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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 June 30, 2023
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 July 24, 2023, there were 171,147,219 shares of the registrant's common stock, $0.0001 par value per share, outstanding.






RIBBON COMMUNICATIONS INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2023
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 and restructuring activities, results of operations and financial position, capital structure, credit facility compliance, expected impacts from the war in Ukraine and the financial sanctions and trade restrictions imposed in connection therewith, beliefs about our business strategy, availability of components for the manufacturing of our products, 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); material litigation; unpredictable fluctuations in quarterly revenue and operating results; the impact of fluctuations in interest rates; the impact of fluctuations of our EBITDA on compliance under our credit facility; material cybersecurity and data intrusion incidents, including any security breaches resulting in the theft, transfer, or unauthorized disclosure of customer, employee, or company information; our ability to comply with applicable domestic and foreign information security and privacy laws, regulations and technology platform rules or other obligations related to data privacy and security; 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; our ability to adapt to rapid technological and market changes; our ability to generate positive returns on our research and development; 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; unanticipated adverse changes in legal, regulatory or tax laws; future accounting pronouncements or changes in our accounting policies; 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, 2022. 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)
June 30,
2023
December 31,
2022
Assets
Current assets:
Cash and cash equivalents$34,646 $67,262 
Accounts receivable, net253,045 267,244 
Inventory74,382 75,423 
Other current assets58,869 68,057 
Total current assets420,942 477,986 
Property and equipment, net42,418 44,832 
Intangible assets, net265,376 294,728 
Goodwill300,892 300,892 
Deferred income taxes66,829 53,649 
Operating lease right-of-use assets42,390 44,888 
Other assets28,349 38,589 
$1,167,196 $1,255,564 
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of term debt$25,073 $20,058 
Accounts payable93,640 95,810 
Accrued expenses and other97,620 85,270 
Operating lease liabilities15,340 15,416 
Deferred revenue113,915 113,939 
Total current liabilities345,588 330,493 
Long-term debt, net of current216,332 306,270 
Warrant liability4,178  
Preferred stock liability, $0.01 par value per share; 10,000,000 shares authorized, 55,000 shares issued and outstanding at June 30, 2023 ($56,650 liquidation preference); none issued and outstanding at December 31, 2022
50,582  
Operating lease liabilities, net of current41,827 46,183 
Deferred revenue, net of current20,045 19,254 
Deferred income taxes3,756 3,750 
Other long-term liabilities30,641 31,187 
Total liabilities712,949 737,137 
Commitments and contingencies (Note 19)
Stockholders' equity:
Common stock, $0.0001 par value per share; 240,000,000 shares authorized; 170,958,400 shares issued and outstanding at June 30, 2023; 168,324,995 shares issued and outstanding at December 31, 2022
17 17 
Additional paid-in capital1,950,079 1,941,569 
Accumulated deficit(1,513,528)(1,453,744)
Accumulated other comprehensive income17,679 30,585 
Total stockholders' equity454,247 518,427 
$1,167,196 $1,255,564 

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 endedSix months ended
 June 30,
2023
June 30,
2022
June 30,
2023
June 30,
2022
Revenue:
Product$117,347 $112,667 $210,665 $194,657 
Service93,271 93,129 186,112 184,337 
Total revenue210,618 205,796 396,777 378,994 
Cost of revenue:
Product67,927 58,151 129,990 109,360 
Service33,782 35,207 69,087 70,874 
Amortization of acquired technology7,439 7,888 14,828 16,155 
Total cost of revenue109,148 101,246 213,905 196,389 
Gross profit101,470 104,550 182,872 182,605 
Operating expenses:
Research and development47,776 51,103 99,080 103,793 
Sales and marketing33,905 35,843 69,304 73,462 
General and administrative14,346 12,901 28,391 25,763 
Amortization of acquired intangible assets7,260 7,513 14,524 14,788 
Acquisition-, disposal- and integration-related498 1,535 2,140 3,384 
Restructuring and related4,307 2,894 11,244 7,708 
Total operating expenses108,092 111,789 224,683 228,898 
Loss from operations(6,622)(7,239)(41,811)(46,293)
Interest expense, net(6,766)(4,602)(13,188)(8,603)
Other (expense) income, net(2,688)(10,228)2,084 (39,028)
Loss before income taxes(16,076)(22,069)(52,915)(93,924)
Income tax provision(5,403)(8,111)(6,869)(6,231)
Net loss$(21,479)$(30,180)$(59,784)$(100,155)
Loss per share:
Basic$(0.13)$(0.20)$(0.35)$(0.67)
Diluted$(0.13)$(0.20)$(0.35)$(0.67)
Weighted average shares used to compute loss per share:
Basic170,103 150,190 169,326 149,681 
Diluted170,103 150,190 169,326 149,681 

See notes to the unaudited condensed consolidated financial statements.

5





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


Three months endedSix months ended
June 30,
2023
June 30,
2022
June 30,
2023
June 30,
2022
Net loss$(21,479)$(30,180)$(59,784)$(100,155)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on interest rate swap, net of reclassifications and amortization into earnings(1,322)4,053 (7,222)19,522 
Reclassification of gain to other income upon sale of interest rate swap  (5,099) 
Foreign currency translation adjustments(434)(322)(585)(1,013)
Employee retirement benefits (884) (884)
Other comprehensive income (loss), net of tax(1,756)2,847 (12,906)17,625 
Comprehensive loss, net of tax$(23,235)$(27,333)$(72,690)$(82,530)

