurately. Any increased or unexpected costs, unanticipated delays or failure to achieve contractual

obligations could make these agreements less profitable or unprofitable.

Managing these types of transactions requires varying levels of management resources, which may divert our attention from other

business operations. These transactions could result in significant costs and expenses and charges to earnings, including those related to

severance pay, early retirement costs, employee benefit costs, asset impairment charges, charges from the elimination of duplicative

facilities and contracts, in-process research and development charges, inventory adjustments, assumed litigation, regulatory compliance

and other liabilities, legal, accounting and financial advisory fees and required payments to executive officers and key employees under

retention plans. Moreover, we could incur additional depreciation and amortization expense over the useful lives of certain assets

acquired in connection with these transactions, and, to the extent that the value of goodwill or intangible assets with indefinite lives

acquired in connection with a transaction becomes impaired, we may be required to incur additional material charges relating to the

impairment of those assets. In order to complete an acquisition, we may issue common shares, potentially creating dilution for existing

shareholders, or borrow funds, which could affect our financial condition, results of operations and potentially our credit ratings. Any

prior or future downgrades in our credit rating associated with a transaction could adversely affect our ability to borrow and our

borrowing cost, and result in more restrictive borrowing terms. In addition, our effective tax rate on an ongoing basis is uncertain, and

such transactions could impact our effective tax rate. We also may experience risks relating to the challenges and costs of closing a

transaction and the risk that an announced transaction may not close. As a result, any completed, pending or future transactions may

contribute to financial results that differ materially from the investment community’s expectations.

Risks related to COVID-19

The ongoing COVID-19 pandemic has impacted and may continue to impact our business, results of operations and financial

condition, particularly our supply chain.

The global spread of COVID-19 created significant volatility, uncertainty and economic disruption. Due to the pandemic and a global

semiconductor chip shortage, we experienced disruption and delays in our supply chain and significant price increases with certain of

our manufacturing partners, and those disruptions, delays and price increases may continue. For example, in the second half of 2021

and throughout 2022, our results of operations were negatively impacted by increased expenses resulting from supply chain disruptions.

Current global supply chain and transportation constraints, including delays in supply chain deliveries and the related global semi-

conductor chip shortage, may continue to have a material adverse effect on our operating results and could have a material adverse effect

on customer relations and our financial condition. We believe these supply chain challenges and their adverse impact on our industry

will continue to ease during 2023. However, there can be no assurance that the ongoing disruptions due to COVID-19, the related global

semiconductor chip shortage or other supply chain constraints or price increases will be resolved in the near term, which could continue

to adversely affect our business, financial condition, and results of operations. We will continue to evaluate the nature and extent of the

impact of COVID-19 and supply chain constraints on our business.

Risks related to our control environment

Breaches of our information systems and cyber-attacks could compromise our intellectual property and cause significant damage to

our business and reputation.

We maintain sensitive data on our information systems and the networks of third-party providers, including intellectual property,

financial data and proprietary or confidential business information relating to our business, customers, suppliers, and business partners.

We also produce networking equipment solutions and software used by network operators to ensure security and reliability in their

management and transmission of data. Our customers, particularly those in regulated industries, are increasingly focused on the security

features of our technology solutions. Maintaining the security of information sensitive to us and our business partners is critical to our

business and reputation. We rely upon several internal business processes and information systems to support key operations and

financial functions, and the efficient operation of these processes and systems is critical. Companies are increasingly subjected to cyber-

attacks and other attempts to gain unauthorized access. We have a comprehensive approach to cybersecurity, which includes prevention,

detection, containment, and response. Our layered defense approach encompasses proactive security monitoring of our global

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infrastructure by both internal solutions and multiple third-party Security Operation Centers. Additionally, we routinely perform patch

management, vulnerability scans, penetration tests and continuous monitoring across our entire enterprise. Our security policy

framework includes meaningful and enforceable Information Security policies and procedures. The cybersecurity program is aligned

with our mission and business objectives, reviewed periodically for improvements, and is supported by experienced and certified security

professionals. This is supplemented by an information security awareness program that spans our global workforce. Despite this, our

network and storage applications and those systems and applications maintained by our third-party providers may be targeted by cyber-

attacks or potentially breached due to operator error, fraudulent activity, or other system disruptions. For example, a vulnerability named

“Log4Shell” was reported for the widely used Java logging library, Apache Log4j 2 (“Log4j”), in December of 2021. Although we did

not identify indicators of compromise in response to the Log4j vulnerability, we cannot assure that future vulnerabilities or malware

attacks will not be successful in breaching our system and in turn, have a material impact our business. Unauthorized access or disclosure

of our information could compromise our intellectual property and expose sensitive business information. Our information systems are

designed to appropriate industry standards and resiliently engineered to reduce downtime in the event of power outages, weather or

climate events and cybersecurity issues. These risks, as well as the number and frequency of cybersecurity events globally, may also be

heightened during times of geopolitical tension or instability between countries, including, for example, the ongoing military conflict in

Ukraine with Russia, from which a number of recent cybersecurity events have been alleged to have originated. We carry cybersecurity

insurance policies meant to limit our risk and exposure should one of these cybersecurity issues occur. However, a significant failure of

our systems due to these issues could result in significant remediation costs, disrupt business operations, and divert management

attention, which could result in harm to our business reputation, operating results, financial condition, and cash flows.

As part of our due diligence and integration planning process, the Company’s cybersecurity team has conducted a review of ADVA’s

cybersecurity program. Additionally, prior to integration of facilities, networks, or systems, the Company also engage CrowdStrike, a

global cybersecurity leader to conduct an enterprise-wide compromise assessment to determine if there were any targeted compromises

by nation-state actors of the ADVA information technology landscape. The results from the CrowdStrike Compromise assessment

indicated that there was no indication of compromise of the ADVA information technology environment. As part of the integration plan,

the Company intends to expand its current cybersecurity program to cover all ADVA’s global infrastructure and adopt any mature

cybersecurity practices already in place. A significant failure of our review and integration of ADVA's cybersecurity program could

expose us to penalties for failing to comply with the EU's GDPR requirements as well as result in significant remediation costs and a

disruption to our operations.

We have had to restate our previously issued consolidated financial statements and, as part of that process, have identified a material

weakness in our internal control over financial reporting commencing September 30, 2022 and continuing as of the date hereof. If

we are unable to develop and maintain effective internal control over financial reporting, we may not be able to accurately report

our financial results in a timely manner, which may adversely affect investor confidence in us and may adversely affect our business,

financial condition and results of operations.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a

reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a

timely basis. Effective internal control over financial reporting is necessary for us to provide reliable financial reporting and prevent

fraud. We continue to evaluate steps to remediate the material weakness. These remediation measures may be time consuming and

costly, and there is no assurance that these initiatives will ultimately have the intended effects. Any failure to maintain effective internal

control over financial reporting could adversely impact our ability to report our financial position and results from operations on a timely

and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations.

Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock

exchange on which our common stock is listed, the SEC or other regulatory authorities. In either case, there could be an adverse effect

on our business, financial condition and results of operations. Ineffective internal control over financial reporting could also cause

investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

We can provide no assurance that the measures we are taking and plan to take in the future will remediate the material weakness

identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to

implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we

are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent

or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.

We may face litigation and other risks as a result of the restatement as described in the “Explanatory Note” within this Amendment

No. 1 and material weakness in our internal control over financial reporting.

As part of the restatement as described in the “Explanatory Note” within this Amendment No. 1, we identified a material weakness in

our internal control over financial reporting. As a result of such material weakness, the restatement and other matters raised or that may

in the future be raised by the SEC, we face potential for litigation or other disputes which may include, among others, claims invoking

the federal and state securities laws, contractual claims or other claims arising from the restatement and the material weakness in our

internal control over financial reporting and the preparation of our financial statements. As of the date of this report, we have no

19

knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the

future. Any such litigation or dispute, whether successful or not, could adversely affect our business, financial condition and results of

operations.

Risks related to the telecommunications industry

We must continue to update and improve our products and develop new products to compete and to keep pace with improvements in

communications technology.

The markets for our products are characterized by rapidly changing technology, evolving industry standards and continuing

improvements in the communications service offerings of service providers. If technologies or standards applicable to our products, or

service provider offerings based on our products, become obsolete or fail to gain widespread commercial acceptance, our existing

products or products under development may become obsolete or unmarketable. Moreover, the introduction of products embodying new

technologies, the emergence of new industry standards, or changes in service provider offerings could adversely affect our ability to sell

our products. For instance, we offer a large number of products that apply primarily to the delivery of high-speed digital communications

over the local loop utilizing copper wire. We compete favorably with our competitors by developing a high-performance line of these

products. We market products that apply to fiber optic transport in the local loop. We expect, however, that use of coaxial cable and

fixed and mobile wireless access in place of local loop access will increase. Also, MSOs are increasing their presence in the local loop.

To meet the requirements of these new delivery systems and to maintain our market position, we expect to continue to develop new

products and/or modify existing products. We expect that the addition of fiber-based products focused on the cable MSO operators,

using EPON and fixed wireless access solutions will better position us to benefit from spending in these adjacent markets.

Our revenue and profitability in the past have, to a significant extent, resulted from our ability to anticipate changes in technology,

industry standards and service provider offerings, and to develop and introduce new and enhanced products. Our continued ability to

adapt will be a significant factor in maintaining or improving our competitive position and our prospects for growth. We cannot assure

that we will be able to respond effectively to changes in technology, industry standards, service provider offerings or new product

announcements by our competitors. We also cannot assure that we will be able to successfully develop and market new products or

product enhancements, or that these products or enhancements will achieve market acceptance. Any failure by us to continue to anticipate

or respond in a cost-effective and timely manner to changes in technology, industry standards, service provider offerings or new product

announcements by our competitors, or any significant delays in product development or introduction, could have a material adverse

effect on our ability to competitively market our products and on our revenue, results of operations, financial condition and cash flows.

Our failure or the failure of our contract manufacturers to comply with applicable environmental regulations could adversely impact

our results of operations.

The manufacture, assembly and testing of our products may require the use of hazardous materials that are subject to environmental,

health and safety regulations. Our failure or the failure of our contract manufacturers to comply with any of these applicable requirements

could result in regulatory penalties, legal claims or disruption of production. In addition, our failure or the failure of our contract

manufacturers to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials

could subject us to increased costs or liabilities. Existing and future environmental regulations may restrict our use of certain materials

to manufacture, assemble and test products. Any of these consequences could adversely impact our results of operations by increasing

our expenses and/or requiring us to alter our manufacturing processes.

If our products do not interoperate with our customers’ networks, installations may be delayed or canceled, which could harm our

business.

Our products must interface with existing networks, each of which may have different specifications, utilize multiple protocol standards

and incorporate products from other vendors. Many of our customers’ networks contain multiple generations of products that have been

added over time as these networks have grown and evolved. Our products may be required to interoperate with many or all of the

products within these networks, as well as future products to meet our customers’ requirements. If we find errors in the existing software

or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome these

errors so that our products will interoperate with the existing software and hardware. Implementation of product corrections involving

interoperability issues could increase our costs and adversely affect our results of operations. Such issues may affect our ability to obtain

product acceptance from other customers.

We engage in research and development activities to develop new, innovative solutions and to improve the application of developed

technologies, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater

research and development efforts and which may focus on more leading edge development.

A portion of our research and development activities are focused on the continued innovation of currently accepted access and edge

transmission technologies in order to deliver faster internet speeds, more capacity, better quality of service and operational efficiency.

These research and development efforts result in improved applications of technologies for which demand already exists or is latent.

We also focus our research and development efforts on developing software, solutions and platforms that enable service providers to

20

increase revenue-generating service velocity, reducing operational costs, increasing scale and providing service agility. We rarely engage

in research projects that represent a vast departure from the current business practices of our key customers. While we believe our

strategy provides a higher likelihood of producing nearer term or more sustainable revenue streams, this strategy could result in lost

revenue opportunities and higher operating expenses should a new technology achieve rapid and widespread market acceptance. When

we do engage in research and development activities for new, leading-edge technologies and market approaches, there is no guarantee

that those technologies or market approaches will be successful or that they will be adopted and purchased by our customers.

Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in various international regions

may result in us not meeting our cost, quality or performance standards.

We are heavily dependent on subcontractors for the assembly and testing of certain printed circuit board assemblies, subassemblies,

chassis, enclosures and equipment shelves, and the purchase of some raw materials used in such assemblies. This reliance involves

several risks, including the unavailability of, or interruptions in, access to certain process technologies and reduced control over product

quality, delivery schedules, transportation, manufacturing yields and costs. We may not be able to provide product order volumes to our

subcontractors that are high enough to achieve sufficient cost savings. If shipments fall below forecasted levels, we may incur increased

costs or be required to take ownership of excess inventory. Changes in international tariff structures could adversely impact our product

costs. We also have experienced and expect to continue to experience increased inflationary pressures on input costs, such as, raw

materials, labor and distribution costs. Our attempts to offset these cost pressures, such as through increases in the selling prices of some

of our products and services, may not be successful and could negatively affect our operating results. In addition, a significant component

of maintaining cost competitiveness is the ability of our subcontractors to adjust their costs to compensate for possible adverse exchange

rate movements. To the extent that the subcontractors are unable to do so, and we are unable to procure alternative product supplies,

then our competitiveness and results of operations could be adversely impaired. These risks may be exacerbated by economic, regulatory

or political changes or uncertainties, terrorist actions, acts of war, the effects of climate change, natural disasters or pandemics in the

foreign countries in which our subcontractors are located.

To date, we believe that we have successfully managed the risks of our dependence on these subcontractors through a variety of efforts,

which include seeking and developing alternative subcontractors while maintaining existing relationships; however, we cannot be

assured that delays in product deliveries will not occur in the future because of shortages resulting from this limited number of

subcontractors or from the financial or other difficulties of these parties. Our inability to develop alternative subcontractors if and as

required in the future, or the need to undertake required retraining and other activities related to establishing and developing a new

subcontractor relationship, could result in delays or reductions in product shipments which, in turn, could have a negative effect on our

customer relationships and operating results.

Our failure to maintain rights to intellectual property used in our business could adversely affect the development, functionality and

commercial value of our products.

Our future success depends in part upon our proprietary technology. Although we attempt to protect our proprietary technology by

contract, trademark, copyright and patent registration and internal security, including trade secret protection, these protections may not

be adequate. Furthermore, our competitors can develop similar technology independently without violating our proprietary rights. From

time to time, we receive and may continue to receive notices of claims alleging that we are infringing upon patents or other intellectual

property. Any of these claims, whether with or without merit, could result in significant legal fees, divert our management’s time,

attention and resources, delay our product shipments or require us to enter into royalty or licensing agreements. We cannot predict

whether we will prevail in any claims or litigation over alleged infringements, or whether we will be able to license any valid and

infringed patents, or other intellectual property, on commercially reasonable terms. If a claim of intellectual property infringement

against us is successful and we fail to obtain a license or develop or license non-infringing technology, our business, operating results,

financial condition and cash flows could be affected adversely.

Software under license from third parties for use in certain of our products may not continue to be available to us on commercially

reasonable terms.

We integrate third-party software into certain of our products. Licenses for this technology may not be available or continue to be

available to us on commercially reasonable terms. Difficulties with third-party technology licensors could result in the termination of

such licenses, which may result in increased costs or require us to purchase or develop a substitute technology. Difficulty obtaining and

maintaining third-party technology licenses may disrupt the development of our products and increase our costs, which could harm our

business.

Our use of open source software could impose limitations on our ability to commercialize our products.

Several of our solutions utilize elements of open source or publicly available software. Although we closely monitor our use of open

source software, the terms of many open source software licenses have not been interpreted by the courts, and there is a risk that such

licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In

such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost,

21

to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of

our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could adversely affect our

revenue and operating expenses.

We may incur liabilities or become subject to litigation that would have a material effect on our business.

In the ordinary course of business, we accept purchase orders, and enter into sales and other related contracts, for the marketing, sale,

manufacture, distribution or use of our products and services. We may incur liabilities relating to our performance under such

agreements, or which result from damage claims arising from certain events as outlined within the particular contract. While we attempt

to include reasonable limitations of liability and other protective measures to all agreements, such agreements may not always contain,

or be subject to, maximum loss clauses and liabilities arising from them may result in significant adverse changes to our results of

operations, financial condition and cash flows.

In the ordinary course of business, we are subject to various legal proceedings and claims, including employment disputes, patent claims,

disputes over contract agreements and other commercial disputes. In some cases, claimants seek monetary recovery, or other relief,

including damages such as royalty payments related to patents, lost profits or injunctive relief, which, if granted, could require significant

expenditures. Any such disputes may be resolved before trial, or if tried, may be resolved in our favor; however, the cost of claims

sustained in litigation, and costs associated with the litigation process, may not be covered by our insurance. Such costs, and the demands

on management time during such an event, could harm our business, reputation and have a material adverse effect on our liquidity,

results of operations, financial condition and cash flows.

If we are unable to successfully develop and maintain relationships with SIs, service providers and enterprise VARs, our revenue

may be negatively affected.

As part of our sales strategy, we are targeting SIs, service providers and enterprise VARs. In addition to specialized technical expertise,

SIs, service providers and VARs typically offer sophisticated service capabilities that are frequently desired by enterprise customers. To

expand our distribution channel to include resellers with such capabilities, we must be able to provide effective support to these resellers.

If our sales, marketing or service capabilities are not sufficient to provide effective support to such SIs, service providers and VARs,

our revenue may be negatively affected, and current SI, service provider and VAR partners may terminate their relationships with us,

which would adversely impact our revenue and overall results of operations.

Risks related to the Company’s stock price

Our operating results may fluctuate in future periods, which may adversely affect our stock price

.

Our operating results have been, and will continue to be, subject to quarterly and annual fluctuations as a result of numerous factors.

These factors include, but are not limited to:

•

fluctuations in demand for our products and services, especially with respect to significant network expansion projects

undertaken by service providers;

•

continued growth of communications network traffic and the adoption of communication services and applications by

enterprise and consumer end users;

•

changes in sales and implementation cycles for our products and reduced visibility into our customers’ spending plans and

associated revenue, especially should a slowdown in communications industry spending occur due to economic downturns,

tight capital markets, or declining liquidity trends;

•

reductions in demand for our traditional products as new technologies gain acceptance;

•

our ability, and that of our distributors, to maintain appropriate inventory levels and related purchase commitments;

•

price and product competition in the communications and networking industries, which can change rapidly due to

technological innovation;

•

the overall movement toward industry consolidation among both our competitors and our customers;

•

our dependence on sales of our products by channel partners, the timing of their replenishment orders, the potential for

conflicts and competition involving our channel partners and large end-user customers and the potential for consolidation

among our channel partners;

•

variations in sales channels, product cost or mix of products and services sold;

•

delays in receiving acceptance, as defined under contract, from certain customers for shipments or services performed near

the end of a reporting period;

22

•

our ability to maintain high levels of product support and professional services;

•

manufacturing and customer order lead times, and potential restrictions in the supply of key components;

•

fluctuations in our gross margin and the factors that contribute to this (as described above);

•

our ability to achieve cost reductions;

•

the ability of our customers, channel partners and suppliers to obtain financing or to fund capital expenditures;

•

our ability to execute on our strategy and operating plans;

•

benefits anticipated from our investments in engineering, sales and marketing activities;

•

the effects of climate change and other natural events;

•

the effect of political or economic conditions, including the effect of tariffs or so-called “trade wars” on us and our supply

chain, acts of war, terrorist attacks or other unrest in certain international markets;

•

the effect of escalating tensions along the Russia-Ukraine border. The U.S. and certain other countries imposed sanctions

on Russia and could impose further sanctions against it, which could damage or disrupt international commerce and the

global economy; and

•

changes in tax laws and regulations or accounting pronouncements.

As a result, operating results for a particular future period are difficult to predict, and prior results are not necessarily indicative of results

to be expected in future periods. Any of the above-mentioned factors, or other factors discussed elsewhere in this report, could have a

material adverse effect on our business, results of operations, financial condition and cash flows that could adversely affect our stock

price.

The price of our common stock has been volatile and may continue to fluctuate significantly.

Our common stock is traded on the NASDAQ Global Select Market under the symbol ADTN. Since our initial public offering in August

1994, there has been, and may continue to be, significant volatility in the market for our common stock, based on a variety of factors,

including factors listed in this section, some of which are beyond our control.

Risks related to the regulatory environments in which we do business

We are subject to complex and evolving U.S. and foreign laws, regulations and standards governing the conduct of our business.

Violations of these laws and regulations may harm our business, subject us to penalties and to other adverse consequences.

We are subject to laws and regulations that govern conduct by our Company, our employees and agents and the manufacture, sale and

use of our products. Our inability to comply with current and evolving laws and regulations governing our business domestically and

internationally may adversely affect our revenue, results of operations, financial conditions and cash flows. New and changing laws,

regulations and industry practices could require us to modify our business, products or services offered, potentially in a material manner,

and may limit our ability to develop new products, services and features. If we violate these laws and regulations, governmental

authorities in the U.S. and in foreign jurisdictions could seek to impose civil and/or criminal fines and penalties which could have an

adverse effect on our reputation, as well as our results of operations, financial condition and cash flows.

These laws and regulations include, but are not limited to:

•

various regulations and regional standards established by communications authorities and import/export control authorities

that govern the manufacture, sale and use of our products. Changes in domestic or international communications regulations,

tariffs, potential changes in trade policies by the U.S. and other nations, application requirements, import/export controls or

expansion of regulation to new areas, including access, communications or commerce over the internet, may affect customer

demand for our products or slow the adoption of new technologies which may affect our revenue. Further, the cost of

complying with the evolving standards and regulations, including the cost of product re-design if necessary, or the failure

to obtain timely domestic or foreign regulatory approvals or certification such that we may not be able to sell our products

where these standards or regulations apply, may adversely affect our revenue, results of operations, financial condition and

cash flows.

23

•

compliance with a wide variety of provincial, state, national and international laws and regulations applicable to the

collection, use, retention, protection, disclosure, transfer and other processing of data, including personal data. Foreign data

protection, privacy and other laws and regulations, including GDPR, are often more restrictive than those in the U.S. These

data protection and privacy-related laws and regulations are varied, evolving, can be subject to significant change, may be

augmented or replaced by new or additional laws and regulations and may result in ever-increasing regulatory and public

scrutiny and escalating levels of enforcement and sanctions. For example, numerous states have adopted within the past

three years or are in the process of adopting various privacy-related laws and regulations. In addition, on July 16, 2020, the

Court of Justice of the European Union issued a decision that invalidated the EU-U.S. Privacy Shield framework as a basis

for transfers of personal data from the EU to the U.S., resulting in uncertainty and potential additional compliance

obligations to ensure that a valid basis under the GDPR exists for these data transfers. The European Commission published

revised standard contractual clauses for data transfers from the European Economic Area in 2021, which were required to

go into effect by December 2022. Finally, the U.K. has enacted a version of the GDPR the implementation of which occurred

by way of the Data Protection Act 2018, collectively referred to as the U.K. GDPR. Uncertainty remains, however, regarding

how aspects of data protection in the U.K. will be handled in the medium to long term. There is also a risk that we, directly

or as the result of a third-party service provider we use, could be found to have failed to comply with the laws and regulations

applicable in a jurisdiction regarding the collection, consent, handling, transfer or disposal of personal data.

•

the FCPA, which prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for

the purpose of directing, obtaining or keeping business, and requires companies to maintain reasonable books and records

and a system of internal accounting controls. The FCPA applies to companies, individual directors, officers, employees and

agents. Under the FCPA, U.S. companies may be held liable for the corrupt actions taken by employees, strategic or local

partners or other representatives. Because a significant portion of our total revenue is generated from revenue outside of the

U.S., we have proactively implemented internally and externally focused measures and controls to address this risk. We

help ensure that our employees understand the key requirements of FCPA compliance and the consequences of non-

compliance through training courses and detective controls. ADTRAN senior management and employees whose

responsibilities include international activities are required to complete an online training program and pass an exam every

two years. We have put processes in place to help detect non-compliance through providing our employees access to a

worldwide reporting “hotline,” available by phone and online, that is maintained by a third-party provider. Finally, we

perform annual reviews of our employees’ expense reports and corporate credit card activity to identify possible corruption

concerns. We have also implemented controls to help ensure our third-party partners and customers observe FCPA

requirements. Prior to selling to new international distributors, resellers or agents, we review third-party data and check

them against over 200 denied party lists from government institutions worldwide for potential FCPA concerns. We also

require international distributors, resellers and agents to complete an Anti-Corruption Due Diligence Questionnaire, which

is reviewed and assessed by a cross-functional compliance committee and our export-compliance function.

•

environmental, health and safety regulation governing the manufacture, assembly and testing of our products, including

without limitation regulations governing the use of hazardous materials. Our failure or the failure of our contract

manufacturers to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous

materials could subject us to increased costs or liabilities. Existing and future environmental regulations may restrict our

use of certain materials to manufacture, assemble and test products.

•

requirements by the SEC governing the disclosure regarding the use of conflict minerals mined from the Democratic

Republic of the Congo and adjoining countries (the “DRC”) and disclosure with respect to procedures regarding a

manufacturer’s efforts to prevent the sourcing of such minerals from the DRC. Certain of these minerals are present in our

products. SEC rules implementing these requirements may have the effect of reducing the pool of suppliers that can supply

“conflict free” components and parts, and we may not be able to obtain conflict free products or supplies in sufficient

quantities for our operations. Because our supply chain is complex, we may face reputational challenges with our customers,

stockholders and other stakeholders if we are unable to verify sufficiently the origins for the conflict minerals used in our

products and cannot assert that our products are “conflict free.” Environmental or similar social initiatives may also make

it difficult to obtain supply of compliant components or may require us to write off non-compliant inventory, which could

have an adverse effect on our business and operating results.

•

the insider trading prohibitions and the respective directors' dealing rules under the German Securities Trading Act

(

Wertpapierhandelsgesetz

) and Regulation (EU) No. 596/2014 of the European Parliament and of the Council of April 16,

2014, and other applicable regulations.

24

Changes in trade policy in the U.S. and other countries, specifically the U.K. and China, including the imposition of additional tariffs

and the resulting consequences, may adversely impact our gross profits, gross margins, results of operations and financial condition.

In recent years, international market conditions and the international regulatory environment have been increasingly affected by

competition among countries and geopolitical frictions. In particular, there have been a number of significant geopolitical events,

including trade tensions and regulatory actions, involving the governments of the U.S. and China. The U.S. government has raised

tariffs, and imposed new tariffs, on a wide range of imports of Chinese products, including component elements of our solutions and

certain finished goods products that we sell. U.S. tariff policy involving imports from China are slated for a broad review in 2023. The

U.S. government has also introduced broad new restrictions on imports from China allegedly manufactured with forced labor, and the

EU has debated similar restrictions. China has retaliated by raising tariffs, and imposing new tariffs, on certain exports of U.S. goods to

China, as well as introducing blocking measures to restrict the ability of domestic companies to comply with U.S. trade restrictions. For

instance, over the course of 2020, the U.S. introduced significant further restrictions limiting access to controlled U.S. technology to

additional Chinese government and commercial entities. More recently, in October 2022, the U.S. Department of Commerce imposed

additional export control restrictions targeting the provision of, inter alia, certain semiconductors and related technology to China that

could further disrupt supply chains that could adversely impact our business. In addition, the U.S. Federal Communications Commission

(the “FCC”) in November 2022 prohibited communications equipment deemed to pose an unacceptable risk to national security from

obtaining the equipment authorization that allows the products to be imported, marketed, or sold in the U.S. This prohibition currently

includes telecommunications equipment produced by Huawei and its affiliates and subsidiaries and four other Chinese companies, and

additional entities may be subsequently added to this list. The situation involving U.S.-China trade relations remains volatile and

uncertain and there can be no assurance that further actions by either country will not have an adverse impact on our business, operations

and access to technology, or components thereof, sourced from China.

The past few years have been challenging for the credit markets due to a shift from a time of quantitative easing to a time of quantitative

tightening by central banks around the world. If global economic and market conditions, or economic conditions in key markets, remain

uncertain or further deteriorate, we may experience material impacts on our business and operating results. We may also be adversely

affected in ways that we do not currently anticipate.

New or revised tax regulations, changes in our effective tax rate, recognition of a valuation allowance or assessments arising from

tax audits may have an adverse impact on our results.

We are subject to taxation in various jurisdictions, both domestically and internationally, in which we conduct business. Significant

judgment is required in the determination of our provision for income taxes, and this determination requires the interpretation and

application of complex and sometimes uncertain tax laws and regulations. Our effective tax rate may be adversely impacted by changes

in the mix of earnings between jurisdictions with different statutory tax rates, in the valuation of our deferred tax assets, and by changes

in tax rules and regulations. We continually monitor our deferred tax assets and when it becomes more likely than not that a tax benefit

will not be recognized, a valuation allowance is recorded against those assets. In addition, we are subject to examination of our income

tax returns by the Internal Revenue Service and various other tax authorities in the jurisdictions in which we conduct business. We

regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for

income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our

results of operations, financial condition and cash flow. Additionally, we continually review the adequacy of the valuation allowance

and recognize the benefits of deferred tax assets only as the reassessment indicates that it is more likely than not that the deferred tax

assets will be recognized. As such, we may release a portion of the valuation allowance or establish a new valuation allowance based

on operations in the jurisdictions in which these assets arose. Management continues to evaluate all evidence including historical

operating results, the existence of losses in the most recent year, forecasted earnings, future taxable income and tax planning strategies.

