Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
o
 
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 001-38267
RIBBON COMMUNICATIONS INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
 
82-1669692
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)

4 Technology Park Drive, Westford, Massachusetts 01886
(Address of principal executive offices) (Zip code)

(978) 614-8100
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 $0.0001
RBBN
The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act) o

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

As of July 26, 2019, there were 110,008,404 shares of the registrant's common stock, $0.0001 par value per share, outstanding.
 




RIBBON COMMUNICATIONS INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2019
TABLE OF CONTENTS

Item
 
Page
 
 
PART I FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
PART II OTHER INFORMATION
 
 




Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which are subject to a number of risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future expenses, results of operations and financial position, integration activities, potential stock repurchases, anticipated settlement payments, beliefs about our market capitalization, business strategy, statements about the potential impact of the merger and acquisition transactions described herein, plans and objectives of management for future operations, plans for future cost reductions, restructuring activities and plans for future product development and manufacturing are forward-looking statements. Without limiting the foregoing, the words "anticipates", "believes", "could", "estimates", "expects", "intends", "may", "plans", "seeks" and other similar language, whether in the negative or affirmative, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements including, but not limited to, our successful integration activities with respect to acquisitions; our ability to realize the benefits from mergers and acquisitions; the effects of disruption from mergers and acquisitions, making it more difficult to maintain relationships with employees, customers, business partners or government entities; unpredictable fluctuations in quarterly revenue and operating results; failure to compete successfully against telecommunications equipment and networking companies; failure to grow our customer base or generate recurring business from our existing customers; consolidation in the telecommunications industry; credit risks; the timing of customer purchasing decisions and our recognition of revenues; economic conditions; our ability to recruit and retain key personnel; difficulties supporting our strategic focus on channel sales; difficulties retaining and expanding our customer base; difficulties leveraging market opportunities; the impact of restructuring and cost-containment activities; litigation; actions taken by significant stockholders; difficulties providing solutions that meet the needs of customers; market acceptance of our products and services; rapid technological and market change; our ability to protect our intellectual property rights and obtain necessary licenses; our ability to maintain partner, reseller, distribution and vendor support and supply relationships; our negotiating position relative to our large customers; the limited supply of certain components of our products; the potential for defects in our products; risks related to the terms of our credit agreement; higher risks in international operations and markets; the impact of increased competition; increases in tariffs, trade restrictions or taxes on our products; currency fluctuations; changes in the market price of our common stock; and/or failure or circumvention of our controls and procedures. We therefore caution you against relying on any of these forward-looking statements.

Important factors that could cause actual results to differ materially from those in these forward-looking statements are also discussed in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q and Part I, Item 1A and Part II, Item 7A, "Risk Factors" and "Quantitative and Qualitative Disclosures About Market Risk," respectively, of our Annual Report on Form 10-K/A for the year ended December 31, 2018. Also, any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which this Quarterly Report on Form 10-Q was first filed. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Presentation of Information

Effective October 27, 2017, we completed the merger (the "Merger") of Sonus Networks, Inc. ("Sonus"), GENBAND Holdings Company, GENBAND, Inc. and GENBAND II, Inc. (collectively, "GENBAND"). Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to "Ribbon," "Ribbon Communications," "Company," "we," "us" and "our" and "the Company" refer to (i) Sonus Networks, Inc. and its subsidiaries prior to the Merger and (ii) Ribbon Communications Inc. and its subsidiaries upon completion of the Merger, as applicable.




3



PART I FINANCIAL INFORMATION

Item 1. Financial Statements
RIBBON COMMUNICATIONS INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
 
June 30,
2019
 
December 31,
2018
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
51,186

 
$
43,694

Marketable securities

 
7,284

Accounts receivable, net
155,415

 
187,853

Inventory
16,509

 
22,602

Other current assets
27,484

 
17,002

Total current assets
250,594

 
278,435

Property and equipment, net
28,297

 
27,042

Intangible assets, net
238,022

 
251,391

Goodwill
389,196

 
383,655

Deferred income taxes
5,785

 
9,152

Operating lease right-of-use assets
40,029

 

Other assets
25,021

 
7,484

 
$
976,944

 
$
957,159

Liabilities and Stockholders' Equity
Current liabilities:
 
 
 
Current portion of long-term debt
$
2,500

 
$

Revolving credit facility
35,000

 
55,000

Accounts payable
33,499

 
45,304

Accrued expenses and other
54,693

 
84,263

Operating lease liabilities
7,800

 

Deferred revenue
96,944

 
105,087

Total current liabilities
230,436

 
289,654

Long-term debt, net of current
47,215

 

Long-term debt, related party

 
24,100

Operating lease liabilities, net of current
40,247

 

Deferred revenue, net of current
15,115

 
17,572

Deferred income taxes
5,031

 
4,738

Other long-term liabilities
12,331

 
30,797

Total liabilities
350,375

 
366,861

Commitments and contingencies (Note 17)

 

Stockholders' equity:
 
 
 
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized, none issued and outstanding

 

Common stock, $0.0001 par value per share; 240,000,000 shares authorized; 110,007,237 shares issued and outstanding at June 30, 2019; 106,815,636 shares issued and outstanding at December 31, 2018
11

 
11

Additional paid-in capital
1,740,563

 
1,723,576

Accumulated deficit
(1,118,354
)
 
(1,136,992
)
Accumulated other comprehensive income
4,349

 
3,703

Total stockholders' equity
626,569

 
590,298

 
$
976,944

 
$
957,159

See notes to the unaudited condensed consolidated financial statements.


4



RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)


 
Three months ended
 
Six months ended
 
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Revenue:
 
 
 
 
 
 
 
Product
$
72,059

 
$
63,123

 
$
119,539

 
$
114,654

Service
73,362

 
74,238

 
144,810

 
143,887

Total revenue
145,421

 
137,361

 
264,349

 
258,541

Cost of revenue:
 
 
 
 
 
 
 
Product
36,433

 
30,278

 
69,580

 
63,292

Service
28,315

 
31,972

 
57,507

 
64,865

Total cost of revenue
64,748

 
62,250

 
127,087

 
128,157

Gross profit
80,673

 
75,111

 
137,262

 
130,384

Operating expenses:
 
 
 
 
 
 
 
Research and development
35,301

 
35,604

 
71,234

 
74,653

Sales and marketing
28,893

 
30,738

 
58,952

 
62,664

General and administrative
12,466

 
15,028

 
31,160

 
30,629

Acquisition- and integration-related
1,965

 
4,280

 
5,164

 
8,692

Restructuring and related
9,144

 
6,097

 
14,076

 
12,765

Total operating expenses
87,769

 
91,747

 
180,586

 
189,403

Loss from operations
(7,096
)
 
(16,636
)
 
(43,324
)
 
(59,019
)
Interest expense, net
(1,262
)
 
(735
)
 
(2,626
)
 
(1,334
)
Other income (expense), net
62,861

 
(2,052
)
 
70,635

 
(1,804
)
Income (loss) before income taxes
54,503

 
(19,423
)
 
24,685

 
(62,157
)
Income tax provision
(5,033
)
 
(499
)
 
(6,047
)
 
(2,669
)
Net income (loss)
$
49,470

 
$
(19,922
)
 
$
18,638

 
$
(64,826
)
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.45

 
$
(0.20
)
 
$
0.17

 
$
(0.64
)
Diluted
$
0.45

 
$
(0.20
)
 
$
0.17

 
$
(0.64
)
Shares used to compute earnings (loss) per share:
 
 
 
 
 
 
 
Basic
110,394

 
102,160

 
109,239

 
102,039

Diluted
110,698

 
102,160

 
109,672

 
102,039


See notes to the unaudited condensed consolidated financial statements.


5



RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)


 
Three months ended
 
Six months ended
 
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Net income (loss)
$
49,470

 
$
(19,922
)
 
$
18,638

 
$
(64,826
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
64

 
(126
)
 
56

 
37

Unrealized gain (loss) on available-for sale marketable securities, net of reclassification adjustments for realized amounts
577

 
39

 
590

 
(33
)
Employee retirement benefits
(32
)
 

 

 

Other comprehensive income (loss), net of tax
609

 
(87
)
 
646

 
4

Comprehensive income (loss)
$
50,079

 
$
(20,009
)
 
$
19,284

 
$
(64,822
)

See notes to the unaudited condensed consolidated financial statements.


