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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
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)
Delaware82-1669692
(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)
(978614-8100
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001RBBNThe 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 filerAccelerated filerNon-accelerated filer
Smaller reporting companyEmerging growth company
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     No x

As of October 26, 2020, there were 145,396,631 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, 2020
TABLE OF CONTENTS
ItemPage
PART I FINANCIAL INFORMATION
1.
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, expected impacts of the COVID-19 pandemic, 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, changes to our operating segments, if any, restructuring activities, and plans for future product offerings, 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 unknown and/or difficult to predict and that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Such risks and uncertainties include, but are not limited to, risks related to the COVID-19 pandemic on the global economy and financial markets as well as on the Company, our customers and suppliers, which may impact our sales, gross margin, customer demand and our ability to supply our products to our customers; risks that the businesses of ECI Telecom Group Ltd. ("ECI") will not be integrated successfully or that the combined companies will not realize estimated cost savings; failure to realize anticipated benefits of the merger with ECI; satisfaction of the closing conditions for the sale of the Kandy Communications Business on a timely basis or at all; failure to achieve the expected benefits from the sale of the Kandy Communications Business; 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; the impact of restructuring and cost-containment activities; litigation; 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; the potential for defects in our products; risks related to the terms of our credit agreement; higher risks in international operations and markets; increases in tariffs, trade restrictions or taxes on our products; currency fluctuations; and/or failure or circumvention of our controls and procedures. We therefore caution you against relying on any of these forward-looking statements.

Additional 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 for the year ended December 31, 2019 as updated by Part II, Item 1A. "Risk Factors" of this Quarterly Reports on Form 10-Q. 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.


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,
2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents$103,698 $44,643 
Restricted cash7,198  
Accounts receivable, net207,813 192,706 
Inventory50,974 14,800 
Other current assets33,159 27,146 
Total current assets402,842 279,295 
Property and equipment, net48,432 28,976 
Intangible assets, net432,914 213,366 
Goodwill416,892 224,896 
Deferred income taxes8,750 4,959 
Operating lease right-of-use assets61,648 36,654 
Other assets34,600 26,762 
$1,406,078 $814,908 
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of term debt$13,909 $2,500 
Revolving credit facility 8,000 
Accounts payable60,784 31,412 
Accrued expenses and other133,875 56,700 
Operating lease liabilities17,757 7,719 
Deferred revenue93,447 100,406 
Total current liabilities319,772 206,737 
Long-term debt, net of current373,026 45,995 
Operating lease liabilities, net of current51,328 37,202 
Deferred revenue, net of current21,285 20,482 
Deferred income taxes17,532 4,648 
Other long-term liabilities67,694 16,589 
Total liabilities850,637 331,653 
Commitments and contingencies (Note 19)
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; 145,226,884 shares issued and outstanding at September 30, 2020; 110,471,995 shares issued and outstanding at December 31, 2019
15 11 
Additional paid-in capital1,866,961 1,747,784 
Accumulated deficit(1,302,236)(1,267,067)
Accumulated other comprehensive (loss) income(9,299)2,527 
Total stockholders' equity555,441 483,255 
$1,406,078 $814,908 

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 endedNine months ended
 September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Revenue:
Product$128,926 $61,152 $325,687 $180,691 
Service102,192 76,501 273,906 221,311 
Total revenue231,118 137,653 599,593 402,002 
Cost of revenue:
Product70,188 31,476 176,650 101,056 
Service37,619 27,300 105,745 84,807 
Total cost of revenue107,807 58,776 282,395 185,863 
Gross profit123,311 78,877 317,198 216,139 
Operating expenses:
Research and development49,113 34,222 143,204 105,456 
Sales and marketing41,604 28,227 115,572 87,179 
General and administrative16,021 9,673 48,320 40,833 
Acquisition- and integration-related1,366 1,697 14,607 6,861 
Restructuring and related3,290 2,372 10,726 16,448 
Total operating expenses111,394 76,191 332,429 256,777 
Income (loss) from operations11,917 2,686 (15,231)(40,638)
Interest expense, net(6,854)(726)(15,649)(3,352)
Other income (expense), net407 (507)(2,844)70,128 
Income (loss) before income taxes5,470 1,453 (33,724)26,138 
Income tax benefit (provision)782 197 (1,445)(5,850)
Net income (loss)$6,252 $1,650 $(35,169)$20,288 
Earnings (loss) per share
Basic$0.04 $0.01 $(0.26)$0.19 
Diluted$0.04 $0.01 $(0.26)$0.18 
Weighted average shares used to compute earnings (loss) per share:
Basic144,948 110,080 136,837 109,523 
Diluted151,680 110,756 136,837 110,100 

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 endedNine months ended
September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Net income (loss)$6,252 $1,650 $(35,169)$20,288 
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on interest rate swap640  (12,857) 
Foreign currency translation adjustments184 270 1,031 326 
Unrealized gain on available-for sale marketable securities, net of reclassification adjustments for realized amounts   590 
Other comprehensive income (loss), net of tax824 270 (11,826)916 
Comprehensive income (loss)$7,076 $1,920 $(46,995)$21,204 

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, 2020
 Common stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive (loss) incomeTotal stockholders' equity
Balance at July 1, 2020144,856,764 $14 $1,863,374 $(1,308,488)$(10,123)$544,777 
Exercise of stock options2,926 6 6 
Vesting of restricted stock awards and units454,178 1 1 
Vesting of performance-based stock units7,886  
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(94,870)(388)(388)
Stock-based compensation expense3,969 3,969 
Other comprehensive income824 824 
Net income6,252 6,252 
Balance at September 30, 2020145,226,884 $15 $1,866,961 $(1,302,236)$(9,299)$555,441 


Nine months ended September 30, 2020
 Common stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive (loss) incomeTotal stockholders' equity
Balance at January 1, 2020110,471,995 $11 $1,747,784 $(1,267,067)$2,527 $483,255 
Exercise of stock options16,128 29 29 
Vesting of restricted stock awards and units1,971,730 1 1 
Vesting of performance-based stock units323,752  
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(373,272)(1,196)(1,196)
Shares issued as consideration in connection with the acquisition of ECI Telecom Group Ltd.32,500,000 3 108,547 108,550 
Shares issued as consideration in connection with the acquisition of Anova Data, Inc.316,551 1,630 1,630 
Stock-based compensation expense10,167 10,167 
Other comprehensive loss(11,826)(11,826)
Net loss(35,169)(35,169)
Balance at September 30, 2020145,226,884 $15 $1,866,961 $(1,302,236)$(9,299)$555,441 


7


RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Stockholders' Equity (continued)
(in thousands, except shares)
(unaudited)
Three months ended September 30, 2019
 Common stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive (loss) incomeTotal stockholders' equity
Balance at July 1, 2019110,007,237 $11 $1,740,563 $(1,118,354)$4,349 $626,569 
Exercise of stock options19,009 43 43 
Vesting of restricted stock awards and units130,580  
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(501)(2)(2)
Stock-based compensation expense2,485 2,485 
Other comprehensive income270 270 
Net income1,650 1,650 
Balance at September 30, 2019110,156,325 $11 $1,743,089 $(1,116,704)$4,619 $631,015 


Nine months ended September 30, 2019
 Common stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive (loss) incomeTotal stockholders' equity
Balance at January 1, 2019106,815,636 $11 $1,723,576 $(1,136,992)$3,703 $590,298 
Issuance of common stock in connection with employee stock purchase plan139,390 506 506 
Exercise of stock options126,015 233 233 
Vesting of restricted stock awards and units1,296,966  
Vesting of performance-based stock units9,466  
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 
Reclassification of liability to equity for bonuses converted to stock1,052 1,052 
Repurchase and retirement of common stock(975,914)(4,536)(4,536)
Stock-based compensation expense8,154 8,154 
Other comprehensive income916 916 
Net income20,288 20,288 
Balance at September 30, 2019110,156,325 $11 $1,743,089 $(1,116,704)$4,619 $631,015 

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,
2020
September 30,
2019
Cash flows from operating activities:
Net (loss) income$(35,169)$20,288 
Adjustments to reconcile net (loss) income to cash flows provided by operating activities:
Depreciation and amortization of property and equipment12,754 8,824 
Amortization of intangible assets45,352 36,829 
Amortization of debt issuance costs4,915 268 
Stock-based compensation10,167 8,154 
Deferred income taxes(2,455)4,559 
Reduction in deferred purchase consideration(69)(8,124)
Foreign currency exchange losses3,162 1,042 
Changes in operating assets and liabilities:
Accounts receivable42,489 25,598 
Inventory6,285 8,387 
Other operating assets36,416 (20,510)
Accounts payable(54,489)(20,260)
Accrued expenses and other long-term liabilities10,143 (21,535)
Deferred revenue(14,253)(20,889)
Net cash provided by operating activities65,248 22,631 
Cash flows from investing activities:
Purchases of property and equipment(18,685)(8,594)
Business acquisitions, net of cash acquired(346,852) 
Maturities of marketable securities 7,295 
Proceeds from the sale of fixed assets43,500  
Net cash used in investing activities(322,037)(1,299)
Cash flows from financing activities:
Borrowings under revolving line of credit615 109,000 
Principal payments on revolving line of credit(8,615)(130,000)
Proceeds from issuance of term debt478,500 50,000 
Principal payment of debt, related party (24,716)
Principal payments of long-term debt(131,279)(625)
Payment of deferred purchase consideration (21,876)
Principal payments of finance leases(971)(698)
Payment of debt issuance costs(14,065)(891)
Proceeds from the sale of common stock in connection with employee stock purchase plan 506 
Proceeds from the exercise of stock options29 233 
Payment of tax withholding obligations related to net share settlements of restricted stock awards(1,196)(1,082)
Repurchase of common stock (4,536)
Net cash provided by (used in) financing activities323,018 (24,685)
Effect of exchange rate changes on cash, cash equivalents and restricted cash24 56 
Net increase (decrease) in cash, cash equivalents and restricted cash66,253 (3,297)
Cash and cash equivalents, beginning of year44,643 43,694 
Cash, cash equivalents and restricted cash, end of period$110,896 $40,397 
9



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

Nine months ended
September 30,
2020
September 30,
2019
Supplemental disclosure of cash flow information:
Interest paid$10,845 $3,649 
Income taxes paid$6,652 $3,527 
Income tax refunds received$196 $291 
Supplemental disclosure of non-cash investing activities:
  Capital expenditures incurred, but not yet paid$4,111 $560 
Property and equipment acquired under finance leases$ $150 
  Acquisition purchase consideration - deferred payments$1,630 $1,700 
  Common stock issued as purchase consideration$108,550 $15,186 
Supplemental disclosure of non-cash financing activities:
Total fair value of restricted stock awards, restricted stock units and performance-based stock units $5,551 $6,765 

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 Communications Inc. ("Ribbon" or the "Company") is a leading provider of next generation software solutions to telecommunications, wireless and cable service providers and enterprises of all sizes across industry verticals. With the March 3, 2020 completion of the merger with ECI Telecom Group Ltd ("ECI"), Ribbon now also provides optical and packet networking products and software-defined solutions to service providers and critical infrastructure sectors like utilities, government and defense. With over 1,000 customers around the globe, including some of the largest telecommunications service providers, enterprises and utilities in the world, Ribbon enables its customers to evolve and modernize their communications networks and packet optical networking infrastructures through software and hardware. By securing and enabling reliable and scalable Internet Protocol ("IP") and packet optical networks and applications, Ribbon helps its customers adopt the next generation of software-, cloud- and edge-based 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 - and support the increasing demand on network infrastructure created by ongoing IP traffic growth and the projected demand related to increased traffic from 5G applications and devices. Ribbon sells its products and solutions through both direct sales and indirect channels, leveraging the reach and local presence 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 March 3, 2020 (the "ECI Merger Date"), the Company merged with ECI (the "ECI Merger"). The financial results of ECI are included in the Company's condensed consolidated financial statements for the periods subsequent to the ECI Merger Date.

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 periods subsequent to the Anova 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 for the year ended December 31, 2019 (the "Annual Report"), which was filed with the SEC on February 28, 2020.

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, 2020, with the exception of policies on transfers of financial assets, warranty costs, and research and development grants. Additionally, effective in 2020, the Company changed its annual goodwill impairment testing date from November 30 to October 1. The Company does not expect this change to have a material impact on its condensed consolidated financial statements.

Transfers of Financial Assets. The Company's ECI subsidiary maintains customer receivables factoring agreements with a number of financial institutions. Under the terms of these agreements, the Company may transfer receivables to the financial
11


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
institutions, on a non-recourse basis, provided that the financial institutions approve the receivables in advance. The Company maintains credit insurance policies from major insurance providers or obtains letters of credit from the customers for a majority of its factored trade receivables. The Company accounts for the factoring of its financial assets as a sale of the assets and records the factoring fees, when incurred, as a component of interest expense in the condensed consolidated statements of operations and the proceeds from the sales of receivables are included in cash from operating activities in the condensed consolidated statements of cash flows. During the three months ended September 30, 2020, the Company received $35.3 million of cash from the sale of certain accounts receivable and recorded $0.3 million of interest expense in connection with these transactions. During the nine months ended September 30, 2020, the Company received $81.1 million of cash from the sale of certain accounts receivable and recorded $0.7 million of interest expense in connection with these transactions.

Warranty. The Company records warranty liabilities for estimated costs of fulfilling its obligations under standard limited hardware and software warranties at the time of sale. The liability for standard warranties is included in Accrued expenses and other and Other non-current liabilities in the condensed consolidated balance sheet at September 30, 2020. The specific warranty terms and conditions vary depending upon the country in which the Company does business, but generally includes material costs, technical support, labor and associated overhead over a period ranging from one to three years. The Company's liability for product warranties was $15.2 million, of which $6.7 million was current and included in Accrued expenses and other and $8.5 million was long-term and included in Other long-term liabilities in the Company's condensed consolidated balance sheet at September 30, 2020. The Company did not have a warranty accrual at December 31, 2019.

Research and Development Grants. The Company records grants received from the Office of the Innovation Authority of the Israeli Ministry of Economics (the "IIA") as a reduction to research and development expense. Royalties payable to the IIA are recognized pursuant to sales of related products and are classified as Cost of revenue.

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, not affecting previously reported net loss, have been made to the previously issued financial statements to conform to the current period presentation.

Restricted Cash

The Company classifies as restricted cash all cash pledged as collateral to secure long-term obligations and all cash whose use is otherwise limited by contractual provisions. At September 30, 2020, the Company had $7.2 million of restricted cash, comprised of $4.3 million restricted in connection with a tax payment on certain fixed assets formerly held by ECI that were sold in connection with the ECI Merger, and $2.9 million restricted short-term bank deposits pledged to secure certain performance and financial bonds as security for the Company's obligations under tenders, contracts and to one of its main subcontractors.
12


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

Fair Value of Financial Instruments

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

Operating Segments

The Company currently operates in a single segment, as the chief operating decision maker makes decisions and assesses performance at the company level. The Company's chief operating decision maker is its President and Chief Executive Officer, who began his employment with the Company effective March 1, 2020. With the acquisition of ECI, the Company's chief operating decision maker is currently assessing the appropriate separate discrete financial information he will utilize for making decisions and assessing performance.

Fair Value Hierarchy

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

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

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

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

Recent Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") has issued the following accounting pronouncements, all of which became effective for the Company in 2020 and none of which had a material impact on the Company's condensed consolidated financial statements:

In March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"), which provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria that reference LIBOR or another reference rate expected to be discontinued.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments ("ASU 2020-03"), which makes narrow-scope amendments related to topics regarding fair value option disclosures, applicability of the portfolio exception in Accounting Standards Codification ("ASC") 820 to nonfinancial items, disclosures for depository and lending institutions, cross reference to guidance in ASC 470-50 on line of credit or revolving debt arrangements, cross reference to net asset value practical expedient in ASC 820-10, interaction between ASC 842 and ASC 326 and between ASC 326 and ASC 860-20.

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
13


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

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.

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.

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 connection with the adoption of ASU 2016-13.

The FASB has issued the following accounting pronouncement which becomes effective for the Company in 2021, which the Company does not believe will have a material impact on its condensed consolidated financial statements upon adoption:

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which modifies ASC 740 to simplify the accounting for income taxes. ASU 2019-12 addresses the accounting for hybrid tax regimes, tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of legal entities not subject to tax, intraperiod tax allocation exception to incremental approach, ownership changes in investments - changes from a subsidiary to an equity method investment, ownership changes in investments - changes from an equity method investment to a subsidiary, interim period accounting for enacted changes in tax law and year-to-date loss limitation in interim period tax accounting.


(2) BUSINESS ACQUISITIONS

ECI

On the ECI Merger Date, Ribbon completed its previously announced merger transaction with ECI in accordance with the terms of the Agreement and Plan of Merger, dated as of November 14, 2019, by and among Ribbon, ECI, an indirect wholly-owned subsidiary of Ribbon ("Merger Sub"), Ribbon Communications Israel Ltd. and ECI Holding (Hungary) kft, pursuant to which Merger Sub merged with and into ECI, with ECI surviving such merger as a wholly-owned subsidiary of Ribbon. Prior to the ECI Merger Date, ECI was a privately-held global provider of end-to-end packet-optical transport and software-defined networking ("SDN") and network function virtualization ("NFV") solutions for service providers, enterprises and data center operators. Ribbon believes the ECI Merger positions the Company for growth and enhances its competitive strengths by expanding its product portfolio beyond solutions primarily supporting voice applications to include data applications and optical networking.

As consideration for the ECI Merger, Ribbon issued the ECI shareholders and certain others 32.5 million shares of Ribbon common stock with a fair value of $108.6 million (the "Stock Consideration") and paid $322.5 million of cash, comprised of $183.3 million to repay ECI's outstanding debt, including both principal and interest, and $139.2 million paid to ECI's selling shareholders (the "Cash Consideration"). In addition, ECI shareholders received $33.4 million from the sale of
14


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
certain of ECI's real estate assets. Cash Consideration was financed through cash on hand and committed debt financing consisting of a new $400 million term loan facility and new $100 million revolving credit facility, which was undrawn at the ECI Merger Date.

The ECI Merger has been accounted for as a business combination and the financial results of ECI have been included in the Company's condensed consolidated financial statements for the periods subsequent to the ECI Merger. The Company's financial results for the three months ended September 30, 2020 include $77.6 million of revenue and $11.2 million of net loss attributable to ECI. The Company's financial results for the nine months ended September 30, 2020 include $171.1 million of revenue and $31.9 million of net loss attributable to ECI for the periods subsequent to the ECI Merger.

As of September 30, 2020, the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities was preliminary. The Company is continuing the process of investigating the facts and circumstances existing as of the ECI Merger Date, including certain assets acquired and liabilities assumed, as well as estimated future cash flows, in order to finalize its valuation. During the second quarter of 2020, the Company recorded changes to the initial preliminary purchase price allocation. The primary adjustments recorded in the period since the ECI Merger Date included reductions of $10.4 million and $7.0 million to current and noncurrent inventory, respectively, and increases to identifiable intangible assets aggregating $11.0 million, comprised of $3.0 million to in-process research and development, $5.0 million to developed technology, $2.0 million to customer relationships and $1.0 million to trade names. These adjustments, as well as other immaterial adjustments to other balance sheet accounts, resulted in a net increase to goodwill of $2.5 million. The preliminary allocation of purchase consideration to the fair value of assets acquired and liabilities assumed includes a noncurrent asset of $5.7 million that represents an indemnification receivable from ECI's selling shareholders for certain liabilities for uncertain tax positions in accordance with the Agreement and Plan of Merger. The Company expects to finalize the valuation of the assets acquired and liabilities assumed by the first quarter of 2021.

A summary of the preliminary allocation of the purchase consideration for ECI is as follows (in thousands):
Fair value of consideration transferred:
  Cash consideration:
    Repayment of ECI outstanding debt obligations$183,266 
    Cash paid to selling shareholders139,244 
    Payment to selling shareholders from sale of ECI real estate assets33,400 
    Less cash and restricted cash acquired(9,058)
      Net cash consideration346,852 
  Fair value of Ribbon stock issued108,550 
        Fair value of total consideration$455,402 
Fair value of assets acquired and liabilities assumed:
  Current assets, net of cash and restricted cash acquired$120,203 
  Property and equipment54,913 
  Intangible assets:
    In-process research and development34,000 
    Developed technology111,900 
    Customer relationships116,000 
    Trade names3,000 
  Goodwill191,996 
  Other noncurrent assets50,716 
  Deferred revenue(4,369)
  Other current liabilities(146,618)
  Deferred revenue, net of current(3,726)
  Deferred tax liability(13,308)
  Other long-term liabilities(59,305)
$455,402 


15


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The Company is still evaluating the fair value of acquired assets and assumed liabilities, and such values are subject to change. 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 in-process research and development, developed technology, customer relationships and trade name intangible assets. The Company is still evaluating the forecast, and the value of these intangible assets could change materially as the Company finalizes the forecast and other inputs used to determine their fair values. 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 arising from the ECI Merger in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 12.38 years (see Note 6). Goodwill results from assets that are not separately identifiable as part of the transaction and is not deductible for tax purposes.

Pro Forma Results

The following unaudited pro forma information presents the condensed combined results of operations of Ribbon and ECI for the three and nine months ended September 30, 2020 and 2019 as if the ECI Merger had been completed on January 1, 2019, with adjustments to give effect to pro forma events that are directly attributable to the ECI Merger. These pro forma adjustments include an increase in research and development expense related to the conformance of ECI's cost capitalization policy to Ribbon's, additional amortization expense for the acquired identifiable intangible assets, a decrease in historical ECI interest expense reflecting the extinguishment of certain of ECI's debt as a result of the ECI Merger, and an increase in interest expense reflecting the new debt entered into by the Company in connection with the ECI Merger. Pro forma adjustments also include the elimination of acquisition- and integration-related costs directly attributable to the acquisition from the three and nine months ended September 30, 2020 and inclusion of such costs in the three and nine months ended September 30, 2019, respectively.

The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of the operations of Ribbon and ECI. Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the ECI Merger occurred at January 1, 2019, nor are they intended to represent or be indicative of future results of operations (in thousands, except per share amounts):
 Three months endedNine months ended
 September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Revenue$231,118 $232,926 $624,800 $673,774 
Net income (loss)$7,036 $(4,795)$(41,345)$(31,023)
Diluted earnings (loss) per share$0.05 $(0.03)$(0.29)$(0.22)


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"). 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 330,000 shares with a fair value of $1.7 million (the "Anova Deferred Consideration"), of which 316,551 shares were issued after post-closing adjustments on March 4, 2020. The Anova Deferred Consideration was included as a component of Accrued expenses and other in the Company's condensed consolidated balance sheet at December 31, 2019.

The Anova Acquisition was 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 periods subsequent to the Anova Acquisition Date. The results for the three and nine months ended September 30, 2019 were not significant to the Company's condensed
16


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
consolidated financial statements and accordingly, the Company has not provided pro forma financial information. The Company finalized the valuation of the assets acquired and liabilities assumed in the fourth quarter of 2019. The purchase consideration aggregating $16.9 million was allocated to $11.2 million of identifiable intangible assets with a weighted average life of 6.25 years (see Note 6) and working capital items aggregating $0.1 million of net assets acquired. The remaining unallocated amount of $5.5 million was recorded as goodwill. The goodwill is deductible for tax purposes.

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. 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 acquisition-related costs in the three months ended September 30, 2020 primarily related to the proposed sale of the Kandy Communications Business. The acquisition-related costs in the nine months ended September 30, 2020 primarily related to the ECI Merger. The acquisition-related costs in the three and nine months ended September 30, 2019 primarily related to the Anova Acquisition.

The Company's acquisition- and integration-related expenses for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):
Three months endedNine months ended
September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Professional and services fees (acquisition-related)$1,003 $743 $14,017 $2,569 
Integration-related expenses363 954 590 4,292 
$1,366 $1,697 $14,607 $6,861 


(3) PROPOSED SALE OF KANDY COMMUNICATIONS BUSINESS

On August 5, 2020, the Company announced that it had entered into a definitive agreement (the "Kandy Agreement") with American Virtual Cloud Technologies, Inc. ("AVCTechnologies") to sell the Company's cloud-based enterprise services business (the "Kandy Communications Business"). Under the Kandy Agreement, AVCTechnologies will purchase the assets and assume certain liabilities associated with the Kandy Communications Business, as well as all of the outstanding interests in Kandy Communications LLC, a subsidiary of the Company. AVCTechnologies has agreed to pay the Company 13 million shares of AVCTechnologies common stock, subject to certain adjustments, as consideration for the transaction. The transaction is subject to receipt of the approval of AVCTechnologies' shareholders for the issuance of the shares to the Company, AVCTechnologies' completion of necessary financing, approval of the lenders under the Company's 2020 Credit Facility and other customary closing conditions.


(4) 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.

17


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The calculations of shares used to compute earnings (loss) per share were as follows (in thousands):
 Three months endedNine months ended
 September 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Weighted average shares outstanding—basic144,948 110,080 136,837 109,523 
Potential dilutive common shares6,732 676  577 
Weighted average shares outstanding—diluted151,680 110,756 136,837 110,100 


Options to purchase the Company's common stock aggregating 0.2 million shares have not been included in the computation of diluted earnings per share for the three months ended September 30, 2020 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 13.5 million shares have not been included in the computation of diluted loss per share for the nine months ended September 30, 2020 because their effect would have been antidilutive. Options to purchase the Company's common stock aggregating 0.3 million shares have not been included in the computation of diluted earnings per share for both the three and nine months ended September 30, 2019 because their effect would have been antidilutive.


(5) INVENTORY

Inventory at September 30, 2020 and December 31, 2019 consisted of the following (in thousands):
 September 30,
2020
December 31,
2019
On-hand final assemblies and finished goods inventories$53,433 $13,283 
Deferred cost of goods sold2,855 2,441 
56,288 15,724 
Less noncurrent portion (included in other assets)(5,314)(924)
Current portion$50,974 $14,800 


(6) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at September 30, 2020 and December 31, 2019 consisted of the following (in thousands):
September 30, 2020Weighted average amortization period
(years)
CostAccumulated
amortization
Net
carrying value
In-process research and development*$39,600 $ $39,600 
Developed technology7.95300,780 132,307 168,473 
Customer relationships11.86268,140 46,231 221,909 
Trade names3.885,000 2,068 2,932 
Internal use software3.00730 730  
9.10$614,250 $181,336 $432,914 

18


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
December 31, 2019Weighted average amortization period
(years)
CostAccumulated
amortization
Net
carrying value
In-process research and development*$5,600 $ $