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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-28 · 469 added, 326 removed, 242 unchanged (77% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

We are a leading provider of next generation ("NextGen") software solutions to telecommunications, wireless and cable service providers and enterprises across industry verticals.

With over 1,000 customers around the globe, including some of the largest telecommunications service providers and enterprises in the world, we enable service providers and enterprises to modernize their communications networks through software and provide secure RTC solutions to their customers and employees.

By securing and enabling reliable and scalable IP networks, we help service providers and enterprises adopt the next generation of software-based virtualized and cloud communications technologies for service providers to drive new, incremental revenue while protecting their existing revenue streams.

Our software solutions provide a secure way for our customers to connect and leverage multivendor, multiprotocol communications systems and applications across their networks and the cloud, around the world and in a rapidly changing ecosystem of IP-enabled devices, such as smartphones and tablets.

In addition, our software solutions secure cloud-based delivery of UC solutions - both for service providers transforming to a cloud-based network and for enterprises using cloud-based UC.

We sell our software solutions through both direct sales and indirect channels globally, leveraging the assistance of resellers, and we provide ongoing support to our customers through a global services team with experience in design, deployment and maintenance of some of the world's largest software IP networks.

Unless otherwise noted, all financial amounts, excluding tabular information, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are rounded to the nearest thousand dollar amount, and all percentages, excluding tabular information, are rounded to the nearest percentage point.

Unless otherwise noted, all forward-looking statements in this MD&A exclude the pending ECI Merger.

We are a leading global provider of communications technology to service providers and enterprises.

We provide a broad range of software and high-performance hardware products, solutions and services that enable the secure delivery of data and voice communications for residential consumers and for small, medium and large enterprises and industry verticals such as finance, education, government, utilities and transportation.

Our 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.

Headquartered in Plano, Texas, we have a global presence with research and development and/or sales and support locations in over thirty-five countries around the world.

Impact of COVID-19 on Our Business

In 2020, a novel strain of the coronavirus (COVID-19) was declared by the World Health Organization to be a global pandemic.

The COVID-19 pandemic has had a negative effect on the global economy, disrupting the various manufacturing, commodity and financial markets and increasing volatility, and has impeded global supply chains, including that of our IP Optical Networks operating segment.

Continued dampened global economic conditions as a result of the COVID-19 pandemic may cause our customers to restrict spending or delay purchases for an indeterminate period of time and consequently cause our revenues to decline.

In addition, our ability to deliver our solutions as agreed upon with our customers depends on the ability of our global contract manufacturers, vendors, licensors and other business partners to deliver products or perform services we have procured from them.

While, to date, we have not experienced material issues, if the continuing COVID-19 pandemic impairs the ability of our business partners to support us on a timely basis, or negatively impacts the demand for our customers' other products and services, our ability to perform our customer contracts as well as the demand for our solutions may suffer.

In addition, disruptions from the COVID-19 pandemic could include, and with respect to our IP Optical Networks operating segment have included, disruption of logistics necessary to import, export and deliver our solutions.

The COVID-19 pandemic has also limited the ability of our associates to perform their work due to illness caused by the pandemic or local, state or federal orders requiring associates to remain at home.

Concerns over the economic impact of the COVID-19 pandemic have also caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price.

Such volatility may also adversely impact our ability to access capital markets if and when we would be required to do so.

The degree to which the COVID-19 pandemic ultimately impacts our business, financial position and results of operations will depend on future developments beyond our control, including the severity of the pandemic, the frequency and duration of future waves of infection, the effectiveness and timing of any vaccines, the extent of actions to contain or treat the virus, how quickly and to what extent normal economic and operating conditions can resume, and the severity and duration of the global economic downturn that results from the pandemic.

As a response to the ongoing COVID-19 pandemic, we have implemented plans to manage our costs.

As part of that plan, we implemented a temporary wage reduction of 10% to 50% applicable to the base salary of most of our employees, which salary reduction has now ended.

We have significantly limited the addition of new employees and third-party contracted services, eliminated all travel except where necessary to meet customer or regulatory needs, and acted to limit discretionary spending.

To the extent the business disruption continues for an extended period, additional cost management actions will be considered.

Any future asset impairment charges, increases in the allowance for doubtful accounts or restructuring charges could be more likely and will be dependent on the severity and duration of this crisis.

Unless otherwise noted, all financial amounts, excluding tabular information, in this MD&A are rounded to the nearest million dollar amount, and all percentages, excluding tabular information, are rounded to the nearest percentage point.

Reclassification of Amortization of Acquired Intangible Assets

In 2020, we reclassified amounts recorded for amortization of acquired intangible assets in prior presentations from Cost of revenue - product and Sales and marketing to a separate line included in operating expenses in our consolidated statements of operations.

Our Management believes this presentation enhances the comparability of our financial statements to industry peers.

These reclassifications did not impact our operating income (loss), net income (loss) or earnings (loss) per share for any historical periods.

These reclassifications also did not impact our consolidated balance sheets or consolidated statements of cash flows.

These reclassifications resulted in reductions to Cost of revenue - product and Sales and marketing of $37.6 million and

$11.6 million, respectively, reclassified to Amortization of acquired intangible assets in the year ended December 31, 2019.

The reduction to Cost of revenue - product increased our product gross profit as a percentage of product revenue ("product gross margin") and our total gross profit as a percentage of revenue ("total gross margin) by 14 and 7 percentage points, respectively.

These reclassifications resulted in reductions to Cost of revenue - product and Sales and marketing of $39.0 million and $10.7 million, respectively, reclassified to Amortization of acquired intangible assets in the year ended December 31, 2018.

The reduction to Cost of revenue - product increased our product gross profit as a percentage of product revenue and our total gross profit as a percentage of revenue by 14 and 7 percentage points, respectively.

Business Acquisitions

Pending Merger

On November 14, 2019, we entered into an Agreement and Plan of Merger (the "ECI Merger Agreement") with Eclipse Communications Ltd., an indirect wholly-owned subsidiary of the Company ("Merger Sub"), Ribbon Communications Israel Ltd., ECI Telecom Group Ltd.

("ECI") and ECI Holding (Hungary) kft, pursuant to which Merger Sub will merge with and into ECI, with ECI surviving such merger as a wholly-owned subsidiary of the Company (the "ECI Merger").

Our Board of Directors (the "Board") unanimously approved the ECI Merger Agreement and the transactions contemplated thereby.

Our stockholders approved the issuance of 32.5 million shares of our common stock (the "ECI Stock Consideration") as partial consideration in the ECI Merger.

As provided in the ECI Merger Agreement, at the time of the closing, all equity securities of ECI issued and outstanding immediately prior to the closing will be converted into the right to receive consideration consisting of $324 million in cash (the "ECI Cash Consideration") and the ECI Stock Consideration, less the amount of indebtedness of ECI.

ECI equityholders will also receive approximately $31 million from ECI's sale of real estate assets.

We intend to fund the ECI Cash Consideration with proceeds from a new $500 million credit facility that we expect to enter into with Citizens Bank, N.A.

and Santander Bank, N.A., as joint lead arrangers and bookrunners, in connection with the closing of the ECI Merger (the “2020 Credit Facility”).

The 2020 Credit Facility consists of a $400 million term loan, which will be used in part to fund the merger, and a $100 million revolver that is projected to be undrawn at closing.

The 2020 Credit Facility will retire our existing credit facility.

Immediately following the closing, it is expected that the former holders of ECI will own approximately 23% of our outstanding common shares.

The ECI Merger is expected to close in the first quarter of 2020, subject to regulatory approvals and customary closing conditions.

ECI Telecom Group Ltd

On March 3, 2020 (the "ECI Acquisition Date"), we completed the acquisition of ECI in accordance with the terms of the Agreement and Plan of Merger, dated as of November 14, 2019, by and among Ribbon, an indirect wholly-owned subsidiary of Ribbon ("Merger Sub"), Ribbon Communications Israel Ltd., ECI, and ECI Holding (Hungary) kft, pursuant to which Merger Sub merged with and into ECI, with ECI surviving such merger as a wholly-owned subsidiary of Ribbon (the "ECI Acquisition").

Prior to the ECI Acquisition Date, ECI was a privately-held global provider of end-to-end packet-optical transport and software-defined networking ("SDN") and network function virtualization ("NFV") solutions for service providers, enterprises and data center operators.

Ribbon believes the ECI Acquisition positions the Company for growth and enhances its competitive strengths by expanding its product portfolio beyond solutions primarily supporting voice applications to include data applications and optical networking.

As consideration for the ECI Acquisition, we issued the ECI shareholders and certain others 32.5 million shares of Ribbon common stock with a fair value of $108.6 million (the "Stock Consideration") and paid $322.5 million of cash, comprised of $183.3 million to repay ECI's outstanding debt, including both principal and interest, and $139.2 million paid to ECI's selling shareholders (the "Cash Consideration").

In addition, ECI shareholders received $33.4 million from the sale of certain of ECI's real estate assets.

Cash Consideration was financed through cash on hand and committed debt financing consisting of a new $400 million term loan facility and new $100 million revolving credit facility, which was undrawn at the ECI Acquisition Date.

The ECI Acquisition has been accounted for as a business combination and the financial results of ECI have been included in our consolidated financial statements for the periods subsequent to the ECI Acquisition Date.

Anova Data, Inc.

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("Anova"), a private company headquartered in Westford, Massachusetts (the "Anova Acquisition").

Anova is a provider of advanced analytics solutions and its NextGen products provide a cloud-native, streaming analytics platform for network and subscriber optimization and monetization.

The Company believes that the Anova Acquisition is reinforcing and extending

Ribbon's strategy to expand into network optimization, security and data monetization via big data analytics and machine learning.

As consideration for the Anova Acquisition, we issued 2.9 million shares of our common stock with a fair value of $15.2 million to Anova's sellers and equity holders on the Anova Acquisition Date and held back an additional 0.3 million shares of our common stock with a fair value of $1.7 million, some or all of which could be issued subject to post-closing adjustments (the "Anova Deferred Consideration").

The Anova Deferred Consideration is included as a component of Accrued expenses and other current liabilities in our consolidated balance sheet at December 31, 2019.

The Anova Acquisition has been accounted for as a business combination and the financial results of Anova have been included in our consolidated financial statements for the period subsequent to the Anova Acquisition Date.

Anova is a provider of advanced analytics solutions and its next generation products provide a cloud-native, streaming analytics platform for network and subscriber optimization and monetization.

The Company believes that the Anova Acquisition will reinforce and extend Ribbon's strategy to expand into network optimization, security and data monetization via big data analytics and machine learning.

As consideration for the Anova Acquisition, we issued 2.9 million shares of our common stock with a fair value of $15.2 million to Anova's sellers and equity holders on the Anova Acquisition Date and held back an additional 330,000 shares of our common stock with a fair value of $1.7 million (the "Deferred Purchase Consideration"), of which 316,551 shares were issued after post-closing adjustments on March 4, 2020.

The Deferred Purchase Consideration was included as a component of Accrued expenses and other in our consolidated balance sheet at December 31, 2019.

Edgewater Networks, Inc.

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We believe that the acquisition of Edgewater allows us to offer our global customer base a complete core-to-edge product portfolio, end-to-end service assurance and analytics solutions, and a fully integrated SD-WAN service.

As consideration for the Edgewater Acquisition, we paid, in the aggregate, approximately $46 million of cash, net of cash acquired, and issued 4.2 million shares of Ribbon common stock to Edgewater's selling shareholders and holders of vested in-the-money options and warrants to acquire common stock of Edgewater (the "Edgewater Selling Stakeholders") on the Edgewater Acquisition Date.

As consideration for the Edgewater Acquisition, we paid, in the aggregate, $46.4 million of cash, net of cash acquired, and

issued 4.2 million shares of Ribbon common stock to Edgewater's selling shareholders and holders of vested in-the-money options and warrants to acquire common stock of Edgewater (the "Edgewater Selling Stakeholders") on the Edgewater Acquisition Date.

The cash payment was funded through our then-current credit facility.

We had previously agreed to pay the Edgewater Selling Stakeholders an additional $30 million of cash, $15 million of which was to be paid six months from the Edgewater Acquisition Date and the other $15 million of which was to be paid as early as nine months from the Edgewater Acquisition Date and no later than 18 months from the Edgewater Acquisition Date (the exact timing of which would depend on the amount of revenue generated from the sales of Edgewater products in 2018) (the "Edgewater Deferred Consideration").

We had previously agreed to pay the Edgewater Selling Stakeholders an additional $30.0 million of cash, $15.0 million of which was to be paid six months from the Edgewater Acquisition Date and the other $15.0 million of which was to be paid as early as nine months from the Edgewater Acquisition Date (the exact timing of which would depend on the amount of revenue generated from the sales of Edgewater products in 2018) (the "Edgewater Deferred Consideration").

On February 15, 2019, we and the Edgewater Selling Stakeholders agreed to reduce the amount of Edgewater Deferred Consideration from $30 million to $21.9 million and agreed that all such deferred consideration would be payable on March 8, 2019.

We paid the Edgewater Selling Stakeholders $21.9 million on March 8, 2019 and recorded the reduction to the Edgewater Deferred Consideration of $8.1 million in Other income, net, in our consolidated statement of operations for the year ended December 31, 2019.

We paid the Edgewater Selling Stakeholders $21.9 million on March 8, 2019 and recorded the $8.1 million reduction to the Edgewater Deferred Consideration in Other income (expense), net, in our consolidated statement of operations for the year ended December 31, 2019.

The Edgewater Acquisition has been accounted for as a business combination and the financial results of Edgewater have been included in our consolidated financial statements for the period subsequent to the Edgewater Acquisition Date.

On October 27, 2017 (the "Merger Date"), Sonus Networks, Inc.

("Sonus") consummated an acquisition as specified in an Agreement and Plan of Merger (the “Merger Agreement”) with Solstice Sapphire Investments, Inc.

("NewCo") and certain of its wholly-owned subsidiaries, GENBAND Holdings Company, GENBAND Inc.

and GENBAND II, INC.

(collectively, "GENBAND") such that, following a series of mergers (collectively, the "Merger"), Sonus and GENBAND each became a wholly-owned subsidiary of NewCo.

As a result of the Merger, we believe we are better positioned to enable network transformations to IP and to cloud-based networks for service providers and enterprise customers worldwide, with a broader and deeper sales footprint, increased ability to invest in growth, more efficient and effective research and development, and a comprehensive RTC product offering.

Pursuant to the Merger Agreement, NewCo issued 50.9 million shares to the GENBAND equity holders, with the number of shares issued in the aggregate to the GENBAND equity holders equal to the number of shares of Sonus common stock outstanding immediately prior to the closing date of the Merger, such that former stockholders of Sonus would own 50%, and former shareholders of GENBAND and the two related holding companies would own 50% of the shares of NewCo common stock issued and outstanding immediately following the consummation of the Merger.

The Merger has been accounted for as a business combination and the financial results of GENBAND have been included in our consolidated financial statements beginning on the Merger Date.

On November 28, 2017, the Company changed its name from "Sonus Networks, Inc." to "Ribbon Communications Inc."

Sale of Kandy Communications Business

On August 5, 2020, we announced that we had entered into a definitive agreement (the "Kandy Purchase Agreement") with American Virtual Cloud Technologies, Inc.

("AVCT") to sell our cloud-based enterprise services business (the "Kandy Communications Business").

Under the Kandy Purchase Agreement, AVCT would purchase the assets and assume certain liabilities associated with the Kandy Communications Business, as well as all of the outstanding interests in our Kandy Communications LLC subsidiary (the "Kandy Sale").

On December 1, 2020, we and AVCT entered into an amended and restated Purchase Agreement (the “Amended Kandy Agreement”).

Under the terms of the Amended Kandy Agreement, AVCT agreed to pay us $45.0 million, subject to certain adjustments, in the form of units of AVCT’s securities (the “AVCT Units”), with each AVCT Unit consisting of:

(i) $1,000 in principal amount of AVCT’s Series A-1 convertible debentures (the “Debentures”);

and (ii) one warrant to purchase 100 shares of AVCT common stock, $0.0001 par value (the “Warrants”), as consideration for the Kandy Sale (the "Kandy Consideration").

The Kandy Sale was completed on December 1, 2020 (the "Kandy Sale Date"), and we received 43,778 AVCT Units as sale consideration on that date.

The Debentures bear interest at a rate of 10% per annum, which will be added to the principal amount of the Debentures, except upon maturity, in which case accrued and unpaid interest is payable in cash.

The entire principal of each Debenture, together with accrued and unpaid interest thereon, is due and payable on the earlier of the May 1, 2023 maturity date or the occurrence of a Change in Control as defined in the Amended Kandy Agreement.

Each Debenture is convertible, in whole or in part, at any time at our option into that number of shares of AVCT common stock, calculated by dividing the principal amount being converted, together with all accrued and unpaid interest thereon, by the applicable conversion price, initially $3.45.

The Debentures are subject to mandatory redemption if the AVCT stock price is at or above $6.00 per share for 40 trading days in any 60 consecutive trading day period, subject to the satisfaction of certain other conditions.

The conversion price is subject to customary adjustments including, but not limited to, stock dividends, stock splits and reclassifications.

At our option, up to $5.0 million of the Debentures may be redeemed by AVCT at par in the event AVCT raises at least $50.0 million in its offering of AVCT Units.

As of February 19, 2021, the stock had traded above $6.00 for 40 days within a 60 consecutive day trading period and accordingly, the Debentures will be converted to shares of AVCT common stock upon the completion of customary and regulatory filings by AVCT.

The Warrants are independent of the Debentures and entitle us to purchase 4,377,800 shares of AVCT common stock at an exercise price of $0.01 per share.

The Warrants expire on December 1, 2025, and were immediately exercisable on the Kandy Sale Date.

We had not redeemed any of the Debentures or exercised any of the Warrants as of December 31, 2020.

We are also subject to a lock-up provision which limits our ability to sell any shares of AVCT common stock underlying the Debentures and the Warrants prior to June 1, 2021, except in certain transactions.

We determined that the AVCT Units had a fair value of $84.9 million at the Kandy Sale Date, comprised of the Debentures with a fair value of $66.3 million and the Warrants with a fair value of $18.6 million.

The value of the net assets sold to AVCT totaled $1.3 million, resulting in a gain on the sale of $83.6 million.

This amount is included as a component of Other income (expense), net, in our consolidated statement of operations for the year ended December 31, 2020.

The fair value of the Debentures was calculated using a Lattice-based valuation approach, which utilizes a binomial tree to model the different paths the price of AVCT's common stock might take over the Debentures' life by using assumptions regarding the stock price volatility and risk-free interest rate.

These results are then used to calculate the fair value of the Debentures at each measurement date.

The Company uses the Black-Scholes valuation model for estimating the fair value of the Warrants at each measurement date.

The fair value of the Warrants is affected by AVCT's stock price as well as valuation assumptions, including the volatility of AVCT's stock price, expected term of the option, risk-free interest rate and expected dividends.

Both the Lattice and Black-Scholes valuation models are based on available market data, giving consideration to all of the rights and obligations of each instrument and precluding the use of "blockage" discounts or premiums in determining the fair value of a large block of financial instruments.

We will calculate the fair value of the Debentures and Warrants at each quarter-end and record any adjustments to the fair values in Other income (expense), net.

At December 31, 2020, the aggregate fair value of the Debentures and Warrants was calculated as $115.2 million, resulting in a gain of $30.3 million in the increase in fair values of the Debentures and Warrants.

This gain is included as a component of Other income (expense), net, in our consolidated statement of operations.

The fair values of the Debentures and Warrants are reported as Investments in our consolidated balance sheet at December 31, 2020.

The results of the Kandy Communications Business are excluded from our consolidated results for the period subsequent to the Kandy Sale Date.

Litigation Settlement

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We received $37.5 million of aggregate payments from Metaswitch in the second quarter of 2019 and recorded notes receivable for future payments of $25.5 million, comprised of $8.5 million in Other current assets and $17.0 million in Other assets in our consolidated balance sheet at December 31, 2019.

We recorded the $63.0 million gain in Other income, net, in our consolidated statement of operations for the year ended December 31, 2019.

We recorded the $63.0 million gain in Other income (expense), net, in our consolidated statement of operations for the year ended December 31, 2019.

We received $37.5 million of aggregate payments from Metaswitch in the second quarter of 2019 and $9.5 million, including $1.0 million of interest, in the second quarter of 2020.

On July 6, 2020, we and Metaswitch signed a First Supplemental Agreement to the Settlement and Cross-License Agreement (the "Supplemental Agreement") under which Metaswitch could elect to repay the outstanding amounts under the Royalty Agreement early in exchange for a reduction of $0.25 million to the outstanding principal, from $17.0 million to $16.75 million, and the payment of no further interest by Metaswitch effective June 26, 2020.

We recorded the reduction to the outstanding principal as a reduction to interest income.

On July 14, 2020, Metaswitch paid us the remaining outstanding balance of $16.75 million.

Operating Segments

Our chief operating decision maker (the "CODM") is our president and chief executive officer.

Effective in the fourth quarter of 2020 and in connection with the ECI Acquisition, our CODM began to assess our performance based on the performance of two separate organizations within Ribbon:

the Cloud and Edge operating segment ("Cloud and Edge") and the IP Optical Networks operating segment ("IP Optical Networks").

We previously operated in a single segment, as our CODM made decisions and assessed performance at the company level, and for periods prior to the ECI Acquisition, there are no financial results for IP Optical Networks to report.

Our Cloud and Edge operating segment is primarily comprised of the legacy Ribbon business and provides secure and reliable software and hardware products, solutions and services for enabling Voice over Internet Protocol ("VoIP") communications, Voice over Long-Term Evolution ("VoLTE") and Voice Over 5G ("VoNR") communications and Unified Communications and Collaboration ("UC&C") within service provider and enterprise networks and from the cloud.

Our Cloud and Edge products are increasingly software-centric and cloud-native for deployment on private, public or hybrid cloud infrastructures, in data centers, on enterprise premises and within service provider networks.

Our Cloud and Edge product portfolio consists of our Session Border Controller ("SBC") products and our Network Transformation ("NTR") products.

Our IP Optical Networks operating segment is primarily comprised of the former ECI business and provides high-performance, secure and reliable hardware and software products solutions for IP networking, switching, routing and optical transport designed to support and enable technologies like 5G, distributed cloud computing and corresponding applications by delivering ultra-low cost-per-bit transport and multi-service flexibility.

Our IP Optical Networks portfolio offers multiple solutions, including 5G-native solutions for mobile backhaul, metro and edge aggregation, core networking, data center interconnect, legacy NTR and transport solutions for wholesale carriers.

This portfolio is offered to service provider, enterprise and industry verticals with critical transport network infrastructures including utilities, government, defense, transportation, and education and research.

Financial Overview

For a discussion of our results of operations for the year ended December 31, 2017, including a year-to-year comparison between 2018 and 2017, and a discussion of our liquidity and capital resources for the year ended December 31, 2017, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K/A for the year ended December 31, 2018.

Financial Results

We reported losses from operations of $189 million for 2019 and $65 million for 2018.

We reported net losses of $130 million for 2019 and $77 million for 2018.

Our revenue was $563 million in 2019 and $578 million in 2018.

Our gross profit was $317 million in 2019 and $308 million in 2018.

We reported income from operations of $2 million for 2020 and a loss from operations of $189 million for 2019.

We reported net income of $89 million for 2020 and a net loss of $130 million for 2019.

Our revenue was $844 million in 2020, comprised of $583 million attributable to Cloud and Edge and $261 million attributable to IP Optical Networks.

Our revenue was $563 million in 2019.

Our gross profit was $493 million in 2020, comprised of $384 million attributable to Cloud and Edge and $109 million attributable to IP Optical Networks.

Our gross profit was $355 million in 2019.

Our gross profit as a percentage of revenue ("total gross margin") was 58% in 2020 and 63% in 2019.

In 2020, our Cloud and Edge total gross margin was 66% and our IP Optical Networks total gross margin was 42%.

Our operating expenses were $491 million in 2020 and $544 million in 2019.

Our 2019 operating expenses included $164 million for the impairment of goodwill, $13 million of acquisition- and integration-related expenses, primarily related to the pending ECI Merger, and $16 million of restructuring expense, primarily related to severance and related costs.

Our 2018 operating expenses included $17 million of acquisition- and integration-related expenses, primarily related to the Merger and, to a lesser extent, to the Edgewater Acquisition, and $17 million of restructuring expense, primarily related to severance and related costs.

Our 2020 operating expenses included $61 million of amortization of acquired intangible assets, $17 million of acquisition-, disposal- and integration-related expense, and $16 million of restructuring and related expense.

Our 2019 operating expenses included $164 million for the impairment of goodwill, $49 million of amortization of acquired intangible assets, $13 million of acquisition-, disposal- and integration-related expense, and $16 million of restructuring expense.

We recorded stock-based compensation expense of $14 million in 2020 and $13 million in 2019.

The expense recorded in 2019 includes $2 million of incremental expense related to the accelerated vesting of RSUs and PSUs held by our former president and chief executive officer, Franklin Hobbs, in connection with his separation from the Company effective December 31, 2019.

The expense recorded in 2019 includes $2 million of incremental expense related to the accelerated vesting of RSUs and PSUs held by our former president and chief executive officer in connection with his separation from the Company effective December 31, 2019.

See "Results of Operations" in this MD&A for additional discussion of our results of operations for the years ended December 31, 2020 and 2019.

Restructuring and Cost Reduction Initiatives

In 2020, we implemented a restructuring plan to eliminate certain positions and redundant facilities, primarily in connection with the ECI Acquisition, to further streamline our global footprint and improve our operations (the "2020 Restructuring Initiative").

The 2020 Restructuring Initiative includes facility consolidations and a reduction in workforce, including severance aggregating $1.1 million for three former executives of ECI.

In connection with this initiative, we expect to eliminate duplicate functions arising from the ECI Acquisition and support our efforts to integrate the two companies.

In connection with the 2020 Restructuring Initiative, we recorded restructuring and related expense of $14.0 million in 2020, comprised of $11.5 million for severance and related costs for approximately 190 employees, including the former executives of ECI, $2.0 million for variable and other facilities-related costs, and $0.5 million for accelerated amortization of lease assets.

We expect these amounts will be fully paid in 2021.

We expect to record additional restructuring and related expense approximating $8 million under the 2020 Restructuring Initiative in the aggregate for severance and planned facility consolidations.

In June 2019, we implemented a restructuring plan to further streamline our global footprint, improve our operations and enhance our customer delivery (the "2019 Restructuring Initiative").

The 2019 Restructuring Initiative includes facility consolidations, refinement of our research and development activities, and a reduction in workforce.

In connection with this initiative, we expect to reduce our focus on hardware and appliance-based development over time and to increase our development focus on software virtualization, functional simplicity and important customer requirements.

The facility consolidations under the 2019 Restructuring Initiative (the "Facilities Initiative") include a consolidation of our North Texas sites into a single campus, housing engineering, customer training and support, and administrative functions, as well as a reduction or elimination of certain excess and duplicative facilities worldwide.

In addition, we intend to substantially

consolidate our global software laboratories and server farms into two lower cost North American sites.

In addition, we intend to substantially consolidate our global software laboratories and server farms into two lower cost North American sites.

We continue to evaluate our properties included in the Facilities Initiative for accelerated amortization and/or right-of-use asset impairment.

We expect that the actions under the Facilities Initiative will be completed by the end of 2020.

In connection with the 2019 Restructuring Initiative, we recorded restructuring and related expense of $11 million in the year ended December 31, 2019, comprised of $6 million for severance and related costs for approximately 120 employees, $1 million for variable and other facilities-related costs and $4 million for accelerated amortization of lease assets.

We expect that nearly all of the amount accrued for severance and related costs will be paid by the end of the first half of 2020.

We estimate that we will record nominal, if any, additional restructuring and related expense related to severance and related costs under the 2019 Restructuring Initiative.

In connection with the Merger, we implemented a restructuring plan in the fourth quarter of 2017 to eliminate certain redundant positions and facilities within the combined companies (the "Merger Restructuring Initiative").

In connection with the Merger Restructuring Initiative, we recorded $5 million of restructuring and related expense in 2019, virtually all of which was for severance and related costs for approximately 40 employees.

We recorded $16 million of restructuring expense related to the Merger Restructuring Initiative in 2018, comprised of $15 million for severance and related expenses for approximately 275 employees and $1 million in connection with redundant facilities located in the Czech Republic, Canada and the U.S.

We recorded $9 million of restructuring expense in connection with the Merger Restructuring Initiative in 2017 for severance and related expenses for approximately 120 employees.

The Merger Restructuring Initiative is substantially complete, and we anticipate that we will record nominal future expense, if any, in connection with this initiative.

In connection with the adoption of Accounting Standards Codification ("ASC") 842, Leases ("ASC 842"), effective January 1, 2019, we wrote off the remaining restructuring accrual related to facilities.

We expect that the amount accrued at December 31, 2019 for severance and related expenses will be paid by the end of the first half of 2020.

We expect that the actions under the Facilities Initiative will be completed in 2021.

In connection with the 2019 Restructuring Initiative, we recorded restructuring and related expense of $2.3 and $11.2 million in 2020 and 2019, respectively.

The amount recorded in 2020 was comprised of $0.5 million for severance and related costs for approximately 5 employees, $1.7 million for variable and other facilities-related costs and $0.1 million for accelerated amortization of lease assets.

The amount recorded in 2019 was comprised of $6.1 million for severance and related costs for approximately 120 employees, $1.4 million for variable and other facilities-related costs and $3.7 million for accelerated amortization of lease assets.

We expect that the amount accrued for severance and related costs will be paid in 2021.

We estimate that we will record nominal, if any, future expense related to this initiative.

Accelerated rent amortization is recognized from the date that we commence 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.

We recorded $0.6 million and $3.7 million of expense for accelerated rent amortization in the years ended December 31, 2020 and 2019, respectively.

These amounts are included as components of Restructuring and related expense.

The accelerated rent amortization recorded in connection with our restructuring initiatives reduced our Operating lease right-of-use assets in our consolidated balance sheets at December 31, 2020 and 2019.

We continue to evaluate our properties included in the Facilities Initiative for accelerated amortization and/or right-of-use asset impairment.

We may incur additional future expense if we are unable to sublease other locations included in the Facilities Initiative.

In connection with the Sonus-GENBAND merger (the "GENBAND Merger") in 2017, we implemented a restructuring plan in the fourth quarter of 2017 to eliminate certain redundant positions and facilities within the combined companies (the "GENBAND Merger Restructuring Initiative").

We recorded a nominal adjustment for changes in estimated severance and related costs in 2020.

We recorded $5 million in 2019, virtually all of which was for severance and related costs for approximately 40 employees.

We recorded $16 million of restructuring expense related to this initiative in 2018, comprised of $15 million for severance and related costs for approximately 275 employees and $1 million in connection with redundant facilities located in the Czech Republic, Canada and the U.S.

The actions under the GENBAND Merger Restructuring Initiative were completed in the second quarter of 2019, with the related payments completed in 2020.

We assumed GENBAND's restructuring liability aggregating $4 million at the Merger Date (the "GENBAND Restructuring Initiative"), primarily related to headcount reductions.

In 2018, we recorded $1 million of restructuring expense for changes in estimated costs for previously recorded initiatives, primarily changes in negotiated severance to employees in certain international locations and changes in estimated sublease income for restructured facilities.

We recorded $1 million of restructuring expense in 2018 for changes in estimated costs for previously recorded initiatives, primarily changes in negotiated severance to employees in certain international locations and changes in estimated sublease income for restructured facilities.

In connection with the adoption of ASC 842 effective January 1, 2019, we wrote off the remaining restructuring accrual related to facilities.

The GENBAND Restructuring Initiative is complete, and we do not expect to record future expense in connection with this initiative.

On July 25, 2016, we announced a program (the "2016 Restructuring Initiative") to further accelerate our investment in new technologies as the communications industry migrates to a cloud-based architecture and to pursue new strategic initiatives, such as new products and an expanded go-to-market footprint in selected geographies and discrete vertical markets.

We have recorded an aggregate of $2 million of restructuring expense in connection with this initiative, primarily for severance and related costs.

The actions under the 2016 Restructuring Initiative were completed in 2019 and accordingly, no additional expense will be recorded in connection with this initiative.

In connection with the acquisition of Taqua, we implemented a restructuring plan in the third quarter of 2016 to eliminate certain redundant positions within the combined companies.

On October 24, 2016, the Audit Committee of our Board (the "Audit Committee") approved a broader Taqua restructuring plan related to headcount and redundant facilities (collectively, the "Taqua Restructuring Initiative").

In connection with this initiative, we have recorded $2 million of restructuring expense for severance and related costs and estimated costs related to the elimination of redundant facilities.

The actions under the Taqua Restructuring Initiative have been completed and accordingly, no additional expense will be recorded in connection with this initiative.

In connection with the adoption of ASC 842 effective January 1, 2019, we wrote off the remaining restructuring accrual related to redundant facilities.

The GENBAND Restructuring Initiative is complete.

Critical Accounting Policies and Estimates

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If actual results differ significantly from management's estimates and projections, there could be a material effect on our consolidated financial statements.

The significant accounting policies that we believe are the most critical include revenue recognition, the valuation of inventory, loss

contingencies and reserves, stock-based compensation, business combinations, goodwill and intangible assets, accounting for leases and accounting for income taxes.

The significant accounting policies that we believe are the most critical include revenue recognition, the valuation of inventory, debentures and warrants received as sale consideration, warranty accruals, loss contingencies and reserves, stock-based compensation, business combinations, goodwill and intangible assets and accounting for income taxes.

Revenue Recognition .

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"), which we adopted on January 1, 2018 using the modified retrospective method.

We derive revenue from two primary sources:

products (software and non-software products) and services.

Software and non-software product revenue is generated from sales of our software with proprietary appliances that function together to deliver the products' essential functionality.

Software and appliances are also sold on a standalone basis.

products and services.

Product revenue is generated from sales of our stand-alone software, as well as software with attached hardware that function together to deliver the products' essential functionality.

Both software and hardware are also sold on a standalone basis.

Services include customer support (software updates and technical support), consulting, design services, installation services and training.

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We also sell term-based software licenses that expire and Software-as-as-Service ("SaaS")-based software, which are referred to as subscription arrangements.

We do not customize our 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 appliances are delivered before related services are provided and are functional without professional services or customer support.

customize our 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.

We have concluded that our software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own.

The product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point that the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property.

We do not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period.

Appliance products are generally sold with software to provide the customer solution.

We begin to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period.

Service revenue includes revenue from customer support and other professional services.

We offer warranties on our products.

Certain of our warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended.

Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations.

Certain of our warranties are considered to be assurance-type in nature, ensuring that the product is functioning as intended.

Assurance-type warranties do not represent separate performance obligations.

We also sell separately-priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations.

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We generally use the input method to measure progress for our contracts because we believe it best depicts the transfer of assets to the customer which occurs as we incur costs for the contracts.

However, in some instances, we use 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.

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In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs.

We typically have more than one SSP for individual products and

services due to the stratification of those products and services by customers and circumstances.

We typically have 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.

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We write down our evaluation equipment at the time of shipment to our customers, as it is not probable that the inventory value will be realizable.

Debentures and Warrants .

We have Debentures and Warrants that we received as sale consideration in connection with the Kandy Sale, which we account for in accordance with Accounting Standards Codification ("ASC") 820, Fair Value Measurement ("ASC 820)".

We calculate the fair value of the Debentures using a Lattice-based valuation approach, which utilizes a binomial tree to model the different paths the price of AVCT's common stock might take over the Debentures' life by using assumptions regarding the stock price volatility and risk-free interest rate.

These results are then used to calculate the fair value of the Debentures at each measurement date.

We use the Black-Scholes valuation model for estimating the fair value of the Warrants at each measurement date.

We are calculating the fair value of the Debentures and Warrants at each quarter-end and recording any adjustments to the fair values in Other income (expense), net.

The fair values of the Debentures and Warrants are reported as Investments in our consolidated balance sheet at December 31, 2020.

Warranty Accruals.

We record warranty liabilities for estimated costs of fulfilling our obligations under standard limited hardware and software warranties at the time of sale.

The liability for standard warranties is included in Accrued expenses and other and Other long-term liabilities in our consolidated balance sheet.

The specific warranty terms and conditions vary depending upon the country in which we do business, but generally include material costs, technical support, labor and associated overhead over a period ranging from one to three years.

We provide for the estimated costs to fulfill customer warranty obligations for certain of our products upon recognition of the related revenue.

Warranty is included as a component of Cost of revenue in our consolidated statements of operations, and is determined based on actual warranty cost experience, estimates of component failure rates and our management's industry experience.

Our sales contracts do not permit the right of return of the product by the customer after the product has been accepted.

Loss Contingencies and Reserves.

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We allocate the purchase price of acquired companies to identifiable assets acquired and liabilities assumed at their acquisition date fair values.

Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired in the business combination that are not individually identified and separately recognized.

individually identified and separately recognized.

Significant management judgments and assumptions are required in determining the fair value of assets acquired and liabilities assumed, particularly acquired intangible assets which are principally based upon estimates of the future performance and cash flows expected from the acquired business and applied discount rates.

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If these comparisons indicate that an asset is not recoverable, we will recognize an impairment loss for the amount by which the carrying value of the asset exceeds the related estimated fair value.

Judgment is required in determining whether an event has occurred that may impair the value of goodwill or identifiable intangible or other long-lived assets.

Judgment is required in determining whether an event has occurred that may impair the value of goodwill, identifiable intangible assets or other long-lived assets.

Factors that could indicate an impairment may exist include significant underperformance relative to plan or long-term projections, strategic changes in business strategy, significant negative industry or economic trends, a significant change in circumstances relative to a large customer, a significant decline in our stock price for a sustained period and a decline in our market capitalization to below net book value.

We must make assumptions about future control premiums, market comparables, cash flows, operating plans, discount rates and other factors to determine recoverability.

Our annual testing for impairment of goodwill is completed as of November 30.

We operate as a single operating segment with one reporting unit and consequently we evaluate goodwill for impairment based on an evaluation of the fair value of the Company as a whole.

Prior to 2020, our annual test for impairment of goodwill was completed as of November 30.

Effective in 2020, we changed our annual goodwill impairment test date from November 30 to October 1.

This change did not have a material impact on our consolidated financial statements.

As described above, effective in the fourth quarter of 2020, we determined that we had two operating segments:

Cloud and Edge, and IP Optical Networks.

For the purpose of testing goodwill for impairment, all goodwill is assigned to a reporting unit, which may be either an operating segment or a portion of an operating segment.

We determined that the goodwill assigned to the Cloud and Edge reporting unit was $225 million and the goodwill assigned to the IP Optical Networks reporting unit was $192 million.

We perform a fair value analysis using both an Income and Market approach, which encompasses a discounted cash flow analysis and a guideline public company analysis using selected multiples.

We assess each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and the methodologies are weighted appropriately.

Upon completion of our 2020 annual test for goodwill impairment, we determined that there was no impairment of goodwill for either of our reporting units.

We previously operated as a single operating segment with one reporting unit and consequently we evaluated goodwill for impairment based on an evaluation of the fair value of the Company as a whole.

Based on the results of our 2019 annual impairment test, we determined that our carrying value exceeded our fair value.

We performed a fair value analysis using both an Income and Market approach, which encompasses a discounted cash flow analysis and a guideline public company analysis using selected multiples.

We performed a fair value analysis using both an income and market approach as described above.

We determined that the amount of the impairment was $164 million and recorded an impairment charge in the fourth quarter of 2019.

The impairment charge is reported separately in our consolidated statement of operations for the year ended December 31, 2019.

We performed our assessments for the years ended December 31, 2018 and 2017 and determined that in each such year, our fair value was in excess of our carrying value and accordingly, there was no impairment of goodwill.

At certain times during both 2019 and 2018, including at our annual testing date of November 30, 2018, our market capitalization was below our book value.

While we concluded that our fair value exceeded carrying value at November 30, 2018, we regularly monitored for changes in circumstances, including changes to our projections regarding performance of the business, that could result in impairment of goodwill.

Effective January 1, 2019, we adopted Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) Section A - Leases:

Amendments to the FASB Accounting Standards Codification ("ASU 2016-02"), the new standard on accounting for leases.

ASU 2016-02 introduces a lessee model that brings most leases onto the balance sheet and eliminates the current GAAP requirement for an entity to use bright-line tests in determining lease classification.

We must determine if an arrangement is a lease at inception.

We account for our leases in accordance with Accounting Standards Codification ("ASC") 842, Leases ("ASC 842"), which we adopted effective January 1, 2019 using the alternative transition method, which allowed entities to initially apply ASC 842 at the adoption date with no adjustments to prior period lease costs for comparability.

We have operating and finance leases for corporate offices, research and development facilities, and certain equipment.

Operating leases are reported separately in our consolidated balance sheets at December 31, 2020 and 2019.

Assets acquired under finance leases are included in Property and equipment, net, in our consolidated balance sheets at December 31, 2020 and 2019.

We determine if an arrangement is a lease at inception.

A contract is determined to contain a lease component if the arrangement provides us with a right to control the use of an identified asset.

Lease agreements may include lease and non-lease components.

In such instances for all classes of underlying assets, we do not separate lease and non-lease components but instead account for the entire arrangement under leasing guidance.

Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term.

Right-of-use assets and lease liabilities are initially measured based on the present value of the future minimum fixed lease payments (i.e., fixed payments in the lease contract) over the lease term at the commencement date.

As our existing leases do not have a readily determinable implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future minimum fixed lease payments.

We calculate our incremental borrowing rate to reflect the interest rate that we would have to pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment over a similar term and consider our historical borrowing activities and market data from entities with comparable credit ratings in this determination.

The measurement of the right-of-use asset also includes any lease payments made prior to the commencement date (excluding any lease incentives) and initial direct costs incurred.

We assessed our right-of-use assets for impairment as of December 31, 2019 and determined no impairment has occurred.

Lease terms may include options to extend or terminate the lease and we incorporate such options in the lease term when we have the unilateral right to make such an election and it is reasonably certain that we will exercise that option.

In making this determination, we consider our prior renewal, termination history and planned usage of the assets under lease, incorporating expected market conditions.

For restructuring events that involve lease assets and liabilities, we apply lease reassessment and modification guidance

and evaluate the right-of-use assets for potential impairment.

If we plan to exit all or distinct portions of a facility and do not have the ability or intent to sublease, we will accelerate the amortization of each of these lease components through the vacate date.

The accelerated amortization is recorded as a component of Restructuring and related expense in our consolidated statements of operations.

Related variable lease expenses will continue to be expensed as incurred through the vacate date, at which time we 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.

In such instances for all classes of underlying assets, we do not separate lease and non-lease components but rather, account for the entire arrangement under leasing guidance.

Leases with an initial term of 12 months or less are not

recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term.

For operating leases, lease expense for minimum fixed lease payments is recognized on a straight-line basis over the lease term.

The expense for finance leases includes both interest and amortization expense components, with the interest component calculated based on the effective interest method and the amortization component calculated based on straight-line amortization of the right-of-use asset over the lease term.

Lease contracts may contain variable lease costs, such as common area maintenance, utilities and tax reimbursements that vary over the term of the contract.

Variable lease costs are not included in minimum fixed lease payments and as a result, are excluded from the measurement of the right-of-use assets and lease liabilities.

We expense all variable lease costs as incurred.

Accounting for Income Taxes.

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In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including our past operating results, the existence of cumulative income in the most recent years, changes in the business in which we operate and our forecast of future taxable income.

In determining future taxable income, we are responsible for assumptions utilized, including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.

In determining future taxable income, we make assumptions, including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.

These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage our underlying businesses.

Such assessment is completed on a jurisdiction-by-jurisdiction basis.

At December 31, 2019, we had valuation allowances of $71 million to offset net domestic deferred tax assets of $72 million.

In addition, we had valuation allowances to offset Canada federal credits carryovers of $11 million, Ireland net deferred tax assets of $9 million and Brazil net deferred tax assets of $3 million.

At December 31, 2020, we had valuation allowances of $496 million to offset deferred tax assets of $582 million.

These valuation allowances mainly relate to our U.S.

and Israel operations.

In the event we determine it is more likely than not that we will be able to use a deferred tax asset in the future in excess of its net carrying value, the valuation allowance would be reduced, thereby increasing net earnings and increasing equity in the period such determination is made.

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We have provided for income taxes on the undistributed earnings of our non-U.S.

subsidiaries as of December 31, 2019, with the exception of the Company's Irish subsidiary, as we do not plan to permanently reinvest these amounts outside the U.S.

The repatriation of the undistributed earnings would result in withholding taxes imposed on the repatriation.

Consequently, we have recorded a tax liability of $5 million, consisting of potential withholding and distribution taxes related to undistributed earnings from these subsidiaries as of December 31, 2019.

Had the earnings of the Irish subsidiary been determined to not be permanently reinvested outside the U.S., no additional deferred tax liability would be required due to no withholding taxes or income tax expense being imposed on such repatriation.

subsidiaries as of December 31, 2020, excluding Ireland and Israel.

These subsidiaries, excluding Ireland and Israel, are cost-plus or limited risk distributors that are not anticipated to need to use excess funds locally.

Accordingly, we are required to recognize and book deferred taxes for 2020.

The deferred taxes are booked on the entire outside basis differences related to the foreign subsidiaries, the largest of these differences being undistributed earnings.

At December 31, 2020, Ribbon had a deferred tax liability of $15.7 million related to withholding taxes in various countries.

We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities.

Assessing an uncertain tax position begins with the initial determination of the position's sustainability and is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of recognized tax benefit is still appropriate.

As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of recognized tax benefit is still appropriate.

The recognition and measurement of tax benefits require significant judgment.

Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act").

The Tax Act makes broad and complex changes to the U.S.

tax code, including, but not limited to:

reducing the U.S.

federal corporate tax rate from 35% to 21%;

requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries;

generally eliminating U.S.

federal income taxes on dividends from foreign subsidiaries;

requiring a current inclusion in U.S.

federal taxable income of certain earnings (Global Intangible Low-taxed Income) ("GILTI") of controlled foreign corporations;

eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized;

creating the base erosion anti-abuse tax;

creating a new limitation on deductible interest expense;

changing rules related to uses and limitations of net operating loss carryforwards created in tax

years beginning after December 31, 2017;

providing a tax deduction for foreign-derived intangible income;

and changing rules related to deductibility of compensation for certain officers.

We completed our accounting for the effects of the Tax Act in the fourth quarter of 2018 and the effects of the Tax Act were reflected in in our 2018 tax provision.

We considered the impact of the Base Erosion and Anti-Abuse Tax ("BEAT"), the GILTI, the deduction for foreign derived intangible income and other provisions of the Tax Act when preparing our 2018 tax provision.

Based on this analysis, we recorded BEAT tax expense of $0.4 million in 2018 and recorded an adjustment to the provisional amounts previously recorded related to the Tax Act that decreased our deferred tax assets by $0.2 million.

When the 2018 Federal tax return was filed, there was no BEAT tax expense.

The related true-up was recorded as a provision to return adjustment in the 2019 tax provision.

Results of Operations

Years Ended December 31, 2020 and 2019

Revenue for the years ended December 31, 2019 and 2018 was as follows (in millions, except percentages):

Increase (decrease)

Revenue for the years ended December 31, 2020 and 2019 was as follows (in thousands, except percentages):

December 31, Increase

from prior year

2020 2019 $ %

Product $ 467,912 $ 262,030 $ 205,882 78.6 %

Service 375,883 301,081 74,802 24.8 %

Total revenue $ 843,795 $ 563,111 $ 280,684 49.8 %

Our product revenue is generated from sales of software with attached appliances, software licenses and software subscription fees.

Certain of our products may be included in more than one of our solutions (session control solutions, network transformation solutions, and applications and security solutions), depending upon the configuration of the individual customer solutions sold.

Our software with attached appliances and software license revenues are primarily comprised of our media gateway, call controller, signaling, virtual mobile core, security and management products.

Our software subscription fees revenue is primarily comprised of sales of our UC-related (i.e., application server, media server, etc.) and Kandy Cloud products.

Each of our solutions portfolios addresses both the service provider and enterprise markets and are sold through both our direct sales program and from indirect sales through our channel partner program.

The decrease in our product revenue in 2019 compared to 2018 was primarily the result of $39 million of lower sales of software with attached appliances, partially offset by $22 million of higher sales of our software licenses and subscriptions.

Segment revenue for the years ended December 31, 2020 and 2019 was as follows (in thousands):

December 31, 2020 Year ended

December 31, 2019

Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total

Product $ 275,445 $ 192,467 $ 467,912 $ 262,030 $ — $ 262,030

Service 307,825 68,058 375,883 301,081 — 301,081

Total revenue $ 583,270 $ 260,525 $ 843,795 $ 563,111 $ — $ 563,111

The increase in our product revenue in 2020 compared to 2019 was primarily the result of the inclusion of $192 million of product revenue attributable to our IP Optical Networks segment in the current year since the ECI Acquisition Date, coupled with $13 million of higher sales in 2020 of our Cloud and Edge products compared to 2019.

The increase in sales of our Cloud and Edge products in the current year was primarily attributable to higher sales of certain of our SBC products (i.e., our SBC 5000 series products and SBC 7000 products), partially offset by lower sales of our EdgeMarc products.

In 2020, 30% of our product revenue was attributable to sales to enterprise customers, compared to 27% in 2019.

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The timing of the completion of customer projects and revenue recognition criteria satisfaction may cause our product revenue to fluctuate from one period to the next.

Service revenue is primarily comprised of appliance and software maintenance and support (“maintenance revenue”) and network design, installation and other professional services (“professional services revenue”).

Service revenue for the years ended December 31, 2019 and 2018 was comprised of the following (in millions, except percentages):

Service revenue is primarily comprised of software and hardware maintenance and support (“maintenance revenue”) and network design, installation and other professional services (“professional services revenue”).

Service revenue for the years ended December 31, 2020 and 2019 was comprised of the following (in thousands, except percentages):

December 31, Increase

from prior year

2020 2019 $ %

Maintenance $ 274,816 $ 234,228 $ 40,588 17.3 %

Professional services 101,067 66,853 34,214 51.2 %

Total service revenue $ 375,883 $ 301,081 $ 74,802 24.8 %

Our maintenance revenue was essentially unchanged in 2019 compared to 2018, as expected industry consolidation and the resulting pricing pressure were offset by the sale of new software products under maintenance support.

The increase in professional services revenue was primarily due to the timing and related revenue recognition of certain projects in 2019 compared to 2018.

Segment service revenue for the years ended December 31, 2020 and 2019 was comprised of the following (in thousands):

December 31, 2020 Year ended

December 31, 2019

Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total

Maintenance $ 229,035 $ 45,781 $ 274,816 $ 234,228 $ — $ 234,228

Professional services 78,790 22,277 101,067 66,853 — 66,853

Total service revenue $ 307,825 $ 68,058 $ 375,883 $ 301,081 $ — $ 301,081

The increase in maintenance revenue was primarily attributable to the inclusion of $46 million of revenue from IP Optical Networks in the 2020 period from the ECI Acquisition Date, partially offset by a slight decrease in maintenance revenue attributable to Cloud and Edge.

The increase in professional services revenue was attributable to the inclusion of $22 million of

revenue from IP Optical Networks in the 2020 period from the ECI Acquisition Date, coupled with $12 million of higher revenue from Cloud and Edge professional services primarily related to Network Transformation and SBC deployments.

The following customers contributed 10% or more of our revenue in the years ended December 31, 2020 and 2019:

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Due to the timing of project completions, we expect that the domestic and international components as a percentage of our revenue may fluctuate from quarter to quarter and year to year.

Our total revenue for the years ended December 31, 2019 and 2018 was disaggregated geographically as follows:

Year ended December 31, 2019

Product revenue

Service revenue (maintenance)

Service revenue (professional services)

Total revenue

Our total revenue for the years ended December 31, 2020 and 2019 was disaggregated geographically as follows (in thousands):

Year ended December 31, 2020 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue

United States $ 201,347 $ 132,661 $ 48,611 $ 382,619

Europe, Middle East and Africa 149,567 73,475 25,226 248,268

Other Asia Pacific

Year ended December 31, 2018

Product revenue

Service revenue (maintenance)

Service revenue (professional services)

Total revenue

Asia Pacific 90,201 36,628 19,627 146,456

Other 26,797 32,052 7,603 66,452

$ 467,912 $ 274,816 $ 101,067 $ 843,795

Year ended December 31, 2019 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue

United States $ 170,937 $ 133,271 $ 37,085 $ 341,293

Europe, Middle East and Africa 42,262 43,186 12,279 97,727

Other Asia Pacific

Asia Pacific 30,617 27,798 10,721 69,136

Other 18,214 29,973 6,768 54,955

$ 262,030 $ 234,228 $ 66,853 $ 563,111

Our deferred product revenue was $8 million at December 31, 2020 and $5 million at December 31, 2019.

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Our deferred revenue balance may fluctuate as a result of the timing of revenue recognition, customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple element arrangements.

We expect that our total revenue in 2020 will increase slightly compared with our 2019 total revenue.

We expect that our total revenue in 2021 will increase as compared to our 2020 total revenue as our strategy to grow our IP Optical market share in North America gains momentum and capital spending in India recovers to 2019 levels.

Cost of Revenue/Gross Margin.

Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased materials and services, royalties, and manufacturing and services personnel and related costs.

Our cost of revenue and gross margins for the years ended December 31, 2019 and 2018 were as follows (in millions, except percentages):

Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased materials and services, royalties, inventory valuation adjustments, warranty costs, and manufacturing and services personnel and related costs.

Our cost of revenue and gross margins for the years ended December 31, 2020 and 2019 were as follows (in thousands, except percentages):

December 31, Increase

from prior year

2020 2019 $ %

Cost of revenue

Product $ 204,772 $ 95,774 $ 108,998 113.8 %

Service $ 145,916 $ 112,680 33,236 29.5 %

Total cost of revenue $ 350,688 $ 208,454 $ 142,234 68.2 %

Product 56.2 % 63.4 %

Service 61.2 % 62.6 %

Total gross margin 58.4 % 63.0 %

Our product gross margin in 2019 was essentially unchanged compared with 2018.

The gross margin benefit of increasing sales of higher gross margin software products was offset by the inclusion of a full year of Edgewater product sales in 2019, as Edgewater products include attached appliances as part of a sales order.

Our purchases of materials and components were $70 million in 2019, compared with $75 million in 2018.

The reduction in 2019 reflects the higher software content of our 2019 sales as a percentage of total product revenue compared with 2018, offset by the inclusion of a full year of Edgewater attached appliance purchases.

We expect that our future purchases of materials and components will decrease as a result of the increasing software content of our products, both in absolute terms and as a percentage of revenue.

The increase in service gross margin in 2019 compared to 2018 was primarily due to efficiency measures undertaken in our professional sales organization.

We believe that our total gross margin will increase in 2020 compared to 2019, primarily due to the expected higher software content as a percentage of our total revenue, coupled with the impact of our restructuring and integration cost reduction initiatives.

Research and Development Expenses.

Research and development expenses consist primarily of salaries and related personnel expenses and prototype costs for the design, development, testing and enhancement of our products.

Research and development expenses for the years ended December 31, 2019 and 2018 were as follows (in millions, except percentages):

Our segment cost of revenue and gross margins for the years ended December 31, 2020 and 2019 were as follows (in thousands, except percentages):

December 31, 2020 Year ended

December 31, 2019

Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total

Product $ 89,883 $ 114,889 $ 204,772 $ 95,774 $ — $ 95,774

Service 108,985 36,931 145,916 112,680 — 112,680

Total cost of revenue $ 198,868 $ 151,820 $ 350,688 $ 208,454 $ — $ 208,454

December 31, 2020 Year ended

December 31, 2019

Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total

Product 67.4 % 40.3 % 56.2 % 63.4 % — % 63.4 %

Service 64.6 % 45.7 % 61.2 % 62.6 % — % 62.6 %

Total gross margin 65.9 % 41.7 % 58.4 % 63.0 % — % 63.0 %

The decrease in our product gross margin in 2020 compared to 2019 was primarily due to the inclusion of IP Optical Networks products from the ECI Acquisition, which include a higher hardware component.

The increase in our Cloud and Edge product gross margin in 2020 compared to 2019 was primarily attributable to higher software sales in 2020.

The decrease in our service gross margin in 2020 compared to 2019 was primarily due to the inclusion in 2020 of IP Optical Networks' historically lower service gross margin, partially offset by the increase in our Cloud and Edge service gross margin in 2020 compared to 2019, which was primarily due to our recent cost reduction and restructuring initiatives.

We believe that our total gross margin will decrease slightly in 2021 compared to 2020, primarily due to higher expected sales from IP Optical Networks, which have historically lower margins due to the higher hardware content in their products.

Research and Development.

Research and development ("R&D") expenses consist primarily of salaries and related personnel expenses and prototype costs for the design, development, testing and enhancement of our products.

Research and development expenses for the years ended December 31, 2020 and 2019 were as follows (in thousands, except percentages):

December 31, Increase

from prior year

The decrease in research and development expenses in 2019 compared with 2018 was primarily attributable to $6 million of lower employee-related expenses, partially offset by $1 million of higher product development expense (i.e., third-party development, prototype and test equipment costs) and $1 million of higher infrastructure-related expenses.

The decrease in employee-related expenses was primarily attributable to lower salary and related expenses, reflecting the impact of our restructuring and cost savings initiatives.

Some aspects of our research and development efforts require significant short-term expenditures, the timing of which may cause significant variability in our expenses.

2020 2019 $ %

$ 194,525 $ 141,060 $ 53,465 37.9 %

The increase in R&D expenses in 2020 compared to 2019 was primarily attributable to the inclusion of IP Optical Networks' R&D expenses in the current year for the period since the ECI Acquisition, which added $62 million in R&D operating expenses, principally employee- and infrastructure-related costs.

This increase was partially offset by $9 million of lower costs in our Cloud and Edge segment, primarily employee- and infrastructure-related, arising from our previous cost reduction and restructuring initiatives.

Some aspects of our R&D efforts require significant short-term expenditures, the timing of which may cause significant variability in our expenses.

We believe that rapid technological innovation is critical to our long-term success, and we are tailoring our investments to meet the requirements of our customers and market.

We believe that our research and development expenses in 2020 will benefit from our ongoing restructuring and cost savings initiatives, partially offset by our increased investment in our software solutions.

Sales and Marketing Expenses.

Sales and marketing expenses consist primarily of salaries and related personnel costs, commissions, travel and entertainment expenses, promotions, customer trial and evaluations inventory and other marketing and sales support expenses.

Sales and marketing expenses for the years ended December 31, 2019 and 2018 were as follows (in millions, except percentages):

We believe that our R&D in 2021 will increase compared to 2020, primarily due to incremental investment in our IP Optical Networks segment to address the global market opportunity.

Sales and Marketing.

sales support expenses.

Sales and marketing expenses for the years ended December 31, 2020 and 2019 were as follows (in thousands, except percentages):

December 31, Increase

from prior year

The decrease in sales and marketing expenses in 2019 compared with 2018 was primarily attributable to $12 million of lower employee-related expenses, partially offset by $1 million of higher amortization of acquired intangible assets and $1

million of net increases in other sales and marketing expenses.

The decrease in employee-related expenses was primarily attributable to lower salary and related expenses, reflecting the impact of our restructuring and cost savings initiatives.

We believe that our sales and marketing expenses will increase in 2020 compared with 2019, primarily due to higher amortization of intangible assets arising from prior acquisitions, coupled with slightly higher employee-related expenses.

General and Administrative Expenses.

2020 2019 $ %

$ 139,318 $ 106,310 $ 33,008 31.0 %

The increase in sales and marketing expenses in 2020 compared to 2019 was primarily attributable to the inclusion of IP Optical Networks' sales and marketing expenses in the current year for the period since the ECI Acquisition, which added $43 million in sales and marketing expenses, principally employee- and infrastructure-related costs.

This increase was partially offset by $10 million of lower costs in our Cloud and Edge segment, primarily employee- and infrastructure-related, arising from our previous cost reduction and restructuring initiatives.

We believe that our sales and marketing expenses will increase modestly in 2021 compared with 2020, primarily due to higher employee-related expenses and higher costs, assuming COVID-19 restrictions begin to ease.

General and Administrative.

General and administrative expenses consist primarily of salaries and related personnel costs for executive and administrative personnel, and audit, legal and other professional fees.

General and administrative expenses for the years ended December 31, 2019 and 2018 were as follows (in millions, except percentages):

General and administrative expenses for the years ended December 31, 2020 and 2019 were as follows (in thousands, except percentages):

December 31, Increase

from prior year

The decrease in 2019 general and administrative expenses compared with 2018 was primarily attributable to $5 million of lower employee-related expenses, $4 million of lower legal fees and $3 million of lower consulting fees.

The decrease in employee-related expenses was primarily attributable to lower salary and related expenses, reflecting the impact of our restructuring and cost savings initiatives.

We believe that our general and administrative expenses will decrease in 2020 compared with 2019, primarily due to savings from our restructuring and integration cost savings initiatives.

2020 2019 $ %

$ 63,286 $ 53,870 $ 9,416 17.5 %

The increase in general and administrative expenses in 2020 compared to 2019 was primarily attributable to the inclusion of IP Optical Networks' general and administrative expenses in the current year for the period since the ECI Acquisition, which added $17 million in general and administrative expenses, principally employee-related expenses.

This increase was partially offset by $8 million of lower costs in our Cloud and Edge segment, primarily legal fees and employee-related expenses.

We believe that our general and administrative expenses in 2021 will be consistent with our 2020 levels, and decline in future years as we realize additional integration synergies.

Amortization of Acquired Intangible Assets.

Amortization of acquired intangible assets for the years ended December 31, 2020 and 2019 was as follows (in thousands, except percentages):

December 31, Increase

from prior year

2020 2019 $ %

$ 60,910 $ 49,225 $ 11,685 23.7 %

The increase in 2020 amortization of acquired intangible assets compared to 2019 was primarily due to expense related to the intangible assets arising from the ECI Acquisition.

Amortization of acquired intangible assets is reported separately in the consolidated statements of operations.

Impairment of Goodwill .

Our annual testing for impairment of goodwill is completed as of November 30.

We operate as a single operating segment with one reporting unit and consequently evaluate goodwill for impairment based on an evaluation of the fair value of the Company as a whole.

Prior to 2020, our annual test for impairment of goodwill was completed as of November 30.

Effective in 2020, we changed our annual goodwill impairment test date from November 30 to October 1.

This change did not have a material impact on our consolidated financial statements.

Our annual test for impairment in 2020 did not result in an impairment for either of our two reporting units.

We previously operated as a single operating segment with one reporting unit and consequently evaluated goodwill for impairment based on an evaluation of the fair value of the Company as a whole.

Based on the results of our 2019 annual impairment test, we determined that our carrying value exceeded our fair value and accordingly, we recorded an impairment charge of $164 million in 2019.

Impairment of goodwill is reported separately in the consolidated statements of operations.

Acquisition- and Integration-Related Expenses.

Acquisition- and integration-related expenses include those expenses related to acquisitions that we would otherwise not have incurred.

Acquisition-related expenses include professional and services fees, such as legal, audit, consulting, paying agent and other fees, and expenses related to cash payments to certain former executives of the acquired businesses in connection with their employment agreements.

Integration-related expenses represent incremental costs related to combining the Company's systems and processes with those of acquired businesses, such as third-party consulting and other third-party services.

We recorded $13 million of acquisition- and integration-related expenses in 2019, comprised of $9 million of acquisition-related expenses and $4 million of integration-related expenses.

The acquisition-related expense primarily related to the pending ECI Merger and, to a lesser extent, the Anova Acquisition and other acquisition-related activities.

The integration-related expenses related to our ongoing integration activities, primarily related to the Merger.

We recorded $17 million of acquisition- and integration-related expenses in 2018, comprised of $10 million of acquisition-related expenses and $7 million of integration-related expenses.

The acquisition-related expense primarily related to the Merger, with nominal amounts related to the acquisition of Edgewater and other acquisition-related activities.

Acquisition- and integration-related expenses are reported separately in the consolidated statements of operations.

Restructuring and Related Expense.

Acquisition-, Disposal- and Integration-Related.

Acquisition-, disposal- and integration-related expenses include those expenses related to acquisitions that we would otherwise not have incurred.

Acquisition- and disposal-related expenses include professional and services fees, such as legal, audit, consulting, paying agent and other fees.

Integration-related expenses

represent incremental costs related to combining the Company's systems and processes with those of acquired businesses, such as third-party consulting and other third-party services.

We recorded $17 million of acquisition-, disposal- and integration-related expenses in 2020, comprised of $13 million of acquisition-related expenses, $2 million of disposal-related expenses and $2 million of integration-related expenses.

The acquisition-related expenses primarily related to the ECI Acquisition and, to a lesser extent, other acquisition-related activities.

The disposal-related expenses related to the Kandy Sale.

The integration-related expenses related to our ongoing integration activities, primarily related to the ECI Acquisition.

We recorded $13 million of acquisition-, disposal and integration-related expenses in 2019, comprised of $9 million of acquisition-related expenses and $4 million of integration-related expenses.

The acquisition-related expenses primarily related to the then-pending ECI Acquisition and, to a lesser extent, the Anova Acquisition and other acquisition-related activities.

The integration-related expenses related to our ongoing integration activities, primarily related to the GENBAND Merger.

Acquisition-, disposal- and integration-related expenses are reported separately in the consolidated statements of operations.

Restructuring and Related.

We have been committed to streamlining operations and reducing operating costs by closing and consolidating certain facilities and reducing our worldwide workforce.

Please see the additional discussion of our restructuring initiatives in the "Restructuring and Cost Reduction Initiatives" section of the Overview of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

We recorded restructuring and related expense of $16 million in 2019, comprised of $11 million for severance and related costs, $1 million for variable and other facilities-related costs and $4 million for accelerated amortization of lease assets.

We recorded $17 million of restructuring and related expense in 2018, comprised of $16 million in connection with our Merger Restructuring Initiative and $1 million for changes in estimated costs in connection with our assumption of GENBAND's restructuring liability at the time of Merger.

We recorded restructuring and related expense of $16 million in 2020, comprised of $12 million for severance and related costs, and $4 million for variable and other facilities-related costs, including accelerated amortization of lease assets.

We recorded $16 million of restructuring and related expense in 2019, comprised of $11 million for severance and related costs, $1 million for variable and other facilities-related costs and $4 million for accelerated amortization of lease assets.

Although we have eliminated positions as part of our restructuring initiatives, we continue to hire in certain areas that we believe are important to our future growth.

2 unchanged sentences

Interest expense and interest income for the years ended December 31, 2020 and 2019 were as follows (in millions, except percentages):

Increase (decrease)

December 31, Increase (decrease)

from prior year

2020 2019 $ %

Interest income $ 471 $ 573 $ (102) (17.8) %

Interest expense (21,513) (4,450) 17,063 383.4 %

Interest (expense) income, net

$ (21,042) $ (3,877) $ (17,165) 442.7 %

Interest income in 2020 primarily represents interest earned on the outstanding note receivable from Metaswitch, which was paid in full in the third quarter of 2020.

Interest expense in 2020 was primarily comprised of $14.4 million of interest on our outstanding term debt, and $4.2 million in the aggregate related to amortization of debt issuance costs, interest on other borrowings and finance leases, and interest expense in connection with the factoring of certain accounts receivable.

Interest expense in 2020 also included the write-off of $2.9 million of debt issuance costs in connection with the amendment of the 2020 Credit Facility and the retirement of the 2019 Credit Facility (as defined below).

Interest income in 2019 was primarily earned from an outstanding $25.5 million three-year note receivable bearing interest at 4%.

Interest expense in 2019 primarily related to revolver and term borrowings and the promissory note issued to certain of GENBAND's equityholders in connection with the Merger.

Interest expense in 2018 was primarily comprised of interest on the promissory note issued to certain of GENBAND's equityholders in connection with the Merger, the outstanding revolving credit facility balance and the amortization of debt issuance costs in connection with our revolving credit facilities.

Interest income consisted of interest earned on our cash equivalents, marketable securities and investments.

Interest expense in 2019 primarily related to revolver and term borrowings and the promissory note issued to certain of GENBAND's equityholders in connection with the GENBAND Merger.

Other Income (Expense), Net .

We recorded other income, net aggregating $113 million in 2020, primarily in connection with the Kandy Sale, which was comprised of $83.6 million from the gain on the sale, and $30.3 million related to the increase in the fair value of the Debentures and Warrants from the Kandy Sale Date through December 31, 2020.

We recorded a gain of $63.0 million from the settlement of litigation with Metaswitch in 2019 and a gain of $8.1 million from the reduction of deferred purchase consideration in connection with the Edgewater Acquisition.

These gains were the primary components of our other income (expense), net, in 2019 and were partially offset primarily by expense related to foreign currency translation.

Our other expense, net, in 2018 was $4 million, and was primarily comprised of expense related to foreign currency translation.

Income Taxes.

These gains were the primary components of our Other income (expense), net, in 2020 and 2019 and were partially offset primarily by expense related to foreign currency translation.

Income Tax Provision.

We recorded income tax provisions of $4.7 million in 2020 and $7.2 million in 2019.

The provision recorded in 2019 was primarily the result of foreign operations and valuation allowances established.

The provision recorded in 2020 was primarily the result of the gain from the Kandy Sale and foreign operations.

The provision recorded in 2019 was primarily the result of foreign operations.

1 unchanged sentence

As a result of our evaluations, we concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to our cumulative losses and other factors.

Accordingly, we maintained a valuation against our domestic deferred tax asset.

A similar analysis and conclusion was made with regard to the valuation allowance on the deferred tax assets of our foreign subsidiaries, mainly the Irish and Brazilian subsidiaries.

In analyzing the deferred tax assets related to our Canadian subsidiaries, we concluded that it was more likely than not that the Canadian federal credits would not be realized in a future period.

Accordingly, we maintained a valuation mainly against our U.S.

and Israel deferred tax assets.

A similar analysis and conclusion was made with regard to the valuation allowance on the deferred tax assets of our foreign subsidiaries.

The Ireland subsidiary's business model changed in 2020 to a limited risk distributor.

As a result, the decision was made to release a portion of the valuation allowance because of the future income.

The valuation allowance for the capital loss carryforward will remain, since there are no current plans to generate capital gains.

Off-Balance Sheet Arrangements

1 unchanged sentence

Liquidity and Capital Resources

Our consolidated statements of cash flows are summarized as follows (in millions):

Year ended December 31, 2019 compared to year ended December 31, 2018

Adjustments to reconcile net loss to cash flows provided by (used in) operating activities

Our consolidated statements of cash flows are summarized as follows (in thousands):

2020 2019 Change

Net income (loss) $ 88,591 $ (130,075) $ 218,666

Adjustments to reconcile net income (loss) to cash flows provided by operating activities (17,903) 236,700 (254,603)

Changes in operating assets and liabilities 30,876 (50,940) 81,816

Net cash provided by (used in) operating activities

Net cash provided by operating activities $ 101,564 $ 55,685 $ 45,879

Net cash used in investing activities $ (330,073) $ (3,529) $ (326,544)

Net cash (used in) provided by financing activities

We had $45 million of cash at December 31, 2019 .

Our cash, cash equivalents and marketable securities totaled $51 million at December 31, 2018 .

Net cash provided by (used in) financing activities $ 319,303 $ (51,277) $ 370,580

We had cash and restricted cash aggregating $136 million at December 31, 2020, and $45 million of cash at December 31, 2019.

We had cash held by our non-U.S.

2 unchanged sentences

subsidiaries as of December 31, 2020, we do not believe that the amounts of potential withholding taxes that would arise from the repatriation would have a material effect on our liquidity.

On December 21, 2017, we entered into a Senior Secured Credit Agreement (the “2017 Credit Facility”) with Silicon Valley Bank ("SVB"), which refinanced the prior credit agreement with SVB that the Company had assumed in connection with the Merger.

On June 24, 2018, we amended the 2017 Credit Facility to, among other things, permit the Edgewater Acquisition and related transactions (the "2018 Credit Facility").

At December 31, 2018, we had an outstanding debt balance of $55 million at an average interest rate of 5.96% and $3 million of outstanding letters of credit at an average interest rate of 1.75% under the 2018 Credit Facility.

We were in compliance with all covenants of the 2018 Credit Facility at December 31, 2018.

On April 29, 2019, we, as guarantor, and Ribbon Communications Operating Company, Inc., as borrower, entered into a syndicated, amended and restated credit facility (the "2019 Credit Facility") with SVB, as lead agent.

The 2019 Credit Facility provides for a $50 million term loan facility that was advanced in full on April 29, 2019, and a $100 million revolving line of credit.

The 2019 Credit Facility also includes procedures for additional financial institutions to become syndicate lenders, or for any existing lender to increase its commitment under either the term loan facility or the revolving loan facility, subject to an aggregate increase of $75 million for all incremental commitments under the 2019 Credit Facility.

The 2019 Credit Facility is scheduled to mature in 2024.

The 2019 Credit Facility provided for a $50 million term loan facility that was advanced in full on April 29, 2019, and a $100 million revolving line of credit.

At December 31, 2019, we had an outstanding term loan debt balance of $49 million and an outstanding revolving line of credit balance of $8 million with a combined average interest rate of 3.30%, and $5 million of outstanding letters of credit at an interest rate of 1.50%.

The indebtedness and other obligations under the 2019 Credit Facility are unconditionally guaranteed on a senior secured basis by us and each of our other material U.S.

domestic subsidiaries (collectively, the "Guarantors").

The 2019 Credit Facility is secured by first-priority liens on substantially all of our assets.

The 2019 Credit Facility requires periodic interest payments on outstanding borrowings under the facility until maturity.

We may prepay all revolving loans under the 2019 Credit Facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements.

Revolving loans under the 2019 Credit Facility bear interest at our option at either the Eurodollar (LIBOR) rate plus a margin ranging from 1.50% to 3.00% per year or the base rate (the highest of the Federal Funds rate 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 2.00% per year (such margins being referred to as the “Applicable Margin”).

The Applicable Margin varies depending on our consolidated leverage ratio (as defined in the 2019 Credit Facility).

The base rate and the LIBOR rate are each subject to a zero percent floor.

The 2019 Credit Facility requires compliance with certain financial covenants, including a minimum consolidated quick ratio, minimum consolidated fixed cover charge coverage ratio and maximum consolidated leverage ratio, all of which are defined in the 2019 Credit Facility and tested on a quarterly basis.

The indebtedness and other obligations under the 2019 Credit Facility were unconditionally guaranteed on a senior secured basis by the Company and each other material U.S.

domestic subsidiary of the Company (collectively, the "Guarantors").

The 2019 Credit Facility was secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including the Company.

The 2019 Credit Facility required periodic interest payments on any outstanding borrowings under the facility.

The Borrower could repay all revolving loans under the 2019 Credit Facility at any time without premium or penalty (other than customer LIBOR breakage costs), subject to certain notice requirements.

Revolving loans under the 2019 Credit Facility bore interest at our option at either the Eurodollar ("LIBOR") rate plus a margin ranging from 1.50% to 3.00% per year or the base rate (the highest of the Federal Funds rate 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 2.00% per year (such margins being referred to as the “Applicable Margin”).

The Applicable Margin varied depending on our consolidated leverage ratio (as defined in the 2019 Credit Facility).

The base rate and the LIBOR rate were each subject to a zero percent floor.

The 2019 Credit Facility required compliance with certain financial covenants, including a minimum consolidated quick ratio, minimum consolidated fixed charge coverage ratio and maximum consolidated leverage ratio, all of which were defined in the 2019 Credit Facility and tested on a quarterly basis.

We were in compliance with all covenants of the 2019 Credit Facility at December 31, 2019.

In addition, the 2019 Credit Facility contains various covenants that, among other restrictions, limit our and our subsidiaries’ ability to enter into certain types of transactions, including, but not limited to:

incurring or assuming indebtedness;

granting or assuming liens;

making acquisitions or engaging in mergers;

making dividend and certain other restricted payments;

making investments;

selling or otherwise transferring assets;

engaging in transactions with affiliates;

entering into sale and leaseback transactions;

entering into burdensome agreements;

changing the nature of our business;

modifying our organizational documents;

and amending or making prepayments on certain junior debt.

On March 3, 2020, we entered into the 2020 Credit Facility, by and among us, 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 from the 2020 Credit Facility were used, in part, to pay off in full all obligations of the Company under the 2019 Credit Facility.

The 2020 Credit Facility provides for $500 million of commitments from the lenders to the Borrower, comprised of $400 million in term loans (the "2020 Term Loan Facility") and a $100 million facility available for revolving loans (the "2020 Revolving Credit Facility").

Under the 2020 Revolving Credit Facility, a $30 million sublimit is available for letters of credit and a $20 million sublimit is available for swingline loans.

Under the 2020 Credit Facility, we were 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 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 Agreement, and each tested on a quarterly basis).

In addition, the 2020 Credit Facility contains various covenants that, among other restrictions, limit our and our 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;

or 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 a borrower occurs, all obligations under the 2019 Credit Facility will immediately become due and payable.

If any other event of default exists under the 2019 Credit Facility, the lenders may accelerate the maturity of the obligations outstanding under the 2019 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 2019 Credit Facility, the lenders may commence foreclosure or other actions against the collateral.

If any default exists under the 2019 Credit Facility, or if the Borrower is unable to make any of the representations and warranties as stated in the 2019 Credit Facility at the applicable time, the Borrower will be unable to borrow funds or have letters of credit issued under the 2019 Credit Facility, which, depending on the circumstances prevailing at that time, could have a material adverse effect on the Borrower’s liquidity and working capital.

We intend to fund the cash consideration relating to the proposed ECI Merger with proceeds received from a new credit facility that we expect to enter into with Citizens Bank, N.A.

and Santander Bank, N.A., as lead arrangers, in connection with the closing of the ECI Merger.

Such cash consideration is expected to be financed through cash on hand and committed debt financing consisting of a new $400 term loan facility and new $100 million revolving credit facility (together, the "2020 Credit Facility"), which is projected to be undrawn at close.

The 2020 Credit Facility is expected to retire our 2019 Credit Facility.

In connection with the Merger, on October 27, 2017, we issued a promissory note for $23 million to certain of GENBAND's equity holders (the "Promissory Note").

The Promissory Note did not amortize and the principal thereon was payable in full on the third anniversary of its execution.

Interest on the promissory note was payable quarterly in arrears and accrued at a rate of 7.5% per year for the first six months after issuance, and thereafter at a rate of 10% per year.

At December 31, 2018, the Promissory Note balance was $24 million, comprised of $22 million of principal plus $2 million of interest converted to principal.

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 exists under the 2020 Credit Facility, the lenders can accelerate the maturity of the obligations outstanding under the 2020 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 Effective Date"), we entered into the First Amendment to the 2020 Credit Facility.

Pursuant to an assignment and assumption agreement entered into by Citizens and certain affiliates of Whitehorse Capital on the First Amendment Effective 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.

The remaining $325 million of the 2020 Term Loan Facility 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 amounts under 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

Agreement) 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 our Consolidated Net Leverage Ratio (as defined in the 2020 Credit Agreement).

The base rate and the LIBOR rate are each subject to a zero percent floor.

We are required to make quarterly principal payments on the Term A Loan aggregating approximately $10 million in the first year, $16 million 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 can 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 First Amendment did not change the terms applied to the Term A Loan or the Revolving Credit Facility under the 2020 Credit Facility.

The Term B Loan is scheduled to mature in March 2026 and bears 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 2020 Credit Facility) 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 has a lower rate of amortization than the Term A Loan and is subject to a 1.0% premium if voluntarily repaid in connection with a repricing transaction (as defined in the First Amendment) occurring prior to the six month anniversary of the First Amendment Effective Date.

We are 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 due on the maturity date.

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 can 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 have been delivered to the lenders, plus additional amounts, so long as the Borrower's Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) does not exceed 2.25:1.00, reduced from 2.75:1.00 prior to the First Amendment.

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, we entered into a Second Amendment to the 2020 Credit Facility to obtain consent for an equity exchange with AVCT as well as amend certain provisions of the 2020 Credit Facility.

We were in compliance with all covenants of the 2020 Credit Facility at December 31, 2020.

At December 31, 2020, we had an outstanding Term A Loan balance of $318.5 million at an average interest rate of 3.4%, and the Term B Loan had an outstanding balance of $74.6 million at average interest rate of 8.40%.

The 2020 Revolving Credit Facility did not have an outstanding balance but had $5.6 million of letters of credit outstanding with an interest rate of 2.5%.

We are 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, we have 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.

Our policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures.

We do not hold or issue derivative financial instruments for trading or speculative purposes.

As a result of exposure to interest rate movements, during March 2020, we entered into an interest rate swap arrangement, which effectively converted our $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 as of December 31, 2020 was $400 million, and the swap matures on March 3, 2025, the same date the Term A Loan and 2020 Revolving Credit Facility mature.

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements.

To accomplish this objective, we are using an interest rate swap as part of our 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 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 derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive (loss) income in the consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings.

During the year ended December 31, 2020, such

a derivative was used to hedge the variable cash flows associated with the 2020 Credit Agreement.

Any ineffective portion of the change in fair value of the derivative would be recognized directly in earnings.

However, during the year ended December 31, 2020, we recorded no hedge ineffectiveness.

Amounts reported in accumulated other comprehensive (loss) income related to our derivative will be reclassified to interest expense as interest is accrued on our variable-rate debt.

Based upon projected forward rates, we estimate as of December 31, 2020 that $3.2 million may be reclassified as an increase to interest expense over the next 12 months.

From time to time, we may enter into uncommitted and unsecured short-term loans which we use for financing exports in China.

Three of these loans, aggregating $3.5 million at a weighted average interest rate of 3.97%, were entered into in March 2020, two of which were with China Zheshang Bank and one of which was with Bank of Communications Hangzhou Branch.

These loans expired and were paid in full at various dates in June and July 2020.

In July 2020, we entered into an uncommitted and unsecured short-term loan in the amount of $0.7 million at an interest rate of 4.0% with Bank of Communications Hangzhou Branch that expired and was paid in full in November 2020.

We use letters of credit, performance and bid bonds in the course of our business.

At December 31, 2020, we had $32.6 million of letters of credit, bank guarantees, performance and bid bonds outstanding (collectively, "Guarantees"), comprised of the $5.6 million of letters of credit under the 2020 Credit Facility described above, and $27.0 million of Guarantees under various uncommitted facilities.

At December 31, 2020, we had cash collateral of $2.7 million supporting the Guarantees under our uncommitted facilities.

This cash collateral is included in Restricted cash in our consolidated balance sheet at December 31, 2020.

In connection with the GENBAND Merger, on October 27, 2017, we issued a promissory note for approximately $23 million to certain of GENBAND's equity holders (the "Promissory Note").

On April 29, 2019, concurrently with the closing of the 2019 Credit Facility as discussed above, we repaid in full all outstanding amounts under the Promissory Note, totaling $24.7 million and comprised of $22.5 million of principal plus $2.2 million of interest converted to principal.

We did not incur any early termination penalties in connection with this repayment.

In the second quarter of 2019, our Board approved a stock repurchase program pursuant to which we may repurchase up to $75 million of the Company's common stock prior to April 18, 2021.

Our IP Optical Networks segment maintains customer receivables factoring agreements with a number of financial institutions.

Under the terms of these agreements, we may transfer receivables to the financial institutions, on a non-recourse basis, provided that the financial institutions approve the receivables in advance.

During the year ended December 31, 2020, we received $119.8 million of cash from the sale of certain accounts receivable and recorded $0.9 million of interest expense in connection with these transactions.

In the second quarter of 2019, our Board approved a stock repurchase program pursuant to which we may repurchase up to $75 million of our common stock prior to April 18, 2021.

Repurchases under the program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases depending on the market conditions and corporate discretion.

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During the year ended December 31, 2019, we repurchased and retired 1 million shares of our common stock for a total purchase price of $5 million, including transaction fees.

Our operating activities provided $56 million of cash in 2019 and used $10 million of cash in 2018 .

In 2019, our cash flow from operating activities was generated from $106 million from our 2019 results, net of non-cash items comprising goodwill impairment, depreciation and amortization, stock-based compensation and other amounts, and $8 million from increased efficiency of inventory, partially offset by cash used for higher other operating assets and accounts receivable aggregating $21 million and lower liabilities of $37 million.

We did not repurchase any shares during the year ended December 31, 2020.

We had $70.5 million remaining under the program for future purchases at December 31, 2020.

Our operating activities provided $102 million and $56 million of cash in 2020 and 2019, respectively.

Cash provided by operating activities in 2020 was primarily the result of our net income, lower other operating assets, inventory and accounts receivable, higher accrued expenses and other long-term liabilities, and our non-cash operating income and expenses such as the gain on the Kandy Sale, amortization of intangible assets, stock-based compensation, depreciation, and amortization of debt issuance costs.

These amounts were partially offset by lower accounts payable and deferred revenue.

The decrease in other operating assets was primarily due to the payments received from Metaswitch aggregating $26 million in connection with the 2019 litigation settlement and subsequent supplemental agreement to accelerate the payment of amounts outstanding.

The increase in accrued expenses and other long-term liabilities was primarily due to the derivative liability we recorded in connection with our interest rate swap, which we entered into in the first quarter of 2020.

Cash provided by operating activities in 2019 was generated from $106 million from our 2019 results, net of non-cash items comprising goodwill impairment, depreciation and amortization, stock-based compensation and other amounts, and $8 million received from increased efficiency of inventory, partially offset by cash used for higher other operating assets and accounts receivable aggregating $21 million, and lower liabilities of $37 million.

The decrease in our liabilities was primarily related to lower accounts payable and accrued expenses and other long-term liabilities.

The decrease in accounts payable relates to the timing and amounts of purchases of both services and tangible goods and their related payment arrangements.

The decrease in accounts payable

relates to the timing and amounts of purchases of both services and tangible goods and their related payment arrangements.

The decrease in accrued expenses and other long-term liabilities primarily relates to lower accruals for employee-related expenses.

Cash used in operating activities in 2018 was primarily the result of lower accrued expenses and other long-term liabilities and accounts payable, coupled with higher accounts receivable and other operating assets.

These were partially offset by higher deferred revenue, lower inventory, and the net impact of non-cash items against our net loss.

The decrease in accrued expenses and other long-term liabilities is primarily related to lower accruals for taxes and professional fees.

The decrease in accounts payable relates to the timing and amounts of purchases of both services and tangible goods and their related payment

arrangements.

The increase in accounts receivable primarily relates to the Edgewater Acquisition.

Our net loss, adjusted for non-cash items such as depreciation, amortization, stock-based compensation, deferred income taxes and other non-cash items, including foreign currency exchange losses, was virtually break-even.

Our investing activities used $330 million and $4 million of cash in 2020 and 2019, respectively.

In 2019, we used $11 million to purchase property and equipment, partially offset by $7 million of maturities of marketable securities.

In 2018, we used $46 million to pay the cash consideration for the Edgewater Acquisition and $8 million to purchase property and equipment, partially offset by $19 million of sales/maturities of marketable securities.

Our financing activities used $51 million of cash in 2019 and provided $32 million of cash in 2018.

Our 2020 investing activities were comprised of $347 million of cash paid as cash consideration for ECI and $26 million paid for property and equipment, partially offset by $43 million of cash proceeds from the sale of land in connection with the ECI Acquisition.

Our 2019 activities were comprised of $11 million paid for property and equipment, partially offset by $7 million of maturities of marketable securities.

Our financing activities provided $319 million of cash in 2020 and used $51 million of cash in 2019.

Cash provided by financing activities in 2020 was primarily due to $479 million of proceeds from term debt, which was comprised of $400 million from the 2020 Credit Facility, $75 million from the Term B Loan under the Amended 2020 Credit Facility (concurrent with the repayment of the same amount of original debt under the 2020 Credit Facility as noted below) and $4 million of proceeds from short-term loans in China for the financing of certain export activities.

These proceeds were partially offset by the repayment of the $75 million of debt that was extinguished in connection with the First Amendment, the repayment of $57 million outstanding under the 2019 Credit Facility (comprised of $8 million under the revolving credit facility and $49 million of long-term debt), the payment of $14 million of debt issuance costs in connection with the 2020 Credit Facility and the First Amendment and the repayment of principal aggregating $10 million related to the 2020 Credit Facility and short-term loans in China.

We also paid $2 million for withholding obligations related to the net share settlement of restricted stock awards upon vesting and $1 million for principal payments on finance leases.

In 2019, we repaid outstanding borrowings of $165 million under our credit facilities, comprised of $164 million for borrowings under the revolving line of credit and $1 million for borrowings under the term loan.

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Cash proceeds from the sale of our common stock under our ESPP and from option exercises totaled approximately $1 million.

Cash provided by financing activities in 2018 was primarily comprised of $35 million of net borrowings against our 2018 Credit Facility, partially offset by $2 million used to pay withholding obligations related to the net share settlement of restricted and performance-based stock grants upon vesting and $1 million in the aggregate used to make principal payments on our finance lease obligations and debt issuance costs related to our 2018 Credit Facility.

Contractual Obligations

Our contractual obligations at December 31, 2019 consisted of the following (in millions):

Our contractual obligations at December 31, 2020 consisted of the following (in thousands):

Payments due by period

Less than 1 year

More than 5 years

Total Less than 1 year 1-3 years 3-5 years More than 5 years

Finance lease obligations $ 1,469 $ 914 $ 555 $ — $ —

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$ 663,001 $ 150,106 $ 105,504 $ 375,776 $ 31,615

Debt obligations - principal represents the outstanding balance on our 2019 Credit Facility of $56.8 million at December 31, 2019, comprised of $8.0 million outstanding under the revolving credit facility and $48.8 million outstanding term loan principal.

We periodically make payments and borrow on the revolving credit facility, and accordingly, we have included it in current liabilities in our consolidated balance sheet.

However, we have reported the outstanding balance payment due in the table above in the "3-5 years" column based solely on the expiration date of the 2019 Credit Facility.

__________________________________

* Debt obligations - principal represents the outstanding balance on our 2020 Credit Facility of $393.1 million at December 31, 2020.

** This liability is not subject to fixed payment terms and the amount and timing of payments, if any, that we will make related to this liability are not known.

See Note 20 to our consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

Based on our current expectations, we believe our current cash and available borrowings under the 2019 Credit Facility or the 2020 Credit Facility, as applicable, will be sufficient to meet our anticipated cash needs for working capital, the pending ECI Merger and capital expenditures for at least twelve months.

However, the rate at which we consume cash is dependent on the cash needs of our future operations.

We anticipate devoting substantial capital resources to continue our research and development efforts, to maintain our sales, support and marketing, to complete merger-related integration activities and for

other general corporate activities.

However, it is difficult to predict future liquidity requirements with certainty, and our cash and available borrowings under the 2019 Credit Facility or the 2020 Credit Facility, as applicable, may not be sufficient to meet our future needs, which would require us to refinance our debt and/or obtain additional financing.

See Note 2 and Note 25 to our consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

Based on our current expectations, we believe our current cash and available borrowings under the 2020 Credit Facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least twelve months.

The rate at which we consume cash is dependent on the cash needs of our future operations.

We further believe that our financial resources, along with managing discretionary expenses, will allow us to manage the anticipated impact of the COVID-19 pandemic on our business operations.

Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates further.

The challenges posed by the COVID-19 pandemic on our business continue to evolve rapidly.

Consequently, we continue to evaluate our financial position in light of future developments, particularly those relating to the COVID-19 pandemic.

However, it is difficult to predict future liquidity requirements with certainty, and our cash and available borrowings under the 2020 Credit Facility may not be sufficient to meet our future needs, which would require us to refinance our debt and/or obtain additional financing.

We may not be able to refinance our debt or obtain additional financing on favorable terms or at all.

Recent Accounting Pronouncements

Effective January 1, 2019, we adopted the Financial Accounting Standard Board's ("FASB") new standard on accounting for leases, ASC 842 .

ASC 842 replaced existing lease accounting rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements.

ASC 842 requires lessees to recognize most leases on their balance sheets and eliminates the current GAAP requirement for an entity to use bright-line tests in determining lease classification.

We elected to use the alternative transition method, which allows entities to initially apply ASC 842 at the adoption date with no subsequent adjustments to prior period lease costs for comparability.

We elected the package of practical expedients permitted under the transition guidance, which provided that a company need not reassess whether expired or existing contracts contained a lease, the lease classification of expired or existing leases, and the amount of initial direct costs for existing leases.

In connection with the adoption of ASC 842, we recorded additional lease assets of approximately $44 million and additional lease liabilities of approximately $48 million as of January 1, 2019.

The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was due to the absorption of related balances into the right-of-use assets, such as deferred rent.

The adoption of this standard had no impact on our consolidated statements of operations or of cash flows.

The FASB has issued the following accounting pronouncements, all of which became effective for the Company on January 1, 2019 and none of which had a material impact on the Company's consolidated financial statements:

In July 2018, the FASB issued ASU 2018-09, Codification Improvements (“ASU 2018-09”), which contains amendments to clarify, correct errors in or make minor improvements to the FASB codification.

ASU 2018-09 makes improvements to multiple topics, including but not limited to comprehensive income, debt, income taxes related to both stock-based compensation and business combinations, fair value measurement and defined contribution benefit plans.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting , which expands the scope of Accounting Standards Codification ("ASC") 718, Compensation - Stock Compensation ("ASC 718"), to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees.

As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"), which amends ASC 220, Income Statement - Reporting Comprehensive Income , to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires entities to provide certain disclosures regarding stranded tax effects.

We did not elect to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to accumulated deficit.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740):

Intra-Entity Transfers of Assets Other Than Inventory , which removes the prohibition in ASC 740, Income Taxes , against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory.

In addition, the FASB has issued the following accounting pronouncements, none of which we believe will have a material impact on our consolidated financial statements:

The Financial Accounting Standards Board ("FASB") has issued the following accounting pronouncements, all of which became effective for us in 2020 and none of which had a material impact on our consolidated financial statements:

In March 2020, the FASB issued Accounting Standard Updates ("ASU") 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"), which provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria that reference LIBOR or another reference rate expected to be discontinued.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments ("ASU 2020-03"), which makes narrow-scope amendments related to topics regarding fair value option disclosures, applicability of the portfolio exception in Accounting Standards Codification ("ASC") 820 to nonfinancial items, disclosures for depository and lending institutions, cross reference to guidance in ASC 470-50 on line of credit or revolving debt arrangements, cross reference to net asset value practical expedient in ASC 820-10, interaction between ASC 842 and ASC 326 and between ASC 326 and ASC 860-20.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which provides guidance on implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract.

ASU 2018-15 amends ASC 350, Intangibles - Goodwill and Other (“ASC 350”) to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply the guidance in

ASC 350-40 to determine which implementation costs should be capitalized in such a CCA.

ASU 2018-15 was effective for us beginning January 1, 2020.

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20):

Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”), which amends ASC 715, Compensation - Retirement Benefits , to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans.

ASU 2018-14 was effective for us beginning January 1, 2020.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which changes the fair value measurement requirements of ASC 820, Fair Value Measurement.

ASU 2018-13 was effective for us beginning January 1, 2020 for both interim and annual reporting.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

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ASU 2019-04 provides transition relief for entities adopting ASU 2016-13 and ASU 2019-05 clarifies certain aspects of the accounting for credit losses, hedging activities and financial instruments in connection with the adoption of ASU 2016-13.

ASU 2019-04 and ASU 2019-05 are effective with the adoption of ASU 2016-13, which was effective for us beginning January 1, 2020 for both interim and annual reporting periods.

The FASB has issued the following accounting pronouncement which became effective for us in 2021, which we do not believe will have a material impact on our consolidated financial statements upon adoption:

The FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which modifies ASC 740 to simplify the accounting for income taxes.

ASU 2019-12 addresses the accounting for hybrid tax regimes, tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of legal entities not subject to tax, intraperiod tax allocation exception to incremental approach, ownership changes in investments - changes from a subsidiary to an equity method investment, ownership changes in investments - changes from an equity method investment to a subsidiary, interim period accounting for enacted changes in tax law and year-to-date loss limitation in interim period tax accounting.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis