What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-11 compared with 2021-02-26 · 256 added, 292 removed, 419 unchanged (57% of the section changed)

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

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

Continued dampened global economic conditions as a result of the COVID-19 pandemic, particularly in areas experiencing slower vaccine rollout, 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 continuing COVID-19 pandemic impairs the ability of our business partners to support us on a timely basis, or negatively impacts the demand for our customers' other products and services, our ability to perform our customer contracts as well as the demand for our solutions may suffer.

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

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

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

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

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

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

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

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

Reclassification of Amortization of Acquired Intangible Assets

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

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

Reclassifications

In 2021, we reclassified amounts recorded for amortization of certain acquired intangible assets in prior presentations from Total operating expenses under the caption "Amortization of acquired intangible assets" to Total cost of revenue under the caption "Amortization of acquired technology" in the consolidated statements of operations.

Our management believes this presentation aids in the comparability of our financial statements to industry peers.

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

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

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

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

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

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

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

These reclassifications resulted in $42.3 million recorded to Amortization of acquired technology within Total cost of revenue and a $42.3 million decrease to Amortization of acquired intangible assets within Total operating expenses in the year ended December 31, 2020.

The increase to Total cost of revenue decreased our gross profit as a percentage of revenue ("gross margin") by approximately five percentage points.

These reclassifications resulted in $37.6 million recorded to Amortization of acquired technology within Total cost of revenue and a $37.6 million decrease to Amortization of acquired intangible assets within Total operating expenses in the year ended December 31, 2019.

The increase to Total cost of revenue decreased our gross margin by approximately seven percentage points.

New Restructuring Initiative

On February 14, 2022, our Board of Directors approved a strategic restructuring program (the "2022 Restructuring Plan") to streamline the Company's operations in order to support the Company's investment in critical growth areas.

The 2022 Restructuring Plan is expected to include, among other things, charges related to a consolidation of facilities and a workforce reduction.

Any potential positions eliminated in countries outside the United States will be subject to local law and consultation requirements.

We currently expect to record approximately $20 million of restructuring and related expense associated with the 2022 Restructuring Plan, including approximately $6 million related to employee severance arrangements and approximately $14 million related to the facilities consolidation.

We expect that the 2022 Restructuring Plan will be substantially completed in 2022.

Business Acquisitions

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").

On March 3, 2020 (the "ECI Acquisition Date"), we completed the acquisition of ECI Telecom Group Ltd.

("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.

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

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

after post-closing adjustments on March 4, 2020.

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

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

Edgewater Networks, Inc.

On August 3, 2018 (the "Edgewater Acquisition Date") we completed our acquisition of Edgewater Networks, Inc.

("Edgewater"), a private company headquartered in San Jose, California (the "Edgewater Acquisition").

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

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

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

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

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

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

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

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

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

Sale of Kandy Communications Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 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, our subsidiary (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").

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 December 31, 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 AVCT Units 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.

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

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

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

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

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

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.

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

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

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

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

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

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 December 31, 2021, we valued the Debenture Shares and Warrants (the "AVCT Investment") by multiplying the closing stock price of AVCT common stock by the number of Debenture Shares and Warrants we held.

At December 31, 2021, the fair value of the AVCT Investment was $43.9 million, comprised of $33.3 million for the Debenture Shares and $10.6 million for the Warrants.

We recorded a loss of $74.8 million in the year ended December 31, 2021 arising from the change in their aggregate fair value.

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

We recorded $3.5 million of interest income in the year ended December 31, 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 consolidated statement of operations.

At December 31, 2020, the fair value of the AVCT Units was $115.2 million.

The fair value of the AVCT Investment at December 31, 2021 and the AVCT Units at December 31, 2020 are reported as Investments in our consolidated balance sheets.

The AVCT Investment is classified as a Level 1 fair value measurement at December 31, 2021 and the AVCT Units 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 December 31, 2021 and determined that it represented an approximate 15% equity interest in AVCT on a diluted basis.

Accordingly, 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 we had neither significant influence nor a controlling interest arising from the AVCT Investment.

Litigation Settlement

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

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

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

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

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

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

Our Cloud and Edge operating segment provides secure and reliable software and hardware products, solutions and services for Voice over Internet Protocol ("VoIP") communications, Voice over Long-Term Evolution ("VoLTE") and Voice Over 5G ("VoNR") communications, and Unified Communications and Collaboration ("UC&C") services to both service provider and enterprise customers.