6



RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Stockholders' Equity
(in thousands, except shares)
(unaudited)

 
Common stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional paid-in capital
 
Accumulated deficit
 
Accumulated other comprehensive income (loss)
 
Total stockholders' equity
Balance at January 1, 2019
106,815,636

 
$
11

 
$
1,723,576

 
$
(1,136,992
)
 
$
3,703

 
$
590,298

Exercise of stock options
88,354

 


 
151

 
 
 
 
 
151

Vesting of restricted stock awards and units
806,813

 


 


 
 
 
 
 

Vesting of performance-based stock units
9,466

 


 


 
 
 
 
 

Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations
(181,428
)
 


 
(968
)
 
 
 
 
 
(968
)
Shares issued as consideration in connection with the acquisition of Anova Data, Inc.
2,948,793

 


 
15,186

 
 
 
 
 
15,186

Reclassification of liability to equity for bonuses converted to stock awards
 
 


 
1,052

 
 
 
 
 
1,052

Stock-based compensation expense
 
 
 
 
4,139

 
 
 
 
 
4,139

Other comprehensive income
 
 
 
 
 
 
 
 
37

 
37

Net loss
 
 
 
 
 
 
(30,832
)
 
 
 
(30,832
)
Balance at March 31, 2019
110,487,634

 
11

 
1,743,136

 
(1,167,824
)
 
3,740

 
579,063

Issuance of common stock in connection with employee stock purchase plan
139,390

 


 
506

 
 
 
 
 
506

Exercise of stock options
18,652

 


 
39

 
 
 
 
 
39

Vesting of restricted stock awards and units
359,573

 


 


 
 
 
 
 

Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations
(22,098
)
 


 
(112
)
 
 
 
 
 
(112
)
Repurchase and retirement of common stock
(975,914
)
 


 
(4,536
)
 
 
 
 
 
(4,536
)
Stock-based compensation expense
 
 
 
 
1,530

 
 
 
 
 
1,530

Other comprehensive income
 
 
 
 
 
 
 
 
609

 
609

Net income
 
 
 
 
 
 
49,470

 
 
 
49,470

Balance at June 30, 2019
110,007,237

 
$
11

 
$
1,740,563

 
$
(1,118,354
)
 
$
4,349

 
$
626,569



7



RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Stockholders' Equity (continued)
(in thousands, except shares)
(unaudited)

 
Common stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional paid-in capital
 
Accumulated deficit
 
Accumulated other comprehensive income (loss)
 
Total stockholders' equity
Balance at January 1, 2018
101,752,856

 
$
10

 
$
1,684,768

 
$
(1,072,426
)
 
$
3,069

 
$
615,421

Adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers
 
 
 
 
 
 
11,964

 
 
 
11,964

Exercise of stock options
2,583

 
 
 
10

 
 
 
 
 
10

Vesting of restricted stock awards and units
490,282

 
 
 
 
 
 
 
 
 

Vesting of performance-based stock units
41,518

 
 
 
 
 
 
 
 
 

Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations
(232,519
)
 
 
 
(371
)
 
 
 
 
 
(371
)
Stock-based compensation expense
 
 
 
 
2,824

 
 
 
 
 
2,824

Other comprehensive income
 
 
 
 
 
 
 
 
91

 
91

Net loss
 
 
 
 
 
 
(44,904
)
 
 
 
(44,904
)
Balance at March 31, 2018
102,054,720

 
10

 
1,687,231

 
(1,105,366
)
 
3,160

 
585,035

Adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers
 
 
 
 
 
 
489

 
 
 
489

Vesting of restricted stock awards and units
234,704

 


 


 
 
 
 
 

Vesting of performance-based stock units
16,250

 


 


 
 
 
 
 

Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations
(62,197
)
 


 
(346
)
 
 
 
 
 
(346
)
Stock-based compensation expense
 
 
 
 
2,081

 
 
 
 
 
2,081

Other comprehensive income
 
 
 
 
 
 
 
 
(87
)
 
(87
)
Net loss
 
 
 
 
 
 
(19,922
)
 
 
 
(19,922
)
Balance at June 30, 2018
102,243,477

 
$
10

 
$
1,688,966

 
$
(1,124,799
)
 
$
3,073

 
$
567,250


See notes to the unaudited condensed consolidated financial statements.


8



RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


 
Six months ended
 
June 30,
2019
 
June 30,
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
18,638

 
$
(64,826
)
Adjustments to reconcile net income (loss) to cash flows provided by (used in) operating activities:
 
 
 
Depreciation and amortization of property and equipment
5,891

 
5,318

Amortization of intangible assets
24,569

 
24,273

Stock-based compensation
5,669

 
4,905

Deferred income taxes
4,358

 
817

Foreign exchange losses
521

 
2,079

Reduction in deferred purchase consideration
(8,124
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
33,121

 
28,752

Inventory
6,159

 
2,077

Other operating assets
(20,851
)
 
(275
)
Accounts payable
(12,763
)
 
(13,872
)
Accrued expenses and other long-term liabilities
(17,129
)
 
(15,203
)
Deferred revenue
(10,940
)
 
3,264

Net cash provided by (used in) operating activities
29,119

 
(22,691
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(6,153
)
 
(3,492
)
Maturities of marketable securities
7,295

 
4,278

Net cash provided by investing activities
1,142

 
786

Cash flows from financing activities:
 
 
 
Borrowings under revolving line of credit
92,000

 
25,000

Principal payments on revolving line of credit
(112,000
)
 
(25,000
)
Proceeds from issuance of long-term debt
50,000

 

Principal payment of debt, related party
(24,716
)
 

Payment of deferred purchase consideration
(21,876
)
 

Principal payments of finance leases
(500
)
 
(293
)
Payment of debt issuance costs
(884
)
 
(624
)
Proceeds from the sale of common stock in connection with employee stock purchase plan
506

 

Proceeds from the exercise of stock options
190

 
10

Payment of tax withholding obligations related to net share settlements of restricted stock awards
(1,080
)
 
(716
)
Repurchase of common stock
(4,536
)
 

Net cash used in financing activities
(22,896
)
 
(1,623
)
Effect of exchange rate changes on cash and cash equivalents
127

 
(134
)
Net increase (decrease) in cash and cash equivalents
7,492

 
(23,662
)
Cash and cash equivalents, beginning of year
43,694

 
57,073

Cash and cash equivalents, end of period
$
51,186

 
$
33,411

 
 
 
 

9



RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)


 
Six months ended
 
June 30,
2019
 
June 30,
2018
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
2,645

 
$
895

Income taxes paid
$
2,010

 
$
2,800

Income tax refunds received
$
224

 
$
220

Supplemental disclosure of non-cash investing activities:
 
 
 
Capital expenditures incurred, but not yet paid
$
1,616

 
$
1,097

Acquisition purchase consideration - deferred payments
$
1,700

 
$

Shares of common stock issued as purchase consideration
$
15,186

 
$

Supplemental disclosure of non-cash financing activities:
 
 
 
Total fair value of restricted stock awards, restricted stock units and performance-based stock units on date vested
$
6,078

 
$
5,159

See notes to the unaudited condensed consolidated financial statements.

10



RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

(1) BASIS OF PRESENTATION

Business

Ribbon is a leading provider of next generation ("NextGen") software solutions to telecommunications, wireless and cable service providers and enterprises of all sizes across industry verticals. With over 1,000 customers around the globe, including some of the largest telecommunications service providers and enterprises in the world, Ribbon enables service providers and enterprises to modernize their communications networks through software and provide secure real-time communications ("RTC") solutions to their customers and employees. By securing and enabling reliable and scalable Internet Protocol ("IP") networks, Ribbon helps service providers and enterprises adopt the next generation of software-based virtualized and cloud communications technologies to drive new, incremental revenue, while protecting their existing revenue streams. Ribbon's software solutions provide a secure way for its customers to connect and leverage multivendor, multiprotocol communications systems and applications across their networks and the cloud, in a rapidly changing ecosystem of IP-enabled devices, such as smartphones and tablets. In addition, Ribbon's software solutions secure cloud-based delivery of unified communications ("UC") solutions - both for service providers transforming to a cloud-based network and for enterprises using cloud-based UC. Ribbon sells its software solutions through both direct sales and indirect channels, leveraging the assistance of resellers, and provides ongoing support to its customers through a global services team with experience in design, deployment and maintenance of some of the world's largest software IP networks.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring items, necessary for their fair presentation with accounting principles generally accepted in the United States of America ("GAAP") and with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC").

On February 28, 2019 (the "Anova Acquisition Date"), the Company acquired the business and technology assets of Anova Data, Inc. ("Anova"). The financial results of Anova are included in the Company's condensed consolidated financial statements for the period subsequent to the Anova Acquisition Date.

On August 3, 2018 (the "Edgewater Acquisition Date"), the Company completed the acquisition of Edgewater Networks, Inc. (“Edgewater”). The financial results of Edgewater are included in the Company's condensed consolidated financial statements for the periods subsequent to the Edgewater Acquisition Date.

Interim results are not necessarily indicative of results for a full year or any future interim period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K/A for the year ended December 31, 2018 (the "Annual Report"), which was filed with the SEC on March 5, 2019.

Significant Accounting Policies

The Company's significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in the Annual Report. There were no material changes to the significant accounting policies during the six months ended June 30, 2019, apart from the Company's accounting policy related to accounting for leases, as discussed below.

Effective January 1, 2019, the Company adopted the Financial Accounting Standard Board's ("FASB") new standard on accounting for leases, Accounting Standards Codification ("ASC") 842, Leases ("ASC 842"). ASC 842 replaced existing lease accounting rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements (see Note 16). ASC 842 requires lessees to recognize most leases on their balance sheets and eliminates the current GAAP requirement for an entity to use bright-line tests in determining lease classification.

The Company elected to use the alternative transition method, which allows entities to initially apply ASC 842 at the adoption date with no subsequent adjustments to prior period lease costs for comparability. The Company elected the package of practical expedients permitted under the transition guidance, which provided that a company need not reassess whether

11


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

expired or existing contracts contained a lease, the lease classification of expired or existing leases, and the amount of initial direct costs for existing leases.

In connection with the adoption of ASC 842, the Company recorded additional lease assets of $43.9 million and additional lease liabilities of $47.8 million as of January 1, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was due to the absorption of related balances into the right-of-use assets, such as deferred rent. The adoption of this standard had no impact on the Company's condensed consolidated statements of operations or of cash flows.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Ribbon and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates and Judgments

The preparation of financial statements in conformity with GAAP requires Ribbon to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and judgments relied upon in preparing these condensed consolidated financial statements include accounting for business combinations, revenue recognition for multiple element arrangements, inventory valuations, assumptions used to determine the fair value of stock-based compensation, intangible asset and goodwill valuations, including impairments, legal contingencies and recoverability of Ribbon's net deferred tax assets and the related valuation allowances. Ribbon regularly assesses these estimates and records changes in estimates in the period in which they become known. Ribbon bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to the previously issued financial statements to conform to the current period presentation, none of which affected the net loss as previously reported.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments approximate their fair values and include cash equivalents, investments, accounts receivable, borrowings under a revolving credit facility, accounts payable and long-term debt.

Operating Segments

The Company operates in a single segment, as the chief operating decision maker makes decisions and assesses performance at the company level. Operating segments are identified as components of an enterprise about which separate discrete financial information is utilized for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. To date, the chief operating decision maker has made such decisions and assessed performance at the company level, as one segment. The Company's chief operating decision maker is its President and Chief Executive Officer.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which provides guidance on implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. ASU 2018-15 amends ASC 350, Intangibles - Goodwill and Other (“ASC 350”) to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply the guidance in ASC 350-40 to determine which implementation costs should be capitalized in such a CCA. ASU 2018-15 is effective for the Company beginning January 1, 2020. The Company is currently assessing the potential impact of the adoption of ASU 2018-15

12


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

on its condensed consolidated financial statements.

The FASB has issued the following accounting pronouncements, all of which became effective for the Company on January 1, 2019 and none of which had a material impact on the Company's condensed consolidated financial statements:

In July 2018, the FASB issued ASU 2018-09, Codification Improvements (“ASU 2018-09”), which contains amendments to clarify, correct errors in or make minor improvements to the FASB Codification. ASU 2018-09 makes improvements to multiple topics, including but not limited to comprehensive income, debt, income taxes related to both stock-based compensation and business combinations, fair value measurement and defined contribution benefit plans.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"), which expands the scope of ASC 718, Compensation - Stock Compensation ("ASC 718"), to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"), which amends ASC 220, Income Statement - Reporting Comprehensive Income, to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act") and requires entities to provide certain disclosures regarding stranded tax effects. The Company did not elect to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to accumulated deficit.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"), which removes the prohibition in ASC 740, Income Taxes, against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory.

In addition, the FASB has issued the following accounting pronouncements, none of which the Company believes will have a material impact on its condensed consolidated financial statements:

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”), which amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 is effective for the Company beginning January 1, 2020.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which changes the fair value measurement requirements of ASC 820, Fair Value Measurement. ASU 2018-13 is effective for the Company beginning January 1, 2020 for both interim and annual reporting.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which adds an impairment model that is based on expected losses rather than incurred losses. Under ASU 2016-13, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. In April and May 2019, the FASB issued ASU 2019-04 and ASU 2019-05, respectively. ASU 2019-04 provides transition relief for entities adopting ASU 2016-13 and ASU 2019-05 clarifies certain aspects of the accounting for credit losses, hedging activities and financial instruments in connection with the adoption of ASU 2016-13. ASU 2019-04 and ASU 2019-05 are effective with the adoption of ASU 2016-13, which is effective for the Company beginning January 1, 2020 for both interim and annual reporting periods, with early adoption permitted.




13


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

(2) BUSINESS ACQUISITIONS

Anova Data, Inc.

On the Anova Acquisition Date, the Company acquired the business and technology assets of Anova, a private company headquartered in Westford, Massachusetts that provides advanced analytics solutions (the "Anova Acquisition"). The Anova Acquisition was completed in accordance with the terms and conditions of an asset purchase agreement, dated as of January 31, 2019 (the "Anova Asset Purchase Agreement"). The Company believes that the Anova Acquisition will reinforce and extend Ribbon's strategy to expand into network optimization, security and data monetization via big data analytics and machine learning.

As consideration for the Anova Acquisition, Ribbon issued 2.9 million shares of Ribbon common stock with a fair value of $15.2 million to Anova's sellers and equity holders on the Anova Acquisition Date and held back an additional 0.3 million shares with a fair value of $1.7 million, some or all of which could be issued subject to post-closing adjustments (the "Anova Deferred Consideration"). The Anova Deferred Consideration is included as a component of Accrued expenses and other current liabilities in the Company's condensed consolidated balance sheet at June 30, 2019.

The Anova Acquisition has been accounted for as a business combination and the financial results of Anova have been included in the Company's condensed consolidated financial statements for the period subsequent to the Anova Acquisition Date. The results for the three and six months ended June 30, 2019 are not significant to the Company's condensed consolidated financial statements. The Company has not provided pro forma financial information, as the historical amounts are not significant to the Company's condensed consolidated financial statements.

As of June 30, 2019, the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities was preliminary. The purchase consideration aggregating $16.9 million has been preliminarily allocated to $11.2 million of identifiable intangible assets (comprised of $7.2 million of customer relationships and $4.0 million of developed technology) and working capital items aggregating $0.1 million of net assets acquired. The remaining unallocated amount of $5.5 million has been recorded as goodwill.

The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired intangible assets relating to developed technology and customer relationships. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of customer attrition, technology obsolescence and revenue growth projections. The Company is amortizing the identifiable intangible assets in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 7.5 years. The preliminary purchase price allocation is subject to change, and such change could be material based on numerous factors, including the final estimated fair value of the assets acquired and liabilities assumed and the amount of the final post-closing net working capital adjustment. The Company expects to finalize the valuation of the assets acquired and liabilities assumed by the first quarter of 2020.

The excess of purchase consideration over net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill is deductible for tax purposes.


Edgewater Networks, Inc.

On the Edgewater Acquisition Date, the Company completed its acquisition of Edgewater, a private company headquartered in San Jose, California (the "Edgewater Acquisition"). The Edgewater Acquisition was completed in accordance with the terms and conditions of an agreement and plan of merger, dated as of June 24, 2018 (the "Edgewater Merger Agreement").

Edgewater is a market leader in Network Edge Orchestration for the small and medium enterprise and UC market. The Company believes that the Edgewater Acquisition advances its strategy by offering its global customer base a complete core-to-

14


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

edge product portfolio, end-to-end service assurance and analytics solutions, and a fully integrated software-defined wide-area network ("SD-WAN") service.

As consideration for the Edgewater Acquisition, Ribbon paid, in the aggregate, $46.4 million of cash, net of cash acquired, and issued 4.2 million shares of Ribbon common stock to Edgewater's selling shareholders and holders of vested in-the-money options and warrants to acquire common stock of Edgewater (the "Edgewater Selling Stakeholders") on the Edgewater Acquisition Date. Pursuant to the Edgewater Merger Agreement and subject to the terms and conditions contained therein, Ribbon agreed to pay the Edgewater Selling Stakeholders an additional $30 million of cash, $15 million of which was to be paid 6 months from the closing date and the other $15 million of which was to be paid as early as 9 months from the closing date and no later than 18 months from the closing date (the exact timing of which would depend on the amount of revenue generated from the sales of Edgewater products in 2018) (the "Edgewater Deferred Consideration"). The current portion of this deferred purchase consideration was included as a component of Accrued expenses and other, and the noncurrent portion was included as a component of Other long-term liabilities in the Company's condensed consolidated balance sheet as of December 31, 2018.

On February 15, 2019, the Company and the Edgewater Selling Stakeholders agreed to reduce the amount of Edgewater Deferred Consideration from $30 million to $21.9 million and agreed that all such deferred consideration would be payable on March 8, 2019. The Company paid the Edgewater Selling Stakeholders $21.9 million on March 8, 2019 and recorded the reduction to the Edgewater Deferred Consideration of $8.1 million in Other income (expense), net, in the Company's condensed consolidated statement of operations and as a non-cash adjustment to reconcile net loss to cash flows provided by operating activities in the Company's condensed consolidated statement of cash flows for the six months ended June 30, 2019.

The Edgewater Acquisition has been accounted for as a business combination and the financial results of Edgewater have been included in the Company's condensed consolidated financial statements for the period subsequent to its acquisition.

As of June 30, 2019, the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities was preliminary. The Company is continuing the process of reviewing the facts and circumstances existing as of the Edgewater Acquisition Date in order to finalize its valuation. The Company expects to finalize the valuation of the assets acquired and liabilities assumed in the third quarter of 2019.

A summary of the preliminary allocation of the purchase consideration for Edgewater as of June 30, 2019 is as follows (in thousands):


15


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

Fair value of consideration transferred:
 
  Cash consideration:
 
    Cash paid to Edgewater Selling Stakeholders
$
51,162

    Less cash acquired
(4,773
)
      Net cash consideration
46,389

    Deferred purchase consideration
30,000

    Fair value of Ribbon stock issued
30,000

    Fair value of equity awards assumed (see Note 12)
747

        Fair value of total consideration
$
107,136

 
 
Fair value of assets acquired and liabilities assumed:
 
  Current assets, net of cash acquired
$
16,098

  Property and equipment
245

  Intangible assets:
 
    Developed technology
29,500

    Customer relationships
26,100

    Trade names
1,100

  Goodwill
48,053

  Other noncurrent assets
103

  Deferred revenue
(2,749
)
  Other current liabilities
(9,926
)
  Deferred revenue, net of current
(669
)
  Other long-term liabilities
(719
)
 
$
107,136



The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired developed technology, customer relationships and trade name intangible assets. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of customer attrition, technology obsolescence and revenue growth projections. The Company is amortizing the identifiable intangible assets in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 8.4 years. Goodwill resulting from the transaction is primarily due to expected synergies between the combined companies and is not deductible for tax purposes.

The Company has not provided pro forma financial information, as the historical amounts are not significant to the Company's condensed consolidated financial statements.

Acquisition- and Integration-Related Expenses

Acquisition- and integration-related expenses include those expenses related to acquisitions that would otherwise not have been incurred by the Company, including professional and services fees such as legal, audit, consulting, paying agent and other fees, and expenses related to cash payments to certain former executives of the acquired businesses in connection with their employment agreements. Integration-related expenses represent incremental costs related to combining the Company and its business acquisitions, such as third-party consulting and other third-party services related to merging previously separate companies' systems and processes.

The Company's acquisition- and integration-related expenses for the three and six months ended June 30, 2019 and 2018 were as follows (in thousands):

16


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

 
Three months ended
 
Six months ended
 
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Professional and services fees (acquisition-related)
$
321

 
$
2,199

 
$
1,826

 
$
2,409

Management bonuses (acquisition-related)

 
298

 

 
1,972

Integration-related expenses
1,644

 
1,783

 
3,338

 
4,311

 
$
1,965

 
$
4,280

 
$
5,164

 
$
8,692




(3) EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. For periods in which the Company reports net income, diluted net earnings per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period unless the effect is antidilutive.

The calculations of shares used to compute earnings (loss) per share were as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Weighted average shares outstanding—basic
110,394

 
102,160

 
109,239

 
102,039

Potential dilutive common shares
304

 

 
433

 

Weighted average shares outstanding—diluted
110,698

 
102,160

 
109,672

 
102,039



Options to purchase the Company's common stock aggregating 0.3 million shares and 0.4 million shares have not been included in the computation of diluted earnings per share for the three and six months ended June 30, 2019, respectively, because their effect would have been antidilutive. Options to purchase the Company's common stock and unvested shares of restricted and performance-based stock and stock units aggregating 3.3 million shares have not been included in the computation of diluted loss per share for the three and six months ended June 30, 2018 because their effect would have been antidilutive.



(4) CASH EQUIVALENTS, MARKETABLE SECURITIES AND INVESTMENTS

The Company invests in debt instruments, primarily U.S. government-backed, municipal and corporate obligations, which management believes to be high quality (investment grade) credit instruments.

The Company's remaining available-for-sale securities matured during the three months ended June 30, 2019. The Company also did not hold any cash equivalents at June 30, 2019. As a result of the Company no longer holding any marketable securities or investments at June 30, 2019, the remaining tax effect on the unrealized gain (loss) on available-for-sale marketable securities was realized in the three months ended June 30, 2019 and recorded in Income tax provision in the Company's condensed consolidated statements of operations as a reclassification from Unrealized gain (loss) on available-for-sale marketable securities in the Company's condensed consolidated statements of comprehensive income (loss). The Company did not sell any of its available-for-sale securities during the three or six months ended June 30, 2019 or 2018 and did not hold any investments that would mature beyond one year at December 31, 2018.

The amortized cost, gross unrealized gains and losses and fair value of the Company's marketable debt securities at December 31, 2018 were comprised of the following (in thousands):
 
 
 
 
 
 
 
 

17


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

 
December 31, 2018
 
Amortized
cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
Cash equivalents
$
310

 
$

 
$

 
$
310

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
U.S. government agency notes
$
3,998

 
$

 
$
(9
)
 
$
3,989

Corporate debt securities
3,301

 

 
(6
)
 
3,295

 
$
7,299

 
$

 
$
(15
)
 
$
7,284



Fair Value Hierarchy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

Level 1. Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2. Level 2 applies to assets or liabilities for which there are inputs that are directly or indirectly observable in the marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets).

Level 3. Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The following table shows the fair value of the Company's financial assets at December 31, 2018. These financial assets are comprised of the Company's available-for-sale debt securities and reported under the captions Cash and cash equivalents and Marketable securities in the condensed consolidated balance sheet (in thousands):
 
 
 
 
 
 
 
 
 
 
 
Fair value measurements at
December 31, 2018 using:
 
Total carrying
value at
December 31,
2018
 
Quoted prices
in active
markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Cash equivalents
$
310

 
$
310

 
$

 
$

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
U.S. government agency notes
$
3,989

 
$

 
$
3,989

 
$

Corporate debt securities
3,295

 

 
3,295

 

 
$
7,284

 
$

 
$
7,284

 
$



The Company's marketable securities were valued with the assistance of valuations provided by third-party pricing services, as derived from such services' pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation

18


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

for a security. The Company is ultimately responsible for the condensed consolidated financial statements and underlying estimates. Accordingly, the Company assesses the reasonableness of the valuations provided by the third-party pricing services by reviewing actual trade data, broker/dealer quotes and other similar data, which are obtained from quoted market prices or other sources.



(5) INVENTORY

Inventory at June 30, 2019 and December 31, 2018 consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
On-hand final assemblies and finished goods inventories
$
13,987

 
$
19,879

Deferred cost of goods sold
3,027

 
3,798

 
17,014

 
23,677

Less noncurrent portion (included in other assets)
(505
)
 
(1,075
)
Current portion
$
16,509

 
$
22,602




(6) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at June 30, 2019 and December 31, 2018 consisted of the following (in thousands):
June 30, 2019
Weighted average amortization period
(years)
 
Cost
 
Accumulated
amortization
 
Net
carrying value
In-process research and development
*
 
$
5,600

 
$

 
$
5,600

Developed technology
6.83
 
186,880

 
82,924

 
103,956

Customer relationships
9.47
 
154,140

 
26,755

 
127,385

Trade names
5.20
 
2,000

 
919

 
1,081

Internal use software
3.00
 
730

 
730

 

 
7.86
 
$
349,350

 
$
111,328

 
$
238,022



December 31, 2018
Weighted average amortization period
(years)
 
Cost
 
Accumulated
amortization
 
Net
carrying value
In-process research and development
*
 
$
5,600

 
$

 
$
5,600

Developed technology
6.91
 
182,880

 
63,187

 
119,693

Customer relationships
9.44
 
146,940

 
22,218

 
124,722

Trade names
5.20
 
2,000

 
624

 
1,376

Internal use software
3.00
 
730

 
730

 

 
7.88
 
$
338,150

 
$
86,759

 
$
251,391


* An in-process research and development intangible asset has an indefinite life until the product is generally available, at which time such asset is typically reclassified to developed technology.


Amortization expense for intangible assets for the three and six months ended June 30, 2019 and 2018 was as follows (in thousands):

19


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

 
Three months ended
 
Six months ended
 
Statement of operations classification
 
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
 
Developed technology
$
10,092

 
$
9,270

 
$
19,737

 
$
18,862

 
Cost of revenue - product
Customer relationships
2,407

 
2,581

 
4,537

 
5,186

 
Sales and marketing
Trade names
148

 
113

 
295

 
225

 
Sales and marketing
 
$
12,647

 
$
11,964

 
$
24,569

 
$
24,273

 
 


Estimated future amortization expense for the Company's intangible assets at June 30, 2019 was as follows (in thousands):
Years ending December 31,
 
Remainder of 2019
$
24,656

2020
48,815

2021
42,493

2022
35,113

2023
27,538

Thereafter
59,407

 
$
238,022



The changes in the carrying value of the Company's goodwill in the six months ended June 30, 2019 and 2018 were as follows (in thousands):
 
 
 
 
Balance at January 1
2019
 
2018
  Goodwill
$
386,761

 
$
338,822

  Accumulated impairment losses
(3,106
)
 
(3,106
)
 
383,655

 
335,716

Acquisition of Anova
5,541

 

Balance at June 30
$
389,196

 
$
335,716

 
 
 
 
Balance at June 30
 
 
 
  Goodwill
$
392,302

 
$
338,822

  Accumulated impairment losses
(3,106
)
 
(3,106
)
 
$
389,196

 
$
335,716




(7) ACCRUED EXPENSES
Accrued expenses at June 30, 2019 and December 31, 2018 consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
Employee compensation and related costs
$
23,585

 
$
42,852

Deferred purchase consideration
1,700

 
15,000

Other
29,408

 
26,411

 
$
54,693

 
$
84,263




(8) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES

The Company recorded restructuring and related expense aggregating $9.1 million and $14.1 million in the three and six

20


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

months ended June 30, 2019, respectively, and $6.1 million and $12.8 million in the three and six months ended June 30, 2018, respectively. Restructuring and related expense includes both restructuring expense (primarily severance and related costs) and accelerated rent amortization expense.

For restructuring events that involve lease assets and liabilities, the Company applies lease reassessment and modification guidance and evaluates the right-of-use assets for potential impairment. If the Company plans to exit all or distinct portions of a facility and does not have the ability or intent to sublease, the Company will accelerate the amortization of each of those lease components through the vacate date. The accelerated amortization is recorded as a component of Restructuring and related expense in the Company's condensed consolidated statements of operations. Related variable lease expenses will continue to be expensed as incurred through the vacate date, at which time the Company will reassess the liability balance to ensure it appropriately reflects the remaining liability associated with the premises and record a liability for the estimated future variable lease costs.

The components of Restructuring and related expense for the three and six months ended June 30, 2019 were as follows (in thousands):
 
 
 
 
 
Three months ended
 
Six months ended
 
June 30,
2019
 
June 30,
2019
Severance and related costs
$
5,981

 
$
10,900

Variable and other facilities-related costs
305

 
318

Accelerated amortization of lease assets due to cease-use
2,858

 
2,858

 
$
9,144

 
$
14,076



Prior to the adoption of ASC 842, the Company recorded restructuring accruals for future lease obligations related to vacated facilities at the time that it ceased usage of the respective facility. The components of Restructuring and related expense recorded in the three and six months ended June 30, 2018 were as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 30,
2018
 
June 30,
2018
Severance and related costs
5,612

 
12,122

Facilities
485

 
643

 
$
6,097

 
$
12,765



2019 Restructuring and Facilities Consolidation Initiative
In June 2019, the Company implemented a restructuring plan to further streamline the Company's global footprint, improve its operations and enhance its customer delivery (the "2019 Restructuring Initiative"). The 2019 Restructuring Initiative includes facility consolidations, refinement of the Company's research and development activities, and a reduction in workforce. In connection with this initiative, the Company expects to reduce its focus on hardware and appliance-based development over time and to increase its development focus on software virtualization, functional simplicity and important customer requirements. The facility consolidations under the 2019 Restructuring Initiative (the "Facilities Initiative") include a consolidation of the Company's North Texas sites into a single campus housing engineering, customer training and support, and administrative functions, as well as a reduction or elimination of certain excess and duplicative facilities worldwide. In addition, the Company intends to substantially consolidate its global software laboratories and server farms into two lower cost North American sites. The Company continues to evaluate its properties included in the Facilities Initiative for accelerated amortization and/or right-of-use asset impairment. The Company expects that the actions under the Facilities Initiative will be completed by the end of 2020.

In connection with the 2019 Restructuring Initiative, the Company recorded restructuring expense of $5.8 million in the three months ended June 30, 2019 for severance and related costs for approximately 110 employees. The Company expects that

21


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

nearly all of this amount will be paid by the end of 2019. The Company estimates that it will record additional restructuring expense related to severance and related costs approximating $1 million under the 2019 Restructuring Initiative.

A summary of the 2019 Restructuring Initiative accrual activity for severance and related costs for the six months ended June 30, 2019 is as follows (in thousands):
 
Balance at
January 1,
2019
 
Initiatives
charged to
expense
 
Cash
payments
 
Balance at
June 30,
2019
Severance
$

 
$
5,824

 
$
(373
)
 
$
5,451


Accelerated rent amortization is being recognized from the date that the Company commenced the plan to fully or partially vacate the respective facility through the final date each such plan is complete. The Company recorded $2.9 million of accelerated rent amortization in the three months ended June 30, 2019. The liability for the total lease payments for each respective facility is included as a component of Operating lease liabilities in the Company's condensed consolidated balance sheets, both current and noncurrent (see Note 16). The Company expects to record approximately $1.5 million of future expense in connection with certain of these facilities, comprised of both accelerated rent amortization and variable facilities-related costs. The Company may incur additional future expense if it is unable to sublease other locations included in the Facilities Initiative.

Merger Restructuring Initiative

In connection with the Merger, the Company implemented a restructuring plan in the fourth quarter of 2017 to eliminate certain redundant positions and facilities within the combined companies (the "Merger Restructuring Initiative"). In connection with this initiative, the Company recorded restructuring expense of $5.2 million in the six months ended June 30, 2019, comprised of $0.3 million in the three months ended June 30, 2019 and $4.9 million in the three months ended March 31, 2019. The Company recorded $11.8 million of restructuring and related expense in the six months ended June 30, 2018, comprised of $5.3 million in the three months ended June 30, 2018 and $6.5 million in the three months ended March 31, 2018. Of the amount recorded in the six months ended June 30, 2019, virtually all was for severance and related costs for approximately 40 employees. The amount recorded in the six months ended June 30, 2018 represented severance and related costs for approximately 255 employees. The Merger Restructuring Initiative is substantially complete and the Company anticipates it will record nominal future expense in connection with this initiative. In connection with the adoption of ASC 842 effective January 1, 2019, the Company wrote off the remaining restructuring accrual related to facilities. The Company expects that the amount accrued at June 30, 2019 for severance will be paid by the end of the first half of 2020.

A summary of the Merger Restructuring Initiative accrual activity for the six months ended June 30, 2019 is as follows (in thousands):
 
Balance at
January 1,
2019
 
Initiatives
charged to
expense
 
Adjustment for the impact of ASC 842 adoption
 
Cash
payments
 
Balance at
June 30,
2019
Severance
$
1,910

 
$
5,076

 
$

 
$
(4,499
)
 
$
2,487

Facilities
771

 
156

 
(771
)
 
(156
)
 

 
$
2,681

 
$
5,232

 
$
(771
)
 
$
(4,655
)
 
$
2,487


 
 
 
 
 
 
Balance Sheet Classification

The current portions of accrued restructuring are included as a component of Accrued expenses and the long-term portions of accrued restructuring are included as a component of Other long-term liabilities in the condensed consolidated balance sheets. There was no long-term portion of accrued restructuring at June 30, 2019. The long-term portion of accrued restructuring totaled $0.5 million at December 31, 2018. This amount represented future lease payments on restructured facilities.

22


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)




(9) DEBT

Senior Secured Credit Facility

On December 21, 2017, the Company entered into a Senior Secured Credit Facilities Credit Agreement (the “Credit Facility”), by and among the Company, as a guarantor, Sonus Networks, Inc., as the borrower (“Borrower”), Silicon Valley Bank ("SVB"), as administrative agent (in such capacity, the “Administrative Agent”), issuing lender, swingline lender and lead arranger and the lenders party thereto (each referred to individually as a “Lender”, and collectively, the “Lenders”), which refinanced the prior credit agreement with SVB that the Company had assumed in connection with the Merger. The Credit Facility includes $100 million of commitments, the full amount of which is available for revolving loans, a $15 million sublimit that is available for letters of credit and a $15 million sublimit that is available for swingline loans. On June 24, 2018, the Company amended the Credit Facility to, among other things, permit the Edgewater Acquisition and related transactions. At December 31, 2018, the Company had an outstanding debt balance of $55.0 million at an interest rate of 5.96% and $2.7 million of outstanding letters of credit at an average interest rate of 1.75% under the Credit Facility. The Company was in compliance with all covenants of the Credit Facility at December 31, 2018.

On April 29, 2019, the Company amended and restated the Credit Facility (the "New Credit Facility"). In addition to the original $100 million of commitments, the New Credit Facility includes an additional $50 million term loan facility that was advanced in full on April 29, 2019. The New Credit Facility also includes procedures for additional financial institutions to become lenders, or for any existing lender to increase its commitment under either the term loan facility or the revolving loan facility, subject to an aggregate increase of $75 million for all incremental commitments under the New Credit Facility. The New Credit Facility is scheduled to mature in April 2024. In addition to SVB, lenders under the New Credit Facility include Citizens Bank N.A., SunTrust Bank, JPMorgan Chase Bank, N.A. and Santander Bank, N.A. At June 30, 2019, the Company had outstanding debt under the New Credit Facility totaling $85.0 million at an average interest rate of 4.75% and $4.4 million of outstanding letters of credit at an average interest rate of 1.89%.

The indebtedness and other obligations under the New Credit Facility are unconditionally guaranteed on a senior secured basis by the Company and each other material U.S. domestic subsidiary of the Company (collectively, the “Guarantors”). The New Credit Facility is secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including the Company.

The New Credit Facility requires periodic interest payments on any outstanding borrowings under the facility. The Borrower may prepay all revolving loans under the New Credit Facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements.

Revolving loans under the New Credit Facility bear interest at the Borrower’s option at either the Eurodollar (LIBOR) rate plus a margin ranging from 1.50% to 3.00% per year or the base rate (the highest of the Federal Funds rate plus 0.50%, or the prime rate announced from time to time in The Wall Street Journal) plus a margin ranging from 0.50% to 2.00% per year (such margins being referred to as the “Applicable Margin”). The Applicable Margin varies depending on the Company’s consolidated leverage ratio (as defined in the New Credit Facility). The base rate and the LIBOR rate are each subject to a zero percent floor.

The Borrower is charged a commitment fee ranging from 0.20% to 0.30% per year on the daily amount of the unused portions of the commitments under the New Credit Facility. Additionally, with respect to all letters of credit outstanding under the New Credit Facility, the Borrower is charged a fronting fee of 0.125% per year and an outstanding letter of credit fee equal to the Applicable Margin for base rate loans times the amount equal to be drawn under each letter of credit.

The New Credit Facility requires compliance with certain financial covenants, including a minimum consolidated quick ratio, minimum consolidated fixed charge coverage ratio and maximum consolidated leverage ratio, all of which are defined in the New Credit Facility and tested on a quarterly basis. The Company was in compliance with all covenants of the New Credit Facility at June 30, 2019.

23


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


In addition, the New Credit Facility contains various covenants that, among other restrictions, limit the Company’s and its subsidiaries’ ability to enter into certain types of transactions, including, but not limited to: incurring or assuming indebtedness; granting or assuming liens; making acquisitions or engaging in mergers; making dividend and certain other restricted payments; making investments; selling or otherwise transferring assets; engaging in transactions with affiliates; entering into sale and leaseback transactions; entering into burdensome agreements; changing the nature of its business; modifying its organizational documents; and amending or making prepayments on certain junior debt.

The New Credit Facility contains events of default that are customary for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events with respect to a borrower occurs, all obligations under the New Credit Facility will immediately become due and payable. If any other event of default exists under the New Credit Facility, the lenders may accelerate the maturity of the obligations outstanding under the New Credit Facility and exercise other rights and remedies, including charging a default rate of interest equal to 2.00% per year above the rate that would otherwise be applicable. In addition, if any event of default exists under the New Credit Facility, the lenders may commence foreclosure or other actions against the collateral.

If any default exists under the New Credit Facility, or if the Borrower is unable to make any of the representations and warranties as stated in the New Credit Facility at the applicable time, the Borrower will be unable to borrow funds or have letters of credit issued under the New Credit Facility, which, depending on the circumstances prevailing at that time, could have a material adverse effect on the Borrower’s liquidity and working capital.


Promissory Note

In connection with the Merger, on October 27, 2017, the Company issued the Promissory Note for $22.5 million to certain of GENBAND's equity holders (the "Promissory Note"). The Promissory Note did not amortize, and the principal thereon was payable in full on the third anniversary of its execution. Interest on the Promissory Note was payable quarterly in arrears and accrued at a rate of 7.5% per year for the first six months after issuance, and thereafter at a rate of 10% per year. The failure to make any payment under the Promissory Note when due and, with respect to payment of any interest, the continuation of such failure for a period of thirty days thereafter, constituted an event of default under the Promissory Note. If an event of default occurred under the Promissory Note, the payees could declare the entire balance of the Promissory Note due and payable (including principal and accrued and unpaid interest) within five business days of the payees' notification to the Company of such acceleration. Interest that was not paid on the interest payment date increased the principal amount of the Promissory Note. At December 31, 2018, the Promissory Note balance was $24.1 million, comprised of $22.5 million of principal and $1.6 million of interest converted to principal.

On April 29, 2019, concurrently with the closing of the New Credit Facility as discussed above, the Company repaid in full all outstanding amounts under the Promissory Note, aggregating $24.7 million. The Company did not incur any early termination penalties in connection with this repayment.



(10) REVENUE RECOGNITION

The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606" or the "New Revenue Standard"), which it adopted on January 1, 2018 using the modified retrospective method.

The Company derives revenues from two primary sources: products and services. Product revenue includes the Company's hardware and software that function together to deliver the products' essential functionality. Software and hardware are also sold on a standalone basis. Services include customer support (software updates, upgrades and technical support), consulting, design services, installation services and training. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct.


24


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

When an arrangement contains more than one performance obligation, the Company will generally allocate the transaction price to each performance obligation on a relative standalone selling price basis. The best evidence of a standalone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers. If the good or service is not sold separately, an entity must estimate the standalone selling price by using an approach that maximizes the use of observable inputs. Acceptable estimation methods include but are not limited to: (1) adjusted market assessment; (2) expected cost plus a margin; and (3) a residual approach (when the standalone selling price is not directly observable and is either highly variable or uncertain).

The Company's software licenses typically provide a perpetual right to use the Company's software. The Company also sells term-based software licenses that expire and Software-as-a-Service ("SaaS")-based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software and hardware are delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. The product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point that the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. The Company does not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period. Hardware product is generally sold with software to provide the customer solution.

Services revenue includes revenue from customer support and other professional services. The Company offers warranties on its products. Certain of the Company's warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations. The Company does not allow and has no history of accepting product returns.

Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. The Company sells its customer support contracts at a percentage of list or net product price related to the support. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.

The Company's professional services include consulting, technical support, resident engineer services, design services and installation services. Because control transfers over time, revenue is recognized based on progress toward completion of the performance obligation. The method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the input method to measure progress for its contracts because it believes such method best depicts the transfer of assets to the customer, which occurs as the Company incurs costs for the contracts. Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. When the measure of progress is based upon expended labor, progress toward completion is measured as the ratio of labor time expended to date versus the total estimated labor time required to complete the performance obligation. Revenue is recorded proportionally as costs are incurred or labor is expended. Costs to fulfill these obligations include internal labor as well as subcontractor costs.

Customer training includes courses offered by the Company. The related revenue is typically recognized as the training services are performed.


25


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

The Company's typical performance obligations include the following:
Performance Obligation
 
When Performance Obligation is Typically Satisfied
 
When Payment is Typically Due
Software and Product Revenue
 
 
 
 
Software licenses (perpetual or term)
 
Upon transfer of control; typically, when made available for download (point in time)
 
Generally, within 30 days of invoicing except for term licenses, which may be paid for over time
 
 
 
 
 
Software licenses (subscription)
 
Upon activation of hosted site (over time)
 
Generally, within 30 days of invoicing
 
 
 
 
 
Appliances
 
When control of the appliance passes to the customer; typically, upon delivery (point in time)
 
Generally, within 30 days of invoicing
 
 
 
 
 
Software upgrades
 
Upon transfer of control; typically, when made available for download (point in time)
 
Generally, within 30 days of invoicing
 
 
 
 
 
Customer Support Revenue
 
 
 
 
Customer support
 
Ratably over the course of the support contract (over time)
 
Generally, within 30 days of invoicing
 
 
 
 
 
Professional Services
 
 
 
 
Other professional services (excluding training services)
 
As work is performed (over time)
 
Generally, within 30 days of invoicing (upon completion of services)
 
 
 
 
 
Training
 
When the class is taught (point in time)
 
Generally, within 30 days of services being performed


Significant Judgments

The Company's contracts with customers often include promises to transfer multiple products and services to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Judgment is required to determine the standalone selling price ("SSP") for each distinct performance obligation. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the SSP.

Deferred Revenue

Deferred revenue is a contract liability representing amounts collected from or invoiced to customers in excess of revenue recognized. This results primarily from the billing of annual customer support agreements where the revenue is recognized over the term of the agreement. The value of deferred revenue will increase or decrease based on the timing of recognition of revenue.

Disaggregation of Revenue

The Company disaggregates its revenue from contracts with customers based on the nature of the products and services and the geographic regions in which each customer is domiciled. The Company's revenue for the three and six months ended June 30, 2019 and 2018 was disaggregated as follows:

26


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Three months ended June 30, 2019
Product revenue
 
Service revenue (maintenance)
 
Service revenue (professional services)
 
Total revenue
United States
$
41,378

 
$
33,785

 
$
9,463

 
$
84,626

Europe, Middle East and Africa
18,411

 
9,394

 
3,215

 
31,020

Japan
3,358

 
2,960

 
1,009

 
7,327

Other Asia Pacific
5,706

 
3,613

 
1,088

 
10,407

Other
3,206

 
7,389

 
1,446

 
12,041

 
$
72,059

 
$
57,141

 
$
16,221

 
$
145,421



Three months ended June 30, 2018
Product revenue
 
Service revenue (maintenance)
 
Service revenue (professional services)
 
Total revenue
United States
$
42,477

 
$
32,640

 
$
9,061

 
$
84,178

Europe, Middle East and Africa
8,007

 
12,898

 
3,155

 
24,060

Japan
6,870

 
2,696

 
838

 
10,404

Other Asia Pacific
2,124

 
2,257

 
1,210

 
5,591

Other
3,645

 
7,580

 
1,903

 
13,128

 
$
63,123

 
$
58,071

 
$
16,167

 
$
137,361



Six months ended June 30, 2019
Product revenue
 
Service revenue (maintenance)
 
Service revenue (professional services)
 
Total revenue
United States
$
69,824

 
$
66,572

 
$
16,806

 
$
153,202

Europe, Middle East and Africa
24,869

 
20,117

 
6,064

 
51,050

Japan
7,319

 
5,873

 
2,571

 
15,763

Other Asia Pacific
10,381

 
7,276

 
1,957

 
19,614

Other
7,146

 
14,292

 
3,282

 
24,720

 
$
119,539

 
$
114,130

 
$
30,680

 
$
264,349



Six months ended June 30, 2018
Product revenue
 
Service revenue (maintenance)
 
Service revenue (professional services)
 
Total revenue
United States
$
60,278

 
$
64,289

 
$
16,495

 
$
141,062

Europe, Middle East and Africa
19,427

 
24,046

 
5,988

 
49,461

Japan
12,540

 
5,549

 
1,793

 
19,882

Other Asia Pacific
15,011

 
5,354

 
2,279

 
22,644

Other
7,398

 
14,895

 
3,199

 
25,492

 
$
114,654

 
$
114,133

 
$
29,754

 
$
258,541



The Company's product revenue from its direct sales program and from indirect sales through its channel partner program for the three and six months ended June 30, 2019 and 2018 was as follows (in thousands):

27


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

 
Three months ended
 
Six months ended
 
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Indirect sales through channel program
$
28,669

 
$
7,590

 
$
47,843

 
$
15,842

Direct sales
43,390

 
55,533

 
71,696

 
98,812

 
$
72,059

 
$
63,123

 
$
119,539

 
$
114,654



The Company's product revenue from sales to enterprise customers and from sales to service provider customers for the three and six months ended June 30, 2019 and 2018 was as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Sales to enterprise customers
$
15,082

 
$
6,699

 
$
29,837

 
$
13,953

Sales to service provider customers
56,977

 
56,424

 
89,702

 
100,701

 
$
72,059

 
$
63,123

 
$
119,539

 
$
114,654



Revenue Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable; unbilled receivables, which are contract assets; and customer advances and deposits, which are contract liabilities, in the Company's condensed consolidated balance sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Completion of services and billing may occur subsequent to revenue recognition, resulting in contract assets. The Company may receive advances or deposits from its customers before revenue is recognized, resulting in contract liabilities that are classified as deferred revenue. These assets and liabilities are reported in the Company's condensed consolidated balance sheets on a contract-by-contract basis as of the end of each reporting period. Changes in the contract asset and liability balances during the six months ended June 30, 2019 were not materially impacted by any factors other than billing and revenue recognition. Nearly all of the Company's deferred revenue balance is related to services revenue, primarily customer support contracts. Unbilled receivables stem primarily from engagements where services have been performed; however, billing cannot occur until services are completed.

In some arrangements, the Company allows customers to pay for term-based software licenses and products over the term of the software license. The Company also sells SaaS-based software under subscription arrangements, with payment terms over the term of the SaaS agreement. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables that are anticipated to be invoiced in the next twelve months are included in Accounts receivable on the Company's condensed consolidated balance sheets. The changes in the Company's accounts receivable, unbilled receivables and deferred revenue balances for the six months ended June 30, 2019 were as follows (in thousands):
 
Accounts receivable
 
Unbilled accounts receivable
 
Deferred revenue (current)
 
Deferred revenue (long-term)
Balance at January 1, 2019
$
174,310

 
$
13,543

 
$
105,087

 
$
17,572

Increase (decrease), net
(51,261
)
 
18,823

 
(8,143
)
 
(2,457
)
Balance at June 30, 2019
$
123,049

 
$
32,366

 
$
96,944

 
$
15,115



The decrease in accounts receivable was primarily the result of typical mid-year seasonality. The Company recognized approximately $63 million of revenue in the six months ended June 30, 2019 that was recorded as deferred revenue at December 31, 2018. The Company recognized approximately $78 million of revenue in the six months ended June 30, 2018 that was recorded as deferred revenue at December 31, 2017. Of the Company's deferred revenue reported as long-term in its condensed consolidated balance sheet at June 30, 2019, the Company expects that approximately $8 million will be recognized

28


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

as revenue in 2020, approximately $5 million will be recognized as revenue in 2021 and approximately $2 million will be recognized as revenue in 2022 and beyond.

All freight-related customer invoicing is recorded as revenue, while the shipping and handling costs that occur after control of the promised goods or services transfer to the customer are reported as fulfillment costs, a component of Cost of revenue - product in the Company's condensed consolidated statements of operations.

Deferred Commissions Cost

Sales commissions earned by the Company's employees are considered incremental and recoverable costs of obtaining a contract with a customer. Expense related to commission payments has been deferred on our condensed consolidated balance sheet and is being amortized over the expected life of the customer contract, which averages five years. At both June 30, 2019 and December 31, 2018, the Company had $2.7 million of deferred sales commissions capitalized.



(11) COMMON STOCK REPURCHASES

In the second quarter of 2019, the Board approved a stock repurchase program (the "Repurchase Program") pursuant to which the Company may repurchase up to $75 million of the Company's common stock prior to April 18, 2021. Repurchases under the Repurchase Program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases depending on market conditions and corporate discretion. The Repurchase Program does not obligate the Company to acquire any particular amount of common stock and may be extended, modified, suspended or discontinued at any time at the Board's discretion. The stock repurchases are being funded using the Company's working capital. During the six months ended June 30, 2019, the Company spent $4.5 million, including transaction fees, to repurchase and retire 1.0 million shares of its common stock under the Repurchase Program. At June 30, 2019, the Company had $70.5 million remaining under the Repurchase Program for future repurchases.



(12) STOCK-BASED COMPENSATION PLANS

2019 Stock Incentive Plan

At the Company's annual meeting of stockholders held on June 5, 2019, the Company's stockholders approved the Ribbon Communications Inc. 2019 Incentive Award Plan (the "2019 Plan"). The 2019 Plan had previously been approved by the Board subject to stockholder approval. Under the 2019 Plan, the Company may grant awards up to 7.0 million shares of common stock (subject to adjustment in the event of stock splits and other similar events), plus 5.1 million shares of common stock that remained available for issuance under the Company's Amended and Restated Stock Incentive Plan (the "2007 Plan") on June 5, 2019, plus any shares covered by awards under the 2007 Plan (or the Company's other prior equity compensation plans) that again become available for grant pursuant to the provisions of the 2007 Plan. The 2019 Plan provides for the grant of options to purchase the Company's common stock ("stock options"), stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), performance-based stock awards ("PSAs"), restricted stock units ("RSUs"), performance-based stock units ("PSUs") and other stock- or cash-based awards. Awards can be granted under the 2019 Plan to the Company's employees, officers and non-employee directors, as well as consultants and advisors of the Company and its subsidiaries.

2007 Plan

The Company's 2007 Plan provides for the award of stock options, SARs, RSAs, RSU, PSAs, PSUs and other stock-based awards to employees, officers, directors (including those directors who are not employees or officers of the Company), consultants and advisors of the Company and its subsidiaries. On and following June 5, 2019, with the exception of shares underlying awards outstanding as of that date, no additional shares may be granted under the 2007 Plan.


29


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

2002 Stock Option Plan

In connection with the Edgewater Acquisition, the Company assumed Edgewater's Amended and Restated 2002 Stock Option Plan (the "Edgewater Plan") to the extent of the shares underlying the options outstanding under the Edgewater Plan as of the Edgewater Acquisition Date (the "Edgewater Options"). The Edgewater Options were converted to Ribbon stock options (the "Ribbon Replacement Options") using a conversion factor of 0.17, which was calculated based on the acquisition consideration of $1.20 per share of Edgewater common stock divided by the weighted average of the closing price of Ribbon common stock for the ten consecutive days, ending with the trading day that preceded the Edgewater Acquisition Date. This conversion factor was also used to convert the exercise prices of Edgewater Options to Ribbon Replacement Option exercise prices. The Ribbon Replacement Options are vesting under the same schedules as the respective Edgewater Options.

The fair values of the Edgewater Options assumed were estimated using a Black-Scholes option pricing model. The Company recorded $0.7 million as additional purchase consideration for the fair value of the assumed Edgewater Options. The fair value of the Ribbon Replacement Options attributable to future service totaled $1.0 million, which are being recognized over a weighted average period of approximately two years.

Executive Equity Arrangements

Stock-for-Cash Bonus Election

In connection with the Company's annual incentive program, certain executives of the Company were given the choice to receive a portion, ranging from 10% to 50% (the "Elected Percentage"), of their fiscal year 2018 bonuses (the "2018 Bonus"), if any were earned, in the form of shares of the Company's common stock (the "2018 Bonus Shares" and such program, the "Stock Bonus Election Program"). Each executive could also elect not to participate in this program and earn his or her 2018 Bonus, if any, in the form of cash. Any executive (other than the Company's Chief Executive Officer and other members of its senior leadership team) who elected to receive a portion of his or her 2018 Bonus in stock would also receive an additional "uplift" of 20% of the value of the 2018 Bonus Shares in additional shares of the Company’s common stock (the “Uplift Shares”). Under the Stock Bonus Election Program, the amount of the 2018 Bonus, if any, for each executive was determined by the Compensation Committee of the Board (the "Compensation Committee").

The number of shares earned by each of the 23 participants in the Stock Bonus Election Program was calculated by multiplying such participant's 2018 Bonus by the applicable Elected Percentage (plus the amount attributable to Uplift Shares, if applicable) and dividing the resulting amount by $4.97, the closing price of the Company's common stock on March 8, 2019, the date of the company-wide cash bonus payments. The Company granted 198,949 shares in the aggregate in connection with the 2018 Bonus Shares on March 15, 2019, and such shares were fully vested on the date of grant. However, notwithstanding that each such share of common stock is fully vested, each participant in the Stock Bonus Election Program is contractually restricted from trading the 2018 Bonus Shares for five months after the date of grant. Both the grant and vesting of the 2018 Bonus Shares are included in the RSU table below.

Performance-Based Stock Grants

In addition to granting RSAs and RSUs to its executives and certain of its employees, the Company also grants PSUs to certain of its executives.

2019 PSU Grants. In March and April 2019, the Company granted certain of its executives an aggregate of 872,073 PSUs, of which 523,244 PSUs had both performance and service conditions (the "Performance PSUs") and 348,829 PSUs had both market and service conditions (the "Market PSUs").

Each executive's Performance PSU grant is comprised of three consecutive fiscal year performance periods from 2019 through 2021 (each, a "Fiscal Year Performance Period"), with one-third of the Performance PSUs attributable to each Fiscal Year Performance Period. The number of shares that will vest for each Fiscal Year Performance Period will be based on the achievement of certain metrics related to the Company's financial performance for the applicable year on a standalone basis (each, a "Fiscal Year Performance Condition"). The Company's achievement of the 2019 Fiscal Year Performance Conditions (and the number of shares of Company common stock to vest as a result thereof) will be measured on a linear sliding scale in

30


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

relation to specific threshold, target and stretch performance conditions. The Company is recording stock-based compensation expense for the Performance PSUs based on its assessment of the probability that each performance condition will be achieved and the level, if any, of such achievement. As of June 30, 2019, the Company determined that the grant date criteria for the 2020 and 2021 Fiscal Year Performance Periods had not been met, as the 2020 and 2021 Fiscal Year Performance Conditions had not been established by the Company. Accordingly, the stock-based compensation expense recorded in the six months ended June 30, 2019 in connection with the Performance PSUs is related only to those PSUs with 2019 Fiscal Year Performance Conditions. The Compensation Committee will determine the number of shares earned, if any, after the Company's financial results for each Fiscal Year Performance Period are finalized. Upon the determination by the Compensation Committee of the number of shares that will be received upon vesting of the PSUs, such number of shares will become fixed and the unamortized expense will be recorded through the remainder of the service period that ends March 15, 2022, at which time the total Performance PSUs earned, if any, will vest, pending each executive's continued employment with the Company through that date. The number of shares of common stock to be achieved upon vesting of the Performance PSUs will in no event exceed 200% of the Performance PSUs. Shares subject to the Performance PSUs that fail to be earned will be forfeited.

The Market PSUs have one three-year performance period which ends on December 31, 2021 (the "Market Performance Period"). The number of shares subject to the Market PSUs that will vest, if any, on March 15, 2022, will be dependent upon the Company's total shareholder return ("TSR") compared with the TSR of the companies included in the Nasdaq Telecommunications Index for the same Market Performance Period, measured by the Compensation Committee after the Market Performance Period ends. The shares determined to be earned will vest on March 15, 2022, pending each executive's continued employment with the Company through that date. The number of shares of common stock to be achieved upon vesting of the Market PSUs will in no event exceed 200% of the Market PSUs. Shares subject to the Market PSUs that fail to be earned will be forfeited. The Company recorded nominal stock-based compensation expense related to the Market PSUs in the three months ended June 30, 2019.

2018 PSU Grant. In May 2018, the Company granted its President and Chief Executive Officer Franklin (Fritz) Hobbs ("Mr. Hobbs"), 195,000 PSUs with both performance and service conditions (the "2018 PSUs"). Of the 195,000 2018 PSUs, one-half of such PSUs were eligible to vest based on the achievement of two separate metrics related to the Company's 2018 financial performance (the "2018 Performance Conditions"). The Company's achievement of the 2018 Performance Conditions (and the number of shares of Company common stock to be received upon vesting as a result thereof) were measured on a linear sliding scale in relation to specific threshold, target and stretch performance conditions. The number of shares of common stock to be received upon vesting of the 2018 PSUs would in no event exceed 150% of the 2018 PSUs. In February 2019, the Compensation Committee determined that the performance metrics for one-half of the 2018 PSUs had been achieved at the 106.49% achievement level and one-half of the 2018 PSUs had been achieved at the 150% level. However, in April 2019, the Compensation Committee subsequently determined that the performance metrics for the entire 2018 PSUs had been achieved at the 150% level, for a total of 292,500 shares eligible to be issued, pending Mr. Hobbs’ continued employment with the Company through December 31, 2020, the vesting date of the 2018 PSUs.

2017 PSU Grants. On March 31, 2017, the Company granted an aggregate of 165,000 PSUs with both market and service conditions to five of its executives (the "2017 PSUs"). The terms of each PSU grant were such that up to one-third of the shares subject to the respective PSU grant would vest, if at all, on each of the respective first, second and third anniversaries of the date of grant, depending on the Company's TSR compared with the TSR of the companies included in the Nasdaq Telecommunications Index for the same fiscal year, measured by the Compensation Committee after each of the fiscal years as defined by each grant (each, a "Performance Period"). The shares determined to be earned would vest on the anniversary of the grant date following each Performance Period. Shares subject to the PSUs that failed to be earned would be forfeited. In March 2018, the Compensation Committee determined that the performance metrics for the 2017 PSUs for the 2017 Performance Period had been achieved at the 130% level and accordingly, 33,584 shares in the aggregate were released to the three executives holding such outstanding grants, comprised of 25,834 shares, representing the 100% achievement target, granted on March 31, 2017 and 7,750 shares, representing the 30% achievement over target, granted on March 31, 2018. In February 2019, the Compensation Committee determined that the performance metrics for the 2017 PSUs for the 2018 Performance Period had been achieved at the 61.4% level and accordingly, 9,466 were released to the three executives holding such outstanding grants on March 31, 2019. The shares that failed to be earned for the 2018 Performance Period, aggregating 5,950 shares, were forfeited. Accordingly, at June 30, 2019, there were no remaining unvested 2017 PSUs outstanding. The release and forfeiture of the shares related to the 2018 Performance Period are included in the PSU table below.

31


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Accounting for PSUs with Market Conditions. PSUs that include a market condition require the use of a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the date of return, the volatility of each entity and the pair-wise covariance between each entity. These results are then used to calculate the grant date fair values of the respective PSUs. The Company is required to record expense for the PSUs with market conditions through their respective final vesting dates, regardless of the number of shares that are ultimately earned. During the three months ended June 30, 2019, the Company completed the analysis required to determine the grant date fair value of the Market PSUs, determining that such value was $7.24 per share. The Company recorded nominal incremental stock-based compensation expense in the three months ended June 30, 2019 to account for the adjustment to the grant date fair value of the Market PSUs from the prior quarter. The adjusted grant date fair value of the Market PSUs is reflected in the PSU activity reported in the PSU table below.

Stock Options

The activity related to the Company's outstanding stock options for the six months ended June 30, 2019 was as follows:
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual Term
(years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding at January 1, 2019
582,061

 
$
9.01

 
 
 
 
Granted

 
$

 
 
 
 
Exercised
(107,006
)
 
$
1.78

 
 
 
 
Forfeited
(16,177
)
 
$
2.47

 
 
 
 
Expired
(34,958
)
 
$
12.21

 
 
 
 
Outstanding at June 30, 2019
423,920

 
$
10.82

 
4.53
 
$
404

Vested or expected to vest at June 30, 2019
413,897

 
$
11.02

 
4.44
 
$
380

Exercisable at June 30, 2019
341,375

 
$
12.90

 
3.96
 
$
190


 
 
Additional information regarding the Company's stock options for the three and six months ended June 30, 2019 was as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 30,
2019
 
June 30,
2019
Total intrinsic value of stock options exercised
$
49

 
$
396

Cash received from the exercise of stock options
$
40

 
$
190



Restricted Stock Awards and Units

The activity related to the Company's RSAs for the six months ended June 30, 2019 was as follows:
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested balance at January 1, 2019
1,508,011

 
$
6.90

Granted

 
$

Vested
(769,403
)
 
$
6.91

Forfeited
(25,497
)
 
$
7.04

Unvested balance at June 30, 2019
713,111

 
$
6.88




32


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

The activity related to the Company's RSUs for the six months ended June 30, 2019 was as follows:
 
Shares
 
Weighted
Average