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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
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 May 6, 2022, there were 150,139,066 shares of the registrant's common stock, $0.0001 par value per share, outstanding.



RIBBON COMMUNICATIONS INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2022
TABLE OF CONTENTS
ItemPage
PART I FINANCIAL INFORMATION
1.
PART II OTHER INFORMATION



Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which are subject to a number of risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future expenses, results of operations and financial position, integration activities, expected impacts 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") and the sale of our Kandy Communications business ("Kandy"), plans and objectives of management for future operations, plans for future cost reductions, if any, restructuring activities, and plans for future product offerings, development and manufacturing are forward-looking statements. Without limiting the foregoing, the words "anticipates", "believes", "could", "estimates", "expects", "intends", "may", "plans", "seeks" and other similar language, whether in the negative or affirmative, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are unknown and/or difficult to predict and that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Such risks and uncertainties include, but are not limited to, supply chain disruptions resulting from component availability and/or geopolitical instabilities and disputes (including those related to the war in Ukraine); 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; declines in the value of our ongoing investment in American Virtual Cloud Technologies, Inc. ("AVCT"), the purchaser of Kandy; unpredictable fluctuations in quarterly revenue and operating results; risks related to cybersecurity and data intrusion; failure to compete successfully against telecommunications equipment and networking companies; failure to grow our customer base or generate recurring business from our existing customers; credit risks; the timing of customer purchasing decisions and our recognition of revenues; macroeconomic conditions; the impact of restructuring and cost-containment activities; litigation; market acceptance of our products and services; rapid technological and market change; our ability to protect our intellectual property rights and obtain necessary licenses; our ability to maintain partner, reseller, distribution and vendor support and supply relationships; the potential for defects in our products; risks related to the terms of our credit agreement; higher risks in international operations and markets; increases in tariffs, trade restrictions or taxes on our products; currency fluctuations; and/or failure or circumvention of our controls and procedures. We therefore caution you against relying on any of these forward-looking statements.

Additional important factors that could cause actual results to differ materially from those in these forward-looking statements are also discussed in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part 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.


3


PART I FINANCIAL INFORMATION

Item 1. Financial Statements
RIBBON COMMUNICATIONS INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
March 31,
2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents$92,838 $103,915 
Restricted cash2,627 2,570 
Accounts receivable, net220,964 282,917 
Inventory61,578 54,043 
Other current assets44,723 37,545 
Total current assets422,730 480,990 
Property and equipment, net48,043 47,685 
Intangible assets, net335,188 350,730 
Goodwill300,892 300,892 
Investments16,904 43,931 
Deferred income taxes53,843 47,287 
Operating lease right-of-use assets49,549 53,147 
Other assets37,006 23,075 
$1,264,155 $1,347,737 
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of term debt$20,058 $20,058 
Accounts payable97,837 97,121 
Accrued expenses and other94,584 100,752 
Operating lease liabilities16,622 17,403 
Deferred revenue109,084 109,119 
Total current liabilities338,185 344,453 
Long-term debt, net of current330,353 350,217 
Operating lease liabilities, net of current51,599 55,196 
Deferred revenue, net of current19,312 20,619 
Deferred income taxes8,104 8,116 
Other long-term liabilities42,190 41,970 
Total liabilities789,743 820,571 
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; 150,111,958 shares issued and outstanding at March 31, 2022; 148,895,308 shares issued and outstanding at December 31, 2021
15 15 
Additional paid-in capital1,877,677 1,875,234 
Accumulated deficit(1,425,636)(1,355,661)
Accumulated other comprehensive income22,356 7,578 
Total stockholders' equity474,412 527,166 
$1,264,155 $1,347,737 

See notes to the unaudited condensed consolidated financial statements.

4


RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

 Three months ended
 March 31,
2022
March 31,
2021
Revenue:
Product$81,990 $97,889 
Service91,208 94,883 
Total revenue173,198 192,772 
Cost of revenue:
Product51,209 44,445 
Service35,667 37,780 
Amortization of acquired technology8,267 10,061 
Total cost of revenue95,143 92,286 
Gross profit78,055 100,486 
Operating expenses:
Research and development52,690 47,410 
Sales and marketing37,619 37,218 
General and administrative12,862 15,553 
Amortization of acquired intangible assets7,275 5,762 
Acquisition-, disposal- and integration-related1,849 1,197 
Restructuring and related4,814 5,950 
Total operating expenses117,109 113,090 
Loss from operations(39,054)(12,604)
Interest expense, net(4,001)(5,819)
Other expense, net(28,800)(25,448)
Loss before income taxes(71,855)(43,871)
Income tax benefit (provision)1,880 (816)
Net loss$(69,975)$(44,687)
Loss per share:
Basic$(0.47)$(0.31)
Diluted$(0.47)$(0.31)
Weighted average shares used to compute loss per share:
Basic149,167 145,936 
Diluted149,167 145,936 

See notes to the unaudited condensed consolidated financial statements.

5


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


Three months ended
March 31,
2022
March 31,
2021
Net loss$(69,975)$(44,687)
Other comprehensive income (loss), net of tax:
Unrealized gain on interest rate swap15,469 6,669 
Foreign currency translation adjustments(691)47 
Other comprehensive income, net of tax14,778 6,716 
Comprehensive loss, net of tax$(55,197)$(37,971)

See notes to the unaudited condensed consolidated financial statements.

6


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


Three months ended March 31, 2022
 Common stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive incomeTotal stockholders' equity
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 units1,610,990 — 
Vesting of performance-based stock units175,751 — 
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(570,446)(1,812)(1,812)
Stock-based compensation expense4,255 4,255 
Other comprehensive income14,778 14,778 
Net loss(69,975)(69,975)
Balance at March 31, 2022150,111,958 $15 $1,877,677 $(1,425,636)$22,356 $474,412 



Three months ended March 31, 2021
 Common stock
SharesAmountAdditional paid-in capitalAccumulated deficitAccumulated other comprehensive (loss) incomeTotal stockholders' equity
Balance at January 1, 2021145,425,248 $15 $1,870,256 $(1,178,476)$(4,942)$686,853 
Exercise of stock options13,389 24 24 
Vesting of restricted stock awards and units1,662,628 — 
Vesting of performance-based stock units1,525,681 — 
Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations(1,268,356)(11,233)(11,233)
Stock-based compensation expense5,060 5,060 
Other comprehensive income6,716 6,716 
Net loss(44,687)(44,687)
Balance at March 31, 2021147,358,590 $15 $1,864,107 $(1,223,163)$1,774 $642,733 

See notes to the unaudited condensed consolidated financial statements.

7



RIBBON COMMUNICATIONS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months ended
March 31,
2022
March 31,
2021
Cash flows from operating activities:
Net loss$(69,975)$(44,687)
Adjustments to reconcile net loss to cash flows provided by (used in) operating activities:
Depreciation and amortization of property and equipment3,885 4,226 
Amortization of intangible assets15,542 15,823 
Amortization of debt issuance costs527 3,141 
Stock-based compensation4,255 5,060 
Deferred income taxes(6,773)293 
Decrease in fair value of investments27,027 22,441 
Foreign currency exchange losses1,105 1,716 
Changes in operating assets and liabilities:
Accounts receivable60,461 28,083 
Inventory(11,837)(330)
Other operating assets(423)979 
Accounts payable540 (3,800)
Accrued expenses and other long-term liabilities(7,962)(41,480)
Deferred revenue(1,342)2,323 
Net cash provided by (used in) operating activities15,030 (6,212)
Cash flows from investing activities:
Purchases of property and equipment(3,471)(5,357)
Net cash used in investing activities(3,471)(5,357)
Cash flows from financing activities:
Proceeds from issuance of term debt 74,625 
Principal payments of term debt(20,015)(77,132)
Principal payments of finance leases(198)(272)
Payment of debt issuance costs(370)(789)
Proceeds from the exercise of stock options 24 
Payment of tax withholding obligations related to net share settlements of restricted stock awards(1,812)(11,233)
Net cash used in financing activities(22,395)(14,777)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(184)(464)
Net decrease in cash, cash equivalents and restricted cash(11,020)(26,810)
Cash, cash equivalents and restricted cash, beginning of year106,485 135,697 
Cash, cash equivalents and restricted cash, end of period$95,465 $108,887 
Supplemental disclosure of cash flow information:
Interest paid$3,453 $4,317 
Income taxes paid$2,576 $7,656 
Income tax refunds received$12 $766 
Supplemental disclosure of non-cash investing activities:
  Capital expenditures incurred, but not yet paid$2,420 $3,059 
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$5,533 $28,182 

See notes to the unaudited condensed consolidated financial statements.
8


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.

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 months ended March 31, 2021 was as follows (in thousands):

9


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Three months ended March 31, 2021
Prior presentationAmounts reclassifiedRevised presentation
Product revenue$97,889 $97,889 
Service revenue94,883 94,883 
  Total revenue192,772  192,772 
Cost of revenue - product44,445 44,445 
Cost of revenue - service37,780 37,780 
Amortization of acquired technology 10,061 10,061 
  Total cost of revenue82,225 10,061 92,286 
    Total gross profit110,547 (10,061)100,486 
Research and development47,410 47,410 
Sales and marketing37,218 37,218 
General and administrative15,553 15,553 
Amortization of acquired intangible assets15,823 (10,061)5,762 
Acquisition-, disposal- and integration-related1,197 1,197 
Restructuring and related5,950 5,950 
  Total operating expenses123,151 (10,061)113,090 
Loss from operations$(12,604)$ $(12,604)

Significant Accounting Policies

The Company's significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in the Annual Report. There were no material changes to the significant accounting policies during the three months ended March 31, 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.

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.

10


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
At both March 31, 2022 and December 31, 2021, the Company had $2.6 million of restricted cash, representing restricted short-term bank deposits pledged to secure certain performance and financial bonds as security for the Company's obligations under tenders, contracts and to one of its main subcontractors.

Transfers of Financial Assets

The Company maintains customer receivables factoring agreements with a number of financial institutions, primarily for IP Optical Networks sales outside of the United States. Under the terms of these agreements, the Company may transfer receivables to the financial institutions, on a non-recourse basis, provided that the financial institutions approve the receivables in advance. The Company maintains credit insurance policies from major insurance providers or obtains letters of credit from the customers for a majority of its factored trade receivables. The Company accounts for the factoring of its financial assets as a sale of the assets and records the factoring fees, when incurred, as a component of interest expense in the condensed consolidated statements of operations, and the proceeds from the sales of receivables are included in cash from operating activities in the condensed consolidated statements of cash flows. During the three months ended March 31, 2022, the Company received $18.0 million of cash from the sale of certain accounts receivable and recorded $0.2 million of interest expense in connection with these transactions. During the three months ended March 31, 2021, the Company received $31.3 million of cash from the sale of certain accounts receivable and recorded $0.2 million of interest expense in connection with these transactions.

Going Concern Assessment and Management Plans

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.

Under the 2020 Credit Facility (as defined in Note 9), the Company is required to maintain compliance with certain financial covenants (see Note 9). As of March 31, 2022, the Company was in compliance with its financial covenants. Due to the impact of market conditions on its forecast, including supply chain disruptions, higher costs, and other geopolitical instabilities and disputes, the Company projects it may not maintain compliance with its financial covenants under the 2020 Credit Facility, as amended, for the quarters ended June 30, 2022 and September 30, 2022. 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. As of the date of the issuance of these condensed consolidated financial statements, the Company currently does not have sufficient cash on hand or available liquidity to repay the outstanding balance of $355.5 million as of March 31, 2022, in the event the debt is accelerated.

Management's plans to avoid any potential event of default include raising additional cash that would allow the Company to pay down debt in order to remain in compliance with its financial covenants. The Company has or is in the process of obtaining agreements with certain vendors and with certain lending institutions that allow the Company to factor additional trade receivables. In addition, the Company has to ability to sell its derivative financial instrument and its investment in equity securities, which had an aggregate fair market value of $34 million as of March 31, 2022. Lastly, the Company would evaluate the timing of its capital spending and extension of its payment terms with vendors as needed.

In addition to the above plans, the Company has entered into discussions with its Lenders to seek a further amendment to the 2020 Credit Facility to adjust the covenants, and believes the likelihood of completion is reasonably likely. However, an amendment has not been finalized and is not within the Company's control.

The Company believes its plans are probable of being successfully implemented, which will result in adequate cash to allow the Company to pay down debt to meet its financial covenant requirements.

Recent Accounting Pronouncements

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
11


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
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 loss per share were as follows (in thousands):
 Three months ended
 March 31,
2022
March 31,
2021
Weighted average shares outstanding - basic149,167 145,936 
Potential dilutive common shares  
Weighted average shares outstanding - diluted149,167 145,936 


Options to purchase the Company's common stock and unvested restricted and performance-based stock units aggregating 8.4 million shares and 12.8 million shares have not been included in the computation of diluted earnings per share for the three months ended March 31, 2022 and 2021, respectively, because their effect would have been antidilutive.


(3) INVENTORY

Inventory at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
 March 31,
2022
December 31,
2021
On-hand final assemblies and finished goods inventories$68,107 $57,360 
Deferred cost of goods sold1,944 1,474 
70,051 58,834 
Less noncurrent portion (included in other assets)(8,473)(4,791)
Current portion$61,578 $54,043 
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RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


(4) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
March 31, 2022Weighted average amortization period
(years)
CostAccumulated
amortization
Net
carrying value
In-process research and development*$34,000 $ $34,000 
Developed technology7.93306,380 189,660 116,720 
Customer relationships11.86268,140 84,651 183,489 
Trade names3.885,000 4,021 979 
Internal use software3.00730 730  
9.17$614,250 $279,062 $335,188 

December 31, 2021Weighted average amortization period
(years)
CostAccumulated
amortization
Net
carrying value
In-process research and development*$34,000 $ $34,000 
Developed technology7.93306,380 181,393 124,987 
Customer relationships11.86268,140 77,653 190,487 
Trade names3.885,000 3,744 1,256 
Internal use software3.00730 730  
9.17$614,250 $263,520 $350,730 

* An in-process research and development intangible asset has an indefinite life until the product is generally available, at which time such asset is typically reclassified to developed technology.

Estimated future amortization expense for the Company's intangible assets at March 31, 2022 was as follows (in thousands):
Years ending December 31,
Remainder of 2022$44,907 
202353,966 
202446,899 
202540,338 
202636,489 
202731,634 
Thereafter80,955 
$335,188 

There were no changes to the carrying value of the Company's goodwill in the three months ended March 31, 2022 or
13


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2021. The components of goodwill at March 31, 2022 and March 31, 2021 were as follows (in thousands):
Cloud and EdgeIP Optical NetworksTotal
Balance at March 31, 2022
  Goodwill$392,302 $191,996 $584,298 
  Accumulated impairment losses(167,406)(116,000)(283,406)
$224,896 $75,996 $300,892 
Balance at March 31, 2021
  Goodwill$392,302 $191,996 $584,298 
  Accumulated impairment losses(167,406) (167,406)
$224,896 $191,996 $416,892 


(5) INVESTMENTS AND FAIR VALUE HIERARCHY

The Company received debentures and 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 (the "Debentures"), which was added to the principal amount of the Debentures. The Company recorded $1.5 million of interest income in the three months ended March 31, 2021, which was added to the principal amount of the Debentures, and which is included in Interest expense, net, in the condensed consolidated statement of operations. 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 warrants entitle the Company to purchase 4,377,800 shares of AVCT common stock at an exercise price of $0.01 per share, and expire on December 1, 2025 (the "Warrants"). The Company had not exercised any of the Warrants as of March 31, 2022. The Company's investment in AVCT (the "AVCT Investment") is comprised of the debentures and Warrants for periods prior to the Debenture Conversion Date and the Debenture Shares and Warrants for periods subsequent to the Debenture Conversion Date. The Company is recording the AVCT Investment at fair value, with changes in fair value recorded as a component of Other expense, net, in the condensed consolidated statements of operations.

The fair values of the AVCT Investment, which are reported as Investments in the Company's condensed consolidated balance sheets, were $16.9 million and $43.9 million at March 31, 2022 and December 31, 2021, respectively. The Company recorded a loss of $27.0 million in the three months ended March 31, 2022, representing the change in the fair value of the AVCT Investment. The Company recorded a loss of $23.9 million in the three months ended March 31, 2021 representing the change in the fair value of the AVCT Investment, which was partially offset by the paid-in-kind interest income described above. The AVCT Investment is classified as a Level 1 fair value measurement at both March 31, 2022 and December 31, 2021.

The Company evaluated the nature of its investment in AVCT at March 31, 2022 and December 31, 2021, and determined that it represented an equity interest on a diluted basis of approximately 10% and 15%, respectively. The Company determined that it is not the primary beneficiary of AVCT as it does not have the power to direct the activities that most significantly impact the AVCT Investment's economic performance, and therefore concluded that it had neither significant influence nor a controlling interest arising from the AVCT Investment that would require consolidation as of March 31, 2022 or December 31, 2021.

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

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
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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 March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
 March 31,
2022
December 31,
2021
Employee compensation and related costs$33,317 $38,040 
Professional fees17,451 14,365 
Other43,816 48,347 
$94,584 $100,752 


(7) WARRANTY ACCRUALS

The changes in the Company's accrual balance in the three months ended March 31, 2022 were as follows (in thousands):
Balance at January 1, 2022$13,120 
Current period provisions1,525 
Settlements(1,393)
Balance at March 31, 2022$13,252 


(8) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES

The Company recorded restructuring and related expense aggregating $4.8 million and $6.0 million in the three months ended March 31, 2022 and 2021, 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 records a liability for the estimated future variable lease costs.

Restructuring and related expense for the three months ended March 31, 2022 and 2021 was comprised of the following (in thousands):
15


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Three months ended
March 31,
2022
March 31,
2021
Severance and related costs$4,122 $669 
Variable and other facilities-related costs692 1,913 
Accelerated amortization of lease assets due to cease-use 3,368 
$4,814 $5,950 
Accelerated Rent Amortization

Accelerated rent 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. The liability for the total lease payments for each respective facility is included as a component of Operating lease liabilities in the Company's condensed consolidated balance sheets, both current and noncurrent (see Note 15). The Company may incur additional future expense if it is unable to sublease other locations included in its restructuring initiatives.

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 is expected to include, 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 $4.2 million for severance and related costs for approximately 50 employees in connection with the 2022 Restructuring Plan in the three months ended March 31, 2022. A summary of the 2022 Restructuring Plan accrual activity for the three months ended March 31, 2022 is as follows (in thousands):

Balance at
January 1,
2022
Initiatives
charged to
expense
Cash
payments
Balance at
March 31,
2022
Severance$ $4,179 $(365)$3,814 

2020 and 2019 Restructuring Plans

In 2020, the Company implemented a restructuring plan to eliminate certain positions and redundant facilities, primarily in connection with the Company's acquisition of ECI Telecom Group Ltd. in 2020 (the "ECI Acquisition"), to streamline the Company's global footprint and improve its operations (the "2020 Restructuring Plan"). The 2020 Restructuring Plan included facility consolidations and a reduction in workforce to eliminate functions arising from the ECI Acquisition and support its efforts to integrate the two companies. At March 31, 2022, the 2020 Restructuring Plan had a remaining accrual of $0.8 million for severance costs that are expected to be paid out over the next year.

In June 2019, the Company implemented a restructuring plan to streamline the Company's global footprint, improve its operations and enhance its customer delivery (the "2019 Restructuring Plan"). The 2019 Restructuring Plan included facility consolidates, refinement of the Company's research and development activities, and a reduction in workforce. At March 31, 2022, the 2019 Restructuring Plan had a remaining accrual of $1.4 million for facility costs that remain in the plan and which will be paid out over the various lease terms, which range from one to six years.
Balance Sheet Classification

The current portions of accrued restructuring are included as a component of Accrued expenses and the long-term portions of accrued restructuring are included as a component of Other long-term liabilities in the condensed consolidated balance
16


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
sheets. The long-term portions of accrued restructuring relate to facilities and totaled $1.4 million at March 31, 2022 and $1.6 million at December 31, 2021.


(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"), as administrative agent, a lender, issuing lender, swingline lender, joint lead arranger and bookrunner, Santander Bank, N.A., as a lender, joint lead arranger and bookrunner, and the other lenders party thereto (each, together with Citizens Bank, N.A. and Santander Bank, N.A., referred to individually as a "Lender", and collectively, the "Lenders"). The proceeds of the 2020 Credit Facility were used, in part, to pay off in full all obligations of the Company under its prior credit facility.

The 2020 Credit Facility provides for $500 million of commitments from the Lenders to the Borrower, comprised of $400 million in term loans (the "2020 Term Loan Facility") and a $100 million facility available for revolving loans (the "2020 Revolving Credit Facility"). Under the 2020 Revolving Credit Facility, a $30 million sublimit is available for letters of credit and a $20 million sublimit is available for swingline loans. Under the 2020 Credit Facility, the Company was originally required to make quarterly principal payments aggregating approximately $10 million in the first year, $20 million per year for the following three years, and $30 million in the last year, with the remaining balance due on the maturity date. The 2020 Credit Facility also requires periodic interest payments until maturity.

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 facilities under the 2020 Credit Facility are 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).

In addition, the 2020 Credit Facility contains various covenants that, among other restrictions, limit the Company’s and its subsidiaries’ ability to incur or assume indebtedness; grant or assume liens; make acquisitions or engage in mergers; sell, transfer, assign or convey assets; repurchase equity and make dividend and certain other restricted payments; make investments; engage in transactions with affiliates; enter into sale and leaseback transactions; enter into burdensome agreements; change the nature of its business; modify their organizational documents; and amend or make prepayments on certain junior debt.

The 2020 Credit Facility contains events of default that are customary for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events with respect to the Company or any of its subsidiaries occurs, all obligations under the 2020 Credit Facility will immediately become due and payable. If any other event of default occurs under the 2020 Credit Facility, the lenders may accelerate the maturity of the obligations outstanding under the Credit Facility and exercise other rights and remedies, including charging a default rate of interest equal to 2.00% per year above the rate that would otherwise be applicable. In addition, if any event of default exists under the 2020 Credit Facility, the lenders can commence foreclosure or other actions against the collateral.

On August 18, 2020 (the "First Amendment Date"), the Borrower entered into a First Amendment to the 2020 Credit Facility (the "First Amendment"). Pursuant to an assignment and assumption agreement entered into by Citizens and certain affiliates of Whitehorse Capital on the First Amendment Date (collectively, "HIG Whitehorse"), and consented to by Citizens and the Borrower, $75 million of the 2020 Term Loan Facility, designated as the Term B Loan (the "Term B Loan"), was assigned from Citizens to HIG Whitehorse as of August 18, 2020. The remaining $325 million of the 2020 Term Loan Facility
17


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
that was not assigned to HIG Whitehorse was deemed the Term A Loan (the "Term A Loan" and, together with the Term B Loan, the "Amended 2020 Term Loan Facility").

The Term A Loan and the 2020 Revolving Credit Facility mature in March 2025. The Term A Loan and 2020 Revolving Credit Facility bear 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 (the highest of the Federal Funds Effective Rate (as defined in the 2020 Credit Facility) plus 0.50%, or the prime rate announced from time to time in The Wall Street Journal) plus a margin ranging from 0.50% to 2.50% per year (the "Applicable Margin"). The Applicable Margin varies depending on the Company's Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility). The base rate and the LIBOR rate are each subject to a zero percent floor. The Company was required to make quarterly principal payments on the Term A Loan aggregating approximately $10 million in the first year, $16 million per year in each of the next two years, $20 million in the fourth year and $16 million in the last year, with the final payment approximating $244 million due on the maturity date. The Borrower could prepay all amounts under the Term A Loan and the 2020 Revolving Credit Facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements.

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 announced from time to time in The Wall Street Journal, plus a margin of 6.50% per year. The Term B Loan had a lower rate of amortization than the Term A Loan and was subject to a 1.0% premium if voluntarily repaid in connection with a repricing transaction (as defined in the 2020 Credit Facility) occurring prior to the six-month anniversary of the First Amendment Effective Date. The Company was required to make quarterly principal payments totaling approximately $1 million in the first year and $8 million in the aggregate over the next four and a half years, with the final payment approximating $66 million.

The First Amendment reduced the Borrower's ability to incur new tranches of term loans, or increases in commitments under the Amended 2020 Term Loan Facility or the 2020 Revolving Credit Facility. Specifically, such indebtedness could be incurred up to an aggregate dollar amount equal to 75% of the Company's Consolidated Adjusted EBITDA (as defined in the 2020 Credit Facility), reduced from 100% prior to the First Amendment, as of the most recently ended fiscal quarter for which financial statements had been delivered to the lenders, plus additional amounts, so long as the Borrower's Consolidated Net Leverage Ratio (as defined in the 2020 Credit Agreement) did not exceed 2.25:1.00, reduced from 2.75:1.00 under the 2020 Credit Facility. The First Amendment also reduced the amount of Unrestricted Cash (as defined in the 2020 Credit Facility) used in calculating the Borrower's Consolidated Net Leverage Ratio from $25 million to $10 million.

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

On March 3, 2021 (the "Third Amendment Date"), the Company, the Borrower and certain of its subsidiaries entered into a Third Amendment to Credit Agreement (the "Third Amendment"), which further amended the 2020 Credit Facility. The Third Amendment provided for an incremental term loan facility to the Borrower in the original principal amount of $74.6 million, the proceeds of which were used on the Third Amendment Date to consummate an open market purchase of all outstanding amounts under the Term B Loan. Upon the consummation of the open market purchase, the Term B Loans were assigned to the Borrower and immediately cancelled, 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, which is included in Interest expense, net, in the Company's condensed consolidated statement of operations for the three months ended March 31, 2021. The Company was required to make quarterly principal payments on the 2020 Term Loan aggregating approximately $20 million per year in the first three years and $30 million in the fourth year, with the final payment approximating $300 million due on the maturity date.

The Third Amendment increased the Borrower's ability to incur new incremental revolving commitments or term loans. Such indebtedness can be incurred up to an aggregate dollar limit equal to 100% of the Company's Consolidated Adjusted EBITDA (as defined in the 2020 Credit Facility) as of the most recently ended fiscal quarter for which financial statements have been delivered to the Lenders, plus additional amounts, so long as the Borrower's Consolidated Net Leverage Ratio (as
18


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
defined in the Credit Agreement) does not exceed 2.75:1.00, increased from 2.25:1.00 under the First Amendment. The Third Amendment also increased the amount of Unrestricted Cash (as defined in the 2020 Credit Facility) used in calculating the Borrower's Consolidated Net Leverage Ratio from $10.0 million to $25.0 million.

On March 10, 2022, the Borrowers entered into a Fourth Amendment to the 2020 Credit Facility (the "Fourth Amendment") to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) to 4.25:1.00 for the first quarter of 2022 and 4.50:1.00 for the second quarter of 2022, with reductions in subsequent quarters through the third quarter of 2023, when the ratio will be fixed at 3.00:1.00. In connection with the Fourth Amendment, the Company made a $15.0 million prepayment that was applied to the final payment due on the maturity date. Subsequent to the Fourth Amendment, the Company is required to make quarterly principal payments on the 2020 Term Loan aggregating approximately $20 million per year for the next two years and $30 million in the following year, with the final payment approximating $285 million due on the maturity date.

At March 31, 2022, the Company had an outstanding 2020 Term Loan balance of $355.5 million at an average interest rate of 3.4% and $4.4 million of letters of credit outstanding with an interest rate of 2.5%. At December 31, 2021, the Company had an outstanding 2020 Term Loan balance of $375.5 million at an average interest rate of 3.4% and $4.3 million of letters of credit outstanding with an interest rate of 2.5%. The Company was in compliance with all covenants of the 2020 Credit Facility at both March 31, 2022 and December 31, 2021.

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 March 31, 2022, the Company had letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees") aggregating $30.7 million, comprised of the $4.4 million of letters of credit under the 2020 Credit Facility described above (the "Letters of Credit") and $26.3 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under various uncommitted facilities. At December 31, 2021, the Company had Guarantees aggregating $30.1 million, comprised of the $4.3 million of Letters of Credit noted above and $25.8 million of Other Guarantees. At both March 31, 2022 and December 31, 2021, the Company had cash collateral of $2.6 million, supporting the Guarantees, which is reported as Restricted cash in the condensed consolidated balance sheets.


(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 has entered into a derivative financial instrument. Management's objective is 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.

19


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Cash Flow Hedge of Interest Rate Risk

The 2020 Term Loan Facility had outstanding balances of $355.5 million and $375.5 million at March 31, 2022 and December 31, 2021, respectively. The 2020 Revolving Credit Facility was undrawn at both March 31, 2022 and December 31, 2021. Borrowings under the 2020 Credit Facility have variable interest rates based on LIBOR (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. The notional amount of this swap at March 31, 2022 was $400 million, and the swap matures on March 3, 2025, the same date the 2020 Credit Facility matures.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company is using 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 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 three months ended March 31, 2022 and 2021, 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. Any ineffective portion of the change in the fair value of the derivative would be 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. Based upon projected forward rates, the Company estimates as of March 31, 2022 that $2.7 million may be reclassified as a decrease to interest expense over the next twelve months.

The impact of the Company’s derivative financial instrument on its condensed consolidated statements of comprehensive loss for the three months ended March 31, 2022 and 2021 was as follows (in thousands):
Three months ended
 March 31,
2022
March 31,
2021
Gain recognized in other comprehensive income (loss) on derivative (effective portion)$14,713 $5,889 
Amount reclassified from accumulated other comprehensive income to interest expense (effective portion) 756 780 
$15,469 $6,669 

The fair values and locations in the condensed consolidated balance sheets at March 31, 2022 and December 31, 2021 of the Company's derivative assets (liabilities) designated as a hedging instrument were as follows (in thousands):
Balance sheet locationMarch 31,
2022
December 31,
2021
Interest rate derivative - asset derivativeOther current assets$2,695 $ 
Interest rate derivative - asset derivativeOther assets14,585 3,865 
Interest rate derivative - liability derivativeAccrued expenses and other (2,054)
$17,280 $1,811 

The Company has classified the interest rate derivative aggregating $17.3 million and $1.8 million at March 31, 2022 and December 31, 2021, respectively, as Level 2 fair value measurements within the fair value hierarchy (see Note 5).


20


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
(11) 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 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.

21


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 months ended March 31, 2022 and 2021 was disaggregated as follows:
22


RIBBON COMMUNICATIONS INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Three months ended March 31, 2022Product revenueService revenue (maintenance)Service revenue (professional services)Total revenue
United States$31,940 $33,064 $10,645 $75,649 
Europe, Middle East and Africa24,410 17,742 6,811 48,963 
Asia Pacific22,390 10,425 3,447 36,262 
Other3,250 7,374 1,700 12,324 
$81,990 $68,605 $22,603 $173,198 

Three months ended March 31, 2021Product revenueService revenue (maintenance)