What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-30 · 237 added, 144 removed, 217 unchanged (64% of the section changed)

10 unchanged sentences

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

Continued dampened global economic conditions as a result of the COVID-19 pandemic, especially in areas where a vaccine rollout is slower, such as India, may cause our customers to restrict spending or delay purchases for an indeterminate period of time and consequently cause our revenues to decline.

Continued dampened global economic conditions as a result of the COVID-19 pandemic, especially in areas where a vaccine rollout is slower, such as Australia and India, may cause our customers to restrict spending or delay purchases for an indeterminate period of time and consequently cause our revenues to decline.

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

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

The COVID-19 pandemic continues to limit in some locations the ability of our employees to perform their work due to illness caused by the pandemic or local, state or federal orders requiring employees to remain at home.

The COVID-19 pandemic continues to limit in some locations, including India, the ability of our employees to perform their work due to illness caused by the pandemic or local, state or federal orders requiring employees to remain at home.

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

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

As part of that plan, we implemented a temporary wage reduction of 10% to 50% applicable to the base salary of most of our employees, which salary reduction ended in 2020.

We have eliminated all travel except where necessary to meet customer or regulatory needs and acted to limit discretionary spending.

We have significantly reduced travel, marketing and other discretionary expenses except where necessary to meet customer or regulatory needs and acted to limit discretionary spending.

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

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

This reclassification resulted in reductions to Cost of revenue - product and Sales and marketing of $8.9 million and $5.4 million, respectively, reclassified to Amortization of acquired intangible assets for the three months ended March 31, 2020.

The reduction in the three months ended March 31, 2020 to Cost of revenue - product increased our product gross profit as a percentage of product revenue ("product gross margin") and our total gross profit as a percentage of revenue ("total gross margin) by approximately 12 percentage points and 6 percentage points, respectively.

This reclassification resulted in reductions in the three and six months ended June 30, 2020 to Cost of revenue - product of $10.9 million and $19.9 million, respectively, and reductions to Sales and marketing of $3.7 million and $9.1 million, respectively, which amounts were reclassified to Amortization of acquired intangible assets.

The reduction to Cost of revenue -

product in the three months ended June 30, 2020 increased our product gross profit as a percentage of product revenue ("product gross margin") and our total gross profit as a percentage of revenue ("total gross margin) by approximately nine percentage points and five percentage points, respectively.

The reduction to Cost of revenue - product in the six months ended June 30, 2020 increased our product gross margin and total gross margin by approximately ten percentage points and five percentage points, respectively.

Acquisition of ECI Telecom Group Ltd.

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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.

As sale consideration, AVCT paid us $45.0 million, subject to certain adjustments, in the form of units of AVCT's securities (the "AVCT Units"), with each AVCT Unit consisting of:

As consideration, AVCT paid us $45.0 million, subject to certain adjustments, in the form of units of AVCT's securities (the "AVCT Units"), with each AVCT Unit consisting of:

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

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

We 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.

We received 43,778 AVCT Units as consideration on the Kandy Sale Date.

The Debentures bear interest at a rate of 10% per annum, which is being 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 definitive purchase agreement, as amended (the "Amended Kandy Agreement").

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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.

Upon the expiration of the lock-up period, we began to value the Debentures at each measurement date by multiplying the closing stock price of AVCT common stock by the number of shares upon conversion of the Debentures.

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

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

We had not redeemed any of the Debentures or exercised any of the Warrants as of March 31, 2021.

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

We had not redeemed any of the Debentures or exercised any of the Warrants as of June 30, 2021.

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

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

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

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

At March 31, 2021 and December 31, 2020, the aggregate fair value of the Debentures and Warrants was $92.7 million and $115.2 million, respectively.

We recorded the loss of $23.9 million arising from the decrease in the fair value of the Debentures and Warrants from March 31, 2021 to March 31, 2021 in Other expense, net, in our condensed consolidated statement of operations for the three months ended March 31, 2021.

The loss was partially offset by $1.5 million of interest which was added to the principal of the Debentures.

The interest is included in Interest (expense) income, net, in the consolidated statement of operations for the three months ended March 31, 2021.

The fair values of the Debentures and Warrants are reported as Investments in our condensed consolidated balance sheets at March 31, 2021 and December 31, 2020.

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

At June 30, 2021 and December 31, 2020, the aggregate fair value of the Debentures and Warrants was $106.0 million and $115.2 million, respectively.

We recorded a gain of $12.1 million in the three months ended June 30, 2021and a loss of $11.8 million in the six months ended June 30, 2021 arising from the change in the fair value of the Debentures and Warrants, and which is included as a component of Other income (expense), net, in our condensed consolidated statements of operations.

We recorded $1.2 million and $2.7 million of interest income in the three and six months ended June 30, 2021, respectively, which was added to the principal of the Debentures, and which is included in Interest expense, net, in our condensed consolidated statements of operations.

The fair values of the Debentures and Warrants are reported as Investments in our condensed consolidated balance sheets at June 30, 2021 and December 31, 2020.

Operating Segments

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

Amounts attributable to IP Optical Networks in the three months ended March 31, 2020 are for the period subsequent to the ECI Acquisition Date.

Amounts attributable to IP Optical Networks in the six months ended June 30, 2020 are for the period subsequent to the ECI Acquisition Date.

For additional details regarding our operating segments, see Note 13 - Operating Segment Information to our condensed consolidated financial statements.

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Financial Results

We reported losses from operations of $12.6 million and $28.7 million for the three months ended March 31, 2021 and 2020, respectively.

Our revenue was $192.8 million in the three months ended March 31, 2021, comprised of $125.4 million attributable to our Cloud and Edge segment and $67.4 million attributable to our IP Optical Networks segment.

Our revenue was $158.0 million in the three months ended March 31, 2020, comprised of $128.0 million attributable to our Cloud and Edge segment and $30.0 million attributable to our IP Optical Networks segment.

Our gross profit was $110.5 million in the three months ended March 31, 2021, comprised of $84.1 million attributable to our Cloud and Edge segment and $26.4 million attributable to our IP Optical Networks segment.

Our gross profit in the three months ended March 31, 2020 was $90.5 million, comprised of $78.8 million attributable to our Cloud and Edge segment and $11.7 million attributable to our IP Optical Networks segment.

Our gross profit as a percentage of revenue ("total gross margin") in both three-month periods ended March 31, 2021 and 2020 was 57.3% .

Our gross margin attributable to our Cloud and Edge segment in the three months ended March 31, 2021 and 2020 was 67.1% and 61.5%, respectively, and attributable to our IP Optical Networks segment was 39.2% in both the three months ended March 31, 2021 and 2020.

Our operating expenses were $123.2 million and $119.3 million in the three months ended March 31, 2021 and 2020, respectively.

Operating expenses for the three months ended March 31, 2021 included $1.2 million of acquisition- and integration-related expense and $6.0 million of restructuring and related expense.

Operating expenses for the three months ended March 31, 2020 included $12.4 million of acquisition-, disposal- and integration-related expense and $2.1 million of restructuring and related expense.

We recorded stock-based compensation expense of $5.1 million and $3.0 million in the three months ended March 31, 2021 and 2020, respectively.

We reported income from operations of $13.0 million and $1.6 million for the three months ended June 30, 2021 and 2020, respectively.

We reported income from operations of $0.3 million for the six months ended June 30, 2021 and a loss from operations of $27.1 million for the six months ended June 30, 2020.

Our revenue was $211.2 million and $210.5 million in the three months ended June 30, 2021 and 2020, respectively.

Our total gross profit and total gross margin were $128.4 million and 60.8%, respectively, in the three months ended June 30, 2021, and $123.3 million and 58.6%, respectively, in the three months ended June 30, 2020.

Our revenue was $404.0 million and $368.5 million in the six months ended June 30, 2021 and 2020, respectively.

Our total gross profit and total gross margin were $239.0 million and 59.2%, respectively, in the six months ended June 30, 2021, and $213.8 million and 58.0%, respectively, in the six months ended June 30, 2020.

Revenue from our Cloud and Edge segment was $141.4 million and $146.9 million in the three months and ended June 30, 2021 and 2020, respectively.

Total gross profit and total gross margin for this segment were $95.5 million and 67.5% respectively, in the three months ended June 30, 2021, and $98.6 million and 67.1% in the three months ended June 30, 2020.

Revenue from our Cloud and Edge segment was $266.8 million and $274.9 million in the six months ended June 30, 2021 and 2020, respectively.

Total gross profit and total gross margin for this segment were $179.6 million and 67.3% respectively, in the six months ended June 30, 2021, and $177.4 million and 64.5% in the six months ended June 30, 2020.

Revenue from our IP Optical Networks segment was $69.8 million and $63.6 million in the three months ended June 30, 2021 and 2020, respectively.

Total gross profit and total gross margin for this segment were $33.0 million and 47.2% respectively, in the three months ended June 30, 2021, and $24.7 million and 38.8% in the three months ended June 30, 2020.

Revenue from our IP Optical Networks segment was $137.1 million and $93.5 million in the six months ended June 30, 2021 and 2020, respectively.

Total gross profit and total gross margin for this segment were $59.3 million and 43.3% respectively, in the six months ended June 30, 2021, and $36.4 million and 38.9% in the six months ended June 30, 2020.

Our operating expenses were $115.5 million and $121.7 million in the three months ended June 30, 2021 and 2020, respectively.

Operating expenses for the three months ended June 30, 2021 included $17.2 million of amortization of acquired intangible assets, $1.1 million of acquisition-, disposal- and integration-related expense and $2.8 million of restructuring and related expense.

Operating expenses for the three months ended June 30, 2020 included $14.7 million of amortization of acquired intangible assets, $0.9 million of acquisition-, disposal- and integration-related expense and $5.4 million of restructuring and related expense.

Our operating expenses were $238.6 million and $240.9 million in the six months ended June 30, 2021 and 2020 respectively.

Operating expenses for the six months ended June 30, 2021 included $33.0 million of amortization of acquired intangible assets, $2.2 million of acquisition-, disposal- and integration-related expense and $8.8 million of restructuring and related expense.

Our operating expenses for the six months ended June 30, 2020 included $29.0 million of amortization of acquired intangible assets, $13.2 million of acquisition-, disposal- and integration-related expense and $7.4 million of restructuring and related expense.

We recorded stock-based compensation expense of $4.8 million and $3.2 million in the three months ended June 30, 2021 and 2020, respectively, and $9.9 million and $6.2 million in the six months ended June 30, 2021 and 2020, respectively.

These amounts are included as components of both Cost of revenue and Operating expenses in our condensed consolidated statements of operations.

See "Results of Operations" in this MD&A for a discussion of the changes in our revenue and expenses for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

See "Results of Operations" in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for a discussion of the changes in our revenue and expenses for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020.

Restructuring and Cost Reduction Initiatives

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

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

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 three months ended March 31, 2020.

In connection with the 2020 Restructuring Initiative, we recorded restructuring and related expense of $0.4 million and $1.1 million in the three months ended March 31, 2021 and 2020, respectively.

The amount recorded in the three months ended March 31, 2021 was comprised of $0.7 million for severance and related costs for approximately 10 employees and $0.4 million for variable costs related to restructured facilities, offset by a credit of $0.7 million for changes in estimate related to amounts previously recorded.

The amount recorded in the three months ended March 31, 2020 represented severance for three former executives of ECI.

We expect that the amounts related to severance will be paid in 2021.

We expect to record additional restructuring and related expense approximating $4 million under the 2020 Restructuring Initiative in the aggregate for severance and planned facility consolidations.

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

We recorded restructuring and related expense of $1.9 million and $4.7 million in connection with the 2020 Restructuring Initiative in the three months ended June 30, 2021 and 2020, respectively, and $2.3 million and $5.8 million in the six months ended June 30, 2021 and 2020, respectively.

The amount recorded in the three months ended June 30, 2021 was comprised of $1.9 million for severance and related costs for approximately 15 employees and nominal expense for variable costs related to restructured facilities.

The amount recorded in the six months June 30, 2021 was comprised of $2.6 million of severance and related costs for approximately 25 employees and $0.4 million for variable costs related to restructured facilities, offset by a credit of $0.7 million for changes in estimate to previously recorded facilities-related amounts.

The amount recorded in the six months ended June 30, 2020, of which $4.7 million was recorded in the three months ended June 30, 2020 and $1.1 million was recorded in the three months ended March 31, 2020, represents severance and related costs for approximately 75 employees.

We expect that the amount accrued for severance at June 30, 2021 will be paid in 2021.

We expect that we will record additional restructuring and related expense approximating $2 million under the 2020 Restructuring Initiative in the aggregate for severance and planned facility consolidations.

2019 Restructuring Initiative .

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

In connection with the 2019 Restructuring Initiative, we recorded restructuring and related expense of $5.6 million and $1.0 million in the three months ended March 31, 2021 and 2020, respectively.

The amount recorded in the three months ended March 31, 2021 related to facilities.

The amount recorded in the three months ended March 31, 2020 was comprised of $0.7 million for severance and related costs for five employees and $0.3 million related to facilities.

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

In connection with the 2019 Restructuring Initiative, we recorded restructuring and related expense of $0.9 million and $0.7 million in the three months ended June 30, 2021 and 2020, respectively, and $6.5 million and $1.7 million in the six months ended June 30, 2021 and 2020, respectively.

The amount recorded in the three months ended June 30, 2021 related to variable facilities costs.

Of the amount recorded in the six months ended June 30, 2021, $3.4 million was for accelerated amortization of lease assets and $3.1 million related to variable and other facilities-related costs in connection with facility consolidations.

The amount recorded in the three months ended June 30, 2020 primarily related to facility consolidations.

The amount recorded in the six months ended June 30, 2020 was comprised of $0.7 million for severance and related costs for five employees and $1.0 million related to facility consolidations.

As of June 30, 2021, the amounts accrued for severance and related costs had been paid in full.

We estimate that we will record nominal, if any, additional restructuring and related expense in connection with this initiative.

Accelerated Rent Amortization .

Accelerated rent amortization is recognized from the date that we commence the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date.

We recorded $3.4 million and $0.1 million for accelerated rent amortization in the three months ended March 31, 2021 and 2020, respectively, in connection with our 2019 Restructuring Initiative.

We recorded $3.4 million and $0.1 million for accelerated rent amortization in the six months ended June 30, 2021 and 2020, respectively, in connection with our 2019 Restructuring Initiative.

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

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We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:

revenue recognition, the valuation of inventory, the valuation of the Debentures and Warrants received as sale consideration in connection with the Kandy Sale, warranty accruals, loss contingencies and reserves, stock-based compensation, business combinations, goodwill and intangible assets, accounting for leases, and accounting for income taxes.

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

financial statements.

There were no significant changes to our critical accounting policies from January 1, 2021 through March 31, 2021.

revenue recognition, the valuation of inventory, the valuation of the Debentures and Warrants received as consideration in connection with the Kandy Sale, warranty accruals, loss contingencies and reserves, stock-based compensation, business combinations, goodwill and intangible assets, accounting for leases, and accounting for income taxes.

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

There were no significant changes to our critical accounting policies from January 1, 2021 through June 30, 2021.

For a further discussion of our other critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2020.

Results of Operations

Three months ended March 31, 2021 and 2020

Revenue for the three months ended March 31, 2021 and 2020 was as follows (in thousands, except percentages):

Three months ended Increase

Three and six months ended June 30, 2021 and 2020

Revenue for the three and six months ended June 30, 2021 and 2020 was as follows (in thousands, except percentages):

Three months ended Increase (decrease)

from prior year

2021 March 31,

2021 June 30,

Product $ 113,129 $ 120,862 $ (7,733) (6.4) %

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Total revenue $ 211,210 $ 210,493 $ 717 0.3 %

Segment revenue for the three months ended March 31, 2021 and 2020 was as follows (in thousands):

Three months ended March 31, 2021 Three months ended March 31, 2020

Six months ended Increase

from prior year

2021 June 30,

Product $ 211,018 $ 196,761 $ 14,257 7.2 %

Service 192,964 171,714 21,250 12.4 %

Total revenue $ 403,982 $ 368,475 $ 35,507 9.6 %

Segment revenue for the three and six months ended June 30, 2021 and 2020 was as follows (in thousands):

Three months ended June 30, 2021 Three months ended June 30, 2020

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

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Total revenue $ 141,421 $ 69,789 $ 211,210 $ 146,907 $ 63,586 $ 210,493

The increase in our product revenue in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily the result of the inclusion of approximately $26 million of higher product revenue attributable to our IP Optical Networks segment in the current year quarter, in part due to the inclusion of IP Optical Networks revenue for the full quarter, compared to only one month of revenue in the three months ended March 31, 2020.

The decrease in revenue in our Cloud and Edge segment was primarily attributable to lower sales of our on-premise Enterprise Edge SBC products and the loss of revenue due to the Kandy Sale, partially offset by higher revenue from sales of certain of our software applications.

Revenue from indirect sales through our channel partner program was 21% and 38% of our product revenue in the three months ended March 31, 2021 and 2020, respectively.

In the three months ended March 31, 2021, 23% of our product revenue was attributable to sales to enterprise customers, compared to 36% in the three months ended March 31, 2020.

Six months ended June 30, 2021 Six months ended June 30, 2020

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

Product $ 114,513 $ 96,505 $ 211,018 $ 126,520 $ 70,241 $ 196,761

Service 152,330 40,634 192,964 148,418 23,296 171,714

Total revenue $ 266,843 $ 137,139 $ 403,982 $ 274,938 $ 93,537 $ 368,475

The decrease in our product revenue in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily the result of lower sales of our Cloud and Edge SBC products and the loss of revenue due to the Kandy Sale, partially offset by higher revenue from sales of certain Cloud and Edge software applications.

Product revenue for our IP Optical Networks segment was essentially flat in the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase in our product revenue in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily attributable to the inclusion of a full half-year of revenue from our IP Optical Networks segment, compared to four months of revenue in the six months ended June 30, 2020.

This increase was partially offset by lower sales of our Cloud and Edge SBC products and the loss of revenue due to the Kandy Sale, partially offset by higher revenue from sales of certain Cloud and Edge software applications.

Revenue from indirect sales through our channel partner program was approximately 24% and 27% of our product revenue in the three months ended June 30, 2021 and 2020, respectively.

Revenue from indirect sales through our channel partner program was approximately 22% and 31% of our product revenue in the six months ended June 30, 2021 and 2020, respectively.

Revenue from sales to enterprise customers was approximately 22% and 30% of our product revenue in the three months ended June 30, 2021 and 2020, respectively.

Revenue from sales to enterprise customers was approximately 22% and 32% of our product revenue in the six months ended June 30, 2021 and 2020, respectively.

These sales were made through both our direct sales team and indirect sales channel partners.

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

Service revenue for the three months ended March 31, 2021 and 2020 was comprised of the following (in thousands, except percentages):

Service revenue for the three and six months ended June 30, 2021 and 2020 was comprised of the following (in thousands, except percentages):

Three months ended Increase

from prior year

2021 March 31,

2021 June 30,

Maintenance $ 72,437 $ 68,623 $ 3,814 5.6 %

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$ 98,081 $ 89,631 $ 8,450 9.4 %

Segment service revenue for the three months ended March 31, 2021 and 2020 was comprised of the following (in thousands):

Three months ended March 31, 2021 Three months ended March 31, 2020

Six months ended Increase

from prior year

2021 June 30,

Maintenance $ 141,142 $ 129,691 $ 11,451 8.8 %

Professional services 51,822 42,023 9,799 23.3 %

$ 192,964 $ 171,714 $ 21,250 12.4 %

Segment service revenue for the three and six months ended June 30, 2021 and 2020 was comprised of the following (in thousands):

Three months ended June 30, 2021 Three months ended June 30, 2020

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

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Total service revenue $ 77,060 $ 21,021 $ 98,081 $ 74,597 $ 15,034 $ 89,631

The increase in maintenance revenue in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to the inclusion of a full quarter of IP Optical Networks segment sales, compared to only one month of revenue in the three months ended March 31, 2020.

The increase in professional services revenue was partially attributable to the inclusion of approximately $3 million of higher professional services revenue attributable to a full quarter of IP Optical Networks segment sales in the current year quarter, compared to only one month of revenue in the three months ended March 31, 2020, coupled with approximately $2 million of higher professional services revenue attributable to our Cloud and Edge segment.

The following customers contributed 10% or more of our revenue in the three months ended March 31, 2021 and 2020:

Three months ended

Customer March 31,

2021 March 31,

Six months ended June 30, 2021 Six months ended June 30, 2020

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

Maintenance $ 112,659 $ 28,483 $ 141,142 $ 113,409 $ 16,282 $ 129,691

Professional services 39,671 12,151 51,822 35,009 7,014 42,023

Total service revenue $ 152,330 $ 40,634 $ 192,964 $ 148,418 $ 23,296 $ 171,714

The increase in maintenance revenue in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily attributable to approximately $4 million of higher revenue from our IP Optical Networks segment.

The increase in maintenance revenue in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to approximately $12 million of higher revenue from our IP Optical Networks segment, partially offset by approximately $1 million of lower revenue from our Cloud and Edge segment.

The increase in IP Optical Networks maintenance revenue in the six months ended June 30, 2021 was partially attributable to the inclusion of a full half-year of revenue in the current year period, compared to four months of revenue in the prior year period.

The increase in professional services revenue in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was equally attributable to Cloud and Edge and IP Optical Networks segments, each of which accounted for approximately $2 million of higher revenue in the current year quarter compared to the same prior year quarter.

The increase in professional services revenue in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was attributable to approximately $5 million from each of our segments.

The increase in IP Optical Networks professional services revenue in the six months ended June 30, 2021 was partially attributable to the inclusion of a full half-year of revenue in the current year period, compared to four months of revenue in the prior year period.

The following customer contributed 10% or more of our revenue in the three and six month periods ended June 30, 2021

Three months ended Six months ended

Customer June 30,

2021 June 30,

2020 June 30,

2021 June 30,

Verizon Communications Inc.

* Represents less than 10% of total revenue.

Revenue from customers domiciled outside the United States was 59% and 50% of revenue in the three months ended March 31, 2021 and 2020, respectively.

17% 15% 16% 14%

Revenue from customers domiciled outside the United States was approximately 52% of revenue in both the three months ended June 30, 2021 and 2020, and approximately 55% and 51% of revenue in the six months ended June 30, 2021 and 2020, respectively.

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

In addition, as a result of the ECI Acquisition, we expect that the domestic and international revenue as a percentage of revenue in future periods will change, as virtually all of ECI's revenue has historically been recognized from customers outside the United States.

Our deferred product revenue was approximately $6 million and $8 million at March 31, 2021 and December 31, 2020, respectively.

Our deferred service revenue was approximately $119 million and $115 million at March 31, 2021 and December 31, 2020, respectively.

Our deferred product revenue was approximately $7 million and $8 million at June 30, 2021 and December 31, 2020, respectively.

Our deferred service revenue was approximately $117 million and $115 million at June 30, 2021 and December 31, 2020, respectively.

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

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

Our cost of revenue and gross margins for the three months ended March 31, 2021 and 2020 were as follows (in thousands, except percentages):

Three months ended Increase

Our cost of revenue and gross margins for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands, except percentages):

Three months ended Decrease

from prior year

2021 March 31,

2021 June 30,

Cost of revenue

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Total gross margin 60.8 % 58.6 %

Our segment cost of revenue and gross margins for the three months ended March 31, 2021 and 2020 were as follows (in thousands, except percentages):

Three months ended March 31, 2021 Three months ended March 31, 2020

Six months ended Increase

from prior year

2021 June 30,

Cost of revenue

Product $ 91,086 $ 86,558 $ 4,528 5.2 %

Service 73,922 68,126 5,796 8.5 %

Total cost of revenue $ 165,008 $ 154,684 $ 10,324 6.7 %

Product 56.8 % 56.0 %

Service 61.7 % 60.3 %

Total gross margin 59.2 % 58.0 %

Our segment cost of revenue and gross margins for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands, except percentages):

Three months ended June 30, 2021 Three months ended June 30, 2020

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

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Total cost of revenue $ 45,958 $ 36,825 $ 82,783 $ 48,316 $ 38,910 $ 87,226

Three months ended March 31, 2021 Three months ended March 31, 2020

Product 70.3 % 43.6 % 58.8 % 70.0 % 40.5 % 58.2 %

Service 65.2 % 55.8 % 63.2 % 64.3 % 33.2 % 59.1 %

Total gross margin 67.5 % 47.2 % 60.8 % 67.1 % 38.8 % 58.6 %

Six months ended June 30, 2021 Six months ended June 30, 2020

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

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Service 54,685 19,237 73,922 54,318 13,808 68,126

Total cost of revenue $ 87,218 $ 77,790 $ 165,008 $ 97,569 $ 57,115 $ 154,684

Product 71.6 % 39.3 % 56.8 % 65.8 % 38.3 % 56.0 %

Service 64.1 % 52.7 % 61.7 % 63.4 % 40.7 % 60.3 %

Total gross margin 67.3 % 43.3 % 59.2 % 64.5 % 38.9 % 58.0 %

The increase in our product gross margin in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to margin improvement in our Cloud and Edge segment.

The increase in product gross margin of our Cloud and Edge segment was primarily attributable to customer and product mix, and to a lesser extent, the impact of the Kandy Sale.

The decrease in our service gross margin in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to the inclusion of a full quarter of our IP Optical Networks segment's historically lower service gross margin for the full quarter, coupled with higher installation costs.

Our product gross margin increased in the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to margin improvement in our IP Optical Networks segment.

The increase in product gross margin of our IP Optical Networks segment was primarily attributable to customer geography and product mix.

The increase in our product gross margin in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to margin improvement in our Cloud and Edge segment.

This increase was primarily attributable to the impact of the Kandy Sale and, to a lesser extent, customer and product mix.

We also had margin improvement in our IP Optical Networks segment in the six months ended June 30, 2021 compared to the same prior year period from the ECI Acquisition Date to June 30, 2020.

The increase in our service gross margin in both the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 was primarily due to margin improvement in both of our segments.

Our Cloud and Edge segment's margin improvement was primarily due to lower fixed costs, while the margin improvement in our IP Optical Networks segments was primarily attributable to the segment's higher revenue in the current year periods against its fixed cost base.

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

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

Research and development expenses for the three months ended March 31, 2021 and 2020 were as follows (in thousands, except percentages):

Research and development expenses for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands, except percentages):

Increase (decrease)

from prior year

2021 March 31,

2021 June 30,

Three months ended $ 46,797 $ 51,796 $ (4,999) (9.7) %

The increase in research and development expenses in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to the inclusion of a full quarter of IP Optical Networks expense,

compared to only one month of expense in the three months ended March 31, 2020, which added approximately $13 million in research and development expenses, principally employee-related.

This increase was partially offset by approximately $8 million of lower expenses in our Cloud and Edge segment, primarily lower employee-related, third-party consulting and infrastructure-related expenses due to our previous cost reduction and restructuring initiatives and the impact of the Kandy Sale.

Six months ended $ 94,207 $ 94,091 $ 116 0.1 %

The decrease in research and development expenses in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily attributable to approximately $6 million of lower expenses in our Cloud and Edge segment,

all primarily employee-related and product development costs, partially offset by approximately $1 million of higher expenses in our IP Optical Networks segment, primarily for infrastructure-related and product development costs.

Our research and development expenses were essentially flat in the six months ended June 30, 2021 compared to the six months ended June 30, 2020, with lower expenses in our Cloud and Edge segment related to the sale of Kandy.

These reductions were partially offset by higher expenses in our IP Optical Networks segment, primarily due to the inclusion of a half-year of IP Optical Networks expense compared to only four months of expense in the prior year period, principally for employee- and infrastructure-related and product development costs.

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

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

Sales and marketing expenses for the three months ended March 31, 2021 and 2020 were as follows (in thousands, except percentages):

Sales and marketing expenses for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands, except percentages):

from prior year

2021 March 31,

2021 June 30,

Three months ended $ 34,881 $ 33,898 $ 983 2.9 %

The increase in sales and marketing expenses in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to the inclusion of a full quarter of IP Optical Networks expense, compared to only one month of expense in the three months ended March 31, 2020, which added approximately $10 million in sales and marketing expenses, principally employee-related expenses.

This increase was partially offset by approximately $4 million of lower costs in our Cloud and Edge segment, principally employee- and infrastructure-related, arising from our previous cost reduction and restructuring initiatives.

Six months ended $ 72,099 $ 64,869 $ 7,230 11.1 %

The increase in sales and marketing expenses in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily attributable to approximately $2 million of higher expenses in our IP Optical Networks segment, primarily for employee-related costs, partially offset by approximately $1 million of lower expense in our Cloud and Edge segment, primarily for employee-related costs.

The increase in sales and marketing expenses in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily attributable to the inclusion of a full half-year of IP Optical Networks expense, compared to only four months of expense in the prior year period, which added approximately $11 million in sales and marketing expenses, principally employee- and infrastructure-related costs.

This increase was partially offset by approximately $4 million of lower expenses in our Cloud and Edge segment, primarily employee-related and marketing costs.

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

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

General and administrative expenses for the three months ended March 31, 2021 and 2020 were as follows (in thousands, except percentages):

General and administrative expenses for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands, except percentages):

from prior year

2021 March 31,

2021 June 30,

Three months ended $ 12,734 $ 15,094 $ (2,360) (15.6) %

The decrease in general and administrative expenses in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to the absence in the current year quarter of approximately $3 million of litigation-related expense in our Cloud and Edge segment, coupled with approximately $1 million of lower other Cloud and Edge expenses.

These reductions were partially offset by higher expense due to the inclusion of a full quarter of IP Optical Networks expense in the current year quarter, compared to only one month of expense in the three months ended March 31, 2020, which added approximately $2 million in general and administrative expenses, principally employee-related.

Six months ended $ 28,287 $ 32,299 $ (4,012) (12.4) %

The decrease in general and administrative expenses in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily attributable to approximately $2 million of lower professional fees and approximately $1 million of lower employee-related expenses.

The reduction in professional fees in the three months ended June 30, 2021 was attributable to both of our segments, while the reduction in employee-related expenses was attributable to our IP Optical Networks segment.

The decrease in general and administrative expenses in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily attributable to the absence in the current year period of approximately $2 million of litigation-related expense in our Cloud and Edge segment, coupled with approximately $2 million of lower professional fees (i.e., consulting, legal and audit fees) and approximately $1 million of net reductions in other Cloud and Edge expenses.

These reductions were partially offset by approximately $1 million of IP Optical Networks expense, principally for employee-related costs

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

Amortization of Acquired Intangible Assets.

Amortization of acquired intangible assets for the three months ended March 31, 2021 and 2020 was as follows (in thousands, except percentages):

Amortization of acquired intangible assets for the three and months ended June 30, 2021 and 2020 was as follows (in thousands, except percentages):

from prior year

2021 March 31,

2021 June 30,

Three months ended $ 17,181 $ 14,669 $ 2,512 17.1 %

The increase in amortization of acquired intangible assets in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to expense related to the inclusion of a full quarter of amortization of the intangible assets arising from the ECI Acquisition, compared to only one month of such amortization in the three months ended March 31, 2020.

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

Six months ended $ 33,004 $ 29,003 $ 4,001 13.8 %

The increase in amortization of acquired intangible assets in both the three and six months ended June 30, 2021 compared to the same prior year periods was primarily due to the recognition of such expense in relation to expected future cash flows;

accordingly, amortization of intangible assets is not recorded on a straight-line basis, coupled with the inclusion of amortization expense for the full half-year in 2021, compared to four months of expense in the same prior year period.

Acquisition-, Disposal- and Integration-Related Expenses.

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

We recorded $1.2 million of acquisition-, disposal- and integration-related expenses in the three months ended March 31, 2021, comprised of $0.2 million of disposal-related fees incurred in connection with the Kandy Sale and $1.0 million of integration-related expenses, primarily related to the ECI Acquisition.

We recorded $12.4 million of acquisition-, disposal- and integration-related expenses in the three months ended March 31, 2020, virtually all of which was for professional fees primarily in connection with the ECI Acquisition.

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

Our acquisition-, disposal- and integration-related expenses for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands):

Three months ended Six months ended

2021 June 30,

2020 June 30,

2021 June 30,

Professional and services fees (acquisition-related) $ 143 $ 640 $ 143 $ 13,014

Professional and services fees (disposal-related) — — 241 —

Integration-related expenses 909 217 1,865 227

$ 1,052 $ 857 $ 2,249 $ 13,241

Our acquisition-related expenses in the three and six months ended June 30, 2020 primarily relate to the ECI Acquisition.

The disposal-related expenses in the six months ended June 30, 2021 relate to the Kandy Sale.

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

Restructuring and Related Expense.

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

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

Please see the additional discussion of our restructuring initiatives in the "Restructuring and Cost Reduction Initiatives" section of the Overview of this MD&A.

We recorded restructuring and related expense of $6.0 million in the three months ended March 31, 2021, comprised of $5.3 million related to facilities and $0.7 million for severance and related expenses.

We recorded $2.1 million in the three months ended March 31, 2020, comprised of $1.8 million for severance and related expenses $0.3 million related to facilities.

We recorded restructuring and related expense of $2.8 million and $8.8 million in the three and six months ended June 30, 2021, respectively.

We recorded restructuring and related expense of $5.4 million and $7.4 million in the three and six months ended June 30, 2020, respectively.

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

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Interest Expense, Net.

Interest income and interest expense for the three months ended March 31, 2021 and 2020 were as follows (in thousands, except percentages):

Three months ended Increase

Interest income and interest expense for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands, except percentages):

Three months ended Increase decrease)

from prior year

2021 March 31,

2021 June 30,

Interest income $ 1,259 $ 98 $ 1,161 1,184.7 %

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$ (3,048) $ (5,400) $ (2,352) (43.6) %

Interest income in the three months ended March 31, 2021 was primarily due to the paid-in-kind interest on the Debentures, which was recorded as an increase to the fair value of the Debentures.

Interest expense in the three months ended March 31, 2021 was comprised of interest and debt issuance costs in connection with the 2020 Credit Facility (as defined below), including the write-off of $2.5 million of capitalized debt insurance costs in connection with the Third Amendment (as defined below), coupled with interest on finance leases.

Interest income in the three months ended March 31, 2020 primarily represents interest earned on the outstanding note receivable arising from litigation that was settled in 2019.

Interest expense in the three months ended March 31, 2020 was comprised of interest and debt issuance costs in connection with the 2020 Credit Facility, the write-off of debt issuance costs in connection with the retirement of the 2019 Credit Facility and interest on other borrowings and finance leases.

Six months ended Increase

from prior year

2021 June 30,

Interest income $ 2,744 $ 416 $ 2,328 559.6 %

Interest expense (11,611) (9,211) 2,400 26.1 %

$ (8,867) $ (8,795) $ 72 0.8 %

Interest income in both the three and six months ended June 30, 2021 was primarily due to the paid-in-kind interest on the Debentures, which was recorded as an increase to the fair value of the Debentures.

Interest expense in the three and six months ended June 30, 2021 was comprised of interest and debt issuance costs in connection with the 2020 Credit Facility (as defined below), including the write-off of $2.5 million of capitalized debt insurance costs in connection with the Third Amendment (as defined below), coupled with interest on finance leases.

Interest income in the three and six months ended June 30, 2020 primarily represents interest earned on the outstanding note receivable arising from litigation that was settled in 2019.

Interest expense in the three and six months ended June 30, 2020 was comprised of interest and debt issuance costs in connection with the 2020 Credit Facility, interest on other borrowings and finance leases, and interest expense recorded in connection with the factoring of certain accounts receivable.

Interest expense in the six months ended June 30, 2020 also included the write-off of debt issuance costs in connection with the retirement of the 2019 Credit Facility.

Income Taxes.

We recorded provisions for income taxes of $0.8 million and $0.2 million in the three months ended March 31, 2021 and 2020, respectively.

We recorded provisions for income taxes of $4.7 million and $2.2 million in the six months ended June 30, 2021 and 2020, respectively.

These amounts reflect our estimates of the effective rates expected to be applicable for the respective full fiscal years, adjusted for any discrete events, which are recorded in the period that they occur.

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

Three months ended

2021 March 31,

Six months ended

2021 June 30,

Net loss $ (21,446) $ (41,421) $ 19,975

Adjustments to reconcile net loss to cash flows (used in) provided by operating activities 52,700 23,324 29,376

Adjustments to reconcile net loss to cash flows provided by operating activities 64,343 49,506 14,837

Changes in operating assets and liabilities (34,867) 28,627 (63,494)

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Net cash (used in) provided by financing activities $ (20,858) $ 331,074 $ (351,932)

Our cash and restricted cash aggregated $109 million at March 31, 2021.

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

These amounts included cash and restricted cash aggregating approximately $39 million at March 31, 2021 and $46 million at December 31, 2020 held by our non-U.S.

Our cash and restricted cash aggregated approximately $115 million at June 30, 2021and $136 million at December 31, 2020.

These amounts included cash and restricted cash aggregating approximately $32 million at June 30, 2021 and $46 million at December 31, 2020 held by our non-U.S.

subsidiaries.

If we elected to repatriate all excess funds held by our non-U.S.

subsidiaries as of March 31, 2021, we do not believe that the amounts of potential withholding taxes that would arise from the repatriation would have a material effect on our liquidity.

subsidiaries as of June 30, 2021, we do not believe that the amounts of potential withholding taxes that would arise from the repatriation would have a material effect on our liquidity.

We currently maintain the Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), by and among us, as a guarantor, Ribbon Communications Operating Company, Inc., as the borrower ("Borrower"), Citizens Bank, N.A.

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

For additional details regarding the terms of the 2020 Credit Facility, see Note 10 - Debt to our condensed consolidated financial statements.

For additional details regarding the terms of the 2020 Credit Facility, see Note 10 to our condensed consolidated financial statements.

On March 3, 2021 (the "Third Amendment Effective Date"), we entered into a Third Amendment to Credit Agreement (the "Third Amendment"), which further amended the 2020 Credit Facility.

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We are required to make quarterly principal payments on the 2020 Term Loan aggregating approximately $20 million per year in the first three years and $30 million in the fourth year, with the final payment approximating $300 million due on the maturity date.

At March 31, 2021, we had an outstanding 2020 Term Loan balance of $390.6 million at an average interest rate of 3.40% and $6.4 million of letters of credit outstanding with an interest rate of 2.50%.

We were in compliance with all covenants of the 2020 Credit Facility at both March 31, 2021 and December 31, 2020.

At June 30, 2021, we had an outstanding 2020 Term Loan balance of $385.5 million at an average interest rate of 3.40% and $6.4 million of letters of credit outstanding with an interest rate of 2.50%.

We were in compliance with all covenants of the 2020 Credit Facility at both June 30, 2021 and December 31, 2020.

We are exposed to financial market risk related to foreign currency fluctuations and changes in interest rates.

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

The notional amount of this swap as of March 31, 2021 was $400 million, and the swap matures on March 3, 2025, the same date the 2020 Credit Facility matures.

The notional amount of this swap as of June 30, 2021 was $400 million, and the swap matures on March 3, 2025, the same date the 2020 Credit Facility matures.

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

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The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings.

During the three months ended March 31, 2021 and 2020, such a derivative was used to hedge the variable cash flows associated with the 2020 Credit Facility.

During the three and six months ended June 30, 2021 and 2020, such a derivative was used to hedge the variable cash flows associated with the 2020 Credit Facility.

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

However, during the three months ended March 31, 2021 and 2020, we recorded no hedge ineffectiveness.

However, during the three and six months ended June 30, 2021 and 2020, we recorded no hedge ineffectiveness.

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

Based upon projected forward rates, we estimate as of March 31, 2021 that $3.1 million may be reclassified as an increase to interest expense over the next 12 months.

Based upon projected forward rates, we estimate as of June 30, 2021 that $3.2 million may be reclassified as an increase to interest expense over the next 12 months.

From time to time, we enter into uncommitted and unsecured short-term loans to finance exports in China.

We did not have any such short-term loans outstanding at March 31, 2021 and December 31, 2020.

We did not have any such short-term loans outstanding at June 30, 2021 and December 31, 2020.

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

At March 31, 2021, we had bank guarantees, performance and bid bonds under various uncommitted facilities (collectively, the "Guarantees") aggregating $26.9 million, and $6.4 million of letters of credit under the 2020 Credit Facility (the "Letters of Credit").

At June 30, 2021, we had bank guarantees, performance and bid bonds under various uncommitted facilities (collectively, the "Guarantees") aggregating $24.9 million, and $6.4 million of letters of credit under the 2020 Credit Facility (the "Letters of Credit").

At December 31, 2020, we had Guarantees aggregating $27.0 million and $5.6 million of Letters of Credit.

At both March 31, 2021 and December 31, 2020, we had cash collateral of $2.7 million supporting the Guarantees, which are included in Restricted cash in our condensed consolidated balance sheets.

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

At June 30, 2021 and December 31, 2020, we had cash collateral of $2.6 million and $2.7 million, respectively, supporting the Guarantees, which are included in Restricted cash in our condensed consolidated balance sheets.

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

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

This program did not obligate us to acquire any particular amount of common stock and the program could be extended, modified, suspended or discontinued at any time at the Board's discretion.

We did not repurchase any shares during the three months ended March 31, 2021 or the year ended December 31, 2020.

At both March 31, 2021 and December 31, 2020, we had $70.5 million remaining under the Repurchase Program for future repurchases.

This program did not obligate us to acquire any particular amount of common stock and the program could have been extended, modified, suspended or discontinued at any time at the Board's discretion.

We did not repurchase any shares during the six months ended June 30, 2021 or the year ended December 31, 2020.

At December 31, 2020, we had $70.5 million remaining under the Repurchase Program for future repurchases.

The Repurchase Program expired on April 18, 2021.

Cash Flows from Operating Activities

Our operating activities used $6.2 million in the three months ended March 31, 2021 and provided $39.9 million of cash in the three months ended March 31, 2020.

Cash used in operating activities in the three months ended March 31, 2021 was primarily the result of our net loss and lower accrued expenses and other long-term liabilities, as well as lower accounts payable.

These amounts were partially offset by lower accounts receivable higher and other operating assets and higher deferred revenue, coupled with our non-cash expenses, such as the decrease in the fair value of investments recorded in connection with the Kandy Sale, amortization of intangible assets, stock-based compensation, depreciation and amortization of property and equipment, and amortization of debt issuance costs.

Our lower accounts receivable was primarily due to the collection in the quarter of seasonally higher amounts outstanding at December 31, 2020.

The decrease in accrued expenses and other long-term liabilities was primarily due to the cash payments in the quarter related to our employee cash bonus program.

Cash provided by operating activities in the three months ended March 31, 2020 was primarily the result of lower accounts receivable and inventory, coupled with higher accrued expenses and other long-term liabilities, and deferred revenue.

These amounts were partially offset by our net loss, non-cash activities, lower accounts payable and higher other operating assets.

Our lower accounts receivable was due to the collection in the quarter of seasonally higher amounts outstanding at December 31, 2019.

Our operating activities provided $8.0 million and $36.7 million of cash in the six months ended June 30, 2021 and 2020, respectively.

Cash provided by operating activities in the six months ended June 30, 2021 was primarily the result of lower accounts receivable and other operating assets, and slightly higher deferred revenue, coupled with our non-cash operating activities.

These amounts were partially offset by our net loss, lower accrued expenses and other long-term liabilities, lower accounts payable and higher inventory.

Our lower accounts receivable reflected typical mid-year seasonality.

The decrease in accrued expenses and other long-term liabilities was primarily due to the cash payments related to our employee cash bonus program, facilities, professional fees and royalties.

Cash provided by operating activities in the six months ended June 30, 2020 was primarily the result of lower accounts receivable, other operating assets and inventory, higher accrued expenses and other long-term liabilities, and our non-cash operating activities.

These amounts were partially offset by our net loss and lower accounts payable.

Our lower accounts receivable primarily reflected typical mid-year seasonality.

The decrease in other operating assets was primarily due to the scheduled payment received in connection with a litigation settlement in 2019.

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

Cash Flows from Investing Activities

Our investing activities used $5.4 million of cash in the three months ended March 31, 2021 to purchase property and equipment.

Our investing activities used $309.4 million of cash in the three months ended March 31, 2020, comprised of $346.9 million of cash paid as cash consideration for ECI and $6.0 million of investments in property and equipment.

Our investing activities used $7.6 million of cash in the six months ended June 30, 2021, comprised of $10.6 million to purchase property and equipment, partially offset by $2.9 million of proceeds from the sale of our QualiTech business, which operates compliance testing laboratories in Israel for reliability and standardization testing for the high-tech industry, including testing in medical equipment, military equipment and vehicles.

Our investing activities used $318.2 million of cash in the six months ended June 30, 2020, comprised of $346.9 million of cash paid as cash consideration for ECI and $14.9 million of investments in property and equipment.

These amounts were partially offset by $43.5 million of cash proceeds from the sale of land in connection with the ECI Acquisition.

Cash Flows from Financing Activities

Our financing activities used $14.8 million of cash in the three months ended March 31, 2021, primarily due to $74.6 million of proceeds from the incremental loan obtained in connection with the Third Amendment, which amount was used to consummate an open market purchase of all outstanding amounts under the Term B Loan, $11.2 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting, and $77.1 million of principal payments of term debt, including the $74.6 million payoff of the Term B Loan in connection with the Third Amendment, $0.8 million of payments of debt issuance costs and $0.3 million for principal payments of finance leases.

Our financing activities provided $335.1 million of cash in the three months ended March 31, 2020, primarily due to $403.0 million of proceeds from term debt, which was comprised of $400.0 million of proceeds from the 2020 Credit Facility and $3.5 million of proceeds from short-term loans in China for the financing of certain export activities.

Our financing activities used $20.9 million of cash in the six months ended June 30, 2021.

We received $74.6 million of proceeds from the incremental loan obtained in connection with the Third Amendment, which amount was used to consummate an open market purchase of all outstanding amounts under the Term B Loan.

In addition, we used $12.1 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting, and $82.1 million of principal payments of term debt, including the $74.6 million payoff of the Term B Loan in connection with the Third Amendment, $0.8 million of payments of debt issuance costs and $0.5 million for principal payments of finance leases.

Our financing activities provided $331.1 million of cash in the six months ended June 30, 2020, primarily due to $403.5 million of proceeds from term debt, which was comprised of $400.0 million of proceeds from the 2020 Credit Facility and $3.5 million of proceeds from short-term loans in China for the financing of certain export activities.

We also recorded $0.6 million of borrowings under the 2020 Credit Facility.

These proceeds were partially offset by the repayment of amounts outstanding under the 2019 Credit Facility aggregating $56.7 million at the time we entered into the 2020 Credit Facility, $10.6 million for the payment of debt issuance costs in connection with the 2020 Credit Facility, $0.8 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting and $0.7 million for principal payments of finance leases.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis