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 September 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 October 25, 2019, there were 110,715,311 shares of the registrant's common stock, $0.0001 par value per share, outstanding.
 




RIBBON COMMUNICATIONS INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 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, remaining 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)
 
September 30,
2019
 
December 31,
2018
Assets
Current assets:
 
 
 
Cash and cash equivalents
$
40,397

 
$
43,694

Marketable securities

 
7,284

Accounts receivable, net
162,964

 
187,853

Inventory
14,103

 
22,602

Other current assets
29,880

 
17,002

Total current assets
247,344

 
278,435

Property and equipment, net
27,023

 
27,042

Intangible assets, net
225,762

 
251,391

Goodwill
389,196

 
383,655

Deferred income taxes
5,463

 
9,152

Operating lease right-of-use assets
37,132

 

Other assets
25,161

 
7,484

 
$
957,081

 
$
957,159

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

 
$

Revolving credit facility
34,000

 
55,000

Accounts payable
25,113

 
45,304

Accrued expenses and other
52,650

 
84,263

Operating lease liabilities
7,568

 

Deferred revenue
83,423

 
105,087

Total current liabilities
205,254

 
289,654

Long-term debt, net of current
46,605

 

Long-term debt, related party

 
24,100

Operating lease liabilities, net of current
37,600

 

Deferred revenue, net of current
18,687

 
17,572

Deferred income taxes
4,865

 
4,738

Other long-term liabilities
13,055

 
30,797

Total liabilities
326,066

 
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; 110,156,325 shares issued and outstanding at September 30, 2019; 106,815,636 shares issued and outstanding at December 31, 2018
11

 
11

Additional paid-in capital
1,743,089

 
1,723,576

Accumulated deficit
(1,116,704
)
 
(1,136,992
)
Accumulated other comprehensive income
4,619

 
3,703

Total stockholders' equity
631,015

 
590,298

 
$
957,081

 
$
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
 
Nine months ended
 
September 30,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
Revenue:
 
 
 
 
 
 
 
Product
$
61,152

 
$
77,283

 
$
180,691

 
$
191,937

Service
76,501

 
75,185

 
221,311

 
219,072

Total revenue
137,653

 
152,468

 
402,002

 
411,009

Cost of revenue:
 
 
 
 
 
 
 
Product
31,476

 
38,891

 
101,056

 
102,183

Service
27,300

 
31,343

 
84,807

 
96,208

Total cost of revenue
58,776

 
70,234

 
185,863

 
198,391

Gross profit
78,877

 
82,234

 
216,139

 
212,618

Operating expenses:
 
 
 
 
 
 
 
Research and development
34,222

 
34,403

 
105,456

 
109,056

Sales and marketing
28,227

 
31,488

 
87,179

 
94,152

General and administrative
9,673

 
15,942

 
40,833

 
46,571

Acquisition- and integration-related
1,697

 
5,570

 
6,861

 
14,262

Restructuring and related
2,372

 
2,397

 
16,448

 
15,162

Total operating expenses
76,191

 
89,800

 
256,777

 
279,203

Income (loss) from operations
2,686

 
(7,566
)
 
(40,638
)
 
(66,585
)
Interest expense, net
(726
)
 
(1,420
)
 
(3,352
)
 
(2,754
)
Other income (expense), net
(507
)
 
(1,254
)
 
70,128

 
(3,058
)
Income (loss) before income taxes
1,453

 
(10,240
)
 
26,138

 
(72,397
)
Income tax benefit (provision)
197

 
82

 
(5,850
)
 
(2,587
)
Net income (loss)
$
1,650

 
$
(10,158
)
 
$
20,288

 
$
(74,984
)
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.01

 
$
(0.10
)
 
$
0.19

 
$
(0.73
)
Diluted
$
0.01

 
$
(0.10
)
 
$
0.18

 
$
(0.73
)
Shares used to compute earnings (loss) per share:
 
 
 
 
 
 
 
Basic
110,080

 
104,918

 
109,523

 
103,009

Diluted
110,756

 
104,918

 
110,100

 
103,009


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
 
Nine months ended
 
September 30,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
Net income (loss)
$
1,650

 
$
(10,158
)
 
$
20,288

 
$
(74,984
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
270

 
(80
)
 
326

 
(43
)
Unrealized gain (loss) on available-for sale marketable securities, net of reclassification adjustments for realized amounts

 
23

 
590

 
(10
)
Employee retirement benefits

 
156

 

 
156

Other comprehensive income, net of tax
270

 
99

 
916

 
103

Comprehensive income (loss)
$
1,920

 
$
(10,059
)
 
$
21,204

 
$
(74,881
)

See notes to the unaudited condensed consolidated financial statements.


6



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

Three months ended September 30, 2019
 
Common stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional paid-in capital
 
Accumulated deficit
 
Accumulated other comprehensive income
 
Total stockholders' equity
Balance at July 1, 2019
110,007,237

 
$
11

 
$
1,740,563

 
$
(1,118,354
)
 
$
4,349

 
$
626,569

Exercise of stock options
19,009

 


 
43

 


 


 
43

Vesting of restricted stock awards and units
130,580

 


 


 


 


 

Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations
(501
)
 


 
(2
)
 


 


 
(2
)
Stock-based compensation expense


 


 
2,485

 


 


 
2,485

Other comprehensive income


 


 


 


 
270

 
270

Net income


 


 


 
1,650

 


 
1,650

Balance at September 30, 2019
110,156,325

 
$
11

 
$
1,743,089

 
$
(1,116,704
)
 
$
4,619

 
$
631,015



Nine months ended September 30, 2019
 
Common stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional paid-in capital
 
Accumulated deficit
 
Accumulated other comprehensive income
 
Total stockholders' equity
Balance at January 1, 2019
106,815,636

 
$
11

 
$
1,723,576

 
$
(1,136,992
)
 
$
3,703

 
$
590,298

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

 


 
506

 


 


 
506

Exercise of stock options
126,015

 


 
233

 


 


 
233

Vesting of restricted stock awards and units
1,296,966

 


 


 


 


 

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
(204,027
)
 


 
(1,082
)
 


 


 
(1,082
)
Shares issued as consideration in connection with the acquisition of Anova Data, Inc.
2,948,793

 


 
15,186

 


 


 
15,186

Repurchase and retirement of common stock
(975,914
)
 


 
(4,536
)
 


 


 
(4,536
)
Reclassification of liability to equity for bonuses converted to stock awards


 


 
1,052

 


 


 
1,052

Stock-based compensation expense


 


 
8,154

 


 


 
8,154

Other comprehensive income


 


 


 


 
916

 
916

Net income


 


 


 
20,288

 


 
20,288

Balance at September 30, 2019
110,156,325

 
$
11

 
$
1,743,089

 
$
(1,116,704
)
 
$
4,619

 
$
631,015




7



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

Three months ended September 30, 2018
 
Common stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional paid-in capital
 
Accumulated deficit
 
Accumulated other comprehensive income
 
Total stockholders' equity
Balance at July 1, 2018
102,243,477

 
$
10

 
$
1,688,966

 
$
(1,124,799
)
 
$
3,073

 
$
567,250

Exercise of stock options
6,070

 


 
1

 


 


 
1

Vesting of restricted stock awards and units
44,209

 


 


 


 


 

Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations
(16,757
)
 


 
(113
)
 


 


 
(113
)
Shares issued as consideration in connection with acquisition of Edgewater Networks, Inc.
4,235,531

 
1

 
29,999

 


 


 
30,000

Assumption of equity awards in connection with acquisition of Edgewater Networks, Inc.


 


 
747

 


 


 
747

Stock-based compensation expense


 


 
2,516

 


 


 
2,516

Other comprehensive income


 


 


 


 
119

 
119

Net loss


 


 


 
(10,158
)
 


 
(10,158
)
Balance at September 30, 2018
106,512,530

 
$
11

 
$
1,722,116

 
$
(1,134,957
)
 
$
3,192

 
$
590,362



Nine months ended September 30, 2018
 
Common stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional paid-in capital
 
Accumulated deficit
 
Accumulated other comprehensive income
 
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


 


 


 
12,453

 


 
12,453

Exercise of stock options
8,653

 


 
11

 


 


 
11

Vesting of restricted stock awards and units
769,195

 


 


 


 


 

Vesting of performance-based stock units
57,768

 


 


 


 


 

Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations
(311,473
)
 


 
(830
)
 


 


 
(830
)
Shares issued as consideration in connection with acquisition of Edgewater Networks, Inc.
4,235,531

 
1

 
29,999

 


 


 
30,000

Assumption of equity awards in connection with acquisition of Edgewater Networks, Inc.


