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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 March 31, 2021
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.)

6500 Chase Oaks Boulevard, Suite 100, Plano, Texas, 75023
(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 April 23, 2021, there were 147,367,469 shares of the registrant's common stock, $0.0001 par value per share, outstanding.



RIBBON COMMUNICATIONS INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2021
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 ongoing COVID-19 pandemic, beliefs about our business strategy, expected benefits from our acquisition of ECI Telecom Group Ltd. ("ECI) and the sale of our Kandy Communications business, plans and objectives of management for future operations, plans for future cost reductions, 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 ongoing 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; failure to realize anticipated benefits of our acquisition of ECI; failure to achieve the expected benefits from the sale of our Kandy Communications business; supply chain disruptions resulting from component availability and/or geopolitical instabilities and disputes; unpredictable fluctuations in quarterly revenue and operating results; risks related to cybersecurity and data intrusion; failure to compete successfully against telecommunications equipment and networking companies; failure to grow our customer base or generate recurring business from our existing customers; credit risks; the timing of customer purchasing decisions and our recognition of revenues; economic conditions; 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, 2020. 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)
March 31,
2021
December 31,
2020
Assets
Current assets:
Cash and cash equivalents$106,228 $128,428 
Restricted cash2,659 7,269 
Accounts receivable, net209,163 237,738 
Inventory44,854 45,750 
Other current assets34,018 28,461 
Total current assets396,922 447,646 
Property and equipment, net49,237 48,888 
Intangible assets, net401,533 417,356 
Goodwill416,892 416,892 
Investments92,742 115,183 
Deferred income taxes10,832 10,651 
Operating lease right-of-use assets62,579 69,757 
Other assets22,047 20,892 
$1,452,784 $1,547,265 
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of term debt$20,058 $15,531 
Accounts payable58,549 63,387 
Accrued expenses and other98,185 134,865 
Operating lease liabilities17,627 17,023 
Deferred revenue102,103 96,824 
Total current liabilities296,522 327,630 
Long-term debt, net of current363,888 369,035 
Operating lease liabilities, net of current68,100 72,614 
Deferred revenue, net of current23,054 26,010 
Deferred income taxes17,303 16,842 
Other long-term liabilities41,184 48,281 
Total liabilities810,051 860,412 
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; 147,358,590 shares issued and outstanding at March 31, 2021; 145,425,248 shares issued and outstanding at December 31, 2020
15 15 
Additional paid-in capital1,864,107 1,870,256 
Accumulated deficit(1,223,163)(1,178,476)
Accumulated other comprehensive income (loss)1,774 (4,942)
Total stockholders' equity642,733 686,853 
$1,452,784 $1,547,265 

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
 March 31,
2021
March 31,
2020
Revenue:
Product$97,889 $75,899 
Service94,883 82,083 
Total revenue192,772 157,982 
Cost of revenue:
Product44,445 35,979 
Service37,780 31,479 
Total cost of revenue82,225 67,458 
Gross profit110,547 90,524 
Operating expenses:
Research and development47,410 42,295 
Sales and marketing37,218 30,971 
General and administrative15,553 17,205 
Amortization of acquired intangible assets15,823 14,334 
Acquisition-, disposal- and integration-related1,197 12,384 
Restructuring and related5,950 2,075 
Total operating expenses123,151 119,264 
Loss from operations(12,604)(28,740)
Interest expense, net(5,819)(3,395)
Other expense, net(25,448)(844)
Loss before income taxes(43,871)(32,979)
Income tax provision(816)(191)
Net loss$(44,687)$(33,170)
Loss per share:
Basic$(0.31)$(0.27)
Diluted$(0.31)$(0.27)
Weighted average shares used to compute loss per share:
Basic145,936 120,992 
Diluted145,936 120,992 

See notes to the unaudited condensed consolidated financial statements.

5


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

Three months ended
March 31,
2021
March 31,
2020
Net loss$(44,687)$(33,170)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on interest rate swap6,669 (9,527)
Foreign currency translation adjustments47 777 
Other comprehensive income (loss), net of tax6,716 (8,750)
Comprehensive loss, net of tax$(37,971)$(41,920)

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 March 31, 2021
 Common stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive income (loss)Total stockholders' equity
Balance at January 1, 2021145,425,248 $15 $1,870,256 $(1,178,476)$(4,942)$686,853 
Exercise of stock options13,389 24 24 
Vesting of restricted stock awards and units1,662,628 — 
Vesting of performance-based stock units1,525,681 — 
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(1,268,356)(11,233)(11,233)
Stock-based compensation expense5,060 5,060 
Other comprehensive loss6,716 6,716 
Net loss(44,687)(44,687)
Balance at March 31, 2021147,358,590 $15 $1,864,107 $(1,223,163)$1,774 $642,733 


7


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


Three months ended March 31, 2020
 Common stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive income (loss)Total stockholders' equity
Balance at January 1, 2020110,471,995 $11 $1,747,784 $(1,267,067)$2,527 $483,255 
Exercise of stock options3,014 5 5 
Vesting of restricted stock awards and units1,016,982 — 
Vesting of performance-based stock units315,866 — 
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(273,104)(792)(792)
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 expense2,976 2,976 
Other comprehensive loss(8,750)(8,750)
Net loss(33,170)(33,170)
Balance at March 31, 2020144,351,304 $14 $1,860,150 $(1,300,237)$(6,223)$553,704 

See notes to the unaudited condensed consolidated financial statements.

8



RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended
March 31,
2021
March 31,
2020
Cash flows from operating activities:
Net loss$(44,687)$(33,170)
Adjustments to reconcile net loss to cash flows (used in) provided by operating activities:
Depreciation and amortization of property and equipment4,226 3,474 
Amortization of intangible assets15,823 14,334 
Amortization of debt issuance costs3,141 1,854 
Stock-based compensation5,060 2,976 
Deferred income taxes293 (99)
Decrease in fair value of investments22,441  
Reduction in deferred purchase consideration (69)
Foreign currency exchange losses1,716 854 
Changes in operating assets and liabilities:
Accounts receivable28,083 46,156 
Inventory(330)4,468 
Other operating assets979 (478)
Accounts payable(3,800)(27,029)
Accrued expenses and other long-term liabilities(41,480)22,310 
Deferred revenue2,323 4,351 
Net cash (used in) provided by operating activities(6,212)39,932 
Cash flows from investing activities:
Purchases of property and equipment(5,357)(6,017)
Business acquisitions, net of cash acquired (346,852)
Proceeds from the sale of fixed assets 43,500 
Net cash used in investing activities(5,357)(309,369)
Cash flows from financing activities:
Principal payments on revolving line of credit (8,000)
Proceeds from issuance of term debt74,625 403,500 
Principal payments of term debt(77,132)(48,750)
Principal payments of finance leases(272)(338)
Payment of debt issuance costs(789)(10,573)
Proceeds from the exercise of stock options24 5 
Payment of tax withholding obligations related to net share settlements of restricted stock awards(11,233)(792)
Net cash (used in) provided by financing activities(14,777)335,052 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(464)(190)
Net (decrease) increase in cash, cash equivalents and restricted cash(26,810)65,425 
Cash and cash equivalents, beginning of year135,697 44,643 
Cash, cash equivalents and restricted cash, end of period$108,887 $110,068 
Supplemental disclosure of cash flow information:
Interest paid$4,317 $688 
Income taxes paid$7,656 $1,259 
Income tax refunds received$766 $ 
Supplemental disclosure of non-cash investing activities:
  Capital expenditures incurred, but not yet paid$3,059 $6,300 
  Acquisition purchase consideration - assumed equity awards$ $110,180 
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$28,182 $3,182 

See notes to the unaudited condensed consolidated financial statements.
9


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 global provider of communications technology to service providers and enterprises. The Company provides a broad range of software and high-performance hardware products, solutions and services that enable the secure delivery of data and voice communications for residential consumers and for small, medium, and large enterprises and industry verticals such as finance, education, government, utilities and transportation. Ribbon's mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance and elasticity. The Company is headquartered in Plano, Texas, and has a global presence with research and development, or sales and support locations in over thirty-five countries around the world.

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 December 1, 2020 (the "Kandy Sale Date"), American Virtual Cloud Technologies, Inc. ("AVCT") completed the purchase of the Company's cloud-based enterprise service business (the "Kandy Communications Business") and accordingly, the revenue and expenses of the Kandy Communications Business are excluded from the Company's condensed consolidated financial statements for the three months ended March 31, 2021.

On March 3, 2020 (the "ECI Acquisition Date"), a subsidiary of the Company merged with ECI Telecom Group Ltd ("ECI") (the "ECI Acquisition"). The financial results of ECI are included in the Company's condensed consolidated financial statements for the period subsequent to the ECI 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, 2020 (the "Annual Report"), which was filed with the SEC on February 26, 2021.

Operating Segments

The Company's chief operating decision maker (the "CODM") is its President and Chief Executive Officer. Effective in the fourth quarter of 2020 and in connection with the ECI Acquisition, the CODM began to assess the Company's performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge segment ("Cloud and Edge") and the IP Optical Networks segment ("IP Optical Networks"). Financial information for the IP Optical Networks segment included in the Company's financial results for the three months ended March 31, 2020 is for the period subsequent to the ECI Acquisition Date through March 31, 2020.

Reclassifications

In the fourth quarter of 2020, the Company reclassified amounts recorded for amortization of acquired intangible assets in prior presentations from Cost of revenue - product and Sales and marketing to a separate line included in operating expenses in the condensed consolidated statements of operations, as management believes this presentation enhances the comparability of the Company's financial statements with industry peers. These reclassifications also did not impact the condensed consolidated balance sheets or statements of cash flows for any historical periods. The Company did not reclassify depreciation of property and equipment related to production activities from cost of revenue to other accounts.

10


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
These reclassifications for the three months ended March 31, 2020 were as follows (in thousands):

Three months ended March 31, 2020
Prior presentationAmounts reclassifiedRevised presentation
Product revenue$75,899 $ $75,899 
Service revenue82,083  82,083 
  Total revenue157,982  157,982 
Cost of revenue - product44,933 (8,954)35,979 
Cost of revenue - service31,479  31,479 
  Total cost of revenue76,412 (8,954)67,458 
    Total gross profit81,570 8,954 90,524 
Research and development42,295  42,295 
Sales and marketing36,351 (5,380)30,971 
General and administrative17,205  17,205 
Amortization of acquired intangible assets 14,334 14,334 
Acquisition-, disposal- and integration-related12,384  12,384 
Restructuring and related2,075  2,075 
  Total operating expenses110,310 8,954 119,264 
Operating loss$(28,740)$ $(28,740)


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

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 three months ended March 31, 2021.

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.

11


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
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 March 31, 2021, the Company had $2.7 million of restricted cash, representing 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.

At December 31, 2020, the Company had $7.3 million of restricted cash, comprised of $4.6 million restricted in connection with a tax payment on certain fixed assets formerly held by ECI that were sold in connection with the ECI Acquisition, and $2.7 million of 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.

Transfers of Financial Assets

The Company maintains customer receivables factoring agreements with a number of financial institutions primarily for IP Optical Networks sales outside of the United States. Under the terms of these agreements, the Company may transfer receivables to the financial 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 March 31, 2021, the Company received $31.1 million of cash from the sale of certain accounts receivable and recorded $0.2 million of interest expense in connection with these transactions. During the three months ended March 31, 2020, the Company received $15.1 million of cash from the sale of certain accounts receivable and recorded $0.1 million of interest expense in connection with these transactions.

Fair Value of Financial Instruments and Fair Value Hierarchy

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.

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.

12


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

The Financial Accounting Standards Board ("FASB") issued the following accounting pronouncement which became effective for the Company in 2021, and which did not have a material impact on its condensed consolidated financial statements:

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.

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

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope ("ASU 2021-01"), which refines the scope of Accounting Standards Codification 848, Reference Rate Reform ("ASC 848") and clarifies some of its guidance as part of the FASB's monitoring of global reference rate reform activities. ASU 2021-01 permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets (the "discounting transition"). ASU 2021-01 is effective for the Company prospectively in any period through December 31, 2022 that a modification is made to the terms of the derivatives affected by the discounting transition.


(2) ACQUISITION OF ECI

On the ECI Acquisition 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 Acquisition 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.

As consideration for the ECI Acquisition, 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 (the "Cash Consideration"), 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. In addition, ECI shareholders received $33.4 million from the sale of 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 Acquisition Date.

The ECI Acquisition 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 Acquisition. The Company's financial results for the three months ended March 31, 2020 include $30.0 million of revenue and $3.3 million of net loss attributable to ECI.

The Company finalized the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities in the fourth quarter of 2020. A summary of the allocation of the purchase consideration for ECI is as follows (in thousands):
13


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
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 assets37,528 
  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(46,117)
$455,402 

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 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 Acquisition 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 months ended March 31, 2020 as if the ECI Acquisition had been completed on January 1, 2019, with adjustments to give effect to pro forma events that are directly attributable to the ECI Acquisition. 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 Acquisition, and an increase in interest expense reflecting the new debt entered into by the Company in connection with the ECI Acquisition. Pro forma adjustments also include the elimination of acquisition-, disposal- and integration-related expenses directly attributable to the acquisition from the three months ended March 31, 2020 and inclusion of such costs in the same prior year period.

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
14


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
would have been achieved had the ECI Acquisition 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):
Revenue$183,189 
Net loss$(39,129)
Loss per share$(0.25)


Acquisition-, Disposal- and Integration-Related Expenses

Acquisition-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. Disposal-related expenses are professional and services fees related to disposals of subsidiaries or portions of the business. 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 the previously separate companies' systems and processes.

The disposal-related expenses in the three months ended March 31, 2021 relate to the Kandy Sale (as defined below). The acquisition-related expenses in the three months ended March 31, 2020 primarily relate to the ECI Acquisition.

The Company's acquisition-, disposal- and integration-related expenses for the three months ended March 31, 2021 and 2020 were as follows (in thousands):
Three months ended
March 31,
2021
March 31,
2020
Professional and services fees (acquisition-related)$ $12,374 
Professional and services fees (disposal-related)241  
Integration-related expenses956 10 
$1,197 $12,384 


(3) SALE OF KANDY COMMUNICATIONS BUSINESS

On August 5, 2020, the Company announced that it had entered into a definitive agreement (as amended, the "Kandy Purchase Agreement") with AVCT to sell the Kandy Communications Business. Under the Kandy Purchase Agreement, AVCT agreed to 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 (the "Kandy Sale").

On December 1, 2020, the Company completed the Kandy Sale. The assets acquired and liabilities assumed by AVCT in connection with the Kandy Sale were primarily comprised of accounts receivable, property and equipment, trade accounts payable and employee-related accruals. As sale consideration, AVCT paid Ribbon $45.0 million, subject to certain adjustments, in the form of units of AVCT's securities (the "AVCT Units"), with each AVCT Unit consisting of: $1,000 in principal amount of AVCT’s Series A-1 convertible debentures (the “Debentures”); and (ii) one warrant to purchase 100 shares of AVCT common stock, $0.0001 par value (the “Warrants”), as consideration for the Kandy Sale. The Company received 43,778 AVCT Units as sale consideration on the Kandy Sale Date.

The Debentures bear interest at a rate of 10% per annum, which will be added to the principal amount of the Debentures, except upon maturity, in which case accrued and unpaid interest is payable in cash. The entire principal of each Debenture, together with accrued and unpaid interest thereon, is due and payable on the earlier of the May 1, 2023 maturity date or the occurrence of a Change in Control as defined in the Kandy Purchase Agreement. Each Debenture is convertible, in whole or in part, at any time at the Company's option into that number of shares of AVCT common stock, calculated by dividing the principal amount being converted, together with all accrued and unpaid interest thereon, by the applicable conversion price, initially $3.45. The Debentures are subject to mandatory redemption if the AVCT stock price is at or above $6.00 per share for 40 trading days in any 60 consecutive trading day period, subject to the satisfaction of certain other conditions. The conversion
15


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
price is subject to customary adjustments including, but not limited to, stock dividends, stock splits and reclassifications. At the Company's option, up to $5.0 million of the Debentures may be redeemed by AVCT at par in the event AVCT raises at least $50.0 million in its offering of AVCT Units. As of February 19, 2021, the stock price had traded above $6.00 for 40 days within a 60 consecutive trading day period, and accordingly, the Debentures will be converted to shares of AVCT common stock upon the completion of customary regulatory filings by AVCT.

The Warrants are independent of the Debentures and entitle the Company to purchase 4,377,800 shares of AVCT common stock at an exercise price of $0.01 per share. The Warrants expire on December 1, 2025, and were immediately exercisable on the Kandy Sale Date.

The Company had not redeemed any of the Debentures or exercised any of the Warrants as of March 31, 2021. The Company is also subject to a lock-up provision which limits the Company's ability to sell any shares of AVCT common stock underlying the Debentures and the Warrants prior to June 1, 2021, except in certain transactions.

The Company determined that the AVCT Units had a fair value of $84.9 million at the Kandy Sale Date, comprised of the Debentures with a fair value of $66.3 million and the Warrants with a fair value of $18.6 million. The value of the net assets sold to AVCT totaled $1.3 million, resulting in a gain on the sale of $83.6 million.

The Company calculated the fair value of the Debentures using a Lattice-based valuation approach, which utilizes a binomial tree to model the different paths the price of AVCT's common stock might take over the Debentures' life by using assumptions regarding the stock price volatility and risk-free interest rate. These results are then used to calculate the fair value of the Debentures at each measurement date. The Company uses the Black-Scholes valuation model for estimating the fair value of the Warrants at each measurement date. The fair value of the Warrants is affected by AVCT's stock price as well as valuation assumptions, including the volatility of AVCT's stock price, expected term of the option, risk-free interest rate and expected dividends. Both the Lattice and Black-Scholes valuation models are based on available market data, giving consideration to all of the rights and obligations of each instrument and precluding the use of "blockage" discounts or premiums in determining the fair value of a large block of financial instruments.

The Company is calculating the fair value of the Debentures and Warrants at each quarter-end and recording any adjustments to the fair values in Other expense, net. At March 31, 2021 and December 31, 2020, the aggregate fair value of the Debentures and Warrants was $92.7 million and $115.2 million, respectively. The Company recorded the loss of $23.9 million arising from the decrease in the fair value of the Debentures and Warrants from January 1, 2021 to March 31, 2021 in Other expense, net, in its condensed consolidated statement of operations for the three months ended March 31, 2021. The loss was partially offset by $1.5 million of interest which was added to the principal of the Debentures. The interest is included in Interest (expense) income, net, in the condensed consolidated statement of operations for the three months ended March 31, 2021. The fair values of the Debentures and Warrants are reported as Investments in the Company's condensed consolidated balance sheets at March 31, 2021 and December 31, 2020 and are classified as Level 2 fair value measurements within the fair value hierarchy (see Note 1).


(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.

The calculations of shares used to compute earnings (loss) per share were as follows (in thousands):
16


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
 Three months ended
 March 31,
2021
March 31,
2020
Weighted average shares outstanding - basic145,936 120,992 
Potential dilutive common shares  
Weighted average shares outstanding - diluted145,936 120,992 


Options to purchase the Company's common stock and unvested shares of restricted and performance-based stock and stock units aggregating 12.8 million shares and 11.7 million shares have not been included in the computation of diluted loss per share for the three months ended March 31, 2021 and 2020, respectively, because their effect would have been antidilutive.

(5) INVENTORY

Inventory at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):
 March 31,
2021
December 31,
2020
On-hand final assemblies and finished goods inventories$48,529 $46,921 
Deferred cost of goods sold1,609 1,165 
50,138 48,086 
Less noncurrent portion (included in other assets)(5,284)(2,336)
Current portion$44,854 $45,750 


(6) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):
March 31, 2021Weighted average amortization period
(years)
CostAccumulated
amortization
Net
carrying value
In-process research and development*$34,000 $ $34,000 
Developed technology7.93306,380 153,111 153,269 
Customer relationships11.86268,140 56,049 212,091 
Trade names3.885,000 2,827 2,173 
Internal use software3.00730 730  
9.17$614,250 $212,717 $401,533 

December 31, 2020Weighted average amortization period
(years)
CostAccumulated
amortization
Net
carrying value
In-process research and development*$34,000 $ $34,000 
Developed technology7.93306,380 143,050 163,330 
Customer relationships11.86268,140 50,627 217,513 
Trade names3.885,000 2,487 2,513 
Internal use software3.00730 730  
9.17$614,250 $196,894 $417,356 

* 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.
17


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

Estimated future amortization expense for the Company's intangible assets at March 31, 2021 was as follows (in thousands):
Years ending December 31,
Remainder of 2021$50,803 
202260,104 
202352,256 
202444,048 
202537,027 
202633,200 
Thereafter124,095 
$401,533 


There were no changes to the carrying value of the Company's goodwill in the three months ended March 31, 2021. The changes in the carrying value of the Company's goodwill in the three months ended March 31, 2020 were as follows (in thousands):
Cloud and EdgeIP Optical NetworksTotal
Balance at January 1, 2020*$224,896 $ $224,896 
Acquisition of ECI 189,493 189,493 
Balance at March 31, 2020$224,896 $189,493 $414,389 

(1) Balance is presented net of accumulated impairment losses of $167.4 million for the Cloud and Edge segment.

The components of goodwill at March 31, 2021 and 2020 were as follows (in thousands):
Cloud and EdgeIP Optical NetworksTotal
Balance at March 31, 2021
  Goodwill$392,302 $191,996 $584,298 
  Accumulated impairment losses(167,406) (167,406)
$224,896 $191,996 $416,892 
Balance at March 31, 2020
  Goodwill$392,302 $189,493 $581,795 
  Accumulated impairment losses(167,406) (167,406)
$224,896 $189,493 $414,389 


(7) ACCRUED EXPENSES AND OTHER
Accrued expenses at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):
 March 31,
2021
December 31,
2020
Employee compensation and related costs$41,128 $66,039 
Other57,057 68,826 
$98,185 $134,865 


18


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

The changes in the Company's accrual balance in the three months ended March 31, 2021 were as follows (in thousands):
Balance at January 1, 2021$14,855 
Current period provisions478 
Settlements(1,456)
Balance at March 31, 2021$13,877 


Of the amounts recorded at March 31, 2021 and December 31, 2020, $5.7 million and $6.5 million, respectively, were current and included as components of Accrued expenses and other, and $8.2 million and $8.4 million, respectively, were long-term and included as components of Other long-term liabilities in the Company's condensed consolidated balance sheets.


(9) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES

The Company recorded restructuring and related expense aggregating $6.0 million and $2.1 million in the three months ended March 31, 2021 and 2020, respectively. Restructuring and related expense includes both restructuring expense for severance and related costs and facilities-related costs, primarily comprised 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 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 months ended March 31, 2021 and 2020 were as follows (in thousands):
Three months ended
March 31,
2021
March 31,
2020
Severance and related costs$669 $1,771 
Variable and other facilities-related costs1,913 234 
Accelerated amortization of lease assets due to cease-use3,368 70 
$5,950 $2,075 

Accelerated Rent Amortization

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 accelerated rent amortization recorded in connection with the Facilities Initiative reduced the value of the Company's Operating lease right-of-use assets recorded in the Company's condensed consolidated balance sheets at March 31, 2021 and December 31, 2020, 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 17). The Company may incur additional future expense if it is unable to sublease other locations included in its restructuring initiatives.

19


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2020 Restructuring Initiative

In 2020, the Company implemented a restructuring plan to eliminate certain positions and redundant facilities, primarily in connection with the ECI Acquisition, to further streamline the Company's global footprint and improve its operations (the "2020 Restructuring Initiative"). In connection with this initiative, the Company expects to eliminate duplicate functions arising from the ECI Acquisition and support its efforts to integrate the two companies.

The Company recorded restructuring and related expense of $0.4 million and $1.1 million in connection with the 2020 Restructuring Initiative in the three months ended March 31, 2021 and 2020, respectively. The amount recorded in the three months ended March 31, 2021 was comprised of $0.7 million for severance and related costs for approximately 10 employees and $0.4 million of expense for variable costs related to restructured facilities, offset by a credit of $0.7 million for changes in estimate related to amounts previously recorded. The amount recorded in the three months ended March 31, 2020 was for severance for three former executives of ECI. The Company expects the amounts related to severance will be paid in 2021. The Company expects that it will record additional restructuring and related expense approximating $4 million under the 2020 Restructuring Initiative in the aggregate for severance and planned facility consolidations. A summary of the 2020 Restructuring Initiative accrual activity for severance and related costs for the three months ended March 31, 2021 is as follows (in thousands):
Balance at
January 1,
2021
Initiatives
charged to
expense
Adjustments for changes in estimateCash
payments
Balance at
March 31,
2021
Severance$5,237 $669 $ $(2,116)$3,790 
Facilities1,256 367 (670)(916)37 
$6,493 $1,036 $(670)$(3,032)$3,827 


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. 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 is substantially consolidating 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 in 2021.

In connection with the 2019 Restructuring Initiative, the Company recorded restructuring and related expense of $5.6 million and $1.0 million in the three months ended March 31, 2021 and 2020, respectively. The amount recorded in the three months ended March 31, 2021 related to facilities, including $3.4 million of accelerated amortization of lease assets. The amount recorded in the three months ended March 31, 2020 was comprised of $0.7 million for severance and related costs for five employees and $0.3 million related to facilities. The Company expects that the entire amount accrued for severance and related costs will be paid in 2021. The Company estimates that it will record nominal, if any, additional restructuring and related expense related to severance and related costs under the 2019 Restructuring Initiative.

A summary of the 2019 Restructuring Initiative accrual activity for the three months ended March 31, 2021 is as follows (in thousands):
20


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Balance at
January 1,
2021
Initiatives
charged to
expense
Reclassify accelerated amortization to operating lease liabilitiesCash
payments
Balance at
March 31,
2021
Severance$173 $ $ $(173)$ 
Facilities766 5,584 (3,368)(914)2,068 
$939 $5,584 $(3,368)$(1,087)$2,068 


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 relate to facilities and totaled $2.1 million at March 31, 2021 and $0.8 million at December 31, 2020.


(10) DEBT

2020 Credit Facility

On March 3, 2020, the Company entered into a Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), by and among the Company, as a guarantor, Ribbon Communications Operating Company, Inc., as the borrower ("Borrower"), Citizens Bank, N.A. ("Citizens"), as administrative agent, a lender, issuing lender, swingline lender, joint lead arranger and bookrunner, Santander Bank, N.A., as a lender, joint lead arranger and bookrunner, and the other lenders party thereto (each, together with Citizens Bank, N.A. and Santander Bank, N.A., referred to individually as a "Lender", and collectively, the "Lenders"). The proceeds of the 2020 Credit Facility were used, in part, to pay off in full all obligations of the Company under its prior credit facility (the "2019 Credit Facility").

The 2020 Credit Facility provides for $500 million of commitments from the lenders to the Borrower, comprised of $400 million in term loans (the "2020 Term Loan Facility") and a $100 million facility available for revolving loans (the "2020 Revolving Credit Facility"). Under the 2020 Revolving Credit Facility, a $30 million sublimit is available for letters of credit and a $20 million sublimit is available for swingline loans. Under the 2020 Credit Facility, the Company was originally required to make quarterly principal payments aggregating approximately $10 million in the first year, $