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

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

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

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

Our IP Optical Networks operating segment provides high-performance, secure solutions for IP networking and optical transport, supporting wireless networks including 5G, metro and edge aggregation, core networking, data center interconnect, legacy network transformation and transport solutions for wholesale carriers.

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

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Financial Results

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

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

We reported a loss from operations of $117.8 million for 2021 and income from operations of $1.7 million for 2020.

We reported a net loss of $177.2 million for 2021 and net income of $88.6 million for 2020.

Our revenue was $845.0 million in 2021, comprised of $556.7 million attributable to Cloud and Edge and $288.3 million attributable to IP Optical Networks.

Our revenue was $563 million in 2019.

Our revenue was $843.8 million in 2020, comprised of $583.3 million attributable to Cloud and Edge and $260.5 million attributable to IP Optical Networks.

Our gross profit was $444.7 million in 2021, comprised of $343.5 million attributable to Cloud and Edge and $101.2 million attributable to IP Optical Networks.

Our gross profit was $355 million in 2019.

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

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

Our gross profit was $450.8 million in 2020, comprised of $353.5 million attributable to Cloud and Edge and $97.4 million attributable to IP Optical Networks.

Our gross margin was 52.6% in 2021 and 53.4% in 2020.

In 2021, our Cloud and Edge gross margin was 61.7% and our IP Optical Networks gross margin was 35.1%.

In 2020, our Cloud and Edge gross margin was 60.6% and our IP Optical Networks gross margin was 37.4%.

Our operating expenses were $562.5 million in 2021 and $449.1 million in 2020.

Our 2021 operating expenses included $116.0 million for the impairment of goodwill, $28.3 million of amortization of acquired intangible assets, $7.6 million of acquisition-, disposal- and integration-related expense, and $11.7 million of restructuring and related expense.

Our 2020 operating expenses included $18.6 million of amortization of acquired intangible assets, $17.2 million of acquisition-, disposal- and integration-related expense, and $16.2 million of restructuring and related expense.

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

We recorded stock-based compensation expense of $19.4 million in 2021 and $13.9 million in 2020.

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

See "Results of Operations" in this MD&A for additional discussion of our results of operations for the years ended December 31, 2021 and 2020.

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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").

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

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

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

In connection with this initiative, we have eliminated duplicate functions arising from the ECI Acquisition in support of our efforts to integrate the two companies.

In connection with the 2020 Restructuring Initiative, we recorded restructuring and related expense of $4.7 million and $14.0 million in 2021 and 2020, respectively.

The 2021 amount was comprised of $4.6 million for severance and related costs for approximately 60 employees and $0.1 million for variable and other facilities-related costs.

The 2020 amount was comprised of $11.5 million for severance and related costs for approximately 190 employees, $2.0 million for variable and other facilities-related costs, and $0.5 million for accelerated amortization of lease assets.

We expect these amounts will be fully paid in 2022.

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We expect that the actions under the Facilities Initiative will be completed in 2023.

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

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

In connection with the 2019 Restructuring Initiative, we recorded restructuring and related expense of $7.0 million and $2.3 million in 2021 and 2020, respectively.

The amount recorded in 2021 was comprised of $5.7 million for variable and other facilities-related costs and $1.3 million of net expense for accelerated amortization of lease assets.

The amount for accelerated amortization of lease assets was comprised of $3.4 million of expense and $2.1 million of income related to a lease modification for one of our restructured lease facilities.

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

The amount accrued for severance and related costs was paid in 2021.

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

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We recorded $3.4 million and $0.6 million of expense for accelerated rent amortization in the years ended December 31, 2021 and 2020, respectively.

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

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

These amounts are included as components of Restructuring and related expense, and reduced our Operating lease right-of-use assets in our consolidated balance sheets at December 31, 2021 and 2020.

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

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

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

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

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

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

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

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

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

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

The GENBAND Restructuring Initiative is complete.

Critical Accounting Policies and Estimates

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

customize our software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company.

We do not customize our software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company.

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

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

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

Under the cost-to-cost measure of progress,

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

When the measure of progress is based upon expended labor, progress toward completion is measured as the ratio of labor time expended to date versus the total estimated labor time required to complete the performance obligation.

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

Debentures and Warrants .

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

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

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

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

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

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

Investments .

We received Debentures and Warrants (collectively, the "AVCT Units") as consideration in connection with the Kandy Sale, which we accounted for in accordance with Accounting Standards Codification ("ASC") 820, Fair Value Measurement ("ASC 820").

We were 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.

On September 8, 2021 (the "Debenture Conversion Date"), the Debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares").

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

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

Both the Lattice and Black-Scholes valuation models were 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, the Company 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.

Since the Debenture Conversion Date, the Company is valuing 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") it is holding at each measurement date.

Adjustments to the fair values of the AVCT Units (prior to the Debenture Conversion Date) and AVCT Investment (subsequent to the Debenture Conversion Date) are included in Other (expense) income, net.

The fair values of the AVCT Investment and the AVCT Units are reported as Investments in our consolidated balance sheets at December 31, 2021 and 2020, respectively.

Warranty Accruals.

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

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

individually identified and separately recognized.

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

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

Based on the results of our recently completed impairment test, we determined that the carrying value of our IP Optical Networks segment exceeded its fair value.

We determined that the amount of the impairment was $116.0 million, and recorded an impairment charge in the fourth quarter of 2021.

The impairment charge is reported separately in our consolidated statement of operations for the year ended December 31, 2021.

We determined that there was no impairment of our Cloud and Edge segment.

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

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

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

We account for our leases in accordance with Accounting Standards Codification ("ASC") 842, Leases ("ASC 842").

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

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

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

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

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

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

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

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

These valuation allowances mainly relate to our U.S.

In 2021, we released a portion of the valuation allowances of $28 million on U.S.

federal attributes, including certain U.S.

federal net operating loss carryforwards.

Thus, at December 31, 2021, we had valuation allowances of $472 million to offset deferred tax assets of $598 million.

These remaining valuation allowances primarily relate to our U.S.

and Israel operations.

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These amounts could change in future periods based upon our operating results and changes in tax law.

We provide for income taxes during interim periods based on the estimated effective tax rate for the full year.

We record a cumulative adjustment to the tax provision in an interim period in which a change in the estimated annual effective tax rate is determined.

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

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

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

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

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Revenue for the years ended December 31, 2021 and 2020 was as follows (in thousands, except percentages):

December 31, Increase

December 31, Increase (decrease)

from prior year

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Total revenue $ 556,656 $ 288,301 $ 844,957 $ 583,270 $ 260,525 $ 843,795

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

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

The decrease in our product revenue in 2021 compared to 2020 was primarily the result of $35 million of lower sales of our Cloud and Edge SBC products, coupled with the loss of $11 million of revenue due to the Kandy Sale.

Supply chain and logistics issues, especially in the fourth quarter of 2021, impacted our ability to deliver products, accounting for $10 million of these lower sales and delaying these sales until 2022.

These decreases were partially offset by $18 million of higher sales of

our Cloud and Edge network transformation products and $12 million of IP Optical Networks products.

The increase in revenue from the sale of IP Optical Networks products was attributable to a full year of revenue included in 2021, compared to ten months of revenue in 2020.

In 2021, 25% of our product revenue was attributable to sales to enterprise customers, compared to 30% in 2020.

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Total service revenue $ 308,086 $ 83,829 $ 391,915 $ 307,825 $ 68,058 $ 375,883

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

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

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

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

Total service revenue from our Cloud and Edge segment was relatively flat in 2021 compared to 2020.

Service revenue from our IP Optical Networks segment increased by $16 million in 2021 compared to 2020.

IP Optical Networks maintenance revenue and professional services revenue increased by $12 million and $4 million, respectively, in 2021 and 2020.

This increase is primarily attributable to the inclusion of a full year of revenue in 2021, compared to 10 months of revenue in 2020.

The following customer contributed 10% or more of our revenue in the years ended December 31, 2021 and 2020:

Verizon Communications Inc.

* Less than 10% of total revenue.

Revenue earned from customers domiciled outside the United States was 56% of revenue in 2021 and 55% of revenue in 2020.

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

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

We expect that our total revenue in 2022 will increase modestly compared to our 2021 total revenue as our strategy to grow our IP Optical market share in North America gains momentum and capital spending in India and Israel increases.