Should management determine that a valuation allowance is needed in the future due to not being able to absorb deferred tax assets, it

would have a material impact on our consolidated financial statements.

25

In August 2022, the Inflation Reduction Act was signed into law, which made a number of changes to the Internal Revenue Code,

including adding a 1% excise tax on stock buybacks by publicly traded corporations and a 15% corporate minimum tax on adjusted

financial statement income of certain large companies. The impact of these provisions on our effective tax rate will also depend on

additional guidance to be issued by the Secretary of the U.S. Department of the Treasury. We are currently evaluating the impact of

these provisions on our effective tax rate. Further, the Tax Act amended the Internal Revenue Code to require that specific research and

experimental (“R&E”) expenditures be capitalized and amortized over five years (U.S. R&E) or fifteen years (non-U.S. R&E) beginning

in the Company’s fiscal 2023. Although the U.S. Congress has considered legislation that would defer, modify, or repeal the

capitalization and amortization requirement, there is no assurance that the provision will be deferred, repealed, or otherwise modified.

If the requirement is not repealed or otherwise modified, it may increase our effective tax rate. Additionally, the Organization for

Economic Co-operation and Development (the “OECD”), an international association comprised of 38 countries, including the U.S.,

has issued proposals that change long-standing tax principles including on a global minimum tax initiative. On December 12, 2022 the

EU member states agreed to implement the OECD’s Pillar 2 global corporate minimum tax rate of 15% on companies with revenues of

at least EUR 750 million, which would go into effect in 2024. Other countries including the U.K., Switzerland, Canada, Australia and

South Korea are also actively considering changes to their tax laws to adopt certain parts of the OECD’s proposals.

Central Banks' monetary policy actions could increase our costs of borrowing money and negatively impact our financial condition

and future operations.

Market interest rates are rising and are expected to continue to rise across the yield curve. Depending on future inflation levels, the rise

of nominal interest rates may produce a rise in real interest rates. Higher interest rates resulting from tightening monetary policy are

expected to increase credit costs and decrease credit availability. Increases in interest rates could increase our costs of borrowing money

under certain of our debt facilities with variable interest rates, which would negatively impact our financial condition and future

operations.

Rising

inflation could negatively impact our revenues and profitability if increases in the prices of our products and services or a

decrease in customer spending result in lower sales.

Recent significant increases in inflation may result in decreased demand for our products and services, increased manufacturing and

operating costs (including our labor costs), reduced liquidity, and limitations on our ability to access credit or otherwise raise debt and

equity capital. In an inflationary environment, because certain of our customer contracts provide for fixed pricing and/or due to our

competitor’s pricing strategies, we may be unable to raise the sales prices of our products and services at or above the rate at which our

costs increase, which would reduce our profit and operating margins and could have a material adverse effect on our financial results.

We also may experience lower than expected sales and potential adverse impacts on our competitive position if there is a decrease in

customer spending or a negative reaction to any price increases we are able to implement. A reduction in our revenue would be

detrimental to our profitability and financial condition and could also have an adverse impact on our future growth.

Expectations relating to environmental, social and governance considerations expose the Company to potential liabilities, increased

costs, reputational harm, and other adverse effects on the Company’s business.

Many governments, regulators, investors, employees, customers and other stakeholders are increasingly focused on environmental,

social and governance considerations relating to businesses, including climate change and greenhouse gas emissions, human and civil

rights, and diversity, equity and inclusion. In addition, we may make statements about our environmental, social and governance goals

and initiatives through our website, press statements and other communications. Responding to these environmental, social and

governance considerations and implementation of these goals and initiatives involves risks and uncertainties, requires investments, and

depends in part on third-party performance or data that is outside of our control. Any failure, or perceived failure, by us to achieve our

targets, further our initiatives, adhere to our public statements, comply with federal, state or international environmental, social and

governance laws and regulations, or meet evolving and varied stakeholder expectations and standards could result in legal and regulatory

proceedings against us and materially adversely affect our business, reputation, results of operations, financial condition and stock price.

26

PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes included

in Part II, Item 8 of this report. We have omitted discussion of the earliest of the three years of financial condition and results of

operations and this information can be found in Part I, Item 7, “Management's Discussion and Analysis of Financial Condition and

Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February

25, 2022, which is available free of charge on the SEC's website at

http://www.sec.gov

and on our website at www.adtran.com.

This discussion is designed to provide the reader with information that will assist in understanding our consolidated financial

statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted

for those changes, as well as how certain accounting principles affect our consolidated financial statements. See “Cautionary Note

Regarding Forward-Looking Statements” on page 4 of this Amendment No. 1 for a description of important factors that could cause

actual results to differ from expected results. See also Part I, Item 1A, Risk Factors, of Amendment No. 1.

Unless the context otherwise indicates or requires, references in this Amendment No. 1 to “ADTRAN,” the “Company,” “we,” “us”

and “our” refer to ADTRAN, Inc. and its consolidated subsidiaries prior to the merger of Acorn MergeCo, Inc., a subsidiary of ADTRAN

Holdings, Inc., with and into ADTRAN, Inc., on July 8, 2022, after which ADTRAN, Inc. became a wholly-owned direct subsidiary of

ADTRAN Holdings, Inc. (the “Merger”), and to ADTRAN Holdings, Inc. and its consolidated subsidiaries following the Merger.

The

prior period results do not include the results of ADVA Optical Networking SE (“ADVA”) prior to the closing of the business

combination with us on July 15, 2022 (the "Business Combination").

Overview

The Company is a leading global provider of networking and communications platforms, software, systems and services focused on the

broadband access market, serving a diverse domestic and international customer base in multiple countries that includes Tier-1, -2 and

-3 service providers, alternative service providers, such as utilities, municipalities and fiber overbuilders, cable/MSOs, SMBs and

distributed enterprises. Our innovative solutions and services enable voice, data, video and internet-communications across a variety of

network infrastructures and are currently in use by millions worldwide. We support our customers through our direct global sales

organization and our distribution networks. Our success depends upon our ability to increase unit volume and market share through the

introduction of new products and succeeding generations of products having optimal selling prices and increased functionality as

compared to both the prior generation of a product and to the products of competitors in order to gain market share. To service our

customers and grow revenue, we are continually conducting research and developing new products addressing customer needs and

testing those products for the specific requirements of the particular customers. We offer a broad portfolio of flexible software and

hardware network solutions and services that enable service providers to meet today’s service demands, while enabling them to transition

to the fully converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network of the future. In addition to

our global headquarters in Huntsville, Alabama, and our European headquarters in Munich, Germany, we have sales, administrative and

research and development facilities in strategic global locations.

ADTRAN Holdings, Inc. solely owns ADTRAN, Inc. and is the majority shareholder of ADVA Optical Networking SE ("ADVA").

ADTRAN is a leading global provider of open, disaggregated networking and communications solutions. ADVA is a global provider

of network solutions for data, storage, voice and video services. The combined technology portfolio can best address current and future

requirements, especially regarding the convergence of solutions at the network edge.

In addition to the Company's reportable segments, revenue is also reported for the following three categories – Subscriber Solutions,

Access & Aggregation Solutions, and Optical Networking Solutions.

Prior to the Business Combination with ADVA on July 15, 2022, ADTRAN reported revenue across the following three categories: (1)

Access & Aggregation, (2) Subscriber Solutions & Experience and (3) Traditional & Other Products. Following the Business

Combination with ADVA, we have recast these revenues such that ADTRAN’s former Access & Aggregation revenue is combined

with a portion of the applicable ADVA solutions to create Access & Aggregation Solutions, ADTRAN’s former Subscriber Solutions

& Experience revenue is combined with a portion of the applicable ADVA solutions to create Subscriber Solutions and the revenue

from Traditional & Other products is now included in the applicable Access & Aggregation Solutions or Subscriber Solutions category.

Optical Networking Solutions is a new revenue category added to represent a meaningful portion of ADVA’s portfolio.

Our Subscriber Solutions portfolio is used by service providers to terminate their access services infrastructure at the customer premises

while providing an immersive and interactive experience for residential, business and wholesale subscribers. This revenue category

includes hardware- and software-based products and services. These solutions include fiber termination solutions for residential,

business and wholesale subscribers, Wi-Fi access solutions for residential and business subscribers, Ethernet switching and network

edge virtualization solutions for business subscribers and cloud software solutions covering a mix of subscriber types.

27

Our Access & Aggregation Solutions are solutions that are used by communications service providers to connect residential subscribers,

business subscribers and mobile radio networks to the service providers’ metro network, primarily through fiber-based connectivity.

This revenue category includes hardware- and software-based products and services. Our solutions within this category are a mix of

fiber access and aggregation platforms, precision network synchronization and timing solutions and access orchestration solutions that

ensure highly reliable and efficient network performance.

Our Optical Networking Solutions are used by communications service providers, internet content providers and large-scale enterprises

to securely interconnect metro and regional networks over fiber. This revenue category includes hardware- and software-based products

and services. Our solutions within this category include open optical terminals, open line systems, optical subsystems and modules,

network infrastructure assurance systems and automation platforms that are used to build high-scale, secure and assured optical

networks.

ADVA Domination and Profit and Loss Transfer Agreement

The DPLTA between the Company, as the controlling company, and ADVA Optical Networking SE, as the controlled company, which

was executed on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the commercial register

(

Handelsregister

) of the local court (

Amtsgericht

) at the registered seat of ADVA (Jena).

Under the DPLTA, subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, (i) the Company is

entitled to issue binding instructions to the management board of ADVA, (ii) ADVA will transfer its annual profit to the Company,

subject to, among other things, the creation or dissolution of certain reserves, and (iii) the Company will generally absorb the annual net

loss incurred by ADVA. The obligation of ADVA to transfer its annual profit to the Company applies for the first time to the profit, if

any, generated in the ADVA fiscal year 2023. The obligation of the Company to absorb ADVA’s annual net loss applies for the first

time to the loss, if any, generated in the ADVA fiscal year 2023.

Additionally, and subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides

that ADVA shareholders (other than us) be offered, at their election, (i) to put their ADVA shares to the Company in exchange for a

compensation in cash of EUR 17.21 per share (the “Exit Compensation”), or (ii) to remain ADVA shareholders and receive a recurring

compensation in cash of EUR 0.59 (EUR 0.52 net under the current tax regime) per share for each full fiscal year of ADVA (the “Annual

Recurring Compensation”). The Annual Recurring Compensation is due on the third banking day following the ordinary general

shareholders’ meeting of ADVA for the respective preceding fiscal year (but in any event within eight months following expiration of

the fiscal year) and is first granted for the 2023 fiscal year, payable for the first time after the ordinary general shareholders’ meeting of

ADVA in 2024. The adequacy of both forms of compensation have been challenged by minority shareholders of ADVA via court-led

appraisal proceedings under German law,

and it is possible that the courts in such appraisal proceedings may adjudicate a higher Exit

Compensation or Annual Recurring Compensation (in each case, including interest thereon) than agreed upon in the DPLTA.

The opportunity for outside ADVA shareholders to tender ADVA shares in exchange for Exit Compensation had been scheduled to

expire on March 16, 2023. However, due to the appraisal proceedings that have been initiated in accordance with applicable German

law, this time period for tendering shares has been extended pursuant to the German Stock Corporation Act (

Aktiengesetz

) and will end

two months after the date on which a final decision in such appraisal proceedings has been published in the Federal Gazette

(

Bundesanzeiger

).

We currently hold 33,961,170 no-par value bearer shares of ADVA, representing 65.30% of ADVA’s outstanding shares as of February

14, 2023.

The foregoing description of the DPLTA does not purport to be complete and is qualified in its entirety by reference to the DPLTA, a

non-binding English translation of which is incorporated by reference to Exhibit 10.5 of this Amendment No. 1.

During the year ended December 31, 2022, we recognized $14.2 million of transaction costs relating to the Business Combination. We

expect to incur integration costs and costs associated with the implementation of the DPLTA during 2023 and such costs are expected

to be material.

Multi-Year Integration Program

During the fourth quarter of 2022, the Company initiated a multi-year integration program designed to optimize the assets, business

processes, and information technology systems of the Company.

The program has identified several potential cost synergies, including:

•

realizing operational scale;

•

combined sales channels;

•

streamlining corporate and general and administrative functions; and

•

combined sourcing and production costs.

28

We have and will continue to invest significant dollars to restructure the workforce, optimize legacy systems, streamline legal entities

and consolidate real estate holdings. By executing these integration activities, we expect to deliver greater innovation for customers,

career enrichment opportunities for employees, and enhanced value for shareholders.

See Note 23 of the Notes to Consolidated Financial

Statements, included in Part II, Item 8 of this Amendment No. 1 for additional information.

Financial Performance and Trends

We ended 2022 with a year-over-year revenue increase of 82.2% as compared to the year ended December 31, 2021, driven by increased

volume of sales activity due to the Business Combination with ADVA and to service provider customers. During 2022, we had one 10%

revenue customer which was a domestic service provider customer and our five largest customers comprised 38.3% of our revenue. Our

year-over-year domestic revenue increased by 38.1%, driven by increased sales volume due to the Business Combination with ADVA

and an increased sales volume of residential gateways and optical network terminals in our Network Solutions segment. Internationally,

our revenue increased by 169.7% compared to the prior year period, primarily driven by increased volume of sales activity due to the

Business Combination with ADVA and increased shipments to a Tier-1 network operator in Europe. We experienced strong demand

for our solutions during 2022 and achieved significant year-over-year bookings growth. Bookings are defined as orders received for a

product or service during a fiscal period that will be delivered or performed sometime in the future and is a forward looking metric that

we utilize to help us understand future revenue growth for the Company. Bookings are generally subject to modification and or

cancellation per the terms of the order. Our increase in demand comes from service providers planning to deploy our fiber access

platforms, in-home service delivery platforms and SaaS applications. We expect this growth to accelerate. During 2021 and 2022, we

secured several Tier-1 next-generation fiber customers, and previously announced Tier-1 fiber customers significantly increased their

bookings for our fiber access platforms. Although we expect our revenue growth and profitability in the near-term to continue to be

negatively impacted by supply chain issues, our outlook continues to strengthen given the increased demand for our products and our

expectation of an improving supply chain over the longer term.

A substantial portion of our shipments of inventory in any fiscal period relate to orders received and shipped within that fiscal period

for customers under agreements containing non-binding purchase commitments. Further, a significant percentage of orders require

delivery within a few days. However, with the current global supply chain and transportation constraints, and limited availability of

semiconductor chips and other components of our products, we have experienced and may continue to experience extended lead times,

increased logistics intervals and costs, and lower volume of products deliveries, which have had and may continue to have a material

adverse effect on our operating results and could have a material adverse effect on our customer relations and our financial condition.

The

extent of the impact of the novel coronavirus (“COVID-19”) pandemic on our business remains uncertain and difficult to predict

because of the dynamic and evolving nature of the situation. Despite the widespread availability of COVID-19 vaccines and related

treatments, the global impact of the outbreak continues to adversely affect many industries, and different geographies continue to reflect

the effects of public health restrictions in various ways. The economic recovery following the impact of the COVID-19 pandemic is

only partially underway and has been gradual, uneven and characterized by meaningful dispersion across sectors and regions with

uncertainty regarding its ultimate length and trajectory. The COVID-19 pandemic and related countermeasures have previously impacted

our operations. During 2022, notwithstanding improvement in many markets in which we operate due to a return to more normalized

business operations, certain markets continued to be adversely impacted by COVID-19 or as a result of policies relating to COVID-19.

Additionally, due to the pandemic and a global semiconductor chip shortage, we experienced disruption and delays in our supply chain

and significant price increases with certain of our manufacturing partners, and those disruptions, delays and price increases may continue.

For example, in the second half of 2021 and throughout 2022, our results of operations were negatively impacted by increased expenses

resulting from supply chain disruptions. With the current global supply chain and transportation constraints, including delays in supply

chain deliveries and the related global semi-conductor chip shortage may continue to have a material adverse effect on our operating

results and could have a material adverse effect on customer relations and our financial condition. We believe these supply chain

challenges and their adverse impact on our industry will continue to ease during 2023. However, there can be no assurance that the

ongoing disruptions due to COVID-19, the related global semiconductor chip shortage or other supply chain constraints or price

increases will be resolved in the near term, which could continue to adversely affect our business, financial condition, and results of

operations. We will continue to evaluate the nature and extent of the impact of COVID-19 on our business.

29

Our operating results have fluctuated, and may continue to fluctuate, on a quarterly basis due to several factors, including customer

order activity, supply chain constraints, component availability, the Company's consolidation, purchase accounting, and integration with

ADVA. A substantial portion of our shipments in any fiscal period relates to orders received and shipped within that fiscal period for

customers under agreements containing non-binding purchase commitments. Further, a significant percentage of orders require delivery

within a few days requiring us to maintain higher inventory levels. These factors may result in limited order flow visibility. However,

with the current global supply chain and transportation constraints, and limited availability of semiconductor chips and other components

of our products, we have experienced and may continue to experience extended lead times, increased logistics intervals and costs, and

lower volume of products deliveries, which have had and may continue to have a material adverse effect on our operating results and

could have a material adverse effect on customer relations and our financial condition. We believe these supply chain challenges and

their adverse impact on our industry will continue at least through fiscal 2023 and expect that the extended lead times and elevated

supply chain costs experienced by our industry will persist for the reasonably foreseeable future. It is unclear when the supply

environment will become less volatile and what impacts the supply environment will have on the industry in future periods. Operating

expenses are relatively fixed in the short term; therefore, a shortfall in quarterly revenues could significantly impact our financial results

in a given quarter.

Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and market

conditions, specifically the decline that initially resulted from the COVID-19 pandemic and that may recur and foreign currency

exchange rate movements, inflation, regional conflicts, increased competition, customer order patterns, changes in product and services

mix, timing differences between price decreases and product cost reductions, product warranty returns, expediting costs, tariffs and

announcements of new products by us or our competitors. Specifically, we expect inflationary pressures on input costs, such as raw

materials and labor, and distribution costs to increase. We continue to support our customer demand for our products by working with

our suppliers, contract manufacturers, distributors, and customers to address and to limit the disruption to our operations and order

fulfillment. Our attempts to offset these cost pressures, such as through increases in the selling prices of some of our products and

services, may not be successful and could negatively affect our operating results. Additionally, maintaining sufficient inventory levels

to assure prompt delivery of our products increases the amount of inventory that may become obsolete and increases the risk that the

obsolescence of this inventory may have an adverse effect on our business and operating results. Also, not maintaining sufficient

inventory levels to assure prompt delivery of our products may cause us to incur expediting costs to meet customer delivery requirements,

which may negatively impact our operating results.

We are exposed to changes in foreign currencies relative to the U.S. dollar, which are references to the differences between the foreign-

exchanges rates we use to convert the financial results of our international operations from local currencies into U.S. dollars for financial

reporting purposes. This impact of foreign-exchange rate changes is calculated based on the difference between the current period’s

currency exchange rates and that of the comparable prior period. Our primary exposures to foreign currency exchange rate movements

are with the Euro and the British pound sterling. As a result of our global operations, our revenue, gross margins, operating expense and

operating income in some international markets have been and may continue to be affected by foreign currency fluctuations.

Our historical financial performance is not necessarily a meaningful indicator of future results, and, in general, management expects

that our financial results may vary from period to period.

For a discussion of risks associated with our operating results, see Part I, Item

1A, Risk Factors of this Amendment No. 1.

30

Results of Operations

The following table presents selected financial information derived from our Consolidated Statements of (Loss) Income expressed as a

percentage of revenue for the years indicated. Amounts may not foot due to rounding.

Year Ended December 31,

2022

2021

2020

Revenue

Network Solutions

89.4

%

88.6

%

86.5

%

Services & Support

10.6

11.4

13.5

Total Revenue

100.0

100.0

100.0

Cost of Revenue

Network Solutions

63.1

54.7

48.2

Services & Support

5.0

6.5

8.8

Total Cost of Revenue

68.1

61.2

57.0

Gross Profit

31.9

38.8

43.0

Selling, general and administrative expenses

20.4

22.1

22.5

Research and development expenses

16.9

19.3

22.4

Asset impairments

1.7

—

—

Operating Loss

(7.1

)

(2.6

)

(1.9

)

Interest and dividend income

0.2

0.5

0.4

Interest expense

(0.3

)

—

—

Net investment (loss) gain

(1.1

)

0.3

1.0

Other income (expense), net

1.4

0.7

(0.6

)

Loss Before Income Taxes

(6.9

)

(1.1

)

(1.2

)

Income tax benefit (expense)

6.1

(0.4

)

1.7

Net (Loss) Income

(0.9

)%

(1.5

)%

0.5

%

Less: Net Loss attributable to non-controlling interest

(0.7

)

—

—

Net (Loss) Income attributable to ADTRAN Holdings, Inc.

(0.2

)%

(1.5

)%

0.5

%

The following discussion and financial information are presented to aid in an understanding of our current consolidated financial

position, changes in financial position, results of operations and cash flows and should be read in conjunction with the audited

consolidated financial statements and notes thereto included herein. The emphasis of the discussion is a comparison of the years ended

December 31, 2022 and December 31, 2021. For a discussion of a comparison of the years ended December 31, 2021 and December

31, 2020, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our

Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022.

Comparison of Years Ended December 31, 2022 and December 31, 2021

Revenue

Our revenue increased 82.2% from $563.0 million for the year ended December 31, 2021 to $1,026 million for the year ended December

31, 2022. The increase in revenue for the year ended December 31, 2022 is primarily attributable to a $365.9 million increase in volume

of sales activity due to the Business Combination with ADVA and a $96.6 million increase in volume of sales activity related to our

ADTRAN, Inc. operations. The increase in revenue by category for the year ended December 31, 2022 was primarily attributable to a

$261.1 million increase in Optical Networking Solutions products due to the Business Combination with ADVA and a $184.2 million

increase in Subscriber Solutions products. Although our revenue increased, supply of semiconductor chips and other components of our

products has become constrained resulting in extended lead times and increased costs. Transportation constraints, including shortages

for both air and surface freight, as well as labor shortages in the transportation industry, have also affected the timing and the cost of

obtaining raw materials and production supplies. Although our revenue growth and profitability in the near-term may be impacted by

these global supply chain issues, our longer term outlook continues to strengthen given our progress with new customer opportunities

and the increased customer demand.

Network Solutions segment revenue increased 83.8% from $498.8 million in 2021 to $916.8 million in 2022, due primarily to the

increase of $320.3 million in volume of sales activity due to the Business Combination with ADVA and the increase in revenue for

Subscriber Solutions products of $107.0 million, partially offset by a decrease in Access & Aggregation Solutions products of $9.3

million revenue in our ADTRAN, Inc. operations.

31

Services & Support revenue increased by 69.5% from $64.2 million in 2021 to $108.7 million in 2022. The increase in revenue for 2022

was primarily attributable to the increase of $45.6 million in volume of sales activity from the Business Combination with ADVA

partially offset by a $3.1 million decrease in revenue for Access & Aggregation Solutions products in our ADTRAN, Inc. operations.

Domestic revenue increased by 38.1% from $374.6 million in 2021 to $517.4 million in 2022, driven by increased volume of network

termination and fiber CPE in our Network Solutions segment. In addition, such growth was a result of increased revenue to Tier-2 and

Tier-3 customers with diversified business among our fiber access and CPE, service provider CPE and services.

International revenue, which is defined as revenue generated from the Network Solutions and Services & Support segments provided to

a customer outside of the U.S., increased by 169.7% from $188.4 million for the year ended December 31, 2021 to $508.1 million for

the year ended December 31, 2022. International revenue, as a percentage of total revenue, increased from 33.5% for the year ended

December 31, 2021 to 49.5% for the year ended December 31, 2022. The increase in international revenue for 2022 was primarily

attributable to the increase in volume of $263.8 million in sales activity from the Business Combination with ADVA and increased

shipments to a Tier-1 network operator and multiple alternative network operators in Europe. While international revenue has increased

to approximately 49.5% of total revenues for the year ended December 31, 2022, the mix of our Network Solutions and Services &

Support segments as a percentage of total international revenue remains relatively linear. For the year ended December 31, 2022 as

compared to the year ended December 31, 2021, changes in foreign currencies relative to the U.S dollar decreased our net sales by

approximately $41.5 million.

Our ADTRAN, Inc. international revenue is largely focused on broadband infrastructure and is consequently affected by the decisions

of our customers as to timing for installation of new technologies, expansion of their networks and/or network upgrades. Our

international customers must make these decisions in the regulatory and political environment in which they operate – both nationally

and in some instances, regionally – whether of a multi-country region or a more local region within a country. Consequently, while we

expect the global trend towards deployment of more robust broadband speeds and access to continue creating additional market

opportunities for us, the factors described above may result in pressure on revenue and operating income. Our ADVA international

revenue is largely focused on the manufacture and selling of networking solutions that are based on three core areas of expertise: fiber-

optic transmission technology (cloud interconnect), cloud access technology for rapid creation of innovative services around the network

edge and solutions for precise timing and synchronization of networks. In addition, ADVA's international operations offers a

comprehensive portfolio of network design, implementation and maintenance services to assist operators in the deployment of market-

leading networks while reducing their cost to maintain these networks.

Cost of Revenue

As a percentage of revenue, cost of revenue increased from 61.2% for the year ended December 31, 2021 to 68.1% for the year ended

December 31, 2022. The increase was primarily attributable to acquisition related expenses, adjustments consisting of intangible

amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a

result of the Business Combination with ADVA, as well as supply chain constraint related expenses and to a lesser extent changes in

customer and product mix and a regional revenue shift in our ADTRAN, Inc. operations. As our current inventory that was acquired in

the Business Combination with ADVA is sold, we expect that our cost of revenue as a percentage of revenue will return to more

normalized levels. For the year ended December 31, 2022, changes in foreign currencies relative to the U.S. dollar decreased our cost

of revenue by approximately $9.6 million.

Network Solutions cost of revenue, as a percentage of that segment’s revenue, increased from 61.7% of revenue in 2021 to 70.6% of

revenue in 2022. The increase in cost of revenue as a percentage of revenue was primarily attributable to acquisition related expenses,

amortizations and adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to

inventory costs that flow through to cost of revenue as a result of the Business Combination with ADVA, as well as supply chain

constraint related expenses and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN,

Inc. operations.

Services & Support cost of revenue, as a percentage of that segment’s revenue, decreased from 57.3% of revenue in 2021 to 47.1% of

revenue in 2022. The decrease in cost of revenue as a percentage of revenue was primarily attributable to customer mix and changes in

Services & Support mix as a result of the Business Combination with ADVA.

Services & Support revenue is comprised of network planning and implementation, maintenance, support and cloud-based management

services, with network planning and implementation being the largest and fastest growing component in the long-term. Compared to

our other services, such as maintenance, support and cloud-based management services, our network planning and implementation

services typically utilize a higher percentage of internal and subcontracted engineers, professionals and contractors to perform the work

for customers. The additional costs incurred to perform these infrastructure and labor-intensive services inherently result in lower

average gross margins as compared to maintenance and support services. Within the Services & Support segment, we do expect

variability in gross margins from quarter-to-quarter based on the mix of the services recognized.

32

Gross Profit

As a percentage of revenue, gross profit decreased from 38.8% for the year ended December 31, 2021 to 31.9% for the year ended

December 31, 2022. The decrease was primarily attributable to increases in cost of revenue related to acquisition related expenses,

adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that

flow through to cost of revenue as a result of the Business Combination with ADVA, as well as supply chain constraint related expenses

and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN, Inc. operations partially offset

by an increase in volume of sales activity due to the Business Combination with ADVA and an increase in volume of sales activity

related to our ADTRAN, Inc. operations.

As a percentage of that segment's revenue, Network Solutions gross profit decreased from 38.3% for the year ended December 31, 2021

to 29.4% for the year ended December 31, 2022. The decrease was primarily attributable to increases in cost of revenue related to

acquisition related expenses, adjustments consisting of intangible amortization of backlog, developed technology and fair value

adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with ADVA, as well as

supply chain constraint related expenses and to a lesser extent changes in customer and product mix and a regional revenue shift in our

ADTRAN, Inc. operations partially offset by an increase in volume of sales activity due to the Business Combination with ADVA and

an increase in volume of sales activity related to our ADTRAN, Inc. operations.

As a percentage of that segment's revenue, Services & Support gross profit increased from 42.7% for the year ended December 31, 2021

to 52.9% for the year ended December 31, 2022. The increase was primarily attributable to an increase in volume of sales activity due

to the Business Combination with ADVA, an increase in volume of sales activity related to our ADTRAN, Inc. and a decrease in cost

of revenue attributable to customer mix and changes in Services & Support mix as a result of the Business Combination with ADVA.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of revenue decreased from 22.1% for the year ended December 31, 2021

to 20.4% for the year ended December 31, 2022. Selling, general and administrative expenses as a percentage of revenue will generally

fluctuate whenever there is a significant fluctuation in revenue for the periods being compared as these costs are relatively fixed in the

short term.

