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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, 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 October 21, 2021, there were 148,624,895 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, 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, availability of components for the manufacturing of our products, 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, supply chain disruptions resulting from component availability and/or geopolitical instabilities and disputes, 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 or declines in the value of our ongoing investment in American Virtual Cloud Technologies, Inc. ("AVCT"), the purchaser of the Kandy Communications business; 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; macroeconomic 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" and Part II, Item 1A. "Risk Factors" 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)
September 30,
2021
December 31,
2020
Assets
Current assets:
Cash and cash equivalents$101,212 $128,428 
Restricted cash2,543 7,269 
Accounts receivable, net235,710 237,738 
Inventory44,789 45,750 
Other current assets34,399 28,461 
Total current assets418,653 447,646 
Property and equipment, net48,557 48,888 
Intangible assets, net367,131 417,356 
Goodwill416,892 416,892 
Investments50,439 115,183 
Deferred income taxes10,673 10,651 
Operating lease right-of-use assets54,446 69,757 
Other assets19,834 20,892 
$1,386,625 $1,547,265 
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of term debt$20,058 $15,531 
Accounts payable63,253 63,387 
Accrued expenses and other94,021 134,865 
Operating lease liabilities17,848 17,023 
Deferred revenue89,553 96,824 
Total current liabilities284,733 327,630 
Long-term debt, net of current354,778 369,035 
Operating lease liabilities, net of current58,609 72,614 
Deferred revenue, net of current21,618 26,010 
Deferred income taxes13,477 16,842 
Other long-term liabilities39,862 48,281 
Total liabilities773,077 860,412 
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; 148,613,829 shares issued and outstanding at September 30, 2021; 145,425,248 shares issued and outstanding at December 31, 2020
15 15 
Additional paid-in capital1,870,711 1,870,256 
Accumulated deficit(1,259,353)(1,178,476)
Accumulated other comprehensive income (loss)2,175 (4,942)
Total stockholders' equity613,548 686,853 
$1,386,625 $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 endedNine months ended
 September 30,
2021
September 30,
2020
September 30,
2021
September 30,
2020
Revenue:
Product$111,726 $128,926 $322,744 $325,687 
Service98,672 102,192 291,636 273,906 
Total revenue210,398 231,118 614,380 599,593 
Cost of revenue:
Product53,494 58,545 144,580 145,103 
Service36,576 37,619 110,498 105,745 
Total cost of revenue90,070 96,164 255,078 250,848 
Gross profit120,328 134,954 359,302 348,745 
Operating expenses:
Research and development49,132 49,113 143,339 143,204 
Sales and marketing36,113 36,898 108,212 101,767 
General and administrative12,148 16,021 40,435 48,320 
Amortization of acquired intangible assets17,221 16,349 50,225 45,352 
Acquisition-, disposal- and integration-related1,955 1,366 4,204 14,607 
Restructuring and related1,767 3,290 10,547 10,726 
Total operating expenses118,336 123,037 356,962 363,976 
Income (loss) from operations1,992 11,917 2,340 (15,231)
Interest expense, net(2,969)(6,854)(11,836)(15,649)
Other (expense) income, net(57,702)407 (65,970)(2,844)
(Loss) income before income taxes(58,679)5,470 (75,466)(33,724)
Income tax (provision) benefit(752)782 (5,411)(1,445)
Net (loss) income$(59,431)$6,252 $(80,877)$(35,169)
(Loss) earnings per share
Basic$(0.40)$0.04 $(0.55)$(0.26)
Diluted$(0.40)$0.04 $(0.55)$(0.26)
Weighted average shares used to compute (loss) earnings per share:
Basic148,184 144,948 147,204 136,837 
Diluted148,184 151,680 147,204 136,837 

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,
2021
September 30,
2020
September 30,
2021
September 30,
2020
Net (loss) income$(59,431)$6,252 $(80,877)$(35,169)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on interest rate swap860 640 7,324 (12,857)
Foreign currency translation adjustments193 184 (207)1,031 
Other comprehensive income (loss), net of tax1,053 824 7,117 (11,826)
Comprehensive (loss) income, net of tax$(58,378)$7,076 $(73,760)$(46,995)

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, 2021
 Common stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive incomeTotal stockholders' equity
Balance at July 1, 2021148,057,301 $15 $1,868,066 $(1,199,922)$1,122 $669,281 
Exercise of stock options213 — 
Vesting of restricted stock awards and units855,440 — 
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(299,125)(1,916)(1,916)
Stock-based compensation expense4,561 4,561 
Other comprehensive income1,053 1,053 
Net loss(59,431)(59,431)
Balance at September 30, 2021148,613,829 $15 $1,870,711 $(1,259,353)$2,175 $613,548 