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 years ended December 31, 2020 and 2019 were as follows (in thousands, except percentages):

December 31, Increase

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

Our cost of revenue, gross profit and gross margin for the years ended December 31, 2021 and 2020 were as follows (in thousands, except percentages):

December 31, Increase (decrease)

from prior year

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Service 147,209 145,916 1,293 0.9 %

Amortization of acquired technology 38,343 42,290 (3,947) (9.3) %

Total cost of revenue $ 400,297 $ 392,978 $ 7,319 1.9 %

Product 56.2 % 63.4 %

Service 61.2 % 62.6 %

Total gross margin 58.4 % 63.0 %

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

Gross profit $ 444,660 $ 450,817 $ (6,157) (1.4) %

Gross margin 52.6 % 53.4 %

Our segment cost of revenue, gross profit and gross margin for the years ended December 31, 2021 and 2020 were as follows (in thousands, except percentages):

December 31, 2021 Year ended

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Service 107,677 39,532 147,209 108,985 36,931 145,916

Amortization of acquired technology 25,704 12,639 38,343 30,937 11,353 42,290

Total cost of revenue $ 213,192 $ 187,105 $ 400,297 $ 229,805 $ 163,173 $ 392,978

December 31, 2020 Year ended

December 31, 2019

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

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

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

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

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

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

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

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

Gross profit $ 343,464 $ 101,196 $ 444,660 $ 353,465 $ 97,352 $ 450,817

Gross margin 61.7 % 35.1 % 52.6 % 60.6 % 37.4 % 53.4 %

Our gross margin decreased by one percentage point in 2021 compared to 2020.

This decrease was primarily the result of higher component costs, expedite and production fees, and logistics expenses (collectively, "production costs") in both of our segments, coupled with product and customer mix, which decreased our gross margin by approximately two percentage points in the aggregate.

This decrease was partially offset by the absence of costs related to our Kandy products as a result of the Kandy Sale, which increased our gross margin by approximately one percentage point.

The increase in our Cloud and Edge segment gross margin in 2021 compared to 2020 was primarily attributable to the absence of Kandy costs in the current year, partially offset by the aforementioned higher production costs in 2021.

The decrease in our IP Optical segment gross margin in 2021 compared to 2020 was primarily attributable to the aforementioned higher production costs, partially offset by lower installation costs.

We believe that our gross margin may decrease in 2022 compared to 2021 as a result of higher expected sales from IP Optical Networks, which has lower margins due to the higher hardware content in their products, and higher production costs resulting from ongoing worldwide supply chain issues.

Research and Development.

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$ 194,948 $ 194,525 $ 423 0.2 %

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

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

Our research and development expenses were virtually flat in 2021 compared to 2020.

Lower costs in our Cloud and Edge segment aggregated $25 million, primarily employee-related and product development costs, including the impact of the Kandy sale.

These decreases were virtually offset by higher costs in our IP Optical Networks segment, primarily employee-related, product development and infrastructure -related expenses.

These higher costs were primarily attributable to the inclusion of a full year of expenses in the current year, compared to ten months of expense in 2020, coupled with increased investment in our IP Optical Networks segment's product development.

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

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

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

We believe that our R&D expenses in 2022 will increase modestly compared to 2021, primarily due to our incremental investment in critical growth areas, partially offset by cost savings from the 2022 Restructuring Initiative.

Sales and Marketing.

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

sales support expenses.

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

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$ 150,279 $ 139,318 $ 10,961 7.9 %

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

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

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

The increase in sales and marketing expenses in 2021 compared to 2020 was primarily attributable to $7 million of higher employee-related expenses, $2 million of higher consulting fees, $1 million of higher infrastructure-related costs, and $1 million of net increases in other sales and marketing expenses.

At the segment level, our IP Optical Networks segment sales and market expenses increased by $15 million in 2021, partially offset by $4 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 year of expense in the current year, compared to ten months of expense in 2020, principally employee-related, consulting and infrastructure-related costs.

The decrease in Cloud and Edge segment expense was primarily attributable to lower employee-related expenses resulting from the Kandy Sale.

We believe that our sales and marketing expenses 2022 will be consistent with 2021 levels.

General and Administrative.

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

December 31, Increase

December 31, Decrease

from prior year

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$ 53,661 $ 63,286 $ (9,625) (15.2) %

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

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

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

Amortization of Acquired Intangible Assets.

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

The decrease in general and administrative expenses in the 2021 compared to 2020 was primarily attributable to $5 million of lower infrastructure-related expenses, $2 million each of lower employee- and litigation-related expenses, and $1 million of

net decreases in other general and administrative expenses.

