Ribbon Communications Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm 58 Consolidated Balance Sheets as of December 31, 2020 and 2019 61 Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 62 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018 63 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2020, 2019 and 2018 64 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 65 Notes to Consolidated Financial Statements 67 57 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Ribbon Communications Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Ribbon Communications Inc. 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. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle 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 These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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. 58 Table of Contents 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. 59 Table of Contents • 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 Dallas, Texas February 26, 2021 We have served as the Company's auditor since 2005. 60 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2020 December 31, 2019 Assets Current assets: Cash and cash equivalents $ 128,428 $ 44,643 Restricted cash 7,269 — Accounts receivable, net 237,738 192,706 Inventory 45,750 14,800 Other current assets 28,461 27,146 Total current assets 447,646 279,295 Property and equipment, net 48,888 28,976 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 term debt $ 15,531 $ 2,500 Revolving credit facility — 8,000 Accounts payable 63,387 31,412 Accrued expenses and other 134,865 56,700 Operating lease liabilities 17,023 7,719 Deferred revenue 96,824 100,406 Total current liabilities 327,630 206,737 Long-term debt, net of current 369,035 45,995 Operating lease liabilities, net of current 72,614 37,202 Deferred revenue, net of current 26,010 20,482 Deferred income taxes 16,842 4,648 Other long-term liabilities 48,281 16,589 Total liabilities 860,412 331,653 Commitments and contingencies (Note 27) Stockholders' equity: Preferred stock, $ 0.01 par value; 10,000,000 shares authorized; none issued and outstanding — — Common stock, 240,000,000 shares authorized, $ 0.0001 par value, 145,425,248 shares issued and outstanding at December 31, 2020; 110,471,995 shares issued and outstanding at December 31, 2019 15 11 Additional paid-in capital 1,870,256 1,747,784 Accumulated deficit ( 1,178,476 ) ( 1,267,067 ) 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. 61 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Statements of Operations (in thousands, except per share data) Year ended December 31, 2020 2019 2018 Revenue: 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: Research and development 194,525 141,060 145,462 Sales and marketing 139,318 106,310 117,529 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-, 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 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 ) 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. 62 Table of Contents RIBBON COMMUNICATIONS INC. 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 Unrealized gain on available-for-sale marketable securities, net of reclassification adjustments for realized amounts — 590 45 Employee retirement benefits 2,585 ( 1,960 ) 369 Other comprehensive (loss) income, net of tax ( 7,469 ) ( 1,176 ) 634 Comprehensive income (loss), net of tax $ 81,122 $ ( 131,251 ) $ ( 76,176 ) See notes to the consolidated financial statements. 63 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Statements of Stockholders' Equity (in thousands, except share data) Common stock 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 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 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 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. 747 747 Stock-based compensation expense 10,013 10,013 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 Issuance of common stock in connection with employee stock purchase plan 282,646 863 863 Exercise of stock options 127,334 235 235 Vesting of restricted stock awards and units 1,504,707 — Vesting of performance-based stock units 9,466 — 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 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 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 Exercise of stock options 38,288 70 70 Vesting of restricted stock awards and units 2,246,690 1 1 Vesting of performance-based stock units 323,752 — 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. 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 See notes to the consolidated financial statements. 64 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Statements of Cash Flows (in thousands) Year ended December 31, 2020 2019 2018 Cash flows from 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 goodwill — 164,300 — Deferred income taxes ( 4,616 ) 5,299 513 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 Accounts payable ( 49,561 ) ( 16,282 ) ( 6,057 ) Accrued expenses and other long-term liabilities 20,629 ( 18,538 ) ( 13,422 ) Deferred revenue ( 5,955 ) ( 2,111 ) 16,563 Net cash provided by (used in) operating activities 101,564 55,685 ( 9,595 ) Cash flows from investing activities: Purchases of property and equipment ( 26,721 ) ( 10,824 ) ( 7,907 ) Business acquisitions, net of cash acquired ( 346,852 ) — ( 46,389 ) Sales/maturities of marketable securities — 7,295 18,919 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: Borrowings under revolving line of credit 615 117,000 197,500 Principal payments on revolving line of credit ( 8,615 ) ( 164,000 ) ( 162,500 ) Proceeds from issuance of long-term debt 478,500 50,000 — Principal payment of debt, related party — ( 24,716 ) — Principal payments of term debt ( 134,188 ) ( 1,250 ) — Payment of deferred purchase consideration — ( 21,876 ) — Principal payments of finance leases ( 1,258 ) ( 913 ) ( 652 ) Payment of debt issuance costs ( 14,147 ) ( 891 ) ( 624 ) Proceeds from the sale of common stock in connection with employee stock purchase plan — 863 — Proceeds from the exercise of stock options 70 235 73 65 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Statements of Cash Flows (continued) (in thousands) 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 ) Net increase (decrease) in cash and cash equivalents 91,054 949 ( 13,379 ) Cash and cash equivalents, beginning of year 44,643 43,694 57,073 Cash, cash equivalents and restricted cash, end of year $ 135,697 $ 44,643 $ 43,694 Supplemental disclosure of cash flow information: Interest paid $ 15,546 $ 4,072 $ 2,367 Income taxes paid $ 9,293 $ 4,665 $ 5,505 Income tax refunds received $ 1,163 $ 1,757 $ 537 Supplemental disclosure of non-cash investing activities: Capital expenditures incurred, but not yet paid $ 3,749 $ 2,566 $ 1,127 Property and equipment acquired under finance leases $ — $ 1,442 $ 2,178 Business acquisition purchase consideration - common stock issued $ 108,550 $ 15,186 $ 30,000 Business acquisition purchase consideration - deferred payments $ 1,630 $ 1,700 $ 30,000 Business acquisition purchase consideration - assumed equity awards $ — $ — $ 747 Supplemental disclosure of non-cash financing activities: Total fair value of restricted stock awards, restricted stock units, performance-based stock awards and performance-based stock units on date vested $ 7,927 $ 7,422 $ 8,312 See notes to the consolidated financial statements. 66 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (1) NATURE OF THE BUSINESS Ribbon Communications Inc. ("Ribbon" or the "Company") is a leading global provider of communications technology to service providers and enterprises. The Company provides a broad range of software and high-performance hardware products, 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 Basis of Presentation 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. ("Anova"). The financial results of Anova are included in the Company's consolidated financial statements for the period subsequent to the Anova Acquisition Date. On August 3, 2018 (the "Edgewater Acquisition Date"), the Company completed the acquisition of Edgewater Networks, Inc. ("Edgewater" and such acquisition, the "Edgewater Acquisition"). The financial results of Edgewater are included in the Company's consolidated financial statements for the period subsequent to the Edgewater Acquisition Date. Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Ribbon and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates and Judgments 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 67 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) estimates. Reclassifications 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 The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired in the business combination that are not individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. 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. 68 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Revenue Recognition The Company derives revenue from two primary sources: products and services. Product revenue includes the Company's hardware and software that function together to deliver the products' essential functionality. Software and hardware are also sold on a standalone basis. Services include customer support (software updates, upgrades and technical support), consulting, design services, installation services and training. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct. When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services when they are sold separately to similar customers in order to estimate standalone selling price. The Company's software licenses typically provide a perpetual right to use the Company's software. The Company also sells term-based software licenses that expire and Software-as-a-Service ("SaaS")-based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software and hardware are delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. Product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. The Company begins to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period. The Company offers warranties on its products. Certain of the Company's warranties are considered to be assurance-type in nature, ensuring the product is functioning as intended. Assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations. The Company does not allow and has no history of accepting product returns. Services revenue includes revenue from customer support and other professional services. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. The Company sells its customer support contracts at a percentage of list or net product price. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year . The Company's professional services include consulting, technical support, resident engineer services, design services and installation services. Because control transfers over time, revenue is recognized based on progress toward completion of the performance obligation. The method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the input method to measure progress for its contracts because it believes such method best depicts the transfer of assets to the customer, which occurs as the Company incurs costs for the contracts. However, in some instances, the Company uses the output method because it best depicts the transfer of asset to the customer. Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. When the measure of progress is based upon expended labor, progress toward completion is measured as the ratio of labor time expended to date versus the total estimated labor time required to complete the performance obligation. Revenue is recorded proportionally as costs are incurred or as labor is expended. Costs to fulfill these obligations include internal labor as well as subcontractor costs. Customer training includes courses offered by the Company. The related revenue is typically recognized as the training services are performed. 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 69 Table of Contents 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 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. Declines in fair value determined to be credit-related are charged to earnings. 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. 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 For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Accumulated other comprehensive income. For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Other income (expense), net. 70 Table of Contents 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. 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. Inventory Inventory is recorded at the lower of cost or market value using the first-in, first-out convention. 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 (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 Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from two to five years . Leasehold improvements are amortized over the lesser of the lease term or five years . When an asset is sold or retired, the cost and related accumulated depreciation or amortization are eliminated, and the resulting gain or loss, if any, is recognized in income (loss) from operations in the consolidated statement of operations. The Company reviews property and equipment for impairment in the same manner as intangible assets discussed below. Software development costs associated with internal use software are incurred in three stages of development: the preliminary project stage, the application development stage and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property and equipment. 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. 71 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Intangible Assets and Goodwill 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. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the Company will recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the 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. Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. 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. 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 The Company's stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of the awards that will be forfeited. The Company uses the Black-Scholes valuation model for estimating the fair value on the date of grant of stock options. The fair value of stock option awards is affected by the Company's stock price as well as valuation assumptions, including the volatility of Ribbon's stock price, expected term of the option, risk-free interest rate and expected dividends. The Company may grant performance-based stock units ("PSUs") that include a market condition to certain of its executives. The Company uses 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. These results are then used to calculate the grant date fair values of the PSUs. 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. 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. 72 Table of Contents 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. 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. Advertising Costs Advertising costs are expensed as incurred and included as a component of Sales and marketing expense in the Company's consolidated statements of operations. 