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Item 1. Legal Proceedings

2023-08-14 compared with 2023-05-10 · 202 added, 21 removed, 75 unchanged (75% of the section changed)

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Additionally, an unfavorable outcome in a Legal Matter, including in a patent dispute, could require the Company to pay damages, entitle claimants to other relief, such as royalties, or could prevent the Company from selling some of its products in certain jurisdictions.

See Note 20 of the Notes to Condensed Consolidated Financial Statements included in Part 1 of this report for a description of our material legal proceedings, which is incorporated herein by reference.

At this time, we are unable to predict the outcome of or estimate the possible loss or range of loss, if any, associated with these Legal Matters.

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A list of factors that could materially affect our business, financial condition or operating results is described in Part I, Item 1A, “Risk Factors”

in the 2022 Form 10-K.

in the 2022 Form 10-K/A.

There have been no material changes to our risk factors from those disclosed in Part I, Item 1A, “Risk Factors”

in the 2022 Form 10-K other than as described in the risk factors below.

in the 2022 Form 10-K/A other than as described in the risk factors below.

Risks related to the Business Combination and DPLTA

We have incurred and expect to continue to incur significant costs in connection with the Business Combination and post-closing integration and restructuring 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 Adtran Networks.

In addition, we have incurred significant banking, legal, accounting and other transaction fees and costs related to the Business Combination.

As of June 30, 2023, we have incurred $26.2 million of transaction costs related to the Business Combination.

We expect to incur additional restructuring costs and such costs are expected to be material.

During the three and six months ended June 30, 2023, we recognized $5.9 million and $8.3 million of restructuring costs relating 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.

During the three and six months ended June 30, 2023, we recognized $0.6 million and $1.4 million of integration costs related to the Business Combination, respectively.

In addition, we have incurred significant banking, legal, accounting and other transaction fees and costs related to the Business Combination.

As of June 30, 2023, we have incurred $26.2 million of transaction costs related to the Business Combination.

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

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.

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.

We further expanded our available borrowings under the credit facility to $450 million effective August 9, 2023.On March 29, 2023, Adtran Networks entered into a $16.1 million unsecured revolving line of credit with Norddeutsche Landesbark - Girozentrale (Nord/LB) and retired the outstanding borrowings under their revolving line of credit with DZ bank.

As of June 30, 2023, the Company had incurred $200.0 million of indebtedness under the Wells Fargo Credit Agreement and Adtran Networks had borrowings of $10.9 million under the Nord/LB revolving line of credit.

S ee “Cash Requirements”

in Item 2 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;

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.

We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If we fail to pay interest on, or repay, our borrowings under the Wells Fargo credit facility and Nord/LB revolving line of credit when required, we will be in default under the applicable loans, and may also suffer an event of default under the terms of other borrowing arrangements that we may enter into from time to time.

If our cash flows and capital resources are insufficient to fund our obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness.

We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled obligations or that these actions would be permitted under the terms of our future debt agreements.

In the absence of sufficient operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations.

We may not be able to consummate those dispositions or obtain sufficient proceeds from those dispositions to meet our debt service and other obligations when due.

Any of these events could have a material adverse effect on our business, results of operations and financial condition.

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.

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

The DPLTA between the Company, as the controlling company, and Adtran Networks, 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 Adtran Networks (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 Adtran Networks, (ii) Adtran Networks 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 Adtran Networks.

The obligation of Adtran Networks to transfer its annual profit to the Company applies for the first time to the profit, if any, generated in the Adtran Networks fiscal year 2023.

The obligation of the Company to absorb Adtran Networks annual net loss applies for the first time to the loss, if any, generated in the Adtran Networks fiscal year 2023.

Additionally, and subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides that Adtran Networks shareholders (other than the Company) be offered, at their election, (i) to put their Adtran Networks shares to the Company in exchange for compensation in cash of €17.21 per share, plus guaranteed interest (the “Exit Compensation”), or (ii) to remain Adtran Networks shareholders and receive a recurring compensation in cash of €0.59 (€0.52 net under the current tax regime) per share for each full fiscal year of Adtran Networks (the “Annual Recurring Compensation”).

The guaranteed interest under the Exit Compensation is calculated from the effective date of the DPLTA to the date the shares are tendered, less any Annual Recurring Compensation paid.

The guaranteed interest rate is 5% plus a variable component that was 1.62% as of June 30, 2023 and reflecting interest accrued through June 30, 2023 at a rate of 5.0% in addition to the variable base interest rate according to the German Civil Code (currently 3.12%) during the pendency of the appraisal proceedings discussed below.

The Annual Recurring Compensation is due on the third banking day following the ordinary general shareholders’

meeting of Adtran Networks 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 Adtran Networks in 2024.

The adequacy of both forms of compensation has been challenged by minority shareholders of Adtran Networks 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 obligation to pay Annual Recurring Compensation under the DPLTA is a continuing payment obligation, which will amount to approximately €10.6 million or $11.6 million (based on the current exchange rate) per year assuming none of the minority Adtran Networks 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.

For the three and six months ended June 30, 2023, a total of approximately 46 thousand shares and 63 thousand

shares, respectively, of Adtran Networks stock was tendered to the Company and Exit Compensation payments of approximately €0.8 million and €1.1 million, respectively, or approximately $0.9 million and $1.2 million, respectively, based on an exchange rate as of June 30, 2023, were paid to Adtran Networks shareholders.

Assuming all the minority holders of currently outstanding Adtran Networks shares were to elect the first option, we would be obligated to make aggregate Exit Compensation payments, including guaranteed interest, of approximately €319.0 million or approximately $348.1 million, based on an exchange rate as of June 30, 2023.

In addition to our cash and cash equivalents and the credit facility, we may fund a portion or all of the Annual Recurring Compensation and Exit Compensation through the sale of securities or additional alternative funding sources, if available.

There can be no assurances that we would be successful in effecting these actions on commercially reasonable terms or at all.

If we cannot raise additional funds as needed, it could have a material adverse impact on our financial results and financial condition.

Additionally, the payment of the Annual Recurring Compensation and Exit Compensation could have a material adverse impact on our financial results and financial condition.

S ee “Liquidity and Capital Resources”

in Item 2 of this report for additional information.

The opportunity for outside Adtran Networks shareholders to tender Adtran Networks 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 ).

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 Adtran Networks to minority shareholders and would even have to be paid if Adtran Networks' incurs losses, which could have a material adverse impact on our financial results and financial condition.

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 Adtran Networks’

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 Adtran Networks;

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;

our ability to satisfy our payment obligations to minority Adtran Networks shareholders under 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.

The terms of our and Adtran Networks credit agreements restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

Our Credit Agreement and Adtran Networks revolving line of credit with Nord/LB 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;

enter into transactions with affiliates;

alter the businesses we conduct;

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;

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.

Risks related to our financial results and Company success

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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 revenue and gross margin percentage declined in the first quarter of 2023.

As a result, our revenue and gross margin percentage declined in the first half of 2023.

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.

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slowdowns, recessions, economic instability (such as the instability in the financial services sector), 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;

protracted negotiations regarding the U.S.

federal debt ceiling or the U.S.

government's failure to raise the debt ceiling;

an extended government shutdown resulting from budgetary decisions or other potential delays or changes in the government appropriations or other funding authorization processes;

Business Combination purchase price allocations.

For example, throughout 2022, we incurred increased expenses resulting from supply chain disruptions, including delays in supply chain deliveries and the related global semi-conductor chip shortage, which lowered our gross margins and decreased our profitability.

These supply chain challenges and their adverse impact on our industry began to ease during the first quarter of 2023.

However, there can be no assurance that the ongoing disruptions due to COVID-19, the related semiconductor chip shortage or other supply chain constraints or price increase will be resolved in the near term, which could continue to adversely affect our business, financial condition, and results of operations.

These supply chain challenges and their adverse impact on our industry began to ease during the first half of 2023.

However, there can be no assurance that the ongoing disruptions due to the 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.

Risks related to our control environment

If we fail to maintain proper and effective internal control over financial reporting, including in connection with the extension of internal controls to ADVA, we could have a material weakness in our internal controls that, if not remediated, could materially adversely affect us.

Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires us to include in our Annual Reports on Form 10-K an assessment by the Company’s management of the effectiveness of our internal control over financial reporting, as well as a report from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting.

We must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404.

Our compliance with Section 404 may require that we incur substantial accounting expense and expend significant management efforts.

As permitted by SEC guidance, we currently exclude ADVA in our evaluation of internal control over financial reporting and related disclosure controls and procedures for the first year after the Business Combination.

However, we are in the process of extending our oversight and monitoring processes that support our internal control over financial reporting and disclosure controls and procedures to include ADVA’s operations.

However, if we unable to successfully extend our oversight and monitoring processes that support our internal control over financial reporting and disclosure controls and procedures to include ADVA’s operations, our business, financial condition and operating results could be harmed.

If we are not able to maintain the adequacy of our internal control over financial reporting, including any failure to implement required new or improved controls, our business, financial condition and operating results could be harmed.

In addition, if management or our independent registered public accounting firm is unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial statements, which could have an adverse effect on our stock price or lead to litigation claims.

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 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.

Furthermore, we, our employees and some of our third-party service providers have been, and anticipate continuing to be, the targets of various cyber threats.

These include hacking attacks, social engineering schemes such as "phishing," and Business Email Compromise (BEC) attacks, wherein attackers impersonate company executives or colleagues in emails to trick employees into transferring funds or revealing sensitive information.

These events have not had a significant effect on our financial condition or operational results to date;

however, we cannot ensure that future cyber threats will not have a material impact on 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 Adtran Networks’

cybersecurity program.

Additionally, prior to integration of facilities, networks, or systems, the Company also engaged 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 Adtran Networks information technology landscape.

The results from the CrowdStrike Compromise assessment indicated that there was no indication of compromise of the Adtran Networks information technology environment.

As part of the integration plan, the Company intends to expand its current cybersecurity program to cover all Adtran Networks’

global infrastructure and adopt any mature cybersecurity practices already in place.

A significant failure of our review and integration of Adtran Networks’

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 of our previously issued consolidated financial statements and 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 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

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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.

For example, in May 2023, ADVA filed a lawsuit against Huawei Technologies Co.

(“Huawei”), which seeks declaratory relief with respect to, among other items, ADVA North America’s non-infringement of certain allegedly standard essential patents owned by Huawei and Huawei’s violation of its contractual commitments to negotiate in good faith and to license patents on fair, reasonable and non-discriminatory terms and conditions.

For example, on May 8, 2023, Adtran Networks' and its subsidiary, ADVA Optical Networking North America Inc.

(together, "ADVA") filed a lawsuit in the U.S District Court for the Eastern District of Texas (“EDTX”) against Huawei Technologies Co.

Ltd (“Huawei”) seeking a declaration from the court that Huawei violated its commitments to negotiate in good faith and to license standard essential patents (“SEPs”), to the extent any SEPs are practiced by ADVA, on Fair, Reasonable and Non-Discriminatory (“FRAND”) terms and conditions.

The case also seeks to obtain a ruling by the court that ADVA has complied with its own commitments and requests that the Court establish FRAND terms and conditions for obtaining a FRAND license on any SEPs to the extend they are practiced by ADVA.

The lawsuit also seeks to enjoin Huawei from enforcing five Huawei patents that ADVA considers invalid and/or not practiced, and that Huawei has infringed an ADVA patent.

ADVA expects Huawei to respond to the action in August 2023 and expects a trial to be scheduled for the second half of 2024.

On July 20, 2023, ADVA Optical Networking SE ("ADVA Germany") was served with a complaint filed by Huawei against ADVA Germany in the District Court München I, Germany, alleging that certain products infringe upon one of Huawei’s patents.

ADVA Germany's response in the case is due in November 2023, and the filing of a separate nullity action to invalidate the patent is also available in Germany.

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 materially adversely affected.

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.

For example, on May 8, 2023, Adtran Networks' and its subsidiary, ADVA Optical Networking North America Inc.

(together, "ADVA") filed a lawsuit in the U.S District Court for the Eastern District of Texas (“EDTX”) against Huawei Technologies Co.

The lawsuit also seeks to enjoin Huawei from enforcing five Huawei patents that ADVA considers invalid and/or not practiced, and that Huawei has infringed an ADVA patent.

ADVA expects Huawei to respond to the action in August 2023 and expects a trial to be scheduled for the second half of 2024.

ADVA Germany's response in the case is due in November 2023, and the filing of a separate nullity action to invalidate the patent is also available in Germany.

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.

Risks related to the regulatory environments in which we do business

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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended March 31, 2023, we did not repurchase any shares of our common stock.

As of March 31, 2023, there is no current authorization to repurchase common stock.

During the six months ended June 30, 2023, we did not repurchase any shares of our common stock.

As of June 30, 2023, there is no current authorization to repurchase common stock.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Legal Proceedings