At the segment level, our Cloud and Edge segment expenses decreased by $8 million, while our IP Optical Networks segment expenses decreased by $2 million.

The decrease in Cloud and Edge segment expenses was primarily attributable to lower infrastructure-related expense, the absence of approximately $2 million of litigation-related expense in the current year, and lower employee-related expenses and professional (i.e., consulting, legal and audit) fees.

Lower infrastructure- and employee-related expenses for our IP Optical Networks segment were partially offset by higher general and administrative expenses resulting from the inclusion of a full year of expense in the current year, compared to ten months of expense in 2020.

We believe that our general and administrative expenses in 2022 will decrease slightly compared to our 2021 levels, primarily due to cost savings from the 2022 Restructuring Initiative.

Amortization of Acquired Intangible Assets included in Operating expenses.

Amortization of acquired intangible assets included in Operating expenses for the years ended December 31, 2021 and 2020 was as follows (in thousands, except percentages):

December 31, Increase

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$ 28,283 $ 18,620 $ 9,663 51.9 %

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

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

The increase in amortization of acquired intangible assets included in operating expenses was primarily due to the inclusion of amortization expense related to the ECI Acquisition for a full year, compared to ten months of expense in 2020, coupled with the scheduled recognition of such expense in relation to expected future cash flows, as the amortization of such intangible assets is not recorded on a straight-line basis.

Impairment of Goodwill .

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

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

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

Our annual testing for impairment of goodwill is completed as of October 1.

Based on the results of our recently completed impairment test, we determined that the carrying value of our IP Optical Networks segment exceeded its fair value, and recorded an impairment charge of $116.0 million in the fourth quarter of 2021.

We determined that there was no impairment of our Cloud and Edge segment.

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

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

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

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

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

Integration-related expenses

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

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

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

We recorded $7.6 million of acquisition-, disposal- and integration-related expenses in 2021, comprised of $7.1 million of integration-related expenses, $0.3 million of disposal-related expenses an $0.2 million of acquisition-related expenses.

We recorded $17.2 million of acquisition-, disposal- and integration-related expenses in 2020, comprised of $13.4 million of acquisition-related expenses, $1.9 million of disposal-related expenses and $1.8 million of integration-related expenses.

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

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

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

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

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

Restructuring and Related.

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

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

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

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

Restructuring and related expense is reported separately in the consolidated statements of operations.

Interest (Expense) Income, net.

We recorded restructuring and related expense of $11.7 million in 2021, comprised of $4.6 million for severance and related costs, and $7.1 million for variable and other facilities-related costs, including $1.3 million of net expense for the accelerated amortization of lease assets.

We recorded $16.2 million of restructuring and related expense in 2020, comprised of $12.0 million for severance and related costs, and $4.2 million for variable and other facilities-related costs, including $0.6 million for the accelerated amortization of lease assets.

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

Interest Expense, net.

Interest expense and interest income for the years ended December 31, 2021 and 2020 were as follows (in millions, except percentages):

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$ (15,831) $ (21,042) $ 5,211 (24.8) %

Interest income in 2021 primarily represents paid-in-kind interest on the Debentures prior to the Debenture Conversion Date, which was recorded as an increase to the fair value of the Debentures.

Interest expense in 2021 was primarily comprised of $13.8 million of interest on our outstanding term debt and $4.8 million in the aggregate related to amortization of debt issuance costs in connection with the 2020 Credit Facility (as defined below), including the write-off of $2.5 million of capitalized debt issuance costs in connection with the Third Amendment (as defined below), and interest expense in connection with the factoring of certain accounts receivable.

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

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

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

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

Other Income (Expense), Net .

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

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

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

Income Tax Provision.

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

Other (Expense) Income, Net .

We recorded other expense, net, aggregating $74.5 million in 2021, primarily comprised of $74.8 million of losses resulting from the change in fair value of the AVCT Units for the period from January 1, 2021 to the Debenture Conversion Date and the AVCT Investment for the period from the Debenture Conversion Date to December 31, 2021.

This loss was partially offset by a gain of $2.8 million on 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 ("QualiTech").

We recorded $112.7 million of net other income in 2020, primarily in connection with the Kandy Sale, which was comprised of $83.6 million from the gain on the sale, and $30.3 million related to the increase in the fair value of the AVCT Units from the Kandy Sale Date through December 31, 2020.

Income Tax Benefit (Provision).