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. Loss Contingencies and Reserves Ribbon is subject to ongoing business risks arising in the ordinary course of business, including legal claims, that affect the estimation process of the carrying value of assets, the recording of liabilities and the possibility of various loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. Ribbon regularly evaluates current information available to determine whether such amounts should be adjusted and records changes in estimates in the period they become known. An allowance for doubtful accounts is estimated based on the Company's assessment of the collectability of specific customer accounts. Ribbon accrues for royalties for technology that it licenses from vendors based on established royalty rates and usage. Ribbon is periodically contacted by third parties who claim that Ribbon's products infringe on certain intellectual property of a third party. Ribbon evaluates these claims and accrues amounts when it is probable that the obligation has been incurred and the amounts are reasonably estimable. Warranty 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 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 73 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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, 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. If it is not more likely than not that a position will be sustained, no amount of the benefit attributable to the position is recognized. The tax benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50 % likely of being realized upon resolution of the contingency. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. Defined Benefit Plans The Company has defined benefit plans for some of its employees at various international locations. The Company recognizes retirement benefit assets or liabilities in the consolidated balance sheets reflecting the funded status of pension and other retirement benefit plans. Retirement benefit assets and liabilities are adjusted for the difference between the benefit obligations and the plan assets at fair value (measured at year-end), with the offset recorded directly to stockholders' equity through accumulated other comprehensive income (loss), net of tax. The amount recorded in stockholders' equity represents the after-tax unamortized actuarial gains or losses, unamortized transition obligations and unamortized prior service costs. Recent Accounting Pronouncements 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 74 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) exception in Accounting Standards Codification ("ASC") 820 to nonfinancial items, disclosures for depository and lending institutions, cross reference to guidance in ASC 470-50 on line of credit or revolving debt arrangements, cross reference to net asset value practical expedient in ASC 820-10, interaction between ASC 842 and ASC 326 and between ASC 326 and ASC 860-20. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which provides guidance on implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. ASU 2018-15 amends ASC 350, Intangibles - Goodwill and Other (“ASC 350”) to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply the guidance in ASC 350-40 to determine which implementation costs should be capitalized in such a CCA. 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. 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. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which adds an impairment model that is based on expected losses rather than incurred losses. Under ASU 2016-13, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. In April and May 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ("ASU 2019-04") and ASU 2019-05 Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief ("ASU 2019-05"), respectively. 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. 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 ECI 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 75 Table of Contents 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): 76 Table of Contents 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 ) $ 455,402 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 77 Table of Contents 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, 2020 2019 (unaudited) Revenue $ 869,002 $ 944,915 Net income (loss) $ 97,036 $ ( 250,337 ) Diluted earnings (loss) per share $ 0.65 $ ( 1.76 ) Anova Data, Inc. On the Anova Acquisition Date, the Company acquired the business and technology assets of Anova, a private company headquartered in Westford, Massachusetts that provides advanced analytics solutions (the "Anova Acquisition"). 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 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. The results for the year ended December 31, 2019 are not significant to the Company's consolidated financial statements. The Company has not provided pro forma financial information, as the historical amounts are not significant to the Company's consolidated financial statements. As of December 31, 2019, the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities was final. The finalization of this valuation resulted in a refinement of the allocation of purchase price between the identifiable intangible assets arising from the transaction, resulting in a $ 2.0 million reduction to the customer relationships intangible asset and an increase of $ 2.0 million to the developed technology intangible asset. The purchase consideration aggregating $ 16.9 million has been allocated to $ 11.2 million of identifiable intangible assets, comprised of $ 5.2 million of customer relationships and $ 6.0 million of developed technology, and working capital items aggregating $ 0.2 million of net assets acquired. The remaining unallocated amount of $ 5.5 million has been recorded as goodwill. 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 intangible assets relating to developed technology and customer relationships. 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 in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 6.25 years (see Note 10). The excess of purchase consideration over net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill is deductible for tax purposes. Edgewater Networks, Inc. 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 78 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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 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. 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): Fair value of consideration transferred: Cash consideration: Cash paid to Edgewater Selling Stakeholders $ 51,162 Less cash acquired ( 4,773 ) Net cash consideration 46,389 Unpaid cash consideration 30,000 Fair value of Ribbon stock issued 30,000 Fair value of equity awards assumed (see Note 21) 747 Fair value of total consideration $ 107,136 Fair value of assets acquired and liabilities assumed: Current assets, net of cash acquired $ 16,098 Property and equipment 245 Intangible assets: Developed technology 29,500 Customer relationships 26,100 Trade names 1,100 Goodwill 48,053 Other noncurrent assets 103 Deferred revenue ( 2,749 ) Other current liabilities ( 9,926 ) Deferred revenue, net of current ( 669 ) Other long-term liabilities ( 719 ) $ 107,136 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 79 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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 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). Goodwill resulting from the transaction is primarily due to expected synergies between the combined companies and is not deductible for tax purposes. The Company's revenue for the year ended December 31, 2018 included $ 21.5 million of revenue and $ 4.3 million of net loss attributable to Edgewater since the Edgewater Acquisition Date. The Company has not provided pro forma financial information, as the historical amounts are not significant to the Company's consolidated financial statements. 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, 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 80 Table of Contents 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. 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 block of financial instruments. 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. 81 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (5) EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. For periods in which the Company reports net income, diluted net 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 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 Potential dilutive common shares 5,683 — — Weighted average shares outstanding—diluted 144,650 109,734 103,916 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. 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, 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. 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 between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows: 82 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Level 1. Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Level 2. Level 2 applies to assets or liabilities for which there are inputs that are directly or indirectly observable in the marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets). Level 3. Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. 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. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. The Company is ultimately responsible for the consolidated financial statements and underlying estimates. Accordingly, the Company assesses the reasonableness of the valuations provided by the third-party pricing services by reviewing actual trade data, broker/dealer quotes and other similar data, which are obtained from quoted market prices or other sources. (7) ACCOUNTS RECEIVABLE, NET Accounts receivable, net, consisted of the following (in thousands): December 31, 2020 2019 Accounts receivable $ 238,514 $ 193,619 Allowance for doubtful accounts ( 776 ) ( 913 ) 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 beginning of year Charges to expense Charges (credits) to other accounts Write-offs Balance at end of year 2020 $ 913 $ 686 $ 94 $ ( 917 ) $ 776 2019 $ 669 $ 738 $ 68 $ ( 562 ) $ 913 2018 $ 73 $ 351 $ 620 $ ( 375 ) $ 669 83 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (8) INVENTORY Inventory consisted of the following (in thousands): December 31, 2020 2019 On-hand final assemblies and finished goods inventories $ 46,921 $ 13,283 Deferred cost of goods sold 1,165 2,441 48,086 15,724 Less noncurrent portion (included in Other assets) ( 2,336 ) ( 924 ) Current portion $ 45,750 $ 14,800 (9) PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): December 31, 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 3,092 1,283 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 ) Property and equipment, net $ 48,888 $ 28,976 The Company recorded depreciation and amortization expense related to property and equipment of $ 17.2 million for the year ended December 31, 2020, $ 11.9 million for the year ended December 31, 2019 and $ 11.2 million for the year ended December 31, 2018. During each of the years ended December 31, 2020, 2019 and 2018, the Company disposed of certain property and equipment that was fully depreciated at the time of disposal, which resulted in reductions in both Cost and Accumulated depreciation. Property and equipment under finance leases included in the amounts above were as follows (in thousands): December 31, 2020 2019 Cost $ 2,908 $ 4,401 Less accumulated depreciation ( 1,925 ) ( 1,981 ) Property and equipment under finance leases, net $ 983 $ 2,420 The net book values of the Company's property and equipment by geographic area were as follows (in thousands): December 31, 2020 2019 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 84 Table of Contents 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, 2020 Weighted average amortization period (years) Cost Accumulated amortization Net carrying value In-process research and development * $ 34,000 $ — $ 34,000 Developed technology 7.93 306,380 143,050 163,330 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 — 9.17 $ 614,250 $ 196,894 $ 417,356 December 31, 2019 Weighted average amortization period (years) Cost Accumulated amortization Net carrying value In-process research and development * $ 5,600 $ — $ 5,600 Developed technology 6.79 188,880 100,760 88,120 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 — 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 2022 60,104 2023 52,256 2024 44,048 2025 37,027 Thereafter 157,295 $ 417,356 Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. 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 85 Table of Contents 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. 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. 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): Cloud and Edge IP Optical Networks Total Balance at December 31, 2018 (1) $ 383,655 $ — $ 383,655 Acquisition of Anova 5,541 — 5,541 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 86 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (11) ACCRUED EXPENSES AND OTHER Accrued expenses and other consisted of the following (in thousands): December 31, 2020 2019 Employee compensation and related costs $ 66,039 $ 27,166 Professional fees 11,451 13,331 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 beginning of year Assumed liability in connection with ECI Acquisition Provision Settlements Balance at end of year 2020 $ — $ 16,251 $ 4,687 $ ( 6,083 ) $ 14,855 (13) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES The Company recorded restructuring and related expense aggregating $ 16.2 million in the year ended December 31, 2020, $ 16.4 million in the year ended December 31, 2019 and $ 17.0 million in the year ended December 31, 2018. Restructuring and related expense includes restructuring expense (primarily severance and related costs), estimated future variable lease costs for vacated properties with no intent or ability of sublease, and accelerated rent amortization expense. For restructuring events that involve lease assets and liabilities, the Company applies lease reassessment and modification guidance and evaluates the right-of-use assets for potential impairment. If the Company plans to exit all or distinct portions of a facility and does not have the ability or intent to sublease, the Company will accelerate the amortization of each of those lease components through the vacate date. The accelerated amortization is recorded as a component of Restructuring and related expense in the Company's consolidated statements of operations. Related variable lease expenses will continue to be expensed as incurred through the vacate date, at which time the Company will reassess the liability balance to ensure it appropriately reflects the remaining liability associated with the premises and record a liability for the estimated future variable lease costs. Accelerated amortization of lease assets is recognized from the date that the Company commences the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date. 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): 87 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2020 2019 Severance and related costs $ 12,025 $ 11,179 Variable and other facilities-related costs 3,605 1,528 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 year ended December 31, 2018 were as follows (in thousands): Severance and related costs 15,217 Facilities 1,798 $ 17,015 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): Balance at January 1, 2020 Initiatives charged to expense Transfer to operating lease liability accounts Cash payments Balance at December 31, 2020 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 In June 2019, the Company implemented a restructuring plan to further streamline the Company's global footprint, improve its operations and enhance its customer delivery (the "2019 Restructuring Initiative"). The 2019 Restructuring Initiative includes facility consolidations, refinement of the Company's research and development activities, and a reduction in workforce. 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 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 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 88 Table of Contents 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. 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 January 1, 2020 Initiatives charged to expense Transfer to operating lease liability accounts Cash payments Balance at December 31, 2020 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 January 1, 2019 Initiatives charged to 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 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 employees and $ 1.4 million for redundant facilities in the Czech Republic, Canada and the U.S. 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 January 1, 2020 Adjustments for changes in estimate Cash payments Balance at December 31, 2020 Severance $ 409 $ ( 58 ) $ ( 351 ) $ — Year ended December 31, 2019 Balance at January 1, 2019 Initiatives charged to expense Adjustment for the impact of ASC 842 adoption Cash payments Balance at December 31, 2019 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 89 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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 January 1, 2019 Adjustment for the impact of ASC 842 adoption Balance at December 31, 2019 Facilities $ 117 $ ( 117 ) $ — 2016 Restructuring Initiative In July 2016, the Company announced a program (the "2016 Restructuring Initiative") to further accelerate its investment in new technologies to address the communications industry's migration to a cloud-based architecture and to support the Company's strategic initiatives, such as new products and an expanded go-to-market footprint in selected geographies and discrete vertical markets. 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. 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 January 1, 2019 Cash payments Balance at December 31, 2019 Facilities $ 58 $ ( 58 ) $ — Balance Sheet Classification 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. (14) DEBT 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. domestic subsidiary of the Company (collectively, the "Guarantors"). The 2018 Credit Facility was secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including the Company. The 2018 Credit Facility required periodic interest payments on outstanding borrowings until maturity. 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. 90 Table of Contents 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”). The Applicable Margin varied depending on the Company’s consolidated leverage ratio (as defined in the 2018 Credit Facility). The base rate and the LIBOR rate were each subject to a zero percent floor. The Borrower was charged a commitment fee ranging from 0.25 % to 0.40 % per year on the daily amount of the unused portions of the commitments under the 2018 Credit Facility. Additionally, with respect to all letters of credit outstanding under the 2018 Credit Facility, the Borrower was charged a fronting fee of 0.125 % per year and an outstanding letter of credit fee equal to the Applicable Margin for base rate loans ranging from 1.50 % to 2.00 % times the amount of the outstanding letters of credit. The 2018 Credit Facility required compliance with certain financial covenants, including a minimum consolidated quick ratio, minimum consolidated interest coverage ratio and maximum consolidated leverage ratio, all of which were defined in the 2018 Credit Facility and tested on a quarterly basis. 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 business and amending or making prepayments on certain junior debt. The 2018 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 2018 Credit Facility would immediately become due and payable. If any other event of default existed under the 2018 Credit Facility, the lenders could accelerate the maturity of the obligations outstanding under the 2018 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 2018 Credit Facility, the lenders could commence foreclosure or other actions against the collateral. 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. 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 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 was secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including the Company. 91 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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; granting or assuming liens; making acquisitions or engaging in mergers; making dividend and certain other restricted payments; making investments; selling or otherwise transferring assets; engaging in transactions with affiliates; entering into sale and leaseback transactions; entering into burdensome agreements; changing the nature of its business; modifying its organizational documents; 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 92 Table of Contents 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 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. 93 Table of Contents 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 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. Interest that was not paid on the interest payment date would increase the principal amount of the Promissory Note. 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. 94 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (15) OTHER LONG-TERM LIABILITIES Other long-term liabilities consisted of the following (in thousands): December 31, 2020 2019 Finance lease obligations $ 1,469 $ 3,149 Restructuring 7,432 3,510 Pension obligations 11,132 9,954 Taxes payable 13,835 1,991 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. 95 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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 $ ( 10,948 ) 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). 96 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (17) REVENUE RECOGNITION The Company's typical performance obligations include the following: 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 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 Professional Services 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 The Company's contracts with customers often include promises to transfer multiple products and services to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company typically has more than one standalone selling price ("SSP") for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the SSP. Deferred Revenue Deferred revenue is a contract liability representing amounts collected from or invoiced to customers in excess of revenue recognized. This results primarily from the billing of annual customer support agreements where the revenue is recognized over the term of the agreement. The value of deferred revenue will increase or decrease based on the timing of invoices and recognition of revenue. Disaggregation of Revenue The Company disaggregates its revenue from contracts with customers based on the nature of the products and services and the geographic regions in which each customer is domiciled. The Company's total revenue for the years ended December 31, 2020, 2019 and 2018 was disaggregated geographically as follows: 97 Table of Contents 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 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 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 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): 98 Table of Contents 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 Maintenance 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 The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, which are contract assets, and customer advances and deposits, which are contract liabilities, in the Company's consolidated balance sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Completion of services and billing may occur subsequent to revenue recognition, resulting in contract assets. The Company may receive advances or deposits from its customers before revenue is recognized, resulting in contract liabilities which are classified as deferred revenue. These assets and liabilities are reported in the Company's consolidated balance sheets on a contract-by-contract basis as of the end of each reporting period. Changes in the contract asset and liability balances during the years ended December 31, 2020 and 2019 were not materially impacted by any factors other than billing and revenue recognition. Nearly all of the Company's deferred revenue balance is related to services revenue, primarily customer support contracts. Unbilled receivables stem primarily from engagements where services have been performed; however, billing cannot occur until services are completed. In some arrangements, the Company allows customers to pay for term-based software licenses and products over the term of the software license. The Company also sells SaaS-based software under subscription arrangements, with payment terms over the term of the SaaS agreement. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables that are anticipated to be invoiced in the next twelve months are included in Accounts receivable on the Company's consolidated balance sheets. 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): 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 Increase (decrease), net 10,829 34,203 ( 3,582 ) 5,528 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) Balance at January 1, 2019 $ 174,310 $ 13,543 $ 105,087 $ 17,572 Increase (decrease), net ( 5,808 ) 10,661 ( 4,681 ) 2,910 Balance at December 31, 2019 $ 168,502 $ 24,204 $ 100,406 $ 20,482 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 99 Table of Contents 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. All freight-related customer invoicing is recorded as revenue, while the shipping and handling costs that occur after control of the promised goods or services transfer to the customer are reported as fulfillment costs, a component of Cost of revenue - product in the Company's consolidated statements of operations. Deferred Commissions Cost Sales commissions earned by the Company's employees are considered incremental and recoverable costs of obtaining a contract with a customer. Under ASC 605, the costs associated with obtaining a customer contract were expensed in the period the revenue was earned. Under ASC 606, these payments have been deferred on our consolidated balance sheet and are being amortized over the expected life of the customer contract, which is five years . At December 31, 2020 and 2019, the Company had $ 4.1 million and $ 3.6 million, respectively, of deferred sales commissions capitalized. (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. 100 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) GAAP. 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 101 Table of Contents 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 % AT&T Inc. * 12 % * * 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 In the second quarter of 2019, the Company's Board of Directors (the "Board") approved a stock repurchase program (the "Repurchase Program") pursuant to which the Company may repurchase up to $ 75 million of its common stock prior to April 18, 2021. 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. 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. (21) STOCK-BASED COMPENSATION PLANS 2019 Stock Incentive Plan At the Company's annual meeting of stockholders held on June 5, 2019, the Company's stockholders approved the Ribbon Communications Inc. Incentive Award Plan (the "2019 Plan"). The 2019 Plan had previously been approved by the Board, subject to stockholder approval. 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. Awards can be granted under the 2019 Plan to the Company's employees, officers and non-employee directors, as well as consultants and advisors of the Company and its subsidiaries. At December 31, 2020, there were 8.9 million shares available for future issuance under the 2019 Plan. 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. On and 102 Table of Contents 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, 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 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 (the "2012 Plan"). In December 2014, all of the unissued shares under the 2012 Plan were transferred to the 2007 Plan. Any outstanding awards under the 2012 Plan that in the future expire, terminate, are canceled, surrendered or forfeited, or are repurchased by the Company will be returned to the 2019 Plan. Accordingly, at December 31, 2020 there were no shares available for future issuance under the 2012 Plan. 2008 Stock Incentive Plan In connection with the acquisition of Network Equipment Technologies, Inc. ("NET"), the Company assumed NET's 2008 Equity Incentive Plan and subsequently renamed it the 2008 Stock Incentive Plan (the "2008 Plan"). In December 2014, all of the unissued shares under the 2008 Plan were transferred to the 2007 Plan. Any outstanding awards under the 2008 Plan that in the future expire, terminate, are canceled, surrendered or forfeited, or are repurchased by the Company will be returned to the 2019 Plan. Accordingly, at December 31, 2020 there were no shares available for future issuance under the 2008 Plan. Executive Equity Arrangements 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 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 103 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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. 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. 2020 PSUs . 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. 2019 PSUs . 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"). 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. Hobbs") 195,000 PSUs with both performance and service conditions (the “2018 PSUs”). Of the 195,000 2018 PSUs, one-half each would vest based on the achievement of two separate metrics related to the Company’s 2018 financial performance (the “2018 Performance Conditions”). The Company’s achievement of the 2018 Performance Conditions (and the shares of Company common stock to vest as a result thereof) were measured on a linear sliding scale in relation to specific threshold, target and stretch performance conditions. 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. 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. 104 Table of Contents 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. These results are then used to calculate the grant date fair values of the respective PSUs. 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. 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 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. Forfeitures are estimated based on historical experience. The activity related to the Company's outstanding stock options during the year ended December 31, 2020 was as follows: 105 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) 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 Vested or expected to vest at December 31, 2020 207,518 $ 12.70 3.73 $ 261 Exercisable at December 31, 2020 201,138 $ 12.93 3.67 $ 241 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. Restricted Stock Grants - Restricted Stock Awards and Restricted Stock Units The Company's outstanding restricted stock grants consist of both RSAs and RSUs. Holders of unvested RSAs have voting rights and rights to receive dividends, if declared; however, these rights are forfeited if the underlying unvested RSA shares are forfeited. Holders of unvested RSUs do not have such voting and dividend rights. The grant date fair value of restricted stock grants, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period. The fair value of restricted stock grants is determined based on the market value of the Company's shares on the date of grant. The activity related to the Company's RSAs for the year ended December 31, 2020 was as follows: Shares Weighted Average Grant Date Fair Value 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 Average Grant Date Fair Value 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. 106 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Performance-Based Stock Units Holders of unvested PSUs do not have voting and dividend rights. The Company recognizes stock-based compensation expense for PSUs without market conditions on a straight-line basis, with the amount recorded based upon the expected level of achievement as of each period-end, recording cumulative adjustments in the period when the expected level of achievement changes. The Company recognizes the grant date fair value of PSUs on a graded attribution basis through the vest date of the respective awards so long as it remains probable that the related service conditions will be satisfied. The activity related to the Company's PSUs for the year ended December 31, 2020 was as follows: Shares Weighted Average Grant Date Fair Value 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 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. ESPP 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 The consolidated statements of operations included stock-based compensation for the years ended December 31, 2020, 2019 and 2018 as follows (in thousands): Year ended December 31, 2020 2019 2018 Product cost of revenue $ 174 $ 76 $ 114 Service cost of revenue 701 478 345 Research and development 2,968 1,898 1,797 Sales and marketing 4,129 3,028 2,935 General and administrative 5,927 7,121 5,881 $ 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. This expense is expected to be recognized over a weighted average period of approximately two years . 107 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Common Stock Reserved 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. (22) LEASES 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, 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 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. Right-of-use assets and lease liabilities are initially measured based on the present value of the future minimum fixed lease payments (i.e., fixed payments in the lease contract) over the lease term at the commencement date. As the Company's existing leases do not have a readily determinable implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future minimum fixed lease payments. The Company calculates its incremental borrowing rate to reflect the interest rate that it would have to pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment over a similar term and considers its historical borrowing activities and market data from entities with comparable credit ratings in this determination. The measurement of the right-of-use asset also includes any lease payments made prior to the commencement date (excluding any lease incentives) and initial direct costs incurred. 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. In making this determination, the Company considers its prior renewal and termination history and planned usage of the assets under lease, incorporating expected market conditions. 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. 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 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 108 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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. The Company's corporate headquarters is located in a leased facility in Westford, Massachusetts under a lease that expires in August 2028. The Company's finance leases primarily consist of equipment. 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): December 31, Classification 2020 2019 Assets 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 Liabilities Current Operating Operating lease liabilities $ 17,023 $ 7,719 Finance Accrued expenses and other 902 1,005 Noncurrent 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 $ 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, 2020 2019 Operating lease cost* $ 19,582 $ 13,865 Finance lease cost Amortization of leased assets 1,200 1,106 Interest on lease liabilities 173 265 Short-term lease cost 20,687 19,460 Variable lease costs (costs excluded from minimum fixed lease payments)** 2,713 3,264 Sublease income ( 1,087 ) ( 374 ) Net lease cost $ 43,268 $ 37,586 * 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 109 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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, 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, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 19,161 $ 10,559 Operating cash flows from finance leases $ 173 $ 265 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): December 31, 2020 2019 Weighted average remaining lease term (years): Operating leases 6.59 6.73 Finance leases 1.70 2.35 Weighted average discount rate: Operating leases 5.67 % 6.50 % Finance leases 6.15 % 7.54 % Future minimum fixed lease payments under noncancelable leases at December 31, 2020 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 — 2025 8,544 — 2026 and beyond 32,516 — Total lease payments 110,329 1,549 Less: interest ( 20,692 ) ( 80 ) Present value of lease liabilities $ 89,637 $ 1,469 (23) EMPLOYEE DEFINED CONTRIBUTION PLANS The Company offers 401(k) savings plans to eligible employees. 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. 110 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (24) NON-U.S. EMPLOYEE DEFINED BENEFIT PLANS 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 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. Settlement accounting was triggered in the year ended December 31, 2019 related to a reduction in force in one of our locations in 2018, resulting in an immaterial settlement gain. 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 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. A reconciliation of the changes in the benefit obligations and fair value of the assets of the defined benefit plans for the years ended December 31, 2020 and 2019, the funded status of the plans, and the amounts recognized in the consolidated balance sheets as of December 31, 2020 and 2019 were as follows (in thousands): 111 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2020 2019 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 on obligation 231 1,059 Curtailment — 82 Settlement — ( 660 ) Projected benefit obligation, end of year $ 25,067 $ 11,784 Changes in plan assets: 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 Participant contributions 21 24 Administrative expenses — ( 21 ) Benefits paid ( 1,976 ) ( 683 ) Fair value of plan assets, end of year $ 14,350 $ 1,830 Funded status at end of year $ ( 10,717 ) $ ( 9,954 ) Amounts recognized in accumulated other comprehensive loss consist of: Net actuarial loss $ ( 102 ) $ 2,743 Amounts recognized in the consolidated balance sheets consist of: Accrued expenses and other (current pension liability) $ ( 435 ) $ ( 74 ) Other long-term liabilities (non-current pension liability) ( 10,282 ) ( 9,880 ) Net amount recognized $ ( 10,717 ) $ ( 9,954 ) 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, 2020 2019 Aggregate projected benefit obligation $ 25,067 $ 11,784 Aggregate accumulated benefit obligation $ 20,746 $ 7,759 Aggregate fair value of plan assets $ 14,350 $ 1,830 Net periodic benefit costs for the years ended December 31, 2020, 2019 and 2018 were as follows (in thousands): 112 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2020 2019 2018 Service cost $ 1,459 $ 335 $ 449 Interest cost 46 140 150 Expected return on plan assets ( 343 ) ( 14 ) ( 45 ) Plan asset expenses 20 21 22 Curtailment charge (credit) — 13 ( 510 ) Settlement (credit) charge ( 1,557 ) 115 3 Net periodic benefit costs $ ( 375 ) $ 610 $ 69 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, 2021 $ 1,508 2022 1,759 2023 1,471 2024 1,298 2025 989 2026 to 2030 8,674 $ 15,699 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, 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. The unrecognized actuarial gains and losses are recorded as unrealized pension actuarial gains (losses) in the Company's consolidated balance sheets as a component of Accumulated other comprehensive income. 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 $ 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, 2020 2019 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: 113 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2020 2019 2018 Discount rate 0.68 % 1.30 % 1.50 % Expected long-term return on plan assets 0.21 % 1.12 % 1.34 % Rate of compensation increase 2.88 % 2.83 % 3.38 % Assumed discount rates are used in the measurement of the projected and accumulated benefit obligations, as well as the service and interest cost components of net periodic pension cost. Estimated discount rates reflect the rates at which the pension benefits could be effectively settled. 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 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 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. 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, 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 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 ) 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): 114 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2020 2019 2018 Provision (benefit) for income taxes: Current: Federal $ 677 $ 11 $ 561 State 1,310 128 128 Foreign 7,355 1,744 2,198 Total current 9,342 1,883 2,887 Deferred: 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 U.S. statutory income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 1.1 ( 0.2 ) ( 0.1 ) Foreign income taxes 2.9 ( 1.0 ) ( 5.7 ) 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 Valuation allowance ( 20.3 ) ( 0.7 ) ( 16.1 ) Goodwill amortization 0.6 0.4 0.3 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 ) % 115 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The following is a summary of the significant components of deferred income tax assets and liabilities (in thousands): December 31, 2020 2019 Assets: 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 Liabilities: Intangible assets ( 75,794 ) ( 22,470 ) Mark-to-market investments ( 17,631 ) — Unremitted foreign income ( 15,717 ) ( 4,827 ) Total deferred tax liabilities ( 109,142 ) ( 27,297 ) Total net deferred tax assets $ ( 6,191 ) $ 311 The deferred tax assets and liabilities based on tax jurisdictions are presented in the Company's consolidated balance sheets as follows: December 31, 2020 2019 Deferred income taxes - noncurrent assets $ 10,651 $ 4,959 Deferred income taxes - noncurrent liabilities ( 16,842 ) ( 4,648 ) $ ( 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. The U.S. 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. 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. As a result of the Edgewater Acquisition in 2018, the Company acquired approximately $ 34 million of net operating loss carryforwards and approximately $ 6 million of tax credit carryforwards. Edgewater incurred an ownership change as a result of its acquisition by the Company; however, the Company does not expect that any of the net operating losses or tax credits related to Edgewater will expire unused. As a result of the ECI Acquisition, an additional $ 129.6 million of NOL was acquired related to the ECI U.S. subsidiary. ECI U.S. incurred an ownership change as a result of its acquisition by the 116 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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 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 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 Increases related to current year tax positions 485 292 74 Increases related to prior period tax positions 11,209 — 122 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 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. federal jurisdiction as well as various state and foreign jurisdictions. Generally, the tax years 2017 through 2020 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company's federal NOLs generated prior to 2017 could be adjusted on examination even though the year in which the loss was generated is otherwise closed by the statute of limitations. As of December 31, 2020, the Company had ongoing income tax audits in certain foreign countries. 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. U.S. 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. For tax 117 Table of Contents RIBBON COMMUNICATIONS INC. 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. The transaction is considered an asset acquisition for tax purposes. Accordingly, Ribbon recorded a stepped up basis in the assets. The Edgewater Acquisition was accounted for as a non-taxable business combination. 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. This benefit was included as a component of the Company's tax provision for the year ended December 31, 2018. In 2019, an adjustment of $ 0.2 million was recorded, reducing the income tax benefit from the Edgewater Acquisition to $ 0.5 million. (26) RELATED PARTIES 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 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 occurs under the promissory note, the payees could have declared 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. 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, 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. (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. and Metaswitch Inc. (collectively, "Metaswitch"). In five of the Lawsuits, the Company was the plaintiff, and in three of those five lawsuits, the Company was also a counterclaim defendant. In the sixth case, the Company was the defendant. On April 22, 2019, the Company and Metaswitch agreed to a binding mediator's proposal that resolved the six Lawsuits between the Company and Metaswitch (the "Lawsuits"). 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 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; (ii) have licensed each party's existing patent portfolio to the other party; and (iii) have requested the applicable courts to dismiss the Lawsuits. 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. 118 Table of Contents RIBBON COMMUNICATIONS INC. 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. Litigation 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. Similar to a previous complaint entitled Sousa et al. vs. Sonus Networks, Inc. et al., which was dismissed with prejudice by an order dated June 6, 2017, the Miller Complaint claims that the Defendants made misleading forward-looking statements concerning Sonus' expected fiscal first quarter of 2015 financial performance, which statements were also the subject of an August 7, 2018 Securities and Exchange Commission Cease and Desist Order, whose findings the Company neither admitted nor denied. The Miller plaintiffs are seeking monetary damages. After the Miller Complaint was filed, several parties filed and briefed motions seeking to be selected by the Massachusetts District Court to serve as a Lead Plaintiff in the action. On June 21, 2019, the Massachusetts District Court appointed a group as Lead Plaintiffs and the Lead Plaintiffs filed an amended complaint on July 19, 2019. On August 30, 2019, the Defendants filed a motion to dismiss the Miller Complaint and, on October 4, 2019, the Lead Plaintiffs filed an opposition to the motion to dismiss. The Defendants filed a reply to such opposition on November 1, 2019. There was an oral argument on the motion to dismiss on February 12, 2020. In addition, the Company is often a party to disputes and legal proceedings that it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material effect on the Company's business or consolidated financial statements. (28) QUARTERLY RESULTS (UNAUDITED) The following tables present the Company's quarterly operating results for the years ended December 31, 2020 and 2019. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements. 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. 119 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) First Quarter (1) Second Quarter Third Quarter Fourth Quarter (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 Net (loss) income $ ( 33,170 ) $ ( 8,251 ) $ 6,252 $ 123,760 (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 First Quarter (2) Second Quarter Third Quarter (2) Fourth Quarter (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 ) 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. (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 quarterly (loss) earnings per share amounts may not equal the total calculated for the year. 120 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.