Ribbon Communications Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the financial condition and results of operations of Ribbon Communications Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the U.S. Securities and Exchange Commission on February 26, 2021. Overview We are a leading global provider of communications technology to service providers and enterprises. We provide a broad range of software and high-performance hardware products, solutions and services that enable the secure delivery of data and voice communications for residential consumers and for small, medium and large enterprises and industry verticals such as finance, education, government, utilities and transportation. Our mission is to create a recognized global technology leader providing increasingly cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance and elasticity. Headquartered in Plano, Texas, we have a global presence with research and development and/or sales and support locations in over thirty-five countries around the world. Impact of COVID-19 on Our Business In 2020, a novel strain of the coronavirus (COVID-19) was declared by the World Health Organization to be a global pandemic. The COVID-19 pandemic has had a negative effect on the global economy, disrupting the various manufacturing, commodity and financial markets and increasing volatility, and has impeded global supply chains, including that of our IP Optical Networks operating segment. Continued dampened global economic conditions as a result of the COVID-19 pandemic, 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. While, to date, we have not experienced material issues, if the ongoing COVID-19 pandemic impairs the ability of our business partners to support us on a timely basis, or negatively impacts the demand for our customers' other products and services, our ability to perform our customer contracts as well as the demand for our solutions may suffer. In addition, disruptions from the COVID-19 pandemic could include, and with respect to our IP Optical Networks operating segment have included, disruption of logistics necessary to import, export and deliver our solutions. The COVID-19 pandemic 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. 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. Any future asset impairment charges, increases in the allowance for doubtful accounts or restructuring charges could be more likely and will be dependent on the severity and duration of this crisis. Presentation Unless otherwise noted, all financial amounts, excluding tabular information, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are rounded to the nearest million dollar amount, and all percentages, excluding tabular information, are rounded to the nearest percentage point. Reclassification of Amortization of Acquired Intangible Assets In 2020, we reclassified amounts recorded for amortization of acquired intangible assets in prior presentations from Cost of revenue - product and Sales and marketing to a separate line included in operating expenses in our consolidated statements of operations. Our management believes this presentation enhances the comparability of our financial statements to industry peers. These reclassifications did not impact our operating income (loss), net income (loss) or earnings (loss) per share for any 42 historical periods. These reclassifications also did not impact our consolidated balance sheets or consolidated statements of cash flows. This reclassification resulted in reductions in the three and nine months ended September 30, 2020 to Cost of revenue - product of $11.6 million and $31.5 million, respectively, and reductions to Sales and marketing of $4.7 million and $13.8 million, respectively, which amounts were reclassified to Amortization of acquired intangible assets. The reduction to Cost of revenue - product in the three months ended September 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 nine months ended September 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. On March 3, 2020 (the "ECI Acquisition Date"), we completed the acquisition of ECI in accordance with the terms of the Agreement and Plan of Merger, dated as of November 14, 2019, by and among Ribbon, an indirect wholly-owned subsidiary of Ribbon ("Merger Sub"), Ribbon Communications Israel Ltd., ECI, and ECI Holding (Hungary) kft, pursuant to which Merger Sub merged with and into ECI, with ECI surviving such merger as a wholly-owned subsidiary of Ribbon (the "ECI Acquisition"). Prior to the ECI Acquisition Date, ECI was a privately-held global provider of end-to-end packet-optical transport and software-defined networking ("SDN") and network function virtualization ("NFV") solutions for service providers, enterprises and data center operators. Ribbon believes the ECI Acquisition positions the Company for growth and enhances its competitive strengths by expanding its product portfolio beyond solutions primarily supporting voice applications to include data applications and optical networking. As consideration for the ECI Acquisition, we issued the ECI shareholders and certain others 32.5 million shares of Ribbon common stock with a fair value of $108.6 million (the "Stock Consideration") and paid $322.5 million of cash, comprised of $183.3 million to repay ECI's outstanding debt, including both principal and interest, and $139.2 million paid to ECI's selling shareholders (the "Cash Consideration"). In addition, ECI shareholders received $33.4 million from the sale of certain of ECI's real estate assets. Cash Consideration was financed through cash on hand and committed debt financing consisting of a new $400 million term loan facility and new $100 million revolving credit facility, which was undrawn at the ECI Acquisition Date. The ECI Acquisition has been accounted for as a business combination and the financial results of ECI have been included in our consolidated financial statements for the periods subsequent to the ECI Acquisition Date. Sale of Kandy Communications Business and Investment in AVCT On December 1, 2020 (the "Kandy Sale Date"), we completed the sale of our Kandy Communications Business to American Virtual Cloud Technologies, Inc. ("AVCT"). AVCT purchased the assets and assumed 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"). 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 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 consideration on the Kandy Sale Date. The Debentures bore interest at a rate of 10% per annum, which was being added to the principal amount of the Debentures. The entire principal amount of each Debenture, together with accrued and unpaid interest thereon, was 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"). Each Debenture was convertible, in whole or in part, at any time at our option into that number of shares of AVCT common stock, calculated by dividing the principal amount being converted, together with all accrued and unpaid interest thereon, by the applicable conversion price, which initially per share was $3.45. The Debentures were subject to mandatory conversion if the AVCT stock price was 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 was subject to customary adjustments including, but not limited to, stock dividends, stock splits and reclassifications. 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, on September 8, 2021 (the "Debenture Conversion Date") upon the completion of customary regulatory filings by AVCT, the Debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares"). 43 The Warrants were 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 were immediately exercisable on the Kandy Sale Date and expire on December 1, 2025. We had not exercised any of the Warrants as of September 30, 2021. We were also subject to a lock-up provision which limited our ability to sell any shares of the AVCT common stock underlying the Debentures and the Warrants prior to June 1, 2021 (the "Lock-Up Period"), 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 calculated 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 were then used to calculate the fair value of the Debentures at each measurement date prior to the Debenture Conversion Date. We used the Black-Scholes valuation model for estimating the fair value of the Warrants at each measurement date. The fair value of the Warrants was 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. After the expiration of the Lock-Up Period and prior to the Debenture Conversion Date, we valued the AVCT Units at each measurement date by multiplying the closing stock price of AVCT common stock by the number of shares upon conversion of the Debentures and Warrants. At September 30, 2021, we valued the Debenture Shares and Warrants by multiplying the closing stock price of AVCT common stock by the number of Debenture Shares and Warrants (collectively, the "AVCT Investment") we held. At September 30, 2021, the aggregate fair value of the AVCT Investment was $50.4 million, comprised of $38.2 million for the Debenture Shares and $12.2 million for the Warrants. At December 31, 2020, the aggregate fair value of the AVCT Units was $115.2 million. We recorded losses of $56.5 million and $68.3 million in the three and nine months ended September 30, 2021, respectively, arising from the change in their aggregate fair value. These amounts are included as components of Other income (expense), net, in our condensed consolidated statements of operations. We recorded $0.9 million and $3.6 million of interest income in the three and nine months ended September 30, 2021, respectively, which was added to the principal amount of the Debentures prior to the Debenture Conversion Date, and which is included in Interest expense, net, in our condensed consolidated statements of operations. The fair value of the AVCT Investment at September 30, 2021 and the fair values of the Debentures and Warrants at December 31, 2021 are reported as Investments in our condensed consolidated balance sheets. The AVCT Investment is classified as a Level 1 fair value measurement at September 30, 2021 and the Debentures and Warrants are classified as Level 2 fair value measurements within the fair value hierarchy at December 31, 2020. We evaluated the nature of our investment in AVCT for the period from the Debenture Conversion Date through September 30, 2021 and determined that it represented an approximate 25% equity interest in AVCT. We determined that we are not the primary beneficiary of AVCT as we do not have the power to direct the activities that most significantly impact the AVCT Investment's economic performance and therefore concluded that, although we have significant influence arising from the AVCT Investment, we do not have a controlling financial interest that would require consolidation as of September 30, 2021. Operating Segments Effective in the fourth quarter of 2020 and in connection with the ECI Acquisition, our CODM began to assess our performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge operating segment ("Cloud and Edge") and the IP Optical Networks operating segment ("IP Optical Networks"). Amounts attributable to IP Optical Networks in the nine months ended September 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. Financial Overview Financial Results We reported income from operations of $2.0 million and $11.9 million for the three months ended September 30, 2021 and 2020, respectively. We reported income from operations of $2.3 million for the nine months ended September 30, 2021 and a 44 loss from operations of $15.2 million for the nine months ended September 30, 2020. Our revenue was $210.4 million and $231.1 million in the three months ended September 30, 2021 and 2020, respectively. Our total gross profit and total gross margin were $120.3 million and 57.2%, respectively, in the three months ended September 30, 2021, and $135.0 million and 58.4%, respectively, in the three months ended September 30, 2020. Our revenue was $614.4 million and $599.6 million in the nine months ended September 30, 2021 and 2020, respectively. Our total gross profit and total gross margin were $359.3 million and 58.5%, respectively, in the nine months ended September 30, 2021, and $348.7 million and 58.2%, respectively, in the nine months ended September 30, 2020. Revenue from our Cloud and Edge segment was $142.4 million and $153.5 million in the three months ended September 30, 2021 and 2020, respectively. Total gross profit and total gross margin for this segment were $95.6 million and 67.1%, respectively, in the three months ended September 30, 2021, and $101.7 million and 66.2%, respectively, in the three months ended September 30, 2020. Revenue from our Cloud and Edge segment was $409.3 million and $428.5 million in the nine months ended September, 2021 and 2020, respectively. Total gross profit and total gross margin for this segment were $275.2 million and 67.2%, respectively, in the nine months ended September 30, 2021, and $279.1 million and 65.1%, respectively, in the nine months ended September 30, 2020. Revenue from our IP Optical Networks segment was $68.0 million and $77.6 million in the three months ended September 30, 2021 and 2020, respectively. Total gross profit and total gross margin for this segment were $24.7 million and 36.4%, respectively, in the three months ended September 30, 2021, and $33.2 million and 42.8%, respectively, in the nine months ended September 30, 2020. Revenue from our IP Optical Networks segment was $205.1 million and $171.1 million in the nine months ended September 30, 2021 and 2020, respectively. Total gross profit and total gross margin for this segment were $84.1 million and 41.0%, respectively, in the nine months ended September 30, 2021, and $69.7 million and 40.7%, respectively, in the nine months ended September 30, 2020. Our operating expenses were $118.3 million and $123.0 million in the three months ended September 30, 2021 and 2020, respectively. Operating expenses for the three months ended September 30, 2021 included $17.2 million of amortization of acquired intangible assets, $2.0 million of acquisition-, disposal- and integration-related expense, and $1.8 million of restructuring and related expense. Operating expenses for the three months ended September 30, 2020 included $16.3 million of amortization of acquired intangible assets, $1.4 million of acquisition-, disposal- and integration-related expense, and $3.3 million of restructuring and related expense. Our operating expenses were $357.0 million and $364.0 million in the nine months ended September 30, 2021 and 2020 respectively. Operating expenses for the nine months ended September 30, 2021 included $50.2 million of amortization of acquired intangible assets, $4.2 million of acquisition-, disposal- and integration-related expense, and $10.5 million of restructuring and related expense. Our operating expenses for the nine months ended September 30, 2020 included $45.4 million of amortization of acquired intangible assets, $14.6 million of acquisition-, disposal- and integration-related expense, and $10.7 million of restructuring and related expense. We recorded stock-based compensation expense of $4.6 million and $4.0 million in the three months ended September 30, 2021 and 2020, respectively, and $14.4 million and $10.2 million in the nine months ended September 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 and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020. Restructuring and Cost Reduction Initiatives 2020 Restructuring Initiative . 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 Acquisition and support our efforts to integrate the two companies. We recorded restructuring and related expense of $0.6 million and $2.9 million in connection with the 2020 Restructuring Initiative in the three months ended September 30, 2021 and 2020, respectively, and $2.9 million and $8.7 million in the nine months ended September 30, 2021 and 2020, respectively. The amount recorded in the three months ended September 30, 2021 was comprised of $0.5 million for severance and 45 related costs for approximately 10 employees and $0.1 million for costs related to restructured facilities. The amount recorded in the nine months ended September 30, 2021 was comprised of $3.1 million for severance and related costs for approximately 30 employees and $0.5 million of expense for variable and other 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 nine months ended September 30, 2020 was comprised of $7.7 million for severance and related costs for approximately 125 employees and $1.0 million for facilities-related expenses. We expect that we will record additional restructuring and related expense approximating $1 million under the 2020 Restructuring Initiative in the aggregate for severance and planned facility consolidations. 2019 Restructuring Initiative . In June 2019, we implemented a restructuring plan to further streamline our global footprint, improve our operations and enhance our customer delivery (the "2019 Restructuring Initiative"). The 2019 Restructuring Initiative includes facility consolidations, refinement of our research and development activities, and a reduction in workforce. In connection with this initiative, we expect to reduce our focus on hardware and hardware-based development over time and to increase our development focus on software virtualization, functional simplicity and important customer requirements. The facility consolidations under the 2019 Restructuring Initiative (the "Facilities Initiative") include a consolidation of our North Texas sites into a single campus, housing engineering, customer training and support, and administrative functions, as well as a reduction or elimination of certain excess and duplicative facilities worldwide. In addition, we are substantially consolidating our global software laboratories and server farms into two lower cost North American sites. We continue to evaluate our properties included in the Facilities Initiative for accelerated amortization and/or right-of-use asset impairment. We expect that the actions under the Facilities Initiative will be completed in 2021. In connection with the 2019 Restructuring Initiative, we recorded restructuring and related expense of $1.2 million and $0.4 million in the three months ended September 30, 2021 and 2020, respectively, and $7.7 million and $2.1 million in the nine months ended September 30, 2021 and 2020, respectively. The amount recorded in the three months ended September 30, 2021 was for facilities-related costs. The amount recorded in the nine months ended September 30, 2021 was for facilities-related costs, and was comprised of $3.4 million for accelerated amortization of lease assets and $4.3 million related to variable and other facilities-related costs in connection with facility consolidations. The amount recorded in the three months ended September 30, 2020 primarily related to facility consolidations. The amount recorded in the nine months ended September 30, 2020 was comprised of $0.6 million for severance and related costs for five employees and $1.5 million related to facility consolidations, including $0.1 million of accelerated amortization of lease assets. As of September 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 nine months ended September 30, 2021 and 2020, respectively, in connection with our 2019 Restructuring Initiative. These amounts are included as components of Restructuring and related expense. We continue to evaluate our properties included in the Facilities Initiative for accelerated amortization and/or right-of-use asset impairment. We may incur additional future expense if we are unable to sublease other locations included in the Facilities Initiative. Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. 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 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 September 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. 46 Results of Operations Three and nine months ended September 30, 2021 and 2020 Revenue. Revenue for the three and nine months ended September 30, 2021 and 2020 was as follows (in thousands, except percentages): Three months ended Decrease from prior year September 30, 2021 September 30, 2020 $ % Product $ 111,726 $ 128,926 $ (17,200) (13.3) % Service 98,672 102,192 (3,520) (3.4) % Total revenue $ 210,398 $ 231,118 $ (20,720) (9.0) % Nine months ended Increase (decrease) from prior year September 30, 2021 September 30, 2020 $ % Product $ 322,744 $ 325,687 $ (2,943) (0.9) % Service 291,636 273,906 17,730 6.5 % Total revenue $ 614,380 $ 599,593 $ 14,787 2.5 % Segment revenue for the three and nine months ended September 30, 2021 and 2020 was as follows (in thousands): Three months ended September 30, 2021 Three months ended September 30, 2020 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Product $ 65,587 $ 46,139 $ 111,726 $ 74,860 $ 54,066 $ 128,926 Service 76,850 21,822 98,672 78,670 23,522 102,192 Total revenue $ 142,437 $ 67,961 $ 210,398 $ 153,530 $ 77,588 $ 231,118 Nine months ended September 30, 2021 Nine months ended September 30, 2020 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Product $ 180,100 $ 142,644 $ 322,744 $ 201,380 $ 124,307 $ 325,687 Service 229,180 62,456 291,636 227,088 46,818 273,906 Total revenue $ 409,280 $ 205,100 $ 614,380 $ 428,468 $ 171,125 $ 599,593 The decrease in our product revenue in the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily the result of lower sales of our Cloud and Edge SBC products and IP Optical Networks products, coupled with the loss of revenue due to the Kandy Sale. These decreases were partially offset by higher revenue from sales of our Cloud and Edge network transformation products. The decrease in our product revenue in the nine months ended September 30, 2021 compared to the nine months ended September 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. These decreases were partially offset by higher revenue from sales of our Cloud and Edge network transformation products and the inclusion of a full nine months of revenue from our IP Optical Networks segment, compared to seven months of revenue in the nine months ended September 30, 2020. Revenue from indirect sales through our channel partner program was 23% and 28% of our product revenue in the three months ended September 30, 2021 and 2020, respectively. Revenue from indirect sales through our channel partner program 47 was 22% and 30% of our product revenue in the nine months ended September 30, 2021 and 2020, respectively. Revenue from sales to enterprise customers was 18% and 29% of our product revenue in the three months ended September 30, 2021 and 2020, respectively. Revenue from sales to enterprise customers was 21% and 31% of our product revenue in the nine months ended September 30, 2021 and 2020, respectively. These sales were made through both our direct sales team and indirect sales channel partners. The timing of the completion of customer projects and revenue recognition criteria satisfaction may cause our product revenue to fluctuate from one period to the next. Service revenue is primarily comprised of hardware and software maintenance and support (“maintenance revenue”) and network design, installation and other professional services (“professional services revenue”). Service revenue for the three and nine months ended September 30, 2021 and 2020 was comprised of the following (in thousands, except percentages): Three months ended Decrease from prior year September 30, 2021 September 30, 2020 $ % Maintenance $ 71,670 $ 73,642 $ (1,972) (2.7) % Professional services 27,002 28,550 (1,548) (5.4) % $ 98,672 $ 102,192 $ (3,520) (3.4) % Nine months ended Increase from prior year September 30, 2021 September 30, 2020 $ % Maintenance $ 212,812 $ 203,333 $ 9,479 4.7 % Professional services 78,824 70,573 8,251 11.7 % $ 291,636 $ 273,906 $ 17,730 6.5 % Segment service revenue for the three and nine months ended September 30, 2021 and 2020 was comprised of the following (in thousands): Three months ended September 30, 2021 Three months ended September 30, 2020 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Maintenance $ 56,786 $ 14,884 $ 71,670 $ 57,623 $ 16,019 $ 73,642 Professional services 20,064 6,938 27,002 21,047 7,503 28,550 Total service revenue $ 76,850 $ 21,822 $ 98,672 $ 78,670 $ 23,522 $ 102,192 Nine months ended September 30, 2021 Nine months ended September 30, 2020 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Maintenance $ 169,445 $ 43,367 $ 212,812 $ 171,032 $ 32,301 $ 203,333 Professional services 59,735 19,089 78,824 56,056 14,517 70,573 Total service revenue $ 229,180 $ 62,456 $ 291,636 $ 227,088 $ 46,818 $ 273,906 Maintenance revenue from the Cloud and Edge and the IP Optical Networks segments each decreased by $1 million in the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase in maintenance revenue in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to $11 million of higher revenue from our IP Optical Networks segment, partially offset by $2 million of lower revenue from our Cloud and Edge segment. The increase in IP Optical Networks maintenance revenue in the nine months ended September 30, 2021 was partially attributable to the inclusion of a full nine months of revenue in the current year period, compared to seven months of revenue in the prior year period. 48 Professional services revenue from the Cloud and Edge and the IP Optical Networks segments each decreased by $1 million in the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase in professional services revenue in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was attributable to $4.6 million of higher revenue from our IP Optical Networks segment and $3.7 million of higher revenue from our Cloud and Edge segment. The increase in IP Optical Networks professional services revenue in the nine months ended September 30, 2021 was partially attributable to the inclusion of a full nine months of revenue in the current year period, compared to seven months of revenue in the prior year period. The following customer contributed 10% or more of our revenue in the three and nine month periods ended September 30, 2021 and 2020: Three months ended Nine months ended Customer September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Verizon Communications Inc. 18% 16% 17% 15% Revenue from customers domiciled outside the United States was 56% and 55% of revenue in the three months ended September 30, 2021 and 2020, respectively, and 56% and 52% of revenue in the nine months ended September 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. Our deferred product revenue was $7 million and $8 million at September 30, 2021 and December 31, 2020, respectively. Our deferred service revenue was $104 million and $115 million at September 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. We expect that our total revenue in 2021 will increase compared to 2020 as a result of both increased customer spend and continued cross-selling opportunities; however, these increases may be affected by supply chain-related challenges. Cost of Revenue/Gross Margin. 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 and nine months ended September 30, 2021 and 2020 were as follows (in thousands, except percentages): Three months ended Decrease from prior year September 30, 2021 September 30, 2020 $ % Cost of revenue Product $ 53,494 $ 58,545 $ (5,051) (8.6) % Service 36,576 37,619 (1,043) (2.8) % Total cost of revenue $ 90,070 $ 96,164 $ (6,094) (6.3) % Gross margin Product 52.1 % 54.6 % Service 62.9 % 63.2 % Total gross margin 57.2 % 58.4 % 49 Nine months ended Increase (decrease) from prior year September 30, 2021 September 30, 2020 $ % Cost of revenue Product $ 144,580 $ 145,103 $ (523) (0.4) % Service 110,498 105,745 4,753 4.5 % Total cost of revenue $ 255,078 $ 250,848 $ 4,230 1.7 % Gross margin Product 55.2 % 55.4 % Service 62.1 % 61.4 % Total gross margin 58.5 % 58.2 % Our segment cost of revenue and gross margins for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands, except percentages): Three months ended September 30, 2021 Three months ended September 30, 2020 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Product $ 20,204 $ 33,290 $ 53,494 $ 25,207 $ 33,338 $ 58,545 Service 26,632 9,944 36,576 26,612 11,007 37,619 Total cost of revenue $ 46,836 $ 43,234 $ 90,070 $ 51,819 $ 44,345 $ 96,164 Product 69.2 % 27.8 % 52.1 % 66.3 % 38.3 % 54.6 % Service 65.3 % 54.4 % 62.9 % 66.2 % 53.2 % 63.2 % Total gross margin 67.1 % 36.4 % 57.2 % 66.2 % 42.8 % 58.4 % Nine months ended September 30, 2021 Nine months ended September 30, 2020 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Product $ 52,737 $ 91,843 $ 144,580 $ 68,458 $ 76,645 $ 145,103 Service 81,317 29,181 110,498 80,930 24,815 105,745 Total cost of revenue $ 134,054 $ 121,024 $ 255,078 $ 149,388 $ 101,460 $ 250,848 Product 70.7 % 35.6 % 55.2 % 66.0 % 38.3 % 55.4 % Service 64.5 % 53.3 % 62.1 % 64.4 % 47.0 % 61.4 % Total gross margin 67.2 % 41.0 % 58.5 % 65.1 % 40.7 % 58.2 % Our product gross margin decreased in the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to the decrease in our IP Optical Networks segment product gross margin, partially offset by margin improvement in our Cloud and Edge segment. The decrease in product gross margin of our IP Optical Networks segment was primarily attributable to product and customer mix, coupled with increased costs associated with near-term supply chain-related cost increases. The increase in product gross margin of our Cloud and Edge segment was primarily attributable to the impact of the Kandy Sale and, to a lesser extent, customer and product mix. Our product gross margin in the nine months ended September 30, 2021 was relatively unchanged compared to the nine months ended September 30, 2020. Our Cloud and Edge segment product gross margin improvement was virtually offset by the decrease in our IP Optical Networks segment product gross margin. The increase in product gross margin of our Cloud and Edge segment was primarily attributable to the impact of the Kandy Sale and, to a lesser extent, customer and product and software mix. The decrease in product gross margin of our IP Optical Networks was primarily attributable to product and customer mix, coupled with increased costs due to supply chain disruptions. 50 Our service gross margin decreased slightly in the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Our Cloud and Edge segment service gross margin decreased, primarily due to higher installation costs. Our IP Optical Networks segment service gross margin increased as the net result of lower service return and installation costs, partially offset by the impact of the segment's fixed service costs against lower revenue. The increase in our service gross margin in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was attributable to improvement in our IP Optical Networks service gross margin arising from lower service and installation costs. Service gross margin for our Cloud and Edge segment was relatively unchanged in the nine months ended September 30, 2021 compared to the same prior year period. 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, coupled with higher costs associated with near-term supply chain-related cost increases. Research and Development Expenses. Research and development expenses consist primarily of salaries and related personnel expenses and prototype costs for the design, development, testing, and enhancement of our products. Research and development expenses for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands, except percentages): Increase from prior year September 30, 2021 September 30, 2020 $ % Three months ended $ 49,132 $ 49,113 $ 19 — % Nine months ended $ 143,339 $ 143,204 $ 135 0.1 % Our research and development expenses were virtually flat in both the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020. Lower expenses for the three months ended September 30, 2021 aggregating $6 million in our Cloud and Edge segment, primarily for employee-related and product development costs, including the impact of the sale of our Kandy Communications Business. These decreases were virtually offset by higher employee-related, product development and infrastructure-related expenses in our IP Optical Networks segment. Overall, our slightly higher employee-related costs in the three months ended September 30, 2021 were equally offset by lower product development costs. Lower expenses aggregating $20 million in our Cloud and Edge segment for the nine months ended September 30, 2021, primarily for employee-related and product development costs, were virtually offset by higher employee-related, product development and infrastructure-related expenses in our IP Optical Networks segment. Overall, increases of $2 million in each of infrastructure costs and employee-related expenses were offset by $4 million in lower 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. We believe that rapid technological innovation is critical to our long-term success, and we are tailoring our investments to meet the requirements of our customers and market. We believe that our research and development expense in 2021 will increase compared to 2020, primarily due to incremental investment in our IP Optical Networks segment to address the global market opportunity. Sales and Marketing Expenses. 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 and nine months ended September 30, 2021 and 2020 were as follows (in thousands, except percentages): Increase (decrease) from prior year September 30, 2021 September 30, 2020 $ % Three months ended $ 36,113 $ 36,898 $ (785) (2.1) % Nine months ended $ 108,212 $ 101,767 $ 6,445 6.3 % The decrease in sales and marketing expenses in the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily attributable to $2 million of lower employee-related expenses in our Cloud and Edge 51 segment, partially offset by higher employee-related and marketing expenses in our IP Optical Networks segment. The increase in sales and marketing expenses in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to $12 million of higher IP Optical Networks segment expenses, partially offset by $6 million of lower Cloud and Edge segment expenses. The increase in IP Optical Networks segment expense is primarily attributable to the inclusion of a full nine months of expense in the current year period, compared to seven months of expense in the prior year period, principally employee- and infrastructure-related costs. The decrease in Cloud and Edge segment expense was primarily attributable to lower employee-related and marketing expenses. 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. General and Administrative Expenses. 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 and nine months ended September 30, 2021 and 2020 were as follows (in thousands, except percentages): Decrease from prior year September 30, 2021 September 30, 2020 $ % Three months ended $ 12,148 $ 16,021 $ (3,873) (24.2) % Nine months ended $ 40,435 $ 48,320 $ (7,885) (16.3) % The decrease in general and administrative expenses in the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was equally attributable to both of our segments. Overall, the reduction was primarily attributable to $2 million lower each of employee-related and infrastructure-related expenses. The decrease in general and administrative expenses in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to $7 million of lower expense for our Cloud and Edge segment, primarily comprised of $3 million of lower professional fees (i.e., consulting, legal and audit fees), the absence of $2 million of litigation-related expense, and $2 million of lower infrastructure-related expense. Lower infrastructure-related and other expenses for our IP Optical Networks segment were partially offset by higher other general and administrative expenses resulting from the inclusion of a full nine months of expense compared to seven months of expense in the prior year. 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 and nine months ended September 30, 2021 and 2020 was as follows (in thousands, except percentages): Increase from prior year September 30, 2021 September 30, 2020 $ % Three months ended $ 17,221 $ 16,349 $ 872 5.3 % Nine months ended $ 50,225 $ 45,352 $ 4,873 10.7 % The increase in amortization of acquired intangible assets in both the three and nine months ended September 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, such that amortization of intangible assets is not recorded on a straight-line basis, coupled with the inclusion of amortization expense related to the ECI Acquisition for the full nine months in 2021, compared to seven months of expense in the same prior year period. Acquisition-, Disposal- and Integration-Related Expenses. Acquisition-, disposal- and integration-related expenses include those expenses related to acquisitions that we would otherwise not have incurred. Acquisition- and disposal-related expenses include professional and services fees, such as legal, audit, consulting, paying agent and other fees. Integration- 52 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. Our acquisition-, disposal- and integration-related expenses for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands): Three months ended Nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Professional and services fees (acquisition-related) $ 13 $ 1,003 $ 156 $ 14,017 Professional and services fees (disposal-related) — — 241 — Integration-related expenses 1,942 363 3,807 590 $ 1,955 $ 1,366 $ 4,204 $ 14,607 Our acquisition-related expenses in the three and nine months ended September 30, 2020 primarily relate to the ECI Acquisition. The disposal-related expenses in the nine months ended September 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 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 $1.8 million and $10.5 million in the three and nine months ended September 30, 2021, respectively. We recorded restructuring and related expense of $3.3 million and $10.7 million in the three and nine months ended September 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. Restructuring and related expense is reported separately in the condensed consolidated statements of operations. Interest Expense, Net. Interest income and interest expense for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands, except percentages): Three months ended Increase (decrease) from prior year September 30, 2021 September 30, 2020 $ % Interest income $ 924 $ 35 $ 889 2,540.0 % Interest expense (3,893) (6,889) (2,996) (43.5) % Interest expense, net $ (2,969) $ (6,854) $ (3,885) (56.7) % Nine months ended Increase (decrease) from prior year September 30, 2021 September 30, 2020 $ % Interest income $ 3,668 $ 451 $ 3,217 713.3 % Interest expense (15,504) (16,100) (596) (3.7) % Interest expense, net $ (11,836) $ (15,649) $ (3,813) (24.4) % Interest income in both the three and nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 53 receivable. Interest expense in the nine months ended September 30, 2020 also included the write-off of debt issuance costs in connection with the retirement of the 2019 Credit Facility, as well as the write-off of debt issuance costs related to the amendment of the 2020 Credit Facility. Income Taxes. We recorded provisions for income taxes of $5.4 million and $1.4 million in the nine months ended September 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. These estimates are reevaluated each quarter based on our estimated tax rate for the full fiscal year. The estimated effective tax rate includes the impact of valuation allowances in various jurisdictions. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial position, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Liquidity and Capital Resources Our condensed consolidated statements of cash flows are summarized as follows (in thousands): Nine months ended September 30, 2021 September 30, 2020 Change Net loss $ (80,877) $ (35,169) $ (45,708) Adjustments to reconcile net loss to cash flows provided by operating activities 143,460 73,826 69,634 Changes in operating assets and liabilities (54,684) 26,591 (81,275) Net cash provided by operating activities $ 7,899 $ 65,248 $ (57,349) Net cash used in investing activities $ (11,335) $ (322,037) $ 310,702 Net cash (used in) provided by financing activities $ (28,017) $ 323,018 $ (351,035) Our cash and restricted cash aggregated $104 million at September 30, 2021 and $136 million at December 31, 2020. These amounts included cash and restricted cash aggregating $36 million at September 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 September 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. ("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"). 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. The Third Amendment provided for an incremental term loan facility to us in the original principal amount of $74.6 million, the proceeds of which were used on the Third Amendment Effective Date to consummate an open market purchase of all outstanding amounts under the Term B Loan. Upon the consummation of the open market purchase, the Term B Loans were assigned to the Borrower and immediately canceled, such that the outstanding amount under the Term A Loan and incremental term loan facility were combined and held by the Lenders (the "2020 Term Loan"). 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 September 30, 2021, we had an outstanding 2020 Term Loan balance of $380.5 million at an average interest rate of 2.9% and $5.9 million of letters of credit outstanding with an interest rate of 2.0%. We were in compliance with all covenants of the 2020 Credit Facility at both September 30, 2021 and December 31, 2020. 54 We are exposed to financial market risk related to foreign currency fluctuations and changes in interest rates. These exposures are actively monitored by management. To manage the volatility related to the exposure to changes in interest rates, we have entered into a derivative financial instrument. Management's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates. Our policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. We do not hold or issue derivative financial instruments for trading or speculative purposes. As a result of exposure to interest rate movements, during March 2020, we entered into an interest rate swap arrangement, which effectively converted our $400 million term loan with its variable interest rate based upon one-month LIBOR to an aggregate fixed rate of 0.904%, plus a leverage-based margin as defined in the 2020 Credit Facility. The notional amount of this swap as of September 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. To accomplish this objective, we are using an interest rate swap as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive 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 and nine months ended September 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 and nine months ended September 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 September 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 September 30, 2021 or December 31, 2020. We use letters of credit, performance and bid bonds in the course of our business. At September 30, 2021, we had bank guarantees, performance and bid bonds under various uncommitted facilities (collectively, the "Guarantees") aggregating $24.8 million, and $5.9 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 September 30, 2021 and December 31, 2020, we had cash collateral of $2.5 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 have been extended, modified, suspended or discontinued at any time at the Board's discretion. We did not repurchase any common stock in the three and nine months ended September 30, 2020 or in the period from January 1, 2021 though the expiration of the Repurchase Program on April 18, 2021. 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 primary source of cash from operating activities has been from cash collections from our customers. We expect cash flows from operating activities to be affected by increases and decreases in sales volumes and timing of collections, and by purchases and shipments of inventory. Our primary uses of cash from operating activities have been for personnel costs and investment in our research and development and in our and sales and marketing, and general and administrative departments. 55 Cash provided by operating activities in the nine months ended September 30, 2021 was $7.9 million, resulting from our net non-cash adjustments of $143.5 million, which was offset by our net loss of $80.9 million and net cash used in changes in our operating assets and liabilities of $54.7 million. The net cash used in changes in our operating assets and liabilities was primarily attributable to a $58.7 million decrease in accrued expenses and other long-term liabilities and an $11.7 million decrease in deferred revenue. These amounts were offset by lower operating assets of $11.3 million, higher accounts payable of $2.2 million and $1.9 million of lower accounts receivable. 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. Our lower accounts receivable and deferred revenue reflected typical mid-year seasonality. Cash provided by operating activities in the nine months ended September 30, 2020 was $65.2 million, resulting from $73.8 million of net non-cash adjustments and $26.6 million of net changes in operating assets and liabilities. These amounts were partially offset by our $35.2 million net loss. The net cash provided by changes in our operating assets and liabilities was attributable to $42.5 million of lower accounts receivable, $36.4 million of lower operating assets, $10.1 million of higher accrued expenses and other long-term liabilities and $6.3 million of lower inventory. These amounts were partially offset by $54.5 million of lower accounts payable and $14.3 million of lower deferred revenue. Our lower accounts receivable and deferred revenue primarily reflected typical mid-year seasonality. The decrease in other operating assets was primarily due to the scheduled payments received in connection with the 2019 settlement of litigation. 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 $11 million of cash in the nine months ended September 30, 2021, comprised of $14 million to purchase property and equipment, partially offset by $3 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 $322 million of cash in the nine months ended September 30, 2020, comprised of $347 million of cash paid as cash consideration for ECI and $19 million of investments in property and equipment. These amounts were partially offset by $43 million of cash proceeds from the sale of land in connection with the ECI Acquisition. Cash Flows from Financing Activities Our financing activities used $28 million of cash in the nine months ended September 30, 2021. We received $75 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 $14 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting, $87 million of principal payments of term debt, including the $75 million payoff of the Term B Loan in connection with the Third Amendment, and $1 million each of payments of debt issuance costs and principal payments of finance leases. Our financing activities provided $323 million of cash in the nine months ended September 30, 2020, primarily due to $479 million of proceeds from term debt, which was comprised of $400 million of proceeds from the 2020 Credit Facility, $75 million from Term Loan B under the Amended 2020 Credit Facility and $4 million of proceeds from short-term loans in China for the financing of certain export activities. These proceeds were partially offset by the repayment of the $75 million of debt that was extinguished in connection with the First Amendment, the repayment of $57 million outstanding under the 2019 Credit Facility (comprised of $8 million under the revolving credit facility and $49 million of long-term debt), the payment of $14 million of debt issuance costs in connection with the 2020 Credit Facility and the First Amendment, the repayment of principal aggregating $8 million related to the 2020 Credit Facility and short-term loans in China, and the payment of $1 million each of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting and principal payments of finance leases. We both borrowed and repaid less than $1 million under our revolving line of credit such that we did not have any outstanding revolving borrowings at September 30, 2020. Based on our current expectations, we believe our current cash and available borrowings under the 2020 Credit Facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least twelve months. The rate at which we consume cash is dependent on the cash needs of our future operations. We anticipate devoting substantial capital resources to continue our research and development efforts, to maintain our sales, support and marketing, to complete acquisition-related integration activities and for other general corporate activities. We further believe that our financial resources, along with managing discretionary expenses, will allow us to manage the anticipated impact of the COVID-19 pandemic on our business operations. Looking ahead, we have developed contingency plans to reduce costs further if the 56 situation continues to deteriorate. The challenges posed by the COVID-19 pandemic on our business continue to evolve rapidly. Consequently, we continue to evaluate our financial position in light of future developments, particularly those relating to the COVID-19 pandemic. However, it is difficult to predict future liquidity requirements with certainty, and our cash and available borrowings under the 2020 Credit Facility may not be sufficient to meet our future needs, which would require us to refinance our debt and/or obtain additional financing. We may not be able to refinance our debt or obtain additional financing on favorable terms or at all. Recent Accounting Pronouncements The Financial Accounting Standards Board ("FASB") issued the following accounting pronouncement which became effective for us in 2021, and which did not have a material impact on our condensed consolidated financial statements: 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. The FASB issued the following accounting pronouncement, which we do not believe will have a material impact on our condensed consolidated financial statements upon adoption: In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope ("ASU 2021-01"), which refines the scope of Accounting Standards Codification 848, Reference Rate Reform ("ASC 848") and clarifies some of its guidance as part of the FASB's monitoring of global reference rate reform activities. ASU 2021-01 permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets (the "discounting transition"). ASU 2021-01 is effective for us prospectively in any period through December 31, 2022 that a modification is made to the terms of the derivatives affected by the discounting transition.