We recorded an income tax benefit of $31.0 million in 2021 and an income tax provision of $4.7 million in 2020.

The benefit recorded in 2021 was primarily the result of the release of part of the valuation allowance against deferred tax assets in the U.S.

and a reduction in the deferred taxes on the undistributed earnings of non-U.S.

subsidiaries due to legal entity restructuring activities.

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

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

During 2021 and 2020, we performed an analysis to determine if, based on all available evidence, we considered it more likely than not that some portion or all of the recorded deferred tax assets will not be realized in a future period.

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

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

and Israel deferred tax assets.

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

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

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

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

Off-Balance Sheet Arrangements

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, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

As a result of our evaluations, in 2021, we released a portion of the valuation allowance on U.S.

federal net operating loss carryforwards of $28 million.

As a result, for the U.S.

deferred tax assets, we concluded that deferred tax assets are generally realizable, with the exception of certain federal and state net operating loss carryforwards, as well as certain tax credits, that are not anticipated to be utilized.

Accordingly, we have maintained a valuation allowance on our U.S.

deferred tax assets of $30.5 million.

As a result of our evaluations for Israel, we maintained a valuation against our deferred tax assets in Israel.

Liquidity and Capital Resources

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2021 2020 Change

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

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

Net (loss) income $ (177,185) $ 88,591 $ (265,776)

Adjustments to reconcile net (loss) income to cash flows provided by operating activities 251,655 (17,903) 269,558

Changes in operating assets and liabilities (55,288) 30,876 (86,164)

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Net cash used in investing activities $ (14,188) $ (330,073) $ 315,885

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

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

Net cash (used in) provided by financing activities $ (33,683) $ 319,303 $ (352,986)

We had cash and restricted cash aggregating $106.5 million and $135.7 million at December 31, 2021 and 2020, respectively.

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

subsidiaries aggregating $46 million at December 31, 2020 and $12 million at December 31, 2019.

subsidiaries aggregating approximately $60 million and $46 million at December 31, 2021 and 2020, respectively.

If we elect to repatriate all of the funds held by our non-U.S.

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

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

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

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

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

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

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

Revolving loans under the 2019 Credit Facility bore interest at our option at either the Eurodollar ("LIBOR") rate plus a margin ranging from 1.50% to 3.00% per year or the base rate (the highest of the Federal Funds rate plus 0.50%, or the prime rate announced from time to time in The Wall Street Journal) plus a margin ranging from 0.50% to 2.00% per year (such margins being referred to as the “Applicable Margin”).

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

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

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

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

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

We currently maintain the Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), which we entered into on March 3, 2020, 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 consolidated financial statements.

The proceeds from the 2020 Credit Facility were used, in part, to pay off in full all obligations of the Company under the 2019 Credit Facility.

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

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

If an event of default relating to bankruptcy or other insolvency events with respect to the Company or any of its subsidiaries occurs, all obligations

under the 2020 Credit Facility will immediately become due and payable.

If any other event of default exists under the 2020 Credit Facility, the lenders can accelerate the maturity of the obligations outstanding under the 2020 Credit Facility and exercise other rights and remedies, including charging a default rate of interest equal to 2.00% per year above the rate that would otherwise be applicable.

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

Agreement) plus 0.50%, or the prime rate announced from time to time in The Wall Street Journal) plus a margin ranging from 0.50% to 2.50% per year (the "Applicable Margin").

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

The Applicable Margin varies depending on our Consolidated Net Leverage Ratio (as defined in the 2020 Credit Agreement).

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The First Amendment did not change the terms applied to the Term A Loan or the Revolving Credit Facility under the 2020 Credit Facility.

The Term B Loan is scheduled to mature in March 2026 and bears interest, at the Borrower's option, at either the LIBOR rate plus a margin of 7.50% per year, or the base rate (the highest of the Federal Funds Effective Rate (as defined in the 2020 Credit Facility) plus 0.50%, or the prime rate announced from time to time in The Wall Street Journal, plus a margin of 6.50% per year.

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

We are required to make quarterly principal payments totaling approximately $1 million in the first year and $8 million in the aggregate over the next four and a half years, with the final payment approximating $66 million due on the maturity date.

The Term B Loan was scheduled to mature in March 2026 and bore interest, at the Borrower's option, at either the LIBOR rate plus a margin of 7.50% per year, or the base rate (the highest of the Federal Funds Effective Rate (as defined in the 2020 Credit Facility) plus 0.50%, or the prime rate announced from time to time in The Wall Street Journal, plus a margin of 6.50% per year.