 


 
747

 


 


 
747

Stock-based compensation expense


 


 
7,421

 


 


 
7,421

Other comprehensive income


 


 


 


 
123

 
123

Net loss


 


 


 
(74,984
)
 


 
(74,984
)
Balance at September 30, 2018
106,512,530

 
$
11

 
$
1,722,116

 
$
(1,134,957
)
 
$
3,192

 
$
590,362


See notes to the unaudited condensed consolidated financial statements.


8



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


 
Nine months ended
 
September 30,
2019
 
September 30,
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
20,288

 
$
(74,984
)
Adjustments to reconcile net income (loss) to cash flows provided by (used in) operating activities:
 
 
 
Depreciation and amortization of property and equipment
8,824

 
8,270

Amortization of intangible assets
36,829

 
37,721

Stock-based compensation
8,154

 
7,421

Deferred income taxes
4,559

 
(39
)
Foreign exchange losses
1,042

 
3,066

Reduction in deferred purchase consideration
(8,124
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
25,598

 
24,550

Inventory
8,387

 
2,783

Other operating assets
(20,242
)
 
2,796

Accounts payable
(20,260
)
 
(7,679
)
Accrued expenses and other long-term liabilities
(21,535
)
 
(20,033
)
Deferred revenue
(20,889
)
 
(7,413
)
Net cash provided by (used in) operating activities
22,631

 
(23,541
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(8,594
)
 
(5,950
)
Business acquisitions, net of cash acquired

 
(46,389
)
Maturities of marketable securities
7,295

 
18,919

Net cash used in investing activities
(1,299
)
 
(33,420
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving line of credit
109,000

 
142,500

Principal payments on revolving line of credit
(130,000
)
 
(104,500
)
Proceeds from issuance of long-term debt
50,000

 

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

Principal payment of long-term debt
(625
)
 

Payment of deferred purchase consideration
(21,876
)
 

Principal payments of finance leases
(698
)
 
(436
)
Payment of debt issuance costs
(891
)
 
(624
)
Proceeds from the sale of common stock in connection with employee stock purchase plan
506

 

Proceeds from the exercise of stock options
233

 
43

Payment of tax withholding obligations related to net share settlements of restricted stock awards
(1,082
)
 
(830
)
Repurchase of common stock
(4,536
)
 

Net cash (used in) provided by financing activities
(24,685
)
 
36,153

Effect of exchange rate changes on cash and cash equivalents
56

 
(281
)
Net decrease in cash and cash equivalents
(3,297
)
 
(21,089
)
Cash and cash equivalents, beginning of year
43,694

 
57,073

Cash and cash equivalents, end of period
$
40,397

 
$
35,984


9



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


 
Nine months ended
 
September 30,
2019
 
September 30,
2018
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
3,649

 
$
1,568

Income taxes paid
$
3,527

 
$
4,047

Income tax refunds received
$
291

 
$
426

Supplemental disclosure of non-cash investing activities:
 
 
 
Capital expenditures incurred, but not yet paid
$
560

 
$
344

Property and equipment acquired under finance leases
$
150

 
$
1,218

  Acquisition purchase consideration - deferred payments
$
1,700

 
$
30,000

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

 
$
30,000

  Acquisition purchase consideration - assumed equity awards
$

 
$
747

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
$
6,765

 
$
5,462


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 nine months ended September 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 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 may be made to the previously issued financial statements to conform to the current period presentation, none of which affected the net income (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 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, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ("ASU 2019-04") and ASU 2019-05 Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief ("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

12


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

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. The Company continues to assess the potential impact of the adoption of ASU 2016-13 and related amendments and currently does not believe that it will have a material impact on the Company's 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 2018-15, 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.

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, Compensation - Retirement Benefits, 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.



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 September 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 nine months ended September 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 September 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 fourth quarter of 2019.

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 income to cash flows provided by operating activities in the Company's condensed consolidated statement of cash flows for the nine months ended September 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 September 30, 2019, the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities was final. A summary of the final allocation of the purchase consideration for Edgewater as of September 30, 2019 is as follows (in thousands):

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


15


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



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 respective employment agreements. These amounts include costs related to prior acquisitions, as well as nominal amounts related to acquisitive activities. 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 nine months ended September 30, 2019 and 2018 were as follows (in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
Professional and services fees (acquisition-related)
$
743

 
$
2,905

 
$
2,569

 
$
5,314

Management bonuses (acquisition-related)

 

 

 
1,972

Integration-related expenses
954

 
2,665

 
4,292

 
6,976

 
$
1,697

 
$
5,570

 
$
6,861

 
$
14,262



(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
 
Nine months ended
 
September 30,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
Weighted average shares outstanding—basic
110,080

 
104,918

 
109,523

 
103,009

Potential dilutive common shares
676

 

 
577

 

Weighted average shares outstanding—diluted
110,756

 
104,918

 
110,100

 
103,009



Options to purchase the Company's common stock aggregating 0.3 million shares have not been included in the

16


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

computation of diluted earnings per share for the three and nine months ended September 30, 2019 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 3.5 million shares have not been included in the computation of diluted loss per share for the three and nine months ended September 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 did not hold any cash equivalents at September 30, 2019. As a result of the Company no longer holding any marketable securities or investments at September 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 is included in the income tax provision in the Company's condensed consolidated statement of operations for the nine months ended September 30, 2019 as a reclassification from Unrealized gain (loss) on available-for-sale marketable securities in the Company's condensed consolidated statement of comprehensive income (loss) for the same nine-month period. The Company had not sold any of its available-for-sale securities during the 2019 period prior to their full maturity. The Company sold $12.5 million of its available-for-sale marketable securities in both the three and nine months ended September 30, 2018, primarily to provide cash for acquisition-related payments in connection with the Edgewater Acquisition and to support integration-related and restructuring activities in connection with the Merger. The Company recognized nominal gross gains and losses from the sales of these securities. The Company 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):
 
 
 
 
 
 
 
 
 
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).

17


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


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 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 September 30, 2019 and December 31, 2018 consisted of the following (in thousands):
 
September 30,
2019
 
December 31,
2018
On-hand final assemblies and finished goods inventories
$
12,137

 
$
19,879

Deferred cost of goods sold
2,525

 
3,798

 
14,662

 
23,677

Less noncurrent portion (included in other assets)
(559
)
 
(1,075
)
Current portion
$
14,103

 
$
22,602




18


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

(6) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at September 30, 2019 and December 31, 2018 consisted of the following (in thousands):
September 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

 
92,446

 
94,434

Customer relationships
9.47
 
154,140

 
29,363

 
124,777

Trade names
5.20
 
2,000

 
1,049

 
951

Internal use software
3.00
 
730

 
730

 

 
7.86
 
$
349,350

 
$
123,588

 
$
225,762



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 nine months ended September 30, 2019 and 2018 was as follows (in thousands):
 
Three months ended
 
Nine months ended
 
Statement of operations classification
 
September 30,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
 
Developed technology
$
9,522

 
$
10,593

 
$
29,259

 
$
29,455

 
Cost of revenue - product
Customer relationships
2,608

 
2,695

 
7,145

 
7,881

 
Sales and marketing
Trade names
130

 
160

 
425

 
385

 
Sales and marketing
 
$
12,260

 
$
13,448

 
$
36,829

 
$
37,721

 
 



19


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

Estimated future amortization expense for the Company's intangible assets at September 30, 2019 was as follows (in thousands):
Years ending December 31,
 
Remainder of 2019
$
12,396

2020
48,815

2021
42,493

2022
35,113

2023
27,538

Thereafter
59,407

 
$
225,762



The changes in the carrying value of the Company's goodwill in the nine months ended September 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

 

Acquisition of Edgewater

 
46,777

Balance at September 30
$
389,196

 
$
382,493

 
 
 
 
Balance at September 30
 
 
 
  Goodwill
$
392,302

 
$
385,599

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

 
$
382,493



(7) ACCRUED EXPENSES
Accrued expenses at September 30, 2019 and December 31, 2018 consisted of the following (in thousands):
 
September 30,
2019
 
December 31,
2018
Employee compensation and related costs
$
26,326

 
$
42,852

Deferred purchase consideration
1,700

 
15,000

Other
24,624

 
26,411

 
$
52,650

 
$
84,263



(8) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES

The Company recorded restructuring and related expense aggregating $2.4 million and $16.4 million in the three and nine months ended September 30, 2019, respectively, and $2.4 million and $15.2 million in the three and nine months ended September 30, 2018, respectively. Restructuring and related expense includes both restructuring expense (primarily severance and related costs), estimated future variable lease costs for vacated properties with no intent or ability of sublease, 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

20


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

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 nine months ended September 30, 2019 were as follows (in thousands):
 
 
 
 
 
Three months ended
 
Nine months ended
 
September 30,
2019
 
September 30,
2019
Severance and related costs
$
719

 
$
11,619

Variable and other facilities-related costs
1,052

 
1,370

Accelerated amortization of lease assets due to cease-use
601

 
3,459

 
$
2,372

 
$
16,448



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 nine months ended September 30, 2018 were as follows (in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
2018
 
September 30,
2018
Severance and related costs
2,481

 
14,603

Facilities
(84
)
 
559

 
$
2,397

 
$
15,162



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 $7.8 million in the nine months ended September 30, 2019, comprised of $1.8 million in the three months ended September 30, 2019 and $6.0 million in the three months ended June 30, 2019. The amount recorded in the three months ended September 30, 2019 was comprised of $0.7 million for severance and related costs for approximately 20 employees and $1.1 million for variable and other facilities-related costs. The amount recorded in the three months ended June 30, 2019 was primarily for severance and related costs for approximately 110 employees. The Company expects that nearly all of the amount accrued for severance and related costs will be paid by the end of the first half of 2020. The Company estimates that it will record nominal additional restructuring expense related to severance and related costs under the 2019 Restructuring Initiative.


21


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

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

 
$
6,543

 
$
(2,620
)
 
$
3,923

Variable and other facilities costs

 
1,214

 
(220
)
 
994

 
$

 
$
7,757

 
$
(2,840
)
 
$
4,917


Accelerated rent amortization is recognized from the date that the Company commences the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date. The Company recorded $0.6 million and $3.5 million of accelerated rent amortization in the three and nine months ended September 30, 2019, respectively. 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 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 nine months ended September 30, 2019. The Company recorded $2.5 million and $14.3 million of restructuring and related expense in the three and nine months ended September 30, 2018, respectively. Of the amount recorded in the nine months ended September 30, 2019, virtually all was for severance and related costs for approximately 40 employees. The amount recorded in the nine months ended September 30, 2018 represented severance and related costs for approximately 285 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 September 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 nine months ended September 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
September 30,
2019
Severance
$
1,910

 
$
5,076

 
$

 
$
(5,818
)
 
$
1,168

Facilities
771

 
156

 
(771
)
 
(156
)
 

 
$
2,681

 
$
5,232

 
$
(771
)
 
$
(5,974
)
 
$
1,168


 
 
 
 
 
 
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. The long-term portions of accrued restructuring totaled $0.9 million and $0.5 million at September 30, 2019 and December 31, 2018, respectively. These amounts represent future payments related to 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 entered into a syndicated, amended and restated Credit Facility (the "New Credit Facility"). The New Credit Facility provides for a $50 million term loan facility that was advanced in full on April 29, 2019 and a $100 million revolving line of credit. The New Credit Facility also includes procedures for additional financial institutions to become syndicate 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 incremental commitments under the New Credit Facility. The New Credit Facility is scheduled to mature in April 2024. At September 30, 2019, the Company had an outstanding term loan debt balance of $49.4 million, an outstanding revolving line of credit balance of $34.0 million, with a combined average interest rate of 3.76%, and $3.4 million of outstanding letters of credit at an average interest rate of 1.50%.

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 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 September 30, 2019.

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.


23


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

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.

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).


24


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

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 nine months ended September 30, 2019 and 2018 was disaggregated as follows:

26


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


Three months ended September 30, 2019
Product revenue
 
Service revenue (maintenance)
 
Service revenue (professional services)
 
Total revenue
United States
$
44,701

 
$
32,709

 
$
10,113

 
$
87,523

Europe, Middle East and Africa
7,346

 
10,899

 
2,635

 
20,880

Japan
2,318

 
2,932

 
1,652

 
6,902

Other Asia Pacific
3,199

 
4,191

 
1,567

 
8,957

Other
3,588

 
8,170

 
1,633

 
13,391

 
$
61,152

 
$
58,901

 
$
17,600

 
$
137,653



Three months ended September 30, 2018
Product revenue
 
Service revenue (maintenance)
 
Service revenue (professional services)
 
Total revenue
United States
$
49,699

 
$
34,065

 
$
9,040

 
$
92,804

Europe, Middle East and Africa
10,380

 
11,504

 
2,169

 
24,053

Japan
3,588

 
2,882

 
503

 
6,973

Other Asia Pacific
6,959

 
3,551

 
906

 
11,416

Other
6,657

 
8,154

 
2,411

 
17,222

 
$
77,283

 
$
60,156

 
$
15,029

 
$
152,468



Nine months ended September 30, 2019
Product revenue
 
Service revenue (maintenance)
 
Service revenue (professional services)
 
Total revenue
United States
$
114,525

 
$
99,281

 
$
26,919

 
$
240,725

Europe, Middle East and Africa
32,215

 
31,016

 
8,699

 
71,930

Japan
9,637

 
8,805

 
4,223

 
22,665

Other Asia Pacific
13,580

 
11,467

 
3,524

 
28,571

Other
10,734

 
22,462

 
4,915

 
38,111

 
$
180,691

 
$
173,031

 
$
48,280

 
$
402,002



Nine months ended September 30, 2018
Product revenue
 
Service revenue (maintenance)
 
Service revenue (professional services)
 
Total revenue
United States
$
109,977

 
$
98,354

 
$
25,535

 
$
233,866

Europe, Middle East and Africa
29,807

 
35,550

 
8,157

 
73,514

Japan
16,128

 
8,431

 
2,296

 
26,855

Other Asia Pacific
21,970

 
8,905

 
3,185

 
34,060

Other
14,055

 
23,049

 
5,610

 
42,714

 
$
191,937

 
$
174,289

 
$
44,783

 
$
411,009



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

27


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

 
Three months ended
 
Nine months ended
 
September 30,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
Indirect sales through channel partner program
$
21,537

 
$
26,309

 
$
69,380

 
$
42,151

Direct sales
39,615

 
50,974

 
111,311

 
149,786

 
$
61,152

 
$
77,283

 
$
180,691

 
$
191,937



The Company's product revenue from sales to enterprise customers and from sales to service provider customers for the three and nine months ended September 30, 2019 and 2018 was as follows (in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
2019
 
September 30,
2018
 
September 30,
2019
 
September 30,
2018
Sales to enterprise customers
$
17,458

 
$
23,581

 
$
47,295

 
$
37,534

Sales to service provider customers
43,694

 
53,702

 
133,396

 
154,403

 
$
61,152

 
$
77,283

 
$
180,691

 
$
191,937



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 nine months ended September 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 nine months ended September 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
(32,533
)
 
7,644

 
(21,664
)
 
1,115

Balance at September 30, 2019
$
141,777

 
$
21,187

 
$
83,423

 
$
18,687



The Company recognized approximately $80 million of revenue in the nine months ended September 30, 2019 that was recorded as deferred revenue at December 31, 2018. The Company recognized approximately $79 million of revenue in the nine months ended September 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 September 30, 2019, the Company

28


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

expects that approximately $5 million will be recognized as revenue in 2020, approximately $8 million will be recognized as revenue in 2021 and approximately $6 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 September 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 nine months ended September 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. No shares were repurchased during the three months ended September 30, 2019. At September 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 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 is 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 was fully vested, each participant in the Stock Bonus Election Program was 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"). In the third quarter of 2019, the Company adjusted the 2019 Performance PSU goals to reflect the changes to the Company's calculation of certain metrics. There was no incremental expense in connection

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