What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-26 compared with 2020-02-28 · 1147 added, 778 removed, 916 unchanged (68% of the section changed)

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Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2020, 2019 and 2018

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We have audited the accompanying consolidated balance sheets of Ribbon Communications Inc.

and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements").

and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

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Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective adoption method on January 1, 2018 and adopted ASC Topic 842, “Leases,” using the alternative transition approach on January 1, 2019.

As discussed in Note 2 to the financial statements, the Company adopted Accounting Standards Codification Topic 842, “Leases,” using the alternative transition approach on January 1, 2019.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition — Refer to Notes 2 and 17 to the financial statements

Critical Audit Matter Description

The Company recognizes revenue from two primary sources:

products and services.

Generally, contracts with customers contain multiple performance obligations, consisting of products and services.

For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct.

When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis.

The Company utilizes the observable price of goods and services when they are sold separately to similar customers in order to estimate standalone selling price.

Management is required to use judgment to develop its estimates of standalone selling price.

Auditing the Company’s estimates of standalone selling price required a high degree of auditor judgment and an increased extent of effort, including the need to involve our data analytics specialists to assist in the testing of the standalone selling price analyses given the judgment required by management in this area.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the testing of management’s estimation of standalone selling prices included the following, among others:

• We tested the effectiveness of controls over revenue, including those over the determination of estimated standalone selling price.

• We evaluated whether management’s significant accounting policies related to the estimation of standalone selling price were appropriate.

• With the assistance of our data analytics specialists, we evaluated the estimated standalone selling price analyses prepared by the Company, including testing the underlying detail of standalone sales and the mathematical accuracy of the calculations.

Business Combinations – ECI Telecom Group Ltd.

Acquisition – Refer to Notes 2 and 3 to the financial statements

Critical Audit Matter Description

The Company completed the acquisition of ECI Telecom Group Ltd.

(“ECI”) on March 3, 2020 by issuing to the ECI shareholders and certain others 32.5 million shares of the Company’s common stock with a fair value of $108.6 million and paying $322.5 million of cash.

The Company accounted for the acquisition under the acquisition method of accounting for business combinations.

Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including customer relationships, developed technology, and in-process research and development intangible assets with an aggregate fair value of approximately $116 million, $112 million, and $34 million, respectively.

The Company used an income approach to value the acquired in-process research and development, developed technology, and customer relationships intangible assets.

The fair value determination of these intangible assets required management to make significant estimates and assumptions related to forecasted future cash flows, including the selection of customer attrition rates, technology obsolescence, revenue growth rates, and discount rates.

We identified the intangible assets for ECI as a critical audit matter because of the significant estimates and assumptions management made to fair value these assets.

This required a high degree of auditor judgment and an increased extent of effort, including the involvement of our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s forecasts of future cash flows, including the selection of customer attrition rates, technology obsolescence, revenue growth rates, and discount rates.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the forecasts of future cash flows and the selection of the customer attrition rates, technology obsolescence, revenue growth rates, and discount rates for the intangible assets for ECI included the following, among others:

• We tested the effectiveness of controls over the valuation of the customer relationships, developed technology, and in-process research and development intangible assets, including management’s controls over forecasts of future cash flows and the selection of the customer attrition rates, technology obsolescence, revenue growth rates, and discount rates.

• We assessed the reasonableness of fiscal year 2020 forecasted cash flows of revenues and operating margins by comparing them to ECI’s actual 2020 cash flows.

• We assessed the reasonableness of the forecasted revenue growth rates over the cash flow forecast period by comparing them to ECI’s actual revenue growth rates during the most recent historical periods as well as certain peer companies, third-party industry forecasts, and internal communications to management and the board of directors.

• We performed sensitivity analyses of the significant assumptions used in the valuation model to evaluate the change in fair value resulting from changes in the significant assumptions.

• With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology;

(2) customer attrition rates by testing the mathematical accuracy of the rates used and comparing them to historical customer data;

(3) technology obsolescence by testing the source information;

(4) revenue growth rates by comparing them to industry growth rates and the projected nominal gross domestic product (GDP) growth rate;

and (5) discount rates, which included testing the source information underlying the determination of the discount rates, testing the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management.

/s/ Deloitte & Touche LLP

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(in thousands, except share and per share data)

2020 December 31,

Current assets:

Cash and cash equivalents $ 128,428 $ 44,643

Marketable securities

Restricted cash 7,269 —

Accounts receivable, net 237,738 192,706

Inventory 45,750 14,800

Other current assets 28,461 27,146

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Intangible assets, net 417,356 213,366

Goodwill 416,892 224,896

Investments 115,183 —

Deferred income taxes 10,651 4,959

Operating lease right-of-use assets 69,757 36,654

Other assets 20,892 26,762

$ 1,547,265 $ 814,908

Liabilities and Stockholders' Equity

Current liabilities:

Current portion of long-term debt

Current portion of term debt $ 15,531 $ 2,500

Revolving credit facility — 8,000

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Long-term debt, net of current 369,035 45,995

Long-term debt, related party

Operating lease liabilities, net of current 72,614 37,202

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Accumulated deficit ( 1,178,476 ) ( 1,267,067 )

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income ( 4,942 ) 2,527

Total stockholders' equity 686,853 483,255

$ 1,547,265 $ 814,908

See notes to the consolidated financial statements.

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Year ended December 31,

2020 2019 2018

Product $ 467,912 $ 262,030 $ 279,014

Service 375,883 301,081 298,891

Total revenue 843,795 563,111 577,905

Cost of revenue:

Product 204,772 95,774 103,209

Service 145,916 112,680 127,388

Total cost of revenue 350,688 208,454 230,597

Gross profit 493,107 354,657 347,308

Operating expenses:

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General and administrative 63,286 53,870 66,036

Amortization of acquired intangible assets 60,910 49,225 49,723

Impairment of goodwill — 164,300 —

Acquisition- and integration-related

Acquisition-, disposal- and integration-related 17,164 12,953 16,951

Restructuring and related 16,235 16,399 17,015

Total operating expenses 491,438 544,117 412,716

Loss from operations

Interest (expense) income, net

Income (loss) from operations 1,669 ( 189,460 ) ( 65,408 )

Interest expense, net ( 21,042 ) ( 3,877 ) ( 4,230 )

Other income (expense), net 112,690 70,444 ( 3,772 )

Loss before income taxes

Income tax (provision) benefit

Loss per share:

Shares used to compute loss per share:

Income (loss) before income taxes 93,317 ( 122,893 ) ( 73,410 )

Income tax provision ( 4,726 ) ( 7,182 ) ( 3,400 )

Net income (loss) $ 88,591 $ ( 130,075 ) $ ( 76,810 )

Earnings (loss) per share:

Basic $ 0.64 $ ( 1.19 ) $ ( 0.74 )

Diluted $ 0.61 $ ( 1.19 ) $ ( 0.74 )

Shares used to compute earnings (loss) per share:

Basic 138,967 109,734 103,916

Diluted 144,650 109,734 103,916

See notes to the consolidated financial statements.

RIBBON COMMUNICATIONS INC.

Consolidated Statements of Comprehensive Loss

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

Year ended December 31,

2020 2019 2018

Net income (loss) $ 88,591 $ ( 130,075 ) $ ( 76,810 )

Other comprehensive income (loss), net of tax:

Unrealized loss on interest rate swap, net of reclassifications ( 10,948 ) — —

Foreign currency translation adjustments 894 194 220

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Other comprehensive (loss) income, net of tax ( 7,469 ) ( 1,176 ) 634

Comprehensive loss, net of tax

Comprehensive income (loss), net of tax $ 81,122 $ ( 131,251 ) $ ( 76,176 )

See notes to the consolidated financial statements.

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(in thousands, except share data)

Additional paid-in capital

Accumulated deficit

Accumulated other comprehensive income (loss)

Total stockholders' equity

Shares Amount Additional paid-in capital Accumulated deficit Accumulated other comprehensive income (loss) Total stockholders' equity

Balances, January 1, 2018 101,752,856 $ 10 $ 1,684,768 $ ( 1,072,426 ) $ 3,069 $ 615,421

Issuance of common stock in connection with employee stock purchase plan

Adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers

12,244 12,244

Exercise of stock options 15,935 73 73

Vesting of restricted stock awards and units

Vesting of restricted stock units 1,278,062 —

Vesting of performance-based stock awards and units 57,768 —

Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 524,516 ) ( 2,024 ) ( 2,024 )

Shares issued as consideration in connection with acquisition of GENBAND

Shares issued as consideration in connection with the acquisition of Edgewater Networks, Inc.

4,235,531 1 29,999 30,000

Assumption of equity awards in connection with the acquisition of Edgewater Networks, Inc.

Stock-based compensation expense 10,013 10,013

Reclassification between Common stock and Additional paid-in capital to record change in par value of common stock

Other comprehensive loss

Other comprehensive income 634 634

Net loss ( 76,810 ) ( 76,810 )

Balances, December 31, 2018 106,815,636 11 1,723,576 ( 1,136,992 ) 3,703 590,298

Adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers

Issuance of common stock in connection with employee stock purchase plan 282,646 863 863

Exercise of stock options 127,334 235 235

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Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 240,673 ) ( 1,193 ) ( 1,193 )

Shares issued as consideration in connection with acquisition of Edgewater Networks, Inc.

Assumption of equity awards in connection with acquisition of Edgewater Networks, Inc.

Shares issued as consideration in connection with the acquisition of Anova Data, Inc.

2,948,793 15,186 15,186

Repurchase and retirement of common stock ( 975,914 ) ( 4,536 ) ( 4,536 )

Reclassification of liability to equity for bonuses converted to stock awards 1,052 1,052

Stock-based compensation expense 12,601 12,601

Other comprehensive income

Other comprehensive loss ( 1,176 ) ( 1,176 )

Net loss ( 130,075 ) ( 130,075 )

Balances, December 31, 2019 110,471,995 11 1,747,784 ( 1,267,067 ) 2,527 483,255

Issuance of common stock in connection with employee stock purchase plan

Exercise of stock options 38,288 70 70

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Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 472,028 ) ( 1,674 ) ( 1,674 )

Shares issued as consideration in connection with the acquisition of ECI Telecom Group Ltd.

32,500,000 3 108,547 108,550

Shares issued as consideration in connection with the acquisition of Anova Data, Inc.

Repurchase and retirement of common stock

Reclassification of liability to equity for bonuses converted to stock awards

316,551 1,630 1,630

Stock-based compensation expense 13,899 13,899

Other comprehensive loss ( 7,469 ) ( 7,469 )

Net income 88,591 88,591

Balances, December 31, 2020 145,425,248 $ 15 $ 1,870,256 $ ( 1,178,476 ) $ ( 4,942 ) $ 686,853

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Year ended December 31,

2020 2019 2018

Cash flows from operating activities:

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

Net income (loss) $ 88,591 $ ( 130,075 ) $ ( 76,810 )

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

Depreciation and amortization of property and equipment 17,188 11,949 11,200

Amortization of intangible assets 60,910 49,225 49,723

Amortization of debt issuance costs 5,673 360 204

Stock-based compensation 13,899 12,601 11,072

Impairment of intangible assets and goodwill

Impairment of goodwill — 164,300 —

Deferred income taxes ( 4,616 ) 5,299 513

Reduction in deferred purchase consideration

Foreign currency exchange losses (gains)

Gain on sale of business ( 83,552 ) — —

Increase in fair value of investments ( 30,296 ) — —

Reduction to deferred purchase consideration ( 70 ) ( 8,124 ) —

Foreign currency exchange losses 2,961 1,090 4,611

Changes in operating assets and liabilities:

Accounts receivable 9,578 ( 3,936 ) ( 13,017 )

Inventory 11,842 7,776 993

Other operating assets 44,343 ( 17,849 ) 4,832

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Business acquisitions, net of cash acquired ( 346,852 ) — ( 46,389 )

Purchases of marketable securities

Sales/maturities of marketable securities — 7,295 18,919

Proceeds from the sale of intangible assets

Net cash (used in) provided by investing activities

Proceeds from the sale of fixed assets 43,500 — —

Net cash used in investing activities ( 330,073 ) ( 3,529 ) ( 35,377 )

Cash flows from financing activities:

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Principal payment of debt, related party — ( 24,716 ) —

Principal payments of long-term debt

Principal payments of term debt ( 134,188 ) ( 1,250 ) —

Payment of deferred purchase consideration — ( 21,876 ) —

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Proceeds from the exercise of stock options 70 235 73

Payment of tax withholding obligations related to net share settlements of restricted stock awards

Repurchase of common stock

Net cash (used in) provided by financing activities

RIBBON COMMUNICATIONS INC.

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Year ended December 31,

2020 2019 2018

Payment of tax withholding obligations related to net share settlements of restricted stock awards ( 1,674 ) ( 1,193 ) ( 2,024 )

Repurchase of common stock — ( 4,536 ) —

Net cash provided by (used in) financing activities 319,303 ( 51,277 ) 31,773

Effect of exchange rate changes on cash and cash equivalents 260 70 ( 180 )

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Cash and cash equivalents, beginning of year 44,643 43,694 57,073

Cash and cash equivalents, end of year

Cash, cash equivalents and restricted cash, end of year $ 135,697 $ 44,643 $ 43,694

Supplemental disclosure of cash flow information:

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Business acquisition purchase consideration - assumed equity awards $ — $ — $ 747

Business acquisition purchase consideration - note issued to selling equityholders

Supplemental disclosure of non-cash financing activities:

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(1) NATURE OF THE BUSINESS

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

With over 1,000 customers around the globe, including some of the largest telecommunications service providers and enterprises in the world, Ribbon enables 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, Ribbon helps service providers and enterprises adopt the next generation of software-based virtualized and cloud communications technologies to drive new, incremental revenue, while protecting their existing revenue streams.

Ribbon's software solutions provide a secure way for its 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, Ribbon's 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.

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

Ribbon Communications Inc.

("Ribbon" or the "Company") is a leading global provider of communications technology to service providers and enterprises.

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

Ribbon's mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance, and elasticity.

The Company is headquartered in Plano, Texas, and has a global presence with research and development, or sales and support locations in over thirty-five countries around the world.

(2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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The consolidated financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States ("GAAP").

On December 1, 2020 (the "Kandy Sale Date"), American Virtual Cloud Technologies, Inc.

("AVCT") completed the purchase of the Company's cloud-based enterprise service business (the "Kandy Communications Business").

The revenue and expenses of the Kandy Communications Business are not included in the Company's consolidated financial statements for the period subsequent to the Kandy Sale Date.

On March 3, 2020 (the "ECI Acquisition Date"), the Company merged with ECI Telecom Group Ltd ("ECI") (the "ECI Acquisition").

The financial results of ECI are included in the Company's consolidated financial statements for the period subsequent to the ECI Acquisition Date.

On February 28, 2019 (the "Anova Acquisition Date"), the Company acquired the business and technology assets of Anova Data, Inc.

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The financial results of Edgewater are included in the Company's 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") pursuant to which, following a series of merger transactions (collectively, the "Merger"), Sonus and GENBAND each became a wholly-owned subsidiary of NewCo, with Sonus deemed the acquirer in the transaction for accounting purposes.

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

The consolidated financial statements of the Company represent the consolidated financial statements of Sonus, prior to the Merger Date, and the consolidated financial statements of Ribbon, on and after the Merger Date.

The financial results of GENBAND are included in Ribbon's consolidated financial statements beginning on the Merger Date.

Significant Accounting Policies

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Use of Estimates and Judgments

The preparation of financial statements in conformity with GAAP requires management to make estimates and

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

Significant estimates and judgments relied upon in preparing these consolidated financial statements include accounting for business combinations, revenue recognition for multiple element arrangements, inventory valuations, assumptions used to determine the fair value of stock-based compensation, intangible assets and goodwill valuations, legal contingencies and recoverability of Ribbon's net deferred tax assets and the related valuation allowances.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

Significant estimates and judgments relied upon in preparing these consolidated financial statements include accounting for business combinations, revenue recognition for multiple element arrangements, inventory valuations, assumptions used to determine the fair value of stock-based compensation, intangible assets, goodwill, debentures and warrants, legal contingencies and recoverability of Ribbon's net deferred tax assets and the related valuation allowances.

Ribbon regularly assesses these estimates and records changes in estimates in the period in which they become known.

Ribbon bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances.

Actual results could differ from those estimates.

Actual results could differ from those

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Reclassifications

Certain reclassifications, net affecting previously reported net loss, have been made to the previously issued financial statements to conform to the current period presentation.

In the fourth quarter of 2020, the Company reclassified amounts recorded for amortization of acquired intangible assets in prior presentations from Cost of revenue - product and Sales and marketing to a separate line included in operating expenses in the consolidated statements of operations, as management believes this presentation enhances the comparability of the Company's financial statements with industry peers.

These reclassifications did not impact operating loss, net loss or loss per share for any historical periods.

These reclassifications also did not impact the consolidated balance sheets or statements of cash flows for any historical periods.

The Company did not reclassify depreciation of property and equipment related to production activities from cost of revenue to other accounts.

These reclassifications for the years ended December 31, 2019 and 2018 were as follows (in thousands):

Year ended December 31, 2019 Year ended December 31, 2018

Prior presentation Amounts reclassified Revised presentation Prior presentation Amounts reclassified Revised presentation

Product revenue $ 262,030 $ — $ 262,030 $ 279,014 $ — $ 279,014

Service revenue 301,081 — 301,081 298,891 — 298,891

Total revenue 563,111 — 563,111 577,905 — 577,905

Cost of revenue - product 133,347 ( 37,573 ) 95,774 142,185 ( 38,976 ) 103,209

Cost of revenue - service 112,680 — 112,680 127,388 — 127,388

Total cost of revenue 246,027 ( 37,573 ) 208,454 269,573 ( 38,976 ) 230,597

Total gross profit 317,084 37,573 354,657 308,332 38,976 347,308

Research and development 141,060 — 141,060 145,462 — 145,462

Sales and marketing 117,962 ( 11,652 ) 106,310 128,276 ( 10,747 ) 117,529

General and administrative 53,870 — 53,870 66,036 — 66,036

Amortization of acquired intangible assets — 49,225 49,225 — 49,723 49,723

Impairment of goodwill 164,300 — 164,300 — — —

Acquisition-, disposal- and integration-related 12,953 — 12,953 16,951 — 16,951

Restructuring and related 16,399 — 16,399 17,015 — 17,015

Total operating expenses 506,544 37,573 544,117 373,740 38,976 412,716

Operating loss $ ( 189,460 ) $ — $ ( 189,460 ) $ ( 65,408 ) $ — $ ( 65,408 )

In addition, certain other reclassifications, not affecting previously reported net loss, have been made to the previously issued financial statements to conform to the current year presentation.

Business Combinations

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Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606" or the "New Revenue Standard") using the modified retrospective approach.

As a result, the Company changed its accounting policy for revenue recognition, which is described below and in Note 14 .

The Company derives revenue from two primary sources:

products and services.

Product revenue includes the Company's appliances and software that function together to deliver the products' essential functionality.

Software and appliances are also sold on a standalone basis.

Product revenue includes the Company's hardware and software that function together to deliver the products' essential functionality.

Software and hardware are also sold on a standalone basis.

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

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The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company.

The software and appliances are delivered before related services are provided and are functional without professional services or customer support.

The software and hardware are delivered before related services are provided and are functional without professional services or customer support.

The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own.

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.

The Company does not recognize software revenue related

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

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.

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

The Company begins to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period.

The Company offers warranties on its products.

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

Assurance-type warranties do not represent separate performance obligations.

The Company also sells separately-priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations.

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Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches.

The Company sells its customer support contracts at a percentage of list or net product price related to the support.

The Company sells its customer support contracts at a percentage of list or net product price.

Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year .

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The Company generally uses the input method to measure progress for its contracts because it believes such method best depicts the transfer of assets to the customer, which occurs as the Company incurs costs for the contracts.

However, in some instances, the Company uses the output method because it best depicts the transfer of asset to the customer.

Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.

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The related revenue is typically recognized as the training services are performed.

Operating Segments

The Company's chief operating decision maker (the "CODM") is its president and chief executive officer.

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

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

Financial information for the IP Optical Networks segment is not

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

presented for any years prior to 2020, as this segment arose from the ECI Acquisition, and accordingly is not included in the Company's consolidated financial statements for the years ended December 31, 2019 and 2018.

Financial Instruments

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

All investments in marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in Accumulated other comprehensive income (loss), which is a component of stockholders' equity.

The carrying amounts of Ribbon's financial instruments approximate their fair values and include accounts receivable, convertible debentures and warrants received as sale consideration, borrowings under a revolving credit facility, accounts payable and term debt.

Investments in marketable securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in Accumulated other comprehensive income (loss), which is a component of stockholders' equity.

Unrealized losses that are determined to be other-than-temporary, based on current and expected market conditions, are recognized in earnings.

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The cost of marketable securities sold is determined by the specific identification method.

Changes in fair value of investments classified as trading securities, such as the convertible debentures and warrants received as sale consideration, are recognized in earnings as components of Other income (expense), net.

Financial instruments with remaining maturities or that are due within one year from the balance sheet date are classified as current.

Financial instruments with maturities or that are payable more than one year from the balance sheet date are classified as noncurrent.

Cash and Cash Equivalents

Cash equivalents are stated at fair value.

Cash equivalents are liquid securities that have remaining maturities of three months or less at the date of purchase.

Restricted Cash

The Company classifies as restricted cash all cash pledged as collateral to secure long-term obligations and all cash whose use is otherwise limited by contractual provisions.

At December 31, 2020, the Company had $ 7.3 million of restricted cash, comprised of $ 4.6 million restricted in connection with a tax payment on certain fixed assets formerly held by ECI that were sold in connection with the ECI Acquisition, and $ 2.7 million of restricted short-term bank deposits pledged to secure certain performance and financial bonds as security for the Company's obligations under tenders, contracts and to one of its main subcontractors.

Transfers of Financial Assets

The Company's IP Optical Networks segment maintains customer receivables factoring agreements with a number of financial institutions.

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

The Company maintains credit insurance policies from major insurance providers or obtains letters of credit from the customers for a majority of its factored trade receivables.

The Company accounts for the factoring of its financial assets as a sale of the assets and records the factoring fees, when incurred, as a component of interest expense in the consolidated statements of operations, and the proceeds from the sales of receivables are included in cash from operating activities in the consolidated statements of cash flows.

During the year ended December 31, 2020, the Company 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.

Foreign Currency Translation

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Translation adjustments for these subsidiaries are included in Accumulated other comprehensive income.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

For foreign subsidiaries where the functional currency is the U.S.

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Translation adjustments for these subsidiaries are included in Other income (expense), net.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Realized and unrealized foreign currency exchange gains and losses arising from transactions denominated in currencies other than the subsidiary's functional currency are reflected in earnings.

Effective on the Merger Date, the Company began to record its foreign currency gains (losses) as a component of Other income (expense), net.

The Company did not reclassify amounts previously recorded within General and administrative expenses as the amounts were not material to the consolidated results of the Company.

The Company records its foreign currency gains (losses) as a component of Other income (expense), net.

The Company recognized net foreign currency losses of $ 3.0 million for the year ended December 31, 2020, $ 1.1 million for the year ended December 31, 2019 and $ 4.6 million for the year ended December 31, 2018.

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The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors.

Ribbon writes down evaluation equipment at the time of shipment to its customers, as it is probable that the inventory value will not be realized.

Ribbon writes down evaluation equipment (equipment at customer sites for testing and evaluation) at the time of shipment to its customers, as it is probable that the inventory value will not be realized.

Deferred product costs represent deferred cost of revenue for product shipments to customers prior to satisfaction of Ribbon's revenue recognition criteria.

The Company classifies inventory that is not expected to be consumed within one year from the balance sheet date as noncurrent and includes such inventory as a component of Other assets.

Debentures and Warrants .

The Company has Debentures and Warrants that it received as sale consideration in connection with the sale of the Kandy Communications Business (see Note 4), which Ribbon accounts for in accordance with Accounting Standards Codification ("ASC") 820, Fair Value Measurement ("ASC 820)".

The Company calculates 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.

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 lock of financial instruments.

The Company is 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 the Company's consolidated balance sheet at December 31, 2020.

Property and Equipment

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Internal use software is amortized on a straight-line basis over its estimated useful life of three years , beginning when the software is ready for its intended use.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Intangible Assets and Goodwill

Intangible assets are primarily comprised of certain intangible assets arising from the Merger and the Edgewater Acquisition.

These intangible assets include a combination of in-process research and development, developed technology, customer relationships, trade names, and internal use software.

The Company's intangible assets are comprised of in-process research and development, developed technology, customer relationships, trade names, and internal use software.

Intangible assets are reviewed for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable based upon the estimated undiscounted cash flows.

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Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Company amortizes its intangible assets over their respective useful lives, with the exception of in-process research and development, which has an indefinite life until the product is generally available, at which time such asset is typically reclassified to developed technology, and the Company begins to amortize this asset.

The Company amortizes its intangible assets over their respective useful lives, with the exception of in-process research and development, which has an indefinite life until the product is generally available, at which time such asset is typically reclassified to developed technology, and the Company begins to amortize this asset.

See Note 10 for additional information regarding the Company's intangible assets.

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Goodwill is not amortized, but instead is tested for impairment at least annually, or more frequently if indicators of potential impairment exist, by comparing the fair value of the Company's reporting unit to its carrying value.

The Company's annual testing for impairment of goodwill is completed as of November 30.

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

Based on the results of the Company's 2019 annual impairment test, the Company determined that its carrying value exceeded its fair value.

The Company 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.

The Company recorded an impairment charge in the fourth quarter of 2019 of $164.3 million .

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

The Company performed its assessments for each of the years ended December 31, 2018 and 2017 and determined in each of those years that its fair value was in excess of its carrying value and accordingly, there was no impairment of goodwill.

At certain times during the years ended December 31, 2019 and 2018, including at the Company's annual testing date of November 30, 2018, the Company's market capitalization was below its book value.

While the Company had concluded that its fair value exceeded its carrying value at that date, the Company regularly monitored for changes in circumstances, including changes to the Company's performance, that could result in impairment of goodwill.

Prior to 2020, the Company's annual test for impairment of goodwill was completed as of November 30.

Effective in 2020, the Company changed its annual goodwill impairment test date from November 30 to October 1.

This change did not have a material impact on the Company's consolidated financial statements.

As described above, effective in the fourth quarter of 2020, the Company determined that it has 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.

The Company's reporting units are its operating segments.

The Company performs 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.

The Company assesses 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.

Any impairment charges are reported separately in the Company's consolidated statements of operations.

Stock-Based Compensation

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These results are then used to calculate the grant date fair values of the PSUs.

Concentrations of Credit Risk

The financial instruments that potentially subject Ribbon to concentrations of credit risk are cash, cash equivalents, investments and accounts receivable.

Concentration of Risk

The financial instruments that potentially subject Ribbon to concentrations of credit risk are cash, restricted cash and accounts receivable.

The Company's cash equivalents and investments were managed by one financial institution at December 31, 2020.

Historically, the Company has not experienced significant losses due to such bank depository concentration.

Certain components and software licenses from third parties used in Ribbon's products are procured from single sources of supply.

The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt Ribbon's delivery of products and thereby materially adversely affect Ribbon's revenue and operating results.

The Company's investments at December 31, 2020 consisted of securities of AVCT (see Note 4).

The Company did not hold any investments at December 31, 2019.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Certain components and software licenses from third parties used in Ribbon's products are procured from single sources of supply.

Advertising Costs

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Advertising expenses were $ 0.8 million for the year ended December 31, 2020, $ 0.5 million for the year ended December 31, 2019 and $ 0.5 million for the year ended December 31, 2018.

Operating Segments

The Company operates in a single segment, as the chief operating decision maker makes decisions and assesses performance at the company level.

Operating segments are identified as components of an enterprise about which separate discrete financial information is utilized for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance.

To date, the chief operating decision maker has made such decisions and assessed performance at the company level, as one segment.

The Company's chief operating decision makers are its Interim Co-Presidents and Chief Executive Officers.

Loss Contingencies and Reserves

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Ribbon evaluates these claims and accrues amounts when it is probable that the obligation has been incurred and the amounts are reasonably estimable.

The Company records warranty liabilities for estimated costs of fulfilling its obligations under standard limited hardware and software warranties at the time of sale.

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

The Company assumed ECI's warranty liability in connection with the ECI Acquisition.

At December 31, 2020, the Company's liability for product warranties was $ 14.9 million, of which $ 6.5 million was current and included in Accrued expenses and other and $ 8.4 million was long-term and included in Other long-term liabilities in the Company's consolidated balance sheet.

The Company did not have a warranty accrual at December 31, 2019.

Research and Development Grants

The Company records grants received from the Office of the Innovation Authority of the Israeli Ministry of Economics (the "IIA") as a reduction to Research and development expense.

Royalties payable to the IIA are recognized pursuant to sales of related products and are included in Cost of revenue - product.

Accounting for Leases

Effective January 1, 2019, the Company adopted the new standard on accounting for leases, ASC 842, Leases ("ASC 842").

ASC 842 replaced existing lease accounting rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements (see Note 17 ).

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.

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

The Company 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, the Company recorded additional lease assets of $43.9 million and additional lease liabilities of $47.8 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 the Company's consolidated statements of operations or cash flows.

Accounting for Income Taxes

Deferred tax assets and liabilities are recognized for the expected future consequences of events that have been reflected in the consolidated financial statements.

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities and operating loss carryforwards, using tax rates

The Company accounts for its leases in accordance with Accounting Standards Codification ("ASC") 842, Leases ("ASC 842"), which was 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 (see Note 22).

The Company has operating and finance leases for corporate offices, research and development facilities, and certain equipment.

Operating leases are reported separately in the Company's consolidated balance sheets at December 31, 2020 and 2019.

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

The Company determines if an arrangement is a lease at inception.

A contract is determined to contain a lease component if the arrangement provides the Company 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, the Company does not separate lease and

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

expected to be in effect for the years in which the differences are expected to reverse.

non-lease components but rather, accounts 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.

The Company expenses all variable lease costs as incurred.

Accounting for Income Taxes

Deferred tax assets and liabilities are recognized for the expected future consequences of events that have been reflected in the consolidated financial statements.

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities and operating loss carryforwards, using tax rates expected to be in effect for the years in which the differences are expected to reverse.

The Company records valuation allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized.

The Company has provided for income taxes on the undistributed earnings of its non-U.S.

subsidiaries as of December 31, 2019, with the exception of the Company's Irish subsidiary, as the Company does not plan to permanently reinvest these amounts outside the United States.

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

Consequently, the Company has recorded a tax liability of $4.8 million , primarily consisting of withholding and distribution taxes, relating 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, the Company is required to recognize and record deferred taxes in 2020.

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

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

The Company determines whether it is more likely than not that a tax position will be sustained upon examination.

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Recent Accounting Pronouncements

The Financial Accounting Standards Board ("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 Accounting Standards Update ("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 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, I ncome Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , 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 Cuts and Jobs Act (the "Tax Act") and requires entities to provide certain disclosures regarding stranded tax effects.

The Company 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, I ncome 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.

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

In March 2020, the FASB issued Accounting Standards Update ("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

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

In addition, the FASB has issued the following accounting pronouncements, none of which the Company believes will have a material impact on its consolidated financial statements:

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):

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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 the Company 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 the Company 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 the Company 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 the Company beginning January 1, 2020 for both interim and annual reporting periods.

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

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

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

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

(3) BUSINESS ACQUISITIONS

Pending Merger

On November 14, 2019, Ribbon 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 Ribbon (the "ECI Merger").

The Board unanimously approved the ECI Merger Agreement and the transactions contemplated thereby.

Ribbon's stockholders approved the issuance of 32.5 million shares of the Company's 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 of the ECI Merger (the "Effective Time"), all equity securities of ECI issued and outstanding immediately prior to the Effective Time will be converted into the right to receive consideration consisting of $324 million in cash (the "ECI Cash Consideration") and ECI Stock Consideration, less the amount of indebtedness of ECI as of the Effective Time.

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

On the ECI Acquisition Date, Ribbon completed its merger transaction with ECI in accordance with the terms of the Agreement and Plan of Merger, dated as of November 14, 2019, by and among Ribbon, ECI, an indirect wholly-owned subsidiary of Ribbon ("Merger Sub"), Ribbon Communications Israel Ltd.

and ECI Holding (Hungary) kft pursuant to which Merger Sub merged with and into ECI, with ECI surviving such merger as a wholly-owned subsidiary of Ribbon.

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

Ribbon acquired ECI because it believed the ECI Acquisition would position the Company for growth and enhance

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

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

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

Cash Consideration was financed through cash on hand and committed debt financing consisting of a new $ 400 million term loan facility and $ 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 the Company's consolidated financial statements for the period subsequent to the ECI Acquisition.

The Company's financial results for the year ended December 31, 2020 include $ 260.5 million of revenue and $ 52.9 million of net loss attributable to ECI.

As of December 31, 2020, the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities had been finalized.

During the fourth quarter of 2020, the Company reclassified the acquired assets held for employee' severance benefits of $ 13.2 million from other assets to other long-term liabilities.

This reclassification was recorded to conform to the Company's presentation and resulted in a net long-term liability for severance benefits of $ 4.7 million in the Company's consolidated balance sheet at December 31, 2020.

This amount reflects the net unfunded liability for the defined benefit plans assumed.

This reclassification did not impact purchase consideration or goodwill.

During the second quarter of 2020, the Company recorded changes to the initial preliminary purchase price allocation, including reductions of $ 10.4 million and $ 7.0 million to current and noncurrent inventory respectively, and increases to identifiable intangible assets aggregating $ 11.0 million, comprised of $ 3.0 million to in-process research and development, $ 5.0 million to developed technology, $ 2.0 million to customer relationships and $ 1.0 million to trade names.

These adjustments, as well as other immaterial adjustments to other balance sheet accounts, resulted in a net increase to goodwill of $ 2.5 million.

The allocation of purchase consideration to the fair value of assets acquired and liabilities assumed includes a noncurrent asset of $ 5.7 million that represents an indemnification receivable from ECI's selling shareholders for certain liabilities for uncertain tax positions in accordance with the Agreement and Plan of Merger.

A summary of the allocation of the purchase consideration for ECI is as follows (in thousands):

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Fair value of consideration transferred:

Cash consideration:

Repayment of ECI outstanding debt obligations $ 183,266

Cash paid to selling shareholders 139,244

Payment to selling shareholders from sale of ECI real estate assets 33,400

Less cash and restricted cash acquired ( 9,058 )

Net cash consideration 346,852

Fair value of Ribbon stock issued 108,550

Fair value of total consideration $ 455,402

Fair value of assets acquired and liabilities assumed:

Current assets, net of cash and restricted cash acquired $ 120,203

Property and equipment 54,913

Intangible assets:

In-process research and development 34,000

Developed technology 111,900

Customer relationships 116,000

Trade names 3,000

Goodwill 191,996

Other noncurrent assets 37,528

Deferred revenue ( 4,369 )

Other current liabilities ( 146,618 )

Deferred revenue, net of current ( 3,726 )

Deferred tax liability ( 13,308 )

Other long-term liabilities ( 46,117 )

The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs.

The Company used an income approach to value the acquired in-process research and development, developed technology, customer relationships and trade name intangible assets.

The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk.

The valuation assumptions take into consideration the Company's estimates of customer attrition, technology obsolescence and revenue growth projections.

The Company is amortizing the identifiable intangible assets arising from the ECI Acquisition in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 12.38 years (see Note 10).

Goodwill results from assets that are not separately identifiable as part of the transaction and is not deductible for tax purposes.

Pro Forma Results

The following unaudited pro forma information presents the combined results of operations of Ribbon and ECI for the years ended December 31, 2020 and 2019 as if the ECI Acquisition had been completed on January 1, 2019, with adjustments to give effect to pro forma events that are directly attributable to the ECI Acquisition.

These pro forma adjustments include an increase in research and development expense related to the conformance of ECI's cost capitalization policy to Ribbon's, additional amortization expense for the acquired identifiable intangible assets, a decrease in historical ECI interest expense reflecting the extinguishment of certain of ECI's debt as a result of the ECI Acquisition, and an increase in interest expense reflecting the new debt entered into by the Company in connection with the ECI Acquisition.

Pro forma adjustments also include the elimination of acquisition- and integration-related costs directly attributable to the acquisition from the year ended December 31, 2020 and inclusion of such costs in the year ended December 31, 2019.

The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of the operations of Ribbon and ECI.

Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

company that would have been achieved had the ECI Acquisition occurred at January 1, 2019, nor are they intended to represent or be indicative of future results of operations (in thousands, except per share amounts):

Year ended December 31,

Revenue $ 869,002 $ 944,915

Net income (loss) $ 97,036 $ ( 250,337 )

Diluted earnings (loss) per share $ 0.65 $ ( 1.76 )

Anova Data, Inc.

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The Anova Acquisition was completed in accordance with the terms and conditions of an asset purchase agreement, dated as of January 31, 2019 (the "Anova Asset Purchase Agreement").

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, Ribbon issued 2.9 million shares of Ribbon 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 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 the Company's consolidated balance sheet at December 31, 2019.

The Company acquired Anova because it believed that the Anova Acquisition would 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, Ribbon issued 2.9 million shares of Ribbon 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 with a fair value of $ 1.7 million, of which 316,551 shares were issued after post-closing adjustments on March 4, 2020.

The Anova Deferred Consideration was included as a component of Accrued expenses and other current liabilities in the Company's 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 the Company's consolidated financial statements for the period subsequent to the Anova Acquisition Date.

14 unchanged sentences

On the Edgewater Acquisition Date, the Company completed its acquisition of Edgewater, a private company headquartered in San Jose, California.

The Edgewater Acquisition was completed in accordance with the terms and conditions of the Agreement and Plan of Merger, dated as of June 24, 2018, by and among Ribbon, Merger Sub, Edgewater and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the initial holder representative (the "Edgewater Merger Agreement”).

Edgewater is a market leader in Network Edge Orchestration for the small and medium enterprise and UC market.

The Company believes that the acquisition of Edgewater will allow it to offer its global customer base a complete core-to-edge product portfolio, end-to-end service assurance and analytics solutions, and a fully integrated software-defined SD-WAN service.

The Edgewater Acquisition was completed in accordance with the terms and conditions

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

the-money options and warrants to acquire common stock of Edgewater (the "Edgewater Selling Stakeholders") on the Edgewater Acquisition Date.

Pursuant to the Edgewater Merger Agreement and subject to the terms and conditions contained therein, Ribbon agreed to pay the Edgewater Selling Stakeholders an additional $30 million of cash, $15 million of which was to be paid 6 months from the closing date and the other $15 million of which was to be paid as early as 9 months from the closing date and no later than 18 months from the closing date (the exact timing of which would depend on the amount of revenue generated from the sales of Edgewater products in 2018) ("Edgewater Deferred Consideration").

The current portion of this deferred purchase consideration was included as a component of Accrued expenses and other, and the noncurrent portion was included as a component of Other long-term liabilities in the Company's consolidated balance sheet as of December 31, 2018.

of the Agreement and Plan of Merger, dated as of June 24, 2018, by and among Ribbon, Merger Sub, Edgewater and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the initial holder representative (the "Edgewater Merger Agreement”).

The Company acquired Edgewater because it believed that Edgewater would allow Ribbon to offer its global customer base a complete core-to-edge product portfolio, end-to-end service assurance and analytics solutions, and a fully integrated software-defined SD-WAN service.

As consideration for the Edgewater Acquisition, Ribbon 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, with additional cash payments of $ 30 million, of which $ 15 million was to be paid 6 months from the closing date and the other $ 15 million was to be paid as early as 9 months from the closing date and no later than 18 months from the closing date (the exact timing of which would depend on the amount of revenue generated from the sales of Edgewater products in 2018) ("Edgewater Deferred Consideration").

On February 15, 2019, the Company 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.

The Company 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 (expense), net, in the Company's consolidated statement of operations and as a non-cash adjustment to reconcile net income to cash flows provided by operating activities in the Company's consolidated statement of cash flows for the year ended December 31, 2019.

The Company 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 (expense), net, in the Company's consolidated statement of operations and as a non-cash adjustment to reconcile net loss to cash flows provided by operating activities in the Company's consolidated statement of cash flows 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 the Company's consolidated financial statements for the period subsequent to its acquisition.

As of December 31, 2019, the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities was final, as the Company finalized the valuation of the assets acquired and liabilities assumed in the second quarter of 2019.

The Company finalized the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities in the second quarter of 2019.

A summary of the allocation of the purchase consideration for Edgewater is as follows (in thousands):

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Customer relationships 26,100

Trade names 1,100

Goodwill 48,053

Other noncurrent assets 103

4 unchanged sentences

The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs.

The Company used an income approach to value the acquired developed technology, customer relationships and trade name intangible assets.

The valuation

The Company used an income approach to value the acquired developed technology, customer relationships and trade name

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

assumptions take into consideration the Company's estimates of customer attrition, technology obsolescence and revenue growth projections.

intangible assets.

The valuation assumptions take into consideration the Company's estimates of customer attrition, technology obsolescence and revenue growth projections.

The Company is amortizing the identifiable intangible assets arising from the Edgewater Acquisition in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 8.38 years (see Note 10).

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The Company has not provided pro forma financial information, as the historical amounts are not significant to the Company's consolidated financial statements.

GENBAND Merger

On October 27, 2017, Sonus consummated an acquisition as specified in the Merger Agreement with NewCo and GENBAND such that, following the Merger, each of Sonus and GENBAND became a wholly-owned subsidiary of NewCo, with Sonus deemed the acquirer in the transaction for accounting purposes.

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

Prior to the Merger, GENBAND was a Cayman Islands exempted company limited by shares that was formed on April 7, 2010.

Through its wholly owned operating subsidiaries, GENBAND created rapid communications and applications for service providers, enterprises, independent software vendors, system integrators and developers globally.

A majority of GENBAND's shares were held by JPMorgan Chase & Co.

and managed by One Equity Partners ("OEP").

GENBAND shares were not listed on an exchange or quoted on any automated services, and there was no established trading market for GENBAND shares.

The Company believes that Sonus' and GENBAND's complementary products, solutions and strategies have positioned the combined company to deliver comprehensive solutions to service providers and enterprises migrating to a virtualized all-IP environment in an expanded customer and global footprint.

Pursuant to the Merger Agreement, NewCo issued 50.9 million shares of Sonus common stock 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 approximately 50% , and former shareholders of GENBAND would own approximately 50% , of the shares of NewCo common stock issued and outstanding immediately following the consummation of the Merger.

In addition, NewCo repaid GENBAND’s long-term debt, including both principal and unpaid interest, to a related party of GENBAND totaling $ 48.0 million and repaid GENBAND’s management fees due to an affiliate of OEP totaling $10.3 million .

NewCo also issued a promissory note for $22.5 million to certain GENBAND equity holders (the "Promissory Note").

NewCo assumed the liability under GENBAND's Senior Secured Credit Agreement (the "GENBAND Credit Agreement") with Silicon Valley Bank ("SVB"), which had outstanding borrowings and letters of credit totaling $17.9 million and $2.9 million , respectively, at October 27, 2017.

At October 27, 2017, the outstanding borrowings had an average interest rate of 4.67% .

The Merger has been accounted for as a business combination and the financial results of GENBAND have been included in the Company's consolidated financial statements for the period subsequent to its acquisition.

As of December 31, 2018, the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities was final, as the Company finalized the valuation of the assets acquired and liabilities assumed in the third quarter of 2018.

A summary of the final allocation of the purchase consideration for GENBAND is as follows (in thousands):

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Fair value of consideration transferred:

Cash consideration:

Repayment of GENBAND long-term debt and accrued interest, related party

Payment of GENBAND management fees due to majority shareholder

Less cash acquired

Net cash consideration

Fair value of Sonus stock issued

Promissory note issued to GENBAND equity holders

Fair value of total consideration

Fair value of assets acquired and liabilities assumed:

Current assets, net of cash acquired

Property and equipment

Intangible assets:

In-process research and development

Developed technology

Customer relationships

Other noncurrent assets

Revolving credit facility

Deferred revenue

Other current liabilities

Deferred revenue, net of current

Other long-term liabilities

The valuation of acquired intangible assets is inherently subjective and relies on significant unobservable inputs.

The Company used an income approach to value the acquired developed technology, customer relationships and trade name intangible assets.

The valuation assumptions took into consideration the Company's estimates of customer attrition, technology obsolescence and revenue growth projections.

The Company will reclassify the in-process research and development intangible asset to a developed technology intangible asset in the period that the related product becomes generally available and will begin to record amortization expense for the developed technology intangible asset at that time.

The Company is amortizing the identifiable intangible assets arising from the Merger in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 8.3 years (see Note 9 ).

Goodwill resulting from the transaction is primarily due to expected synergies between the combined companies and is not deductible for tax purposes.

Pro Forma Results

The following unaudited pro forma information presents the condensed combined results of operations of Sonus and GENBAND for the year ended December 31, 2017 as if the Merger had been completed on January 1, 2016, with adjustments to give effect to pro forma events that are directly attributable to the Merger.

These pro forma adjustments include a reduction of historical GENBAND revenue for the fair value adjustment related to acquired deferred revenue, an increase in amortization expense for the acquired identifiable intangible assets, a decrease in historical GENBAND interest expense reflecting the extinguishment of certain of GENBAND's debt as a result of the Merger, net of the interest expense recorded in connection with the promissory note issued to certain GENBAND equity holders as part of the purchase consideration and the elimination of revenue and costs related to sales transactions between Sonus and GENBAND.

Pro forma adjustments also include the elimination of acquisition- and integration-related costs directly attributable to the acquisition and incremental stock-based compensation expense directly attributable to the acquisition from the year ended December 31, 2017.

The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of the operations of Sonus and GENBAND.

Accordingly, these unaudited pro forma results are presented for

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the Merger occurred at the beginning of the periods presented, nor are they intended to represent or be indicative of future results of operations (in thousands, except per share amounts):

Loss per share

Acquisition- and Integration-Related Expenses

Acquisition- and integration-related expenses include those expenses related to acquisitions that would otherwise not have been incurred by the Company, including professional and services fees, such as legal, audit, consulting, paying agent and other fees, and expenses related to cash payments to certain former executives of the acquired businesses in connection with their employment agreements.

Acquisition-, Disposal- and Integration-Related Expenses

Acquisition-related expenses include those expenses related to acquisitions that would otherwise not have been incurred by the Company, including professional and services fees, such as legal, audit, consulting, paying agent and other fees, and expenses related to cash payments to certain former executives of the acquired businesses in connection with their employment agreements.

Disposal-related expenses are professional and services fees related to disposals of subsidiaries or portions of the business.

Integration-related expenses represent incremental costs related to combining the Company and its business acquisitions, such as third-party consulting and other third-party services related to merging the previously separate companies' systems and processes.

The acquisition-related professional and services fees recorded in the year ended December 31, 2019 primarily related to the pending ECI Merger and, to a lesser extent, to the Anova Acquisition and other acquisition-related activities.

The acquisition-related professional and services fees recorded in the year ended December 31, 2018 primarily related to the Merger, with nominal amounts related to the acquisition of Edgewater and other acquisition-related activities.

The amounts recorded in the year ended December 31, 2017 primarily related to the Merger, with a nominal amount related to the acquisition of Taqua.

The components of acquisition- and integration-related costs incurred in the years ended December 31, 2019, 2018 and 2017 were as follows (in thousands):

The acquisition-related professional and services fees recorded in the year ended December 31, 2020 primarily related to the ECI Acquisition and the disposal-related expenses related to the Company's sale of the Kandy Communications Business.

The acquisition-related professional and services fees recorded in the year ended December 31, 2019 primarily related to the ECI Acquisition and, to a lesser extent, to the Anova Acquisition and other acquisition-related activities.

The acquisition-related professional and services fees recorded in the year ended December 31, 2018 primarily related to the 2017 merger between Sonus Networks, Inc.

and GENBAND (the "GENBAND Merger"), with nominal amounts related to the acquisition of Edgewater and other acquisition-related activities.

The components of Acquisition-, disposal- and integration-related expenses incurred in the years ended December 31, 2020, 2019 and 2018 were as follows (in thousands):

Year ended December 31,

2020 2019 2018

Professional and services fees (acquisition-related) $ 13,441 $ 8,657 $ 7,627

Management bonuses (acquisition-related) — — 1,972

Professional and services fees (disposal-related) 1,890 — —

Integration-related expenses 1,833 4,296 7,352

$ 17,164 $ 12,953 $ 16,951

(4) SALE OF KANDY COMMUNICATIONS BUSINESS

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

("AVCT") to sell 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 Kandy Communications LLC, a subsidiary of the Company (the "Kandy Sale").

On December 1, 2020, the Company 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 to Ribbon $ 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

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

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

The Company received 43,778 AVCT Units as sale consideration on the Kandy Sale 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 the Company's option into that number of shares of AVCT common stock, calculated by dividing the principal amount being converted, together with all accrued and unpaid interest thereon, by the applicable conversion price, 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 the Company's 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 price had traded above $ 6.00 for 40 days within a 60 consecutive trading day period, and accordingly, the Debentures will be converted to shares of AVCT common stock upon the completion of customary regulatory filings by AVCT.

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

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

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

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

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

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

The gain on the Kandy Sale is included as a component of Other income (expense), net, in the consolidated statement of operations for the year ended December 31, 2020.

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 Company 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 $ 115.2 million, resulting in a gain of $ 30.3 million arising from the increase in fair values of the Debentures and Warrants for the period from the Kandy Sale Date to December 31, 2020.

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

The fair values of the Debentures and Warrants are reported as Investments in the Company's consolidated balance sheet at December 31, 2020 and are classified as Level 2 fair value measurements within the fair value hierarchy (see Note 6).

The assets acquired and liabilities assumed by AVCT in connection with the Kandy Sale were primarily comprised of accounts receivable, property and equipment, trade accounts payable and employee-related accruals.

The Company incurred $ 1.9 million of transaction costs, which are included as a component of Acquisition-, disposal- and integration-related expense in the consolidated statement of operations for the year ended December 31, 2020.

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

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

(5) EARNINGS (LOSS) PER SHARE

1 unchanged sentence

For periods in which the Company reports net income, diluted net income per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period unless the effect is antidilutive.

The calculations of shares used to compute basic and diluted loss per share are as follows (in thousands):

The calculations of shares used to compute basic and diluted earnings (loss) per share are as follows (in thousands):

Year ended December 31,

2020 2019 2018

Weighted average shares outstanding—basic 138,967 109,734 103,916

1 unchanged sentence

Weighted average shares outstanding—diluted 144,650 109,734 103,916

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Options to purchase the Company's common stock, unvested shares of restricted stock and unvested shares underlying performance-based stock grants aggregating 4.6 million shares for the year ended December 31, 2019 have not been included in the computation of diluted loss per share because their effect would have been antidilutive.

Options to purchase the Company's common stock, unvested shares of restricted stock, unvested shares underlying performance-based stock grants and shares in connection with future purchases under the Company's Amended and Restated 2000 Employee Stock Purchase Plan, as amended (the "ESPP"), aggregating 3.1 million shares for the year ended December 31, 2018 have not been included in the computation of diluted loss per share because their effect would have been antidilutive.

Options to purchase the Company's common stock, unvested shares of restricted stock and unvested shares underlying performance-based stock grants aggregating 2.5 million shares for the year ended December 31, 2017 have not been included in the computation of diluted loss per share because their effect would have been antidilutive.

(5) CASH EQUIVALENTS AND INVESTMENTS

The Company invests in debt instruments, primarily U.S.

Options to purchase the Company's common stock aggregating 0.2 million shares have not been included in the computation of diluted earnings per share for the year ended December 31, 2020 because their effect would have been antidilutive.

Options to purchase the Company's common stock and unvested shares of restricted and performance-based stock and stock units aggregating 4.6 million shares have not been included in the computation of diluted loss per share for the year ended December 31, 2019 because their effect would have been antidilutive.

Options to purchase the Company's common stock, unvested shares of restricted and performance-based stock and stock units, and shares in connection with future purchases under the Company's Amended and Restated 2000 Employee Stock Purchase Plan, as amended (the "ESPP"), aggregating 3.1 million shares have not been included in the computation of diluted loss per share for the year ended December 31, 2019 because their effect would have been antidilutive.

(6) INVESTMENTS AND FAIR VALUE HIERARCHY

The Company's policy and historical practice has been to invest in debt instruments, primarily U.S.

government-backed, municipal and corporate obligations, which management believes to be high quality (investment grade) credit instruments.

At December 31, 2020, the Company's investments were comprised of the Debentures and Warrants received as sale consideration for the Kandy Sale (see Note 4).

The Company did not hold any marketable securities at December 31, 2019, as its remaining available-for-sale marketable securities matured during the second quarter of 2019.

In addition, the Company did not hold any cash equivalents at December 31, 2019.

As a result of the Company no longer holding any marketable securities or investments at December 31, 2019, the remaining tax effect on the unrealized gain on available-for-sale marketable securities was realized in the second quarter of 2019 and is included in the income tax provision in the Company's consolidated statement of operations for the year ended December 31, 2019 as a reclassification from Unrealized gain on available-for-sale marketable securities in the Company's consolidated statement of comprehensive loss.

The Company had not sold any of its marketable securities in 2019 prior to their full maturity.

During the year ended December 31, 2018, the Company sold $12.5 million of its available-for-sale securities, which it used for acquisition-related payments in connection with the Edgewater Acquisition and to support integration-related and restructuring activities in connection with the Merger.

During the year ended December 31, 2017, the Company sold $51.6 million of its available-for-sale securities, primarily to provide the cash consideration and other acquisition-related payments in connection with the Merger.

During the years ended December 31, 2019 and 2018, the Company recognized nominal gross gains and losses on the sales/maturities of its marketable securities.

During the year ended December 31, 2019, the Company recognized nominal gross gains and losses on the maturities of its marketable securities.

On a quarterly basis, the Company reviews its investments, if any, to determine if there have been any events that could create a credit impairment.

The amortized cost, gross unrealized gains and losses and fair value of the Company's cash equivalents and marketable securities at December 31, 2018 were comprised of the following (in thousands):

December 31, 2018

Cash equivalents

Marketable securities

government agency notes

Corporate debt securities

Fair Value Hierarchy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

between market participants.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

2 unchanged sentences

The fair value hierarchy is as follows:

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

1 unchanged sentence

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The following table shows the fair value of the Company's financial assets at December 31, 2018.

These financial assets are comprised of the Company's available-for-sale debt securities and reported under the captions Cash and cash equivalents and Marketable securities in the consolidated balance sheets (in thousands):

Fair value measurements at

December 31, 2018 using:

Total carrying

Quoted prices

Significant other

Cash equivalents

Marketable securities

government agency notes

Corporate debt securities

The Company's marketable securities were valued with the assistance of valuations provided by third-party pricing services, as derived from such services' pricing models.

The classification of each asset or liability fair value measurement within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Market activity is presumed to be orderly in the absence of evidence of forced or disorderly sales, although such sales may still be indicative of fair value.

Applicable accounting guidance precludes the use of blockage factors or liquidity adjustments due to the quantity of securities held by an entity.

The Company's marketable securities, when applicable, are valued with the assistance of valuations provided by third-party pricing services, as derived from such services' pricing models.

Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events.

7 unchanged sentences

Accounts receivable, net $ 237,738 $ 192,706

The Company's allowance for doubtful accounts activity was as follows (in thousands):

Year ended December 31, Balance at

of year Charges

to expense Charges (credits) to other accounts Write-offs Balance at

2020 $ 913 $ 686 $ 94 $ ( 917 ) $ 776

2019 $ 669 $ 738 $ 68 $ ( 562 ) $ 913

2018 $ 73 $ 351 $ 620 $ ( 375 ) $ 669

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

The Company's allowance for doubtful accounts activity was as follows (in thousands):

Year ended December 31,

Charges (credits) to other accounts (deferred revenue)

(8) INVENTORY

2 unchanged sentences

Deferred cost of goods sold 1,165 2,441

48,086 15,724

Less noncurrent portion (included in Other assets) ( 2,336 ) ( 924 )

2 unchanged sentences

Property and equipment consisted of the following (in thousands):

Furniture and fixtures

Leasehold improvements

Shorter of the life of the lease or estimated useful life (1-5 years)

Useful Life 2020 2019

Equipment 2 - 5 years

$ 90,885 $ 82,737

Software 2 - 5 years

32,244 27,939

Furniture and fixtures 3 - 5 years

Leasehold improvements Shorter of the estimated lease term or useful life 37,263 23,975

163,484 135,934

Less accumulated depreciation and amortization ( 114,596 ) ( 106,958 )

3 unchanged sentences

Property and equipment under finance leases included in the amounts above were as follows (in thousands):

Cost $ 2,908 $ 4,401

Less accumulated depreciation ( 1,925 ) ( 1,981 )

Property and equipment under finance leases, net $ 983 $ 2,420

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

The net book values of the Company's property and equipment by geographic area were as follows (in thousands):

United States $ 27,211 $ 17,584

Canada 4,584 4,768

Asia/Pacific 6,078 5,146

Europe 1,171 1,204

Israel 9,613 20

Other 231 254

$ 48,888 $ 28,976

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

(10) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at December 31, 2020 and 2019 consisted of the following (in thousands):

December 31, 2019

Weighted average amortization period

December 31, 2020 Weighted average amortization period

(years) Cost Accumulated

amortization Net

carrying value

2 unchanged sentences

Customer relationships 11.86 268,140 50,627 217,513

Trade names 3.88 5,000 2,487 2,513

Internal use software 3.00 730 730 —

December 31, 2018

Weighted average amortization period

9.17 $ 614,250 $ 196,894 $ 417,356

December 31, 2019 Weighted average amortization period

(years) Cost Accumulated

amortization Net

carrying value

2 unchanged sentences

Customer relationships 9.46 152,140 33,350 118,790

Trade names 5.20 2,000 1,144 856

Internal use software 3.00 730 730 —

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

Amortization expense for intangible assets for the years ended December 31, 2019 , 2018 and 2017 was as follows (in thousands):

Year ended December 31,

Statement of operations classification

Developed technology

Cost of revenue - product

Customer relationships

Sales and marketing

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

In connection with the preparation of its financial statements for the fourth quarter of 2017, the Company reviewed its intangible assets and other long-lived assets for impairment indicators.

The Company determined that a triggering event had occurred relative to one of its developed technology intangible assets that had been previously acquired.

During 2017, the Company discontinued its ongoing development of this technology and determined that there were no alternative uses of the technology within either its existing or future product lines.

As a result, the Company recorded an impairment charge of $5.5 million to write down the carrying value of the asset to zero.

This expense is included as a component of Cost of revenue - product in the table above and in the Company's consolidated statement of operations for the year ended December 31, 2017.

7.82 $ 349,350 $ 135,984 $ 213,366

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

In the fourth quarter of 2020, the Company reclassified an in-process research and development intangible asset related to developed technology, as the associated product became generally available.

As previously discussed (see Note 2), for the year ended December 31, 2020, the Company reclassified amounts recorded for amortization of acquired intangible assets in prior period presentations from Cost of revenue - product and Sales and marketing expense to a separate line included in operating expenses in the consolidated statements of operations.

Amounts reported as Amortization of acquired intangible assets for the years ended December 31, 2020, 2019 and 2018 were $ 60.9 million, $ 49.2 million and $ 49.7 million, respectively.

Estimated future amortization expense for the Company's intangible assets at December 31, 2020 was as follows (in thousands):

Years ending December 31,

2021 $ 66,626

Thereafter 157,295

Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired.

The Company's annual testing for impairment of goodwill is completed as of November 30.

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

Effective in 2020, the Company's annual test for impairment of goodwill is completed as of October 1.

Previously, the Company's annual test for impairment of goodwill was completed as of November 30.

As previously discussed, effective in the fourth quarter of 2020, the Company determined that it has two operating segments:

Cloud and Edge, and IP Optical Networks.

For the purpose of testing goodwill for impairment, all goodwill is

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

assigned to a reporting unit, which may be either an operating segment or a portion of an operating segment.

The Company's reporting units are its operating segments.

The Company determined that the goodwill assigned to the Cloud and Edge reporting unit was $ 224.9 million and the goodwill assigned to the IP Optical Networks reporting unit was $ 192.0 million.

Upon completion of the Company's 2020 annual test for goodwill impairment, the Company determined that there was no impairment of goodwill in either of its reporting units.

Prior to the fourth quarter of 2020, the Company 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 the Company's 2019 annual impairment test, the Company determined that its carrying value exceeded its fair value and accordingly, the Company recorded an impairment charge of $ 164.3 million.

The Company performed its assessment for the year ended December 31, 2018 and determined that its fair value was in excess of its carrying value and accordingly, there was no impairment of goodwill.

At certain times during the years ended December 31, 2020, 2019 and 2018, including at the Company's annual test date in 2018, the Company's market capitalization was below its book value.

The changes in the carrying value of the Company's goodwill in the years ended December 31, 2020 and 2019 were as follows (in thousands):

Year ended December 31,

Balance at January 1

Accumulated impairment losses

Cloud and Edge IP Optical Networks Total

Balance at December 31, 2018 (1)

$ 383,655 $ — $ 383,655

Acquisition of Anova 5,541 — 5,541

Acquisition of Edgewater

Write-off of goodwill attributable to dissolved subsidiary

Impairment of goodwill ( 164,300 ) — ( 164,300 )

Balance at December 31, 2019 (2)

224,896 — 224,896

Acquisition of ECI — 191,996 191,996

Balance at December 31, 2020 (2)

$ 224,896 $ 191,996 $ 416,892

(1) Balance is presented net of accumulated impairment losses of $ 3.1 million for the Cloud and Edge segment.

(2) Balance is presented net of accumulated impairment losses of $ 167.4 million for the Cloud and Edge segment.

The components of goodwill at December 31, 2020 and 2019 were as follows (in thousands):

Cloud and Edge IP Optical Networks Total

Balance at December 31, 2019

Goodwill $ 392,302 $ — $ 392,302

Accumulated impairment losses ( 167,406 ) — ( 167,406 )

224,896 — 224,896

Balance at December 31, 2020

Goodwill $ 392,302 $ 191,996 $ 584,298

Accumulated impairment losses ( 167,406 ) — ( 167,406 )

$ 224,896 $ 191,996 $ 416,892

RIBBON COMMUNICATIONS INC.

4 unchanged sentences

Professional fees 11,451 13,331

Deferred purchase consideration - business acquisitions

Other 57,375 16,203

$ 134,865 $ 56,700

(12) WARRANTY

The changes in the Company's warranty accrual balance in the year ended December 31, 2020 were as follows (in thousands):

Year ended December 31, Balance at

of year Assumed liability in connection with ECI Acquisition Provision Settlements Balance at

2020 $ — $ 16,251 $ 4,687 $ ( 6,083 ) $ 14,855

(13) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES

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Related variable lease expenses will continue to be expensed as incurred through the vacate date, at which time the Company will reassess the liability balance to ensure it appropriately reflects the remaining liability associated with the premises and record a liability for the estimated future variable lease costs.

The components of restructuring and related expense for the year ended December 31, 2019 were as follows (in thousands):

Accelerated amortization of lease assets is recognized from the date that the Company commences the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date.

Amounts of accelerated rent amortization that are included as a component of restructuring and related expense are not included in the tables below, as the liability for the total lease payments for each respective facility is included as a component of Operating lease liabilities in the Company's consolidated balance sheets at December 31, 2020 and 2019, both current and noncurrent (see Note 22).

The Company may incur additional future expense if it is unable to sublease other locations included in the Facilities Initiative.

The components of restructuring and related expense for the year ended December 31, 2020 and 2019 were as follows (in thousands):

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Year ended December 31,

Severance and related costs $ 12,025 $ 11,179

1 unchanged sentence

Accelerated amortization of lease assets due to cease-use 605 3,692

$ 16,235 $ 16,399

Prior to the adoption of ASC 842, the Company recorded restructuring accruals for future lease obligations related to vacated facilities at the time that it ceased usage of the respective facility.

The components of Restructuring and related expense recorded in the years ended December 31, 2018 and 2017 were as follows (in thousands):

Year ended December 31,

The components of Restructuring and related expense recorded in the year ended December 31, 2018 were as follows (in thousands):

Severance and related costs 15,217

Facilities 1,798

2020 Restructuring Initiative

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

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

In connection with this initiative, the Company expects to eliminate duplicate functions arising from the ECI Acquisition and support its efforts to integrate the two companies.

The Company recorded restructuring expense of $ 14.0 million in connection with the 2020 Restructuring Initiative in the year ended December 31, 2020, comprised of $ 11.5 million for severance and related costs for approximately 190 employees, including the aforementioned former executives of ECI, $ 2.0 million for variable and other facilities-related costs, and $ 0.5 million for accelerated amortization of lease assets.

The Company expects these amounts will be fully paid in 2021.

The Company expects that it will record additional restructuring and related expense approximating $ 8 million under the 2020 Restructuring Initiative in the aggregate for severance and planned facility consolidations.

A summary of the 2020 Restructuring Initiative accrual activity for the year ended December 31, 2020 is as follows (in thousands):

2020 Initiatives

expense Transfer to operating lease liability accounts Cash

payments Balance at

Severance $ — $ 11,547 $ — $ ( 6,310 ) 5,237

Facilities — 2,478 ( 535 ) ( 687 ) 1,256

$ — $ 14,025 $ ( 535 ) $ ( 6,997 ) $ 6,493

2019 Restructuring and Facilities Consolidation Initiative

1 unchanged sentence

The 2019 Restructuring Initiative includes facility consolidations, refinement of the Company's research and development activities, and a reduction in workforce.

In connection with this initiative, the Company expects to reduce its focus on hardware and appliance-based

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

development over time and to increase its 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 the Company's 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, the Company intends to substantially consolidate its global software laboratories and server farms into two lower cost North American sites.

In addition, the Company is substantially consolidating its global software laboratories and server farms into two lower cost North American sites.

The Company continues to evaluate its properties included in the Facilities Initiative for accelerated amortization and/or right-of-use asset impairment.

The Company expects that the actions under the Facilities Initiative will be completed by the end of 2020.

In connection with the 2019 Restructuring Initiative, the Company recorded restructuring and related expense of $11.2 million in the year ended December 31, 2019, 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.

The Company expects that the actions under the Facilities Initiative will be completed in 2021.

In connection with the 2019 Restructuring Initiative, the Company recorded restructuring and related expense of $ 2.3 million and $ 11.2 million in the years ended December 31, 2020 and 2019, respectively.

The amount recorded in the

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

current year 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 the year ended December 31, 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.

The Company expects that all of the amount accrued for severance and related costs will be paid in 2021.

The Company estimates that it will record nominal, if any, additional restructuring and related expense related to severance and related costs under the 2019 Restructuring Initiative.

The $3.7 million of accelerated rent amortization recorded in 2019 that is included as a component of restructuring and related expense is not included in the table below, as the liability for the total lease payments for each respective facility is included as a component of Operating lease liabilities in the Company's consolidated balance sheet at December 31, 2019, both current and noncurrent (see Note 16 ).

The Company may incur additional future expense if it is unable to sublease other locations included in the Facilities Initiative.

A summary of the 2019 Restructuring Initiative accrual activity, excluding the accelerated amortization of lease assets, for the year ended December 31, 2019 is as follows (in thousands):

Summaries of the 2019 Restructuring Initiative accrual activity for the years ended December 31, 2020 and 2019 are as follows (in thousands):

Year ended December 31, 2020 Balance at

2020 Initiatives

expense Transfer to operating lease liability accounts Cash

payments Balance at

Severance $ 2,110 $ 536 $ — $ ( 2,473 ) 173

Facilities 991 1,732 ( 70 ) ( 1,887 ) 766

$ 3,101 $ 2,268 $ ( 70 ) $ ( 4,360 ) $ 939

Year ended December 31, 2019 Balance at

2019 Initiatives

expense Transfer to operating lease liability accounts Cash

payments Balance at December 31, 2019

Severance $ — $ 6,103 — $ ( 3,993 ) 2,110

Facilities — 5,064 ( 3,692 ) ( 381 ) 991

$ — $ 11,167 ( 3,692 ) $ ( 4,374 ) $ 3,101

Merger Restructuring Initiative

In connection with the Merger, the Company's management approved 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 GENBAND Merger, the Company 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 this initiative, the Company recorded $ 5.2 million of restructuring and related expense in 2019, virtually all of which was for severance and related costs for approximately 40 employees.

The Company recorded $16.1 million of restructuring and related expense in 2018 in connection with this initiative, comprised of $14.7 million for severance for approximately 275 additional employees and $1.4 million for redundant facilities in the Czech Republic, Canada and the U.S., and $8.5 million of restructuring and related expense in 2017 for severance and related costs for approximately 120 employees.

The Merger Restructuring Initiative is substantially complete, and the Company anticipates it will record nominal future expense, if any, in connection with this initiative.

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

The Company expects that the amount accrued at December 31, 2019 for severance will be paid by the end of the first half of 2020.

The Merger Restructuring Initiative was completed in 2020.

Summaries of the Merger Restructuring Initiative accrual activity for the years ended December 31, 2020 and 2019 are as follows (in thousands):

Year ended December 31, 2020 Balance at

2020 Adjustments for changes in estimate Cash

payments Balance at

Severance $ 409 $ ( 58 ) $ ( 351 ) $ —

Year ended December 31, 2019 Balance at

2019 Initiatives

expense Adjustment for the impact of ASC 842 adoption Cash

payments Balance at

Severance $ 1,910 $ 5,076 $ — $ ( 6,577 ) $ 409

Facilities 771 156 ( 771 ) ( 156 ) —

$ 2,681 $ 5,232 $ ( 771 ) $ ( 6,733 ) $ 409

Assumed Restructuring Initiative

The Company assumed GENBAND's previously recorded restructuring liability, totaling $ 4.1 million, on the GENBAND Merger Date (the "GENBAND Restructuring Initiative").

Of this amount, $ 3.7 million related to severance and related costs

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Year ended December 31, 2019

Adjustment for the impact of ASC 842 adoption

Year ended December 31, 2018

Adjustments for changes in estimate

Assumed Restructuring Initiative

The Company assumed GENBAND's previously recorded restructuring liability, totaling $4.1 million , on the Merger Date (the "GENBAND Restructuring Initiative").

Of this amount, $3.7 million related to severance and related costs and $0.4 million related to facilities.

Subsequent to the Merger, the Company recorded $0.6 million in the aggregate in connection with the GENBAND Restructuring Initiative, comprised of $0.9 million of restructuring and related expense in 2018 and a credit of $0.3 million to restructuring and related expense in 2017 for changes in estimated costs for this previously recorded and assumed restructuring initiative, primarily changes in negotiated severance to employees in certain international locations and changes in estimated sublease income for restructured facilities.

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

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

Summaries of the GENBAND Restructuring Initiative accrual activity for the years ended December 31, 2019 and 2018 are as follows (in thousands):

Year ended December 31, 2019

Adjustment for the impact of ASC 842 adoption

Year ended December 31, 2018

Adjustments for changes in estimate

and $ 0.4 million related to facilities.

Subsequent to the GENBAND Merger, the Company recorded $ 0.6 million in the aggregate in connection with the GENBAND Restructuring Initiative, comprised of $ 0.9 million of restructuring and related expense in 2018 and a credit of $ 0.3 million to restructuring and related expense in 2017 for changes in estimated costs for this previously recorded and assumed restructuring initiative.

The GENBAND Restructuring Initiative was completed in 2019.

In connection with the adoption of ASC 842, which was effective on January 1, 2019, the Company wrote off the remaining restructuring accrual related to facilities, as indicated in the table below (in thousands):

Year ended December 31, 2019 Balance at

2019 Adjustment for the impact of ASC 842 adoption Balance at

Facilities $ 117 $ ( 117 ) $ —

2016 Restructuring Initiative

1 unchanged sentence

The Company recorded $ 2.0 million of restructuring and related expense in the aggregate in connection with this initiative, comprised of $ 1.9 million for severance and related costs and $ 0.1 million to abandon its facility in Rochester, New York (the "Rochester Facility").

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

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

In connection with the 2016 Restructuring Initiative, the Company recorded $0.5 million of restructuring expense in the year ended December 31, 2017, including adjustments for changes in estimated costs, comprised of $0.4 million for severance and related costs and $0.1 million related to the Company's Rochester Facility.

Summaries of the 2016 Restructuring Initiative accrual activity for the years ended December 31, 2019 and 2018 are as follows (in thousands):

Year ended December 31, 2019

Year ended December 31, 2018

Taqua Restructuring Initiative

In connection with the acquisition of Taqua, the Company's management approved 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 the Board of Directors of the Company approved a broader Taqua restructuring plan related to headcount and redundant facilities (both restructuring plans, the "Taqua Restructuring Initiative").

The Company recorded $1.8 million of restructuring and related expense in the aggregate in connection with this initiative, comprised of $1.2 million for severance and related costs and $0.6 million related to the elimination of redundant facilities, including adjustments recorded for changes in cost estimates for the planned restructuring activities.

Of this amount, $0.7 million was recorded in 2017, comprised of $0.2 million for severance and related costs and $0.5 million related to 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, which was effective on January 1, 2019, the Company wrote off the remaining restructuring accrual related to facilities.

Summaries of the Taqua Restructuring Initiative accrual activity for the years ended December 31, 2019 and 2018 are as follows (in thousands):

Year ended December 31, 2019

Adjustment for the impact of ASC 842 adoption

Year ended December 31, 2018

The actions under the 2016 Restructuring Initiative were completed in 2019.

A summary of the 2016 Restructuring Initiative accrual activity for the year ended December 31, 2019 is as follows (in thousands):

Year ended December 31, 2019 Balance at

payments Balance at

Facilities $ 58 $ ( 58 ) $ —

Balance Sheet Classification

The current portions of accrued restructuring are included as a component of Accrued expenses in the consolidated balance sheets.

The long-term portions of accrued restructuring are included as a component of Other long-term liabilities in the consolidated balance sheets.

The current portions of accrued restructuring were $ 6.6 million and $ 2.6 million at December 31, 2020 and 2019, respectively, and are included as components of Accrued expenses in the consolidated balance sheets.

The long-term portions of accrued restructuring are included as components of Other long-term liabilities in the consolidated balance sheets.

The long-term portions of accrued restructuring were $ 0.8 million at December 31, 2020 and $ 0.9 million at December 31, 2019.

The amount recorded as long-term at December 31, 2018 represented future lease payments on restructured facilities.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Assumed Senior Secured Credit Agreement

On the Merger Date and in connection with the Merger, the Company assumed the GENBAND Credit Agreement with SVB, which had outstanding borrowings and letters of credit totaling $17.9 million and $2.9 million , respectively, and an average interest rate of 4.67% .

GENBAND had entered into the GENBAND Credit Agreement with SVB effective July 1, 2016, with two of its operating subsidiaries as borrowers and GENBAND as the guarantor.

The GENBAND Credit Agreement had a maturity date of July 1, 2019 and provided for revolving loans, including letters of credit and swingline loans, not to exceed $50 million in total, with potential further increases of $75 million available for a total revolving line of credit of up to $125 million .

The GENBAND Credit Agreement was superseded by a Senior Secured Credit Facilities Credit Agreement (the "2017 Credit Facility"), which was entered into on December 21, 2017 and is discussed below.

Senior Secured Credit Facility

On December 21, 2017, the Company entered into the 2017 Credit Facility by and among the Company, as a guarantor, Sonus Networks, Inc., as the borrower (“Borrower”), SVB, as administrative agent (in such capacity, the “Administrative Agent”), issuing lender, swingline lender and lead arranger and the lenders party thereto (each referred to individually as a “Lender”, and collectively, the “Lenders”), which refinanced the GENBAND Credit Agreement.

The 2017 Credit Facility included $100 million of commitments, the full amount of which was available for revolving loans, a $15 million sublimit that was available for letters of credit and a $15 million sublimit that was available for swingline loans.

The 2017 Credit Facility contained procedures for additional financial institutions to become lenders or for any existing lender to increase its commitment under the facility, subject to an available increase of $50 million for all incremental commitments under the 2017 Credit Facility.

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

2018 Credit Facility

On June 24, 2018, the Company amended its previous outstanding credit facility to, among other things, permit the Edgewater Acquisition and related transactions (the "2018 Credit Facility").

The indebtedness and other obligations under the 2018 Credit Facility were unconditionally guaranteed on a senior secured basis by the Company and each other material U.S.

3 unchanged sentences

The Borrower could prepay all revolving loans under the 2018 Credit Facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Revolving loans under the 2018 Credit Facility bore interest at the Borrower’s option at either the Eurodollar (LIBOR) rate plus a margin ranging from 2.50 % 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 1.50 % to 2.00 % per year (such margins being referred to as the “Applicable Margin”).

5 unchanged sentences

In addition, the 2018 Credit Facility contained various covenants that, among other restrictions, limited the Company’s and its subsidiaries’ ability to enter into certain types of transactions, including, but not limited to:

incurring or assuming indebtedness, making acquisitions or engaging in mergers, making investments, repurchasing equity and paying dividends, selling or otherwise transferring assets, changing the nature of its

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

business and amending or making prepayments on certain junior debt.

The Company was in compliance with all covenants of the 2018 Credit Facility as of December 31, 2018.

The 2018 Credit Facility contained events of default that are customary for a secured credit facility.

3 unchanged sentences

If any default existed under the 2018 Credit Facility, or if the Borrower was unable to make any of the representations and warranties as stated in the 2018 Credit Facility at the applicable time, the Borrower would be unable to borrow funds or have letters of credit issued under the 2018 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.

At December 31, 2018, the Company had an outstanding debt balance of $55.0 million at a weighted average interest rate of 5.96% and $2.7 million of outstanding letters of credit at an interest rate of 1.75% under the 2018 Credit Facility.

The 2018 Credit Facility was superseded by a Senior Secured Credit Facilities Credit Agreement (the "2019 Credit Facility") which was entered into on April 29, 2019 and which is discussed below.

The 2018 Credit Facility was superseded by the 2019 Credit Facility, which was entered into on April 29, 2019 and which is discussed below.

2019 Credit Facility

On April 29, 2019, the Company, as guarantor, and Ribbon Communications Operating Company, Inc., as borrower, entered into the 2019 Credit Facility, which 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 incremental commitments under the 2019 Credit Facility.

The 2019 Credit Facility is scheduled to mature in April 2024.

At December 31, 2019, the Company had an outstanding term loan debt balance of $48.8 million at an interest rate and an outstanding revolving line of credit balance of $8.0 million with a combined average interest rate of 3.30% , and $5.4 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 the Company and each other material U.S.

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

The 2019 Credit Facility also included 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 incremental commitments under the 2019 Credit Facility.

The 2019 Credit Facility was scheduled to mature in April 2024.

At December 31, 2019, the Company had an outstanding term loan debt balance of $ 48.8 million and an outstanding revolving line of credit balance of $ 8.0 million with a combined average interest rate of 3.30 %, and $ 5.4 million of outstanding letters of credit at an interest rate of 1.50 %.

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 is secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including the Company.

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

The Borrower 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 the Borrower’s 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 the Company’s 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 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 Company was in compliance with all covenants of the 2019 Credit Facility at December 31, 2019.

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.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

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

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

The Borrower could 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 bore interest at the Borrower’s 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 the Company’s 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.

The Company was in compliance with all covenants of the 2019 Credit Facility at December 31, 2019.

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

incurring or assuming indebtedness;

10 unchanged sentences

and amending or making prepayments on certain junior debt.

The 2019 Credit Facility contained 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 occurred, all obligations under the 2019 Credit Facility would immediately become due and payable.

If any other event of default existed under the 2019 Credit Facility, the lenders could 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 existed under the 2019 Credit Facility, the lenders could commence foreclosure or other actions against the collateral.

If any default existed under the 2019 Credit Facility, or if the Borrower was unable to make any of the representations and warranties as stated in the 2019 Credit Facility at the applicable time, the Borrower would 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 had a material adverse effect on the Borrower’s liquidity and working capital.

The 2019 Credit Facility was superseded by the 2020 Credit Facility, which was entered into on March 3, 2020, and which is discussed below.

2020 Credit Facility

On March 3, 2020, the Company entered into a Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), by and among the Company, as a guarantor, Ribbon Communications Operating Company, Inc., as the borrower ("Borrower"), Citizens Bank, N.A.

("Citizens"), as administrative agent, a lender, issuing lender, swingline lender, joint lead arranger and bookrunner, Santander Bank, N.A., as a lender, joint lead arranger and bookrunner, and the other lenders party thereto (each, together with Citizens Bank, N.A.

and Santander Bank, N.A., referred to individually as a "Lender", and collectively, the "Lenders").

The proceeds of the Credit Agreement were used, in part, to pay off in full all obligations of the Company under the 2019 Credit Facility.

The 2020 Credit Facility 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 submit is available for swingline loans.

Under the 2020 Credit Facility, the Company was originally required to make quarterly principal payments aggregating approximately $ 10 million in the first year, $ 20 million per year for the

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

following three years, and $ 30 million in the last year, with the remaining balance due on the maturity date.

The 2020 Credit Facility also requires periodic interest payments until maturity.

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

The facilities under the 2020 Credit Facility are secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including substantially all of the assets of the Company.

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

In addition, the 2020 Credit Facility contains various covenants that, among other restrictions, limit the Company's and its subsidiaries' ability to incur or assume indebtedness;

grant or assume liens;

make acquisitions or engage in mergers;

sell, transfer, assign or convey assets;

repurchase equity and make dividend and certain other restricted payments;

make investments;

engage in transactions with affiliates;

enter into sale and leaseback transactions;

enter into burdensome agreements;

change the nature of its business;

modify their organizational documents;

and amend or make prepayments on certain junior debt.

The 2020 Credit Facility contains events of default that are customary for a secured credit facility.

If an event of default relating to bankruptcy or other insolvency events with respect to 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.

If an event of default relating to bankruptcy or other insolvency events with respect to the Company or any of its subsidiaries occurs, all obligations under the 2020 Credit Facility will immediately become due and payable.

If any other event of default occurs under the 2020 Credit Facility, the lenders may accelerate the maturity of the obligations outstanding under the 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"), the Borrowers entered into a First Amendment to the 2020 Credit Facility (the "First Amendment").

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

The remaining $ 325 million of the 2020 Term Loan Facility that was not assigned to HIG Whitehorse was deemed the Term A Loan (the "Term A Loan" and, together with the Term B Loan, the "Amended 2020 Term Loan Facility").

The Term A Loan and the 2020 Revolving Credit Facility mature in March 2025.

The Term A Loan and 2020 Revolving Credit Facility bear interest at the Borrower's option at either the LIBOR rate plus a margin ranging from 1.50 % to 3.50 % per year, or the base rate (the highest of the Federal Funds Effective Rate (as defined in the 2020 Credit Facility) plus 0.50 %, or the prime rate announced from time to time in The Wall Street Journal) plus a margin ranging from 0.50 % to 2.50 % per year (the "Applicable Margin").

The Applicable Margin varies depending on the Company's Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility).

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

The Company is required to make quarterly principal payments on the Term A Loan aggregating approximately $ 10 million in the first year, $ 16 million per year in each of the next two years, $ 20 million in the fourth year and $ 16 million in the last year, with the final payment approximating $ 244 million due on the maturity date.

The Borrower 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 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 First Amendment) plus 0.50 %, or the prime rate announced from time to time in The Wall Street Journal, plus a margin of 6.50 % per year.

The Term B Loan 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 2020 Credit Facility) occurring prior to the six month anniversary of the First Amendment Effective Date.

The Company is 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.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

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 under the 2020 Credit Facility.

The First Amendment also reduced the amount of Unrestricted Cash (as defined in the 2020 Credit Facility) used in calculating the Borrower's Consolidated Net Leverage Ratio from $ 25 million to $ 10 million.

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

At December 31, 2020, the Company had an outstanding Term A Loan balance of $ 318.5 million at an average interest rate of 3.4 %, and an outstanding Term B Loan balance of $ 74.6 million at an average interest rate of 8.4 %.

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 %.

The Company was in compliance with all covenants of the 2020 Credit Facility at December 31, 2020.

Short-Term Loan

From time to time, the Company may enter into uncommitted and unsecured short-term loans which it uses 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, the Company 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.

This loan expired and was paid in full in November 2020.

Letters of Credit and Performance and Bid Bonds

The Company uses letters of credit and performance and bid bonds in the course of its business.

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

At December 31, 2020, the Company had cash collateral of $ 2.7 million supporting the Guarantees under its uncommitted facilities, which is included in Restricted cash in the consolidated balance sheet at December 31, 2020.

Promissory Note

In connection with the Merger, on October 27, 2017, the Company issued a promissory note for $22.5 million to certain of GENBAND's equityholders (the "Promissory Note").

In connection with the GENBAND Merger, on October 27, 2017, the Company issued a promissory note for $ 22.5 million to certain of GENBAND's equityholders (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.

The failure to make any payment under the Promissory Note when due and, with respect to payment of any interest, the continuation of such failure for a period of thirty days thereafter, constituted an event of default under the Promissory Note.

If an event of default occurred under the Promissory Note, the payees could declare the entire balance of the Promissory Note due and payable (including principal and accrued and unpaid interest) within five business days of the payees' notification to the Company of such acceleration.

Interest that was not paid on the interest payment date would increase the principal amount of the Promissory Note.

At December 31, 2018, the Promissory Note balance was $24.1 million , comprised of $22.5 million of principal, plus $1.6 million of interest converted to principal.

On April 29, 2019, concurrently with the closing of the 2019 Credit Facility as discussed above, the Company repaid in full all outstanding amounts under the Promissory Note, aggregating $ 24.7 million.

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

(13) LONG-TERM LIABILITIES

Long-term liabilities consisted of the following (in thousands):

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

(15) OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following (in thousands):

Finance lease obligations $ 1,469 $ 3,149

Deferred rent

Restructuring 7,432 3,510

1 unchanged sentence

Taxes payable 13,835 1,991

Deferred purchase consideration

Interest rate swap 10,948 —

Warranty 14,855 —

Other 6,082 1,683

65,753 20,287

Current portion ( 17,472 ) ( 3,698 )

Long-term liabilities, net of current portion $ 48,281 $ 16,589

The current portions of long-term liabilities are included as components of Accrued expenses and other in the Company's consolidated balance sheets.

(16) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to financial market risk related to foreign currency fluctuations and changes in interest rates.

These exposures are actively monitored by management.

To manage the volatility related to the exposure to changes in interest rates, the Company has entered into a derivative financial instrument.

Management's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates.

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

Ribbon does not hold or issue derivative financial instruments for trading or speculative purposes.

The Company records derivatives on the balance sheet at fair value.

The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.

Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a specific risk, such as interest rate risk, are considered fair value hedges.

Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation.

Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge, or the earnings effect of the hedged forecasted transactions in a cash flow hedge.

The Company may enter into derivative contracts that are intended to economically hedge certain of its risk even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

Cash Flow Hedge of Interest Rate Risk

The Amended 2020 Term Loan Facility had an outstanding balance of $ 393.1 million at December 31, 2020.

The 2020 Revolving Credit Facility was undrawn at December 31, 2020.

The credit facilities under the 2020 Credit Agreement have variable interest rates based on LIBOR (see Note 14).

As a result of exposure to interest rate movements, during March 2020, the Company entered into an interest rate swap arrangement, which effectively converted its $ 400 million term loan with its variable interest rate based upon one-month LIBOR to an aggregate fixed rate of 0.904 %, plus a leverage-based margin as defined in the 2020 Credit Agreement.

The Term A Loan continues to have a leverage-based margin and the Term B Loan has a fixed margin as defined in the 2020 Credit Agreement.

The notional amount of this swap at December 31, 2020 was $ 400 million, and the swap matures on March 3, 2025, the same date the Term A Loan matures.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

The current portions of long-term liabilities are included as components of Accrued expenses and other in the Company's consolidated balance sheets.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.

To accomplish this objective, the Company is using an interest rate swap as part of its interest rate risk management strategy.

Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is recorded in accumulated other comprehensive (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 credit facilities under the 2020 Credit Agreement, and the Company has accounted for this derivative as an effective hedge.

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

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

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

The impact of the Company’s derivative financial instrument on its consolidated statement of comprehensive income (loss) for the year ended December 31, 2020 was as follows (in thousands):

Loss recognized in other comprehensive loss on derivative (effective portion) $ ( 12,671 )

Amount reclassified from accumulated other comprehensive loss to interest expense (effective portion) 1,723

The fair values and locations in the consolidated balance sheet at December 31, 2020 of the Company's derivative liability designated as a hedging instrument were as follows (in thousands):

Balance sheet location

Interest rate derivative - liability derivative Accrued expenses and other $ 3,157

Interest rate derivative - liability derivative Other long-term liabilities $ 7,791

The Company has classified the interest rate derivative aggregating $ 10.9 million at December 31, 2020 as a Level 2 fair value measurement within the fair value hierarchy (see Note 6).

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

(17) REVENUE RECOGNITION

Effective January 1, 2018, the Company adopted the New Revenue Standard using the modified retrospective option and identified the necessary changes to its policies, processes, systems and controls.

Under the modified retrospective method, the Company is applying the New Revenue Standard to all contracts not yet completed as of January 1, 2018, recognizing in beginning Accumulated deficit an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to those as if the Company was still following the previous accounting standards.

Under ASC 605, Revenue Recognition ("ASC 605"), the Company concluded it did not have vendor-specific objective evidence of selling price ("VSOE") for certain elements in software bundled arrangements, which resulted in revenue being recognized ratably over the longest performance period.

Additionally, under ASC 606 for arrangements with certain customers that include acceptance criteria, revenue is recognized when the customer obtains control, as the Company believes acceptance is perfunctory.

Under ASC 605, revenue was deferred until acceptance was received.

The Company is also capitalizing incremental commission fees as a result of obtaining contracts and will amortize the asset based on the transfer of services to which the asset relates, which is approximately five years .

The cumulative effect of capitalizing commission fees was not material at January 1, 2018.

In connection with the adoption of ASC 606, as of January 1, 2018, the Company recorded an adjustment to decrease Accumulated deficit by $12.2 million (net of tax, which was $0 due to the full valuation allowance).

The Company's typical performance obligations include the following:

Performance Obligation

When Performance Obligation is Typically Satisfied

When Payment is Typically Due

Performance Obligation When Performance Obligation is Typically Satisfied When Payment is Typically Due

Software and Product Revenue

Software licenses (perpetual or term)

Upon transfer of control;

typically, when made available for download (point in time)

Generally, within 30 days of invoicing except for term licenses, which may be paid for over time

Software licenses (subscription)

Upon activation of hosted site (over time)

Generally, within 30 days of invoicing

When control of the appliance passes to the customer;

typically, upon delivery (point in time)

Generally, within 30 days of invoicing

Software upgrades

Upon transfer of control;

typically, when made available for download (point in time)

Generally, within 30 days of invoicing

Software licenses (perpetual or term) Upon transfer of control;

typically, when made available for download (point in time) Generally, within 30 days of invoicing except for term licenses, which may be paid for over time

Software licenses (subscription) Upon activation of hosted site (over time) Generally, within 30 days of invoicing

Hardware When control of the hardware passes to the customer;

typically, upon delivery (point in time) Generally, within 30 days of invoicing

Software upgrades Upon transfer of control;

typically, when made available for download (point in time) Generally, within 30 days of invoicing

Customer Support Revenue

Customer support

Ratably over the course of the support contract (over time)

Generally, within 30 days of invoicing

Customer support Ratably over the course of the support contract (over time) Generally, within 30 days of invoicing

Professional Services

Other professional services (excluding training services)

As work is performed (over time)

Generally, within 30 days of invoicing (upon completion of services)

When the class is taught (point in time)

Generally, within 30 days of services being performed

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Other professional services (excluding training services) As work is performed (over time) Generally, within 30 days of invoicing (upon completion of services)

Training When the class is taught (point in time) Generally, within 30 days of services being performed

Significant Judgments

11 unchanged sentences

The Company's total revenue for the years ended December 31, 2020, 2019 and 2018 was disaggregated geographically as follows:

Year ended December 31, 2019

Product revenue

Service revenue (maintenance)

Service revenue (professional services)

Total revenue

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

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

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Year ended December 31, 2017

Product revenue

Service revenue (maintenance)

Service revenue (professional services)

Total revenue

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

Year ended December 31, 2018 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue

United States $ 169,510 $ 132,282 $ 35,832 $ 337,624

Europe, Middle East and Africa 37,833 46,856 11,794 96,483

Other Asia Pacific

Asia Pacific 53,683 23,555 9,427 86,665

Other 17,988 31,273 7,872 57,133

$ 279,014 $ 233,966 $ 64,925 $ 577,905

The Company's product revenue from its direct sales program and from indirect sales through its channel partner program for the years ended December 31, 2020, 2019 and 2018 was as follows (in thousands):

Year ended December 31,

2020 2019 2018

Indirect sales through channel program $ 134,876 $ 94,639 $ 69,232

Direct sales 333,036 167,391 209,782

$ 467,912 $ 262,030 $ 279,014

The Company's product revenue from sales to enterprise customers and from sales to service provider customers for the years ended December 31, 2020, 2019 and 2018 was as follows (in thousands):

Year ended December 31,

2020 2019 2018

Sales to enterprise customers $ 138,469 $ 70,548 $ 57,534

Sales to service provider customers 329,443 191,482 221,480

$ 467,912 $ 262,030 $ 279,014

The Company's product revenue and service revenue components by segment for the years ended December 31, 2020, 2019 and 2018 was as follows (in thousands):

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Year ended December 31,

2020 2019 2018

Product revenue

Cloud and Edge 275,445 262,030 279,014

IP Optical Networks 192,467 — —

Total product revenue 467,912 262,030 279,014

Service revenue

Cloud and Edge 229,035 234,228 233,966

IP Optical Networks 45,781 — —

Total maintenance revenue 274,816 234,228 233,966

Professional services

Cloud and Edge 78,790 66,853 64,925

IP Optical Networks 22,277 — —

Total professional services revenue 101,067 66,853 64,925

Total service revenue 375,883 301,081 298,891

Revenue Contract Balances

13 unchanged sentences

The changes in the Company's accounts receivable, unbilled receivables and deferred revenue balances for the years ended December 31, 2020 and 2019 were as follows (in thousands):

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Accounts receivable

Unbilled accounts receivable

Deferred revenue (current)

Deferred revenue (long-term)

Accounts receivable Unbilled accounts receivable Deferred revenue (current) Deferred revenue (long-term)

Balance at January 1, 2020 $ 168,502 $ 24,204 $ 100,406 $ 20,482

1 unchanged sentence

Balance at December 31, 2020 $ 179,331 $ 58,407 $ 96,824 $ 26,010

Accounts receivable

Unbilled accounts receivable

Deferred revenue (current)

Deferred revenue (long-term)

Accounts receivable Unbilled accounts receivable Deferred revenue (current) Deferred revenue (long-term)

Balance at January 1, 2019 $ 174,310 $ 13,543 $ 105,087 $ 17,572

1 unchanged sentence

Balance at December 31, 2019 $ 168,502 $ 24,204 $ 100,406 $ 20,482

The Company recognized approximately $94 million of revenue in the year ended December 31, 2019 that was recorded as deferred revenue at December 31, 2018 and approximately $84 million of revenue in the year ended December 31, 2018 that was recorded as deferred revenue at December 31, 2017.

The Company recognized approximately $ 99 million of revenue in the year ended December 31, 2020 that was recorded as deferred revenue at December 31, 2019 and approximately $ 94 million of revenue in the year ended December 31, 2019 that

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

was recorded as deferred revenue at December 31, 2018.

Of the Company's deferred revenue reported as long-term in its consolidated balance sheet at December 31, 2020, the Company expects that approximately $ 15 million will be recognized as revenue in 2022, approximately $ 6 million will be recognized as revenue in 2023 and approximately $ 5 million will be recognized as revenue in 2024 and beyond.

5 unchanged sentences

At December 31, 2020 and 2019, the Company had $ 4.1 million and $ 3.6 million, respectively, of deferred sales commissions capitalized.

Adoption of ASC 606

Under the modified retrospective method, the Company applied ASC 606 to those contracts that were not completed as of January 1, 2018.

Results for reporting periods beginning January 1, 2018 are presented under ASC 606, and prior period amounts have not been adjusted and are reported in accordance with the Company's historical accounting treatment under ASC 605.

The Company recorded a net reduction to Accumulated deficit of $12.2 million (net of tax, which was $0 due to the full valuation allowance) at January 1, 2018 due to the cumulative impact of adopting ASC 606.

Had the Company continued to recognize revenue under ASC 605, the Company would have recognized approximately $16 million less revenue in the year ended December 31, 2018.

Incremental costs that would have been recognized had the Company continued to recognize revenue under ASC 605 would not have been material to the Company's consolidated results of operations.

(18) OPERATING SEGMENT INFORMATION

The Company has two reportable segments, which are intended to align with the manner in which the business is managed:

Cloud and Edge, and IP Optical Networks.

The Cloud and Edge segment 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.

The 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.

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

The IP Optical Networks segment 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.

The 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.

The Company has not provided segment asset information as such information is not provided to the CODM and accordingly, asset information is not used in assessing segment performance.

Segment revenue and expense included in the tables below represent direct revenue and expense attributable to each segment.

Please see Note 10 for information regarding the allocation of goodwill between segments.

The CODM utilizes revenue, adjusted gross margin (revenue divided by gross profit) and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) to measure and assess each segment's performance.

The Company calculates adjusted gross margin by excluding from cost of revenue:

stock-based compensation, acquisition-related inventory adjustments and acquisition-related facilities adjustments.

The Company calculates adjusted EBITDA by excluding from income (loss) from operations:

depreciation;

amortization of acquired intangible assets;

stock-based compensation;

acquisition-related inventory adjustments;

acquisition-related facilities adjustments;

certain litigation costs;

impairment of goodwill;

settlement expense;, cancelled debt offering costs;

acquisition-, disposal- and integration-related expense;

and restructuring and related expense.

These adjusted measures may also exclude other items in future periods that the Company believes are not part of the Company's core business.

Adjusted gross profit and adjusted EBITDA are not financial measures determined in accordance with U.S.

GAAP and may not be comparable to similarly titled measures used by other companies and should not be considered a substitute for income (loss) from operations or gross profit or other results reported in accordance with U.S.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

See below for a reconciliation of adjusted gross profit to gross profit and adjusted EBITDA to income (loss) from operations, as those are the most directly comparable U.S.

GAAP measures.

Financial information for the IP Optical Networks segment is not presented for any years prior to 2020, as this segment arose from the ECI Acquisition, and accordingly is not included in the Company's consolidated financial statements for the years December 31, 2019 and 2018.

The tables below provide net sales, adjusted gross profit, adjusted EBITDA and depreciation expense by reportable segment for the years ended December 31, 2020, 2019 and 2018 (in thousands):

Year ended December 31,

2020 2019 2018

Segment revenue:

Cloud and Edge $ 583,270 $ 563,111 $ 577,905

IP Optical Networks 260,525 — —

Revenue $ 843,795 $ 563,111 $ 577,905

Year ended December 31,

2020 2019 2018

Segment adjusted gross profit:

Cloud and Edge $ 385,137 $ 355,211 $ 348,076

IP Optical Networks 110,845 — —

Total segment adjusted gross profit 495,982 355,211 348,076

Stock-based compensation expense ( 875 ) ( 554 ) ( 459 )

Acquisition-related inventory and facilities adjustments ( 2,000 ) — ( 309 )

Gross profit $ 493,107 $ 354,657 $ 347,308

Segment adjusted EBITDA:

Cloud and Edge $ 135,678 $ 85,701 $ 51,934

IP Optical Networks ( 4,512 ) — —

Total segment adjusted EBITDA 131,166 85,701 51,934

Depreciation ( 17,188 ) ( 11,949 ) ( 11,200 )

Amortization of intangible assets ( 60,910 ) ( 49,225 ) ( 49,723 )

Stock-based compensation ( 13,899 ) ( 12,601 ) ( 11,072 )

Acquisition-related inventory and facilities adjustments ( 2,000 ) — ( 966 )

Litigation costs ( 2,101 ) ( 7,734 ) ( 7,682 )

Impairment of goodwill — ( 164,300 ) —

Settlement expense — — ( 1,730 )

Cancelled debt offering costs — — ( 1,003 )

Acquisition-, disposal- and integration-related expense ( 17,164 ) ( 12,953 ) ( 16,951 )

Restructuring and related expense ( 16,235 ) ( 16,399 ) ( 17,015 )

Income (loss) from operations $ 1,669 $ ( 189,460 ) $ ( 65,408 )

Depreciation expense:

Cloud and Edge $ 12,111 $ 11,949 $ 11,200

IP Optical Networks 5,077 — —

Depreciation expense $ 17,188 $ 11,949 $ 11,200

(19) MAJOR CUSTOMERS

The following customers contributed 10% or more of the Company's revenue in at least one of the years ended December

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

31, 2020, 2019 and 2018:

Year ended December 31,

2020 2019 2018

Verizon Communications Inc.

15 % 17 % 17 %

* Less than 10% of total revenue.

At December 31, 2020, one customer accounted for 10% or more of the Company's accounts receivable balance, representing approximately 12 % in the aggregate of total accounts receivable.

At December 31, 2019, one customer accounted for 10% or more of the Company's accounts receivable balance, representing approximately 32 % of total accounts receivable.

The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable.

The Company maintains an allowance for doubtful accounts and such losses have been within management's expectations.

(20) COMMON STOCK REPURCHASES

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

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Repurchase Program does not obligate the Company to acquire any particular amount of common stock and may be extended, modified, suspended or discontinued at any time at the Board's discretion.

The Repurchase Program does not obligate the Company to acquire any particular amount of common stock and may be extended, modified, suspended or discontinued at any time at the Board's discretion.

The stock repurchases are being funded using the Company's working capital.

During the year ended December 31, 2019, the Company spent $ 4.5 million, including transaction fees, to repurchase and retire 1.0 million shares of its common stock under the Repurchase Program.

The Company did not repurchase any common stock during the year ended December 31, 2020.

At December 31, 2020, the Company had $ 70.5 million remaining under the Repurchase Program for future repurchases.

The Company had previously implemented a stock repurchase program (the "Sonus Repurchase Program"), which Ribbon did not assume in connection with the Merger.

The Company did not repurchase any shares under the Sonus Repurchase Program during the year ended December 31, 2017.

(21) STOCK-BASED COMPENSATION PLANS

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The 2019 Plan had previously been approved by the Board, subject to stockholder approval.

Under the 2019 Plan, the Company may grant awards up to 7.0 million shares of common stock (subject to adjustment in the event of stock splits and other similar events), plus 5.1 million shares of common stock that remained available for issuance under the Company's Amended and Restated Stock Incentive Plan (the "2007 Plan") on June 5, 2019, plus any shares covered by awards under the 2007 Plan (or the Company's other prior equity compensation plans) that again become available for grant pursuant to the provisions of the 2007 Plan.

At the Company's annual meeting of stockholders held on June 2, 2020, the Company's stockholders approved an amendment to the 2019 Plan to increase the number of shares of the Company's common stock authorized for issuance under the 2019 Plan by 7.5 million shares.

Under the 2019 Plan, the Company may grant awards aggregating up to 14.5 million shares of common stock (subject to adjustment in the event of stock splits and other similar events), plus 5.1 million shares of common stock that remained available for issuance under the Company's Amended and Restated Stock Incentive Plan (the "2007 Plan") on June 5, 2019, plus any shares covered by awards under the 2007 Plan (or the Company's other prior equity compensation plans) that again become available for grant pursuant to the provisions of the 2007 Plan.

The 2019 Plan provides for the grant of options to purchase the Company's common stock ("stock options"), stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), performance-based stock awards ("PSAs"), restricted stock units ("RSUs"), performance-based stock units ("PSUs") and other stock- or cash-based awards.

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At December 31, 2020, there were 8.9 million shares available for future issuance under the 2019 Plan.

The Company's 2007 Plan provides for the award of stock options, SARs, RSAs, RSUs, PSAs, PSUs and other stock-based awards to employees, officers, non-employee directors, consultants and advisors of the Company and its subsidiaries.

On and following June 5, 2019, with the exception of shares underlying awards outstanding as of that date, no additional shares may be granted under the 2007 Plan.

The Company's 2007 Plan provided for the award of stock options, SARs, RSAs, RSUs, PSAs, PSUs and other stock-based awards to employees, officers, non-employee directors, consultants and advisors of the Company and its subsidiaries.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

following June 5, 2019, with the exception of shares underlying awards outstanding as of that date, no additional shares may be granted under the 2007 Plan.

2002 Stock Option Plan

In connection with the Edgewater Acquisition, the Company assumed Edgewater's Amended and Restated 2002 Stock Option Plan (the "Edgewater Plan") for all outstanding options as of the Edgewater Acquisition Date (the "Edgewater Options").

The Edgewater Options were converted to Ribbon stock options (the "Ribbon Replacement Options") using a conversion factor of 0.17 , which was calculated based on the acquisition consideration of $1.20 per share of Edgewater common stock divided by the weighted average of the closing price of Ribbon common stock for the ten consecutive days ending with the trading day that preceded the Edgewater Acquisition Date.

This conversion factor was also used to convert the exercise prices of the Edgewater Options to Ribbon Replacement Option exercise prices.

In connection with the Edgewater Acquisition, the Company assumed Edgewater's Amended and Restated 2002 Stock Option Plan, converted all then-outstanding options to purchase Edgewater common stock (the "Assumed Options") to Ribbon stock options (the "Ribbon Replacement Options"), and subsequently renamed it the 2002 Stock Option Plan (the "2002 Plan").

The Ribbon Replacement Options are vesting under the same schedules as the respective Edgewater Options.

The fair values of the Edgewater Options assumed were estimated using a Black-Scholes option pricing model.

The Company recorded $0.7 million as additional purchase consideration for the fair value of the Edgewater Options.

The fair value of the Ribbon Replacement Options attributable to future service totaled $1.0 million , which is being recognized over a weighted average period of approximately two years.

The fair values of the Assumed Options were estimated using a Black-Scholes option pricing model.

The Company recorded $ 0.7 million as additional purchase consideration for the fair value of the Assumed Options.

The fair value of the Ribbon Replacement Options attributable to future service totaled $ 1.0 million, which will be fully expensed by the end of 2021.

2012 Stock Incentive Plan

In connection with the acquisition of Performance Technologies, Inc.

("PT"), the Company assumed PT's 2012 Amended Performance Technologies, Incorporated Omnibus Incentive Plan, and subsequently renamed it the 2012 Stock Incentive Plan

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

(the "2012 Plan").

("PT"), the Company assumed PT's 2012 Amended Performance Technologies, Incorporated Omnibus Incentive Plan, and subsequently renamed it the 2012 Stock Incentive Plan (the "2012 Plan").

In December 2014, all of the unissued shares under the 2012 Plan were transferred to the 2007 Plan.

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Accordingly, at December 31, 2020 there were no shares available for future issuance under the 2008 Plan.

Treatment of Equity Awards in Connection with the Merger

In connection with the Merger, the Company accelerated the vesting of all then-outstanding stock options and certain then-outstanding full value awards on the Merger Date.

In addition, the vesting schedules of certain remaining unvested full value awards were adjusted.

Such vesting and adjustments are described below:

Stock options - each stock option outstanding as of five business days prior to the Merger Date became vested in full as of that date (to the extent not previously vested), and the holders of such stock options were permitted to exercise their stock options from October 20, 2017 through October 24, 2017, after which date all remaining stock options, with certain exceptions, were canceled.

The Company accelerated the vesting of 0.3 million stock options and subsequently canceled 4.5 million vested unexercised stock options in connection with this transaction.

Any stock options granted under the 2008 Plan and 2012 Plan were not canceled, as these plans do not permit such cancellations.

These stock options continue to be outstanding until they are either exercised or expire.

RSAs and RSUs - as prescribed by the Company's 2007 Plan, any unvested RSAs and RSUs that were scheduled to vest within one year from the Merger Date vested in full as of the Merger Date.

The vesting schedules of the remaining unvested RSAs and RSUs were then accelerated by one year.

Certain executives had specific terms and conditions related to their RSAs detailed in their employment agreements or amendments thereto (the "employment terms").

The accelerated vesting of and future vesting schedule adjustments to the RSAs held by these individuals were completed in accordance with their individual employment terms.

In accordance with the terms of their RSA grants, unvested RSAs held by the then-current members of the Board were accelerated on a pro rata basis based on the amount of time the unvested RSAs were outstanding compared to the originally scheduled vesting date.

Unvested PSUs granted to the Company's then-current President and Chief Executive Officer, who separated from the Company effective December 13, 2017 (the "Former CEO"), were converted to RSAs in accordance with his employment terms;

certain of those converted grants were accelerated, and the remaining RSAs continued to vest according to their terms, but with the elimination of any required satisfaction of the performance metrics associated with the awards when they were originally granted as PSUs.

In total, the Company accelerated the vesting of and released 1.1 million RSAs and approximately 36,000 RSUs in connection with the Merger.

PSUs - any unvested PSUs were accelerated in accordance with the employment agreement of each individual PSU holder.

The remaining unvested units would continue to vest according to their terms, with the exception of the PSU grants held by the Former CEO, as discussed above.

The Company accelerated the vesting of and released approximately 98,000 PSUs in connection with the Merger.

Executive Equity Arrangements

Stock-for-Cash Bonus Election

In connection with the Company’s annual incentive program, certain executives of the Company were given the choice to receive a portion, ranging from 10% to 50% (the "Elected Percentage") of their fiscal year 2018 bonuses (the “2018 Bonus”), if any were earned, in the form of shares of the Company’s common stock (the “2018 Bonus Shares” and such program, the “Stock Bonus Election Program”).

Each executive could also elect not to participate in this program and to earn his or her 2018 Bonus, if any, in the form of cash.

Any executive who elected to receive a portion of his or her 2018 Bonus in stock would also

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

receive an uplift of 20% of the value of the 2018 Bonus Shares in additional shares of the Company’s common stock (the “Uplift Shares”) with the exception of the Company’s Chief Executive Officer and his senior leadership team.

Under the Stock Bonus Election Program, the amount of the 2018 Bonus, if any, for each executive was determined by the Compensation Committee of the Board (the "Compensation Committee").

The number of shares earned by each of the 23 participants in the Stock Bonus Election Program was calculated by multiplying each participant's 2018 Bonus by the applicable Elected Percentage (plus the amount attributable to Uplift Shares, if applicable) and dividing the resulting amount by $4.97 , the closing price of the Company’s common stock on March 8, 2019, the date of the company-wide cash bonus payments.

The Company granted 198,949 shares in the aggregate in connection with the 2018 Bonus Shares on March 15, 2019, and such shares were fully vested on the date of grant.

However, notwithstanding that each such share of common stock was fully vested, each participant in the Stock Bonus Election Program was contractually restricted from trading the 2018 Bonus Shares for five months after the date of grant.

Both the grant and vesting of the 2018 Bonus Shares are included in the RSU table below.

The Company determined that the grant date criteria for the 2018 Bonus Shares and Uplift Shares had not been met as of December 31, 2018, as the number of shares to be granted to each executive had not been determined.

The Company recorded stock-based compensation expense totaling $1.1 million in connection with the Stock Bonus Program in 2018 and recorded a liability in connection with the future issuance of the 2018 Bonus Shares and Uplift Shares.

This liability was reclassified to equity at the time the shares were granted.

Inducement Awards

In connection with his appointment as President and Chief Executive Officer of Ribbon, and as an inducement for Bruce McClelland's ("Mr.

McClelland") commencement of employment, the Company awarded Mr.

McClelland sign-on equity grants, comprised of an RSU grant and a PSU grant with both market service conditions (the "Inducement PSUs") on March 16, 2020.

Subject to Mr.

McClelland's continued employment, 462,963 RSUs are eligible to vest on the earlier of March 16, 2021 or the date of the consummation of a change in control of the Company and, upon vesting, will be settled in shares of Ribbon's common stock.

The RSUs had a grant date fair value of $ 1.0 million on the date of grant.

Subject to Mr.

McClelland's continued employment, the PSUs are eligible to vest and be settled in up to 4,750,000 shares of Ribbon common stock upon the achievement of specified share price thresholds on or prior to September 1, 2024.

These grants are reported in the applicable tables below.

Performance-Based Stock Grants

In addition to granting RSAs and RSUs to its executives and certain of its employees, the Company also grants PSUs to certain of its executives.

2019 PSU Grants .

In March and April 2019, the Company granted certain of its executives an aggregate of 872,073 PSUs, of which 523,244 PSUs had both performance and service conditions (the "Performance PSUs") and 348,829 PSUs had both market and service conditions (the "Market PSUs").

Each executive's Performance PSU grant is comprised of three consecutive fiscal year performance periods from 2019 through 2021 (each, a "Fiscal Year Performance Period"), with one-third of the Performance PSUs attributable to each Fiscal Year Performance Period.

The number of shares that will vest for each Fiscal Year Performance Period will be based on the achievement of certain metrics related to the Company's financial performance for the applicable year on a standalone basis (each, a "Fiscal Year Performance Condition").

In the third quarter of 2019, the Company adjusted the 2019 Performance PSU goals to reflect the changes to the Company's calculation of certain metrics.

There was no incremental expense in connection with this modification.

The Company's achievement of the 2019 Fiscal Year Performance Conditions (and the number of shares of Company common stock to vest as a result thereof) will be measured on a linear sliding scale in relation to specific threshold, target and stretch performance conditions.

The Company is recording stock-based compensation expense for the Performance PSUs based on its assessment of the probability that each performance condition will be achieved and the level, if any, of such achievement.

As of December 31, 2019, the Company determined that the grant date criteria for the 2020 and 2021 Fiscal Year Performance Periods had not been met, as the 2020 and 2021 Fiscal Year Performance Conditions had not been established by the Company.

Accordingly, the stock-based compensation expense recorded in the year ended December 31, 2019 in connection with the Performance PSUs is related only to those PSUs with 2019 Fiscal Year Performance Conditions.

The Compensation Committee will determine the number of shares earned, if any, after the Company's financial results for each Fiscal Year Performance Period are finalized.

Upon the determination by the Compensation Committee of the number of shares that will be received upon vesting of the Performance PSUs, such number of shares will become fixed and the unamortized expense will be recorded through the remainder of the service period that ends on March 15, 2022, at which time the total Performance PSUs earned, if any, will vest, pending each executive's continued employment with the Company through that date.

The number of shares of common stock to be achieved upon vesting of the Performance PSUs will in no event exceed 200% of the Performance PSUs.

Shares subject to the Performance PSUs that fail to be earned will be forfeited.

The Market PSUs have one three-year performance period, which will end on December 31, 2021 (the "Market Performance Period").

The number of shares subject to the Market PSUs that will vest, if any, on March 15, 2022, will be dependent upon the Company's total shareholder return ("TSR") compared with the TSR of the companies included in the Nasdaq Telecommunications Index for the same Market Performance Period, measured by the Compensation Committee after

In addition to granting RSAs and RSUs and the aforementioned Inducement PSUs, to its executives and certain of its employees, the Company also grants PSUs to certain of its executives.

PSU Grants - 2020 and 2019 .

In both 2020 and 2019, the Company granted certain of its executives (the "2020 PSUs" and "2019 PSUs", respectively), of which 60 % of each executive's PSU grant had both performance service conditions (the "Performance PSUs") and 40 % had both market and service conditions (the "Market PSUs").

Each executive's Performance PSU grant is comprised of three consecutive fiscal year performance periods beginning in the year of grant (each, a "Fiscal Year Performance Period"), with one-third of the Performance PSUs attributable to each Fiscal

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

the Market Performance Period ends.

The shares determined to be earned will vest on March 15, 2022, pending each executive's continued employment with the Company through that date.

The number of shares of common stock to be achieved upon vesting of the Market PSUs will in no event exceed 200% of the Market PSUs.

Year Performance Period.

The number of shares that will be vest for each Fiscal Year Performance Period, if any, will be based on the achievement of certain metrics related to the Company's financial performance for the applicable year on a standalone basis (each, a "Fiscal Year Performance Condition").

The Company's achievement of the goals for each Fiscal Year Performance Condition (and the number of shares of Company common stock to vest as a result thereof) are being measured on a linear sliding scale in relation to specific threshold, target and stretch performance conditions, with any shares earned vesting in the first quarter of the fiscal year following the third Performance Period of the grant, pending each executive's continued employment with the Company through that date.

The number of shares of common stock underlying the Performance PSUs that can be earned will in no event exceed 200 % of the Performance PSUs.

Shares subject to the Performance PSUs that fail to be earned will be forfeited.

The Market PSUs have one three-year performance period, beginning January 1 in the year of grant and ending on December 31, three years thereafter (the "Market Performance Period").

The number of shares subject to the Market PSUs that will vest, if any, will be dependent upon the Company's total shareholder return ("TSR") compared with the TSR of the companies included in the Nasdaq Telecommunications Index for the applicable Market Performance Period, measured by the Compensation Committee after the Market Performance Period ends, with any shares earned vesting in the first quarter of the fiscal year following the respective Market Performance Period, pending each executive's continued employment with the Company through that date.

The number of shares of common stock underlying the Market PSUs that can be earned will in no event exceed 200 % of the Market PSUs.

Shares subject to the Market PSUs that fail to be earned will be forfeited.

2018 PSU Grant .

In addition, in connection with his appointment as Executive Vice President and General Manager, Packet Optical Networking, the Company granted Sam Bucci 133,333 PSUs (the "Bucci Stock Price PSUs") with both market and service conditions.

Subject to Mr.

Bucci's continued employment, the Bucci Stock Price PSUs were eligible to vest and be settled in shares of Ribbon common stock upon the achievement of a specific share price threshold on or prior to January 31, 2022.

The price share threshold was met on February 12, 2021 and the shares vested and were released on February 15, 2021.

From June through September 2020, the Company granted certain of its executives an aggregate of 823,369 PSUs, of which 494,020 PSUs had both performance and service conditions (the “2020 Performance PSUs”) and 329,349 had both market and service conditions (the “2020 Market PSUs”).

The three Fiscal Year Performance Periods for the 2020 Performance PSUs are the years ended December 31, 2020, 2021 and 2022 (respectively, the “2020 Performance Period”, “2021 Performance Period” and “2022 Performance Period”).

As of December 31, 2020, the Company determined that the grant date criteria for the 2021 Performance Period and the 2022 Performance Period had not been met, as the goals for these performance periods had not been established by the Company, and accordingly, no expense has been recorded related to these performance periods.

The three Fiscal Year Performance Periods for the 2019 Performance PSUs are the years ended December 31, 2019, 2020 and 2021 (respectively, the “2019 Performance Period”, “2020 Performance Period” and “2021 Performance Period”).

In the third quarter of 2019, the Company adjusted the goals for the 2019 Performance Period to reflect the changes to the Company's calculation of certain metrics.

There was no incremental expense in connection with this modification.

In March 2020, the Compensation Committee determined that the performance conditions for the 2019 Performance Period had been satisfied at the 30.493 % level.

As of December 31, 2020, the Company determined that the grant date criteria for the 2021 Fiscal Year Performance Period had not been met, as the goals for the 2021 Performance Period had not been established by the Company, and accordingly, no expense has been recorded related to this performance period.

PSU Grants - 2018 .

In May 2018, the Company granted its then-current President and Chief Executive Officer ("Mr.

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The number of shares of common stock to be received upon vesting of the 2018 PSUs would in no event exceed 150 % of the 2018 PSUs.

In the year ended December 31, 2018, the Company recorded stock-based compensation expense for the 2018 PSUs based on its assessment of the probability that each performance condition would be achieved and the level, if any, of such achievement.

The Company recorded $0.3 million of stock-based compensation expense in the year ended December 31, 2018 in connection with the 2018 PSUs.

In February 2019, the Compensation Committee determined that the performance metrics for one-half of the 2018 PSUs had been achieved at the 106.49% achievement level and one-half of the 2018 PSUs had been achieved at the 150% level, for a total of 250,075 shares earned.

However, in April 2019, the Compensation Committee subsequently determined that the performance metrics for the entire 2018 PSUs had been achieved at the 150% level, for a total of 292,500 shares eligible to be issued (the "2018 Shares Earned"), pending Mr.

The Compensation Committee ultimately determined that the performance conditions for the 2018 PSUs had been achieved at the 150 % level, for a total of 292,500 shares eligible to be issued (the "2018 Shares Earned"), pending Mr.

Hobbs' continued employment with the Company through December 31, 2020.

In connection with Mr.

Hobbs' separation from the Company effective December 31, 2019, the vesting schedule for the 2018 Shares Earned was accelerated and the shares were released on January 30, 2020 (see "Accelerated Vesting of Unvested Stock Units Held by Mr.

Hobbs" below).

2017 PSU Grants .

On March 31, 2017, the Company granted an aggregate of 165,000 PSUs with both market and service conditions to five of its executives (the "2017 PSUs").

The terms of each PSU grant were such that up to one-third of the shares subject to the respective PSU grant would vest, if at all, on each of the respective first, second and third anniversaries of the date of grant, depending on the Company's TSR compared with the TSR of the companies included in the Nasdaq Telecommunications Index for the same fiscal year, measured by the Compensation Committee after each of the fiscal years as defined by each grant (each, a "Performance Period").

The shares determined to be earned would vest on the anniversary of the grant date following each Performance Period.

Shares subject to the PSUs that failed to be earned would be forfeited.

In March 2018, the Compensation Committee determined that the performance metrics for the 2017 PSUs for the 2017 Performance Period had been achieved at the 130% level and accordingly, 33,584 shares in the aggregate were released to the three remaining executives holding such outstanding grants, comprised of 25,834 shares, representing the 100% achievement of target, granted on March 31, 2017, and 7,750 shares, representing the 30% achievement over target, granted on March 31, 2018.

In February 2019, the Compensation Committee determined that the performance metrics for the 2017 PSUs for the 2018 Performance Period had been achieved at the 61.4% level and accordingly, 9,464 shares were released to the three remaining executives holding such outstanding grants on March 31, 2019.

The shares that failed to be earned for the 2018 Performance Period, aggregating 5,950 shares, were forfeited.

Accordingly, at December 31, 2019, there were no remaining unvested 2017 PSUs outstanding.

The release and forfeiture of the shares related to the 2018 Performance Period are included in the PSU table below.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

In connection with his separation from the Company effective December 31, 2019, the vesting schedule for the 2018 Shares Earned was accelerated and the shares were released on January 30, 2020.

The release of these shares is included in the PSU table below.

Accounting for Performance PSUs .

Once the grant date criteria have been met for a Fiscal Year Performance Period, the Company records stock-based compensation expense for the respective shares underlying the PSUs based on its assessment of the probability that the respective performance condition will be achieved and the level, if any, of such achievement.

The Compensation Committee determines the number of shares earned, if any, after the Company's financial results for each Fiscal Year Performance Period are finalized.

Upon the determination by the Compensation Committee of the number of shares that will be received upon vesting of the related Performance PSUs, such number of shares becomes fixed and the unamortized expense is recorded through the remainder of the service period, at which time such Performance PSUs earned, if any, will vest, pending each executive's continued employment with the Company through that date.

Accounting for Market PSUs .

PSUs that include a market condition require the use of a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the volatility of each entity and the pair-wise covariance between each entity.

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The Company is required to record expense for the PSUs with market conditions through their respective final vesting dates regardless of the number of shares that are ultimately earned.

Accelerated Vesting of Unvested Stock Units Held by Mr.

On November 13, 2019, the Company announced that, effective that date, Mr.

Hobbs was no longer serving as the President and Chief Executive Officer of Ribbon, and, also on and effective November 13, 2019, the Board appointed Steven Bruny, the Company's Executive Vice President, Global Sales & Services, and Kevin Riley, the Company's Executive Vice President, Advanced R&D and Chief Technology Officer, as Interim Co-Presidents and Chief Executive Officers, to assume the duties of the Company's President and Chief Executive Officer while the Board searched for a permanent successor to Mr.

Hobbs resigned his position as a member of the Board effective December 27, 2019 and separated from the Company effective December 31, 2019.

In connection with his separation from the Company and in accordance with the terms of his employment agreement with the Company, the vesting of certain of

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Hobbs' RSUs and PSUs were accelerated, some of which were released on January 30, 2020, with certain other PSUs, if any are earned, scheduled for release no later than December 15, 2020.

Stock-for-Cash Bonus Election

In connection with the Company’s annual incentive program, certain executives of the Company were given the choice to receive a portion of their fiscal year 2018 bonuses (the “2018 Bonus”), if any were earned, in the form of shares of the Company’s common stock (the “2018 Bonus Shares”).

Each executive could also elect not to participate in this program and to earn his or her 2018 Bonus, if any, in the form of cash.

The Company determined that the grant date criteria for the 2018 Bonus Shares had not been met as of December 31, 2018, as the number of shares to be granted to each executive had not been determined.

The Company recorded stock-based compensation expense totaling $ 1.1 million in connection with the Stock Bonus Program in 2018 and recorded a liability in connection with the future issuance of the 2018 Bonus Shares.

This liability was reclassified to equity at the time the shares were granted on March 15, 2019.

Accelerated Vesting of Stock Units

In connection with the separation of several executives from the Company in the years ended December 31, 2020 and 2019, the Company accelerated the vesting of certain of their outstanding RSUs and PSUs in accordance with their respective terms of employment with the Company, with the potential for a portion of certain other PSUs aggregating approximately 43,000 shares to be released to two of these former executives on a pro rata basis subject to achievement of the related performance or market conditions for the performance periods through their respective 2020 separation dates.

Stock Options

Stock options granted under the 2019 Plan expire ten years from the date of grant.

Outstanding stock options granted under the Edgewater Plan expire ten years from the date of grant.

Outstanding stock options granted under the 2008 Plan expire either seven or ten years from the date of grant.

Outstanding stock options granted under the 2012 Plan expire ten years from the date of grant.

There were no stock options outstanding under either the 2019 Plan or the 2007 Plan at December 31, 2019.

The Company has not granted stock options since 2017.

Outstanding stock options granted under the Company's plans expire either seven or ten years from the date of grant.

The grant date fair value of stock options, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

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The activity related to the Company's outstanding stock options during the year ended December 31, 2020 was as follows:

Exercise Price

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Shares Weighted

Exercise Price Weighted

Contractual Term

(years) Aggregate

Intrinsic Value

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Outstanding at January 1, 2020 297,124 $ 11.55

Granted — $ —

Exercised ( 38,288 ) $ 1.81

Forfeited ( 6,055 ) $ 2.78

Expired ( 45,071 ) $ 15.72

Outstanding at December 31, 2020 207,710 $ 12.69 3.73 $ 262

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Exercisable at December 31, 2020 201,138 $ 12.93 3.67 $ 241

The Company did not grant stock options during the years ended December 31, 2019 and 2018.

The grant date fair values of stock options granted in the year ended December 31, 2017 were estimated using the Black-Scholes valuation model with the following assumptions:

Risk-free interest rate

1.22% - 1.95%

Expected dividends

Weighted average volatility

Expected life (years)

The risk-free interest rate used is the average U.S.

Treasury Constant Maturities Rate for the expected life of the award.

The expected dividend yield of zero is based on the fact that the Company has never paid dividends and has no present intention to pay cash dividends.

The expected life for stock options is based on a combination of the Company's historical option patterns and expectations of future employee actions.

The weighted average grant-date fair value of options granted for the year ended December 31, 2017 was $3.05 .

The total intrinsic values of options exercised were $0.5 million for the year ended December 31, 2019 , approximately $39,000 for the year ended December 31, 2018 and $0.2 million for the year ended December 31, 2017 .

The total intrinsic values of options exercised were $ 0.1 million for the year ended December 31, 2020, $ 0.5 million for the year ended December 31, 2019 and approximately $ 39,000 for the year ended December 31, 2018.

The Company received cash from option exercises of $ 0.1 million in the year ended December 31, 2020, $ 0.2 million in the year ended December 31, 2019 and $ 0.1 million in the year ended December 31, 2018.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Restricted Stock Grants - Restricted Stock Awards and Restricted Stock Units

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The activity related to the Company's RSAs for the year ended December 31, 2020 was as follows:

Shares Weighted

Unvested balance at January 1, 2020 487,976 $ 6.87

Granted — $ —

Vested ( 360,204 ) $ 6.82

Forfeited ( 40,789 ) $ 6.96

Unvested balance at December 31, 2020 86,983 $ 7.04

The activity related to the Company's RSUs for the year ended December 31, 2020 was as follows:

Shares Weighted

Unvested balance at January 1, 2020 2,790,060 $ 5.11

Granted 6,550,106 $ 2.96

Vested ( 1,886,486 ) $ 4.65

Forfeited ( 922,570 ) $ 3.50

Unvested balance at December 31, 2020 6,531,110 $ 3.32

The total grant date fair value of vested restricted stock grant shares was $ 11.2 million in the year ended December 31, 2020, $ 9.9 million in the year ended December 31, 2019 and $ 9.7 million in the year ended December 31, 2018.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Performance-Based Stock Units

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The activity related to the Company's PSUs for the year ended December 31, 2020 was as follows:

Shares Weighted

Unvested balance at January 1, 2020 1,067,073 $ 5.94

Granted 5,804,202 $ 1.41

Vested ( 323,752 ) $ 5.52

Forfeited ( 511,592 ) $ 5.37

Unvested balance at December 31, 2020 6,035,931 $ 1.56

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

The total grant date fair value of vested performance-based stock grant shares was $ 1.8 million in the year ended December 31, 2020, $ 0.1 million in the year ended December 31, 2019 and $ 0.6 million in the year ended December 31, 2018.

The ESPP is designed to provide eligible employees of the Company and its participating subsidiaries an opportunity to purchase common stock of the Company through accumulated payroll deductions.

The ESPP provides for six-month consecutive offering periods, with the purchase price of the stock equal to 85% of the lesser of the market price on the first or last day of the offering period.

The maximum number of shares of common stock an employee may purchase during each offering period is 500 , subject to certain adjustments pursuant to the ESPP.

In May 2017, the Compensation Committee determined to suspend all offering periods under the ESPP, effective September 1, 2017, until such time after the Merger Date as the Compensation Committee determined was best in its sole discretion.

The Company's Board voted to re-implement the ESPP effective December 1, 2018 for employees in certain geographic regions, with the first purchase date of the re-implemented ESPP completed on May 31, 2019.

At December 31, 2019 , 5.0 million shares, the maximum number of shares that may be issued under the ESPP, were authorized and 1.1 million shares were available under the ESPP for future issuance.

The ESPP will expire on May 20, 2020.

The ESPP was designed to provide eligible employees of the Company and its participating subsidiaries an opportunity to purchase common stock of the Company through accumulated payroll deductions.

The last purchase under the ESPP was on November 29, 2019, and the ESPP expired on May 20, 2020.

Stock-Based Compensation

1 unchanged sentence

Year ended December 31,

2020 2019 2018

Product cost of revenue $ 174 $ 76 $ 114

3 unchanged sentences

General and administrative 5,927 7,121 5,881

There was no income tax benefit for employee stock-based compensation expense for the years ended December 31, 2019 , 2018 and 2017 due to the valuation allowance recorded.

Stock-based compensation expense recorded for the year ended December 31, 2019 included $1.6 million of incremental expense related to the accelerated vesting of RSUs and PSUs held by the former President and Chief Executive Officer in connection with his separation from the Company effective December 31, 2019.

Stock-based compensation expense recorded for the year ended December 31, 2017 included $8.6 million of incremental expense related to the acceleration of stock options and full value awards and subsequent adjustments to the vesting schedules of the remaining unvested full value awards in connection with the Merger.

In addition, the Company recorded $1.6 million of incremental expense related to the accelerated vesting of RSAs held by a former President and Chief Executive Officer in connection with his separation from the Company effective December 13, 2017.

$ 13,899 $ 12,601 $ 11,072

There was an income tax benefit for employee stock-based compensation expense for the year ended December 31, 2020, but no income tax benefit for the years ended December 31, 2019 and 2018 due to the valuation allowance recorded.

In the year ended December 31, 2019, the Company recorded nominal incremental expense related to the accelerated vesting of RSUs and PSUs held by certain former executives of the Company in connection with their separations from the Company.

Stock-based compensation expense recorded for the year ended December 31, 2019 included $ 1.6 million of incremental expense related to the accelerated vesting of RSUs and PSUs held by the former President and Chief Executive Officer in connection with his separation from the Company.

At December 31, 2020, there was $ 19.3 million, net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested stock options, RSAs, RSUs and PSUs.

3 unchanged sentences

Common Stock Reserved

Common stock reserved for future issuance at December 31, 2019 consists of the following:

At December 31, 2020, there were 8,888,677 shares of common stock reserved for future issuance under the 2019 Plan.

The Company's policy is to issue authorized but unissued shares upon the exercise of stock options, to grant restricted common stock, to settle restricted stock units and performance-based stock units, and to authorize the purchase of shares of the Company's common stock under the ESPP.

The Company has operating and finance leases for corporate offices, research and development facilities, and certain equipment.

Operating leases are reported separately in the Company's consolidated balance sheet at December 31, 2019.

Operating leases are reported separately in the Company's consolidated balance sheet at December 31, 2020 and 2019.

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

8 unchanged sentences

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.

The Company assessed its right-of-use assets for impairment as of December 31, 2019 and determined no impairment has occurred.

The Company assessed its right-of-use assets for impairment as of December 31, 2020 and 2019 and determined no impairment had occurred.

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

5 unchanged sentences

The Company expenses all variable lease costs as incurred.

In connection with the 2019 Restructuring Initiative, certain lease assets related to facilities will be partially or fully vacated as the Company consolidates its facilities.

In connection with the 2019 Restructuring Initiative, certain lease assets related to facilities are being partially or fully vacated as the Company consolidates its facilities.

The Company has no plans to enter into sublease agreements for certain facilities.

The Company ceased use of these facilities in the third quarter of 2019.

Accordingly, the Company accelerated the amortization of the associated lease assets through the planned cease-use date of each facility, resulting in additional

The Company ceased use of these facilities in the first and fourth quarters of 2020 and in the third quarter of 2019.

Accordingly, the Company accelerated the amortization of the associated lease assets through the planned cease-use date of each facility, resulting in additional amortization expense of $ 0.6 million and $ 3.7 million in the years ended December 31, 2020 and 2019, respectively.

The Company also recorded a liability aggregating $ 0.9 million in 2019 for all future estimated variable lease costs related to these facilities.

This incremental accelerated amortization and accrual for all estimated future variable lease costs are included in Restructuring and related expense in the Company's consolidated statements of operations for the years ended December 31, 2020 and 2019.

The Company may incur additional future expense if it is unable to sublease

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

amortization expense of $3.7 million in the year ended December 31, 2019.

The Company also recorded a liability of $0.9 million in 2019 for all future anticipated variable lease costs related to these facilities.

This incremental accelerated amortization and estimated future variable lease costs are included in Restructuring and related expense in the Company's consolidated statements of operations for the year ended December 31, 2019.

The Company may incur additional future expense if it is unable to sublease other locations included in the Facilities Initiative.

other locations included in the Facilities Initiative.

The Company leases its corporate offices and other facilities under operating leases, which expire at various times through 2032.

1 unchanged sentence

The Company's finance leases primarily consist of equipment.

At December 31, 2019, the Company had 107,800 square feet of building space in North Dallas, Texas under construction as part of its 2019 Restructuring and Facilities Consolidation Initiative.

The Company's leased Plano, Texas facility will be vacated upon completion of the construction of the North Dallas, Texas site.

At that time, employees will relocate to the new site as part of the 2019 Restructuring Initiative.

The construction of the new North Dallas, Texas site is expected to be completed in 2020.

In December 2020, the Company began relocating from its leased Plano, Texas facility to the recently constructed building space in North Dallas, Texas as part of its 2019 Restructuring and Facilities Consolidation Initiative.

The Company's relocation from its leased Plano, Texas facility is expected to be completed in the first quarter of 2021.

The Company's right-of-use lease assets and lease liabilities at December 31, 2020 and December 31, 2019 were as follows (in thousands):

Operating lease assets

Finance lease assets*

Classification 2020 2019

Operating lease assets Operating lease right-of-use assets $ 69,757 $ 36,654

Finance lease assets* Property and equipment, net 983 2,420

Total leased assets $ 70,740 $ 39,074

Operating Operating lease liabilities $ 17,023 $ 7,719

Finance Accrued expenses and other 902 1,005

Operating Operating lease liabilities, net of current 72,614 37,202

Finance Other long-term liabilities 568 2,144

Total lease liabilities $ 91,107 $ 48,070

* Finance lease assets were recorded net of accumulated depreciation of $2.0 million and $0.9 million at December 31, 2019 and December 31, 2018, respectively, and were reported as capital lease assets prior to the Company's adoption of ASC 842.

The components of lease expense for the year ended December 31, 2019 were as follows (in thousands):

* Finance lease assets were recorded net of accumulated depreciation of $ 1.9 million and $ 2.0 million at December 31, 2020 and December 31, 2019, respectively.

The components of lease expense for the year ended December 31, 2020 and 2019 were as follows (in thousands):

Year ended December 31,

Operating lease cost* $ 19,582 $ 13,865

6 unchanged sentences

Net lease cost $ 43,268 $ 37,586

* Operating lease cost for the year ended December 31, 2019 includes $3.7 million of accelerated amortization for certain assets partially or fully vacated in 2019 with no intent or ability to sublease.

** Variable lease costs for the year ended December 31, 2019 include a $0.9 million accrual for all future estimated variable expenses related to certain assets partially or fully vacated in 2019 with no intent or ability to sublease.

* Operating lease cost for the years ended December 31, 2020 and 2019 include $ 0.6 million and $ 3.7 million, respectively, of accelerated amortization for certain assets partially or fully vacated with no intent or ability to sublease.

** Variable lease costs for the year ended December 31, 2019 included an accrual of $ 0.9 million for all future estimated variable expenses related to certain assets partially or fully vacated with no intent or ability to sublease.

No such variable costs were accrued in the year ended December 31, 2020.

The Company elected to use the alternative transition method upon adoption of ASC 842 on January 1, 2019.

This method allowed entities to initially apply the standard at the adoption date with no subsequent adjustments to prior period lease costs for

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

The Company 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.

comparability.

As a result, operating leases in periods prior to the Company's adoption of ASC 842 were not recorded on the consolidated balance sheet.

Prior to the adoption of ASC 842, rent expense (including any escalation clauses, free rent and other lease concessions) on operating leases was recognized on a straight-line basis over the minimum lease term, and this remains consistent with the Company's application of ASC 842.

Rent expense was $11.9 million and $5.9 million for the years ended December 31, 2018 and 2017, respectively.

Interest expense for finance leases was approximately $52,000 and $14,000 for the years ended December 31, 2018 and 2017, respectively.

Amortization expense for finance leases was $0.6 million and $0.1 million for the years ended December 31, 2018 and 2017, respectively.

Other information related to the Company's leases as of and for the year ended December 31, 2019 was as follows (in thousands, except lease terms and percentages):

Rent expense was $ 11.9 million, interest expense for finance leases was approximately $ 52,000 , and amortization expense for finance leases was $ 0.6 million for the year ended December 31, 2018.

Cash flow information related to the Company's leases for the years ended December 31, 2020 and 2019 was as follows (in thousands):

Year ended December 31,

Cash paid for amounts included in the measurement of lease liabilities:

2 unchanged sentences

Financing cash flows from finance leases $ 1,279 $ 913

Other information related to the Company's leases as of December 31, 2020 and 2019 was as follows (in thousands):

Weighted average remaining lease term (years):

5 unchanged sentences

Future minimum fixed lease payments under noncancelable leases at December 31, 2020 were as follows (in thousands):

2025 and beyond

Total lease payments

Present value of lease liabilities

Future minimum fixed lease payments under noncancelable leases at December 31, 2018 were as follows (in thousands):

December 31, 2020

Operating Finance

leases leases

2021 $ 21,366 $ 981

2022 20,171 506

2023 17,312 62

2024 10,420 —

2026 and beyond 32,516 —

Total lease payments 110,329 1,549

interest ( 20,692 ) ( 80 )

Present value of lease liabilities $ 89,637 $ 1,469

* The amounts in this column include restructuring payments aggregating approximately $1 million , of which approximately 50% was due in less than one year and the remainder was due in one to three years.

These amounts exclude current estimated sublease income aggregating approximately $125,000 over the remaining lease terms for restructured facilities.

** Prior to the Company's adoption of ASC 842 on January 1, 2019, operating leases were not recorded on the consolidated

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

balance sheet and no interest component was calculated.

(23) EMPLOYEE DEFINED CONTRIBUTION PLANS

The Company offers 401(k) savings plans to eligible employees.

The Company assumed GENBAND's 401(k) savings plan in connection with the Merger.

Effective January 1, 2019, the previously separate former Sonus and former GENBAND 401(k) savings plans were combined into one plan.

Effective January 1, 2018, the Company began to match 50% of each employee's contributions to the 401(k) program up to 4% of the employee's eligible earnings, for a maximum match of 2% of eligible earnings.

The Company matches 50 % of each employee's contributions to the 401(k) program up to 4 % of the employee's eligible earnings, for a maximum match of 2 % of eligible earnings.

The Company recorded expense related to its employee defined contribution plans aggregating $ 3.4 million in the year ended December 31, 2020, $ 4.0 million in the year ended December 31, 2019 and $ 3.2 million in the year ended December 31, 2018.

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

(24) NON-U.S.

EMPLOYEE DEFINED BENEFIT PLANS

In connection with the Merger, the Company assumed GENBAND's defined benefit retirement plans that cover certain employees at various international locations.

The Company adopted GENBAND's policy to contribute amounts at least sufficient to satisfy the minimum amount required by applicable law and regulations or to directly pay benefits where appropriate.

The Company has defined benefit retirement plans that cover certain employees at various international locations.

The Company's policy is to contribute amounts at least sufficient to satisfy the minimum amount required by applicable law and regulations or to directly pay benefits where appropriate.

Benefits under the defined benefit plans are typically based either on years of service and the employee's compensation (generally during a fixed number of years immediately before retirement) or on annual credits.

The range of assumptions that are used for the non-U.S.

The range of assumptions that are used for these non-U.S.

defined benefit plans reflect the different economic environments within the various countries.

In the year ended December 31, 2020, the Company assumed ECI's defined benefit plans in connection with the ECI Acquisition.

These plans exist in several international locations where severance pay is either required by law for voluntary terminations or upon reaching a statutory retirement age.

The Company adopted ECI's policy to fund notional accounts each month in the name of each employee to satisfy not only the severance amounts required by the applicable laws and regulations in certain countries, but also to satisfy severance for other types of terminations not necessarily required by law, but paid in accordance with company policy.

Benefits funded and paid under these plans are based upon years of service and the employees' current compensation.

At the ECI Acquisition Date, ECI accounted for these plans under the shutdown approach allowed under ASC 715, Compensation - Retirement Benefits (Topic 715) ("ASC 715") .

Beginning December 31, 2020, in order to be consistent with the accounting methodology utilized for Ribbon's other defined benefit plans, the Company began to account for the ECI assumed plans using the actuarial cost approach, which is also allowed under ASC 715 for these types of plans.

The range of assumptions that are utilized for these plans reflects the different economic environments within each country where such severance indemnities are required.

In 2020, regulatory changes occurred in the Netherlands that changed the Company's defined benefit pension plan there from a participating plan to a non-participating plan.

This plan amendment triggered settlement accounting, resulting in a gain of $ 1.6 million, which is included in Other income (expense), net, in the Company's consolidated statement of operations for the year ended December 31, 2020.

Prior to the amendment, the Company's Netherlands pension plan provided defined benefit accruals which were financed by insurance contracts that had a profit sharing feature.

The pension benefits accrued were subject to future increases based on final earnings at the end of employment (the final average earnings formula).

With the amendment in 2020, the final average earnings formula was frozen and the insurance contracts were converted to fully paid contracts.

Following the amendment, pension accruals are now based upon a new formula that only considers current earnings (the career earnings formula) with the benefits still financed through insurance contracts.

Ribbon has no further liability for pension benefits earned prior to the amendment as they are fully paid contracts.

In addition, the insurance contract for the new benefit accruals has no profit sharing feature.

Therefore, Ribbon has no current or future obligation to pay pension benefits promised in the Netherlands beyond the payment of premiums to the insurance company.

During the year ended December 31, 2019, in conjunction with the 2019 Restructuring Initiative, there were reductions in force that significantly reduced benefits that can be earned under the plan in one of our international locations that resulted in an immaterial curtailment loss.

1 unchanged sentence

During the year ended December 31, 2018, in conjunction connection with the Merger Restructuring Initiative, there were reductions in force that significantly reduced benefits that can be earned under the defined benefit plans in several international locations that resulted in curtailment accounting.

A curtailment gain of $0.5 million was recognized in 2018 and included as a component of Other (expense) income, net, in the Company's consolidated statement of operations.

A curtailment gain of $ 0.5 million was recognized in 2018 and included as a component of Other income (expense), net, in the Company's consolidated statement of operations.

In the year ended December 31, 2018, settlement accounting was triggered in only one of these locations, resulting in an immaterial settlement charge.

3 unchanged sentences

Year ended December 31,

Year ended December 31, 2018

Changes in projected benefit obligations:

Projected benefit obligation, beginning of year $ 11,784 $ 10,848

Business combination 17,963 —

Service cost 1,459 335

Interest cost 46 140

Participant contributions — 24

Plan amendments ( 4,440 ) —

Benefits and expenses paid ( 1,976 ) ( 44 )

Net actuarial loss (gain) on obligation

Net actuarial loss on obligation 231 1,059

Curtailment — 82

Settlement — ( 660 )

Projected benefit obligation, end of year $ 25,067 $ 11,784

1 unchanged sentence

Fair value of plan assets, beginning of year $ 1,830 $ 3,842

Business combination 13,188 —

Actual return on plan assets 1,077 ( 1,471 )

Plan amendments ( 588 ) —

Employer contributions 798 139

10 unchanged sentences

Net amount recognized $ ( 10,717 ) $ ( 9,954 )

The increase in the underfunded status of the Company's defined benefit plans at December 31, 2019 compared to December 31, 2018 was the result of asset losses and a general decrease in discount rates which resulted in an increase in the projected benefit obligation.

The increase in the underfunded status of the Company's defined benefit plans at December 31, 2020 compared to December 31, 2019 was the result of the assumption of the ECI plans in connection with the ECI Acquisition, and a general decrease in discount rates which resulted in increases in projected benefit obligations, partially offset by the effect of the change in the benefit structure of the Netherlands plan from the plan amendment that occurred in 2020 as a result of regulatory changes.

Plans with underfunded or non-funded accumulated benefit obligations at December 31, 2020 and 2019 were as follows (in thousands):

December 31, 2019

December 31, 2018

Aggregate projected benefit obligation $ 25,067 $ 11,784

1 unchanged sentence

Aggregate fair value of plan assets $ 14,350 $ 1,830

Net periodic benefit costs for the years ended December 31, 2019 and 2018 and the period from the Merger Date to December 31, 2017 were as follows (in thousands):

Net periodic benefit costs for the years ended December 31, 2020, 2019 and 2018 were as follows (in thousands):

RIBBON COMMUNICATIONS INC.

1 unchanged sentence

Year ended December 31,

Year ended December 31, 2018

October 27, 2017 to December 31, 2017

2020 2019 2018

Service cost $ 1,459 $ 335 $ 449

Interest cost 46 140 150

2 unchanged sentences

Curtailment charge (credit) — 13 ( 510 )

Settlement charge

Settlement (credit) charge ( 1,557 ) 115 3

Net periodic benefit costs $ ( 375 ) $ 610 $ 69

The Company made benefit payments of $683,000 and $273,000 in the years ended December 31, 2019 and 2018, respectively.

These benefit payments included $660,000 and $250,000 of one-time lump sum payments to participants in 2019 and 2018, respectively.

The Company made benefit payments of $3,000 in the period from the Merger Date to December 31, 2017.

The Company made benefit payments of $ 2.0 million, $ 0.7 million and $ 0.3 million in the years ended December 31, 2020, 2019 and 2018, respectively.

These benefit payments included $ 0.7 million and $ 0.3 million of one-time lump sum payments to participants in the years ended December 31, 2019 and 2018, respectively.

No one-time lump sum payments were made to participants in the year ended December 31, 2020.

Expected benefit payments for the next ten years are as follows (in thousands):

Years ending December 31,

The changes in plan assets and benefit obligations recognized in other comprehensive income (loss) before tax for the years ended December 31, 2019 and 2018 and the period from the Merger Date to December 31, 2017 were as follows (in thousands):

Year ended December 31, 2019

2026 to 2030 8,674

The changes in plan assets and benefit obligations recognized in other comprehensive income (loss) before tax for the years ended December 31, 2020, 2019 and 2018 were as follows (in thousands):

Year ended December 31,

October 27, 2017 to December 31, 2017

Net loss (gain)

2020 2019 2018

Net (gain) loss $ ( 558 ) $ 2,526 $ ( 356 )

Settlement gain ( 1,557 ) — —

Total recognized in comprehensive income (loss) $ ( 2,115 ) $ 2,526 $ ( 356 )

The Company defers all actuarial gains and losses resulting from variances between actual results and economic estimates or actuarial assumptions.

1 unchanged sentence

These unrecognized gains and losses are amortized as a component of net periodic benefit cost when the net gains and losses exceed 10 % of the greater of the market value of plan assets or the projected benefit obligation at the beginning of the year.

Amortization of the amount included in Accumulated other comprehensive income into net periodic benefit cost is expected to total approximately $176,000 for the year ended December 31, 2020.

Amortization of the amount included in Accumulated other comprehensive income into net periodic benefit cost is expected to total $ 0.1 million for the year ended December 31, 2021.

The principal weighted average assumptions used to determine the benefit obligation at December 31, 2020 and 2019 were as follows:

December 31, 2019

December 31, 2018

Discount rate 2.16 % 0.68 %

Rate of compensation increase 2.41 % 2.88 %

The principal weighted average assumptions used to determine net period benefit cost for the years ended December 31, 2020, 2019 and 2018 were as follows:

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

The principal weighted average assumptions used to determine net period benefit cost for the years ended December 31, 2019 and 2018 and the period from the Merger Date to December 31, 2017 were as follows:

Year ended December 31,

Year ended December 31, 2018

October 27, 2017 to December 31, 2017

2020 2019 2018

Discount rate 0.68 % 1.30 % 1.50 %

4 unchanged sentences

For each defined benefit plan, the Company chooses an estimated discount rate from a readily available market index rate, based upon high-quality fixed income investments, specific to the country or economic zone in which the benefits are paid and taking into account the duration of the plan and the number of participants.

The plans in the Netherlands and Switzerland are funded through insurance contracts, which provide guaranteed interest credit.

The fair value of the contract is derived from the insurance company's assessment of the minimum value of the benefits provided by the insurance contract.

The methodology used to value the plan assets assumes that the value of the plan assets equals the guaranteed insured benefits.

The Company's plans in both the Netherlands and Switzerland are funded through insurance contracts, which have historically provided guaranteed interest credit.

The fair value of these contracts is derived from the insurance companies' assessment of the minimum value of the benefits provided by the insurance contracts.

The methodology used to value these plan assets has always assumed that the value of the plan assets equals the guaranteed insured benefits.

For consistency, the same discount rate used in the valuation of the benefit obligations is used to place a value on the plan assets.

The assets are assumed to grow each year in line with the discount rate, and therefore, the expected return on the assets is set equal to the discount rate.

The fair value of the combined plan assets was $1.8 million at December 31, 2019 and $3.8 million at December 31, 2018.

The Company classifies the fair value of these plan assets as Level 2 in the fair value hierarchy as discussed in Note 5 .

The fair value of the plan assets in Switzerland was $ 1.6 million at December 31, 2020 and $ 1.2 million at December 31, 2019.

Due to the plan amendment in 2020 that changed the benefit structure of the Netherlands plan, the Company no longer has any obligation related to this plan beyond the payment of insurance premiums.

Therefore, there is no projected benefit obligation and no plan assets in the Netherlands as of December 31, 2020.

Plan assets for the Netherlands plan totaled $ 0.6 million at December 31, 2019.

The Company classifies the fair value of its plan assets as Level 2 in the fair value hierarchy as discussed in Note 6.

During the years ended December 31, 2020, 2019 and 2018, employees in the Netherlands and Switzerland made contributions to the respective pension plans aggregating $ 21,000 , $ 24,000 and $ 5,000 , respectively.

During the period from the Merger Date to December 31, 2017, employees in the Netherlands and Switzerland made contributions to the respective plans aggregating $5,000 .

Employee contributions to these plans are based on a fixed 5 % of the relevant pensionable earnings.

The Company funds these plans by contributing at least the minimum amount required by applicable regulations and as recommended by an independent actuary.

During the years ended December 31, 2019 and 2018, the Company contributed $139,000 and $292,000 , respectively, to its pension plans.

During the period from the Merger Date to December 31, 2017, the Company contributed $22,000 to its pension plans.

The Company expects to contribute $0.2 million to its pension plans in 2020.

During the years ended December 31, 2020, 2019 and 2018, the Company contributed $ 0.8 million, $ 0.1 million and $ 0.3 million, respectively, to its pension plans.

The Company expects to contribute $ 1.2 million to its defined benefit plans in 2021.

(25) INCOME TAXES

The components of loss from continuing operations before income taxes consisted of the following (in thousands):

The components of income (loss) from continuing operations before income taxes consisted of the following (in thousands):

Year ended December 31,

2020 2019 2018

Income (loss) before income taxes:

United States $ 123,817 $ ( 132,887 ) $ ( 52,569 )

The provision (benefit) for income taxes from continuing operations consisted of the following (in thousands):

Foreign ( 30,500 ) 9,994 ( 20,841 )

$ 93,317 $ ( 122,893 ) $ ( 73,410 )

The provision for income taxes from continuing operations consisted of the following (in thousands):

RIBBON COMMUNICATIONS INC.

1 unchanged sentence

Year ended December 31,

2020 2019 2018

Provision (benefit) for income taxes:

Federal $ 677 $ 11 $ 561

State 1,310 128 128

Foreign 7,355 1,744 2,198

Total current 9,342 1,883 2,887

Federal 30,278 9,790 ( 8,481 )

State 195 1,630 ( 1,414 )

Foreign ( 16,117 ) 383 ( 1,477 )

Change in valuation allowance ( 18,972 ) ( 6,504 ) 11,885

Total deferred ( 4,616 ) 5,299 513

Total $ 4,726 $ 7,182 $ 3,400

A reconciliation of the Company's effective tax rate for continuing operations to the statutory federal rate is as follows:

Year ended December 31,

2020 2019 2018

statutory income tax rate 21.0 % 21.0 % 21.0 %

1 unchanged sentence

Foreign income taxes 2.9 ( 1.0 ) ( 5.7 )

Acquisition costs

Foreign deemed dividends ( 2.7 ) ( 0.4 ) ( 3.4 )

Stock-based compensation 1.0 ( 0.7 ) ( 0.3 )

Tax credits ( 2.8 ) 2.8 0.6

Uncertain tax positions 0.5 ( 0.2 ) 1.3

NOL and credit limitations

Valuation allowance ( 20.3 ) ( 0.7 ) ( 16.1 )

Goodwill amortization 0.6 0.4 0.3

Meals and entertainment

Tax reform — ( 0.1 ) —

Goodwill impairment — ( 25.4 ) —

Other permanent adjustments 1.8 ( 1.5 ) ( 1.4 )

Permanent adjustments - foreign exchange 1.8 — ( 0.9 )

Other, net 0.2 0.2 0.1

Effective income tax rate 5.1 % ( 5.8 ) % ( 4.6 ) %

3 unchanged sentences

Net operating loss carryforwards $ 447,101 $ 61,057

Capital loss carryforward 71,182 —

Research and development tax credits 45,031 32,879

Other tax credits 6,400 —

Deferred revenue 3,184 7,868

Accrued expenses 13,557 5,687

Inventory 2,603 4,618

Stock-based compensation 1,668 2,880

Fixed assets 4,613 5,461

Other temporary differences 4,051 2,138

599,390 122,588

Valuation allowance ( 496,439 ) ( 94,980 )

Total deferred tax assets 102,951 27,608

Purchased intangible assets

Intangible assets ( 75,794 ) ( 22,470 )

Mark-to-market investments ( 17,631 ) —

Unremitted foreign income ( 15,717 ) ( 4,827 )

4 unchanged sentences

Deferred income taxes - noncurrent liabilities ( 16,842 ) ( 4,648 )

At December 31, 2019 , the Company had cumulative federal and state net operating losses ("NOLs") of $224.8 million .

The federal NOL carryforwards expire at various dates from 2020 through 2037.

The state NOL carryforwards expire at various dates from 2020 through 2038.

$ ( 6,191 ) $ 311

The largest increases in the year ended December 31, 2020 compared to the year ended December 31, 2019, including net operating loss carryforwards, intangible assets and the valuation allowance were primarily the result of the ECI Acquisition.

The change in mark-to-market securities in the year ended December 31, 2020 was related to the Debentures and Warrants received as sale consideration in connection with the Kandy Sale.

At December 31, 2020, the Company had cumulative net operating losses ("NOLs") in the U.S.

of $ 302.1 million.

The Company, through the ECI Acquisition, also has $ 1.6 billion of Israel NOLs.

NOL carryforwards expire at various dates from 2021 through 2038.

The Israel NOLs do not expire.

The Company also has available federal, state and foreign income tax credit carryforwards of $ 51.4 million that expire at various dates from 2021 through 2039.

Under the provisions of the Internal Revenue Code, the net operating losses and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities.

Under the provisions of the Internal Revenue Code, the net operating losses and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service.

Net operating losses and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership of significant shareholders over a three-year period in excess of 50 %, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as a similar state provision.

2 unchanged sentences

however, the Company does not expect that any of the net operating losses or tax credits related to Edgewater will expire unused.

In connection with the Company's adoption of ASC 606, the Company recorded an adjustment to decrease its deferred tax assets by $2.2 million in 2018.

There was no impact to the Company's consolidated financial statements for this adjustment due to the Company's full valuation allowance against these assets.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as 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 (the Global Intangible Low-taxed Income ("GILTI")) of controlled foreign corporations;

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

As a result of the ECI Acquisition, an additional $ 129.6 million of NOL was acquired related to the ECI U.S.

incurred an ownership change as a result of its acquisition by the

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Notes to Consolidated Financial Statements (Continued)

creating the base erosion anti-abuse tax ("BEAT");

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 ("FDII");

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

The consequences of the Tax Act were reflected in the Company's U.S.

tax provision for the year ended December 31, 2018 and the Company has completed its accounting for the effects of the Tax Act within the measurement period.

The Company did not have any FDII or GILTI adjustments, but recorded a BEAT tax expense of $0.4 million and recorded an adjustment to the provisional amounts recorded at December 31, 2017 related to the Tax Act that decreased the Company's deferred tax assets by $0.2 million .

These adjustments were recorded in the year ended December 31, 2018.

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.

Company and the Company expects that, due to the limitations under Sections 382 and 383, all but approximately $ 8 million of the NOLs related to ECI U.S.

will expire unused.

During 2020 and 2019, the Company performed an analysis to determine if, based on all available evidence, it considered it more likely than not that some portion or all of the recorded deferred tax assets will not be realized in a future period.

As a result of the Company's evaluation, the Company concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to its cumulative losses and other factors.

Accordingly, the Company has maintained a valuation allowance against its domestic deferred tax asset amounting to $71.4 million at December 31, 2019 and $82.4 million at December 31, 2018 .

A similar analysis and conclusion were made with regard to the valuation allowance on the deferred tax assets of the Company's Ireland subsidiary, acquired as part of the acquisition of GENBAND, resulting in a valuation allowance of $9.2 million at December 31, 2019 and $9.5 million at December 31, 2018.

Accordingly, the Company has maintained a valuation allowance against its U.S.

deferred tax asset amounting to $ 73.0 million at December 31, 2020 and $ 71.4 million at December 31, 2019.

A similar analysis and conclusion were made with regard to the valuation allowance on the deferred tax assets of the Company's Ireland subsidiary.

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 resulting in a tax benefit of $ 4.1 million.

The valuation allowance for the capital loss carryforward of $ 8.8 million will remain, since there are no current plans to generate capital gains.

In analyzing the deferred tax assets related to the Company's Canada subsidiaries at such time, the Company concluded that it was more likely than not that the Canadian federal credits would not be realized in a future period.

This resulted in a valuation allowance of $11.0 million .

In addition, because of continued losses, a valuation allowance of $2.7 million was established for the Company's Brazil subsidiary.

The deferred tax assets recognized with no valuation allowance at December 31, 2019 and 2018 relate to foreign subsidiaries where recoverability is concluded to be more likely than not based on the Company's cost plus compensation policy as well as a state credit in the U.S.

This resulted in the Company's maintaining a valuation allowance of $ 12.3 million.

In addition, because of continued losses, a valuation allowance of $ 2.3 million was maintained for the Company's Brazil subsidiary.

The ECI Acquisition resulted in valuation allowances of $ 429.0 million against some of the acquired subsidiaries, comprised of $ 380.0 million related to the ECI Israel subsidiaries, $ 29.8 million related to ECI in the U.S., $ 13.7 million related to ECI Netherlands and $ 5.5 million in the aggregate related to other ECI subsidiaries.

The deferred tax assets recognized with no valuation allowance at December 31, 2020 and 2019 primarily relate to foreign subsidiaries where recoverability is concluded to be more likely than not based on the Company's cost-plus compensation policy, as well as a state credit in the U.S.

A reconciliation of the Company's unrecognized tax benefits is as follows (in thousands):

Year ended December 31,

2020 2019 2018

Unrecognized tax benefits at January 1 $ 2,932 $ 3,461 $ 4,528

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Increases related to prior period tax positions 11,209 — 122

Increases related to business acquisitions

Decreases related to prior period tax positions ( 572 ) ( 821 ) ( 1,263 )

Unrecognized tax benefits at December 31 $ 14,054 $ 2,932 $ 3,461

The Company recorded liabilities for potential penalties and interest of $0.1 million for the year ended December 31, 2019 , $0.1 million for the year ended December 31, 2018 and $0.2 million for the year ended December 31, 2017 .

The Company had cumulative deferred tax liabilities recorded related to interest and penalties of $0.7 million for the year ended December 31, 2019, $0.6 million for the year ended December 31, 2018 and $0.6 million for the year ended December 31, 2017.

Some of the unrecognized tax benefit items are expected to reverse in 2020 due to statute of limitation lapses.

The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes.

The Company had $ 15.3 million, $ 3.6 million and $ 4.1 million of unrecognized tax benefits including penalties and interest at December 31, 2020, 2019 and 2018, respectively.

Of these amounts, $ 13.9 million, $ 2.0 million and $ 1.8 million represent the amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate for the years ended December 31, 2020, 2019 and 2018, respectively.

The Company recorded liabilities for potential penalties and interest of $ 0.5 million, $ 0.1 million and $ 0.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The Company had $ 1.3 million and $ 0.7 million accrued in Other long-term liabilities for penalties and interest at December 31, 2020 and 2019, respectively.

The Company believes that it is reasonably possible that certain tax positions related to its unrecognized tax benefits will be effectively settled within the next twelve months.

The Company and its subsidiaries file income tax returns in the U.S.

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Management believes that an adequate provision has been recorded for any adjustments that may result from tax examinations.

The ECI Acquisition was accounted for as a non-taxable business combination.

federal and state deferred taxes were recorded as part of the business combination based on the differences between the tax basis of the acquired assets and assumed liabilities and their reported amounts for financial reporting purposes.

The Company concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to cumulative losses and other factors.

The Company recorded identifiable intangible assets in Israel as part of the purchase accounting for the acquisition.

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Notes to Consolidated Financial Statements (Continued)

purposes, the future amortization of these identifiable intangible assets will be non-deductible, thereby creating income.

ECI Israel has $ 1.6 billion of NOLs that will be utilizable against the future tax income from these identifiable intangible assets.

The Company is required to determine its ability to use the assets and analyze the valuation allowance previously established.

The Company has determined it is not more likely that some of these net tax assets, mainly in Israel, will be recognized.

As a result, a valuation allowance of $ 429.0 million has been established against ECI's deferred taxes.

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

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Accordingly, Ribbon recorded a stepped up basis in the assets.

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Notes to Consolidated Financial Statements (Continued)

The Edgewater Acquisition was accounted for as a non-taxable business combination.

Edgewater had previously been a single corporate filer for U.S.

tax purposes.

Consequently, U.S.

The Company concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to cumulative losses and other factors.

The Company recorded identifiable intangible assets as part of the purchase accounting for the acquisition.

tax purposes, the future amortization of these intangibles will be non-deductible, thereby creating income.

Since the Company files a consolidated U.S.

tax return, the benefit from these identifiable intangible assets will be utilizable.

The Company is required to determine its ability to use the tax benefit against the valuation allowance previously established.

The Company has determined that it is more likely than not that these benefits will be recognized.

As a result, the valuation allowance has been reduced for the assumed net deferred tax liabilities, resulting in an income tax benefit of $ 0.7 million.

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In 2019, an adjustment of $ 0.2 million was recorded, reducing the income tax benefit from the Edgewater Acquisition to $ 0.5 million.

The 2017 acquisition of GENBAND was accounted for as a non-taxable business combination.

GENBAND had previously been treated as a partnership for U.S.

tax purposes.

Consequently, U.S.

The Company concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to cumulated losses and other factors.

The Company recorded a valuation allowance against the acquired deferred tax assets.

The Company recorded identifiable intangible assets as part of the purchase accounting for the acquisition.

tax purposes, the future amortization of these intangibles will be non-deductible, thereby creating income.

Since the Company files a consolidated U.S.

tax return, the benefit from these identifiable intangible assets will be utilizable.

The Company is required to determine its ability to use the tax benefit against the valuation allowance previously established.

The Company has determined that it is more likely than not that these benefits will be recognized.

As a result, the valuation allowance has been reduced for the assumed net deferred tax liabilities, resulting in an income tax benefit of $16.4 million .

This benefit was included as a component of the Company's provision for income taxes for the year ended December 31, 2017.

(21) MAJOR CUSTOMERS

The following customers contributed 10% or more of the Company's revenue in at least one of the years ended December 31, 2019, 2018 and 2017 :

Year ended December 31,

Verizon Communications Inc.

* Less than 10% of total revenue.

At December 31, 2019 , one customer accounted for 10% or more of the Company's accounts receivable balance, representing approximately 22% of total accounts receivable.

At December 31, 2018 , two customers accounted for 10% or more of the Company's accounts receivable balance, representing approximately 32% in the aggregate of total accounts receivable.

The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable.

The Company maintains an allowance for doubtful accounts and such losses have been within management's expectations.

(26) RELATED PARTIES

As a portion of the consideration for the Merger, on October 27, 2017, the Company issued a promissory note for $22.5 million to certain of GENBAND's equity holders who, following the Merger, owned greater than five percent of the Company's outstanding shares.

As a portion of the consideration for the GENBAND Merger, on October 27, 2017, the Company issued a promissory note for $ 22.5 million to certain of GENBAND's equity holders who, following the GENBAND Merger, owned greater than five percent of the Company's outstanding shares.

As described in Note 14 above, 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

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Notes to Consolidated Financial Statements (Continued)

a rate of 7.5% per year for the first six months after issuance, and thereafter at a rate of 10% per year.

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.

The failure to make any payment under the promissory note when due and, with respect to payment of any interest, the continuation of such failure for a period of thirty days thereafter, constituted an event of default under the promissory note.

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(27) COMMITMENTS AND CONTINGENCIES

Litigation Settlement

As previously disclosed, the Company was involved in six lawsuits (together, the "Lawsuits") with Metaswitch Networks Ltd., Metaswitch Networks Corp.

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The Company and Metaswitch signed a Settlement and Cross-License Agreement on May 29, 2019 (the "Royalty Agreement").

Pursuant to the terms of the Royalty Agreement, Metaswitch has agreed to pay the Company an aggregate amount of $63.0 million , which includes cash payments of $37.5 million during the second quarter of 2019 and $25.5 million payable in three installments annually, beginning June 26, 2020, with such installment payments accruing interest at a rate of 4% per year.

Pursuant to the terms of the Royalty Agreement, Metaswitch agreed to pay the Company an aggregate amount of $ 63.0 million, which included cash payments of $ 37.5 million during the second quarter of 2019 and $ 25.5 million payable in three installments annually, beginning June 26, 2020, with such installment payments accruing interest at a rate of 4 % per year.

As part of the Royalty Agreement, the Company and Metaswitch (i) have released the other from all claims and liabilities;

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and (iii) have requested the applicable courts to dismiss the Lawsuits.

The Company 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 the consolidated balance sheet at December 31, 2019.

This activity is included in cash flows from operating activities in the consolidated statement of cash flows for the year ended December 31, 2019.

The gain from the settlement of $63.0 million is included in Other income (expense), net, in the Company's consolidated statement of operations for the year ended December 31, 2019.

The $ 63.0 million gain from the settlement is included in Other income (expense), net, in the Company's consolidated statement of operations for the year ended December 31, 2019, and had 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 the consolidated balance sheet.

The Company 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.

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Notes to Consolidated Financial Statements (Continued)

On July 6, 2020, the Company 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.

The Company recorded the reduction to the outstanding principal as a reduction to interest income.

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

Contingencies

Liabilities for Royalty Payments to the IIA

Prior to the ECI Acquisition, ECI had received research and development grants from the IIA.

The Company assumed ECI's contract with the IIA, which requires the Company to pay royalties to the IIA on proceeds from the sale of products which the Israeli government has supported by way of research and development grants.

The royalties for grants prior to 2017 were calculated at the rates of 1.3 % to 5.0 % of the aggregated proceeds from the sale of such products developed at certain of the Company's R&D centers, up to an amount not exceeding 100 % of such grants plus interest at LIBOR.

Effective for grants approved in 2017 and thereafter, interest was calculated at the higher of LIBOR plus 1.5 % to 2.75 %.

At December 31, 2020, the Company's maximum possible future royalties commitment, including $ 6.1 million of unpaid royalties accrued at December 31, 2020, was $ 44.0 million, including interest of $ 2.0 million, based on estimates of future product sales, grants received from the IIA and not yet repaid, and management's estimation of products still to be sold.

On November 8, 2018, Ron Miller, a purported stockholder of the Company, filed a Class Action Complaint (the "Miller Complaint") in the United States District Court for the District of Massachusetts (the "Massachusetts District Court") against the Company and three of its former officers (collectively, the "Defendants"), claiming to represent a class of purchasers of Sonus common stock during the period from January 8, 2015 through March 24, 2015 and alleging violations of the federal securities laws.

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There was an oral argument on the motion to dismiss on February 12, 2020.

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Notes to Consolidated Financial Statements (Continued)

In addition, the Company is often a party to disputes and legal proceedings that it considers routine and incidental to its business.

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In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited consolidated quarterly results when read in conjunction with the Company's audited consolidated financial statements and related notes.

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Notes to Consolidated Financial Statements (Continued)

Quarter (1) Second

Quarter Third

Quarter Fourth

(In thousands, except per share data)

Year ended December 31, 2020

Revenue $ 157,982 $ 210,493 $ 231,118 $ 244,202

Cost of revenue (3) 67,458 87,226 96,164 99,840

Gross profit (3) $ 90,524 $ 123,267 $ 134,954 $ 144,362

(Loss) income from operations $ ( 28,740 ) $ 1,592 $ 11,917 $ 16,900

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(Loss) earnings per share (4):

Basic $ ( 0.27 ) $ ( 0.06 ) $ 0.04 $ 0.85

Diluted $ ( 0.27 ) $ ( 0.06 ) $ 0.04 $ 0.81

Shares used in computing (loss) earnings per share:

Basic 120,992 144,483 144,948 145,311

Diluted 120,992 144,483 151,680 153,441

Quarter (2) Second

Quarter Third

Quarter (2) Fourth

(In thousands, except per share data)

Year ended December 31, 2019

Revenue $ 118,928 $ 145,421 $ 137,653 $ 161,109

Cost of revenue (3) 52,694 54,656 49,254 51,850

Gross profit (3) $ 66,234 $ 90,765 $ 88,399 $ 109,259

Loss (income) from operations $ ( 36,228 ) $ ( 7,096 ) $ 2,686 $ ( 148,822 )

Loss per share (3):

Shares used in computing loss per share:

Net (loss) income $ ( 30,832 ) $ 49,470 $ 1,650 $ ( 150,363 )

Loss (earnings) per share (4):

Basic $ ( 0.29 ) $ 0.45 $ 0.01 $ ( 1.36 )

Diluted $ ( 0.29 ) $ 0.45 $ 0.01 $ ( 1.36 )

Shares used in computing loss (earnings) per share:

Basic 108,167 110,394 110,080 110,269

Diluted 108,167 110,698 110,756 110,269

__________________________________

(1) Includes the results of ECI for the period subsequent to March 3, 2020.

(2) Includes the results of Anova for the period subsequent to February 28.

Includes the results of Edgewater for the period subsequent to August 3, 2018.

(3) Reflects the reductions to Cost of revenue arising from the reclassification of amortization of acquired intangible assets to operating expenses in 2020 of $ 9.0 million in the first quarter, $ 11.0 million in the second quarter and $ 11.6 million in the third quarter;

and in 2019 of $ 9.7 million in the first quarter, $ 10.1 million in the second quarter, $ 9.5 million in the third quarter and $ 8.3 million in the fourth quarter.

(4) (Loss) earnings per share is calculated independently for each of the quarters presented;

accordingly, the sum of the

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

quarterly (loss) earnings per share amounts may not equal the total calculated for the year.

accordingly, the sum of the quarterly (loss) earnings per share amounts may not equal the total calculated for the year.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data