Nine months ended September 30, 2021
 Common stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive (loss) incomeTotal stockholders' equity
Balance at January 1, 2021145,425,248 $15 $1,870,256 $(1,178,476)$(4,942)$686,853 
Exercise of stock options13,815 24 24 
Vesting of restricted stock awards and units3,320,644 — 
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(1,671,559)(13,980)(13,980)
Stock-based compensation expense14,411 14,411 
Other comprehensive income7,117 7,117 
Net loss(80,877)(80,877)
Balance at September 30, 2021148,613,829 $15 $1,870,711 $(1,259,353)$2,175 $613,548 


7


RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Stockholders' Equity (continued)
(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 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 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 

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,
2021
September 30,
2020
Cash flows from operating activities:
Net loss$(80,877)$(35,169)
Adjustments to reconcile net loss to cash flows provided by operating activities:
Depreciation and amortization of property and equipment12,684 12,754 
Amortization of intangible assets50,225 45,352 
Amortization of debt issuance costs4,227 4,915 
Stock-based compensation14,411 10,167 
Deferred income taxes(3,295)(2,455)
Gain on sale of business(2,772) 
Decrease in fair value of investments64,745  
Reduction in deferred purchase consideration (69)
Foreign currency exchange losses3,235 3,162 
Changes in operating assets and liabilities:
Accounts receivable1,892 42,489 
Inventory253 6,285 
Other operating assets11,303 36,416 
Accounts payable2,194 (54,489)
Accrued expenses and other long-term liabilities(58,661)10,143 
Deferred revenue(11,665)(14,253)
Net cash provided by operating activities7,899 65,248 
Cash flows from investing activities:
Purchases of property and equipment(14,279)(18,685)
Business acquisitions, net of cash acquired (346,852)
Proceeds from sale of business2,944  
Proceeds from the sale of fixed assets 43,500 
Net cash used in investing activities(11,335)(322,037)
Cash flows from financing activities:
Borrowings under revolving line of credit 615 
Principal payments on revolving line of credit (8,615)
Proceeds from issuance of term debt74,625 478,500 
Principal payments of term debt(87,161)(131,279)
Principal payments of finance leases(736)(971)
Payment of debt issuance costs(789)(14,065)
Proceeds from the exercise of stock options24 29 
Payment of tax withholding obligations related to net share settlements of restricted stock awards(13,980)(1,196)
Net cash (used in) provided by financing activities(28,017)323,018 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(489)24 
Net (decrease) increase in cash, cash equivalents and restricted cash(31,942)66,253 
Cash, cash equivalents and restricted cash, beginning of year135,697 44,643 
Cash, cash equivalents and restricted cash, end of period$103,755 $110,896 
9



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

Nine months ended
September 30,
2021
September 30,
2020
Supplemental disclosure of cash flow information:
Interest paid$11,410 $10,845 
Income taxes paid$11,944 $6,652 
Income tax refunds received$983 $196 
Supplemental disclosure of non-cash investing activities:
  Capital expenditures incurred, but not yet paid$1,807 $4,111 
  Acquisition purchase consideration - deferred payments$ $1,630 
  Common stock issued as purchase consideration$ $108,550 
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$38,879 $5,551 

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 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"), the Company completed the sale of its cloud-based enterprise service business (the "Kandy Communications Business") to AVCT and, accordingly, the revenue and expenses of the Kandy Communications Business are excluded from the Company's condensed consolidated financial statements for the three and nine months ended September 30, 2021.

On March 3, 2020 (the "ECI Acquisition Date"), a subsidiary of the Company merged (the "ECI Acquisition") with ECI Telecom Group Ltd ("ECI"). 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 nine months ended September 30, 2020 is for the period subsequent to the ECI Acquisition Date through September 30, 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.

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RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
These reclassifications for the three and nine months ended September 30, 2020 were as follows (in thousands):

Three months ended September 30, 2020Nine months ended September 30, 2020
Prior presentationAmounts reclassifiedRevised presentationPrior presentationAmounts reclassifiedRevised presentation
Product revenue$128,926 $128,926 $325,687 $325,687 
Service revenue102,192 102,192 273,906 273,906 
  Total revenue231,118  231,118 599,593  599,593 
Cost of revenue - product70,188 (11,643)58,545 176,650 (31,547)145,103 
Cost of revenue - service37,619 37,619 105,745 105,745 
  Total cost of revenue107,807 (11,643)96,164 282,395 (31,547)250,848 
    Total gross profit123,311 11,643 134,954 317,198 31,547 348,745 
Research and development49,113 49,113 143,204 143,204 
Sales and marketing41,604 (4,706)36,898 115,572 (13,805)101,767 
General and administrative16,021 16,021 48,320 48,320 
Amortization of acquired intangible assets 16,349 16,349  45,352 45,352 
Acquisition-, disposal- and integration-related1,366 1,366 14,607 14,607 
Restructuring and related3,290 3,290 10,726 10,726 
  Total operating expenses111,394 11,643 123,037 332,429 31,547 363,976 
Income (loss) from operations$11,917 $ $11,917 $(15,231)$ $(15,231)


Certain reclassifications, not affecting previously reported net income (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 September 30, 2021 with the exception of the Company's election to account for its equity investment in AVCT using the fair value option in connection with the September 8, 2021 conversion of the debentures received by the Company as consideration for the sale of its Kandy Communications Business (the "Debentures Conversion") (see Note 3).

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.

12


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 September 30, 2021, the Company had $2.5 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 and nine months ended September 30, 2021, the Company received $24.8 million and $88.0 million, respectively, of cash from the sale of certain accounts receivable and recorded $0.2 million and $0.6 million, respectively, of interest expense in connection with these transactions. During the three and nine months ended September 30, 2020, the Company received $35.3 million and $81.1 million, respectively, of cash from the sale of certain accounts receivable and recorded $0.3 million and $0.7 million, respectively, 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.

13


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Fair Value Option - Investment in AVCT

In connection with the Debentures Conversion, the Company elected to use the fair value option to account for its equity investment in AVCT as permitted under Accounting Standards Codification ("ASC") 825, Financial Instruments ("ASC 825"). ASC 820, Fair Value Measurement ("ASC 820") provides the fair value framework for valuing such investments. In accordance with ASC 820, the Company is recording the investment in AVCT at fair value, with changes in fair value recorded as a component of Other (expense) income, net, in the condensed consolidated statements of operations.

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) BUSINESS ACQUISITION

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
14


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
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 September 30, 2020 included $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 included $171.1 million of revenue and $31.9 million of net loss attributable to ECI for the period subsequent to the ECI Acquisition.

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):

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 and nine months ended September 30, 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
15


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
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 and nine months ended September 30, 2020 and inclusion of such costs in the comparable prior year periods.

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 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):
4
 Three months endedNine months ended
 September 30,
2020
September 30,
2020
Revenue$231,118 $624,800 
Net income (loss)$7,036 $(41,345)
Diluted earnings (loss) per share$0.05 $(0.29)


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 acquisition-related expenses in the three and nine months ended September 30, 2020 primarily related to the ECI Acquisition. The disposal-related expenses in the nine months ended September 30, 2021 relate to the Kandy Sale (as defined below).

The Company's acquisition-, disposal- and integration-related expenses for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):
Three months endedNine months ended
September 30,
2021
September 30,
2020
September 30,
2021
September 30,
2020
Professional and services fees (acquisition-related)$13 $1,003 $156 $14,017 
Professional and services fees (disposal-related)  241  
Integration-related expenses1,942 363 3,807 590 
$1,955 $1,366 $4,204 $14,607 


(3) SALE OF KANDY COMMUNICATIONS BUSINESS AND INVESTMENT IN AVCT

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 consideration, AVCT paid Ribbon $45.0 million, subject to certain adjustments, in
16


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
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 consideration on the Kandy Sale Date.

The Debentures bore interest at a rate of 10% per annum, which was added to the principal amount of the Debentures. The entire principal amount of each Debenture, together with accrued and unpaid interest thereon, was 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 was 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, which initially was $3.45 per share. The Debentures were subject to mandatory conversion if the AVCT stock price was 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 price was subject to customary adjustments including, but not limited to, stock dividends, stock splits and reclassifications. 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, on September 8, 2021 (the "Debenture Conversion Date"), upon the completion of customary regulatory filings by AVCT, the Debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares").

The Warrants were 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 exercised any of the Warrants as of September 30, 2021. The Company was also subject to a lock-up provision which limited the Company's ability to sell any shares of the AVCT common stock underlying the Debentures and the Warrants prior to June 1, 2021 (the "Lock-Up Period"), 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 were then used to calculate the fair value of the Debentures at each measurement date prior to the Debenture Conversion Date. The Company used the Black-Scholes valuation model for estimating the fair value of the Warrants at each measurement date. The fair value of the Warrants was 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. After the expiration of the Lock-Up Period and prior to the Debenture Conversion Date, the Company valued the AVCT Units at each measurement date by multiplying the closing stock price of AVCT common stock by the number of shares upon conversion of the Debentures and Warrants. At September 30, 2021, the Company valued the Debenture Shares and Warrants by multiplying the closing stock price of AVCT common stock by the number of Debenture Shares and Warrants (collectively, the "AVCT Investment") it held.

At September 30, 2021, the aggregate fair value of the AVCT Investment was $50.4 million, comprised of $38.2 million for the Debenture Shares and $12.2 million for the Warrants. At December 31, 2020, the aggregate fair value of the AVCT Units was $115.2 million. The Company recorded losses of $56.5 million and $68.3 million in the three and nine months ended September 30, 2021, respectively, arising from the change in the aggregate fair value of the AVCT Investment. These amounts are included as components of Other income (expense), net, in the Company's condensed consolidated statements of operations. The Company recorded $