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 June 30, 2023
Accumulated
AdditionalotherTotal
Common stockpaid-inAccumulatedcomprehensivestockholders'
SharesAmountcapitaldeficit(loss) incomeequity
Balance at April 1, 2023169,229,979 $17 $1,945,525 $(1,492,049)$19,435 $472,928 
Exercise of stock options344 1 1 
Vesting of restricted stock awards and units2,294,295 — 
Vesting of performance-based stock units— 
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(566,218)(1,563)(1,563)
Stock-based compensation expense6,116 6,116 
Other comprehensive loss(1,756)(1,756)
Net loss(21,479)(21,479)
Balance at June 30, 2023170,958,400 $17 $1,950,079 $(1,513,528)$17,679 $454,247 

Six months ended June 30, 2023
Accumulated
AdditionalotherTotal
Common stockpaid-inAccumulatedcomprehensivestockholders'
SharesAmountcapitaldeficit(loss) incomeequity
Balance at January 1, 2023168,324,995 $17 $1,941,569 $(1,453,744)$30,585 $518,427 
Exercise of stock options917 2 2 
Vesting of restricted stock awards and units3,314,572 — 
Vesting of performance-based stock units381,071 — 
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(1,063,155)(3,456)(3,456)
Stock-based compensation expense11,964 11,964 
Other comprehensive loss(12,906)(12,906)
Net loss(59,784)(59,784)
Balance at June 30, 2023170,958,400 $17 $1,950,079 $(1,513,528)$17,679 $454,247 

See notes to the unaudited condensed consolidated financial statements.
















7





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


Three months ended June 30, 2022
Accumulated
AdditionalotherTotal
Common stockpaid-inAccumulatedcomprehensivestockholders'
SharesAmountcapitaldeficitincomeequity
Balance at April 1, 2022150,111,958 $15 $1,877,677 $(1,425,636)$22,356 $474,412 
Vesting of restricted stock awards and units396,148 — 
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(48,322)(134)(134)
Stock-based compensation expense4,399 4,399 
Other comprehensive income2,847 2,847 
Net loss(30,180)(30,180)
Balance at June 30, 2022150,459,784 $15 $1,881,942 $(1,455,816)$25,203 $451,344 



Six months ended June 30, 2022
Accumulated
AdditionalotherTotal
Common stockpaid-inAccumulatedcomprehensivestockholders'
SharesAmountcapitaldeficitincomeequity
Balance at January 1, 2022148,895,308 $15 $1,875,234 $(1,355,661)$7,578 $527,166 
Exercise of stock options355 — 
Vesting of restricted stock awards and units2,007,138 — 
Vesting of performance-based stock units175,751 — 
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(618,768)(1,946)(1,946)
Stock-based compensation expense8,654 8,654 
Other comprehensive income17,625 17,625 
Net loss(100,155)(100,155)
Balance at June 30, 2022150,459,784 $15 $1,881,942 $(1,455,816)$25,203 $451,344 


See notes to the unaudited condensed consolidated financial statements.






8



RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six months ended
June 30,
2023
June 30,
2022
Cash flows from operating activities:
Net loss$(59,784)$(100,155)
Adjustments to reconcile net loss to cash flows provided by (used in) operating activities:
Depreciation and amortization of property and equipment7,059 7,773 
Amortization of intangible assets29,352 30,943 
Amortization of debt issuance costs1,793 1,078 
Amortization of accumulated other comprehensive gain related to interest rate swap(2,062) 
Stock-based compensation11,964 8,654 
Deferred income taxes(6,946)(9,900)
Decrease in fair value of investments 39,411 
Gain on sale of swap(7,301) 
Change in fair value of warrant liability(1,318) 
Change in fair value of preferred stock liability1,456  
Dividends accrued on preferred stock liability1,272  
Foreign currency exchange losses(1,080)(1,048)
Changes in operating assets and liabilities:
Accounts receivable21,534 24,017 
Inventory(2,221)(17,043)
Other operating assets13,486 (319)
Accounts payable(1,740)4,090 
Accrued expenses and other long-term liabilities2,343 (8,196)
Deferred revenue767 (3,692)
Net cash provided by (used in) operating activities8,574 (24,387)
Cash flows from investing activities:
Purchases of property and equipment(4,091)(6,515)
Net cash used in investing activities(4,091)(6,515)
Cash flows from financing activities:
Borrowings under revolving line of credit30,000 20,000 
Principal payments on revolving line of credit(30,000)(20,000)
Principal payments of term debt(85,029)(35,029)
Principal payments of finance leases (341)
Payment of debt issuance costs(1,572)(1,046)
Proceeds from issuance of preferred stock and warrant liabilities53,350  
Proceeds from the exercise of stock options2  
Payment of tax withholding obligations related to net share settlements of restricted stock awards(3,456)(1,946)
Net cash used in financing activities(36,705)(38,362)
Effect of exchange rate changes on cash and cash equivalents(394)1,043 
Net decrease in cash and cash equivalents(32,616)(68,221)
Cash and cash equivalents, beginning of year67,262 106,485 
Cash and cash equivalents, end of period$34,646 $38,264 
9



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

Six months ended
June 30,
2023
June 30,
2022
Supplemental disclosure of cash flow information:
Interest paid$11,617 $7,833 
Income taxes paid$6,945 $5,955 
Income tax refunds received$430 $25 
Supplemental disclosure of non-cash investing activities:
  Capital expenditures incurred, but not yet paid$2,150 $3,478 
Inventory transfers to property and equipment$963 $868 
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$11,724 $6,608 

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, network solutions, and services that enable the secure delivery of data and voice communications, and high-bandwidth networking and connectivity 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 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, 2022, as amended (the "Annual Report"), which was filed with the SEC on March 31, 2023.

Private Placement Offering

On March 28, 2023, the Company issued 55,000 shares of newly designated Series A Preferred Stock (the "Preferred Stock") to investors in a private placement offering at a price of $970 per share, along with 4.9 million warrants (the "Warrants") to purchase shares of the Company's common stock, par value $0.0001 per share (the "Private Placement"), at the exercise price of $3.77 per share. The proceeds from the Private Placement were approximately $53.4 million, including approximately $10 million from existing related party stockholders (See Note 11).

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").

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 June 30, 2023, except for the addition of the accounting policy below for the Preferred Stock and Warrants issued in the Private Placement on March 28, 2023.

Preferred Stock and Warrants

The Company accounts for the Preferred Stock and Warrants as liability-classified instruments based on an assessment of their specific terms in accordance with ASC Topic 480, Distinguishing Liabilities from Equity. The fair value option was elected for the Preferred Stock, as the Company considers fair value to best reflect the expected future economic value. These liabilities are remeasured to fair value at each reporting date using the same valuation methodology applied upon issuance.

11


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The value of the Preferred Stock is calculated using the Black-Derman-Toy (BDT) stochastic yield lattice model to capture the optimal timing of repayment, increasing dividend rate and other features, and the value of the Warrants is calculated using the Black-Scholes Pricing Model.

Changes in the fair value of the Preferred Stock and Warrants are reported as Other income (expense), net in the Company's condensed consolidated statements of operations.

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 and the Preferred Stock and Warrants, 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.

Transfers of Financial Assets

The Company's IP Optical Networks segment maintains customer receivables factoring agreements with a number of financial institutions. Under the terms of these agreements, the Company may transfer receivables to the financial 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.

Factoring of accounts receivable and associated fees for the three and six months ended June 30, 2023 and 2022 were as follows (in thousands):

Three months endedSix months ended
June 30,
2023
June 30,
2022
June 30,
2023
June 30,
2022
Accounts receivable sold27,266 22,747 48,327 40,714 
Less factoring fees(815)(323)(1,270)(476)
Net cash proceeds26,451 22,424 47,057 40,238 


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 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 requirements
12


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
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 was effective for the Company January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on the Company's consolidated financial statements.

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 was effective for the Company January 1, 2023. 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.


(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 shares used to compute loss per share were as follows (in thousands):
 Three months endedSix months ended
 June 30,
2023
June 30,
2022
June 30,
2023
June 30,
2022
Weighted average shares outstanding - basic170,103 150,190 169,326 149,681 
Potential dilutive common shares    
Weighted average shares outstanding - diluted170,103 150,190 169,326 149,681 


Options to purchase the Company's common stock and unvested restricted and performance-based stock units aggregating 14.1 million shares and 15.4 million shares were excluded from the computation of diluted loss per share for the three and six months ended June 30, 2023 and 2022, respectively, because their effect would have been antidilutive.

As of June 30, 2023, the potential number of dilutive shares from the Warrants totaled 4,858,090 shares. However, there was no impact on weighted average shares outstanding from these Warrants for the three and six months ended June 30, 2023 as the average share price of the Company's common stock in each period was below the exercise price of $3.77 per share and their effect would have been antidilutive.

Dividends payable on the Preferred Stock are not an adjustment to net income (loss) used for the calculation of diluted earnings (loss) per share as these dividends are included in the fair value adjustment of the Preferred Stock which is reflected in Other income (expense), net.


13


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

Inventory at June 30, 2023 and December 31, 2022 consisted of the following (in thousands):
 June 30,
2023
December 31,
2022
On-hand final assemblies and finished goods inventories$87,081 $85,888 
Deferred cost of goods sold1,515 1,449 
88,596 87,337 
Less noncurrent portion (included in Other assets)(14,214)(11,914)
Current portion$74,382 $75,423 


(4) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at June 30, 2023 and December 31, 2022 consisted of the following (in thousands):
June 30, 2023Weighted average amortization period
(years)
CostAccumulated
amortization
Net
carrying value
Developed technology7.84$340,380 $226,478 $113,902 
Customer relationships11.86268,140 120,722 147,418 
Trade names3.885,000 4,845 155 
Software licenses3.005,186 1,285 3,901 
9.51$618,706 $353,330 $265,376 

December 31, 2022Weighted average amortization period
(years)
CostAccumulated
amortization
Net
carrying value
Developed technology7.84$340,380 $212,448 $127,932 
Customer relationships11.86268,140 106,385 161,755 
Trade names3.885,000 4,658 342 
Software licenses3.005,186 487 4,699 
9.51$618,706 $323,978 $294,728 

Estimated future amortization expense for the Company's intangible assets at June 30, 2023 was as follows (in thousands):
Years ending December 31,
Remainder of 2023$27,530 
202450,717 
202544,006 
202638,965 
202733,936 
202823,400 
Thereafter46,822 
$265,376 

There were no changes to the carrying value of the Company's goodwill in the six months ended June 30, 2023 and 2022.
14


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The components of goodwill at June 30, 2023 and 2022 were as follows (in thousands):
Cloud and EdgeIP Optical NetworksTotal
Balance at June 30, 2023
  Goodwill$392,302 $191,996 $584,298 
  Accumulated impairment losses(167,406)(116,000)(283,406)
$224,896 $75,996 $300,892 
Balance at June 30, 2022
  Goodwill$392,302 $191,996 $584,298 
  Accumulated impairment losses(167,406)(116,000)(283,406)
$224,896 $75,996 $300,892 


(5) INVESTMENTS AND FAIR VALUE HIERARCHY

The Company received debentures (the "Debentures") and warrants (the "AVCT Warrants") as sale consideration in connection with the sale of its Kandy Communications business on December 1, 2020 to American Virtual Cloud Technologies, Inc. ("AVCT"). The Debentures bore interest at a rate of 10% per annum, which was added to the principal amount of the Debentures. On September 8, 2021 (the "Debenture Conversion Date"), the Debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares"). The AVCT Warrants entitled the Company to purchase 4,377,800 shares of AVCT common stock at an exercise price of $0.01 per share and were to expire on December 1, 2025. The Company's investment in AVCT (the "AVCT Investment") was comprised of the Debentures and AVCT Warrants for periods prior to the Debenture Conversion Date and the Debenture Shares and AVCT Warrants for periods subsequent to the Debenture Conversion Date. The Company recorded the AVCT Investment at fair value, with changes in fair value recorded as a component of Other (expense) income, net, in the condensed consolidated statements of operations.

On August 29, 2022, the Company and AVCT entered into a settlement agreement which provided for, amongst other things, the cancellation of the Company's investment in the Debenture Shares and the AVCT Warrants with an aggregate fair value of $2.6 million. Pursuant to the settlement agreements, the Company and AVCT also entered into a Wind Down Agreement, pursuant to which a Reseller Agreement between the parties, as previously amended, was terminated, and the Company was granted a non-exclusive perpetual license to use and modify certain intellectual property owned by AVCT comprising WebRTC gateway technology that is integrated with Ribbon’s SBCs and Application Servers. As consideration, the Company paid AVCT $2.5 million in cash, the Debenture Shares were redeemed and canceled, and the AVCT Warrants were terminated and canceled. The perpetual license granted by AVCT is classified as Intangible assets, net in the Company's condensed consolidated balance sheet as of June 30, 2023 and December 31, 2022 in the amount of $3.2 million and $3.9 million, respectively.

The Company had no investment in AVCT as of June 30, 2023 or December 31, 2022 due to the settlement agreement entered into on August 29, 2022. The Company recorded losses of $12.4 million and $39.4 million in the three and six months ended June 30, 2022, respectively, representing the change in the fair value of the AVCT Investment.

The carrying amounts of the Company's financial instruments approximate their fair values and include cash equivalents, accounts receivable, accounts payable and borrowings under a revolving credit facility. Ribbon's term debt balance as of June 30, 2023 and December 31, 2022 of $245.4 million and $330.4 million, respectively, had a fair value of approximately $246.7 million and $323.0 million, respectively. Our Preferred Stock and Warrants liabilities had a combined fair value of $54.8 million as of June 30, 2023, including cumulative dividends on the Preferred Stock of $1.3 million.

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:
15


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

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.


(6) ACCRUED EXPENSES AND OTHER
Accrued expenses at June 30, 2023 and December 31, 2022 consisted of the following (in thousands):
 June 30,
2023
December 31,
2022
Employee compensation and related costs$31,654 $25,994 
Professional fees19,124 17,195 
Taxes payable16,895 8,152 
Other29,947 33,929 
$97,620 $85,270 


(7) WARRANTY ACCRUALS

The changes in the Company's accrual balance in the six months ended June 30, 2023 were as follows (in thousands):
Balance at January 1, 2023$11,857 
Current period provisions2,691 
Settlements(2,781)
Balance at June 30, 2023$11,767 


(8) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES

The Company recorded restructuring and related expense aggregating $4.3 million and $2.9 million in the three months ended June 30, 2023 and 2022, respectively, and $11.2 million and $7.7 million in the six months ended June 30, 2023 and 2022, respectively. Restructuring and related expense includes restructuring expense (primarily severance and related costs), estimated future variable lease costs for vacated properties with no intent or ability of sublease, and accelerated rent amortization expense.

For restructuring events that involve lease assets and liabilities, the Company applies lease reassessment and modification guidance and evaluates the right-of-use assets for potential impairment. If the Company plans to exit all or distinct portions of a facility and does not have the ability or intent to sublease, the Company will accelerate the amortization of each of those lease components through the vacate date. The accelerated amortization is recorded as a component of Restructuring and related 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.

Accelerated amortization of lease assets 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.
16


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Accelerated amortization of lease assets that are included as a component of restructuring and related expense are excluded from the restructuring accrual activity tables below, as the liability for lease payments for these facilities is included as a component of current and noncurrent Operating lease liabilities in the Company's condensed consolidated balance sheets at June 30, 2023 and December 31, 2022 (see Note 16). The Company may incur additional future expense if it is unable to sublease other locations included in the Company's facilities consolidation initiatives.

Restructuring and related expense for the three and six months ended June 30, 2023 and 2022 was comprised of the following (in thousands):
Three months endedSix months ended
June 30,
2023
June 30,
2022
June 30,
2023
June 30,
2022
Severance and related costs$2,843 $859 $8,551 $4,981 
Variable and other facilities-related costs1,125 $1,072 2,131 1,764 
Accelerated amortization of lease assets due to cease-use339 $963 562 963 
$4,307 $2,894 $11,244 $7,708 
2023 Restructuring Plan

On February 22, 2023, the Company's Board of Directors approved a strategic restructuring program (the "2023 Restructuring Plan") to streamline the Company's operations in order to support the Company's investment in critical growth areas. The 2023 Restructuring Plan is expected to include, among other things, charges related to a consolidation of facilities and a workforce reduction. Any potential positions eliminated in countries outside the United States are subject to local law and consultation requirements.

The Company recorded restructuring and related expense of $2.8 million and $8.5 million in the three and six months ended June 30, 2023, respectively, in connection with the 2023 Restructuring Plan entirely for severance related costs. A summary of the 2023 Restructuring Plan accrual activity for the six months ended June 30, 2023 is as follows (in thousands):

Balance at
January 1,
2023
Initiatives
charged to
expense
Cash
payments
Net transfer to operating lease accountsBalance at
June 30, 2023
Severance$ $8,551 $(6,042)$ $2,509 


2022 Restructuring Plan

On February 14, 2022, the Company's Board of Directors approved a strategic restructuring program (the "2022 Restructuring Plan") to streamline the Company's operations in order to support the Company's investment in critical growth areas. The 2022 Restructuring Plan includes, among other things, charges related to a consolidation of facilities and a workforce reduction. Any positions eliminated in countries outside the United States are subject to local law and consultation requirements.

The Company recorded restructuring and related expense of $1.5 million and $2.7 million in the three and six months ended June 30, 2023, respectively, in connection with the 2022 Restructuring Plan. The amount for the three months ended June 30, 2023 was comprised of $1.1 million for facilities-related costs, and $0.4 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease. The amount for the six months ended June 30, 2023 was comprised of $2.1 million for facilities-related costs and $0.6 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease. A summary of the 2022 Restructuring Plan accrual activity for the six months ended June 30, 2023 is as follows (in thousands):

17


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Balance at
January 1,
2023
Initiatives
charged to
expense
Cash
payments
Net transfer to operating lease accountsBalance at
June 30, 2023
Severance$1,164 $ $(843)$ $321 
Variable and other facilities-related costs890 2,131 (2,388) 633 
Accelerated amortization of lease assets due to cease-use 562  (562) 
$2,054 $2,693 $(3,231)$(562)$954 

Balance Sheet Classification

The current portions of accrued restructuring were $3.3 million and $1.3 million at June 30, 2023 and December 31, 2022, respectively, and are included as components of Accrued expenses in the condensed consolidated balance sheets. The long-term portions of accrued restructuring are included as components of Other long-term liabilities in the condensed consolidated balance sheets. The long-term portions of accrued restructuring were $1.3 million and $2.0 million at June 30, 2023 and December 31, 2022, respectively.


(9) 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"), Santander Bank, N.A., and others as lenders ("Lenders"). The proceeds from the Credit Agreement were used, in part, to pay off in full all obligations of the Company under the 2019 Credit Facility.

The 2020 Credit Facility originally provided 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 was originally available for letters of credit and a $20 million sublimit is available for swingline loans.

The indebtedness and other obligations under the 2020 Credit Facility are unconditionally guaranteed on a senior secured basis by the Company, Edgewater Networks, Inc., a wholly-owned subsidiary of the Company, and GENBAND Inc., a wholly-owned subsidiary of the Company (together, the "Guarantors"). The 2020 Credit Facility is secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including substantially all of the assets of the Company.

The 2020 Credit Facility requires compliance with certain financial covenants, including a minimum Consolidated Fixed Charge Coverage Ratio and a maximum Consolidated Net Leverage Ratio (each as defined in the 2020 Credit Facility, and each tested on a quarterly basis).

On August 18, 2020, the Company entered into the First Amendment to the 2020 Credit Facility in which $75 million of the 2020 Term Loan Facility was assigned from Citizens to a new lender and designated as the Term B Loan. The remaining $325 million of the 2020 Term Loan Facility was deemed the Term A Loan.

The Term A Loan and the 2020 Revolving Credit Facility mature in March 2025 and originally bore interest at the Borrower's option at either the LIBOR rate plus a margin ranging from 1.50% to 3.50% per year, or the base rate plus 0.50%, or the prime rate plus a margin ranging from 0.50% to 2.50% per year (the "Applicable Margin"). The Applicable Margin varied depending on the Company's Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility).

18


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The Term B Loan was scheduled to mature in March 2026 and bore interest, at the Borrower's option, at either the LIBOR rate plus a margin of 7.50% per year, or the base rate (the highest of the Federal Funds Effective Rate (as defined in the First Amendment) plus 0.50%, or the prime rate.

On December 1, 2020, the Company entered into the Second Amendment to the 2020 Credit Facility to obtain consent for an equity exchange with AVCT in connection with the sale of our Kandy Communications business, as well as to amend certain other provisions of the 2020 Credit Facility.

On March 3, 2021, the Company entered into the Third Amendment to the 2020 Credit Facility which provided for an incremental term loan facility in the principal amount of $74.6 million, the proceeds of which were used to consummate an open market purchase of all outstanding amounts under the Term B Loan, resulting in the assignment and immediate cancellation of the Term B Loan, such that the outstanding amount under the Term A Loan and incremental term loan facility were combined and held by the Lenders (the "2020 Term Loan") with the same terms as the Term A Loan. The Company wrote off $2.5 million of capitalized debt issuance costs in connection with the Third Amendment.

On March 10, 2022, the Company entered into the Fourth Amendment to the 2020 Credit Facility to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) and in conjunction the Company made a $15.0 million prepayment that was applied to the final payment due on the maturity date.

On June 30, 2022, the Company entered into the Fifth Amendment to the 2020 Credit Facility (the "Fifth Amendment") to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) for 2022, with the fourth quarter of 2022 increased to 4.75:1.00, the 1st and 2nd quarters of 2023 declining to 3.25:1.00, and in all subsequent quarters the ratio was to be fixed at 3.00:1.00. Also, the Fifth Amendment reduced the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the 2020 Credit Facility) in 2022, with the fourth quarter of 2022 reduced to 1.10:1.00 and in all subsequent quarters the ratio was to be fixed at 1.25:1.00. In addition, the Fifth Amendment increased the maximum rate at which loans were to bear interest if the Company's Consolidated Net Leverage Ratio for any quarter was greater than 4.50:1.00. Specifically, loans incurred would bear interest, at the Borrower’s option, at either LIBOR plus a margin ranging from 1.50% to 4.50% per year, or the base rate plus 0.50%, or the prime rate plus a margin ranging from 0.50% to 3.50% per year. The Fifth Amendment also allows the Company to incur junior secured or unsecured debt in an amount no less than $50 million, subject to certain conditions, including the requirement that 50% of the aggregate amount of such incurred debt (net of certain costs, fees and other amounts) must be applied to prepay the 2020 Credit Facility, and compliance with certain leverage ratio-based covenant exceptions. In connection with the Fifth Amendment, the Company made a $10.0 million voluntary prepayment that was applied to the final payment due on the maturity date. Subsequent to the Fifth Amendment, the Company is required to make quarterly principal payments on the 2020 Term Loan aggregating approximately $5.0 million per quarter through March 31, 2024 and $10.0 million in each of the three quarters thereafter, with the remaining and final payment due on the maturity date in March 2025.

On March 24, 2023, the Company entered into the Sixth Amendment to the 2020 Credit Facility (the “Sixth Amendment”) effective March 30, 2023. The Sixth Amendment, among other things, increased the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility), with the first, second and third quarters of 2023 increasing to 4.50:1.00. In the fourth quarter of 2023 and the first quarter of 2024, the Maximum Consolidated Net Leverage Ratio declines to 4.25:1.00 and 4.00:1.00, respectively. In all subsequent quarters, the Maximum Consolidated Senior Net Leverage Ratio will be fixed at 3.00:1.00 and the Maximum Consolidated Net Leverage Ratio will be fixed at 4.00:1.00. Also, the Sixth Amendment reduced the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the 2020 Credit Facility) to 1.10:1.00 through the first quarter of 2024 and in all subsequent quarters the ratio will be fixed at 1.25:1.00. The Sixth Amendment reduced the maximum borrowings allowed under the 2020 Revolving Credit Facility from $100 million to $75 million and the sublimit available for letters of credit was reduced from $30 million to $20 million. In addition, the Sixth Amendment replaced LIBOR with the Secured Overnight Financing Rate, or SOFR, as the alternative rate that may be used by the Company for calculating interest owed under the 2020 Credit Facility with the margin now fixed at 4.5%. In conjunction with the Sixth Amendment, the Company made a $75 million prepayment that was applied to the final payment due upon maturity in March 2025 of approximately $200.3 million. The $75 million prepayment was almost entirely funded with the net proceeds from the Private Placement and the sales of our interest rate swap. Debt issuance costs associated with the Sixth Amendment totaled $1.7 million and are being amortized on a straight line basis over the remaining life of the 2020 Credit Facility to Interest expense, net.

19


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
At June 30, 2023, the Company had an outstanding balance under the 2020 Term Loan of $245.4 million with an average interest rate of 9.6% and $3.0 million of letters of credit outstanding with an interest rate of 4.5%. At December 31, 2022, the Company had an outstanding balance under the 2020 Term Loan of $330.4 million at an average interest rate of 5.4% and $3.3 million of letters of credit outstanding with an interest rate of 4.5%. The Company's interest rates under our 2020 Term Loan for the six months ended June 30, 2023 and 2022 benefited from a hedge instrument that was in place, specifically a fixed rate swap, which was sold in March 2023 (see Note 10). As a result of the fixed rate swap sold in March 2023, the ongoing interest rate is based upon SOFR plus a fixed margin of 4.5%. The Company was in compliance with all covenants of the 2020 Credit Facility at both June 30, 2023 and December 31, 2022.

Letters of Credit and Performance and Bid Bonds

The Company uses letters of credit and performance and bid bonds in the course of its business. At June 30, 2023, the Company had $7.2 million of letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees"), comprised of the $3.0 million of letters of credit under the 2020 Credit Facility described above (the "Letters of Credit") and $4.2 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under various uncommitted facilities. At December 31, 2022, the Company had Guarantees aggregating $8.3 million, comprised of the $3.3 million of Letters of Credit noted above and $5.0 million of Other Guarantees.


(10) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to financial market risk related to foreign currency fluctuations and changes in interest rates. These exposures are actively monitored by management. To manage the volatility related to the exposure to changes in interest rates, the Company may enter into derivative financial instruments. Management's objective has been to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates. Ribbon's policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. Ribbon does not hold or issue derivative financial instruments for trading or speculative purposes.

The Company records derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a specific risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge, or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

Cash Flow Hedge of Interest Rate Risk

The 2020 Term Loan Facility had outstanding balances of $245.4 million and $330.4 million at June 30, 2023 and December 31, 2022, respectively. The 2020 Revolving Credit Facility was undrawn at both June 30, 2023 and December 31, 2022. Borrowings under the 2020 Credit Facility have variable interest rates based on LIBOR or SOFR (see Note 9). As a result of exposure to interest rate movements, during March 2020, the Company entered into an interest rate swap arrangement, which effectively converted its $400 million term loan with its variable interest rate based upon one-month LIBOR to an aggregate fixed rate of 0.904%, plus a leverage-based margin as defined in the 2020 Credit Facility.

On July 22, 2022, the Company sold $30 million of the notional amount of its interest rate swap back to its counterparty for $1.5 million, reducing the notional amount of this swap to $370 million. On August 16, 2022 the Company sold another $30 million of the notional amount of its interest rate swap back to its counterparty for $1.6 million, reducing the notional amount to $340 million, which approximated the current level of our term loan debt then outstanding. The gain in accumulated
20


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
other comprehensive (loss) income related to the $60 million notional amount sold of $3.1 million is being released into earnings on a straight line basis over the remaining term of the 2020 Credit Facility as a decrease to interest expense, the amortization of which totaled $0.2 million and $0.5 million for the three and six months ended June 30, 2023, respectively.

On March 24, 2023, the Company received $9.4 million, consisting of $0.4 million of interest and $9.0 million for the sale of $170 million of its $340 million notional amount interest rate swap back to its counterparty, reducing the notional amount to $170 million. On March 27, 2023, the Company received $9.8 million, consisting of $0.4 million of interest and $9.4 million for the sale of the remaining $170 million of its interest rate swap back to its counterparty. The portion of the gain in accumulated other comprehensive (loss) income related to the term loan debt prepaid on the date of the final sale of our swap totaled $7.3 million and was released into earnings immediately as Other income (expense), net. The portion of the gain in accumulated other comprehensive (loss) income related to our remaining term loan debt balance was $12.0 million and is being released into earnings on a straight line basis over the remaining term of the 2020 Credit Facility as a decrease to interest expense, the amortization of which totaled $1.6 million for the three months ended June 30, 2023.

The Company’s objectives in using interest rate derivatives have been to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has used an interest rate swap as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the related agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is recorded in accumulated other comprehensive income in the condensed consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the six months ended June 30, 2023 and 2022, such a derivative was used to hedge the variable cash flows associated with the outstanding borrowings under the 2020 Credit Facility and the Company has accounted for this derivative as an effective hedge until the final portion of the swap was sold on March 27, 2023. Any ineffective portion of the change in the fair value of the derivative was recognized directly in earnings.

Amounts reported in accumulated other comprehensive income related to the Company's derivative are reclassified to interest expense as interest is accrued on the Company’s variable-rate debt. The impact of the Company’s derivative financial instrument on its condensed consolidated statements of comprehensive (loss) income for the three and six months ended June 30, 2023 and 2022 was as follows, net of tax (in thousands):

Three months endedSix months ended
 June 30,
2023
June 30,
2022
June 30,
2023
June 30,
2022
Gain (loss) recognized in other comprehensive income (loss) on derivative, net of tax$ $3,916 $(2,715)$18,629 
Amount reclassified from accumulated other comprehensive income (loss) to other income upon sale of swap, net of tax  (5,099) 
Amount reclassified from accumulated other comprehensive income (loss) to interest expense(1,322)137 (4,507)893 
$(1,322)$4,053 $(12,321)$19,522 

The Company had no derivative assets or liabilities at June 30, 2023. The fair values and locations in the condensed consolidated balance sheets at December 31, 2022 of the Company's derivative assets (liabilities) designated as a hedging instrument were as follows (in thousands):
21


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Balance sheet locationDecember 31,
2022
Interest rate derivative - asset derivativeOther current assets$13,212 
Interest rate derivative - asset derivativeOther assets12,216 
$25,428 

The Company has classified the interest rate derivative aggregating $25.4 million at December 31, 2022, as Level 2 fair value measurements within the fair value hierarchy (see Note 5).


(11) PREFERRED STOCK AND WARRANTS

On March 28, 2023, the Company issued 55,000 shares of Preferred Stock to investors in the Private Placement at a price of $970 per share, along with 4,858,090 Warrants with an exercise price of $3.77 per share.

The Company accounts for the Preferred Stock and Warrants as liability-classified instruments based on an assessment of their specific terms in accordance with ASC Topic 480, Distinguishing Liabilities from Equity. The fair value option was elected for the Preferred Stock, as the Company considers fair value to best reflect the expected future economic value. These liabilities are remeasured to fair value at each reporting date using the same valuation methodology applied upon issuance using current input assumptions.

The value of the Preferred Stock is calculated using the Black-Derman-Toy (BDT) stochastic yield lattice model to capture the optimal timing of repayment, increasing dividend rate and other features and the value of the Warrants is calculated using the Black-Scholes Pricing Model.

Changes in the fair value of the Preferred Stock and Warrants are reported as Other income (expense), net in the Company's condensed consolidated statements of operations.

The fair value of the Preferred Stock and Warrants are determined using Level 3 input and the key inputs into the models utilized were as follows as of June 30, 2023:

Preferred Stock (BDT)
Face value per share$1,000
Interest payments per year4
Dividend rate - year 1 (paid in-kind)9.25%
Dividend rate - year 2 (paid in-kind or in cash at the Company's choice)9.75%
Dividend rate - thereafter (paid in cash)12.00%
Yield volatility25.0%
Time to maturity (in years)2.3

Warrants (Black-Scholes)
Stock price$2.79
Strike price$3.77
Risk-free rate4.31%
Volatility47.1%
Dividend yield0.0%
Time to expiration (years)3.8


22


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The changes in the Company's Preferred Stock and Warrant liabilities in the three months ended June 30, 2023 were as follows (in thousands):

Preferred stock liability
Balance at March 31, 2023$47,854 
Cumulative dividends1,272 
Fair value change1,456 
Balance at June 30, 2023$50,582 


Warrant liability
Balance at March 31, 2023$5,496 
Fair value change$(1,318)
Balance at June 30, 2023$4,178 

The Preferred Stock is subordinate to Company indebtedness and senior to the Company’s common stock or other equity. Holders of the Preferred Stock are entitled to cumulative dividends that accrue quarterly through the September 30, 2025 maturity date. Dividends are payable in-kind during the first year at a rate of 9.25%. At the Company’s option, the dividends are payable in-kind or in cash during the second year at a rate of 9.75%. Dividends thereafter are payable in cash at a rate of 12.00%. The proceeds from the Preferred Stock issuance were approximately $53.4 million, including $10.0 million from existing related party stockholders. Offering costs paid by the Company of approximately $3.5 million were recorded in Other income (expense), net in our condensed consolidated statement of operations in the three months ended March 31, 2023. The net proceeds from the Private Placement were used for the repayment of debt. The Preferred Stock is redeemable on or after the first and second anniversaries of the closing date at a rate of 103% and 102%, respectively.

The Warrants are immediately exercisable and upon an event such as a merger, consolidation, asset sale or similar change of control, the Warrants may be exercised and the holders may vote the underlying shares of common stock. In connection with the Private Placement, the Company provided the investors with certain registration rights relating to the Preferred Stock, the Warrants and the shares of the Company’s common stock underlying the Warrants, that required the Company to file a registration statement on Form S-3 with the SEC within 30 days following the closing date of the Private Placement. The registration requirement was completed on May 19, 2023.


(12) REVENUE RECOGNITION

The Company derives revenue from two primary sources: products and services. Product revenue includes the Company's hardware and software that function together to deliver the products' essential functionality. Software and hardware are also sold on a standalone basis. Services include customer support (software updates, upgrades and technical support), consulting, design services, installation services and training. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct.

When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services when they are sold separately to similar customers in order to estimate standalone selling price.

The Company's software licenses typically provide a perpetual right to use the Company's software. The Company also sells term-based software licenses that expire and Software-as-a-Service ("SaaS")-based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software and hardware are delivered before related services are provided and are functional without professional services or customer support. The Company has
23


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. Product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. The Company begins to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period.

The Company offers warranties on its products. Certain of the Company's warranties are considered to be assurance-type in nature, ensuring the product is functioning as intended. Assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations. The Company does not allow and has no history of accepting product returns.

Services revenue includes revenue from customer support and other professional services. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. The Company sells its customer support contracts at a percentage of list or net product price. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.

The Company's professional services include consulting, technical support, resident engineer services, design services and installation services. Because control transfers over time, revenue is recognized based on progress toward completion of the performance obligation. The method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the input method to measure progress for its contracts because it believes such method best depicts the transfer of assets to the customer, which occurs as the Company incurs costs for the contracts. However, in some instances, the Company uses the output method because it best depicts the transfer of asset to the customer. Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. When the measure of progress is based upon expended labor, progress toward completion is measured as the ratio of labor time expended to date versus the total estimated labor time required to complete the performance obligation. Revenue is recorded proportionally as costs are incurred or as labor is expended. Costs to fulfill these obligations include internal labor as well as subcontractor costs.

Customer training includes courses offered by the Company. The related revenue is typically recognized as the training services are performed.

24


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The Company's typical performance obligations include the following:
Performance ObligationWhen Performance Obligation is Typically SatisfiedWhen Payment is Typically Due
Software and Product Revenue
Software licenses (perpetual or term)Upon transfer of control; typically, when made available for download (point in time)Generally, within 30 days of invoicing except for term licenses, which may be paid for over time
Software licenses (subscription)Upon activation of hosted site (over time)Generally, within 30 days of invoicing
HardwareWhen control of the hardware passes to the customer; typically, upon delivery (point in time)Generally, within 30 days of invoicing
Software upgradesUpon transfer of control; typically, when made available for download (point in time)Generally, within 30 days of invoicing
Customer Support Revenue
Customer supportRatably over the course of the support contract (over time)Generally, within 30 days of invoicing
Professional Services
Other professional services (excluding training services)As work is performed (over time)Generally, within 30 days of invoicing (upon completion of services)
TrainingWhen the class is taught (point in time)Generally, within 30 days of services being performed

Significant Judgments

The Company's contracts with customers often include promises to transfer multiple products and services to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Judgment is required to determine the standalone selling price ("SSP") for each distinct performance obligation. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the SSP.

Deferred Revenue

Deferred revenue is a contract liability representing amounts collected from or invoiced to customers in excess of revenue recognized. This results primarily from the billing of annual customer support agreements where the revenue is recognized over the term of the agreement. The value of deferred revenue will increase or decrease based on the timing of recognition of revenue.

Disaggregation of Revenue

The Company disaggregates its revenue from contracts with customers based on the nature of the products and services and the geographic regions in which each customer is domiciled. The Company's revenue for the three and six months ended June
25


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
30, 2023 and 2022 was disaggregated as follows:
Three months ended June 30, 2023Product revenueService revenue (maintenance)Service revenue (professional services)Total revenue
United States$53,545 $33,890 $11,842 $99,277 
Europe, Middle East and Africa28,831 17,998 7,679 54,508 
Asia Pacific31,810 10,164 2,269 44,243 
Other3,161 7,576 1,853 12,590 
$117,347 $69,628 $23,643 $210,618 
Three months ended June 30, 2022Product revenueService revenue (maintenance)Service revenue (professional services)Total revenue
United States$53,743 $33,046 $11,360 $98,149 
Europe, Middle East and Africa28,528 18,700 6,545 53,773 
Asia Pacific23,004 9,371 4,158 36,533 
Other7,392 8,341 1,608 17,341 
$112,667 $69,458 $23,671 $205,796 
Six months ended June 30, 2023Product revenueService revenue (maintenance)Service revenue (professional services)Total revenue
United States$91,612 $66,963 $22,695 $181,270 
Europe, Middle East and Africa56,266 38,125 14,254 108,645 
Asia Pacific57,425 19,536 5,413 82,374 
Other5,362 15,592 3,534 24,488 
$210,665 $140,216 $45,896 $396,777 

Six months ended June 30, 2022Product revenueService revenue (maintenance)Service revenue (professional services)Total revenue
United States$85,683 $66,110 $22,005 $173,798 
Europe, Middle East and Africa52,938 36,442 13,356 102,736 
Asia Pacific45,394 19,796 7,605 72,795 
Other10,642 15,715 3,308 29,665 
$194,657 $138,063 $46,274 $378,994 


The Company's product revenue from indirect sales through its channel partner program and from its direct sales program for the three and six months ended June 30, 2023 and 2022 was as follows (in thousands):
Three months endedSix months ended
June 30,
2023
June 30,
2022
June 30,
2023
June 30,
2022
Indirect sales through channel partner program$37,590