SEC Filing | Ribbon Communications, Inc.

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rbbn-20220930

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, 2022
☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-38267

RIBBON COMMUNICATIONS INC.

(Exact name of Registrant as specified in its charter)


Delaware						82-1669692
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

6500 Chase Oaks Boulevard, Suite 100, Plano, Texas 75023

(Address of principal executive offices) (Zip code)

(978) 614-8100

(Registrant's telephone number, including area code)

N/A

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001	RBBN	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging 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, 2022, there were 168,123,073 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, 2022

TABLE OF CONTENTS


Item		Page
	Cautionary Note Regarding Forward-Looking Statements	3


PART I FINANCIAL INFORMATION
1.	Financial Statements
	Condensed Consolidated Balance Sheet s as of September 30, 2022 and December 31, 2021 (unaudited)	4
	Condensed Consolidated Statements of Ope rations for the Three and N ine Months Ended September 30, 2022 and 2021 (unaudited)	5
	Condensed Con solidated Statements of Comprehensive Loss for the Three and N ine Months Ended September 30, 2022 and 2021 (unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months E nded September 30, 2022 an d 2021 (unaudited)	9
	Notes to Condensed Consolidated Financial Statements (unaudited)	11
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38
3.	Quantitative and Qualitative Disclosures About Market Risk	52
4.	Controls and Procedures	52

PART II OTHER INFORMATION
1.	Legal Proceedings	53
1A.	Risk Factors	53
2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
5.	Other Information	53
6.	Exhibits	54
	Signatures	55

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, capital structure, credit facility compliance, restructuring activities, expected impacts from the war in Ukraine and the financial sanctions imposed in connection therewith, 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"), ongoing litigation, plans and objectives of management for future operations 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 (including those related to the war in Ukraine); litigation; risks related to the ongoing COVID-19 pandemic on the global economy and financial markets as well as us, 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; unpredictable fluctuations in quarterly revenue and operating results; the impact on fluctuations of our EBITDA on compliance under our credit facility; 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, including inflation; the impact of restructuring and cost-containment activities; 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 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, 2021. 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.

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, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	55,670	$	103,915
Restricted cash	265		2,570

Accounts receivable, net	237,834		282,917
Inventory	70,286		54,043

Other current assets	58,344		37,545
Total current assets	422,399		480,990
Property and equipment, net	46,166		47,685
Intangible assets, net	309,697		350,730
Goodwill	300,892		300,892
Investments	—		43,931
Deferred income taxes	57,273		47,287
Operating lease right-of-use assets	48,079		53,147
Other assets	40,129		23,075
	$	1,224,635	$	1,347,737
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of term debt	$	20,058	$	20,058

Accounts payable	73,018		97,121
Accrued expenses and other	99,261		100,752
Operating lease liabilities	15,617		17,403
Deferred revenue	90,139		109,119



Total current liabilities	298,093		344,453
Long-term debt, net of current	310,770		350,217

Operating lease liabilities, net of current	49,137		55,196
Deferred revenue, net of current	22,185		20,619
Deferred income taxes	11,679		8,116


Other long-term liabilities	43,602		41,970
Total liabilities	735,466		820,571
Commitments and contingencies (Note 17)
Stockholders' equity:
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized, none issued and outstanding	—		—
Common stock, $0.0001 par value per share; 240,000,000 shares authorized; 168,093,446 shares issued and outstanding at September 30, 2022; 148,895,308 shares issued and outstanding at December 31, 2021	17		15
Additional paid-in capital	1,936,457		1,875,234
Accumulated deficit	(1,474,232)		(1,355,661)
Accumulated other comprehensive income	26,927		7,578
Total stockholders' equity	489,169		527,166
	$	1,224,635	$	1,347,737

See notes to the unaudited condensed consolidated financial statements.

RIBBON COMMUNICATIONS INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)


	Three months ended				Nine months ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Revenue:
Product	$	111,152	$	111,726	$	305,809	$	322,744
Service	95,975		98,672		280,312		291,636
Total revenue	207,127		210,398		586,121		614,380
Cost of revenue:
Product	59,866		53,494		169,226		144,580
Service	35,175		36,576		106,049		110,498
Amortization of acquired technology	7,768		9,674		23,923		29,435
Total cost of revenue	102,809		99,744		299,198		284,513
Gross profit	104,318		110,654		286,923		329,867
Operating expenses:
Research and development	49,366		49,132		153,159		143,339
Sales and marketing	36,365		36,113		109,827		108,212
General and administrative	12,118		12,148		37,881		40,435
Amortization of acquired intangible assets	7,508		7,547		22,296		20,790
Acquisition-, disposal- and integration-related	988		1,955		4,372		4,204
Restructuring and related	1,269		1,767		8,977		10,547
Total operating expenses	107,614		108,662		336,512		327,527
(Loss) income from operations	(3,296)		1,992		(49,589)		2,340
Interest expense, net	(5,266)		(2,969)		(13,869)		(11,836)
Other expense, net	(3,732)		(57,702)		(42,760)		(65,970)
Loss before income taxes	(12,294)		(58,679)		(106,218)		(75,466)
Income tax provision	(6,122)		(752)		(12,353)		(5,411)
Net loss	$	(18,416)	$	(59,431)	$	(118,571)	$	(80,877)
Loss per share:
Basic	$	(0.12)	$	(0.40)	$	(0.78)	$	(0.55)
Diluted	$	(0.12)	$	(0.40)	$	(0.78)	$	(0.55)
Weighted average shares used to compute loss per share:
Basic	158,921		148,184		152,795		147,204
Diluted	158,921		148,184		152,795		147,204

See notes to the unaudited condensed consolidated financial statements.

RIBBON COMMUNICATIONS INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three months ended				Nine months ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net loss	$	(18,416)	$	(59,431)	$	(118,571)	$	(80,877)
Other comprehensive income (loss), net of tax:
Unrealized gain on interest rate swap	1,726		860		21,248		7,324
Foreign currency translation adjustments	(144)		193		(1,157)		(207)

Employee retirement benefits	142		—		(742)		—

Other comprehensive income, net of tax	1,724		1,053		19,349		7,117
Comprehensive loss, net of tax	$	(16,692)	$	(58,378)	$	(99,222)	$	(73,760)

See notes to the unaudited condensed consolidated financial statements.

RIBBON COMMUNICATIONS INC.

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except shares)

(unaudited)



Three months ended September 30, 2022
								Accumulated
				Additional				other		Total
	Common stock			paid-in		Accumulated		comprehensive		stockholders'
	Shares	Amount		capital		deficit		income		equity
Balance at July 1, 2022	150,459,784	$	15	$	1,881,942	$	(1,455,816)	$	25,203	$	451,344

Exercise of stock options	353			1						1
Vesting of restricted stock units	800,999									—
Vesting of performance-based stock units	3,433									—
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations	(242,434)			(738)						(738)




Common stock issued in equity offering	17,071,311	2		52,065						52,067
Issuance costs related to equity offering				(1,654)						(1,654)
Stock-based compensation expense				4,841						4,841
Other comprehensive income								1,724		1,724
Net loss						(18,416)				(18,416)
Balance at September 30, 2022	168,093,446	$	17	$	1,936,457	$	(1,474,232)	$	26,927	$	489,169


Nine months ended September 30, 2022
								Accumulated
				Additional				other		Total
	Common stock			paid-in		Accumulated		comprehensive		stockholders'
	Shares	Amount		capital		deficit		income		equity
Balance at January 1, 2022	148,895,308	$	15	$	1,875,234	$	(1,355,661)	$	7,578	$	527,166

Exercise of stock options	708			1						1
Vesting of restricted stock units	2,808,137									—
Vesting of performance-based stock units	179,184									—
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations	(861,202)			(2,684)						(2,684)




Common stock issued in equity offering	17,071,311	2		52,065						52,067
Issuance costs related to equity offering				(1,654)						(1,654)
Stock-based compensation expense				13,495						13,495
Other comprehensive income								19,349		19,349
Net loss						(118,571)				(118,571)
Balance at September 30, 2022	168,093,446	$	17	$	1,936,457	$	(1,474,232)	$	26,927	$	489,169

See notes to the unaudited condensed consolidated financial statements.

RIBBON COMMUNICATIONS INC.

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except shares)

(unaudited)



Three months ended September 30, 2021
								Accumulated
				Additional				other		Total
	Common stock			paid-in		Accumulated		comprehensive		stockholders'
	Shares	Amount		capital		deficit		income		equity
Balance at July 1, 2021	148,057,301	$	15	$	1,868,066	$	(1,199,922)	$	1,122	$	669,281


Exercise of stock options	213									—
Vesting of restricted stock awards and units	855,440									—

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 expense				4,561						4,561
Other comprehensive income								1,053		1,053
Net loss						(59,431)				(59,431)
Balance at September 30, 2021	148,613,829	$	15	$	1,870,711	$	(1,259,353)	$	2,175	$	613,548


Nine months ended September 30, 2021
								Accumulated
				Additional				other		Total
	Common stock			paid-in		Accumulated		comprehensive		stockholders'
	Shares	Amount		capital		deficit		(loss) income		equity
Balance at January 1, 2021	145,425,248	$	15	$	1,870,256	$	(1,178,476)	$	(4,942)	$	686,853


Exercise of stock options	13,815			24						24
Vesting of restricted stock awards and units	3,320,644									—
Vesting of performance-based stock units	1,525,681									—
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 expense				14,411						14,411
Other comprehensive income								7,117		7,117
Net loss						(80,877)				(80,877)
Balance at September 30, 2021	148,613,829	$	15	$	1,870,711	$	(1,259,353)	$	2,175	$	613,548

See notes to the unaudited condensed consolidated financial statements.

RIBBON COMMUNICATIONS INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Nine months ended
	September 30, 2022		September 30, 2021
Cash flows from operating activities:
Net loss	$	(118,571)	$	(80,877)
Adjustments to reconcile net loss to cash flows (used in) provided by operating activities:
Depreciation and amortization of property and equipment	11,688		12,684
Amortization of intangible assets	46,219		50,225
Amortization of debt issuance costs	1,697		4,227
Stock-based compensation	13,495		14,411




Deferred income taxes	(19,071)		(3,295)
Gain on sale of business	—		(2,772)
Decrease in fair value of investments	41,291		64,745

Foreign currency exchange losses	830		3,235

Changes in operating assets and liabilities:
Accounts receivable	44,604		1,892
Inventory	(24,002)		253
Other operating assets	6,066		11,303
Accounts payable	(22,311)		2,194
Accrued expenses and other long-term liabilities	(6,983)		(58,661)

Deferred revenue	(17,414)		(11,665)
Net cash (used in) provided by operating activities	(42,462)		7,899
Cash flows from investing activities:
Purchases of property and equipment	(9,744)		(14,279)
Purchases of software licenses	(3,300)		—
Proceeds from sale of business	—		2,944
Net cash used in investing activities	(13,044)		(11,335)
Cash flows from financing activities:
Borrowings under revolving line of credit	58,625		—
Principal payments on revolving line of credit	(58,625)		—
Proceeds from issuance of term debt	—		74,625

Principal payments of term debt	(40,044)		(87,161)

Principal payments of finance leases	(433)		(736)
Payment of debt issuance costs	(1,046)		(789)
Proceeds from equity offering	52,067		—
Payment of equity offering issuance costs	(1,654)		—
Proceeds from the exercise of stock options	1		24
Payment of tax withholding obligations related to net share settlements of restricted stock awards	(2,684)		(13,980)


Net cash provided by (used in) financing activities	6,207		(28,017)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(1,251)		(489)
Net decrease in cash, cash equivalents and restricted cash	(50,550)		(31,942)
Cash, cash equivalents and restricted cash, beginning of year	106,485		135,697
Cash, cash equivalents and restricted cash, end of period	$	55,935	$	103,755

RIBBON COMMUNICATIONS INC.

Condensed Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)


	Nine months ended
	September 30, 2022		September 30, 2021
Supplemental disclosure of cash flow information:
Interest paid	$	13,179	$	11,410
Income taxes paid	$	14,653	$	11,944
Income tax refunds received	$	643	$	983
Supplemental disclosure of non-cash investing activities:
Capital expenditures incurred, but not yet paid	$	989	$	1,807
Software license acquired through investment disposal	$	1,886	$	—
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	$	9,092	$	38,879

See notes to the unaudited condensed consolidated financial statements.

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, network solutions and services that enable the secure delivery of data and voice communications, and high-bandwidth networking and connectivity for residential consumer 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").

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, 2021 (the "Annual Report"), which was filed with the SEC on March 11, 2022.

Equity Offering

On August 12, 2022, the Company entered into a Securities Purchase Agreement with certain investors for the sale (the "Equity Offering") in a private placement by the Company of 17,071,311 shares (the "Shares") of the Company’s common stock, par value $0.0001 per share, at a price of $3.05 per share. The aggregate gross proceeds from the Equity Offering were approximately $52.1 million, before deducting offering expenses paid by the Company of approximately $1.7 million. The Company intends to use the net proceeds from the Equity Offering to fund general corporate purposes, including capital expenditures, working capital and repayment of debt.

The original issuance of the Shares in the Equity Offering was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Company subsequently filed a registration statement on Form S-3 (the “Registration Statement”) with the SEC registering the Shares, which Registration Statement was declared effective by the SEC on September 23, 2022.

Operating Segments

The Company's chief operating decision maker (the "CODM") is its President and Chief Executive Officer. The CODM assesses 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").

Reclassifications

In the fourth quarter of 2021, the Company reclassified amounts recorded for amortization of certain acquired intangible assets in prior presentations from Total operating expenses under the caption "Amortization of acquired intangible assets" to Cost of revenue under the caption "Amortization of acquired technology" in the condensed consolidated statements of operations. The Company's management believes this presentation aids in the comparability of its financial statements to industry peers. This reclassification did not impact the condensed consolidated balance sheets or statements of cash flows for any historical periods. The Company reports depreciation of property and equipment related to production activities as components of Cost of revenue. This reclassification for the three and nine months ended September 30, 2021 was as follows

RIBBON COMMUNICATIONS INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

(in thousands):


	Three months ended September 30, 2021						Nine months ended September 30, 2021
	Prior presentation		Amounts reclassified		Revised presentation		Prior presentation		Amounts reclassified		Revised presentation
Product revenue	$	111,726			$	111,726	$	322,744			$	322,744
Service revenue	98,672				98,672		291,636				291,636
Total revenue	210,398		—		210,398		614,380		—		614,380
Cost of revenue - product	53,494				53,494		144,580				144,580
Cost of revenue - service	36,576				36,576		110,498				110,498
Amortization of acquired technology	—		9,674		9,674		—		29,435		29,435
Total cost of revenue	90,070		9,674		99,744		255,078		29,435		284,513
Total gross profit	120,328		(9,674)		110,654		359,302		(29,435)		329,867
Research and development	49,132				49,132		143,339				143,339
Sales and marketing	36,113				36,113		108,212				108,212
General and administrative	12,148				12,148		40,435				40,435
Amortization of acquired intangible assets	17,221		(9,674)		7,547		50,225		(29,435)		20,790

Acquisition-, disposal- and integration-related	1,955				1,955		4,204				4,204
Restructuring and related	1,767				1,767		10,547				10,547
Total operating expenses	118,336		(9,674)		108,662		356,962		(29,435)		327,527
Income from operations	$	1,992	$	—	$	1,992	$	2,340	$	—	$	2,340

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, 2022.

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.

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.

The Company had $0.3 million and $2.6 million of restricted cash as of September 30, 2022 and December 31, 2021, respectively, 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.

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.

Information regarding the Company's factoring of its financial assets for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands):



	Three months ended				Nine months ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Accounts receivable sold	$	16,926	$	24,961	$	57,640	$	88,608
Less factoring fees	(281)		$	(169)	(757)		(570)
Net cash proceeds	$	16,645	$	24,792	$	56,883	$	88,038

Going Concern

The accompanying condensed consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

In the second quarter of 2022, although the Company was in compliance with its financial covenants, it projected that it may not maintain compliance with its financial covenants under the 2020 Credit Facility, as amended (as defined in Note 9), for the quarter ended September 30, 2022 due to the impact of market conditions, including supply chain disruptions, higher costs, and other geopolitical instabilities and disputes. Failure to remain in compliance would be an event of default that would permit the Lenders (as defined in Note 9) to accelerate the maturity of the 2020 Credit Facility.

Under the terms of the existing credit agreement (see Note 9), the Company is allowed, subject to certain limitations, to use a portion of the capital raised in the Equity Offering in the calculation of the covenant ratios for the quarter in which the Equity Offering was completed (quarter ended September 30, 2022) and for future calculation of the covenant ratios for which the third quarter of 2022 is included in the trailing twelve month period. As a result, the Company currently projects that it will remain in compliance with its financial covenants for at least one year from the date the condensed consolidated financial statements are issued.

Recent Accounting Pronouncements

In March 2022, the Financial Accounting Standards Board (the "FASB") issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings ("TDRs") for creditors in ASC 310, Receivables (Topic 310), and requires entities to provide disclosures about current period gross write-offs by year of origination. Also, ASU 2022-02 updates the

RIBBON COMMUNICATIONS INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

requirements related to accounting for credit losses under ASC 326, Financial Instruments – Credit Losses (Topic 326), and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 is effective for the Company January 1, 2023, with early adoption permitted. The Company believes that the adoption of ASU 2022-02 will not have a material impact on its consolidated financial statements upon adoption.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"), which amends ASC 805, Business Combinations (Topic 805), to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an acquiring entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers (Topic 606) ("ASC 606"). Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. While primarily related to contract assets and contract liabilities that were accounted for by the acquiree in accordance with ASC 606, ASU 2021-08 also applies to contract assets and contract liabilities from other contracts to which the provisions of ASC 606 apply, such as contract liabilities from the sale of nonfinancial assets within the scope of ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2021-08 is effective for the Company January 1, 2023, with early adoption permitted. The Company believes that the adoption of ASU 2021-08 could have a material impact on its consolidated financial statements for periods including and subsequent to significant business acquisitions.

In January 2021 the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope ("ASU 2021-01"), which refines the scope of ASC 848, Reference Rate Reform, 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. The adoption of ASU 2021-01 did not have a material impact on the Company's consolidated financial statements.

(2) 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 diluted earnings (loss) per share were as follows (in thousands):


	Three months ended		Nine months ended
	September 30, 2022	September 30, 2021	September 30, 2022	September 30, 2021
Weighted average shares outstanding - basic	158,921	148,184	152,795	147,204
Potential dilutive common shares	—	—	—	—
Weighted average shares outstanding - diluted	158,921	148,184	152,795	147,204

Options to purchase the Company's common stock and unvested restricted and performance-based stock units aggregating 14.4 million shares have not been included in the computation of loss per share for the three and nine months ended September 30, 2022 because their effect would have been antidilutive. Options to purchase the Company's common stock and unvested restricted and performance-based stock awards and stock units aggregating 10.9 million shares have not been included in the computation of diluted loss per share for the three and nine months ended September 30, 2021 because their effect would have been antidilutive.

RIBBON COMMUNICATIONS INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

(3) INVENTORY

Inventory at September 30, 2022 and December 31, 2021 consisted of the following (in thousands):


	September 30, 2022		December 31, 2021

On-hand final assemblies and finished goods inventories	$	77,244	$	57,360
Deferred cost of goods sold	3,887		1,474
	81,131		58,834
Less noncurrent portion (included in other assets)	(10,845)		(4,791)
Current portion	$	70,286	$	54,043

(4) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at September 30, 2022 and December 31, 2021 consisted of the following (in thousands):


September 30, 2022	Weighted average amortization period (years)	Cost		Accumulated amortization		Net carrying value
In-process research and development	*	$	34,000	$	—	$