Selling, general and administrative expenses increased by 67.9% from $124.4 million for the year ended December 31, 2021 to $208.9

million for the year ended December 31, 2022. Selling, general and administrative expenses include personnel costs for management,

accounting, information technology, human resources, sales and marketing, as well as independent auditor, tax and other professional

fees, contract services and legal and litigation related costs. The increase in selling, general and administrative expenses was primarily

attributable to increased expenses related to the Business Combination with ADVA such as employee-related costs due to an increase

in the number of employees, amortization of intangible assets, depreciation of property, plant and equipment and transactions costs. For

the year ended December 31, 2022 as compared to the year ended December 31, 2021, changes in foreign currencies relative to the U.S

dollar decreased our selling, general and administrative expenses by approximately $4.4 million.

Research and Development Expenses

Research and development expenses as a percentage of revenue decreased from 19.3% for the year ended December 31, 2021 to 16.9%

for the year ended December 31, 2022. Research and development expenses as a percentage of revenue will fluctuate whenever there

are incremental product development activities or significant fluctuations in revenue for the periods being compared as these costs are

relatively fixed in the short term.

Research and development expenses increased by 59.9% from $108.7 million for the year ended December 31, 2021 to $173.8 million

for the year ended December 31, 2022. The increase in research and development expenses was primarily attributable to increased

expenses related to the Business Combination with ADVA such as employee-related costs due to an increase in the number of employees

and expenses related to our multi-year integration program, amortization of intangible assets and depreciation of property, plant and

equipment. For the year ended December 31, 2022 as compared to the year ended December 31, 2021, changes in foreign currencies

relative to the U.S. dollar decreased our research and development expenses by approximately $5.2 million.

ADVA has arrangements with governmental entities for the purposes of obtaining funding for research and development activities. The

Company classifies government grants received under these arrangements as a reduction to research and development expense incurred.

For the year ended December 31, 2022, the Company recognized $1.1 million as a reduction of research and development expense.

We expect to continue to incur research and development expenses in connection with our new and existing products. We continually

evaluate new product opportunities and engage in significant research and product development efforts, which provides for new product

development, enhancement of existing products and product cost reductions. We may incur significant research and development

expenses prior to the receipt of revenue from a major new product group.

33

Asset Impairments

In connection with the planned integration of information technology following the Business Combination, we determined that certain

projects no longer fit our needs. As a result, the Company recognized impairment charges of $17.4 million during the year ended

December 31, 2022, primarily attributable to capitalized implementation costs for a cloud computing arrangement. There were no asset

impairments recognized during the year ended December 31, 2021.

See Note 11 of the Notes to the Consolidated Financial Statements

included in Part II, Item 8 of this Amendment No. 1 for additional information.

Interest and Dividend Income

Interest and dividend income decreased by 25.4% from $2.8 million for the year ended December 31, 2021 to $2.1 million for the year

ended December 31, 2022. The decrease in interest and dividend income was primarily attributable to a decrease in the investment

balance for the twelve months ended December 31, 2022. Our investments decreased from $71.0 million as of December 31, 2021 to

$33.0 million as of December 31, 2022 and was primarily attributable to the sale of certain equity and fixed income investments for

working capital and other purposes.

Interest Expense

Interest expense increased from less than $0.1 million for the year ended December 31, 2021 to $3.4 million for the year ended December

31, 2022. The increase in interest expense was primarily related to an increase in assumed debt associated with the Business Combination

with ADVA and the new Wells Fargo Credit Agreement.

See Note 13 and Note 14 of the Notes to Consolidated Financial Statements,

included in Part II, Item 8 of this Amendment No. 1 and “Financing Activities” in “Liquidity and Capital Resources” below.

Net Investment (Loss) Gain

We recognized a net investment gain of $1.8 million and a loss of $11.3 million for the years ended December 31, 2021 and 2022,

respectively. The fluctuations in our net investments were primarily attributable to changes in the fair value of our securities recognized

during the period. We expect that any future market volatility could result in continued fluctuations in our investment portfolio.

See

“Investing Activities” in “Liquidity and Capital Resources” of this report and Note 1 and Note 6 of Notes to Consolidated Financial

Statements included in Part II, Item 8 of this report for additional information.

Other Income (Expense), net

Other income (expense), net, increased from income of $3.8 million for the year ended December 31, 2021 to income of $14.5 million

for the year ended December 31, 2022. For the years ended December 31, 2022 and 2021, other income (expense), net, is comprised

primarily of unrealized gains on foreign exchange contracts, gains and losses on foreign currency transactions and income from excess

material sales.

See Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Amendment No. 1 for

additional information on foreign exchange contracts.

Income Tax Benefit (Expense)

Our effective tax rate changed from an expense of 37.0%, for the year ended December 31, 2021 to a benefit of 87.5% for the year ended

December 31, 2022. The change in the effective tax rate for the year ended December 31, 2022, was driven primarily by the release of

the majority of our valuation allowance against our domestic deferred tax assets during the fourth quarter of 2022, that was partially

offset by increased international tax expense primarily as a result of our closing of the Business Combination with ADVA during the

third quarter of 2022.

See Note 15 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Amendment No.

1 for additional information.

Net (Loss) Income Attributable to ADTRAN Holdings, Inc.

As a result of the above factors, our net loss attributable to ADTRAN Holdings, Inc. decreased from $8.6 million for the year ended

December 31, 2021 to a net loss of $2.0 million for the year ended December 31, 2022. As a percentage of revenue, net loss was 1.5%

for the year ended December 31, 2021 and net loss was 0.2% for the year ended December 31, 2022.

Liquidity and Capital Resources

Liquidity

We have historically financed, our ongoing business with existing cash, investments and cash flow from operations. In the current supply

environment we also expect to utilize our credit arrangements to manage our working capital needs. We have used, and expect to

continue to use, existing cash, investments, credit arrangements and cash generated from operations for working capital, business

acquisitions, shareholder dividends and other general corporate purposes, including product development activities to enhance our

existing products and develop new products, expand our sales and marketing activities and fund capital expenditures. As of December

31, 2022, the Company has incurred a total of $26.1 million of transaction costs related to the Business Combination. We will also be

obligated to compensate any annual net loss of ADVA under the DPLTA. Additionally, pursuant to the terms of the DPLTA, each

34

ADVA shareholder (other than the Company) has received an offer to elect either (1) to remain an ADVA shareholder and receive from

us an Annual Recurring Compensation payment, or (2) to receive Exit Compensation. Assuming all of the minority holders of currently

outstanding ADVA shares were to elect the second option, we would be obligated to make aggregate Exit Compensation payments of

approximately EUR 310.6 million or approximately $333.2 million, based on an exchange rate as of December 31, 2022. Shareholders

electing the first option of Annual Recurring Compensation may later elect the second option. The opportunity for outside ADVA

shareholders to tender ADVA shares in exchange for Exit Compensation expires on March 16, 2023 (subject to appraisal proceedings).

Our obligation to pay Annual Recurring Compensation under the DPLTA would lead to a continuing payment obligation, which would

amount to approximately EUR 10.6 million or $11.4 million (based on the current exchange rate), per year assuming none of the minority

ADVA shareholders were to elect Exit Compensation. The foregoing amounts do not reflect any potential increase in payment

obligations that we may have depending on the outcome of ongoing appraisal proceedings in Germany.

We believe that our cash and cash equivalents, investments, cash generated from operations and access to funds under the new Wells

Fargo credit facility (described below) will be adequate to meet our operating and capital needs and our obligations under the Business

Combination and the DPLTA for at least the next 12 months.

As of December 31, 2022, cash on hand was $108.6 million and short-term investments were $0.3 million, which resulted in available

short-term liquidity of $108.9 million, of which $86.3 million was held by our foreign subsidiaries. As of December 31, 2021, cash on

hand was $56.6 million and short-term investments were $0.4 million, which resulted in available short-term liquidity of $57.0 million,

of which $47.7 million was held by our foreign subsidiaries. Generally, we intend to permanently reinvest funds held outside the U.S.,

except to the extent that any of these funds can be repatriated without withholding tax. The decrease in short-term liquidity from

December 31, 2021 to December 31, 2022 was primarily attributable to the sale of certain equity and fixed income investments for

working capital and other purposes.

In addition to our cash and cash equivalents and the credit facility, we may fund a portion or all of the Exit Compensation through the

sale of securities. There can be no assurances that we would be successful in effecting these actions on commercially reasonable terms

or at all.

Operating Activities

Net cash used in operating activities of $44.2 million during the year ended December 31, 2022 decreased by $47.2 million compared

to $3.0 million of net cash provided during the year ended December 31, 2021. This decrease was primarily due to net cash outflows

from working capital, specifically, an inventory build related to component availability, an increase in accounts receivables and

transaction costs related to the Business Combination partially offset by an increase in the average number of days payable to our trade

suppliers. Additional details related to our working capital and its drivers are discussed below.

Net accounts receivable increased 76.0% from $158.7 million as of December 31, 2021 to $279.4 million as of December 31, 2022.

There was an allowance for credit losses of less than $0.1 million as of December 31, 2022 and no allowance for credit losses as of

December 31, 2021. The increase in net accounts receivable was due primarily to the increase in sales volume related to the Business

Combination with ADVA and an increase in sales volume in our ADTRAN, Inc. operations. Quarterly accounts receivable DSO

decreased from 95 days as of December 31, 2021 to 72 days as of December 31, 2022. The decrease in DSO was due to customer and

geographical mix associated with the Business Combination with ADVA and timing of sales within the quarter.

Other receivables increased 192.4% from $11.2 million as of December 31, 2021 to $32.8 million as of December 31, 2022. The increase

in other receivables was primarily attributable to an increase in prepaid taxes associated with Business Combination with ADVA and

contract assets partially offset by a decrease in our receivables for sales of raw materials and reclaimed duty drawbacks.

Annual inventory turnover decreased from 2.60 turns as of December 31, 2021 to 2.46 turns as of December 31, 2022. Inventory

increased 205.6% from $139.9 million as of December 31, 2021 to $427.5 million as of December 31, 2022. The increase in inventory

was due to Business Combination with ADVA and strategic inventory buffer purchases given extended component lead times and

availability constraints as well as new product ramp ups to ensure supply continuity. We expect inventory levels to fluctuate as we

attempt to maintain sufficient inventory in response to supply chain uncertainties.

Accounts payable increased 131.9% from $102.5 million as of December 31, 2021 to $237.7 million as of December 31, 2022. The

increase in accounts payable was primarily due to the increase in volume of operating costs associated with the Business Combination

with ADVA, additional purchases of raw material inventory and extended payment terms. Accounts payable will fluctuate due to

variations in the timing of the receipt of inventory, supplies and services and our subsequent payments for these purchases.

Investing Activities

Capital expenditures totaled approximately $17.1 million and $5.7 million for the years ended December 31, 2022 and 2021,

respectively. These expenditures were primarily used to purchase manufacturing and test equipment, software, computer hardware and

building improvements.

35

Our combined short-term and long-term investments decreased $38.0 million from $71.0 million as of December 31, 2021 to $33.0

million as of December 31, 2022. This decrease reflects the impact of the sale of portions of our equity and fixed income investments

and the net unrealized and realized gains and losses on our investments.

We typically invest all available cash not required for immediate use in operations, primarily in securities that we believe bear minimal

risk of loss.

See Note 6 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Amendment No. 1 for additional

information.

As of December 31, 2022, our corporate bonds, municipal bonds, asset-backed bonds, mortgage/agency bonds, U.S. government bonds

and other government bonds were classified as available-for-sale and had a combined duration of 1.74 years with an average Standard

& Poor’s credit rating of AA-. Because our investment portfolio has a high-quality rating and contractual maturities of short duration,

we are able to obtain prices for these bonds derived from observable market inputs, or for similar securities traded in an active market,

on a daily basis.

Our long-term investments decreased 53.7% from $70.6 million as of December 31, 2021 to $32.7 million as of December 31, 2022.

Our investments include various marketable equity securities classified as long-term investments with a fair market value of $0.8 million

and $12.6 million, as of December 31, 2022 and 2021, respectively. Long-term investments as of December 31, 2022 and 2021 also

included $22.9 million and $26.9 million, respectively, related to our deferred compensation plan.

Financing Activities

Dividends

During 2022 and 2021, we paid shareholder dividends totaling $22.9 million and $17.5 million, respectively. The continued payment of

dividends is at the discretion of the Company's Board of Directors and is subject to general business conditions and ongoing financial

results of the Company. The following table shows dividends per common share paid to our shareholders in each quarter of 2022 and

2021:

Dividends per Common Share

2022

2021

First Quarter

$

0.09

$

0.09

Second Quarter

$

0.09

$

0.09

Third Quarter

$

0.09

$

0.09

Fourth Quarter

$

0.09

$

0.09

On February 20, 2023, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.09 per common

share to be paid to the Company’s stockholders of record at the close of business on March 7, 2023. The dividends will be paid on March

21, 2023 in the aggregate amount of approximately $7.0 million.

Stock Repurchase Program

There were no stock repurchases during the years ended December 31, 2022 and 2021, and there currently is no authorized stock

repurchase plan.

Stock Option Exercises

To accommodate employee stock option exercises, the Company issued 0.5 million and 0.4 million shares of common stock and treasury

stock which resulted in proceeds of $6.9 million and $6.4 million during the years ended December 31, 2022 and 2021, respectively.

Additionally, to accommodate ADVA Optical Networking SE stock option exercises, ADVA Optical Networking SE issued 0.1 million

of ADVA Optical Networking SE common stock which resulted in proceeds of $0.8 million, during the period July 15, 2022 to

December 31, 2022. ADVA Optical Networking SE stock options outstanding as of December 31, 2022 totaled 81 thousand

(representing less than 0.2% of ADVA's outstanding shares), of which 27 thousand were exercisable.

Employee Pension Plan

We maintain a defined benefit pension plan covering employees in certain foreign countries. Pension benefit plan obligations are based

on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount rates, compensation rate

increases, expected return on plan assets, retirement rates and mortality rates. Actual results that differ from the assumptions and changes

in assumptions could affect future expenses and obligations.

36

In connection with the Business Combination, we acquired $29.6 million of additional obligations and $22.3 million of assets related to

postemployment benefit plans for certain groups of employees at our new operations outside of the U.S. Plans vary depending on the

legal, economic, and tax environments of the respective country. For defined benefit plans, accruals for pensions and similar

commitments have been included in the results for this year. The new defined benefit plans are for employees in Switzerland, Italy,

Israel and India:

•

In Switzerland, there are two defined benefit pension plans. Both plans provide benefits in the event of retirement, death or

disability. The plan's benefits are based on age, years of service, salary and on a participants old age account. The plans are

financed by contributions paid by the participants and by the Company.

•

In Italy, the post-employment benefit plan is required due to statutory provisions. The plan is financed directly by the

Company on a pay-as-you-go basis. Employees receive their pension payments as a function of salary, inflation and a

notional account.

•

In Israel, there is a defined benefit plan that provides benefits in the event of a participant being dismissed involuntarily,

retirement or death. The plan's benefits are based on the higher of the severance benefit required by law or the cash surrender

value of the severance benefit component of any qualifying insurance policy or long-term employee benefit fund that is

registered in the participant's name. The plan is financed by contributions paid by the Company.

•

In India, the post-employment benefit plan is required due to statutory provisions. The plan is financed directly by the

Company on a pay-as-you-go basis.

Our defined benefit plan assets consist of a balanced portfolio of equity funds, bond funds, emerging market funds, real estate funds and

balanced funds. Our investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner

necessary to meet expected future benefits earned by participants and consider a broad range of economic conditions. The objectives of

our investment policy are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset

returns that meet or exceed the plans’ actuarial assumptions and achieve asset returns that are competitive with like institutions

employing similar investment strategies. The investment policy is periodically reviewed by us and a designated third-party fiduciary for

investment matters. At December 31, 2022, the estimated fair market value of our defined benefit pension plans' assets increased to

$48.7 million from $32.7 million at December 31, 2021.

The defined benefit pension plan is accounted for on an actuarial basis, which requires the use of various assumptions, including an

expected rate of return on plan assets and a discount rate. The expected return on our German plan assets that is utilized in determining

the benefit obligation and net periodic benefit cost is derived from periodic studies, which include a review of asset allocation strategies,

anticipated future long-term performance of individual asset classes, risks using standard deviations and correlations of returns among

the asset classes that comprise the plans' asset mix. While the studies give appropriate consideration to recent plan performance and

historical returns, the assumptions are primarily long-term, prospective rates of return. The discount rate has been derived from the

returns of high-quality, corporate bonds denominated in Euro currency with durations close to the duration of our pension obligations.

The projected benefit obligation for our defined benefit pension plans was $59.3 million and $44.2 million as of December 31, 2022

and 2021, respectively.

The components of net periodic pension cost, other than the service cost component, are included in other income (expense), net in the

Consolidated Statements of (Loss) Income. The components of net periodic pension cost and amounts recognized in other

comprehensive (loss) income for the years ended December 31, 2022 and 2021 were ($5.8) million and ($5.0) million, respectively.

Actuarial gains and losses are recorded in accumulated other comprehensive (loss) income. To the extent unamortized gains and losses

exceed 10% of the higher of the market-related value of assets or the projected benefit obligation, the excess is amortized as a component

of net periodic pension cost over the remaining service period of active participants. We estimate that less than $0.1 million will be

amortized from accumulated other comprehensive (loss) income into net periodic pension cost in 2023 for the net actuarial loss. The net

actuarial loss recognized in accumulated other comprehensive loss as of December 31, 2022 and 2021 was $1.1 million and $7.7 million,

respectively.

See Note 15 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Amendment No. 1 for

additional information.

37

Off-Balance Sheet Arrangements

We do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with

unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for

capital resources.

Cash Requirements

The following table (as restated) summarizes the Company’s material short- and long-term cash requirements from known obligations

pursuant to certain contracts and commitments as of December 31, 2022, as well as an estimate of the timing in which such obligations

and payments are expected to be satisfied (but excluding payments that may be made pursuant to the DPLTA and currency hedging

arrangements, which are discussed below). Other than operating lease obligations, the cash requirements table excludes interest

payments.

(In thousands)

Total

2023

2024

2025

2026

2027

After 2027

Wells Fargo credit agreement

(1)

$

60,000

$

—

$

—

$

—

$

—

$

60,000

$

—

Nord/LB revolving line of credit

(2)

16,091

16,091

—

—

—

—

—

Syndicated credit agreement

working capital line of credit

(3)

10,727

10,727

—

—

—

—

—

DZ Bank revolving line of credit

(4)

9,118

9,118

—

—

—

—

—

Syndicated credit agreement note

payable

(5)

24,598

24,598

—

—

—

—

—

Purchase obligations

(6)

552,440

527,562

24,141

309

167

261

—

Operating lease obligations

(7)

34,976

8,992

8,076

6,740

3,825

2,865

4,478

Totals

$

707,950

$

597,088

$

32,217

$

7,049

$

3,992

$

63,126

$

4,478

(1) See description below.

(2) See description below.

(3) See description below.

(4) See description below.

(5) See description below.

(6) We have purchase obligations related to open purchase orders to our contract manufacturers, ODMs, component suppliers, service partners and other vendors. The settlement of our purchase obligations

will occur at various dates beginning in 2023 and going through 2027. See Note 20 of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Amendment No. 1 for more information.

(7) We have operating leases for office space, automobiles and various other equipment in the U.S. and in certain international locations. Our operating leases had remaining lease terms ranging from one month

to 119 months as of December 31, 2022.

New Wells Fargo Credit Agreement

On July 18, 2022, ADTRAN Holdings, Inc. and ADTRAN, Inc., as the borrower, entered into a credit agreement with a syndicate of

banks, including Wells Fargo Bank, National Association, as administrative agent (“Administrative Agent”), and the other lenders

named therein (the “Credit Agreement”). The Credit Agreement allows for borrowings of up to $100 million in aggregate principal

amount, subject to being increased to up to $400 million in aggregate principal amount upon the Company or Borrower’s execution of

a DPLTA with ADVA or a parent of ADVA, among other conditions (the “Senior Credit Facilities Increase”). The DPLTA as executed

on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the commercial register (

Handelsregister

)

of the local court (

Amtsgericht

) at the registered seat of ADVA (Jena).

See Note 24 of the Notes to Consolidated Financial Statements

for further information.

38

As of December 31, 2022, ADTRAN, Inc.’s borrowings under the revolving line of credit were $60.0 million. The Credit Agreement

matures in July 2027 but provides the Company with an option to request extensions subject to customary conditions. In addition, we

may issue up to $25 million in letters of credit against the first $100 million in our total facility. As of December 31, 2022, we had a

total of $21.3 million in letters of credit with ADTRAN, Inc. outstanding against our eligible borrowings, leaving a net amount of $18.7

million available for future borrowings. Upon the DPLTA becoming effective on January 16, 2023, the available total borrowings under

the Wells Fargo Credit Agreement increased from $100 million to $400 million. On January 31, 2023, the Company increased its

borrowings under the Credit Agreement from $60.0 million to $187.5 million. In February 2023, the borrowings under the Credit

Agreement were paid down by $7.5 million, leaving $180.0 million of borrowings as of February 28, 2023. After considering our

outstanding letters of credit, this leaves the Company approximately $198.7 million available for future borrowings as of February 28,

2023. The Company used approximately $51.4 million of the proceeds from the borrowings under the Credit Agreement to retire the

outstanding borrowings under ADVA's syndicated credit agreement note payable, syndicated credit agreement working capital line of

credit and the Nord/LB revolving line of credit. ADVA's $9.1 million of borrowings under its revolving line of credit with DZ Bank

remain outstanding. Any future credit extensions under the Credit Agreement are subject to customary conditions precedent. The

proceeds of any loans are expected to be used for general corporate purposes and to pay a portion of the Exchange Offer consideration.

All U.S. borrowings under the Credit Agreement (other than swingline loans, which will bear interest at the Base Rate (as defined

below)) will bear interest, at the Company’s option, at a rate per annum equal to (A)(i) the highest of (a) the federal funds rate (i.e., for

any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the

Federal Reserve System, as published by the Federal Reserve Bank of New York on the business day next succeeding such day) plus ½

of 1%, (b) the prime commercial lending rate of the Administrative Agent, as established from time to time at its principal U.S. office

(which such rate is an index or base rate and will not necessarily be its lowest or best rate charged to its customers or other banks), and

(c) the daily Adjusted Term SOFR (as defined in the Credit Agreement) for a one-month tenor plus 1%, plus (ii) the applicable rate,

ranging from 0.5% to 1.25% (the “Base Rate”), or (B) the sum of the Adjusted Term SOFR (as defined in the Credit Agreement) plus

the applicable rate, ranging from 1.4% to 2.15%, provided that such sum is subject to a 0.0% floor (such loans utilizing this interest rate,

“SOFR Loans”). All EU borrowings under the Credit Agreement (other than swingline loans) will bear interest at a rate per annum equal

to the sum of the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor

administrator approved by the Administrative Agent) plus the applicable rate, ranging from 1.5% to 2.25%, provided that such sum is

subject to a 0.0% floor (such loans utilizing this interest rate, “EURIBOR Loans”). The applicable rate is based on the consolidated net

leverage ratio of the Company and its subsidiaries as determined pursuant to the terms of the Credit Agreement. Default interest is 2.00%

per annum in excess of the rate otherwise applicable in the case of any overdue principal or any other overdue amount.

In addition to paying interest on outstanding principal under the Credit Agreement, the Company is required to pay a commitment fee

to the lenders under the Credit Agreement in respect of unutilized revolving loan commitments and an additional commitment ticking

fee at a rate of 0.25% on the commitment amounts of each lender until the earliest of (i) the date of the Senior Credit Facilities Increase,

(ii) the Company’s voluntary termination of the credit facility commitment, and (iii) December 31, 2023. The Company is also required

to pay a participation fee to the Administrative Agent for the account of each lender with respect to the Company’s participations in

letters of credit at the then applicable rate for SOFR Loans.

The Credit Agreement permits the Company to prepay any or all of the outstanding loans or to reduce the commitments under the Credit

Agreement without incurring premiums or penalties (except breakage costs with respect to SOFR Loans and EURIBOR Loans). The

Credit Agreement contains customary affirmative and negative covenants, including incurrence covenants and certain other limitations

on the ability of the Company and the Company’s subsidiaries to incur additional debt, guarantee other obligations, grant liens on assets,

make investments, dispose of assets, pay dividends or other payments on capital stock, make restricted payments, engage in mergers or

consolidations, engage in transactions with affiliates, modify its organizational documents, and enter into certain restrictive agreements.

It also contains customary events of default (subject to customary cure periods and materiality thresholds). Furthermore, the Credit

Agreement requires that the Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) of the Company and its

subsidiaries tested on the last day of each fiscal quarter not exceed 3.25 to 1.0 through September 30, 2024 and 2.75 to 1.00 from

December 31, 2024 and thereafter, subject to certain exceptions. The Credit Agreement also requires that the Consolidated Interest

Coverage Ratio (as defined in the Credit Agreement) of the Company and its subsidiaries tested on the last day of each fiscal quarter

not fall below 3.00 to 1.00.

Finally, pursuant to a Collateral Agreement, dated as of July 18, 2022, among the Company, ADTRAN, Inc. and the Administrative

Agent, ADTRAN, Inc.’s obligations under the Credit Agreement are secured by substantially all of the assets of ADTRAN, Inc. and the

Company. In addition, the Company has guaranteed ADTRAN, Inc.’s obligations under the Credit Agreement pursuant to a Guaranty

Agreement, dated as of July 18, 2022, by ADTRAN, Inc. and the Company in favor of the Administrative Agent.

39

Nord/LB Revolving Line of Credit

On August 8, 2022, ADVA entered into a $16.1 million revolving line of credit with Norddeutsche Landesbark - Girozentrale (Nord/LB)

that bears interest of Euro Short Term Rate plus 1.4% and which matures in August 2023. During the term of the loan, ADVA is

obligated to maintain an adjusted net debt to cover ratio that is equal to or less than 2.75. As of December 31, 2022, ADVA’s borrowings

under the revolving line of credit were $16.1 million. On January 31, 2023, the Company increased its borrowings under the Wells

Fargo Credit Agreement. A portion of the proceeds from the borrowings were used to retire the outstanding borrowings under the

Nord/LB revolving line of credit.

Syndicated Credit Agreement Working Capital Line of Credit

In September 2018, ADVA entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch

German Business to borrow up to $10.7 million as part of a working capital line of credit. The interest rate for the working capital line

of credit is adjusted periodically based on a defined leverage ratio and is currently EURIBOR plus 1.35% as of December 31, 2022. The

working capital line of credit matures in September 2023. As of December 31, 2022, borrowings under the working capital line of credit

totaled $10.7 million. On January 31, 2023, the Company increased its borrowings under the Wells Fargo Credit Agreement. A portion

of the proceeds from the borrowings were used to retire the outstanding borrowings under the syndicated credit agreement working

capital line of credit.

DZ Bank Money Market Facility

As of December 31, 2022, ADVA’s borrowings under its revolving line of credit with DZ Bank totaled $9.1 million, with no amounts

available for future borrowings. The interest rate is currently a fixed rate of 2.85%, which resets monthly based on renewal of the loan.

Syndicated Credit Agreement Note Payable

In September 2018, ADVA entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch

German Business to borrow $63.7 million. As of December 31, 2022, the amount outstanding under the note payable is $24.6 million.

The interest rate for the note payable is adjusted periodically based on a defined leverage ratio and is currently EURIBOR plus 1.35%

as of December 31, 2022. The note payable matures in September 2023. On January 31, 2023, the Company increased its borrowings

under the Wells Fargo Credit Agreement. A portion of the proceeds from the borrowings were used to retire the outstanding borrowings

under the syndicated credit agreement note payable.

Currency Hedging Arrangements

On November 3, 2022, the Company entered into a Euro/U.S. dollar cross-currency swap arrangement (the “Swap”) with Wells Fargo

Bank, N.A. (the “Hedge Counterparty”). The Swap, which is governed by the provisions of an ISDA Master Agreement (including

schedules thereto and transaction confirmations that supplement such agreement) entered into between the Company and the Hedge

Counterparty, enable the Company to convert a portion of its Euro denominated payment obligations under the DPLTA into U.S. Dollars.

Under the Swap, the Company will exchange an aggregate notional amount of $160.0 million U.S. dollars for Euros at a daily fixed

forward rate ranging from $0.98286 to $1.03290. The aggregate amount of $160.0 million will be divided into eight quarterly tranches

of $20.0 million. The Company, at its sole discretion, may exchange all or part of each tranche on any given day within the applicable

quarter; provided, however, that it must exchange the full tranche by the end of such quarter. The Swap may be accelerated or terminated

early for a number of reasons, including but not limited to (i) non-payment by the Company or the Hedge Counterparty, (ii) breach of

representation or warranty or covenant by either party or (iii) insolvency or bankruptcy of either party.

ADVA Domination and Profit and Loss Transfer Agreement

On December 1, 2022, we, as the controlling company, entered into the DPLTA with ADVA, as the controlled company (the “DPLTA”).

The DPLTA, which was executed on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the

commercial register (

Handelsregister

) of the local court (

Amtsgericht

) at the registered seat of ADVA (Jena).

Under the DPLTA, subject to certain limitations pursuant to applicable law, (i) we are entitled to issue binding instructions to the

management board of ADVA, (ii) ADVA will transfer all of its annual profits to us, subject to, among other things, the creation or

dissolution of certain reserves, and (iii) we will generally absorb all annual losses incurred by ADVA. The obligation of ADVA to

transfer its annual profit to us, as well as our obligation to absorb ADVA’s annual net loss, applies for the first time to the profits or

losses generated in the ADVA fiscal year 2023.

40

Additionally, and subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides

that ADVA shareholders (other than us) be offered, at their election, (i) to put their ADVA shares to the Company in exchange for a

compensation in cash of EUR 17.21 per share (the “Exit Compensation”), or (ii) to remain ADVA shareholders and receive a recurring

compensation in cash of EUR 0.59 (EUR 0.52 net under the current tax regime) per share for each full fiscal year of ADVA (the “Annual

Recurring Compensation”). The Annual Recurring Compensation is due on the third banking day following the ordinary general

shareholders’ meeting of ADVA for the respective preceding fiscal year (but in any event within eight months following expiration of

the fiscal year) and is first granted for the 2023 fiscal year, payable for the first time after the ordinary general shareholders’ meeting of

ADVA in 2024. The adequacy of both forms of compensation have been challenged by minority shareholders of ADVA via court-led

appraisal proceedings under German law,

and it is possible that the courts in such appraisal proceedings may adjudicate a higher Exit

Compensation or Annual Recurring Compensation (in each case, including interest thereon) than agreed upon in the DPLTA. Our

aggregate potential payment obligations under the DPLTA are discussed above under "

Liquidity

".

The opportunity for outside ADVA shareholders to tender ADVA shares in exchange for Exit Compensation had been scheduled to

expire on March 16, 2023. However, due to the appraisal proceedings that have been initiated in accordance with applicable German

law, this time period for tendering shares has been extended pursuant to the German Stock Corporation Act (

Aktiengesetz

) and will end

two months after the date on which a final decision in such appraisal proceedings has been published in the Federal Gazette

(

Bundesanzeiger

).

We currently hold 33,961,170 no-par value bearer shares of ADVA, representing 65.30% of ADVA’s outstanding shares as of February

14, 2023.

The foregoing description of the DPLTA does not purport to be complete and is qualified in its entirety by reference to the DPLTA, a

non-binding English translation of which incorporated by reference to Exhibit 10.5 of this Amendment No. 1.

During the year ended December 31, 2022, we recognized $14.2 million of transaction costs relating to the Business Combination. We

expect to incur integration costs and costs associated with the implementation of the DPLTA during 2023 and such costs are expected

to be material.

Performance Bonds

Certain contracts, customers and jurisdictions in which we do business require us to provide various guarantees of performance such as

bid bonds, performance bonds and customs bonds. As of December 31, 2022 and 2021, we had commitments related to these bonds

totaling $21.1 million and $22.9 million, respectively, which expire at various dates through April 2031. In general, we would only be

liable for the amount of these guarantees in the event of default under each contract; the probability of which we believe is remote.

Critical Accounting Policies and Estimates

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that

are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used or if changes in the

accounting estimate that are reasonably likely to occur could materially impact the results of financial operations. Several accounting

policies, as described in Note 1 of Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report, require

material subjective or complex judgment and have a significant impact on our financial condition and results of operations, as applicable.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our

Consolidated Financial Statements:

Revenue

Revenue is measured based on the consideration expected to be received in exchange for transferring goods or providing services to a

customer and as performance obligations under the terms of the contract are satisfied. Generally, this occurs with the transfer of control

of a product to the customer. Review of contracts with customers, for both direct customers and distributors, are performed and assessed

for principal versus agent considerations to determine primary responsibility for delivery of performance obligation, presumed inventory

risk, and discretion in establishing pricing, when applicable. For transactions where there are multiple performance obligations,

individual products and services are accounted for separately if they are distinct (if a product or service is separately identifiable from

other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The

consideration, including any discounts, is allocated between separate products and services based on their stand-alone selling prices.

Stand-alone selling prices are determined based on the prices at which the separate products and services are sold and are allocated

based on each item’s relative value to the total value of the products and services in the arrangement. For items that are not sold

separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin” approach. Payment terms are

generally 30 days in the U.S. and typically longer in many geographic markets outside the U.S. Shipping fees are recorded as revenue

and the related cost which we have elected to account for as a cost of fulfilling the related contract is included in cost of revenue.

Revenue, value-added and other taxes collected concurrently with revenue-producing activities are excluded from revenue. Costs of

obtaining a contract, if material, are capitalized and amortized over the period that the related revenue is recognized if greater than one

year. We have also elected to apply the practical expedient related to the incremental costs of obtaining contracts and recognize those

41

costs as an expense when incurred if the amortization period of the assets is one year or less. These costs are included in selling, general

and administrative expenses. Capitalized costs with an amortization period greater than one year were immaterial.

Revenue is generated by two reportable segments: Network Solutions and Services & Support.

Network Solutions Segment -

Includes hardware products and software defined next-generation virtualized solutions used in service

provider or business networks, as well as prior generation products. The majority of the revenue from this segment is from hardware

revenue.

Hardware and Software Revenue

Revenue from hardware sales is recognized when control is transferred to the customer, which is generally when the products are

shipped. Shipping terms are generally FOB shipping point. Revenue from software license sales is recognized at delivery and transfer

of control to the customer. Revenue is recorded net of estimated discounts and rebates using historical trends. Customers are typically

invoiced when control is transferred and revenue is recognized. Our products generally include assurance-based warranties of 90 days

to five years for product defects, which are accrued at the time products are delivered.

Services & Support Segment -

Includes a complete portfolio of maintenance, network implementation and solutions integration and

managed services, which include hosted cloud services and subscription services to complement our Network Solutions segment.

Maintenance Revenue

Our maintenance service periods range from one month to five years. Customers are typically invoiced and pay for maintenance services

at the beginning of the maintenance period. We recognize revenue for maintenance services on a straight-line basis over the maintenance

period as our customers benefit evenly throughout the contract term and deferred revenue, when applicable, is recorded in unearned

revenue and non-current unearned revenue. The total balance of our unearned revenue was $60.4 million and $27.0 million as of

December 31, 2022 and 2021, respectively.

Network Implementation Revenue

We recognize revenue for network implementation, which primarily consists of engineering, execution and enablement services at a

point in time when each performance obligation is complete. If we have recognized revenue but have not billed the customer, the right

to consideration is recognized as a contract asset that is included in other receivables on the Consolidated Balance Sheets. The contract

asset is transferred to accounts receivable when the completed performance obligation is invoiced to the customer.

Accounts Receivable Factoring

The Company has entered into a factoring agreement to sell certain receivables to an unrelated third-party financial institution on a non-

recourse basis. These transactions are accounted for in accordance with Accounting Standards Codification ("ASC") Topic 860,

Transfers and Servicing,

and result in a reduction in accounts receivable because the agreements transfer effective control over and risk

related to the receivables to the buyers. Trade accounts receivables balances sold are removed from the Consolidated Balance Sheets

and cash received is reflected as cash provided by (used in) operating activities in the Consolidated Statements of Cash Flow. Factoring

related interest expense is recorded to interest expense on the Consolidated Statements of (Loss) Income. On each sale date, the financial

institution retains from the sale price a default reserve, up to a required balance, which is held by the financial institution in a reserve

account and pledged to the Company. The financial institution is entitled to withdraw from the reserve account the sale price of a

defaulted receivable. The balance in the reserve account is included in other assets on the Consolidated Balance Sheets.

Inventory

We carry our inventory at the lower of cost and net realizable value, with cost being determined using the first-in, first-out method.

Standard costs for material, labor, and manufacturing overhead are used to value inventory and are updated at least quarterly. Most

variances are expensed in the current period; therefore, our inventory costs approximate actual costs at the end of each reporting period.

We establish reserves for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the

estimated net realizable value of the inventory based on estimated reserve percentages, which consider historical usage, known trends,

inventory age and market conditions. If actual trends and market conditions are less favorable than those projected by management, we

may be required to make additional inventory write-downs. Our reserve for excess and obsolete inventory was $51.8 million and $44.6

million at December 31, 2022 and 2021, respectively. Inventory disposals charged against the reserve were $2.9 million and $1.0 million

for the years ended December 31, 2022 and December 31, 2021, respectively.

Stock-Based Compensation

For purposes of determining the estimated fair value of market-based PSU awards on the date of grant, the Monte Carlo Simulation

valuation method is used. These PSUs are subject to a market condition based on the relative total shareholder return of ADTRAN

against all of the companies in the NASDAQ Telecommunications Index and vest at the end of a three-year performance period. The

fair value of performance-based PSUs, RSUs and restricted stock is equal to the closing price of our stock on the business day

42

immediately preceding the grant date. Compensation expense related to unvested performance-based PSUs is recognized over the

requisite service period of two to three years as the achievement of the performance obligation becomes probable. For purposes of

determining the estimated fair value of our stock option awards on the date of grant, we use the Black-Scholes Model. This model

requires the input of certain assumptions that require subjective judgment. These assumptions include, but are not limited to, expected

stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Because our stock

option awards have characteristics significantly different from those of traded options, and because changes in the input assumptions

can materially affect the fair value estimate, the existing model may not provide a reliable, single measure of the fair value of our stock

option awards. Management will continue to assess the assumptions and methodologies used to calculate the estimated fair value of

stock-based compensation. Circumstances may change and additional data may become available over time, which could result in

changes to these assumptions and methodologies and thereby materially impact our fair value determination. If factors change in future

periods, the compensation expense that we record may differ significantly from what we have recorded in the current period. As of

December 31, 2022, total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and

restricted stock was approximately $15.8 million.

Pursuant to the Business Combination, which closed on July 15, 2022, ADVA stock option holders were entitled to have their ADVA

stock options assumed by ADTRAN Holdings (applying the exchange ratio in the Business Combination Agreement), thereafter

representing options to acquire stock of ADTRAN Holdings. The maximum number of shares of ADTRAN Holdings stock potentially

issuable upon such assumption was 2.3 million shares. The period in which such options could be assumed ended July 22, 2022. A total

of 2.1 million shares of ADTRAN Holdings stock are subject to assumed ADVA options. The determination of the fair value of stock

options assumed by ADTRAN Holdings was estimated using the Monte Carlo method and is affected by its stock price, as well as

assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate. The

stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but are

not limited to, the volatility of the Company's stock price and employee exercise behaviors. As of December 31, 2022, total unrecognized

compensation expense related to the non-vested portion of stock options was approximately $8.3 million.

Goodwill

Goodwill represents the excess purchase price over the fair value of net assets acquired. The carrying value of goodwill is tested for

impairment in the fourth quarter of each year or more frequently if events or circumstances indicate it may be impaired. The quantitative

goodwill impairment test is performed at the level of the reporting unit. The identification of our reporting units begins at the operating

segment level and considers whether components one level below the operating segment levels should be identified as reporting units

for the purpose of testing goodwill for impairment. For goodwill impairment testing purposes, we determined the Company's reporting

units are generally the same as its operating segments, which are identified in Note 18 to the Consolidated Financial Statements.

Our general policy is to qualitatively assess the carrying value of goodwill each reporting period for events or changes in circumstances

that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In connection with the Business

Combination with ADVA the Company recognized $350.5 million of goodwill upon the closing of the exchange offer on July 15, 2022.

Therefore, we decided to proceed directly to the quantitative test of goodwill and forego the qualitative assessment. We estimate the fair

value of our reporting units based on an income approach, whereby we calculate the fair value of a reporting unit based on the present

value of estimated future cash flows. A discounted cash flow analysis requires us to make various judgmental assumptions about future

sales, operating margins, growth rates and discount rates, which are based on our budgets, business plans, economic projections,

anticipated future cash flows and market participants. We also estimate the fair value of our reporting units based on a peer group

analysis, whereby companies in the telecommunications industry or with a comparable product and market structure are used to calculate

a fair enterprise value using revenue, EBITDA and debt multiples of trading value. Based on our analysis, management concluded that

there was no impairment of goodwill as of December 31, 2022. No goodwill impairment charges were recognized during the years

ended December 31, 2021 and 2020. The balance of our goodwill was $381.7 million and $7.0 million as of December 31, 2022 and

2021, respectively.

Intangible Assets

Purchased intangible assets with finite lives are carried at cost less accumulated amortization. Amortization is recorded over the

estimated useful lives of the respective assets.

As part of the purchase price allocation related to the Business Combination with ADVA, the Company recognized $403.8 million of

intangible assets on July 15, 2022. Intangible assets are reviewed for impairment whenever events and circumstances indicate

impairment may have occurred. The Company assessed impairment triggers related to intangible assets during the fourth quarter of

2022, 2021 and 2020. As a result, no quantitative impairment test of long-lived assets was performed as of December 31, 2022, 2021

and 2020, and no impairment losses of intangible assets were recorded during the years ended December 31, 2022, 2021 and 2020. The

balance of our intangible assets was $401.2 million and $19.3 million as of December 31, 2022 and 2021, respectively.

43

Income Taxes

We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating exposures related

to examinations by taxing authorities. We also make judgments regarding the realization of deferred tax assets and establish valuation

allowances where we believe it is more likely than not that future taxable income in certain jurisdictions will be insufficient to realize

these deferred tax assets. Our estimates regarding future taxable income and income tax provision or benefit may vary due to changes

in market conditions, changes in tax laws, or other factors. If our assumptions, and consequently our estimates, change in the future, the

valuation allowances we have established may be increased or decreased, impacting future income tax expense. We continually review

the adequacy of our valuation allowance and recognize the benefits of deferred tax assets only as the reassessment indicates that it is

more likely than not that the deferred tax assets will be realized in accordance with ASC 740, Income Taxes. During the fourth quarter

of 2022, after considering all quantitative and qualitative evidence, including our cumulative income position, historical operating

performance and future income projections, we have determined that the positive evidence overcame the negative evidence and have

concluded that it is more likely than not that a substantial portion of our U.S. federal and certain other state deferred tax assets were

realizable. As a result we have released the majority of our valuation allowance against those assets. However, the amount of deferred

tax assets considered realizable could be adjusted in future periods in the event that sufficient evidence is no longer present to support a

conclusion that it is more likely than not that all or a portion of our domestic deferred tax assets will be realized.

We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions

become uncertain. We adjust these reserves, including any impact on the related interest and penalties, as facts and circumstances

change.

Liability for Warranty

Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at the time of

product shipment based on our historical return rate and an estimate of the cost to repair or replace the defective products. We engage

in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component

suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from

line card applications to total systems. The increasing complexity of our products will cause warranty incidences, when they arise, to be

more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other

rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if

unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to

record additional warranty expense. The liability for warranty obligations totaled $7.2 million and $5.4 million at December 31, 2022

and 2021, respectively. These liabilities are included in accrued expenses and other liabilities in the accompanying Consolidated Balance

Sheets.

Pension Benefit Plan Obligations

Pension benefit plan obligations are based on various assumptions used by our actuaries in calculating these amounts. These assumptions

include discount rates, compensation rate increases, expected return on plan assets, retirement rates and mortality rates. Actual results

that differ from the assumptions and changes in assumptions could affect future expenses and obligations. Our net pension liability

totaled $10.6 million and $11.4 million at December 31, 2022 and December 31, 2021, respectively. This liability is included in pension

liability in the accompanying Consolidated Balance Sheets.

Lease Obligations

We have operating leases for office space, automobiles and various other equipment in the U.S. and in certain international locations.

Other contracts, such as manufacturing agreements and service agreements, are reviewed to determine if they contain potential embedded

leases. These other contracts are specifically reviewed to determine whether we have the right to substantially all of the economic benefit

from the use of any specified assets or the right to direct the use of any specified assets, either of which would indicate the existence of

a lease. Some of our leases include options to renew. For those leases that are reasonably assured to be renewed, we have included the

option to extend as part of our right of use asset and lease liability. The exercise of lease renewal options is at our sole discretion. The

depreciable life of leased assets and leasehold improvements are limited by the expected lease term. Leases with an initial term of 12

months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the

lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, we elected to not separate lease and non-

lease components. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Business Combinations

The Company records assets acquired, liabilities assumed, contractual contingencies, when applicable, and intangible assets recognized

as part of business combinations based on their fair values on the date of acquisition subject to purchase accounting adjustments. The

excess of the purchase price over the estimated fair values of the net tangible and intangible assets and liabilities assumed or acquired is

recorded as goodwill. If the estimated fair values of net tangible and intangible assets acquired and liabilities assumed exceed the

purchase price, a bargain purchase gain is recorded. The Company’s estimates of fair value are based on historical experience, industry

44

knowledge, certain information obtained from the management of the acquired company and, in some cases, valuations performed by

independent third-party firms. The results of operations of acquired companies are included in the accompanying Consolidated

Statements of (Loss) Income since their dates of acquisition. Costs incurred to complete the Business Combination, such as legal,

accounting or other professional fees, are charged to selling, general and administrative expenses as incurred.

Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements,

see Note 1 of Notes to Consolidated Financial Statements included in

Part II, Item 8 of this Amendment No. 1 for additional information.

45

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements are contained in this report.

Page

Report of Independent Registered Public Accounting Firm

............................................................................................................

46

Financial Statements

.........................................................................................................................................................................

49

Consolidated Balance Sheets,

As of December 31, 2022 and 2021

......................................................................................................................................

49

Consolidated Statements of (Loss) Income,

Years Ended December 31, 2022, 2021 and 2020

.................................................................................................................

50

Consolidated Statements of Comprehensive (Loss) Income,

Years Ended December 31, 2022, 2021 and 2020

.................................................................................................................

51

Consolidated Statements of Changes in Equity,

Years Ended December 31, 2022, 2021 and 2020

.................................................................................................................

52

Consolidated Statements of Cash Flows,

Years Ended December 31, 2022, 2021 and 2020

.................................................................................................................

53

Schedule II - Valuation and Qualifying Accounts, Years Ended December 31, 2022, 2021 and 2020

105

46

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of ADTRAN Holdings, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of ADTRAN Holdings, Inc. and its subsidiaries (the “Company”) as of

December 31, 2022 and 2021, and the related consolidated statements of (loss) income, of comprehensive income (loss), of changes in

equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and financial

statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have

audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in

Internal Control

- Integrated Framework

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of

the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the

period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in

our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December

31, 2022, based on criteria established in

Internal Control – Integrated Framework

(2013) issued by the COSO because a material

weakness in internal control over financial reporting existed as of that date related to the Company not designing and maintaining

effective controls over the presentation and disclosure of debt agreements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a

reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a

timely basis. The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting

appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in

our audit of the 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control

over financial reporting does not affect our opinion on those consolidated financial statements.

Restatement of Previously Issued Financial Statements and Management’s Conclusion Regarding Internal Control over Financial

Reporting

As discussed in Note 1 to the consolidated financial statements, the Company has restated its 2022 consolidated financial statements to

correct misstatements.

Management and we previously concluded that the Company maintained effective internal control over financial reporting as of

December 31, 2022. However, management has subsequently determined that a material weakness in internal control over financial

reporting related to the Company not designing and maintaining effective controls over the presentation and disclosure of debt

agreements existed as of that date. Accordingly, management’s report has been restated and our present opinion on internal control over

financial reporting, as presented herein, is different from that expressed in our previous report.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over

financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management’s

report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the

Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public

Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in

accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission

and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits

to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to

error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the

consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures

included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits

also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall

presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an

understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating

the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other

procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

47

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded ADVA Optical

Networking SE (ADVA) from its assessment of internal control over financial reporting as of December 31, 2022, because it was

acquired by the Company in a purchase business combination during 2022. We have also excluded ADVA from our audit of internal

control over financial reporting. ADVA is a subsidiary whose total assets and total revenues excluded from management’s assessment

and our audit of internal control over financial reporting represent 46.9% and 35.7%, respectively, of the related consolidated financial

statement amounts as of and for the year ended December 31, 2022.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of

financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting

principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the

maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the

company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in

accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in

accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding

prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect

on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections

of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in

conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements

that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are

material to the

consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The

communication of critical audit matters does not alter in any way our opinion on the consolidated

financial statements, taken as a whole,

and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the

accounts or disclosures to which it relates.

Acquisition of ADVA Optical Networking SE – Valuation of Developed Technology, Customer Relationships, and Backlog Intangible

Assets

As described in Note 2 to the consolidated financial statements, the Company completed the acquisition of ADVA Optical Networking

SE for total purchase consideration of $578.3 million on July 15, 2022.

Assets acquired and liabilities assumed were recognized at their

respective fair values as of July 15, 2022, which resulted in the recognition of $403.8 million of identifiable intangible assets. The fair

value of the identifiable intangible assets acquired as of the acquisition date primarily consisted of developed technology of $291.9

million, customer relationships of $32.7 million, and backlog of $52.2 million. In determining the fair value, management utilized

various methods of the income approach depending on the asset. The estimation of fair value required significant judgment by

management related to net cash flows reflecting the risk inherent in each cash flow stream, competitive trends, market comparables and

other factors. Inputs were generally determined by taking into account historical data, current and anticipated market conditions, and

growth rates. Developed technology and customer relationships were valued using the multi-period excess earnings method. Backlog

was valued using the distributor method. Significant assumptions used in the discounted cash flow analysis for (i) developed technology

were the revenue growth rates, long-term revenue growth rate, discount rate, earnings before interest, taxes, depreciation, and

amortization (EBITDA) margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation; (ii) customer

relationships were earnings before interest and taxes (EBIT) margins, contributory asset charges, and customer attrition rate; and (iii)

backlog were EBIT margins, adjusted EBIT margins, and contributory asset charges.

The principal considerations for our determination that performing procedures relating to the valuation of the developed technology,

customer relationships, and backlog intangible assets acquired in the acquisition of ADVA Optical Networking SE is a critical audit

matter are (i) the significant judgment by management when developing the fair value estimates of the identifiable intangible assets

acquired; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s

significant assumptions related to the revenue growth rates, long-term revenue growth rate, discount rate, EBITDA margins,

obsolescence factors, income tax rate, tax depreciation, and economic depreciation used in the valuation of the developed technology;

EBIT margins, contributory asset charges, and customer attrition rate used in the valuation of the customer relationships; and EBIT

margins, adjusted EBIT margins, and contributory asset charges used in the valuation of the backlog; and (iii)

the audit effort involved

the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion

on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition

accounting, including controls over the valuation of the identifiable intangible assets acquired. These procedures also included, among

others (i) reading the purchase agreement; (ii) testing management’s process for developing the fair value estimates of the developed

48

technology, customer relationships, and backlog intangible assets; (iii) evaluating the appropriateness of the multi-period excess earnings

and distributor methods; (iv) testing the completeness and accuracy of underlying data used by management in the valuation methods;

and (v) evaluating the reasonableness of significant assumptions used by management related to the revenue growth rates, long-term

revenue growth rate, discount rate, EBITDA margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation

used in the valuation of the developed technology; EBIT margins, contributory asset charges, and customer attrition rate used in the

valuation of the customer relationships; and EBIT margins, adjusted EBIT margins, and contributory asset charges used in the valuation

of the backlog. Evaluating the reasonableness of management’s significant assumptions related to the revenue growth rates, long-term

revenue growth rate, EBITDA margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation related to

the developed technology; the EBIT margins, contributory asset charges, and customer attrition rate related to the customer relationships;

and EBIT margins, adjusted EBIT margins, and contributory asset charges related to backlog involved considering (i) the past

performance of the acquired business; (ii) the consistency with external market and industry data; and (iii) whether these assumptions

were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist

in evaluating (i) the appropriateness of the valuation methods used and (ii) the reasonableness of the discount rate significant assumption.

/s/ PricewaterhouseCoopers LLP

Birmingham, Alabama

March 1, 2023, except for the effects of the restatement discussed in Note 1 to the consolidated financial statements and the matter

discussed in the fifth paragraph of Management’s Report on Internal Control over Financial Reporting, as to which the date is August

14, 2023

We have served as the Company’s auditor since 1986.

49

Financial Statements

ADTRAN Holdings, Inc.

Consolidated Balance Sheets

(In thousands, except per share amount)

December 31, 2022 and 2021

ASSETS

(As Restated)

2022

2021

Current Assets

Cash and cash equivalents

$

108,644

$

56,603

Restricted cash

—

215

Short-term investments (includes $340 and $350 of available-for-sale securities as of December

31, 2022 and 2021, respectively, reported at fair value)

340

350

Accounts receivable, less allowance for credit losses of $49 and $0 as of December 31, 2022 and

2021, respectively

279,435

158,742

Other receivables

32,831

11,228

Inventory, net

427,531

139,891

Prepaid expenses and other current assets

33,577

9,296

Total Current Assets

882,358

376,325

Property, plant and equipment, net

110,699

55,766

Deferred tax assets

67,839

9,079

Goodwill

381,724

6,968

Intangibles, net

401,211

19,293

Other non-current assets

66,998

30,971

Long-term investments (includes $8,913 and $29,717 of available-for-sale securities as of

December 31, 2022 and 2021, respectively, reported at fair value)

32,665

70,615

Total Assets

$

1,943,494

$

569,017

LIABILITIES AND EQUITY

Current Liabilities

Accounts payable

$

237,699

$

102,489

Revolving credit agreements outstanding

35,936

—

Notes payable

24,598

—

Unearned revenue

41,193

17,737

Accrued expenses and other liabilities

35,235

13,673

Accrued wages and benefits

44,882

14,900

Income tax payable, net

9,032

6,560

Total Current Liabilities

428,575

155,359

Non-current revolving credit agreement outstanding

60,000

—

Deferred tax liabilities

61,629

—

Non-current unearned revenue

19,239

9,271

Pension liability

10,624

11,402

Deferred compensation liability

26,668

31,383

Non-current lease obligations

22,807

3,269

Other non-current liabilities

10,339

1,231

Total Liabilities

639,881

211,915

Commitments and contingencies (see Note 20)

Equity

Common stock, par value $0.01 per share; 200,000 shares authorized;

78,088 shares issued and 77,889 outstanding as of December 31, 2022 and

79,652 shares issued and 49,063 shares outstanding as of December 31, 2021

781

797

Additional paid-in capital

895,834

288,946

Accumulated other comprehensive income (loss)

46,713

(11,914

)

Retained earnings

55,338

740,820

Less treasury stock at cost: 198 and 30,590 shares as of December 31, 2022 and 2021,

respectively

(4,125

)

(661,547

)

Non-controlling interest

309,072

—

Total Equity

1,303,613

357,102

Total Liabilities and Equity

$

1,943,494

$

569,017

See accompanying notes to consolidated financial statements.

50

ADTRAN Holdings, Inc.

Consolidated Statements of (Loss) Income

(In thousands, except per share amounts)

Years ended December 31, 2022, 2021 and 2020

2022

2021

2020

Revenue

Network Solutions

$

916,793

$

498,834

$

438,015

Services & Support

108,743

64,170

68,495

Total Revenue

1,025,536

563,004

506,510

Cost of Revenue

Network Solutions

647,105

307,841

244,226

Services & Support

51,179

36,786

44,733

Total Cost of Revenue

698,284

344,627

288,959

Gross Profit

327,252

218,377

217,551

Selling, general and administrative expenses

208,889

124,414

113,972

Research and development expenses

173,757

108,663

113,287

Asset impairment

17,433

—

65

Operating Loss

(72,827

)

(14,700

)

(9,773

)

Interest and dividend income

2,123

2,844

1,936

Interest expense

(3,437

)

(34

)

(5

)

Net investment (loss) gain

(11,339

)

1,761

4,850

Other income (expense), net

14,517

3,824

(3,254

)

Loss Before Income Taxes

(70,963

)

(6,305

)

(6,246

)

Income tax benefit (expense)

62,075

(2,330

)

8,624

Net (Loss) Income

$

(8,888

)

$

(8,635

)

$

2,378

Less: Net Loss attributable to non-controlling interest

(6,851

)

—

—

Net (Loss) Income attributable to ADTRAN Holdings, Inc.

$

(2,037

)

$

(8,635

)

$

2,378

Weighted average shares outstanding – basic

62,346

48,582

47,996

Weighted average shares outstanding – diluted

62,346

48,582

48,288

(Loss) earnings per common share attributable to ADTRAN Holdings, Inc. – basic

$

(0.03

)

$

(0.18

)

$

0.05

(Loss) earnings per common share attributable to ADTRAN Holdings, Inc. – diluted

$

(0.03

)

$

(0.18

)

$

0.05

See accompanying notes to consolidated financial statements.

51

ADTRAN Holdings, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

Years ended December 31, 2022, 2021 and 2020

2022

2021

2020

Net (Loss) Income

$

(8,888

)

$

(8,635

)

$

2,378

Other Comprehensive Income (Loss), net of tax

Net unrealized (loss) gain on available-for-sale securities

(284

)

(584

)

316

Defined benefit plan adjustments

4,597

4,008

(395

)

Foreign currency translation gain (loss)

53,396

(3,699

)

4,857

Other Comprehensive Income (Loss), net of tax

57,709

(275

)

4,778

Less: Comprehensive Loss attributable to non-controlling interest, net of tax

(918

)

—

—

Comprehensive Income (Loss) attributable to ADTRAN Holdings, Inc., net of tax

$

49,739

$

(8,910

)

$

7,156

See accompanying notes to consolidated financial statements.

52

ADTRAN Holdings, Inc.

Consolidated Statements of Changes in Equity

(In thousands, except per share amounts)

Years ended December 31, 2022, 2021 and 2020

Common

Shares

Common

Stock

Additional

Paid-In

Capital

Retained

Earnings

Treasury

Stock

Accumulated

Other

Comprehensive

Income (Loss)

Non-

controlling

interest

Total

Equity

Balance as of December 31, 2019

79,652

$

797

$

274,632

$

806,702

$

(685,288

)

$

(16,417

)

$

—

$

380,426

Net income

—

—

—

2,378

—

—

—

2,378

Other comprehensive income, net of tax

—

—

—

—

—

4,778

—

4,778

Dividend payments ($0.09 per share)

—

—

—

(17,334

)

—

—

—

(17,334

)

Dividends accrued on unvested restricted

stock units

—

—

—

(180

)

—

—

—

(180

)

Deferred compensation adjustments,

net of tax

—

—

—

—

(2,806

)

—

—

(2,806

)

PSUs, RSUs and restricted stock vested

—

—

—

(9,753

)

8,601

—

—

(1,152

)

Stock-based compensation expense

—

—

6,834

—

—

—

—

6,834

Balance as of December 31, 2020

79,652

797

281,466

781,813

(679,493

)

(11,639

)

—

372,944

Net loss

—

—

—

(8,635

)

—

—

—

(8,635

)

Other comprehensive loss, net of tax

—

—

—

—

—

(275

)

—

(275

)

Dividend payments ($0.09 per share)

—

—

—

(17,529

)

—

—

—

(17,529

)

Non-cash dividend payments ($0.09 per

share)

—

—

—

(5

)

5

—

—

—

Dividends accrued on unvested restricted

stock units

—

—

—

(320

)

—

—

—

(320

)

Deferred compensation adjustments,

net of tax

—

—

—

—

(1,248

)

—

—

(1,248

)

Stock options exercised

—

—

—

(1,842

)

8,274

—

—

6,432

PSUs, RSUs and restricted stock vested

—

—

—

(12,662

)

10,915

—

—

(1,747

)

Stock-based compensation expense

—

—

7,480

—

—

—

—

7,480

Balance as of December 31, 2021

79,652

797

288,946

740,820

(661,547

)

(11,914

)

—

357,102

Net loss

—

—

—

(2,037

)

—

—

(6,851

)

(8,888

)

Acquisition of ADVA

27,995

280

577,980

—

—

—

316,415

894,675

Retirement of treasury stock

(30,330

)

(303

)

—

(655,761

)

656,064

—

—

—

Other comprehensive loss, net of tax

—

—

—

—

—

58,627

(918

)

57,709

Dividend payments ($0.09 per share)

—

—

—

(22,885

)

—

—

—

(22,885

)

Dividends accrued on unvested restricted

stock units

—

—

—

353

—

—

—

353

Deferred compensation adjustments, net of

tax

—

—

—

(71

)

—

—

(71

)

ADTRAN RSUs and restricted stock vested

372

4

—

(10,482

)

631

—

—

(9,847

)

ADTRAN stock options exercised

399

3

—

5,330

798

—

—

6,131

ADTRAN stock-based compensation

expense

—

—

26,141

—

—

—

—

26,141

Reclassification of ADVA stock options

—

—

187

—

—

—

99

286

ADVA stock options exercised

—

—

472

—

—

—

254

726

ADVA stock-based compensation expense

—

—

2,108

—

—

—

73

2,181

Balance as of December 31, 2022

78,088

$

781

$

895,834

$

55,338

$

(4,125

)

$

46,713

$

309,072

$

1,303,613

See accompanying notes to consolidated financial statements.

53

ADTRAN Holdings, Inc.

Consolidated Statements of Cash Flows

(In thousands)

Years ended December 31, 2022, 2021 and 2020

2022

2021

2020

Cash flows from operating activities:

Net (Loss) Income

$

(8,888

)

$

(8,635

)

$

2,378

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating

activities:

Depreciation and amortization

67,553

16,084

16,627

Asset impairments

17,433

—

65

Amortization of debt issuance cost

288

—

—

Amortization of net discount on available-for-sale investments

19

108

—

Loss (gain) on investments

9,826

(5,127

)

(5,802

)

Net loss on disposal of property, plant and equipment

152

4

—

Stock-based compensation expense

28,322

7,480

6,834

Deferred income taxes

(62,388

)

(1,784

)

(1,356

)

Inventory reserves

(2,363

)

(5,029

)

(5,398

)

Other, net

—

—

216

Change in operating assets and liabilities:

Accounts receivable, net

788

(60,864

)

(7,269

)

Other receivables

(20,088

)

9,752

(4,732

)

Inventory

(73,237

)

(10,638

)

(20,184

)

Prepaid expenses other current assets and other assets

(7,116

)

(7,146

)

(5,239

)

Accounts payable

28,105

53,270

4,543

Accrued expenses and other liabilities

(20,483

)

10,063

5,093

Income taxes payable

(2,151

)

5,470

(2,294

)

Net cash (used in) provided by operating activities

(44,228

)

3,008

(16,518

)

Cash flows from investing activities:

Purchases of property, plant and equipment

(17,072

)

(5,669

)

(6,413

)

Proceeds from sales and maturities of available-for-sale investments

51,661

50,466

105,100

Purchases of available-for-sale investments

(23,899

)

(35,031

)

(56,767

)

Proceeds from beneficial interests in securitized accounts receivable

1,126

—

—

Proceeds from disposals of property, plant and equipment

12

—

2

Insurance proceeds received

—

500

—

Acquisition of note receivable

—

—

(523

)

Acquisition of business, net of cash acquired

44,003

—

—

Net cash provided by investing activities

55,831

10,266

41,399

Cash flows from financing activities:

Tax withholdings related to stock-based compensation settlements

(4,253

)

(1,860

)

(1,043

)

Proceeds from stock option exercises

6,904

6,431

—

Dividend payments

(22,885

)

(17,529

)

(17,334

)

Proceeds from draw on revolving credit agreements

141,887

10,000

—

Repayment of revolving credit agreements

(48,000

)

(10,000

)

—

Payment of debt issuance cost

(3,015

)

—

—

Repayment of bonds payable

—

—

(24,600

)

Repayment of notes payable

(17,702

)

—

—

Net cash provided by (used in) financing activities

52,936

(12,958

)

(42,977

)

Net increase (decrease) in cash and cash equivalents

64,539

316

(18,096

)

Effect of exchange rate changes

(12,713

)

(3,677

)

4,502

Cash, cash equivalents and restricted cash, beginning of year

56,818

60,179

73,773

Cash, cash equivalents and restricted cash, end of year

$

108,644

$

56,818

$

60,179

Supplemental disclosure of cash financing activities

Cash paid for interest

$

1,728

$

13

$

24

Cash paid for income taxes

$

3,832

$

1,780

$

7,609

Cash used in operating activities related to operating leases

$

5,229

$

1,892

$

2,632

Supplemental disclosure of non-cash investing activities

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

$

3,410

$

1,875

$

324

Purchases of property, plant and equipment included in accounts payable

$

1,165

$

638

$

108

ADVA common shares exchanged in acquisition

$

565,491

$

—

$

—

ADVA options assumed in acquisition

$

12,769

$

—

$

—

Non-controlling interest related to ADVA

$

316,415

$

—

$

—

See accompanying notes to consolidated financial statements.

54

Notes to Consolidated Financial Statements

Note 1 – Nature of Business

ADTRAN Holdings, Inc. (“ADTRAN” or the “Company”) is a leading global provider of networking and communications platforms,

software, systems and services focused on the broadband access market, serving a diverse domestic and international customer base in

multiple countries that includes Tier-1, -2 and -3 service providers, alternative service providers, such as utilities, municipalities and

fiber overbuilders, cable/MSOs, SMBs and distributed enterprises. Our innovative solutions and services enable voice, data, video and

internet-communications across a variety of network infrastructures and are currently in use by millions worldwide. We support our

customers through our direct global sales organization and our distribution networks. Our success depends upon our ability to increase

unit volume and market share through the introduction of new products and succeeding generations of products having optimal selling

prices and increased functionality as compared to both the prior generation of a product and to the products of competitors in order to

gain market share. To service our customers and grow revenue, we are continually conducting research and developing new products

addressing customer needs and testing those products for the specific requirements of the particular customers. We offer a broad portfolio

of flexible software and hardware network solutions and services that enable service providers to meet today’s service demands, while

enabling them to transition to the fully converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network

of the future. In addition to our global headquarters in Huntsville, Alabama, and our European headquarters in Munich, Germany, we

have sales and research and development facilities in strategic global locations.

In 2022, following the business combination (the “Business Combination”) with ADVA Optical Networking SE (“ADVA”), which

included the Merger, we became the sole owner of and successor to ADTRAN, Inc. and the majority shareholder of ADVA. ADTRAN,

Inc. is a leading global provider of open, disaggregated networking and communications solutions that enable voice, data, video, and

internet communications across any network infrastructure. Its award-winning end-to-end fiber broadband solutions portfolio spans

from OLTs to in-home services and intelligent SaaS solutions. ADVA is a global provider of open networking solutions with over 25

years of experience in optical networking, carrier Ethernet access and network synchronization. ADVA has led the industry for over

two decades with open and secure networking solutions that carefully balance space, power and cost. Together, we serve customers in

a broad range of industries in over 100 countries.

Principles of Consolidation

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted

in the U.S. (“U.S. GAAP”) and include the financial position, results of operations, comprehensive (loss) income, changes in equity and

cash flows of ADTRAN and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in

consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that

affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial

statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include allowance for

credit losses on accounts receivable and contract assets, excess and obsolete inventory reserves, warranty reserves, customer rebates,

determination and accrual of the deferred revenue related to performance obligations under contracts with customers, estimated costs to

complete obligations associated with deferred and accrued revenues and network installations, estimated income tax provision and

income tax contingencies, fair value of stock-based compensation, assessment of goodwill and other intangibles for impairment,

estimated lives of intangible assets, estimates of intangible assets upon measurement, estimated pension liability and fair value of

investments. Actual amounts could differ significantly from these estimates.

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the

information reasonably available to us and the unknown future impacts of the SARS-CoV-2 coronavirus/COVID-19 global pandemic

(or variants of the SARS-CoV-2 coronavirus), supply chain constraints, inflationary pressures, the energy crisis, currency fluctuations

and political tensions as of December 31, 2022 and through the date of this report. The accounting matters assessed included, but were

not limited to, the allowance for credit losses, stock-based compensation, carrying value of goodwill, intangibles and other long-lived

assets, financial assets, valuation allowances for tax assets, revenue recognition and costs of revenue. Future conditions related to the

magnitude and duration of the COVID-19 pandemic, as well as other factors, including supply chain constraints and inflationary

pressures could result in further impacts to the Company's consolidated financial statements in future reporting periods.

Restatement of Previously Issued Financial Statements

During the second quarter of 2023, the Company determined that it overstated total current liabilities and understated non-current

liabilities as of December 31, 2022, due to a revolving credit agreement being classified as a current liability instead of a non-current

liability. The total amount of liabilities remains unchanged. The Company restated the December 31. 2022

Consolidated Balance Sheet

presented in this report by decreasing the current portion of revolving credit agreements outstanding by $60.0 million and increasing

non-current revolving credit agreement outstanding by $60.0 million.

55

The following table reflects the impact of the restatement to the specific line items presented in the Company’s previously reported

consolidated financial statements as of December 31, 2022:

(In thousands)

As Reported

Adjustment

As Restated

Revolving credit agreements outstanding

$

95,936

$

(60,000

)

$

35,936

Total current liabilities

$

488,575

$

(60,000

)

$

428,575

Non-current revolving credit agreement outstanding

$

—

$

60,000

$

60,000

During the first quarter of 2023, the

Company determined that it understated total assets and total liabilities as of December 31, 2022,

due to improper netting of deferred tax assets and deferred tax liabilities. While the net amount of deferred tax assets and liabilities

remains unchanged, the Company reported the deferred tax assets and liabilities balances without properly applying jurisdictional net

reporting disclosure rules. The jurisdictional netting error was a result of the consolidation of financial statements with ADVA following

the business combination, which closed on July 15, 2022. Management has determined that this misstatement was not material to any

of its previously issued financial statements. However, the Company restated the December 31, 2022 Consolidated Balance Sheet

presented in this Amendment No. 1 by increasing deferred tax assets and total assets by $61.6 million and increasing deferred tax

liability, total liabilities, and total liabilities, redeemable non-controlling interest and equity by $61.6 million.

The following table reflects the impact of the restatement to the specific line items presented in the Company’s previously reported

consolidated financial statements as of December 31, 2022:

(In thousands)

As Reported

Adjustment

As Restated

Deferred tax assets

$

6,210

$

61,629

$

67,839

Total assets

$

1,881,865

$

61,629

$

1,943,494

Deferred tax liabilities

$

—

$

61,629

$

61,629

Total liabilities

$

578,252

$

61,629

$

639,881

The accompanying applicable Notes have been updated to reflect the effects of the restatement as of December 31, 2022.

Correction of Immaterial Misstatements

During the first quarter of 2020, it was determined that certain investments held in the Company’s stock for a deferred compensation

plan accounted for as a Rabbi trust were incorrectly classified as long-term investments with the fair value of such investments

incorrectly marked to market at each period end rather than classified as treasury stock held at historical cost. This plan has been in

existence since 2011. The Company corrected this misstatement as an out-of-period adjustment in the three months ended March 31,

2020 and the twelve months ended December 31, 2020, by remeasuring the investment assets to their historical cost basis through the

recording of a net investment gain of $1.5 million in the Consolidated Statement of (Loss) Income and then correcting the classification

by decreasing the long-term investment balance at its remeasured cost basis of $2.8 million to treasury stock in the Consolidated 2020

Balance Sheet. Management has determined that this misstatement was not material to any of its previously issued financial statements

and that correction of the misstatement was not material to the 2020 annual financial results on either a quantitative or qualitative basis.

Summary of Significant Accounting Policies

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposits, money market funds and short-term investments classified as available-for-sale

with original maturities of three months or less. We maintain depository investments with certain financial institutions. As of

December 31, 2022, $100.1 million of our cash and cash equivalents, primarily certain domestic money market funds and foreign

depository accounts, were in excess of government provided insured depository limits. Although these depository investments may

exceed government insured depository limits, we have evaluated the credit worthiness of these applicable financial institutions and

determined the risk of material financial loss due to the exposure of such credit risk to be minimal.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between

market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived

from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied. Assets and

liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the

inputs used to measure their fair values.

The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable and accounts

payable approximate fair value due to the immediate or short-term maturity of these financial instruments.

56

The fair value measurements of our derivative instruments are determined using models that maximize the use of the observable market

inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under the fair value

hierarchy. The fair values of our derivatives are included in Note 12.

The estimated fair value of our notes payable, approximates the carrying value and is classified as Level II under the fair value hierarchy.

The carrying value of our notes payable is included in Note 14.

Investments with contractual maturities beyond one year may be classified as short-term based on their highly liquid nature and because

such marketable securities represent the investment of cash that is available for current operations. Despite the long-term nature of their

stated contractual maturities, we routinely buy and sell these securities and we believe we have the ability to quickly sell them to the

remarketing agent, tender agent or issuer at par value plus accrued interest in the event we decide to liquidate our investment in a

particular variable rate demand note. All income generated from these investments is recorded as interest income. We have not recorded

any losses relating to variable rate demand notes.

Long-term investments is comprised of deferred compensation plan assets, corporate bonds, municipal fixed-rate bonds, asset-backed

bonds, mortgage/agency-backed bonds, U.S. and foreign government bonds, marketable equity securities and other equity investments.

Marketable equity securities are reported at fair value as determined by the most recently traded price of the securities at the balance

sheet date, although the securities may not be readily marketable due to the size of the available market. Any changes in fair value are

recognized in net investment (loss) gain. Realized gains and losses on sales of debt securities are computed under the specific

identification method and are included in other income (expense). See Note 6 for additional information.

For financing receivables, the Company does not measure the allowance for credit losses for accrued interest receivables, as the

uncollectable accrued interest receivable is written off by reversing any previously recorded interest income in a timely manner (as soon

as these amounts are determined to be uncollectable).

Accounts Receivable

We record accounts receivable at amortized cost. Prior to establishing payment terms for a new customer, we evaluate the credit risk of

the customer. Credit limits and payment terms established for new customers are re-evaluated periodically based on customer collection

experience and other financial factors. As of December 31, 2022, single customers comprising more than 10% of our total accounts

receivable balance included three customers, which accounted for 33.1% of our total accounts receivable. As of December 31, 2022,

these three customers individually accounted for 11.4%, 11.1% and 10.6%, respectively, of our total accounts receivable. As of

December 31, 2021, single customers comprising more than 10% of our total accounts receivable balance included three customers,

which accounted for 59.9% of our total accounts receivable. As of December 31, 2021, these three customers individually accounted

for 35.8%, 12.1% and 12.0%, respectively, of our total accounts receivable.

We regularly review the need for an allowance for credit losses related to our outstanding accounts receivable balances using the

historical loss-rate method as well as assessing asset-specific risks. The assessment of asset-specific risks included the evaluation of

relevant available information, from internal and external sources, relating to current conditions that may affect a customer’s ability to

pay, such as the customer’s current financial condition or credit rating by geographic location, as provided by a third party and/or by

customer, if needed, and overall macro-economic conditions in which the customer operates. Based on this assessment, an allowance

for credit losses would be recorded if the Company determined that, based on our historical write-offs, which have been immaterial, and

such asset specific risks, there was risk in collectability of the full amount of any accounts receivable.

Accounts Receivable Factoring

The Company has entered into a factoring agreement to sell certain receivables to an unrelated third-party financial institution on a non-

recourse basis. These transactions are accounted for in accordance with Accounting Standards Codification ("ASC") Topic 860,

Transfers and Servicing,

and result in a reduction in accounts receivable because the agreements transfer effective control over and risk

related to the receivables to the buyers. Trade accounts receivables balances sold are removed from the Consolidated Balance Sheets

and cash received is reflected as cash provided by (used in) operating activities in the Consolidated Statements of Cash Flow. Factoring

related interest expense is recorded to interest expense on the Consolidated Statements of Loss. On each sale date, the financial institution

retains from the sale price a default reserve, up to a required balance, which are held by the financial institution in a reserve account and

pledged to the Company. The financial institution is entitled to withdraw from the reserve account the sale price of a defaulted receivable.

The balance in the reserve account is included in other assets on the Consolidated Balance Sheets.

Inventory

Inventory is carried at the lower of cost and estimated net realizable value, with cost being determined using the first-in, first-out method.

Standard costs for material, labor and manufacturing overhead are used to value inventory and are updated at least quarterly. We establish

reserves for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated net

realizable value of the inventory based on estimated reserve percentages, which consider historical usage, known trends, inventory age

and market conditions. When we dispose of excess and obsolete inventories, the related disposals are charged against the inventory

reserve. See Note 7 for additional information.

57

Property, Plant and Equipment

Property, plant and equipment, which is stated at cost, is depreciated using the straight-line method over the estimated useful lives of

the assets. We depreciate building and land improvements from five to 39 years, office machinery and equipment from three to seven

years, engineering machinery and equipment from three to seven years, and computer software from three to five years. Expenditures

for repairs and maintenance are charged to expense as incurred. Major improvements that materially prolong the lives of the assets are

capitalized. Gains and losses on the disposal of property, plant and equipment are recorded in operating loss. See Note 8 for additional

information.

Intangible Assets

Purchased intangible assets with finite lives are carried at cost less accumulated amortization. Amortization is recorded over the

estimated useful lives of the respective assets. See Note 11 for additional information.

Impairment of Long-Lived Assets and Intangibles

Long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying

amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the

asset’s carrying value. In connection with the planned integration of information technology following the Business Combination, we

determined that certain projects no longer fit our needs. As a result the Company recognized impairment charges of $17.4 million during

the year ended December 31, 2022 related to capitalized implementation costs for a cloud computing arrangement. The impairment

charges were determined based on actual costs incurred. There were no impairment losses for long-lived assets during the years ended

December 31, 2021 and 2020, or for intangible assets recognized during the years ended December 31, 2022, 2021 or 2020.

Goodwill

Goodwill represents the excess purchase price over the fair value of net assets acquired. The carrying value of goodwill is tested for

impairment in the fourth quarter of each year or more frequently if events or circumstances indicate it may be impaired. The quantitative

goodwill impairment test is performed at the level of the reporting unit. The identification of our reporting units begins at the operating

segment level and considers whether components one level below the operating segment levels should be identified as reporting units

for purpose of testing goodwill for impairment. For goodwill impairment testing purposes, the Company determined the Company's

reporting units are generally the same as its operating segments, which are identified in Note 18 to the Consolidated Financial Statements.

Our general policy is to qualitatively assess the carrying value of goodwill each reporting period for events or changes in circumstances

that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Related to the Business Combination

with ADVA the Company recognized $350.5 million of goodwill upon the merger on July 15, 2022. Therefore, we decided to proceed

directly to the quantitative test of goodwill and forego the qualitative assessment. We estimate the fair value of our reporting units based

on an income approach, whereby we calculate the fair value of a reporting unit based on the present value of estimated future cash flows.

A discounted cash flow analysis requires us to make various judgmental assumptions about future sales, operating margins, growth rates

and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market

participants. We also estimate the fair value of our reporting units based on a peer group analysis, whereby companies in the

telecommunications industry or with a comparable product and market structure are used to calculate a fair enterprise value using

revenue, EBITDA and debt multiples of trading value. Based on our analysis, management concluded that there was no impairment of

goodwill as of December 31, 2022. No impairment charges on goodwill were recognized during the years ended December 31, 2021

and 2020.

Other Non-Current Assets

Implementation costs incurred for hosting arrangements that are related to service contracts are capitalized and amortized over the term

of the arrangement. Capitalized implementation costs totaled $6.2 million and $21.0 million as of December 31, 2022 and 2021,

respectively and are included in other non-current assets on the Consolidated Balance Sheets. In connection with the planned integration

of information technology following the Business Combination, we determined that certain projects no longer fit our needs. As a result

the Company recognized impairment charges of $16.9 million during the year ended December 31, 2022 related to capitalized

implementation costs for a cloud computing arrangement. The impairment charges were determined based on actual costs incurred.

During the year ended December 31, 2021 and 2020, no impairment charges were recognized. We depreciate capitalized implementation

costs on a straight-line basis over ten years. Amortization expense was $3.9 million and $1.0 million for the years ended December 31,

2022 and 2021, respectively, which is recorded almost entirely in selling, general and administrative expenses in the Consolidated

Statements of (Loss) Income. No amortization expense was recognized for the year ended December 31, 2020.

58

Liability for Warranty

Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at the time of

product shipment based on our historical return rate and estimate of the cost to repair or replace the defective products. We engage in

extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers.

The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding

future warranty obligations may change due to product failure rates, material usage and other rework costs incurred in correcting a

product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our

actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Our

liability for warranty returns totaled $7.2 million and $5.4 million as of December 31, 2022 and 2021, respectively.

Pension Benefit Plan Obligations

We maintain a defined benefit pension plan covering employees in certain foreign countries. Pension benefit plan obligations are based

on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount rates, compensation rate

increases, expected return on plan assets, retirement rates and mortality rates. Actual results that differ from the assumptions and changes

in assumptions could affect future expenses and obligations. Our net pension liability totaled $10.6 million and $11.4 million as of

December 31, 2022 and 2021, respectively.

Lease Obligations

We have operating leases for office space, automobiles and various other equipment in the U.S. and in certain international locations.

Other contracts, such as manufacturing agreements and service agreements, are reviewed to determine if they contain potential embedded

leases. These other contracts are specifically reviewed to determine whether we have the right to substantially all of the economic benefit

from the use of any specified assets or the right to direct the use of any specified assets, either of which would indicate the existence of

a lease. Some of our leases include options to renew, with renewal terms of up to five years. For those leases that are reasonably assured

to be renewed, we have included the option to extend as part of our right of use asset and lease liability. The exercise of lease renewal

options is at our sole discretion. The depreciable life of leased assets and leasehold improvements are limited by the expected lease term.

Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized

on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, we elected

to not separate lease and non-lease components. Our lease agreements do not contain any material residual value guarantees or material

restrictive covenants.

Stock-Based Compensation

We have two stock incentive plans from which stock options, performance stock units (“PSUs”), restricted stock units (“RSUs”) and

restricted stock are available for grant to employees and directors. Costs related to these awards are recognized over their vesting periods.

Stock-based compensation expense recognized for the years ended December 31, 2022, 2021 and 2020 was approximately $28.3 million,

$7.5 million, and $6.8 million, respectively. See Note 5 for additional information.

Research and Development Costs

Research and development costs include compensation for engineers and support personnel, contracted services, depreciation and

material costs associated with new product development, enhancement of current products and product cost reductions. We continually

evaluate new product opportunities and engage in intensive research for product and software development efforts. Research and

development costs totaled $173.8 million, $108.7 million and $113.3 million for the years ended December 31, 2022, 2021 and 2020,

respectively.

ADVA has arrangements with governmental entities for the purposes of obtaining funding for research and development activities. The

Company classifies government grants received under these arrangements as a reduction to research and development expense incurred.

For the year ended December 31, 2022, the Company recognized $1.1 million as a reduction of research and development expense.

Income Taxes

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this

approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are

recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred

taxes during the year. Deferred taxes result from the difference between financial and tax basis of our assets and liabilities and are

adjusted for changes in tax rates and tax laws when such changes are enacted. Valuation allowances are recorded to reduce deferred tax

assets when it is more likely than not that a tax benefit will not be realized.

We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions

become uncertain. We adjust these reserves, including any impact on the related interest and penalties, as facts and circumstances

change.

59

Foreign Currency

Transactions with customers that are denominated in foreign currencies are recorded using the appropriate exchange rates from

throughout the year. Assets and liabilities denominated in foreign currencies are remeasured at the balance sheet dates using the closing

rates of exchange between those foreign currencies and the functional currency with any transaction gains or losses reported in other

income (expense). Our primary exposures to foreign currency exchange rate movements are with our German subsidiary, whose

functional currency is the Euro and our Australian subsidiary, whose functional currency is the Australian dollar. Adjustments resulting

from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive

(loss) income.

Revenue

Revenue is measured based on the consideration expected to be received in exchange for transferring goods or providing services to a

customer and as performance obligations under the terms of the contract are satisfied. Generally, this occurs with the transfer of control

of a product to the customer. Review of contracts with customers, for both direct customers and distributors, are performed and

assessment made regarding principal versus agent considerations to determine primary responsibility for delivery of performance

obligation, presumed inventory risk, and discretion in establishing pricing, when applicable. For transactions where there are multiple

performance obligations, individual products and services are accounted for separately if they are distinct (if a product or service is

separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available

to the customer). The consideration, including any discounts, is allocated between separate products and services based on their stand-

alone selling prices. Stand-alone selling prices are determined based on the prices at which the separate products and services are sold

and are allocated based on each item’s relative value to the total value of the products and services in the arrangement. For items that

are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin” approach. Payment

terms are generally 30 days in the U.S. and typically longer in many geographic markets outside the U.S. Shipping fees are recorded as

revenue and the related cost is included in cost of revenue. Revenue, value-added and other taxes collected concurrently with revenue-

producing activities are excluded from revenue. Costs of obtaining a contract, if material, are capitalized and amortized over the period

that the related revenue is recognized if greater than one year. We have elected to account for shipping fees as a cost of fulfilling the

related contract. We have also elected to apply the practical expedient related to the incremental costs of obtaining contracts and

recognize those costs as an expense when incurred if the amortization period of the assets is one year or less. These costs are included

in selling, general and administrative expenses. Capitalized costs with an amortization period greater than one year were immaterial.

Revenue is generated by two reportable segments: Network Solutions and Services & Support.

Network Solutions Segment -

Includes hardware products and software defined next-generation virtualized solutions used in service

provider or business networks, as well as prior generation products. The majority of the revenue from this segment is from hardware

revenue.

Hardware and Software Revenue

Revenue from hardware sales is recognized when control is transferred to the customer, which is generally when the products are

shipped. Shipping terms are generally FOB shipping point. Revenue from software license sales is recognized at delivery and transfer

of control to the customer. Revenue is recorded net of estimated discounts and rebates using historical trends. Customers are typically

invoiced when control is transferred and revenue is recognized. Our products generally include assurance-based warranties of 90 days

to five years for product defects, which are accrued at the time products are delivered.

Services & Support Segment -

Includes a complete portfolio of maintenance, network implementation and solutions integration and

managed services, which include hosted cloud services and subscription services to complement our Network Solutions segment.

Maintenance Revenue

Our maintenance service periods range from one month to five years. Customers are typically invoiced and pay for maintenance services

at the beginning of the maintenance period. We recognize revenue for maintenance services on a straight-line basis over the maintenance

period as our customers benefit evenly throughout the contract term and deferred revenue, when applicable, are recorded in current and

non-current unearned revenue.

Network Implementation Revenue

We recognize revenue for network implementation, which primarily consists of engineering, execution and enablement services at a

point in time when each performance obligation is complete. If we have recognized revenue but have not billed the customer, the right

to consideration is recognized as a contract asset that is included in other receivables on the Consolidated Balance Sheet. The contract

asset is transferred to accounts receivable when the completed performance obligation is invoiced to the customer.

See Notes 4 and 18 for additional information on reportable segments.

60

Unearned Revenue

Unearned revenue primarily represents customer billings on maintenance service programs and unearned revenue related to multiple

element contracts where we still have contractual obligations to our customers. We currently offer maintenance contracts ranging from

one month to five years. Revenue attributable to maintenance contracts is recognized on a straight-line basis over the related contract

term. In addition, we provide software maintenance and a variety of hardware maintenance services to customers under contracts with

terms up to ten years. When we defer revenue related to multiple performance obligations where we still have contractual obligations,

we also defer the related costs. Current deferred costs are included in prepaid expenses and other current assets on the accompanying

Consolidated Balance Sheets and totaled $1.5 million and $0.7 million as of December 31, 2022 and 2021, respectively. Non-current

deferred costs are included in other non-current assets on the accompanying Consolidated Balance Sheets and less than $0.1 million as

of December 31, 2022 and $0.1 million as of December 31, 2021.

(Loss) Earnings per Share

(Loss) earnings per common share and (loss) earnings per common share assuming dilution are based on the weighted average number

of common shares and, when dilutive, common equivalent shares outstanding during the year. See Note 22 for additional information.

Business Combinations

The Company records assets acquired, liabilities assumed, contractual contingencies, when applicable, and intangible assets recognized

as part of business combinations based on their fair values on the date of acquisition subject to purchase accounting adjustments. The

excess of the purchase price over the estimated fair values of the net tangible and intangible assets and liabilities assumed or acquired is

recorded as goodwill. If the estimated fair values of net tangible and intangible assets acquired and liabilities assumed exceed the

purchase price, a bargain purchase gain is recorded. The Company’s estimates of fair value are based on historical experience, industry

knowledge, certain information obtained from the management of the acquired company and, in some cases, valuations performed by

independent third-party firms. The results of operations of acquired companies are included in the accompanying Consolidated

Statements of (Loss) Income since their dates of acquisition. Costs incurred to complete the Business Combination, such as legal,

accounting or other professional fees are charged to selling, general and administrative expenses as incurred.

Non-Controlling Interest

Non-controlling interest represents the equity interest in ADVA held by holders other than the Company. On July 15, 2022, upon the

close of the Business Combination, the ADVA stockholders’ equity ownership percentage in ADVA was approximately 36%. The

Company has consolidated the financial position and results of operations of ADVA and reflected the proportionate interest held by the

ADVA stockholders as non-controlling interest in the accompanying condensed consolidated balance sheet. As of December 31, 2022,

the ADVA stockholders’ equity ownership percentage in ADVA was approximately 34.7%.

Recent Accounting Pronouncements Not Yet Adopted

There are currently no recently issued accounting pronouncements not yet adopted which would have a material effect on the Condensed

Consolidated Financial Statements.

Recently Adopted 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, which would require

an acquirer to recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree

recognized and measured them in its pre-acquisition financial statements in accordance with Topic 606, Revenue Recognition. The

Company early adopted ASU 2021-08 on July 1, 2022 and the standard was applied retrospectively beginning with January 1, 2022.

Note 2 – Business Combination Agreement

ADVA Optical Networking SE

On August 30, 2021, ADTRAN and ADVA, entered into a Business Combination Agreement, pursuant to which both companies agreed

to combine their respective businesses and each become subsidiaries of a new holding company, ADTRAN Holdings, Inc. (formerly

known as Acorn HoldCo, Inc.) which was formed as a wholly-owned subsidiary of ADTRAN in order to consummate the transactions

under the Business Combination Agreement. Under the terms of the Business Combination Agreement, on July 8, 2022, Acorn

MergeCo, Inc, a Delaware corporation and wholly-owned direct subsidiary of the Company, merged with and into ADTRAN, Inc.

leaving ADTRAN, Inc. surviving the merger as a wholly-owned direct subsidiary of the Company.

Additionally, pursuant to the Business Combination Agreement, on July 15, 2022, the Company made a public offer to exchange each

issued and outstanding no-par value bearer share of ADVA for 0.8244 shares of Company Common Stock, par value $0.01 per share of

the Company. The Exchange Offer was settled on Exchange Offer Settlement Date, on which date the Company acquired 33,957,538

61

bearer shares of ADVA, or 65.43% of ADVA’s outstanding bearer shares as of the Exchange Offer Settlement Date, in exchange for

the issuance of an aggregate of 27,994,595 shares of Company Common Stock. Additionally, pursuant to the Business Combination

Agreement, ADVA stock option holders were entitled to have their ADVA stock options assumed by ADTRAN Holdings, Inc. (applying

the exchange ratio in the Business Combination Agreement), thereafter representing options to acquire stock of ADTRAN, Inc. The fair

value of the ADVA stock options assumed by ADTRAN, Inc. was $12.8 million, estimated using the Monte Carlo method.

ADTRAN, Inc. and ADVA became subsidiaries of ADTRAN Holdings, Inc. as a result of the Business Combination. ADTRAN was

determined to be the accounting acquirer of ADVA based on ADTRAN shareholders’ majority equity stake in the combined company,

the composition of the board of directors and senior management of the combined company, among other factors. The Business

Combination of ADVA has been accounted for using the acquisition method of accounting as per the provisions of Accounting Standards

Codification 805, “Business Combinations” (“ASC 805”). The Business Combination Agreement used a fixed exchange ratio of

Company Common Stock for ADVA shares of common stock, which resulted in a 36% equity stake for ADVA stockholders and 64%

equity stake for ADTRAN stockholders in the post-closing combined company (calculated on a fully diluted basis and utilizing the

tender of 65.43% of ADVA’s current issued and outstanding share capital). Therefore, ADTRAN shareholders continue to hold a

majority interest in the combined company after the Business Combination was completed. Additionally, the Board of Directors is

comprised of six members from ADTRAN and three members from ADVA; the current ADTRAN chief executive officer acts as the

chairman of the Board of Directors and the former ADVA chief executive officer as the vice chairman of the Board of Directors.

Additionally, the current ADTRAN chief executive officer and ADTRAN chief financial officer hold these positions within the

combined company. Based upon these and other considerations as outlined in ASC 805, ADTRAN represents the accounting acquirer.

The following table summarizes the purchase price for the ADVA business combination:

(In thousands, except shares, share price and exchange ratio)

Purchase Price

ADVA shares exchanged

33,957,538

Exchange ratio

0.8244

ADTRAN Holdings, Inc. shares issued

27,994,595

ADTRAN Holdings, Inc. share price on July 15, 2022

$

20.20

Purchase price paid for ADVA shares

$

565,491

Equity compensation

(1)

$

12,769

Total purchase price

$

578,260

(1)

Represents the portion of replacement share-based payment awards that relates to pre-combination vesting.

Assets acquired and liabilities assumed were recognized at their respective fair values as of July 15, 2022. In determining the fair value,

the Company utilized various methods of the income, cost and market approaches depending on the asset or liability being fair valued.

The estimation of fair value required significant judgment related to future net cash flows reflecting the risk inherent in each cash flow

stream, competitive trends, market comparables and other factors. Inputs were generally determined by taking into account historical

data, current and anticipated market conditions, and growth rates.

Developed technology and customer relationships were valued using the multi-period excess earnings method. Backlog was valued

using the distributor method. Significant assumptions used in the discounted cash flow analysis for (i) developed technology were the

revenue growth rates, long-term revenue growth rate, discount rate, and earnings before interest, taxes, depreciation and amortization

(“EBITDA”) margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation; (ii) customer relationships

were earnings before interest and taxes (“EBIT”) margins, contributory asset charges, and customer attrition rate; and (iii) backlog were

EBIT margins, adjusted EBIT margins, and contributory asset charges.

The allocation of the purchase price to the assets acquired and liabilities assumed was subject to adjustment within the measurement

period (up to one year from the acquisition date). The measurement period adjustments since initial preliminary estimates resulted from

changes to the fair value estimates of the acquired assets and assumed liabilities based on finalizing the valuations of inventory, prepaid

expenses and other current assets, property plant and equipment, intangible assets, other non-current assets and deferred tax assets and

liabilities. The cumulative effect of all measurement period adjustments resulted in a decrease to recognized goodwill of $8.7 million.

62

The following table summarizes the preliminary purchase price allocation for each major class of assets acquired and liabilities assumed

in the acquisition of ADVA (in thousands):

(In thousands)

Total purchase price

$

578,260

Non-controlling interest

$

316,415

Net Assets:

Cash and cash equivalents

$

44,003

Accounts receivable

114,659

Other receivables

1,457

Inventory

200,331

Prepaid expenses and other current assets

28,208

Property plant and equipment

55,480

Deferred tax assets

1,759

Identifiable intangible assets

403,780

Other non-current assets

31,074

Accounts payable

(98,587

)

Current unearned revenue

(26,047

)

Accrued expenses and other liabilities

(59,600

)

Income tax payable, net

(4,898

)

Current portion of notes payable

(25,254

)

Tax liabilities

(1,400

)

Non-current unearned revenue

(11,498

)

Pension liability

(6,820

)

Other non-current liabilities

(6,094

)

Non-current portion of revolving credit agreements and notes payable

(15,250

)

Non-current lease obligations

(20,046

)

Deferred tax liabilities

(61,040

)

Total net assets acquired

$

544,217

Goodwill

$

350,458

The allocation of the purchase price and fair value assessment of goodwill, deferred tax assets, and deferred tax liabilities continues to

be preliminary. The acquisition accounting is subject to revision once the Company receives final information. It is possible that the

final assessment of fair value may differ materially from the preliminary assessment. If the final assessment differs from this preliminary

assessment, the measurement period adjustments will be recorded in the period in which they are determined as if they had been

completed at the acquisition date.

The preliminary fair value of the assets acquired include accounts receivable of $114.7 million and other receivables of $1.5 million.

The unpaid principal balance under these receivables is $118.5 million and $1.5 million, respectively. The difference between the fair

value and the unpaid principal balance primarily represents amounts expected to be uncollectible.

The fair value of the identifiable intangible assets acquired as of the acquisition date:

(In thousands)

Estimated-average useful

life (in years)

(1)

Fair value

Income Statement Amortization Classification

Developed technology

8.5

$

291,925

Cost of revenue - Network Solutions

Backlog

1.4

52,165

Cost of revenue - Network Solutions and Services & Support

Customer relationships

10.5

32,704

Selling, general and administrative expenses

Trade name

2.8

26,986

Selling, general and administrative expenses

Total

$

403,780

(1)

Determination of the weighted average period of the individual categories of intangible assets was based on the nature of the applicable

intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with definite

lives is recognized over the period of time the assets are expected to contribute to future cash flows.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Based on

preliminary estimates, the ADVA acquisition resulted in the recognition of goodwill of $350.5 million, which the Company believes is

attributable to the value driven by the Company’s expected growth of the business, synergies, and expanded market and product

opportunities.

Goodwill created as a result of the ADVA acquisition that is not deductible for tax purposes.

After the Business Combination, the chief operating decision maker assessed and will continue to assess the Company’s performance

and allocate resources to its two segments (1) Network Solutions and (2) Services & Support. Based on preliminary estimates, the

63

goodwill resulting from the Business Combination of $272.8 million was allocated to the Network Solutions segment, and $77.7 million

was allocated to the Services & Support segment. See Note 18 of the Notes to Consolidated Financial Statements, included in this

Amendment No. 1 for more information about the Company’s segments.

As of the acquisition date, the fair value of the non-controlling interest was approximately $316.4 million and determined using a market

approach. As a portion of ADVA shares will remain trading after the Business Combination, the non-controlling interest was calculated

using 17,941,496 ADVA shares held by non-controlling interest multiplied by the ADVA closing share price of €17.58 ($17.64 using

the July 15, 2022 EUR to USD conversion rate of $1.00318) on July 15, 2022.

The Company included the financial results of ADVA in its consolidated financial statements since July 15, 2022, the acquisition date.

The net revenue and net loss from the ADVA business since July 15, 2022, were $365.9 million and $12.9 million, respectively, which

are included in the Company’s Consolidated Statement of Loss. The net loss attributable to non-controlling interest from the ADVA

business for the year ended December 31, 2022 was $6.9 million.

As of December 31, 2022, the Company has incurred $26.1 million of transaction costs related to the Business Combination, of which

$14.2 million and $11.9 million were incurred during the years ended December 31, 2022 and 2021, respectively. These transaction

costs are recorded in selling, general and administrative expense in the Consolidated Statements of Loss.

Supplemental Pro Forma Information (Unaudited)

The unaudited pro forma financial information in the table below summarizes the combined results of operations for ADTRAN and

ADVA as though the Business Combination had occurred on January 1, 2021. The pro forma amounts have been adjusted for differences

in basis of accounting which are determined before taking into effect the impacts of purchase accounting and Business Combination

accounting impacts.

The following unaudited pro forma information is presented for illustrative purposes only. It is not necessarily indicative of the results

of operations of future periods, the results of operations that actually would have been realized had the entities been a single company

as of January 1, 2021, or the future operating results of the combined entities. The unaudited pro forma information does not give effect

to the potential impact of current financial conditions, regulatory matters or any anticipated synergies, operating efficiencies or cost

savings that may be associated with the acquisition. The unaudited pro forma information also does not include any integration costs

that the Company may incur related to the acquisition as part of combining the operations of the companies.

For the Years Ended

December 31,

(In thousands)

2022

2021

Revenue

$

1,410,296

$

1,210,201

Net loss attributable to ADTRAN Holdings, Inc.

$

(46,204

)

$

(91,423

)

Note 3 – Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance

Sheet that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows:

(In thousands)

December 31, 2022

December 31, 2021

Cash and cash equivalents

$

108,644

$

56,603

Restricted cash

—

215

Cash, cash equivalents and restricted cash

$

108,644

$

56,818

64

Note 4 - Revenue

The following is a description of the principal activities from which revenue is generated by reportable segment:

Network Solutions Segment -

Includes hardware and software products that enable a digital future which support the Company's

Subscriber, Access and Aggregation, and Optical Networking Solutions.

Services & Support Segment -

Includes network design, implementation, maintenance and cloud-hosted services supporting the

Company's Subscriber, Access and Aggregation, and Optical Networking Solutions.

Revenue by Category

In addition to the Company's reportable segments, revenue is also reported for the following three categories – Subscriber Solutions,

Access & Aggregation Solutions and Optical Networking Solutions.

Prior to the Business Combination with ADVA on July 15, 2022, ADTRAN reported revenue across the following three categories: (1)

Access & Aggregation, (2) Subscriber Solutions & Experience and (3) Traditional & Other Products. Following the Business

Combination with ADVA, we have recast these revenues such that ADTRAN’s former Access & Aggregation revenue is combined

with a portion of the applicable ADVA solutions to create Access & Aggregation Solutions, ADTRAN’s former Subscriber Solutions

& Experience revenue is combined with a portion of the applicable ADVA solutions to create Subscriber Solutions, and the revenue

from Traditional & Other products is now included in the applicable Access & Aggregation Solutions or Subscriber Solutions category.

Optical Networking Solutions is a new revenue category added to represent a meaningful portion of ADVA’s portfolio.

Our Subscriber Solutions portfolio is used by service providers to terminate their access services infrastructure at the customer premises

while providing an immersive and interactive experience for residential, business and wholesale subscribers. This revenue category

includes hardware- and software-based products and services. These solutions include fiber termination solutions for residential,

business and wholesale subscribers, Wi-Fi access solutions for residential and business subscribers, Ethernet switching and network

edge virtualization solutions for business subscribers, and cloud software solutions covering a mix of subscriber types.

Our Access & Aggregation Solutions are solutions that are used by communications service providers to connect residential subscribers,

business subscribers and mobile radio networks to the service providers’ metro network, primarily through fiber-based connectivity.

This revenue category includes hardware- and software-based products and services. Our solutions within this category are a mix of

fiber access and aggregation platforms, precision network synchronization and timing solutions, and access orchestration solutions that

ensure highly reliable and efficient network performance.

Our Optical Networking Solutions are used by communications service providers, internet content providers and large-scale enterprises

to securely interconnect metro and regional networks over fiber. This revenue category includes hardware- and software-based products

and services. Our solutions within this category include open optical terminals, open line systems, optical subsystems and modules,

network infrastructure assurance systems, and automation platforms that are used to build high-scale, secure and assured optical

networks.

The following table disaggregates revenue by reportable segment and revenue category for the year ended December 31, 2022:

(In thousands)

Network Solutions

Services & Support

Total

Subscriber Solutions

$

364,238

$

26,216

$

390,454

Access & Aggregation Solutions

326,934

47,068

374,002

Optical Networking Solutions

225,621

35,459

261,080

Total

$

916,793

$

108,743

$

1,025,536

The following table disaggregates revenue by reportable segment and revenue category for the year ended December 31, 2021:

(In thousands)

Network Solutions

Services & Support

Total

Subscriber Solutions

$

189,825

$

16,385

$

206,210

Access & Aggregation Solutions

309,009

47,785

356,794

Optical Networking Solutions

—

—

—

Total

$

498,834

$

64,170

$

563,004

65

The following table disaggregates revenue by reportable segment and revenue category for the year ended December 31, 2020:

(In thousands)

Network Solutions

Services & Support

Total

Subscriber Solutions

$

163,349

$

15,315

$

178,664

Access & Aggregation Solutions

274,666

53,180

327,846

Optical Networking Solutions

—

—

—

Total

$

438,015

$

68,495

$

506,510

The aggregate amount of transaction price allocated to remaining performance obligations that have not been satisfied as of December

31, 2022 and December 31, 2021 related to contractual maintenance agreements, contractual SaaS and subscription services, and

hardware contracts that exceed one year in duration amounted to $277.2 million and $101.1 million, respectively. As of December 31,

2022, approximately 66% is expected to be recognized over the next 12 months, and the remainder recognized thereafter. The majority

of the Company's remaining performance obligations at December 31, 2022 are related to contracts or orders that have an original

expected duration of one year or less, for which the Company is electing to utilize the practical expedient available within the guidance,

and are excluded from the transaction price related to these future obligations. The Company will generally satisfy the remaining

performance obligations as we transfer control of the products ordered or services to our customers, excluding maintenance services,

which are satisfied over time.

The following table provides information about accounts receivable, contract assets and unearned revenue from contracts with

customers:

(In thousands)

December 31, 2022

December 31, 2021

Accounts receivable

$

279,435

$

158,742

Contract assets

(1)

$

1,852

$

464

Unearned revenue

$

41,193

$

17,737

Non-current unearned revenue

$

19,239

$

9,271

(1)

Included in other receivables on the Consolidated Balance Sheets.

The Company is party to a receivables purchase agreement with a third party financial institution (the “Factor”). As of December 31,

2022, accounts receivable totaling $14.9 million were sold, of which $1.2 million was retained by the Factor in the reserve account. The

balance in the reserve account is included in other assets on the Consolidated Balance Sheets. As of December 31, 2022, the Company

has an allowance for doubtful accounts related to factored accounts receivable totaling less than $0.1 million. The cost of receivables

purchase agreement is included in interest expense in the Consolidated Statements of Loss and totaled $0.3 million for the year ended

December 31, 2022.

Of the outstanding unearned revenue balances as of December 31, 2021, $14.0 million was recognized as revenue during the year ended

December 31, 2022, respectively. Of the outstanding unearned revenue balances as of December 31, 2020, $11.2 million was recognized

as revenue during the year ended December 31, 2021.

66

Note 5 – Stock-Based Compensation

The following table summarizes stock-based compensation expense related to stock options, PSUs, RSUs and restricted stock for the

years ended December 31, 2022, 2021 and 2020:

(In thousands)

2022

2021

2020

Stock-based compensation expense included in cost of revenue

$

2,876

$

543

$

426

Selling, general and administrative expenses

20,844

4,571

4,036

Research and development expenses

4,602

2,366

2,372

Stock-based compensation expense included in operating expenses

25,446

6,937

6,408

Total stock-based compensation expense

28,322

7,480

6,834

Tax benefit for expense associated with non-qualified stock options, PSUs,

RSUs and restricted stock

(5,152

)

(1,849

)

(1,629

)

Total stock-based compensation expense, net of tax

$

23,170

$

5,631

$

5,205

Stock Incentive Program Descriptions

2020 Stock Incentive Plans

At the annual meeting of stockholders held on May 13, 2020, the Company’s stockholders approved, upon recommendation of the Board

of Directors, the adoption of the ADTRAN, Inc. 2020 Employee Stock Incentive Plan (the “2020 Employee Plan”) as well as the

ADTRAN, Inc. 2020 Directors Stock Plan (the “2020 Directors Plan”), which were assumed by the Company upon consummation of

the Merger. No additional awards will be granted under the Company’s previous stock incentive plans, the ADTRAN, Inc. 2015

Employee Stock Incentive Plan (the “2015 Employee Plan”) or the 2010 Directors Stock Plan (the “2010 Directors Plan”) subsequent

to the stockholders’ approval of these new stock plans. Outstanding awards granted under the 2015 Employee Plan and the 2010

Directors Plan will remain subject to the terms of such plans, and shares underlying awards granted under such plans that are cancelled

or forfeited will be available for issuance under the 2020 Employee Plan or the 2020 Directors Plan, as applicable.

Under the 2020 Employee Plan, the Company is authorized to issue 2.8 million shares of common stock to certain employees, key

service providers and advisors through incentive stock options and non-qualified stock options, stock appreciation rights, RSUs and

restricted stock, any of which may be subject to performance-based conditions. RSUs and restricted stock granted under the 2020

Employee Plan will typically vest pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date. Stock

options granted under the 2020 Employee Plan will typically become exercisable beginning after one year of continued employment,

normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date and have a ten-year contractual

term. Stock options, RSUs and restricted stock granted under the 2020 Employee Plan reduce the shares authorized for issuance under

the 2020 Employee Plan by one share of common stock for each share underlying the award. Forfeitures, cancellations or expirations of

awards granted under the 2015 Employee Plan increase the shares authorized for issuance under the 2020 Employee Plan, with

forfeitures, cancellations or expirations of RSUs and restricted stock increasing the shares authorized for issuance by 2.5 shares of

common stock for each share underlying the award. Forfeitures, cancellations or expirations of stock options from the 2015 Employee

Plan increase the shares authorized for issuance under the 2020 Employee Plan by one share of common stock for each share underlying

the award.

Under the 2020 Directors Plan, the Company is authorized to issue 0.4 million shares of common stock through stock options, restricted

stock and RSUs to non-employee directors. Stock awards issued under the 2020 Directors Plan typically will become vested in full on

the first anniversary of the grant date. Stock options issued under the 2020 Directors Plan will have a ten-year contractual term. Stock

options, restricted stock and RSUs granted under the 2020 Directors Plan reduce the shares authorized for issuance under the 2020

Directors Plan by one share of common stock for each share underlying the award. Forfeitures, cancellations and expirations of awards

granted under the 2010 Directors Stock Plan increase the shares authorized for issuance under the 2020 Directors Plan by one share of

common stock for each share underlying the award.

Previous Stock Incentive Plans

In January 2015, the Board of Directors adopted the 2015 Employee Plan, which authorized 7.7 million shares of common stock for

issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights,

PSUs, RSUs and restricted stock. The 2015 Employee Plan was adopted by stockholder approval at our annual meeting of stockholders

held in May 2015. PSUs, RSUs and restricted stock granted under the 2015 Plan reduce the shares authorized for issuance under the

2015 Employee Plan by 2.5 shares of common stock for each share underlying the award. Options granted under the 2015 Employee

Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule

beginning on the first anniversary of the grant date and have a ten-year contractual term. Expiration dates of options outstanding as of

December 31, 2022 under the 2015 Employee Plan range from 2025 to 2026.

67

In January 2006, the Board of Directors adopted the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (the “2006 Plan”), which

authorized 13.0 million shares of common stock for issuance to officers and certain employees through incentive stock options and non-

qualified stock options, stock appreciation rights, RSUs and restricted stock. Options granted under the 2006 Plan typically become

exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first

anniversary of the grant date and had a ten-year contractual term. The 2006 Plan was replaced in May 2015 by the 2015 Employee Plan.

Expiration dates of options outstanding as of December 31, 2022 under the 2006 Plan range from 2022 to 2024.

In May 2010, the Company’s stockholders approved the 2010 Directors Plan, under which 0.5 million shares of common stock have

been reserved for issuance. This plan replaced the 2005 Directors Stock Option Plan. Under the 2010 Directors Plan, the Company may

issue stock options, restricted stock and RSUs to our non-employee directors. Stock awards issued under the 2010 Directors Plan become

vested in full on the first anniversary of the grant date. Options issued under the 2010 Directors Plan had a ten-year contractual term.

All remaining options under the 2010 Directors Plan expired in 2019.

PSUs, RSUs and restricted stock - ADTRAN Holdings, Inc.

The following table is a summary of our PSUs, RSUs and restricted stock outstanding as of December 31, 2021 and 2022 and the

changes that occurred during 2022:

Number of

shares (In

thousands)

Weighted

Average Grant

Date Fair Value

Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2021

1,930

$

14.11

PSUs, RSUs and restricted stock granted

645

$

20.56

PSUs, RSUs and restricted stock vested

(1,440

)

$

12.81

PSUs, RSUs and restricted stock forfeited

(49

)

$

14.22

Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2022

1,086

$

17.54

The following table details the significant assumptions that impact the fair value estimate of the market-based PSUs:

2022

2021

2020

Estimated fair value per share

$

24.01

$

26.07

$

14.43

Expected volatility

45.77

%

53.27

%

51.88

%

Risk-free interest rate

4.28

%

0.85

%

0.24

%

Expected dividend yield

1.76

%

1.63

%

2.85

%

For market-based PSUs, the number of shares of common stock earned by a recipient is subject to a market condition based on

ADTRAN’s relative total shareholder return against all companies in the NASDAQ Telecommunications Index at the end of a three-

year performance period. Depending on the relative total shareholder return over the performance period, the recipient may earn from

0% to 150% of the shares underlying the PSUs, with the shares earned distributed upon the vesting. The fair value of the award is based

on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions

using a Monte Carlo Simulation valuation method. A portion of the granted PSUs vests and the underlying shares become deliverable

upon the death or disability of the recipient or upon a change of control of ADTRAN, as defined by the 2020 Employee Plan. The

recipients of the PSUs receive dividend credits based on the shares of common stock underlying the PSUs. The dividend credits vest

and are earned in the same manner as the PSUs and are paid in cash upon the issuance of common stock for the PSUs.

During each of the years ended December, 2022, 2021 and 2020, the Company granted 0.3 million performance-based PSUs to its

executive officers and certain employees. The grant-date fair value of these performance-based awards was based on the closing price

of the Company’s stock on the date of grant. These awards vest over one-year, two-year and three-year periods, respectively, subject to

the grantee’s continued employment, with the ability to earn shares in a range of 0% to 142.8% of the awarded number of PSUs based

on the achievement of defined performance targets. Equity-based compensation expense with respect to these awards may be adjusted

over the vesting period to reflect the probability of achievement of performance targets defined in the award agreements. Pursuant to

the Business Combination, the unearned performance-based PSUs converted to time-based RSUs which were treated as an award

modification during the third quarter of 2022. This resulted in incremental compensation expense totaling $17.8 million being recognized

during the twelve months ended December 31, 2022. These awards were fully vested as of December 31, 2022.

Pursuant to the Business Combination, 0.3 million shares of market-based PSU awards converted to time-based RSU's awards which

were treated as an award modification during the third quarter of 2022. Given that the fair value of these awards after the modification

was less than the fair value of the awards immediately before the modification, no incremental compensation expense was recognized.

The Company continued to recognize compensation expense based on the award's original grant date fair value. As of December 31,

2022, there was $1.4 million of unrecognized compensation expense related to these awards which will be recognized over the weighted

average remaining service period of 1.57 years.

68

The fair value of RSUs and restricted stock is equal to the closing price of our stock on the grant date. RSUs and restricted stock vest

ratably over four-year and one-year periods, respectively.

We will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation.

If circumstances change, and additional data becomes available over time, we may change our assumptions and methodologies, which

may materially impact our fair value determination.

As of December 31, 2022, total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and

restricted stock was approximately $15.8 million, which is expected to be recognized over an average remaining recognition period of

2.25 years and will be adjusted for actual forfeitures as they occur.

As of December 31, 2022, 3.3 million shares were available for issuance under shareholder-approved equity plans in connection with

the grant and exercise of stock options, PSU’s, RSU’s or restricted stock.

Stock Options - ADTRAN Holdings, Inc.

The following table is a summary of stock options outstanding as of December 31, 2022 and 2021 and the changes that occurred during

2022:

Number of

Options

(In

thousands)

Weighted

Average

Exercise

Price

(Per share)

Weighted Avg.

Remaining

Contractual Life

in Years

Aggregate

Intrinsic

Value

(In thousands)

Stock options outstanding, December 31, 2021

1,721

$

19.37

2.39

$

6,669

ADVA stock options replaced by ADTRAN Holdings stock options

(1)

2,094

$

11.12

Stock options exercised

(519

)

$

15.70

Stock options forfeited

(10

)

$

10.28

Stock options expired

(138

)

$

22.73

Stock options outstanding, December 31, 2022

3,148

$

14.37

3.42

$

16,251

Stock options exercisable, December 31, 2022

1,711

$

15.95

1.95

$

7,104

(1)

Each ADVA stock option surrendered was exchanged for 0.8244 ADTRAN Holdings stock options.

As of December 31, 2022, there was $8.3 million of unrecognized compensation expense related to stock options which will be

recognized over the remaining weighted-average period of 2.4 years.

Pursuant to the Business Combination, which closed on July 15, 2022, ADVA stock option holders were entitled to have their ADVA

stock options assumed by ADTRAN Holdings (applying the exchange ratio in the Business Combination Agreement), thereafter

representing options to acquire stock of ADTRAN Holdings. The maximum number of shares of ADTRAN Holdings stock potentially

issuable upon such assumption was 2.3 million shares. The period in which such options could be assumed ended July 22, 2022. A total

of 2.1 million shares of ADTRAN Holdings stock are subject to assumed ADVA options. The determination of the fair value of stock

options assumed by ADTRAN Holdings was estimated using the Monte Carlo method and is affected by its stock price, as well as

assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate. The

stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but are

not limited to, the volatility of the Company's stock price and employee exercise behaviors.

All of the options were previously issued at exercise prices that approximated fair market value at the date of grant.

The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the difference between ADTRAN’s closing

stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would

have been received by the option holders had all option holders exercised their options on December 31, 2022. The amount of aggregate

intrinsic value was $16.3 million as of December 31, 2022 and will change based on the fair market value of ADTRAN’s stock. The

total pre-tax intrinsic value of options exercised during the year ended December 31, 2022 was $4.0 million.

69

The following table further describes our stock options outstanding as of December 31, 2022:

Options Outstanding

Options Exercisable

Range of

Exercise Prices

Options

Outstanding at

December 31, 2022

(In thousands)

Weighted Avg.

Remaining

Contractual Life

in Years

Weighted

Average

Exercise

Price

Options

Exercisable at

December 31, 2022

(In thousands)

Weighted

Average

Exercise

Price

$6.06 – $8.67

755

3.21

$

7.37

320

$

6.47

$8.68 – $13.74

833

4.65

$

11.45

207

$

9.63

$13.75 – $17.15

427

3.27

$

15.33

368

$

15.33

$17.16 – $21.36

679

3.92

$

19.02

369

$

18.97

$21.37 – $23.64

454

0.83

$

23.64

447

$

23.64

3,148

1,711

The Black-Scholes option pricing model (the “Black-Scholes Model”) is used to determine the estimated fair value of stock option

awards on the date of grant. The Black-Scholes Model requires the input of certain assumptions that involve judgment. Because our

stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can

materially affect the fair value estimate, existing models may not provide reliable measures of fair value of our stock options. The stock

option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but are not

limited to, the volatility of our stock price and employee exercise behaviors.

The stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but

are not limited to, the volatility of our stock price and employee exercise behaviors.

The weighted-average estimated fair value of stock options granted to employees during the year ended December 31, 2022 was $5.81

per share with the following weighted-average assumptions:

2022

Expected volatility

45.00

%

Risk-free interest rate

3.00

%

Expected dividend yield

1.77

%

Expected life (in years)

2.4

There were no stock options granted in during the years ended December 31, 2021 and 2020.

Stock Options - ADVA Optical Networking SE

The following table summarizes ADVA Optical Networking SE stock options outstanding as of July 15, 2022 (the Business Combination

closing date) and December 31, 2022 and the changes that occurred between July 15, 2022 and December 31, 2022:

Number of

Options

(In thousands)

Weighted

Average

Exercise Price

(Per share)

Weighted Avg.

Remaining

Contractual Life

in Years

Aggregate

Intrinsic

Value

(In thousands)

Stock options outstanding, July 15, 2022

2,745

$

9.09

4.60

$

27,205

Stock options exercised

(102

)

$

8.02

ADVA stock options replaced by ADTRAN Holdings stock

options

(1)

(2,550

)

$

9.80

Stock options forfeited

(12

)

$

9.57

Stock options outstanding, December 31, 2022

81

$

8.58

4.00

$

1,222

Stock options exercisable, December 31, 2022

27

$

7.37

2.39

$

432

(1)

Each ADVA stock option surrendered was exchanged for 0.8244 ADTRAN Holdings stock options.

As of December 31, 2022, there was $0.1 million of unrecognized compensation expense related to stock options which will be

recognized over the remaining weighted-average period of 1.17 years.

All of the options were previously issued at exercise prices that approximated fair market value at the date of grant.

70

The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the difference between ADVA's closing stock

price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have

been received by the option holders had all option holders exercised their options on December 31, 2022. The amount of aggregate

intrinsic value was $1.2 million as of December 31, 2022 and will change based on the fair market value of ADVA's stock. The total

pre-tax intrinsic value of options exercised during the period July 15, 2022 through December 31, 2022 was $1.6 million.

The following table further describes ADVA's stock options outstanding as of December 31, 2022:

Options Outstanding

Options Exercisable

Range of

Exercise Prices

Options

Outstanding at

December 31, 2022

(In thousands)

Weighted Avg.

Remaining

Contractual Life

in Years

Weighted

Average

Exercise

Price

Options

Exercisable at

December 31, 2022

(In thousands)

Weighted

Average

Exercise

Price

€4.98 - €7.05

35

3.52

$

6.97

9

$

5.34

€7.06 - €8.70

18

2.60

$

8.41

18

$

8.41

€8.71 - €15.68

28

5.48

$

10.73

—

$

—

81

27

Note 6 – Investments

Debt Securities and Other Investments

As of December 31, 2022, the following debt securities and other investments were included in short-term investments and long-term

investments on the Consolidated Balance Sheet and recorded at fair value:

Amortized

Gross Unrealized

Fair

(In thousands)

Cost

Gains

Losses

Value

Corporate bonds

$

2,538

$

5

$

(81

)

$

2,462

Municipal fixed-rate bonds

185

(5

)

180

Asset-backed bonds

818

1

(24

)

795

Mortgage/Agency-backed bonds

1,853

(105

)

1,748

U.S. government bonds

3,870

3

(188

)

3,685

Foreign government bonds

407

(24

)

383

Available-for-sale debt securities held at fair value

$

9,671

$

9

$

(427

)

$

9,253

As of December 31, 2021, the following debt securities and other investments were included in short-term investments and long-term

investments on the Consolidated Balance Sheet and recorded at fair value:

Amortized

Gross Unrealized

Fair

(In thousands)

Cost

Gains

Losses

Value

Corporate bonds

$

10,776

$

6

$

(35

)

$

10,747

Municipal fixed-rate bonds

1,553

2

(4

)

1,551

Asset-backed bonds

322

3

(3

)

322

Mortgage/Agency-backed bonds

4,754

15

(33

)

4,736

U.S. government bonds

12,251

12

(92

)

12,171

Foreign government bonds

543

—

(4

)

539

Available-for-sale debt securities held at fair value

$

30,199

$

38

$

(171

)

$

30,066

71

As of December 31, 2022, our debt securities had the following contractual maturities:

(In thousands)

Corporate

bonds

Municipal

fixed-rate

bonds

Asset-backed

bonds

Mortgage /

Agency-backed

bonds

U.S.

government

bonds

Foreign

government

bonds

Less than one year

$

—

$

180

$

—

$

—

$

160

$

—

One to two years

1,450

—

96

162

2,787

276

Two to three years

1,012

—

186

598

617

107

Three to five years

—

—

335

253

121

—

Five to ten years

—

—

—

317

—

—

More than ten years

—

—

178

418

—

—

Total

$

2,462

$

180

$

795

$

1,748

$

3,685

$

383

Actual maturities may differ from contractual maturities as some borrowers have the right to call or prepay obligations with or without

call or prepayment penalties.

Realized gains and losses on sales of securities are computed under the specific identification method. The following table presents

gross realized gains and losses related to our debt securities for the years ended December 31, 2022, 2021 and 2020:

For the year ended December 31,

(In thousands)

2022

2021

2020

Gross realized gains on debt securities

$

17

$

241

$

459

Gross realized losses on debt securities

(1,211

)

(159

)

(58

)

Total (loss) gain recognized, net

$

(1,194

)

$

82

$

401

The Company’s investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration

in any one issuer to 5% of the market value of the total investment portfolio. The Company did not purchase any available-for-sale debt

with credit deterioration during the years ended December 31, 2022, 2021 and 2020.

The following table presents the breakdown of debt securities and other investments with unrealized losses as of December 31, 2022:

Continuous Unrealized

Loss Position for Less

than 12 Months

Continuous Unrealized

Loss Position for 12

Months or Greater

Total

(In thousands)

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

Corporate bonds

$

1,367

$

(39

)

$

583

$

(42

)

$

1,950

$

(81

)

Municipal fixed-rate bonds

—

—

178

(5

)

180

(5

)

Asset-backed bonds

524

(14

)

117

(10

)

641

(24

)

Mortgage/Agency-backed bonds

825

(23

)

844

(82

)

1,668

(105

)

U.S. government bonds

2,215

(106

)

1,063

(82

)

3,278

(188

)

Foreign government bonds

—

—

383

(24

)

383

(24

)

Total

$

4,931

$

(182

)

$

3,168

$

(245

)

$

8,100

$

(427

)

The following table presents the breakdown of debt securities and other investments with unrealized losses as of December 31, 2021:

Continuous Unrealized

Loss Position for Less

than 12 Months

Continuous Unrealized

Loss Position for 12

Months or Greater

Total

(In thousands)

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

Corporate bonds

$

6,795

$

(35

)

$

—

$

—

$

6,795

$

(35

)

Municipal fixed-rate bonds

1,129

(4

)

—

—

1,129

(4

)

Asset-backed bonds

198

(3

)

—

—

198

(3

)

Mortgage/Agency-backed bonds

3,006

(33

)

—

—

3,006

(33

)

U.S. government bonds

10,552

(92

)

—

—

10,552

(92

)

Foreign government bonds

294

(4

)

—

—

294

(4

)

Total

$

21,974

$

(171

)

$

—

$

—

$

21,974

$

(171

)

72

The increase in unrealized losses during 2022 resulted from changes in market positions associated with our fixed income portfolio.

Marketable Equity Securities

Marketable equity securities consist of publicly traded stock, funds and certain other investments measured at fair value or cost, where

appropriate.

Realized and unrealized gains and losses for our marketable equity securities for the year ended December 31, 2022, 2021 and 2020

were as follows:

For the year ended December 31,

(In thousands)

2022

2021

2019

Realized losses on equity securities sold

$

(1,675

)

$

(992

)

$

(2,382

)

Unrealized (losses) gains on equity securities held

(8,470

)

2,671

6,831

Total (loss) gain recognized, net

$

(10,145

)

$

1,679

$

4,449

As of December 31, 2022 and 2021, gross unrealized losses related to individual investments in a continuous loss position for twelve

months or longer were not material.

U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for fair value measurement of

financial instruments:

•

Level 1 – Observable outputs; values based on unadjusted quoted prices for identical assets or liabilities in an active market;

•

Level 2 – Significant inputs that are observable; values based on quoted prices in markets that are not active or model inputs

that are observable either directly or indirectly;

•

Level 3 – Significant unobservable inputs; values based on prices or valuation techniques that require inputs that are both

unobservable and significant to the overall fair value measurement; inputs could include information supplied by investees.

The Company’s cash equivalents and investments held at fair value are categorized into this hierarchy as follows:

Fair Value Measurements as of December 31, 2022 Using

(In thousands)

Fair Value

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Cash equivalents

Money market funds

$

228

$

228

$

—

Available-for-sale debt securities

Corporate bonds

2,462

2,462

—

Municipal fixed-rate bonds

180

180

—

Asset-backed bonds

795

795

—

Mortgage/Agency-backed bonds

1,748

1,748

—

U.S. government bonds

3,685

3,685

—

Foreign government bonds

383

383

—

Marketable equity securities

Marketable equity securities - various industries

804

804

—

Deferred compensation plan assets

22,942

22,942

—

Total

$

33,227

$

27,659

$

5,568

$

—

73

Fair Value Measurements as of December 31, 2021 Using

(In thousands)

Fair Value

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Cash equivalents

Money market funds

$

652

$

652

$

—

$

—

Available-for-sale debt securities

Corporate bonds

10,747

—

10,747

—

Municipal fixed-rate bonds

1,551

—

1,551

—

Asset-backed bonds

322

—

322

—

Mortgage/Agency-backed bonds

4,736

—

4,736

—

U.S. government bonds

12,171

12,171

—

—

Foreign government bonds

539

—

539

—

Marketable equity securities

Marketable equity securities - various industries

12,606

12,606

—

—

Deferred compensation plan assets

26,935

26,935

—

—

Total

$

70,259

$

52,364

$

17,895

$

—

The fair value of our Level 2 securities is calculated using a weighted average market price for each security. Market prices are obtained

from a variety of industry standard data providers, large financial institutions and other third-party sources. These multiple market prices

are used as inputs into a distribution-curve-based algorithm to determine the daily market value of each security.

The fair value of Level 3 securities is calculated based on unobservable inputs. Quantitative information with respect to unobservable

inputs consisted of third-party valuations performed in accordance with ASC 820 –

Fair Value Measurement.

Inputs used in preparing

the third-party valuation included the following assumptions, among others: estimated discount rates and fair market yields.

Our variable rate demand notes have a structure that implies a standard expected market price. The frequent interest rate resets make it

reasonable to expect the price to stay at par. These securities are priced at the expected market price.

74

Note 7 – Inventory

As of December 31, 2022 and 2021, inventory, net was comprised of the following:

(In thousands)

2022

2021

Raw materials

$

186,346

$

74,709

Work in process

12,087

2,143

Finished goods

229,098

63,039

Total Inventory, net

$

427,531

$

139,891

Inventory reserves are established for estimated excess and obsolete inventory equal to the difference between the cost of the inventory

and the estimated net realizable value of the inventory based on estimated reserve percentages, which consider historical usage, known

trends, inventory age and market conditions. As of December 31, 2022 and 2021, our inventory reserve was $57.0 million and $44.6

million, respectively.

Note 8 – Property, Plant and Equipment

As of December 31, 2022 and 2021, property, plant and equipment, net was comprised of the following:

(In thousands)

2022

2021

Engineering and other equipment

$

170,785

$

134,771

Building

82,932

68,157

Computer hardware and software

80,455

72,274

Building and land improvements

47,861

35,578

Furniture and fixtures

22,403

19,917

Land

5,364

4,575

Total Property, Plant and Equipment

409,800

335,272

Less: accumulated depreciation

(299,101

)

(279,506

)

Total Property, Plant and Equipment, net

$

110,699

$

55,766

Long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying

amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the

asset’s carrying value. In connection with the planned integration of information technology following the Business Combination, we

determined that certain projects no longer fit our needs. As a result, the Company recognized impairment charges of $0.5 million during

the year ended December 31, 2022 related to software and web site development. The impairment charges were determined based on

actual costs incurred. During the year ended December 31, 2021, no impairment charges were recognized. During the year ended

December 31, 2020, the Company recognized impairment charges of $0.1 million.

Depreciation expense was $20.9 million, $12.0 million and $12.2 million for the years ended December 31, 2022, 2021 and 2020,

respectively, which is recorded in cost of revenue, selling, general and administrative expenses and research and development expenses

in the Consolidated Statements of (Loss) Income.

Note 9 – Leases

We have operating leases for office space, automobiles and various other equipment in the U.S. and in certain international locations.

As of December 31, 2022, our operating leases had remaining lease terms of one month to 119 months, some of which included options

to extend the leases for up to five years, and some of which included options to terminate the leases within three months. Supplemental

balance sheet information related to operating leases is as follows:

December 31,

December 31,

(In thousands)

Classification

2022

2021

Assets

Operating lease assets

Other non-current assets

$

30,340

$

4,922

Total lease asset

$

30,340

$

4,922

Liabilities

Current operating lease liability

Accrued expenses and other liabilities

$

7,596

$

1,730

Non-current operating lease liability

Other non-current liabilities

22,807

3,269

Total lease liability

$

30,403

$

4,999

75

Lease expense related to short-term leases was less than $0.1 million for the twelve months ended December 31, 2022, 2021 and 2020,

and is included in cost of revenue, selling, general and administrative expenses and research and development expenses in the

Consolidated Statements of (Loss) Income. Lease expense related to variable lease payments that do not depend on an index or rate,

such as real estate taxes and insurance reimbursements, was $0.6 million, $0.5 million and $0.7 million for the twelve months ended

December 31, 2022, 2021 and 2020, respectively.

The components of lease expense included in the Consolidated Statements of (Loss) Income were as follows:

For the Year Ended December 31,

(In thousands)

2022

2021

2020

Cost of revenue

$

110

$

51

$

113

Research and development expenses

942

1,071

1,121

Selling, general and administrative expenses

3,961

883

1,311

Total operating lease expense

$

5,013

$

2,005

$

2,545

As of December 31, 2022, operating lease liabilities included on the Consolidated Balance Sheet by future maturity were as follows:

(In thousands)

Amount

2023

8,992

2024

8,076

2025

6,740

2026

3,825

2027

2,865

Thereafter

4,478

Total lease payments

34,976

Less: Interest

(4,573

)

Present value of lease liabilities

$

30,403

Future operating lease payments include $4.4 million related to options to extend lease terms that are reasonably certain of being

exercised. There are no legally binding leases that have not yet commenced.

An incremental borrowing rate is used based on information available at the commencement date in determining the present value of

lease payments. The incremental borrowing rate is determined on a portfolio basis by grouping leases with similar terms, as well as

grouping leases based on a U.S. dollar or Euro functional currency. The following table provides information about our weighted average

lease terms and weighted average discount rates:

As of

December 31,

Weighted average remaining lease term (years)

2022

2021

Operating leases with USD functional currency

7.9

1.8

Operating leases with Euro functional currency

4.2

3.5

Weighted average discount rate

Operating leases with USD functional currency

3.77

%

3.49

%

Operating leases with Euro functional currency

3.70

%

1.22

%

Note 10 – Goodwill

The changes in the carrying amount of goodwill for the year ended December 31, 2022 are as follows:

(In thousands)

Network Solutions

Services & Support

Total

As of December 31, 2021

$

6,570

$

398

$

6,968

Goodwill from Business Combination with ADVA

272,797

77,661

350,458

Foreign currency translation adjustments

18,913

5,385

24,298

As of December 31, 2022

$

298,280

$

83,444

$

381,724

76

Our general policy is to qualitatively assess the carrying value of goodwill each reporting period for events or changes in circumstances

that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Related to the Business Combination

with ADVA the Company recognized $350.5 million of goodwill upon the merger on July 15, 2022. Therefore, we decided to proceed

directly to the quantitative test of goodwill and forego the qualitative assessment. We estimate the fair value of our reporting units based

on an income approach, whereby we calculate the fair value of a reporting unit based on the present value of estimated future cash flows.

A discounted cash flow analysis requires us to make various judgmental assumptions about future sales, operating margins, growth rates

and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market

participants. We also estimate the fair value of our reporting units based on a peer group analysis, whereby companies in the

telecommunications industry or with a comparable product and market structure are used to calculate a fair enterprise value using

revenue, EBITDA and debt multiples of trading value. Based on our analysis, management concluded that there was no impairment of

goodwill as of December 31, 2022. No impairment charges on goodwill were recognized during the years ended December 31, 2021

and 2020.

Note 11 – Intangible Assets

Intangible assets as of December 31, 2022 and 2021, consisted of the following:

2022

2021

(In thousands)

Weighted

Average Useful

Life

(in years)

Gross Value

Accumulated

Amortization

Net Value

Gross Value

Accumulated

Amortization

Net Value

Customer relationships

10.9

$

55,517

$

(12,772

)

$

42,745

$

20,796

$

(9,906

)

$

10,890

Backlog

1.6

55,782

(22,725

)

33,057

—

—

—

Developed technology

8.5

320,364

(21,856

)

298,508

8,200

(3,683

)

4,517

Licensed technology

9.0

5,900

(3,141

)

2,759

5,900

(2,486

)

3,414

Licensing agreements

8.5

560

(298

)

262

560

(225

)

335

Patents

7.3

500

(431

)

69

500

(363

)

137

Trade names

3.0

29,066

(5,255

)

23,811

210

(210

)

—

Total

$

467,689

$

(66,478

)

$

401,211

$

36,166

$

(16,873

)

$

19,293

As part of the purchase price allocation related to the Business Combination with ADVA, the Company recognized $403.8 million of

intangible assets on July 15, 2022. Intangible assets are reviewed for impairment whenever events and circumstances indicate

impairment may have occurred. The Company assessed impairment triggers related to intangible assets during each financial period in

2022, 2021 and 2020. As a result, no quantitative impairment test of long-lived assets was performed as of December 31, 2022, 2021

and 2020, and no impairment losses of intangible assets were recorded during the years ended December 31, 2022, 2021 and 2020.

Amortization expense was $47.3 million, $4.1 million and $4.4 million for the years ended December 31, 2022, 2021 and 2020,

respectively, and was included in cost of revenue, selling, general and administrative expenses and research and development expenses

in the Consolidated Statements of (Loss) Income.

As of December 31, 2022, estimated future amortization expense of intangible assets was as follows:

(In thousands)

Amount

2023

$

82,080

2024

57,545

2025

46,095

2026

42,851

2027

41,491

Thereafter

131,149

Total

$

401,211

77

Note 12 - Hedging

The Company has certain forward rate agreements to hedge foreign currency exposure of expected future cash flows in foreign currency.

The Company does not hold or issue derivative instruments for trading or other speculative purposes. Derivatives are initially recognized

at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value at the end of each

reporting period. All changes in the fair value of derivative instruments are recognized as other income (expense) in the Consolidated

Statements of Income. The derivative instruments are not subject to master netting agreements and are not offset in the Consolidated

Balance Sheets. We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial

instruments. We perform credit evaluations of our counterparties under forward exchange contracts and expect all counterparties to meet

their obligations. We have not experienced credit losses from our counterparties.

As of December 31, 2022, the Company had 47 forward rate contracts outstanding.

Foreign Currency Hedging Agreement

On November 3, 2022, the Company entered into a Euro/U.S. dollar cross-currency swap arrangement (the “Swap”) with Wells Fargo

Bank, N.A. (the “Hedge Counterparty”). The Swap, which is governed by the provisions of an ISDA Master Agreement (including

schedules thereto and transaction confirmations that supplement such agreement) entered into between the Company and the Hedge

Counterparty, enable the Company to convert a portion of its Euro denominated payment obligations under the proposed DPLTA into

U.S. Dollars. Under the Swap, the Company will exchange an aggregate notional amount of $160.0 million U.S. dollars for Euros at a

daily fixed forward rate ranging from $0.98286 to $1.03290. The aggregate amount of $160.0 million will be divided into eight quarterly

tranches of $20.0 million. The Company, at its sole discretion, may exchange all or part of each tranche on any given day within the

applicable quarter; provided, however, that it must exchange the full tranche by the end of such quarter. The Swap may be accelerated

or terminated early for a number of reasons, including but not limited to (i) non-payment by the Company or the Hedge Counterparty,

(ii) breach of representation or warranty or covenant by either party or (iii) insolvency or bankruptcy of either party.

The fair values of the Company's derivative instruments recorded in the Condensed Consolidated Balance Sheet as of December 31,

2022 were as follows:

(In thousands)

Balance Sheet

Location

December 31, 2022

December 31, 2021

Derivatives Not Designated as Hedging Instruments (Level 2):

Foreign exchange contracts – derivative assets

Other receivables

$

11,992

$

—

Foreign exchange contracts – derivative liabilities

Accounts payable

$

(633

)

$

—

Total derivatives

$

11,359

$

—

The change in the fair values of the Company's derivative instruments recorded in the Condensed Consolidated Statements of Income

during the years ended December 31, 2022, 2021 and 2020 were as follows:

(In thousands)

Income Statement

Location

2022

2021

2020

Derivatives Not Designated as Hedging Instruments:

Foreign exchange contracts

Other income (expense), net

$

10,793

$

—

$

—

78

Note 13 – Revolving Credit Agreements

The carrying amounts of the Company's current and non-current revolving credit agreements in its Consolidated Balance Sheets were

as follows:

As of

December 31,

2022

2021

(In thousands)

(As Restated)

Nord/LB revolving line of credit

$

16,091

$

—

Syndicated credit agreement working capital line of credit

10,727

—

DZ bank revolving line of credit

9,118

—

Wells Fargo revolving credit agreement

—

—

Cadence revolving credit agreement

—

—

Total current revolving credit agreements

$

35,936

$

—

As of

December 31,

2022

2021

(In thousands)

(As Restated)

Wells Fargo credit agreement

$

60,000

$

—

Total non-current revolving credit agreement

$

60,000

$

—

As of December 31, 2022, the weighted average interest rate on our revolving credit agreements was 4.12%.

Wells Fargo Credit Agreement

On July 18, 2022, ADTRAN Holdings, Inc. and ADTRAN, Inc., as the borrower, entered into a credit agreement with a syndicate of

banks, including Wells Fargo Bank, National Association, as administrative agent (“Administrative Agent”), and the other lenders

named therein (the “Credit Agreement”). The Credit Agreement allows for borrowings of up to $100.0 million in aggregate principal

amount, subject to being increased to up to $400.0 million in aggregate principal amount upon the Company or Borrower’s execution

of a DPLTA with ADVA or a parent of ADVA, among other conditions (the “Senior Credit Facilities Increase”). The DPLTA as

executed on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the commercial register

(

Handelsregister

) of the local court (

Amtsgericht

) at the registered seat of ADVA (Jena). See Note 24 of the Notes to Consolidated

Financial Statements for further information.

The Credit Agreement replaced the Cadence Revolving Credit Agreement and the Wells Fargo Revolving Credit Agreement. In

connection with the entry into the Credit Agreement, all outstanding borrowings under such credit agreements have been repaid and the

agreements terminated.

As of December 31, 2022, ADTRAN, Inc.’s borrowings under the revolving line of credit were $60.0 million. The Credit Agreement

matures in July 2027 but provides the Company with an option to request extensions subject to customary conditions. In addition, we

may issue up to $25.0 million in letters of credit against our $100.0 million total facility. As of December 31, 2022, we had a total of

$21.3 million in letters of credit with ADTRAN, Inc. outstanding against our eligible borrowings, leaving a net amount of $18.7 million

available for future borrowings. In February 2023, the borrowings under the Credit Agreement were paid down by $7.5 million, leaving,

$180.0 million of borrowings as of February 28, 2023. After considering our outstanding letters of credit, this leaves the Company

approximately $198.7 million available for future borrowings as of February 28, 2023. Any future credit extensions under the Credit

Agreement are subject to customary conditions precedent. The proceeds of any loans are expected to be used for general corporate

purposes and to pay a portion of the Exchange Offer consideration.

79

All U.S. borrowings under the Credit Agreement (other than swingline loans, which will bear interest at the Base Rate (as defined

below)) will bear interest, at the Company’s option, at a rate per annum equal to (A)(i) the highest of (a) the federal funds rate (i.e., for

any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the

Federal Reserve System, as published by the Federal Reserve Bank of New York on the business day next succeeding such day) plus ½

of 1%, (b) the prime commercial lending rate of the Administrative Agent, as established from time to time at its principal U.S. office

(which such rate is an index or base rate and will not necessarily be its lowest or best rate charged to its customers or other banks), and

(c) the daily Adjusted Term SOFR (as defined in the Credit Agreement) for a one-month tenor plus 1%, plus (ii) the applicable rate,

ranging from 0.5% to 1.25% (the “Base Rate”), or (B) the sum of the Adjusted Term SOFR (as defined in the Credit Agreement) plus

the applicable rate, ranging from 1.4% to 2.15%, provided that such sum is subject to a 0.0% floor (such loans utilizing this interest rate,

“SOFR Loans”). All EU borrowings under the Credit Agreement (other than swingline loans) will bear interest at a rate per annum equal

to the sum of the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor

administrator approved by the Administrative Agent) plus the applicable rate, ranging from 1.5% to 2.25%, provided that such sum is

subject to a 0.0% floor (such loans utilizing this interest rate, “EURIBOR Loans”). The applicable rate is based on the consolidated net

leverage ratio of the Company and its subsidiaries as determined pursuant to the terms of the Credit Agreement. Default interest is 2.00%

per annum in excess of the rate otherwise applicable in the case of any overdue principal or any other overdue amount.

In addition to paying interest on outstanding principal under the Credit Agreement, the Company is required to pay a commitment fee

to the lenders under the Credit Agreement in respect of unutilized revolving loan commitments and an additional commitment ticking

fee at a rate of 0.25% on the commitment amounts of each lender until the earliest of (i) the date of the Senior Credit Facilities Increase,

(ii) the Company’s voluntary termination of the credit facility commitment, and (iii) December 31, 2023. The Company is also required

to pay a participation fee to the Administrative Agent for the account of each lender with respect to the Company’s participations in

letters of credit at the then applicable rate for SOFR Loans.

The Credit Agreement permits the Company to prepay any or all of the outstanding loans or to reduce the commitments under the Credit

Agreement without incurring premiums or penalties (except breakage costs with respect to SOFR Loans and EURIBOR Loans). The

Credit Agreement contains customary affirmative and negative covenants, including incurrence covenants and certain other limitations

on the ability of the Company and the Company’s subsidiaries to incur additional debt, guarantee other obligations, grant liens on assets,

make investments, dispose of assets, pay dividends or other payments on capital stock, make restricted payments, engage in mergers or

consolidations, engage in transactions with affiliates, modify its organizational documents, and enter into certain restrictive agreements.

It also contains customary events of default (subject to customary cure periods and materiality thresholds). Furthermore, the Credit

Agreement requires that the consolidated total net leverage ratio (as defined in the Credit Agreement) of the Company and its subsidiaries

tested on the last day of each fiscal quarter not exceed 3.25 to 1.0 through September 30, 2024 and 2.75 to 1.00 from December 31,

2024 and thereafter, subject to certain exceptions. The Credit Agreement also requires that the consolidated interest coverage ratio (as

defined in the Credit Agreement) of the Company and its subsidiaries tested on the last day of each fiscal quarter not fall below 3.00 to

1.00. As of December 31, 2022, the Company was in compliance with all material covenants.

Finally, pursuant to a Collateral Agreement, dated as of July 18, 2022, among the Company, ADTRAN, Inc. and the Administrative

Agent, ADTRAN, Inc.’s obligations under the Credit Agreement are secured by substantially all of the assets of ADTRAN, Inc. and the

Company. In addition, the Company has guaranteed ADTRAN, Inc.’s obligations under the Credit Agreement pursuant to a Guaranty

Agreement, dated as of July 18, 2022, by ADTRAN, Inc. and the Company in favor of the Administrative Agent.

Nord/LB Revolving Line of Credit

On August 8, 2022, ADVA entered into a $16.1 million revolving line of credit with Norddeutsche Landesbark - Girozentrale (Nord/LB)

that bears interest of Euro Short Term Rate plus 1.4% and which matures in August 2023. During the term of the loan, ADVA is

obligated to maintain an adjusted net debt to cover ratio that is equal to or less than 2.75. As of December 31, 2022, The Company was

in compliance with the adjusted net debt to cover ratio. As of December 31, 2022, ADVA’s borrowings under the revolving line of

credit were $16.1 million, with no amounts available for future borrowings. On January 31, 2023, the Company increased its borrowings

under the Wells Fargo Credit Agreement. A portion of the proceeds from the borrowings were used to retire the outstanding borrowings

under the Nord/LB revolving line of credit.

Syndicated Credit Agreement Working Capital Line of Credit

In September 2018, ADVA entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch

German Business to borrow up to $10.7 million as part of a working capital line of credit. The interest rate for the working capital line

of credit is adjusted periodically based on a defined leverage ratio and is currently EURIBOR plus 1.35% as of December 31, 2022. The

working capital line of credit matures in September 2023. As of December 31, 2022, borrowings under the working capital line of credit

totaled $10.7 million, with no amounts available for future borrowings. On January 31, 2023, the Company increased its borrowings

under the Wells Fargo Credit Agreement. A portion of the proceeds from the borrowings were used to retire the outstanding borrowings

under the syndicated credit agreement working capital line of credit.

80

DZ Bank Money Market Facility

As of December 31, 2022, ADVA’s borrowings under the revolving line of credit totaled $9.1 million, with no amounts available for

future borrowings. The interest rate is currently a rate of 2.8%, which resets monthly based on renewal of the loan.

Prior Wells Fargo Revolving Credit Agreement

On April 1, 2022, ADTRAN, Inc. entered into a Credit Agreement and related Revolving Line of Credit Note (together, the “Prior Wells

Revolving Credit Agreement”) in favor of Wells Fargo Bank, National Association, as lender (the “Wells Lender”). The Wells Revolving

Credit Agreement provided the Company with a $25.0 million secured revolving credit facility. During the year ended December 31,

2022, the Company made draws totaling $10.0 million under the Prior Wells Revolving Credit Agreement all of which had been repaid

as of December 31, 2022. The Wells Fargo Credit Agreement replaced the Prior Wells Fargo Revolving Credit Agreement and all

outstanding borrowings have been repaid and the prior agreement was terminated.

Prior Cadence Revolving Credit Agreement

On May 19, 2022, ADTRAN, Inc., as borrower, modified its Revolving Credit and Security Agreement and related Promissory Note

(together, the “Cadence Revolving Credit Agreement”) with Cadence Bank, N.A., as lender (the “Cadence Lender”). The modified Prior

Cadence Revolving Credit Agreement provided the Company with a $25.0 million secured revolving credit facility. During the year

ended December 31, 2022, the Company made draws totaling $18.0 million under the Prior Cadence Revolving Credit Agreement all

of which had been repaid as of December 31, 2022. The Wells Fargo Credit Agreement replaced the Prior Cadence Revolving Credit

Agreement and all outstanding borrowings have been repaid and the prior agreement was terminated.

Note 14 – Notes Payable

The carrying amounts of the Company's notes payable in its Condensed Consolidated Balance Sheets were as follows:

Fair Value as of

Carrying Value as of

Carrying Value as of

(In thousands)

December 31, 2022

December 31, 2022

December 31, 2021

Syndicated credit agreement note payable

$

24,598

$

24,598

$

—

Deutsche Bank term loan

—

—

—

Total Notes Payable

$

24,598

$

24,598

$

—

Syndicated Credit Agreement Note Payable

In September 2018, ADVA entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch

German Business to borrow $63.7 million. As of December 31, 2022, the amount outstanding under the note payable is $24.6 million.

The interest rate for the note payable is adjusted periodically based on a defined leverage ratio and is currently 2.49% as of December

31, 2022. The note payable matures in September 2023.

Deutsche Bank Term Loan

In October 2019, ADVA entered into a $9.8 million term loan with Deutsche Bank that bears interest of EURIBOR plus 1.1%. The term

loan matured in September 2022 and was repaid as of December 31, 2022.

Note 15 – Income Taxes

The components of income tax expense (benefit) for the years ended December 31, 2022, 2021 and 2020 are as follows:

(In thousands)

2022

2021

2020

Current

Federal

$

4,572

$

11

$

(10,574

)

State

88

(63

)

(329

)

International

(4,347

)

4,166

3,635

Total Current

313

4,114

(7,268

)

Deferred

Federal

(47,429

)

—

—

State

(6,776

)

—

—

International

(8,183

)

(1,784

)

(1,356

)

Total Deferred

(62,388

)

(1,784

)

(1,356

)

Total Income Tax (Benefit) Expense

$

(62,075

)

$

2,330

$

(8,624

)

81

The effective income tax rate differs from the federal statutory rate due to the following:

2022

2021

2020

Tax provision computed at the federal statutory rate

21.00

%

21.00

%

21.00

%

State income tax provision, net of federal benefit

2.60

13.33

11.10

Federal research credits

6.74

53.77

57.63

Foreign taxes

6.29

(4.69

)

(17.83

)

Tax-exempt income

0.21

3.75

1.93

Change in valuation allowance

63.92

(75.26

)

44.79

Non-deductible transaction costs

(2.74

)

(39.48

)

—

Foreign tax credits

(0.40

)

0.14

17.90

Stock-based compensation

(2.09

)

10.74

(23.36

)

Withholding taxes

0.03

0.14

(20.83

)

Alabama law change

—

(25.39

)

—

Impact of CARES Act

—

—

45.65

Return to accrual

0.24

9.48

—

Global intangible low-taxed income ("GILTI")

(8.08

)

(4.29

)

(0.49

)

Other, net

(0.24

)

(0.19

)

0.56

Effective Tax Rate

87.48

%

(36.95

)%

138.05

%

(Loss) income before expense (benefit) for income taxes for the years ended December 31, 2022, 2021 and 2020 is as follows:

(In thousands)

2022

2021

2020

U.S. entities

$

(33,720

)

$

(14,982

)

$

(12,833

)

International entities

(37,243

)

8,677

6,587

Total

$

(70,963

)

$

(6,305

)

$

(6,246

)

(Loss) income before expense (benefit) for income taxes for international entities reflects (loss) income based on statutory transfer

pricing agreements. This amount does not correlate to consolidated international revenue, which occurs from our U.S. entity.

82

Deferred income taxes on the Consolidated Balance Sheets result from temporary differences between the amount of assets and liabilities

recognized for financial reporting and tax purposes. The significant components of current and non-current deferred taxes as of

December 31, 2022 and 2021 consist of the following:

(In thousands)

2022

2021

Deferred tax assets:

Inventory

$

5,818

$

9,538

Accrued expenses

7,865

3,851

Deferred compensation

5,792

7,027

Stock-based compensation

1,373

1,469

Uncertain tax positions related to state taxes and related interest

102

124

Pensions

5,952

6,061

Foreign losses

4,744

2,862

State losses and credit carry-forwards

3,516

5,914

Federal loss and research carry-forwards

64,995

21,606

Lease liabilities

4,093

1,471

Capitalized research and development expenditures

31,248

9,349

Investments

160

—

Valuation allowance

(5,201

)

(50,564

)

Total Deferred Tax Assets

130,457

18,708

Deferred tax liabilities:

Property, plant and equipment

(8,982

)

(3,590

)

Intellectual property

(108,671

)

(3,230

)

Right of use lease assets

(6,594

)

(1,459

)

Investments

—

(1,350

)

Total Deferred Tax Liabilities

(124,247

)

(9,629

)

Net Deferred Tax Assets

$

6,210

$

9,079

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. Subsequently,

the Internal Revenue Service (“IRS”) released its final GILTI regulations on July 9,

2020. The passage of the CARES Act and subsequent

issuance of the GILTI final regulations together resulted in the Company’s recognition of a tax benefit in the amount of $10.8 million

during 2020, $7.9 million of which related to the utilization of deferred tax assets which had previously been offset with a valuation

allowance and $2.9 million primarily related to the tax rate differential on carrying back losses from 2018 and 2019 tax years to prior

years in which the U.S. Corporate tax rate was 35% versus the current 21% federal tax rate.

On February 12, 2021, the Alabama Business Tax Competitiveness Act (the "Act") was signed into law. As a result of the Act, we

recognized an expense of $1.6 million in the three months ended March 31, 2021 related to the revaluation of our deferred tax assets,

which was offset by changes in our valuation allowance previously recorded against our domestic deferred tax assets.

During the three months ended September 30, 2021, Management decided to pursue a claim for refund related to the revocation of our

IRC Section 59(e) election that was made on our originally filed 2018 U.S. federal tax return. The Company filed a related carryback

claim of net operating losses generated in 2018 to prior years as allowed under the CARES Act that was passed in 2020. An IRS Section

59(e) election is generally non-revocable except in cases for which IRS Commissioner’s approval is given. Approval is granted only in

rare and unusual circumstances. We filed a private letter ruling (“PLR”) request to revoke our election. During the three months ended

December 31, 2021, a response to our PLR was published denying our request to revoke the previously made 59(e). As a result of these

filings, and Management’s position to pursue them through appeals, we have established a receivable in the amount of $15.2 million

and a deferred tax asset related to additional research and development credit carryforward in the amount of $1.8 million that would be

available if our revocation request is successful, offset with an uncertain tax liability of $17.0 million.

As of December 31, 2022 and 2021, non-current deferred taxes reflected deferred taxes on net unrealized gains and losses on available-

for-sale investments and deferred taxes on unrealized losses in our pension plan. The net change in non-current deferred taxes associated

with these items, which resulted in a deferred tax expense of $2.0 million and $1.6 million in 2022 and 2021, respectively, was recorded

as an adjustment to other comprehensive (loss) income, presented in the Consolidated Statements of Comprehensive (Loss) Income.

83

The Company continually reviews the adequacy of its valuation allowance and recognizes the benefits of deferred tax assets only as the

reassessment indicates that it is more likely than not that the deferred tax assets will be recognized in accordance with ASC 740,

Income

Taxes.

Our assessment of the realizability of our deferred tax assets includes the evaluation of evidence, some of which requires

significant judgment, including historical operating results, the evaluation of a three-year cumulative income position, future taxable

income projections and tax planning strategies. Should management’s conclusion change in the future and additional valuation

allowance or a partial or full release of the valuation allowance become necessary, it could have a material effect on our consolidated

financial statements. During the fourth quarter of 2022, after considering all quantitative and qualitative evidence, including our

cumulative income position, historical operating performance and future income projections, we have determined that the positive

evidence overcame the negative evidence and have concluded that it is more likely than not that a substantial portion of our U.S. federal

and certain other state deferred tax assets were realizable. As a result we have released the majority of our valuation allowance against

those assets.

As of December 31, 2022 and 2021, the Company had gross deferred tax assets totaling $11.4 million offset by a valuation allowance

totaling $5.2 million and gross deferred tax assets totaling $59.6 million offset by a valuation allowance of $50.6 million, respectively.

Of the current valuation allowance, $3.2 million was established against our domestic deferred tax assets and the remaining $2.0 million

is related to foreign net operating loss and research and development credit carryforwards where we lacked sufficient activity to realize

those deferred tax assets. The change in our valuation allowance for the year ending December 31, 2022 was a decrease of $45.4 million.

The change in the valuation allowance was primarily related to the previously mentioned release of the valuation allowance in the fourth

quarter of 2022. The large increase during the year in our international deferred tax liabilities was primarily related to purchase price

accounting, partially offset with acquired deferred tax assets as a result of the ADVA acquisition that was completed in the third quarter

of 2022.

Supplemental balance sheet information related to deferred tax assets (liabilities) as of December 31, 2022 and 2021 were as follows:

December 31, 2022

(In thousands)

Deferred Tax Assets (Liabilities)

Valuation Allowance

Deferred Tax Assets

(Liabilities), net

Domestic

$

61,726

$

(3,177

)

$

58,549

International

(50,315

)

(2,024

)

(52,339

)

Total

$

11,411

$

(5,201

)

$

6,210

December 31, 2021

(In thousands)

Deferred Tax Assets

Valuation Allowance

Deferred Tax Assets, net

Domestic

$

48,265

$

(48,265

)

$

—

International

11,378

(2,299

)

9,079

Total

$

59,643

$

(50,564

)

$

9,079

As of December 31, 2022 and 2021, the deferred tax assets for foreign and domestic loss carry-forwards, research and development tax

credits, unamortized research and development costs and state credit carry-forwards totaled $104.5 million and $39.7 million,

respectively. As of December 31, 2022, $21.8 million of these deferred tax assets will expire at various times between 2023 and 2038.

The remaining deferred tax assets will either amortize through 2038 or carryforward indefinitely.

As of December 31, 2022 and 2021, respectively, our cash and cash equivalents were $108.6 million and $56.6 million and short-term

investments were $0.3 million and $0.4 million, which provided available short-term liquidity of $108.9 million and 57.0 million. Of

these amounts, our foreign subsidiaries held cash of $86.3 million and $47.7 million, respectively, representing approximately 79% and

84% of available short-term liquidity, which is used to fund ongoing liquidity needs of these subsidiaries. As part of our restructuring

plan, the Company’s assertion on being indefinitely reinvested changed in a particular jurisdiction in a previous year. The Company has

a withholding tax liability of $0.4 million and $0.7 million as of December 31, 2022 and 2021, respectively. The Company maintains

its assertion in all other jurisdictions that it is indefinitely reinvesting its funds held in foreign jurisdictions outside of the U.S., except

to the extent any of these funds can be repatriated without withholding tax. However, if all of these funds were repatriated to the U.S.,

or used for U.S. operations, certain amounts could be subject to tax. Due to the timing and circumstances of repatriation of such earnings,

if any, it is not practicable to determine the amount of funds subject to unrecognized deferred tax liability.

During 2022, 2021 and 2020, no income tax benefit or expense was recorded for stock options exercised as an adjustment to equity.

84

The change in the unrecognized income tax benefits for the years ended December 31, 2022, 2021 and 2020 were as follows:

(In thousands)

2022

2021

2020

Balance at beginning of period

$

17,836

$

1,078

$

1,487

Increases for tax position related to:

Prior years

—

17,025

4

Current year

123

136

165

Decreases for tax positions related to:

Prior years

(13

)

(27

)

—

Expiration of applicable statute of limitations

(61

)

(376

)

(578

)

Balance at end of period

$

17,885

$

17,836

$

1,078

As of December 31, 2022, 2021 and 2020, our total liability for unrecognized tax benefits was $17.9 million, $17.8 million and $1.1

million, respectively, of which $17.9 million, $17.8 million and $1.0 million, respectively, would reduce our effective tax rate if we

were successful in upholding all of the uncertain positions and recognized the amounts recorded. We classify interest and penalties

recognized on the liability for unrecognized tax benefits as income tax expense. As of December 31, 2022, 2021 and 2020, the balances

of accrued interest and penalties were $0.1 million, $0.2 million and $0.3 million, respectively.

We do not anticipate a single tax position generating a significant increase or decrease in our liability for unrecognized tax benefits

within 12 months of this reporting date, unless a resolution is reached regarding the appeal of our PLR denial noted above. We file

income tax returns in the U.S. for federal and various state jurisdictions and several foreign jurisdictions. We are not currently under

audit by the Internal Revenue Service. Generally, we are not subject to changes in income taxes by any taxing jurisdiction for the years

prior to 2018.

Note 16 – Employee Benefit Plans

Pension Benefit Plan

We maintain a defined benefit pension plan covering employees in certain foreign countries.

In connection with the Business Combination, we acquired $29.6 million of additional obligations and $22.3 million of assets related to

postemployment benefit plans for certain groups of employees at our new operations outside of the U.S. Plans vary depending on the

legal, economic, and tax environments of the respective country. For defined benefit plans, accruals for pensions and similar

commitments have been included in the results for this year. The new defined benefit plans are for employees in Switzerland, Italy,

Israel and India:

•

In Switzerland, there are two defined benefit pension plans. Both plans provide benefits in the event of retirement, death or

disability. The plan's benefits are based on age, years of service, salary and on a participants old age account. The plans are

financed by contributions paid by the participants and by the Company.

•

In Italy, the post-employment benefit plan is required due to statutory provisions. The plan is financed directly by the

Company on a pay as you go basis. Employees receive their pension payments as a function of salary, inflation and a

notional account.

•

In Israel, there is a defined benefit pension plan that provides benefits in the event of a participant being dismissed

involuntarily, retirement or death. The plan's benefits are based on the higher of the severance benefit required by law or

the cash surrender value of the severance benefit component of any qualifying insurance policy or long-term employee

benefit fund that is registered in the participant's name. The plan is financed by contributions paid by the Company.

•

In India, the post-employment benefit plan is required due to statutory provisions. The plan is financed directly by the

Company on a pay as you go basis.

85

The pension benefit plan obligations and funded status as of December 31, 2022 and 2021, were as follows:

(In thousands)

2022

2021

Change in projected benefit obligation:

Projected benefit obligation at beginning of period

$

73,779

(1)

$

50,927

Service cost

1,426

1,229

Interest cost

1,168

339

Actuarial gain - experience

(2,039

)

(750

)

Actuarial gain - assumptions

(11,128

)

(3,327

)

Benefit payments

(1,400

)

(756

)

Effects of foreign currency exchange rate changes

(2,462

)

(3,498

)

Projected benefit obligation at end of period

59,344

44,164

Change in plan assets:

Fair value of plan assets at beginning of period

55,084

(1)

32,263

Actual (loss) gain on plan assets

(4,372

)

2,943

Contributions

382

—

Effects of foreign currency exchange rate changes

(2,374

)

(2,444

)

Fair value of plan assets at end of period

48,720

32,762

Unfunded status at end of period

$

(10,624

)

$

(11,402

)

(1)

In connection with the Business Combination, we acquired $29.6 million of additional projected benefit obligations and $22.3

million of plan assets whose beginning of period measurement date is July 15, 2022.

The accumulated benefit obligation was $56.8 million and $44.2 million as of December 31, 2022 and 2021, respectively. The decrease

in the accumulated benefit obligation, projected benefit obligation and the actuarial loss was primarily attributable to an increase in the

discount rate during 2022.

The net amounts recognized in the Consolidated Balance Sheets for the unfunded pension liability as of December 31, 2022 and 2021

were as follows:

(In thousands)

2022

2021

Current liability

$

—

$

—

Pension liability

10,624

11,402

Total

$

10,624

$

11,402

The components of net periodic pension cost, other than the service cost component, are included in other income (expense), net in the

Consolidated Statements of (Loss) Income. The components of net periodic pension cost and amounts recognized in other

comprehensive (loss) income for the years ended December 31, 2022, 2021 and 2020 were as follows:

(In thousands)

2022

2021

2020

Net periodic benefit cost:

Service cost

$

1,426

$

1,229

$

1,270

Interest cost

1,168

339

444

Expected return on plan assets

(2,129

)

(1,842

)

(1,679

)

Amortization of actuarial losses

355

1,088

970

Net periodic benefit cost

820

814

1,005

Other changes in plan assets and benefit obligations

recognized in other comprehensive (loss) income:

Net actuarial (gain) loss

(6,549

)

(4,984

)

1,784

Amortization of actuarial losses

(113

)

(825

)

(1,212

)

Amount recognized in other comprehensive (loss) income

(6,662

)

(5,809

)

572

Total recognized in net periodic benefit cost and other

comprehensive (loss) income

$

(5,842

)

$

(4,995

)

$

1,577

The amounts recognized in accumulated other comprehensive (loss) income as of December 31, 2022 and 2021 were as follows:

(In thousands)

2022

2021

Net actuarial loss

$

(1,073

)

$

(7,736

)

86

The defined benefit pension plan is accounted for on an actuarial basis, which requires the use of various assumptions, including an

expected rate of return on plan assets and a discount rate. The expected return on our plans assets is utilized in determining the benefit

obligation and net periodic benefit cost is derived from periodic studies, which include a review of asset allocation strategies, anticipated

future long-term performance of individual asset classes, risks using standard deviations and correlations of returns among the asset

classes that comprise the plans' asset mix. While the studies give appropriate consideration to recent plan performance and historical

returns, the assumptions are primarily long-term, prospective rates of return. The discount rate has been derived from the returns of

high-quality, corporate bonds denominated in Euro currency with durations close to the duration of our pension obligations.

The weighted-average assumptions that were used to determine the net periodic benefit cost for the years ended December 31, 2022,

2021 and 2020 were as follows:

2022

2021

2020

Discount rate

3.24

%

1.16

%

1.00

%

Rate of compensation increase

2.17

%

2.00

%

2.00

%

Expected long-term rates of return

4.65

%

5.90

%

5.90

%

The weighted-average assumptions that were used to determine the benefit obligation as of December 31, 2022 and 2021:

2022

2021

2020

Discount rate

3.10

%

1.16

%

0.69

%

Rate of compensation increase

2.17

%

2.00

%

2.00

%

Actuarial gains and losses are recorded in accumulated other comprehensive (loss) income. To the extent unamortized gains and losses

exceed 10% of the higher of the market-related value of assets or the projected benefit obligation, the excess is amortized as a component

of net periodic pension cost over the remaining service period of active participants.

The Company anticipates making approximately $1.8 million in contributions to the pension plans in 2023

The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid to participants:

(In thousands)

2023

$

2,377

2024

2,303

2025

3,331

2026

3,092

2027

3,710

2028 - 2032

18,287

Total

$

33,100

87

U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for fair value measurement of

financial instruments:

•

Level 1 – Observable outputs; values based on unadjusted quoted prices for identical assets or liabilities in an active market;

•

Level 2 – Significant inputs that are observable; values based on quoted prices in markets that are not active or model inputs

that are observable either directly or indirectly;

•

Level 3 – Significant unobservable inputs; values based on prices or valuation techniques that require inputs that are both

unobservable and significant to the overall fair value measurement. These inputs could include information supplied by

investees.

We have categorized our cash equivalents and our investments held at fair value into this hierarchy as follows:

Fair Value Measurements at December 31, 2022 Using

(In thousands)

Fair Value

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Cash and cash equivalents

$

1,423

$

1,423

$

—

$

—

Available-for-sale securities

Bond funds:

Corporate bonds

13,256

13,256

—

—

Government bonds

5,490

5,490

—

—

Equity funds:

—

—

—

—

Global equity

15,452

15,452

—

—

Balanced fund

5,190

5,190

—

—

Emerging markets

1,707

1,707

—

—

Large cap value

194

194

—

—

Global real estate fund

6,008

6,008

—

—

Available-for-sale securities

47,297

47,297

—

—

Total

$

48,720

$

48,720

$

—

$

—

Fair Value Measurements at December 31, 2021 Using

(In thousands)

Fair Value

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

Significant

Unobservable

Inputs

(Level 3)

Cash and cash equivalents

$

801

$

801

$

—

$

—

Available-for-sale securities

Bond funds:

Corporate bonds

7,528

7,528

—

—

Government bonds

5,721

5,721

—

—

Equity funds:

Global equity

12,170

12,170

—

—

Balanced fund

2,919

2,919

—

—

Emerging markets

2,259

2,259

—

—

Large cap value

235

235

—

—

Global real estate fund

1,129

1,129

—

—

Available-for-sale securities

31,961

31,961

—

—

Total

$

32,762

$

32,762

$

—

$

—

Our investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet

expected future benefits earned by participants and consider a broad range of economic conditions. The objectives of the target

allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns

that meet or exceed the plans’ actuarial assumptions and achieve asset returns that are competitive with like institutions employing

similar investment strategies.

The investment policy is periodically reviewed by the Company and a designated third-party fiduciary for investment matters. The

policy is established and administered in a manner that is compliant at all times with applicable government regulations.

88

401(k) Savings Plan

We maintain the ADTRAN, Inc. 401(k) Retirement Plan (the “Savings Plan”) for the benefit of eligible employees. The Savings Plan

is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), and is intended

to be a “safe harbor” 401(k) plan under Code Section 401(k)(12). The Savings Plan allows employees to save for retirement by

contributing part of their compensation to the plan on a tax-deferred basis. The Savings Plan also requires us to contribute a “safe harbor”

amount each year. We match up to 4% of employee contributions (100% of an employee’s first 3% of contributions and 50% of their

next 2% of contributions), beginning on the employee’s one-year anniversary date. In calculating our matching contribution,

compensation up to the statutory maximum under the Code is used ($305,000 for 2022). All matching contributions under the Savings

Plan vest immediately. Employer contribution expense and plan administration costs for the Savings Plan amounted to approximately

$4.1 million, $3.9 million and $4.0 million in 2022, 2021 and 2020, respectively.

Deferred Compensation Plans

We maintain four deferred compensation programs for certain executive management employees and our Board of Directors.

The ADTRAN, Inc. Deferred Compensation Program for Employees is offered as a supplement to our tax-qualified 401(k) plan and is

available to certain executive management employees who have been designated by our Board of Directors. This deferred compensation

plan allows participants to defer all or a portion of certain specified bonuses and up to 25% of remaining cash compensation and permits

us to make matching contributions on a discretionary basis without the limitations that apply to the 401(k) plan. To date, we have not

made any matching contributions under this plan. We also maintain the ADTRAN, Inc. Equity Deferral Program for Employees. Under

this plan, participants may elect to defer all or a portion of their vested PSUs and RSUs to the plan. Such deferrals shall continue to be

held and deemed to be invested in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals are moved to

another deemed investment pursuant to an election made by the participant.

For our Board of Directors, we maintain the ADTRAN, Inc. Deferred Compensation Program for Directors. This program allows our

Board of Directors to defer all or a portion of monetary remuneration paid to the Director, including, but not limited to, meeting fees

and annual retainers. We also maintain the ADTRAN, Inc. Equity Deferral Program for Directors. Under this plan, participants may

elect to defer all or a portion of their vested restricted stock awards. Such deferrals shall continue to be held and deemed to be invested

in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals are moved to another deemed investment

pursuant to an election made by the director.

We have set aside the plan assets for all plans in a rabbi trust (the “Trust”) and all contributions are credited to bookkeeping accounts

for the participants. The Trust assets are subject to the claims of our creditors in the event of bankruptcy or insolvency. The assets of the

Trust are deemed to be invested in pre-approved mutual funds as directed by each participant and the participant’s bookkeeping account

is credited with the earnings and losses attributable to those investments. Benefits are scheduled to be distributed six months after

termination of employment in a single lump sum payment or annual installments paid over a three or ten-year term based on the

participant’s election. Distributions will be made on a pro-rata basis from each of the hypothetical investments of the participant’s

account in cash. Any whole shares of ADTRAN, Inc. common stock that are distributed will be distributed in-kind.

Assets of the Trust are deemed invested in mutual funds that cover an investment spectrum ranging from equities to money market

instruments. These mutual funds are publicly quoted and reported at fair value. The fair value of the assets held by the Trust and the

amounts payable to the plan participants as of December 31, 2022 and 2021 were as follows:

(In thousands)

2022

2021

Fair Value of Plan Assets

Long-term investments

$

22,943

$

26,935

Total Fair Value of Plan Assets

$

22,943

$

26,935

Amounts Payable to Plan Participants

Deferred compensation liability

$

26,668

$

31,383

Total Amounts Payable to Plan Participants

$

26,668

$

31,383

The Trust held $3.7 million and $4.1 million of common stock in the Company as of December 31, 2022 and 2021, respectively. Shares

of the Company held by the Trust are recorded at cost and classified as treasury stock on the Consolidated Balance Sheet.

Interest and dividend income of the Trust are included in interest and dividend income in the accompanying 2022, 2021 and 2020

Consolidated Statements of (Loss) Income. Changes in the fair value of the plan assets held by the Trust have been included in other

income (expense) in the accompanying 2022, 2021 and 2020 Consolidated Statements of (Loss) Income. Changes in the fair value of

the deferred compensation liability are included as selling, general and administrative expense in the accompanying 2022, 2021 and

2020 Consolidated Statements of (Loss) Income. Based on the changes in the total fair value of the Trust’s assets, the Company recorded

deferred compensation income in 2022, 2021 and 2020 of $6.3 million, $0.9 million and $4.3 million, respectively.

89

Retiree Medical Coverage

Medical, dental and prescription drug coverage is provided to certain spouses and former spouses of current and former officers on the

same terms as provided to our active officers for up to 30 years. As of December 31, 2022 and 2021, this liability totaled $0.2 million

and $0.3 million, respectively.

Note 17 – Equity

The following table presents changes in accumulated other comprehensive (loss) income, net of tax, by components of accumulated

other comprehensive (loss) income for the years ended December 31, 2022, 2021 and 2020:

(In thousands)

Unrealized

Gains (Losses)

on Available-

for-Sale

Securities

Defined

Benefit Plan

Adjustments

Foreign

Currency

Adjustments

ASU 2018-02

Adoption

(1)