The Term B Loan had a lower rate of amortization than the Term A Loan and was subject to a 1.0% premium if voluntarily repaid in connection with a repricing transaction (as defined in the First Amendment) occurring prior to the six month anniversary of the First Amendment Effective Date.

We were required to make quarterly principal payments totaling approximately $1 million in the first year and $8 million in the aggregate over the next four and a half years, with the final payment approximating $66 million due on the maturity date.

The First Amendment reduced the Borrower's ability to incur new tranches of term loans, or increases in commitments under the Amended 2020 Term Loan Facility or the 2020 Revolving Credit Facility.

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

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

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

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

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

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

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.

On March 10, 2022, we entered into a Fourth Amendment to the 2020 Credit Facility (the "Fourth Amendment") to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) to 4.25:1.00 for the first quarter of 2022 and 4.50:1.00 for the second quarter of 2022, with reductions in subsequent quarters through the third quarter of 2023, when the ratio will be fixed at 3.00:1.00.

In connection with the Fourth Amendment, we made a $15.0 million prepayment that was applied to the final payment due on the maturity date.

At December 31, 2021, we had an outstanding 2020 Term Loan balance of $375.5 million at an average interest rate of 3.4% and $4.3 million of letters of credit outstanding with an interest rate of 2.5%.

We were in compliance with all covenants of the 2020 Credit Facility at both December 31, 2021 and 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 December 31, 2020 was $400 million, and the swap matures on March 3, 2025, the same date the Term A Loan and 2020 Revolving Credit Facility mature.

The notional amount of this swap as of December 31, 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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Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

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

During the year ended December 31, 2020, such

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

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 consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings.

During the years ended December 31, 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 year ended December 31, 2020, we recorded no hedge ineffectiveness.

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

However, during the years ended December 31, 2021 and 2020, we recorded no hedge ineffectiveness.

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

Based upon projected forward rates, we estimate as of December 31, 2021 that $2.1 million may be reclassified as an increase to interest expense over the next 12 months.

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

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

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

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

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

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

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

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

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

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

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

At December 31, 2021, we had $30.1 million of letters of credit, bank guarantees, performance and bid bonds outstanding (collectively, the "Guarantees"), comprised of the $4.3 million of letters of credit under the 2020 Credit Facility described above (the "Letters of Credit") and $25.8 million of bank guarantees and performance and bid bonds under various uncommitted facilities (collectively, the "Other Guarantees").

At December 31, 2020, we had $32.6 million of Guarantees, comprised of $5.6 million of Letters of Credit and $27.0 million of Other Guarantees.

At December 31, 2021 and 2020, we had cash collateral of $2.6 million and $2.7 million, respectively, supporting the Guarantees under our uncommitted facilities.

This cash collateral is included in Restricted cash in our consolidated balance sheets at December 31, 2021 and 2020.

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

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During the year ended December 31, 2021, we received $118.5 million of cash from the sale of certain accounts receivable and recorded $0.8 million of interest expense in connection with these transactions.

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

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

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

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

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

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

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

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

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

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

The Company did not repurchase any common stock in the year ended December 31, 2020 or in the period from January 1, 2021 though the expiration of the Repurchase Program 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 sales and marketing, and general and administrative departments.

Our operating activities provided $19 million of cash in 2021, primarily the result of higher accounts payable and deferred revenue, and lower other operating assets, coupled with our non-cash operating expenses such as the impairment of goodwill, the decrease in the fair value of the AVCT Investment, amortization of intangible assets, stock-based compensation and depreciation.

These amounts were partially offset by our net loss and a non-cash gain arising from the reversal of portions of our deferred tax asset, coupled with lower accrued expenses and other long-term liabilities and higher accounts receivable and inventory.

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

Our operating activities provided $102 million of cash in 2020, primarily the result of our net income, lower other operating assets, inventory and accounts receivable, higher accrued expenses and other long-term liabilities, and our non-cash operating income and expenses such as the gain on the Kandy Sale, amortization of intangible assets, stock-based compensation, depreciation, and amortization of debt issuance costs.

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

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

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

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

The decrease in accounts payable

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

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

Cash Flows from Investing Activities

Our investing activities used $14 million and $330 million of cash in 2021 and 2020, respectively.

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

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

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

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

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

Our 2021 investing activities were comprised of $17 million paid for purchases of property and equipment, partially offset by $3 million of proceeds from the sale of QualiTech.

Our 2020 investing activities were comprised of $347 million of cash paid as cash consideration for ECI and $26 million paid for purchases of property and equipment, 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 $34 million of cash in 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.

We used $92 million for principal payments of term debt, including the $75 million payoff of the Term B Loan in connection with the Third Amendment, $14 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting, and $1 million each for principal payments of finance leases and payments of debt issuance costs.

Our financing activities provided $319 million of cash in 2020, primarily due to $479 million of proceeds from term debt, which was comprised of $400 million from the 2020 Credit Facility, $75 million from the Term B Loan under the Amended 2020 Credit Facility (concurrent with the repayment of the same amount of original debt under the 2020 Credit Facility as noted below) and $4 million of proceeds from short-term loans in China for the financing of certain export activities.

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

2020 Credit Facility and short-term loans in China.

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

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

We also repaid $25 million on the note to certain of the former GENBAND equityholders and the deferred purchase consideration of $22 million to the selling Edgewater shareholders.

We spent $5 million to repurchase and retire shares of our common stock on the open market and used $1 million to pay withholding obligations related to the net share settlement of restricted stock awards upon vesting.

We also spent $1 million for principal payments on our finance lease obligations and $1 million for debt issuance costs.

Our borrowings totaled $167 million, comprised of $117 million of borrowings under the revolving line of credit and $50 million of term loan debt under the 2019 Credit Facility.

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

Contractual Obligations

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

Payments due by period

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

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

Operating lease obligations 89,637 16,912 30,676 14,568 27,481

Purchase obligations 86,780 80,415 6,165 200 —

Restructuring severance obligations 5,410 5,410 — — —

Debt obligations - principal * 393,062 15,531 36,250 341,281 —

Debt obligations - interest 61,872 15,362 28,628 17,440 442

Employee postretirement defined benefit plans 10,717 1,508 3,230 2,287 3,692

Uncertain tax positions ** 14,054 14,054 — — —

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

__________________________________

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

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

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

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

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

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

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

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

The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations at December 31, 2021, primarily comprised of our debt principal and interest obligations as described above, and our operating lease and purchase obligations.

Our operating lease obligations totaled $88 million at December 31, 2021, with payments aggregating $21 million in 2022, $18 million in 2023, $11 million in 2024 and $38 million thereafter.

Our purchase obligations totaled $167 million at December 31, 2021, with estimated payments aggregating $139 million in 2022 and $28 million thereafter.

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 ongoing impact of the COVID-19 pandemic on our business operations.

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

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

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Recent Accounting Pronouncements

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

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

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

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

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

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

ASU 2018-15 amends ASC 350, Intangibles - Goodwill and Other (“ASC 350”) to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply the guidance in ASC 350-40 to determine which implementation costs should be capitalized in such a CCA.

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

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

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

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

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

Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which adds an impairment model that is based on expected losses rather than incurred losses.

Under ASU 2016-13, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses.

In April and May 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ("ASU 2019-04") and ASU 2019-05 Financial Instruments - Credit Losses (Topic 326):

Targeted Transition Relief ("ASU 2019-05"), respectively.

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

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

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

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

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which modifies Accounting Standards Codification ("ASC") 740, Income Taxes (Topic 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 adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements upon adoption.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"), which amends ASC 805, Business Combinations (Topic 805) , to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an acquiring entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers (Topic 606) ("ASC 606").

Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date.

While primarily related to contract assets and contract liabilities that were accounted for by the acquiree in accordance with ASC 606, ASU 2021-08 also applies to contract assets and contract liabilities from other contracts to which the provisions of ASC 606 apply, such as contract liabilities from the sale of nonfinancial assets within the scope of ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) .

ASU 2021-08 is effective for the Company January 1, 2023, with early adoption permitted.

We believe that the adoption of ASU 2021-08 could have a material impact on our consolidated financial statements for periods including and subsequent to significant business acquisitions.

In January 2021 the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):

Scope ("ASU 2021-01"), which refines the scope of ASC 848, Reference Rate Reform , 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 the Company prospectively in any period through December 31, 2022 that a modification is made to the terms of the derivatives affected by the discounting transition.

We do not believe the adoption of ASU 2021-01 will have a material impact on our consolidated financial statements.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis