Ribbon Communications Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 58 Consolidated Balance Sheets as of December 31, 2021 and 2020 61 Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 62 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2021, 2020 and 2019 63 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2021, 2020 and 2019 64 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 65 Notes to Consolidated Financial Statements 67 57 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Ribbon Communications Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Ribbon Communications Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition — Refer to Notes 2 and 16 to the financial statements Critical Audit Matter Description The Company recognizes revenue from two primary sources: products and services. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct. When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services when they are sold separately to similar customers in order to estimate standalone selling price. Management is required to use judgment to develop its estimates of standalone selling price. Auditing the Company’s estimates of standalone selling price required a high degree of auditor judgment and an increased extent of effort, including the need to involve our data analytics specialists to assist in the testing of the standalone selling price analyses given the judgment required by management in this area. 58 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the testing of management’s estimation of standalone selling prices included the following, among others: • We tested the effectiveness of controls over revenue, including those over the determination of estimated standalone selling price. • We evaluated whether management’s significant accounting policies related to the estimation of standalone selling price were appropriate. • With the assistance of our data analytics specialists, we evaluated the estimated standalone selling price analyses prepared by the Company, including testing the underlying detail of standalone sales and the mathematical accuracy of the calculations. Goodwill – IP Optical Networks Reporting Unit — Refer to Notes 2 and 10 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company used a combination of the income and market approaches to estimate reporting unit fair value. With respect to the income approach, management is required to make significant estimates and assumptions related to discount rates and forecasts of future revenue. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance was $417 million as of December 31, 2021, of which $192 million was allocated to the IP Optical Networks Reporting Unit (“IP Optical”). The carrying value of IP Optical exceeded its fair value as of December 31, 2021, and, therefore, $116 million of impairment was recognized. Given the significant judgments made by management to estimate the fair value of IP Optical, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the discount rate and forecasts of future revenue and profit margin required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the discount rate and forecasts of future revenue and profit margin, used by management to estimate the fair value of IP Optical, included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of IP Optical, such as controls related to management’s selection of the discount rate and forecasts of future revenue and profit margin. • We evaluated management’s ability to accurately forecast future revenues and profit margins by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s revenue and profit margin forecasts by comparing the forecasts to: ◦ Historical revenues and profit margins. ◦ Internal communications to management and the Board of Directors. ◦ Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies. • We evaluated the impact of changes in management’s forecasts from the October 1, 2021, annual measurement date to December 31, 2021. • With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate by: ◦ Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation. ◦ Developing a range of independent estimates and comparing those to the discount rate selected by management. 59 Table of Contents /s/ Deloitte & Touche LLP Dallas, Texas March 11, 2022 We have served as the Company's auditor since 2005. 60 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 103,915 $ 128,428 Restricted cash 2,570 7,269 Accounts receivable, net 282,917 237,738 Inventory 54,043 45,750 Other current assets 37,545 28,461 Total current assets 480,990 447,646 Property and equipment, net 47,685 48,888 Intangible assets, net 350,730 417,356 Goodwill 300,892 416,892 Investments 43,931 115,183 Deferred income taxes 47,287 10,651 Operating lease right-of-use assets 53,147 69,757 Other assets 23,075 20,892 $ 1,347,737 $ 1,547,265 Liabilities and Stockholders' Equity Current liabilities: Current portion of term debt $ 20,058 $ 15,531 Accounts payable 97,121 63,387 Accrued expenses and other 100,752 134,865 Operating lease liabilities 17,403 17,023 Deferred revenue 109,119 96,824 Total current liabilities 344,453 327,630 Long-term debt, net of current 350,217 369,035 Operating lease liabilities, net of current 55,196 72,614 Deferred revenue, net of current 20,619 26,010 Deferred income taxes 8,116 16,842 Other long-term liabilities 41,970 48,281 Total liabilities 820,571 860,412 Commitments and contingencies (Note 26) Stockholders' equity: Preferred stock, $ 0.01 par value; 10,000,000 shares authorized; none issued and outstanding — — Common stock, 240,000,000 shares authorized, $ 0.0001 par value, 148,895,308 shares issued and outstanding at December 31, 2021; 145,425,248 shares issued and outstanding at December 31, 2020 15 15 Additional paid-in capital 1,875,234 1,870,256 Accumulated deficit ( 1,355,661 ) ( 1,178,476 ) Accumulated other comprehensive income (loss) 7,578 ( 4,942 ) Total stockholders' equity 527,166 686,853 $ 1,347,737 $ 1,547,265 See notes to the consolidated financial statements. 61 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Statements of Operations (in thousands, except per share data) Year ended December 31, 2021 2020 2019 Revenue: Product $ 453,042 $ 467,912 $ 262,030 Service 391,915 375,883 301,081 Total revenue 844,957 843,795 563,111 Cost of revenue: Product 214,745 204,772 95,774 Service 147,209 145,916 112,680 Amortization of acquired technology 38,343 42,290 37,573 Total cost of revenue 400,297 392,978 246,027 Gross profit 444,660 450,817 317,084 Operating expenses: Research and development 194,948 194,525 141,060 Sales and marketing 150,279 139,318 106,310 General and administrative 53,661 63,286 53,870 Amortization of acquired intangible assets 28,283 18,620 11,652 Impairment of goodwill 116,000 — 164,300 Acquisition-, disposal- and integration-related 7,632 17,164 12,953 Restructuring and related 11,653 16,235 16,399 Total operating expenses 562,456 449,148 506,544 (Loss) income from operations ( 117,796 ) 1,669 ( 189,460 ) Interest expense, net ( 15,831 ) ( 21,042 ) ( 3,877 ) Other (expense) income, net ( 74,516 ) 112,690 70,444 (Loss) income before income taxes ( 208,143 ) 93,317 ( 122,893 ) Income tax benefit (provision) 30,958 ( 4,726 ) ( 7,182 ) Net (loss) income $ ( 177,185 ) $ 88,591 $ ( 130,075 ) (Loss) earnings per share: Basic $ ( 1.20 ) $ 0.64 $ ( 1.19 ) Diluted $ ( 1.20 ) $ 0.61 $ ( 1.19 ) Shares used to compute (loss) earnings per share: Basic 147,575 138,967 109,734 Diluted 147,575 144,650 109,734 See notes to the consolidated financial statements. 62 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Statements of Comprehensive (Loss) Income (in thousands) Year ended December 31, 2021 2020 2019 Net (loss) income $ ( 177,185 ) $ 88,591 $ ( 130,075 ) Other comprehensive income (loss), net of tax: Unrealized gain (loss) on interest rate swap, net of reclassifications 12,759 ( 10,948 ) — Foreign currency translation adjustments ( 239 ) 894 194 Unrealized gain on available-for-sale marketable securities, net of reclassification adjustments for realized amounts — — 590 Employee retirement benefits — 2,585 ( 1,960 ) Other comprehensive income (loss), net of tax 12,520 ( 7,469 ) ( 1,176 ) Comprehensive (loss) income, net of tax $ ( 164,665 ) $ 81,122 $ ( 131,251 ) See notes to the consolidated financial statements. 63 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Statements of Stockholders' Equity (in thousands, except share data) Common stock Shares Amount Additional paid-in capital Accumulated deficit Accumulated other comprehensive income (loss) Total stockholders' equity Balances, January 1, 2019 106,815,636 $ 11 $ 1,723,576 $ ( 1,136,992 ) $ 3,703 $ 590,298 Issuance of common stock in connection with employee stock purchase plan 282,646 863 863 Exercise of stock options 127,334 235 235 Vesting of restricted stock awards and units 1,504,707 — Vesting of performance-based stock awards and units 9,466 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 240,673 ) ( 1,193 ) ( 1,193 ) Shares issued as consideration in connection with the acquisition of Anova Data, Inc. 2,948,793 15,186 15,186 Repurchase and retirement of common stock ( 975,914 ) ( 4,536 ) ( 4,536 ) Stock-based compensation expense 12,601 12,601 Reclassification of liability to equity for bonuses converted to stock awards 1,052 1,052 Other comprehensive loss ( 1,176 ) ( 1,176 ) Net loss ( 130,075 ) ( 130,075 ) Balances, December 31, 2019 110,471,995 11 1,747,784 ( 1,267,067 ) 2,527 483,255 Exercise of stock options 38,288 70 70 Vesting of restricted stock awards and units 2,246,690 1 1 Vesting of performance-based stock units 323,752 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 472,028 ) ( 1,674 ) ( 1,674 ) Shares issued as consideration in connection with the acquisition of ECI Telecom Group Ltd. 32,500,000 $ 3 108,547 108,550 Shares issued as consideration in connection with acquisition of Anova Data, Inc. 316,551 1,630 1,630 Stock-based compensation expense 13,899 13,899 Other comprehensive loss ( 7,469 ) ( 7,469 ) Net income 88,591 88,591 Balances, December 31, 2020 145,425,248 15 1,870,256 ( 1,178,476 ) ( 4,942 ) 686,853 Exercise of stock options 13,815 24 24 Vesting of restricted stock awards and units 3,653,552 — Vesting of performance-based stock units 1,557,656 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 1,754,963 ) ( 14,464 ) ( 14,464 ) Stock-based compensation expense 19,418 19,418 Other comprehensive income 12,520 12,520 Net loss ( 177,185 ) ( 177,185 ) Balances, December 31, 2021 148,895,308 $ 15 $ 1,875,234 $ ( 1,355,661 ) $ 7,578 $ 527,166 See notes to the consolidated financial statements. 64 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Statements of Cash Flows (in thousands) Year ended December 31, 2021 2020 2019 Cash flows from operating activities: Net (loss) income $ ( 177,185 ) $ 88,591 $ ( 130,075 ) Adjustments to reconcile net (loss) income to cash flows provided by operating activities: Depreciation and amortization of property and equipment 16,962 17,188 11,949 Amortization of intangible assets 66,626 60,910 49,225 Amortization of debt issuance costs 4,763 5,673 360 Stock-based compensation 19,418 13,899 12,601 Impairment of goodwill 116,000 — 164,300 Deferred income taxes ( 45,596 ) ( 4,616 ) 5,299 Gain on sale of business ( 2,772 ) ( 83,552 ) — Decrease (increase) in fair value of investments 71,252 ( 30,296 ) — Reduction to deferred purchase consideration — ( 70 ) ( 8,124 ) Foreign currency exchange losses 5,002 2,961 1,090 Changes in operating assets and liabilities: Accounts receivable ( 47,279 ) 9,578 ( 3,936 ) Inventory ( 9,029 ) 11,842 7,776 Other operating assets 9,958 44,343 ( 17,849 ) Accounts payable 34,482 ( 49,561 ) ( 16,282 ) Accrued expenses and other long-term liabilities ( 50,324 ) 20,629 ( 18,538 ) Deferred revenue 6,904 ( 5,955 ) ( 2,111 ) Net cash provided by operating activities 19,182 101,564 55,685 Cash flows from investing activities: Purchases of property and equipment ( 17,132 ) ( 26,721 ) ( 10,824 ) Business acquisitions, net of cash acquired — ( 346,852 ) — Proceeds from sale of business 2,944 — — Sales/maturities of marketable securities — — 7,295 Proceeds from the sale of fixed assets — 43,500 — Net cash used in investing activities ( 14,188 ) ( 330,073 ) ( 3,529 ) Cash flows from financing activities: Borrowings under revolving line of credit — 615 117,000 Principal payments on revolving line of credit — ( 8,615 ) ( 164,000 ) Proceeds from issuance of long-term debt 74,625 478,500 50,000 Principal payment of debt, related party — — ( 24,716 ) Principal payments of term debt ( 92,176 ) ( 134,188 ) ( 1,250 ) Payment of deferred purchase consideration — — ( 21,876 ) Principal payments of finance leases ( 903 ) ( 1,258 ) ( 913 ) Payment of debt issuance costs ( 789 ) ( 14,147 ) ( 891 ) Proceeds from the sale of common stock in connection with employee stock purchase plan — — 863 Proceeds from the exercise of stock options 24 70 235 65 Table of Contents RIBBON COMMUNICATIONS INC. Consolidated Statements of Cash Flows (continued) (in thousands) Year ended December 31, 2021 2020 2019 Payment of tax withholding obligations related to net share settlements of restricted stock awards ( 14,464 ) ( 1,674 ) ( 1,193 ) Repurchase of common stock — — ( 4,536 ) Net cash (used in) provided by financing activities ( 33,683 ) 319,303 ( 51,277 ) Effect of exchange rate changes on cash and cash equivalents ( 523 ) 260 70 Net (decrease) increase in cash and cash equivalents ( 29,212 ) 91,054 949 Cash, cash equivalents and restricted cash, beginning of year 135,697 44,643 43,694 Cash, cash equivalents and restricted cash, end of year $ 106,485 $ 135,697 $ 44,643 Supplemental disclosure of cash flow information: Interest paid $ 14,867 $ 15,546 $ 4,072 Income taxes paid $ 14,447 $ 9,293 $ 4,665 Income tax refunds received $ 1,488 $ 1,163 $ 1,757 Supplemental disclosure of non-cash investing activities: Capital expenditures incurred, but not yet paid $ 2,269 $ 3,749 $ 2,566 Property and equipment acquired under finance leases $ — $ — $ 1,442 Business acquisition purchase consideration - common stock issued $ — $ 108,550 $ 15,186 Business acquisition purchase consideration - deferred payments $ — $ 1,630 $ 1,700 Supplemental disclosure of non-cash financing activities: Total fair value of restricted stock awards, restricted stock units, performance-based stock awards and performance-based stock units on date vested $ 40,751 $ 7,927 $ 7,422 See notes to the consolidated financial statements. 66 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (1) NATURE OF THE BUSINESS Ribbon Communications Inc. ("Ribbon" or the "Company") is a leading global provider of communications technology to service providers and enterprises. The Company provides a broad range of software and high-performance hardware products, network solutions, and services that enable the secure delivery of data and voice communications, and high-bandwidth networking and connectivity for residential consumers and for small, medium, and large enterprises and industry verticals such as finance, education, government, utilities, and transportation. Ribbon's mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance, and elasticity. The Company is headquartered in Plano, Texas, and has a global presence with research and development, or sales and support locations in over thirty-five countries around the world. (2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States ("GAAP"). On December 1, 2020 (the "Kandy Sale Date"), American Virtual Cloud Technologies, Inc. ("AVCT") completed the purchase of the Company's cloud-based enterprise service business (the "Kandy Communications Business"). The revenue and expenses of the Kandy Communications Business are excluded from the Company's consolidated financial statements for the period subsequent to the Kandy Sale Date. On March 3, 2020 (the "ECI Acquisition Date"), the Company merged with ECI Telecom Group Ltd ("ECI") (the "ECI Acquisition"). The financial results of ECI are included in the Company's consolidated financial statements for the period subsequent to the ECI Acquisition Date. On February 28, 2019 (the "Anova Acquisition Date"), the Company acquired the business and technology assets of Anova Data, Inc. ("Anova"). The financial results of Anova are included in the Company's consolidated financial statements for the period subsequent to the Anova Acquisition Date. Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Ribbon and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates and Judgments The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and judgments relied upon in preparing these consolidated financial statements include accounting for business combinations, revenue recognition for multiple element arrangements, inventory valuations, assumptions used to determine the fair value of stock-based compensation, intangible assets, goodwill, debentures and warrants, legal contingencies and recoverability of Ribbon's net deferred tax assets and the related valuation allowances. Ribbon regularly assesses these estimates and records changes in estimates in the period in which they become known. Ribbon bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates. 67 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Reclassifications In the fourth quarter of 2021, the Company 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 Cost of revenue under the caption "Amortization of acquired technology" in the consolidated statements of operations. The Company's management believes this presentation aids in the comparability of its financial statements to industry peers. These reclassifications did not impact operating income (loss), net income (loss) or earnings (loss) per share for any historical periods. These reclassifications also did not impact the consolidated balance sheets or statements of cash flows for any historical periods. The Company reports depreciation of property and equipment related to production activities as components of cost of revenue. These reclassifications for the years ended December 31, 2020 and 2019 were as follows (in thousands): Year ended December 31, 2020 Year ended December 31, 2019 Prior presentation Amounts reclassified Revised presentation Prior presentation Amounts reclassified Revised presentation Product revenue $ 467,912 $ 467,912 $ 262,030 $ 262,030 Service revenue 375,883 375,883 301,081 301,081 Total revenue 843,795 — 843,795 563,111 — 563,111 Cost of revenue - product 204,772 204,772 95,774 95,774 Cost of revenue - service 145,916 145,916 112,680 112,680 Amortization of acquired technology — 42,290 42,290 — 37,573 37,573 Total cost of revenue 350,688 42,290 392,978 208,454 37,573 246,027 Gross profit 493,107 ( 42,290 ) 450,817 354,657 ( 37,573 ) 317,084 Research and development 194,525 194,525 141,060 141,060 Sales and marketing 139,318 139,318 106,310 106,310 General and administrative 63,286 63,286 53,870 53,870 Amortization of acquired intangible assets 60,910 ( 42,290 ) 18,620 49,225 ( 37,573 ) 11,652 Impairment of goodwill — — 164,300 164,300 Acquisition-, disposal- and integration-related 17,164 17,164 12,953 12,953 Restructuring and related 16,235 16,235 16,399 16,399 Total operating expenses 491,438 ( 42,290 ) 449,148 544,117 ( 37,573 ) 506,544 Operating income (loss) $ 1,669 $ — $ 1,669 $ ( 189,460 ) $ — $ ( 189,460 ) In addition, certain other reclassifications, not affecting previously reported net income (loss), have been made to the previously issued financial statements to conform to the current year presentation. Business Combinations The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired in the business combination that are not individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. 68 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Revenue Recognition The Company derives revenue from two primary sources: products and services. Product revenue includes the Company's hardware and software that function together to deliver the products' essential functionality. Software and hardware are also sold on a standalone basis. Services include customer support (software updates, upgrades and technical support), consulting, design services, installation services and training. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct. When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services when they are sold separately to similar customers in order to estimate standalone selling price. The Company's software licenses typically provide a perpetual right to use the Company's software. The Company also sells term-based software licenses that expire and Software-as-a-Service ("SaaS")-based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software and hardware are delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. Product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. The Company begins to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period. The Company offers warranties on its products. Certain of the Company's warranties are considered to be assurance-type in nature, ensuring the product is functioning as intended. Assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations. The Company does not allow and has no history of accepting product returns. Services revenue includes revenue from customer support and other professional services. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. The Company sells its customer support contracts at a percentage of list or net product price. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year . The Company's professional services include consulting, technical support, resident engineer services, design services and installation services. Because control transfers over time, revenue is recognized based on progress toward completion of the performance obligation. The method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the input method to measure progress for its contracts because it believes such method best depicts the transfer of assets to the customer, which occurs as the Company incurs costs for the contracts. However, in some instances, the Company uses the output method because it best depicts the transfer of asset to the customer. Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. When the measure of progress is based upon expended labor, progress toward completion is measured as the ratio of labor time expended to date versus the total estimated labor time required to complete the performance obligation. Revenue is recorded proportionally as costs are incurred or as labor is expended. Costs to fulfill these obligations include internal labor as well as subcontractor costs. Customer training includes courses offered by the Company. The related revenue is typically recognized as the training services are performed. Operating Segments The Company's chief operating decision maker (the "CODM") is its president and chief executive officer. Effective in the fourth quarter of 2020 and in connection with the ECI Acquisition, the CODM began to assess the Company's performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge segment ("Cloud and Edge") and the IP Optical Networks segment ("IP Optical Networks"). Financial information for the IP Optical Networks segment is not 69 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) presented for any years prior to 2020, as this segment arose from the ECI Acquisition, and accordingly is not included in the Company's consolidated financial statements for the year ended December 31, 2019. Financial Instruments The carrying amounts of Ribbon's financial instruments approximate their fair values and include accounts receivable, equity securities and convertible warrants received as sale consideration, borrowings under a revolving credit facility, accounts payable and term debt. Financial instruments with remaining maturities or that are due within one year from the balance sheet date are classified as current. Financial instruments with maturities or that are payable more than one year from the balance sheet date are classified as noncurrent. Fair Value Option - Investment in AVCT The Company received debentures and warrants as sale consideration in connection with the sale of the Kandy Communications Business. On September 8, 2021 (the "Debenture Conversion Date"), the debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares") (see Note 4 for a discussion of the valuation of the debentures, warrants and Debenture Shares). In connection with the conversion of the debentures to the Debenture Shares, the Company elected to use the fair value option to account for its equity investment in AVCT as permitted under Accounting Standards Codification ("ASC") 825, Financial Instruments ("ASC 825"), which then refers to ASC 820, Fair Value Measurement ("ASC 820") to provide the fair value framework for valuing such investments. In accordance with ASC 820, the Company is recording the investment in AVCT at fair value, with changes in fair value recorded as a component of Other (expense) income, net, in the consolidated statements of operations. Restricted Cash The Company classifies as restricted cash all cash pledged as collateral to secure long-term obligations and all cash whose use is otherwise limited by contractual provisions. At December 31, 2021, the Company had $ 2.6 million of restricted cash, representing restricted short-term bank deposits pledged to secure certain performance and financial bonds as security for the Company's obligations under tenders, contracts and to one of its main subcontractors. At December 31, 2020, the Company had $ 7.3 million of restricted cash, comprised of $ 4.6 million restricted in connection with a tax payment on certain fixed assets formerly held by ECI that were sold in connection with the ECI Acquisition, and $ 2.7 million of restricted short-term bank deposits pledged to secure certain performance and financial bonds as security for the Company's obligations under tenders, contracts and to one of its main subcontractors. Transfers of Financial Assets The Company's IP Optical Networks segment maintains customer receivables factoring agreements with a number of financial institutions. Under the terms of these agreements, the Company may transfer receivables to the financial institutions, on a non-recourse basis, provided that the financial institutions approve the receivables in advance. The Company maintains credit insurance policies from major insurance providers or obtains letters of credit from the customers for a majority of its factored trade receivables. The Company accounts for the factoring of its financial assets as a sale of the assets and records the factoring fees, when incurred, as a component of interest expense in the consolidated statements of operations, and the proceeds from the sales of receivables are included in cash from operating activities in the consolidated statements of cash flows. During the year ended December 31, 2021, the Company 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. During the year ended December 31, 2020, the Company received $ 119.8 million of cash from the sale of certain accounts receivable and recorded $ 0.9 million of interest expense in connection with these transactions. Foreign Currency Translation For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated into U.S. 70 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) dollars at the current exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Accumulated other comprehensive income. For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Other expense (income), net. Realized and unrealized foreign currency exchange gains and losses arising from transactions denominated in currencies other than the subsidiary's functional currency are reflected in earnings. The Company records its foreign currency gains (losses) as a component of Other (expense) income, net. The Company recognized net foreign currency losses of $ 5.0 million, $ 3.0 million and $ 1.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. Inventory Inventory is recorded at the lower of cost or market value using the first-in, first-out convention. The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors. Ribbon writes down evaluation equipment (equipment at customer sites for testing and evaluation) at the time of shipment to its customers, as it is probable that the inventory value will not be realized. Deferred product costs represent deferred cost of revenue for product shipments to customers prior to satisfaction of Ribbon's revenue recognition criteria. The Company classifies inventory that is not expected to be consumed within one year from the balance sheet date as noncurrent and includes such inventory as a component of Other assets. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from two to five years . Leasehold improvements are amortized over the lesser of the lease term or five years . When an asset is sold or retired, the cost and related accumulated depreciation or amortization are eliminated, and the resulting gain or loss, if any, is recognized in (Loss) income from operations in the consolidated statement of operations. The Company reviews property and equipment for impairment in the same manner as intangible assets discussed below. Software development costs associated with internal use software are incurred in three stages of development: the preliminary project stage, the application development stage and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property and equipment. Internal use software is amortized on a straight-line basis over its estimated useful life of three years , beginning when the software is ready for its intended use. Intangible Assets and Goodwill The Company's intangible assets are comprised of in-process research and development, developed technology, customer relationships, trade names, and internal use software. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable based upon the estimated undiscounted cash flows. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the Company will recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset. The Company amortizes its intangible assets over their respective useful lives, with the exception of in-process research and development, 71 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) which has an indefinite life until the product is generally available, at which time such asset is typically reclassified to developed technology, and the Company begins to amortize this asset. See Note 10 for additional information regarding the Company's intangible assets. Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested for impairment at least annually, or more frequently if indicators of potential impairment exist, by comparing the fair value of the Company's reporting unit to its carrying value. Prior to 2020, the Company's annual test for impairment of goodwill was completed as of November 30. Effective in 2020, the Company changed its annual goodwill impairment test date from November 30 to October 1. This change did not have a material impact on the Company's consolidated financial statements. As described above, effective in the fourth quarter of 2020, the Company determined that it has two operating segments: Cloud and Edge, and IP Optical Networks. For the purpose of testing goodwill for impairment, all goodwill is assigned to a reporting unit, which may be either an operating segment or a portion of an operating segment. The Company's reporting units are its operating segments. The Company performs a fair value analysis using both an income and market approach, which encompasses a discounted cash flow analysis and a guideline public company analysis using selected multiples. The Company assesses each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and the methodologies are weighted appropriately. Any impairment charges are reported separately in the Company's consolidated statements of operations. Stock-Based Compensation The Company's stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of the awards that will be forfeited. The Company uses the Black-Scholes valuation model for estimating the fair value on the date of grant of stock options. The fair value of stock option awards is affected by the Company's stock price as well as valuation assumptions, including the volatility of Ribbon's stock price, expected term of the option, risk-free interest rate and expected dividends. The Company may grant to certain of its executives performance-based stock units ("PSUs") that include a market condition. The Company uses a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the volatility of each entity and the pair-wise covariance between each entity. These results are then used to calculate the grant date fair values of the PSUs. Concentration of Risk The financial instruments that potentially subject Ribbon to concentrations of credit risk are cash, restricted cash and accounts receivable. The Company's cash equivalents and investments were managed by one financial institution at December 31, 2021. Historically, the Company has not experienced significant losses due to such bank depository concentration. The Company's investments at December 31, 2021 and 2020 consisted of securities of AVCT (see Note 4). Certain components and software licenses from third parties used in Ribbon's products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt Ribbon's delivery of products and thereby materially adversely affect Ribbon's revenue and operating results. Advertising Costs Advertising costs are expensed as incurred and included as a component of Sales and marketing expense in the Company's consolidated statements of operations. Advertising expenses were $ 1.6 million for the year ended December 31, 2021, $ 0.8 million for the year ended December 31, 2020 and $ 0.5 million for the year ended December 31, 2019. 72 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Loss Contingencies and Reserves Ribbon is subject to ongoing business risks arising in the ordinary course of business, including legal claims, that affect the estimation process of the carrying value of assets, the recording of liabilities and the possibility of various loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. Ribbon regularly evaluates current information available to determine whether such amounts should be adjusted and records changes in estimates in the period they become known. An allowance for doubtful accounts is estimated based on the Company's assessment of the collectability of specific customer accounts. Ribbon accrues for royalties for technology that it licenses from vendors based on established royalty rates and usage. Ribbon is periodically contacted by third parties who claim that Ribbon's products infringe on certain intellectual property of a third party. Ribbon evaluates these claims and accrues amounts when it is probable that the obligation has been incurred and the amounts are reasonably estimable. Warranty The Company records warranty liabilities for estimated costs of fulfilling its obligations under standard limited hardware and software warranties at the time of sale. The specific warranty terms and conditions vary depending upon the country in which the Company does business, but generally includes material costs, technical support, labor and associated overhead over a period ranging from one to three years . The Company assumed ECI's warranty liability in connection with the ECI Acquisition. At December 31, 2021, the Company's liability for product warranties was $ 13.1 million, of which $ 5.9 million was current and included in Accrued expenses and other and $ 7.2 million was long-term and included in Other long-term liabilities in the Company's consolidated balance sheet. At December 31, 2020, the Company's liability for product warranties was $ 14.9 million, of which $ 6.5 million was current and included in Accrued expenses and other, and $ 8.4 million was long-term and included in Other long-term liabilities in the Company's consolidated balance sheet. Research and Development Grants The Company records grants received from the Office of the Innovation Authority of the Israeli Ministry of Economics (the "IIA") as a reduction to Research and development expense. Royalties payable to the IIA are recognized pursuant to sales of related products and are included in Cost of revenue - product (see Note 26). Accounting for Leases The Company accounts for its leases in accordance with Accounting Standards Codification ("ASC") 842, Leases ("ASC 842") (see Note 21). The Company has operating and finance leases for corporate offices, research and development facilities, and certain equipment. Operating leases are reported separately in the Company's consolidated balance sheets at December 31, 2021 and 2020. Assets acquired under finance leases are included in Property and equipment, net, in the consolidated balance sheets at December 31, 2021 and 2020. The Company determines if an arrangement is a lease at inception. A contract is determined to contain a lease component if the arrangement provides the Company with a right to control the use of an identified asset. Lease agreements may include lease and non-lease components. In such instances for all classes of underlying assets, the Company does not separate lease and non-lease components but rather, accounts for the entire arrangement under leasing guidance. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term. For operating leases, lease expense for minimum fixed lease payments is recognized on a straight-line basis over the lease term. The expense for finance leases includes both interest and amortization expense components, with the interest component calculated based on the effective interest method and the amortization component calculated based on straight-line amortization of the right-of-use asset over the lease term. Lease contracts may contain variable lease costs, such as common area maintenance, utilities and tax reimbursements that vary over the term of the contract. Variable lease costs are not included in minimum fixed lease payments and as a result, are excluded from the measurement of the right-of-use assets and lease 73 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) liabilities. The Company expenses all variable lease costs as incurred. Accounting for Income Taxes Deferred tax assets and liabilities are recognized for the expected future consequences of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities and operating loss carryforwards, using tax rates expected to be in effect for the years in which the differences are expected to reverse. The Company records valuation allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized. The Company has provided for income taxes on the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2021, excluding Ireland and Israel. These subsidiaries, excluding Ireland and Israel, are cost-plus or limited risk distributors that are not anticipated to need to use excess funds locally. Accordingly, the Company is required to recognize and record deferred taxes in 2021. The deferred taxes are recorded on the entire outside basis differences related to the foreign subsidiaries, the largest of these differences being undistributed earnings. The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of the benefit attributable to the position is recognized. The tax benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50 % likely of being realized upon resolution of the contingency. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. Defined Benefit Plans The Company has defined benefit plans for some of its employees at various international locations. The Company recognizes retirement benefit assets or liabilities in the consolidated balance sheets reflecting the funded status of pension and other retirement benefit plans. Retirement benefit assets and liabilities are adjusted for the difference between the benefit obligations and the plan assets at fair value (measured at year-end), with the offset recorded directly to stockholders' equity through accumulated other comprehensive income (loss), net of tax. The amount recorded in stockholders' equity represents the after-tax unamortized actuarial gains or losses, unamortized transition obligations and unamortized prior service costs. Recent Accounting Pronouncements 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 the Company's 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. The Company believes that the adoption of ASU 2021-08 could have 74 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) a material impact on its 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. The Company does not believe the adoption of ASU 2021-01 will have a material impact on its consolidated financial statements. (3) BUSINESS ACQUISITIONS ECI On the ECI Acquisition Date, Ribbon completed its merger transaction with ECI in accordance with the terms of the Agreement and Plan of Merger, dated as of November 14, 2019, by and among Ribbon, ECI, an indirect wholly-owned subsidiary of Ribbon ("Merger Sub"), Ribbon Communications Israel Ltd. and ECI Holding (Hungary) Kft pursuant to which Merger Sub merged with and into ECI, with ECI surviving such merger as a wholly-owned subsidiary of Ribbon. Prior to the ECI Acquisition Date, ECI was a privately-held global provider of end-to-end packet optical transport and software-defined networking ("SDN") and network function virtualization ("NFV") solutions for service providers, enterprises and data center operators. As consideration for ECI, Ribbon issued the ECI shareholders and certain others 32.5 million shares of Ribbon common stock with a fair value of $ 108.6 million (the "Stock Consideration") and paid $ 322.5 million of cash (the "Cash Consideration"), comprised of $ 183.3 million to repay ECI's outstanding debt, including both principal and interest, and $ 139.2 million paid to ECI's selling shareholders. In addition, ECI shareholders received $ 33.4 million from the sale of certain of ECI's real estate assets. Cash Consideration was financed through cash on hand and committed debt financing consisting of a new $ 400 million term loan facility and $ 100 million revolving credit facility, which was undrawn at the ECI Acquisition Date. The ECI Acquisition has been accounted for as a business combination and the financial results of ECI have been included in the Company's consolidated financial statements for the period subsequent to the ECI Acquisition. The Company's financial results for the year ended December 31, 2020 included $ 260.5 million of revenue and $ 52.9 million of net loss attributable to ECI. The Company finalized the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities in the fourth quarter of 2020. A summary of the allocation of the purchase consideration for ECI is as follows (in thousands): 75 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Fair value of consideration transferred: Cash consideration: Repayment of ECI outstanding debt obligations $ 183,266 Cash paid to selling shareholders 139,244 Payment to selling shareholders from sale of ECI real estate assets 33,400 Less cash and restricted cash acquired ( 9,058 ) Net cash consideration 346,852 Fair value of Ribbon stock issued 108,550 Fair value of total consideration $ 455,402 Fair value of assets acquired and liabilities assumed: Current assets, net of cash and restricted cash acquired $ 120,203 Property and equipment 54,913 Intangible assets: In-process research and development 34,000 Developed technology 111,900 Customer relationships 116,000 Trade names 3,000 Goodwill 191,996 Other noncurrent assets 37,528 Deferred revenue ( 4,369 ) Other current liabilities ( 146,618 ) Deferred revenue, net of current ( 3,726 ) Deferred tax liability ( 13,308 ) Other long-term liabilities ( 46,117 ) $ 455,402 The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired in-process research and development, developed technology, customer relationships and trade name intangible assets. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of customer attrition, technology obsolescence and revenue growth projections. The Company is amortizing the identifiable intangible assets arising from the ECI Acquisition in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 12.38 years (see Note 10). Goodwill results from assets that are not separately identifiable as part of the transaction and is not deductible for tax purposes. Pro Forma Results The following unaudited pro forma information presents the combined results of operations of Ribbon and ECI for the years ended December 31, 2020 and 2019 as if the ECI Acquisition had been completed on January 1, 2019, with adjustments to give effect to pro forma events that are directly attributable to the ECI Acquisition. These pro forma adjustments include an increase in research and development expense related to the conformance of ECI's cost capitalization policy to Ribbon's, additional amortization expense for the acquired identifiable intangible assets, a decrease in historical ECI interest expense reflecting the extinguishment of certain of ECI's debt as a result of the ECI Acquisition, and an increase in interest expense reflecting the new debt entered into by the Company in connection with the ECI Acquisition. Pro forma adjustments also include the elimination of acquisition- and integration-related costs directly attributable to the acquisition from the year ended December 31, 2020 and inclusion of such costs in the year ended December 31, 2019. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of the operations of Ribbon and ECI. Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined 76 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) company that would have been achieved had the ECI Acquisition occurred at January 1, 2019, nor are they intended to represent or be indicative of future results of operations (in thousands, except per share amounts): Year ended December 31, 2020 2019 (unaudited) Revenue $ 869,002 $ 944,915 Net income (loss) $ 97,036 $ ( 250,337 ) Diluted earnings (loss) per share $ 0.65 $ ( 1.76 ) Anova Data, Inc. On the Anova Acquisition Date, the Company acquired the business and technology assets of Anova, a private company headquartered in Westford, Massachusetts that provides advanced analytics solutions (the "Anova Acquisition"). The Anova Acquisition was completed in accordance with the terms and conditions of an asset purchase agreement, dated as of January 31, 2019 (the "Anova Asset Purchase Agreement"). The Company acquired Anova because it believed that the Anova Acquisition would reinforce and extend Ribbon's strategy to expand into network optimization, security and data monetization via big data analytics and machine learning. As consideration for the Anova Acquisition, Ribbon issued 2.9 million shares of Ribbon common stock with a fair value of $ 15.2 million to Anova's sellers and equity holders on the Anova Acquisition Date and held back an additional 0.3 million shares with a fair value of $ 1.7 million, of which 316,551 shares were issued after post-closing adjustments on March 4, 2020. The Anova Deferred Consideration was included as a component of Accrued expenses and other current liabilities in the Company's consolidated balance sheet at December 31, 2019. The Anova Acquisition has been accounted for as a business combination and the financial results of Anova have been included in the Company's consolidated financial statements for the period subsequent to the Anova Acquisition Date. The results for the year ended December 31, 2019 are not significant to the Company's consolidated financial statements. The Company has not provided pro forma financial information, as the historical amounts are not significant to the Company's consolidated financial statements. As of December 31, 2019, the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities was final. The purchase consideration aggregating $ 16.9 million has been allocated to $ 11.2 million of identifiable intangible assets, comprised of $ 5.2 million of customer relationships and $ 6.0 million of developed technology, and working capital items aggregating $ 0.2 million of net assets acquired. The remaining unallocated amount of $ 5.5 million has been recorded as goodwill. The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired intangible assets relating to developed technology and customer relationships. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of customer attrition, technology obsolescence and revenue growth projections. The Company is amortizing the identifiable intangible assets in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 6.25 years (see Note 10). The excess of purchase consideration over net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill is deductible for tax purposes. Acquisition-, Disposal- and Integration-Related Expenses Acquisition-related expenses include those expenses related to acquisitions that would otherwise not have been incurred by the Company, including professional and services fees, such as legal, audit, consulting, paying agent and other fees, and expenses related to cash payments to certain former executives of the acquired businesses in connection with their employment agreements. Disposal-related expenses are professional and services fees related to disposals of subsidiaries or portions of the 77 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) business. Integration-related expenses represent incremental costs related to combining the Company and its business acquisitions, such as third-party consulting and other third-party services related to merging the previously separate companies' systems and processes. The disposal-related expenses in the year ended December 31, 2021 relate to the Kandy Sale (as defined below). The acquisition-related professional and services fees recorded in the year ended December 31, 2020 primarily related to the ECI Acquisition and the disposal-related expenses related to the Company's sale of the Kandy Communications Business. The acquisition-related professional and services fees recorded in the year ended December 31, 2019 primarily related to the ECI Acquisition and, to a lesser extent, to the Anova Acquisition and other acquisition-related activities. The components of Acquisition-, disposal- and integration-related expenses incurred in the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands): Year ended December 31, 2021 2020 2019 Professional and services fees (acquisition-related) $ 165 $ 13,441 $ 8,657 Professional and services fees (disposal-related) 329 1,890 — Integration-related expenses 7,138 1,833 4,296 $ 7,632 $ 17,164 $ 12,953 (4) SALE OF KANDY COMMUNICATIONS BUSINESS On August 5, 2020, the Company announced that it had entered into a definitive agreement (the "Kandy Purchase Agreement") with American Virtual Cloud Technologies, Inc. ("AVCT") to sell the Kandy Communications Business. Under the Kandy Purchase Agreement, AVCT would purchase the assets and assume certain liabilities associated with the Kandy Communications Business, as well as all of the outstanding interests in Kandy Communications LLC, a subsidiary of the Company (the "Kandy Sale"). On December 1, 2020, the Company completed 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 Ribbon $ 45.0 million, subject to certain adjustments, in the form of units of AVCT’s securities (the “AVCT Units”), with each AVCT Unit consisting of: (i) $ 1,000 in principal amount of AVCT’s Series A-1 convertible debentures (the “Debentures”); and (ii) one warrant to purchase 100 shares of AVCT common stock, $ 0.0001 par value (the “Warrants”). The Company received 43,778 AVCT Units as sale consideration on the Kandy Sale Date (the "Kandy Sale Consideration"). The Debentures bore interest at a rate of 10 % per annum, which was added to the principal amount of the Debenture. 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 Kandy Purchase Agreement. Each Debenture was convertible, in whole or in part, at any time at the Company's option into that number of shares of AVCT common stock, calculated by dividing the principal amount being converted, together with all accrued and unpaid interest thereon, by the applicable conversion price, initially $ 3.45 . The Debentures 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 the Company to purchase 4,377,800 shares of AVCT common stock at an exercise price of $ 0.01 per share. The Warrants expire on December 1, 2025, and were immediately exercisable on the Kandy Sale Date. The Company had not exercised any of the Warrants as of December 31, 2021. The Company was also subject to a lock-up provision which limited the Company's 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. 78 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The Company determined that the AVCT Units had a fair value of $ 84.9 million at the Kandy Sale Date, comprised of the Debentures with a fair value of $ 66.3 million and the Warrants with a fair value of $ 18.6 million. The value of the net assets sold to AVCT totaled $ 1.3 million, resulting in a gain on the sale of $ 83.6 million. The gain on the Kandy Sale is included as a component of Other (expense) income, net, in the consolidated statement of operations for the year ended December 31, 2020. The Company 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. The Company used the Black-Scholes valuation model for estimating the fair value of the Warrants at each measurement date. The fair value of the Warrants is affected by AVCT's stock price as well as valuation assumptions, including the volatility of AVCT's stock price, expected term of the option, risk-free interest rate and expected dividends. Both the Lattice and Black-Scholes valuation models are based on available market data, giving consideration to all of the rights and obligations of each instrument and precluding the use of "blockage" discounts or premiums in determining the fair value of a large block of financial instruments. 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. At December 31, 2021, the Company valued the Debenture Shares and Warrants (collectively, the "AVCT Investment") by multiplying the closing stock price of AVCT common stock by the number of Debenture Shares and Warrants it held. At December 31, 2021, the fair value of the AVCT Investment was $ 43.9 million. At December 31, 2020, the fair value of the AVCT Units was $ 115.2 million. The Company recorded a loss of $ 74.8 million in the year ended December 31, 2021 arising from the change in the fair value of the AVCT Investment, and recorded a gain of $ 30.3 million in the year ended December 31, 2020 arising from the change in the fair value of the AVCT Units. These amounts are included as components of Other (expense) income, net, in the Company's consolidated statements of operations. The Company recorded $ 3.5 million of interest income in the year ended December 31, 2021, 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 the consolidated statement of operations. The fair value of the AVCT Investment at December 31, 2021 and the fair value of the AVCT Units at December 31, 2020 are reported as Investments in the Company's 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 (see Note 6). The Company evaluated the nature of its investment in AVCT for the period from the Debenture Conversion Date to December 31, 2021 and determined that it represented an approximate 15 % equity interest in AVCT on a diluted basis. The Company determined that it is not the primary beneficiary of AVCT as it does not have the power to direct the activities that most significantly impact the AVCT Investment's economic performance, and therefore concluded that it had neither significant influence nor a controlling interest arising from the AVCT Investment that would require consolidation as of December 31, 2021. The results of the Kandy Communications Business are excluded from the Company's consolidated results for the period subsequent to the Kandy Sale Date. (5) EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. For periods in which the Company reports net income, diluted net income per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period unless the effect is antidilutive. 79 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The calculations of shares used to compute basic and diluted earnings (loss) per share are as follows (in thousands): Year ended December 31, 2021 2020 2019 Weighted average shares outstanding—basic 147,575 138,967 109,734 Potential dilutive common shares — 5,683 — Weighted average shares outstanding—diluted 147,575 144,650 109,734 Options to purchase the Company's common stock and unvested restricted and performance-based stock units aggregating 10.6 million shares have not been included in the computation of diluted loss per share for the year ended December 31, 2021 because their effect would have been antidilutive. Options to purchase the Company's common stock aggregating 0.2 million shares have not been included in the computation of diluted earnings per share for the year ended December 31, 2020 because their effect would have been antidilutive. Options to purchase the Company's common stock and unvested shares of restricted and performance-based stock and stock units aggregating 4.6 million shares have not been included in the computation of diluted loss per share for the year ended December 31, 2019 because their effect would have been antidilutive. (6) INVESTMENTS AND FAIR VALUE HIERARCHY The Company's policy and historical practice has been to invest in debt instruments, primarily U.S. government-backed, municipal and corporate obligations, which management believes to be high quality (investment grade) credit instruments. At December 31, 2021, the Company's investments were comprised of the AVCT Investment. At December 31, 2020, the Company's investments were comprised of the Debentures and Warrants (see Note 4). On a quarterly basis, the Company reviews its investments, if any, to determine if there have been any events that could create a credit impairment. Fair Value Hierarchy Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows: Level 1. Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Level 2. Level 2 applies to assets or liabilities for which there are inputs that are directly or indirectly observable in the marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets). Level 3. Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. The classification of each asset or liability fair value measurement within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Market activity is presumed to be orderly in the absence of evidence of forced or disorderly sales, although such sales may still be indicative of fair value. Applicable accounting guidance precludes the use of blockage factors or liquidity adjustments due to the quantity of securities held by an entity. 80 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The Company's marketable securities, when applicable, are valued with the assistance of valuations provided by third-party pricing services, as derived from such services' pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. The Company is ultimately responsible for the consolidated financial statements and underlying estimates. Accordingly, the Company assesses the reasonableness of the valuations provided by the third-party pricing services by reviewing actual trade data, broker/dealer quotes and other similar data, which are obtained from quoted market prices or other sources. (7) ACCOUNTS RECEIVABLE, NET Accounts receivable, net, consisted of the following (in thousands): December 31, 2021 2020 Accounts receivable $ 284,187 $ 238,514 Allowance for doubtful accounts ( 1,270 ) ( 776 ) Accounts receivable, net $ 282,917 $ 237,738 The Company's allowance for doubtful accounts activity was as follows (in thousands): Year ended December 31, Balance at beginning of year Charges to expense Charges (credits) to other accounts Write-offs Balance at end of year 2021 $ 776 $ 553 $ 85 $ ( 144 ) $ 1,270 2020 $ 913 $ 686 $ 94 $ ( 917 ) $ 776 2019 $ 669 $ 738 $ 68 $ ( 562 ) $ 913 (8) INVENTORY Inventory consisted of the following (in thousands): December 31, 2021 2020 On-hand final assemblies and finished goods inventories $ 57,360 $ 46,921 Deferred cost of goods sold 1,474 1,165 58,834 48,086 Less noncurrent portion (included in Other assets) ( 4,791 ) ( 2,336 ) Current portion $ 54,043 $ 45,750 81 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (9) PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): December 31, Useful Life 2021 2020 Equipment 2 - 5 years $ 74,769 $ 90,885 Software 2 - 5 years 32,804 32,244 Furniture and fixtures 3 - 5 years 3,188 3,092 Leasehold improvements Shorter of the estimated lease term or useful life 34,640 37,263 145,401 163,484 Less accumulated depreciation and amortization ( 97,716 ) ( 114,596 ) Property and equipment, net $ 47,685 $ 48,888 The Company recorded depreciation and amortization expense related to property and equipment of $ 17.0 million for the year ended December 31, 2021, $ 17.2 million for the year ended December 31, 2020 and $ 11.9 million for the year ended December 31, 2019. During each of these years, the Company disposed of certain property and equipment that was fully depreciated at the time of disposal, which resulted in reductions in both Cost and Accumulated depreciation. Property and equipment under finance leases included in the amounts above were as follows (in thousands): December 31, 2021 2020 Cost $ 2,050 $ 2,908 Less accumulated depreciation ( 1,763 ) ( 1,925 ) Property and equipment under finance leases, net $ 287 $ 983 The net book values of the Company's property and equipment by geographic area were as follows (in thousands): December 31, 2021 2020 United States $ 24,683 $ 27,211 Canada 5,184 4,584 Asia/Pacific 8,174 6,078 Europe 1,157 1,171 Israel 7,859 9,613 Other 628 231 $ 47,685 $ 48,888 (10) INTANGIBLE ASSETS AND GOODWILL The Company's intangible assets at December 31, 2021 and 2020 consisted of the following (in thousands): December 31, 2021 Weighted average amortization period (years) Cost Accumulated amortization Net carrying value In-process research and development * $ 34,000 $ — $ 34,000 Developed technology 7.93 306,380 181,393 124,987 Customer relationships 11.86 268,140 77,653 190,487 Trade names 3.88 5,000 3,744 1,256 Internal use software 3.00 730 730 — 9.17 $ 614,250 $ 263,520 $ 350,730 82 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) December 31, 2020 Weighted average amortization period (years) Cost Accumulated amortization Net carrying value In-process research and development * $ 34,000 $ — $ 34,000 Developed technology 7.93 306,380 143,050 163,330 Customer relationships 11.86 268,140 50,627 217,513 Trade names 3.88 5,000 2,487 2,513 Internal use software 3.00 730 730 — 9.17 $ 614,250 $ 196,894 $ 417,356 * An in-process research and development intangible asset has an indefinite life until the product is generally available, at which time such asset is typically reclassified to developed technology, at which time the Company begins to amortize the asset. In the fourth quarter of 2020, the Company reclassified an in-process research and development intangible asset related to developed technology, as the associated product became generally available. As previously discussed (see Note 2), for the year ended December 31, 2021, the Company reclassified amounts recorded for amortization of acquired intangible assets in prior period presentations from Amortization of acquired intangible assets, a component of Operating expenses, to Amortization of acquired technology, a separate line included in Cost of revenue, in the consolidated statements of operations. Total amortization of acquired intangible assets, comprised of the cost of revenue and operating expense components noted above, aggregated $ 66.6 million, $ 60.9 million and $ 49.2 million for the years ended December 31, 2021, 2020 and 2019 respectively. Estimated future amortization expense for the Company's intangible assets at December 31, 2021 was as follows (in thousands): Years ending December 31, 2022 $ 60,449 2023 53,966 2024 46,899 2025 40,338 2026 36,489 Thereafter 112,589 $ 350,730 Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. Effective in 2020, the Company began to perform its annual test for impairment of goodwill as of October 1. Previously, the Company's annual test for impairment of goodwill was completed as of November 30. The Company has determined that it has two operating segments: Cloud and Edge, and IP Optical Networks. For the purpose of testing goodwill for impairment, all goodwill is assigned to a reporting unit, which may be either an operating segment or a portion of an operating segment. The Company's reporting units are its operating segments. The Company determined that the goodwill assigned to the Cloud and Edge reporting unit was $ 224.9 million and the goodwill assigned to the IP Optical Networks reporting unit was $ 192.0 million. Based on the results of the Company's recently completed impairment test, the Company determined that the carrying value of its IP Optical Networks segment exceeded its fair value. The Company 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 the Company's consolidated statement of operations for the year ended December 31, 2021. The Company determined that there was no impairment of its Cloud and Edge segment. Upon completion of the Company's 2020 annual test for goodwill impairment, the Company determined that there was no impairment of goodwill in either of its reporting units. Prior to the fourth quarter of 2020, the Company operated as a single operating segment with one reporting unit and consequently evaluated goodwill for impairment based on an evaluation of the fair value of the Company as a whole. Based on the results of the Company's 2019 annual impairment test, the Company determined that its carrying value exceeded its fair value and accordingly, the Company recorded an impairment charge of $ 164.3 million. 83 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) At certain times during the years ended December 31, 2020 and 2019, the Company's market capitalization was below its book value. The Company regularly monitors for changes in circumstances, including changes to the Company's performance, that could result in impairment of goodwill. The changes in the carrying value of the Company's goodwill in the years ended December 31, 2021 and 2020 were as follows (in thousands): Cloud and Edge IP Optical Networks Total Balance at January 1, 2020 (1) $ 224,896 $ — $ 224,896 Acquisition of ECI — 191,996 191,996 Balance at December 31, 2020 (1) 224,896 191,996 416,892 Impairment of goodwill — ( 116,000 ) ( 116,000 ) Balance at December 31, 2021 (1)(2) $ 224,896 $ 75,996 $ 300,892 (1) Balance is presented net of accumulated impairment losses of $ 167.4 million for the Cloud and Edge segment. (2) Balance is presented net of an impairment loss of $ 116.0 million for the IP Optical Networks segment. The components of goodwill at December 31, 2020 and 2021 were as follows (in thousands): Cloud and Edge IP Optical Networks Total Balance at December 31, 2020 Goodwill $ 392,302 $ 191,996 $ 584,298 Accumulated impairment losses ( 167,406 ) — ( 167,406 ) 224,896 191,996 416,892 Balance at December 31, 2021 Goodwill $ 392,302 $ 191,996 $ 584,298 Accumulated impairment losses ( 167,406 ) ( 116,000 ) ( 283,406 ) $ 224,896 $ 75,996 $ 300,892 (11) ACCRUED EXPENSES AND OTHER Accrued expenses and other consisted of the following (in thousands): December 31, 2021 2020 Employee compensation and related costs $ 38,040 $ 66,039 Other 62,712 68,826 $ 100,752 $ 134,865 (12) WARRANTY The changes in the Company's warranty accrual balance in the years ended December 31, 2021 and 2020 were as follows (in thousands): Year ended December 31, Balance at beginning of year Assumed liability in connection with ECI Acquisition Provision Settlements Balance at end of year 2021 $ 14,855 $ — $ 3,777 $ ( 5,512 ) $ 13,120 2020 $ — $ 16,251 $ 4,687 $ ( 6,083 ) $ 14,855 84 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (13) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES The Company recorded restructuring and related expense aggregating $ 11.7 million, $ 16.2 million and $ 16.4 million in the years ended December 31, 2021, 2020 and 2019, respectively. Restructuring and related expense includes restructuring expense (primarily severance and related costs), estimated future variable lease costs for vacated properties with no intent or ability of sublease, and accelerated rent amortization expense. For restructuring events that involve lease assets and liabilities, the Company applies lease reassessment and modification guidance and evaluates the right-of-use assets for potential impairment. If the Company plans to exit all or distinct portions of a facility and does not have the ability or intent to sublease, the Company will accelerate the amortization of each of those lease components through the vacate date. The accelerated amortization is recorded as a component of Restructuring and related expense in the Company's consolidated statements of operations. Related variable lease expenses will continue to be expensed as incurred through the vacate date, at which time the Company will reassess the liability balance to ensure it appropriately reflects the remaining liability associated with the premises and record a liability for the estimated future variable lease costs. Accelerated amortization of lease assets is recognized from the date that the Company commences the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date. Amounts of accelerated rent amortization that are included as a component of restructuring and related expense are not included in the tables below, as the liability for the total lease payments for each respective facility is included as a component of Operating lease liabilities in the Company's consolidated balance sheets at December 31, 2021 and 2020, both current and noncurrent (see Note 21). The Company may incur additional future expense if it is unable to sublease other locations included in the Facilities Initiative. The components of restructuring and related expense for the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands): Year ended December 31, 2021 2020 2019 Severance and related costs $ 4,618 $ 12,025 $ 11,179 Variable and other facilities-related costs 5,710 3,605 1,528 Accelerated amortization of lease assets due to cease-use 1,325 605 3,692 $ 11,653 $ 16,235 $ 16,399 2020 Restructuring Initiative In 2020, the Company implemented a restructuring plan to eliminate certain positions and redundant facilities, primarily in connection with the ECI Acquisition, to further streamline the Company's global footprint and improve its operations (the "2020 Restructuring Initiative"). The 2020 Restructuring Initiative includes facility consolidations and a reduction in workforce In connection with this initiative, the Company is eliminating functions arising from the ECI Acquisition and supporting its efforts to integrate the two companies. The Company recorded restructuring and related expense of $ 4.7 million and $ 14.0 million in connection with the 2020 Restructuring Initiative in the years ended December 31, 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. The Company expects these amounts will be fully paid in 2022. The Company expects that it will record additional restructuring and related expense approximating $ 1 million under the 2020 Restructuring Initiative in the aggregate for severance and planned facility consolidations. Summaries of the 2020 Restructuring Initiative accrual activity for the years ended December 31, 2021 and 2020 are as follows (in thousands): 85 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2021 Balance at January 1, 2021 Initiatives charged to expense Adjustments for changes in estimate Cash payments Balance at December 31, 2021 Severance $ 5,237 $ 4,618 $ — $ ( 7,960 ) 1,895 Facilities 1,256 742 ( 670 ) ( 1,268 ) 60 $ 6,493 $ 5,360 $ ( 670 ) $ ( 9,228 ) $ 1,955 Year ended December 31, 2020 Balance at January 1, 2020 Initiatives charged to expense Transfer to operating lease liability accounts Cash payments Balance at December 31, 2020 Severance $ — $ 11,547 $ — $ ( 6,310 ) 5,237 Facilities — 2,478 ( 535 ) ( 687 ) 1,256 $ — $ 14,025 $ ( 535 ) $ ( 6,997 ) $ 6,493 2019 Restructuring and Facilities Consolidation Initiative In June 2019, the Company implemented a restructuring plan to further streamline the Company's global footprint, improve its operations and enhance its customer delivery (the "2019 Restructuring Initiative"). The 2019 Restructuring Initiative includes facility consolidations, refinement of the Company's research and development activities, and a reduction in workforce. The facility consolidations under the 2019 Restructuring Initiative (the "Facilities Initiative") include a consolidation of the Company's North Texas sites into a single campus, housing engineering, customer training and support, and administrative functions, as well as a reduction or elimination of certain excess and duplicative facilities worldwide. In addition, the Company is substantially consolidating its global software laboratories and server farms into two lower cost North American sites. The Company continues to evaluate its properties included in the Facilities Initiative for accelerated amortization and/or right-of-use asset impairment. The Company expects that the actions under the Facilities Initiative will be completed in 2023. In connection with the 2019 Restructuring Initiative, the Company recorded restructuring and related expense of $ 7.0 million, $ 2.3 million and $ 11.2 million in the years ended December 31, 2021, 2020 and 2019, 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 includes income of $ 2.1 million related to a lease modification for one of the Company's restructured facilities. 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. The amount recorded in the year ended December 31, 2019 was comprised of $ 6.1 million for severance and related costs for approximately 120 employees, $ 1.4 million for variable and other facilities-related costs and $ 3.7 million for accelerated amortization of lease assets. The amount accrued for severance and related costs was paid in 2021. The Company estimates that it will record nominal, if any, future expense under the 2019 Restructuring Initiative. Summaries of the 2019 Restructuring Initiative accrual activity for the years ended December 31, 2021 and 2020 are as follows (in thousands): Year ended December 31, 2021 Balance at January 1, 2021 Initiatives charged to expense Net transfer to operating lease liability accounts Cash payments Balance at December 31, 2021 Severance $ 173 $ — $ — $ ( 173 ) — Facilities 766 9,006 ( 1,325 ) ( 4,810 ) 1,594 $ 939 $ 9,006 $ ( 1,325 ) $ ( 4,983 ) $ 1,594 86 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2020 Balance at January 1, 2020 Initiatives charged to expense Transfer to operating lease liability accounts Cash payments Balance at December 31, 2020 Severance $ 2,110 $ 536 — $ ( 2,473 ) 173 Facilities 991 1,732 ( 70 ) ( 1,887 ) 766 $ 3,101 $ 2,268 ( 70 ) $ ( 4,360 ) $ 939 Merger Restructuring Initiative In connection with the GENBAND Merger, the Company implemented a restructuring plan in the fourth quarter of 2017 to eliminate certain redundant positions and facilities within the combined companies (the "Merger Restructuring Initiative"). The Company recorded $ 21.3 million in the aggregate in connection with this initiative, including $ 5.2 million of restructuring and related expense in 2019, virtually all of which was for severance and related costs for approximately 40 employees. The Merger Restructuring Initiative was completed in 2020. A summary of the Merger Restructuring Initiative accrual activity for the year ended December 31, 2020 is follows (in thousands): Year ended December 31, 2020 Balance at January 1, 2020 Adjustments for changes in estimate Cash payments Balance at December 31, 2020 Severance $ 409 $ ( 58 ) $ ( 351 ) $ — Balance Sheet Classification The current portions of accrued restructuring were $ 1.9 million and $ 6.6 million at December 31, 2021 and 2020, respectively, and are included as components of Accrued expenses in the consolidated balance sheets. The long-term portions of accrued restructuring are included as components of Other long-term liabilities in the consolidated balance sheets. The long-term portions of accrued restructuring were $ 1.6 million and $ 0.8 million at December 31, 2021 and 2020, respectively. (14) DEBT 2018 Credit Facility On June 24, 2018, the Company amended its previous outstanding credit facility to, among other things, permit the Edgewater Acquisition and related transactions (the "2018 Credit Facility"). The indebtedness and other obligations under the 2018 Credit Facility were unconditionally guaranteed on a senior secured basis by the Company and each other material U.S. domestic subsidiary of the Company (collectively, the "Guarantors"). The 2018 Credit Facility was secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including the Company. The 2018 Credit Facility required periodic interest payments on outstanding borrowings until maturity. The Borrower could prepay all revolving loans under the 2018 Credit Facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements. Revolving loans under the 2018 Credit Facility bore interest at the Borrower’s option at either the Eurodollar (LIBOR) rate plus a margin ranging from 2.50 % to 3.00 % per year or the base rate (the highest of the Federal Funds rate plus 0.50 %, or the prime rate announced from time to time in The Wall Street Journal) plus a margin ranging from 1.50 % to 2.00 % per year (such margins being referred to as the “Applicable Margin”). The Applicable Margin varied depending on the Company’s consolidated leverage ratio (as defined in the 2018 Credit Facility). The base rate and the LIBOR rate were each subject to a zero percent floor. The Borrower was charged a commitment fee ranging from 0.25 % to 0.40 % per year on the daily amount of the unused portions of the commitments under the 2018 Credit Facility. Additionally, with respect to all letters of credit outstanding under the 2018 Credit Facility, the Borrower was charged a fronting fee of 0.125 % per year and an outstanding letter of credit fee 87 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) equal to the Applicable Margin for base rate loans ranging from 1.50 % to 2.00 % times the amount of the outstanding letters of credit. The 2018 Credit Facility was superseded by the 2019 Credit Facility, which was entered into on April 29, 2019 and which is discussed below. 2019 Credit Facility On April 29, 2019, the Company, as guarantor, and Ribbon Communications Operating Company, Inc., as borrower, entered into a syndicated, amended and restated credit facility (the "2019 Credit Facility"), which provided for a $ 50 million term loan facility that was advanced in full on April 29, 2019, and a $ 100 million revolving line of credit. The 2019 Credit Facility also included procedures for additional financial institutions to become syndicate lenders, or for any existing lender to increase its commitment under either the term loan facility or the revolving loan facility, subject to an aggregate increase of $ 75 million for incremental commitments under the 2019 Credit Facility. The 2019 Credit Facility was scheduled to mature in April 2024. At December 31, 2019, the Company had an outstanding term loan debt balance of $ 48.8 million and an outstanding revolving line of credit balance of $ 8.0 million with a combined average interest rate of 3.30 %, and $ 5.4 million of outstanding letters of credit at an interest rate of 1.50 %. The indebtedness and other obligations under the 2019 Credit Facility were unconditionally guaranteed on a senior secured basis by the Company and each other material U.S. domestic subsidiary of the Company (collectively, the “Guarantors”). The 2019 Credit Facility was secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including the Company. The 2019 Credit Facility required periodic interest payments on any outstanding borrowings under the facility. The Borrower could prepay all revolving loans under the 2019 Credit Facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements. Revolving loans under the 2019 Credit Facility bore interest at the Borrower’s option at either the Eurodollar (LIBOR) rate plus a margin ranging from 1.50 % to 3.00 % per year or the base rate (the highest of the Federal Funds rate plus 0.50 %, or the prime rate announced from time to time in The Wall Street Journal) plus a margin ranging from 0.50 % to 2.00 % per year (such margins being referred to as the “Applicable Margin”). The Applicable Margin varied depending on the Company’s consolidated leverage ratio (as defined in the 2019 Credit Facility). The base rate and the LIBOR rate were each subject to a zero percent floor. The 2019 Credit Facility was superseded by the 2020 Credit Facility, which was entered into on March 3, 2020, and which is discussed below. 2020 Credit Facility On March 3, 2020, the Company entered into a Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), by and among the Company, as a guarantor, Ribbon Communications Operating Company, Inc., as the borrower ("Borrower"), Citizens Bank, N.A. ("Citizens"), as administrative agent, a lender, issuing lender, swingline lender, joint lead arranger and bookrunner, Santander Bank, N.A., as a lender, joint lead arranger and bookrunner, and the other lenders party thereto (each, together with Citizens Bank, N.A. and Santander Bank, N.A., referred to individually as a "Lender", and collectively, the "Lenders"). The proceeds of the Credit Agreement were used, in part, to pay off in full all obligations of the Company under the 2019 Credit Facility. The 2020 Credit Facility provides for $ 500 million of commitments from the Lenders to the Borrower, comprised of $ 400 million in term loans (the "2020 Term Loan Facility") and a $ 100 million facility available for revolving loans (the "2020 Revolving Credit Facility"). Under the 2020 Revolving Credit Facility, a $ 30 million sublimit is available for letters of credit and a $ 20 million submit is available for swingline loans. Under the 2020 Credit Facility, the Company was originally required to make quarterly principal payments aggregating approximately $ 10 million in the first year, $ 20 million per year for the following three years, and $ 30 million in the last year, with the remaining balance due on the maturity date. The 2020 Credit Facility also requires periodic interest payments until maturity. 88 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The indebtedness and other obligations under the 2020 Credit Facility are unconditionally guaranteed on a senior secured basis by the Company, Edgewater Networks, Inc., a wholly-owned subsidiary of the Company, and GENBAND Inc., wholly-owned subsidiary of the Company (together, the "Guarantors"). The facilities under the 2020 Credit Facility are secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including substantially all of the assets of the Company. The 2020 Credit Facility requires compliance with certain financial covenants, including a minimum Consolidated Fixed Charge Coverage Ratio and a maximum Consolidated Net Leverage Ratio (each as defined in the 2020 Credit Facility, and each tested on a quarterly basis). In addition, the 2020 Credit Facility contains various covenants that, among other restrictions, limit the Company's and its subsidiaries' ability to incur or assume indebtedness; grant or assume liens; make acquisitions or engage in mergers; sell, transfer, assign or convey assets; repurchase equity and make dividend and certain other restricted payments; make investments; engage in transactions with affiliates; enter into sale and leaseback transactions; enter into burdensome agreements; change the nature of its business; modify their organizational documents; and amend or make prepayments on certain junior debt. The 2020 Credit Facility contains events of default that are customary for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events with respect to the Company or any of its subsidiaries occurs, all obligations under the 2020 Credit Facility will immediately become due and payable. If any other event of default occurs under the 2020 Credit Facility, the lenders may accelerate the maturity of the obligations outstanding under the 2020 Credit Facility and exercise other rights and remedies, including charging a default rate of interest equal to 2.00 % per year above the rate that would otherwise be applicable. In addition, if any event of default exists under the 2020 Credit Facility, the lenders can commence foreclosure or other actions against the collateral. On August 18, 2020 (the "First Amendment Effective Date"), the Borrowers entered into a First Amendment to the 2020 Credit Facility (the "First Amendment"). Pursuant to an assignment and assumption agreement entered into by Citizens and certain affiliates of Whitehorse Capital on the First Amendment Date (collectively, "HIG Whitehorse"), and consented to by Citizens and the Borrower, $ 75 million of the 2020 Term Loan Facility, designated as the Term B Loan (the "Term B Loan"), was assigned from Citizens to HIG Whitehorse as of August 18, 2020. The remaining $ 325 million of the 2020 Term Loan Facility that was not assigned to HIG Whitehorse was deemed the Term A Loan (the "Term A Loan" and, together with the Term B Loan, the "Amended 2020 Term Loan Facility"). The Term A Loan and the 2020 Revolving Credit Facility mature in March 2025. The Term A Loan and 2020 Revolving Credit Facility bear interest at the Borrower's option at either the LIBOR rate plus a margin ranging from 1.50 % to 3.50 % per year, or the base rate (the highest of the Federal Funds Effective Rate (as defined in the 2020 Credit Facility) plus 0.50 %, or the prime rate announced from time to time in The Wall Street Journal) plus a margin ranging from 0.50 % to 2.50 % per year (the "Applicable Margin"). The Applicable Margin varies depending on the Company's Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility). The base rate and the LIBOR rate are each subject to a zero percent floor. The Company was required to make quarterly principal payments on the Term A Loan aggregating approximately $ 10 million in the first year, $ 16 million per year in each of the next two years, $ 20 million in the fourth year and $ 16 million in the last year, with the final payment approximating $ 244 million due on the maturity date. The Borrower could prepay all amounts under the Term A Loan and the 2020 Revolving Credit Facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements. The Term B Loan 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 First Amendment) plus 0.50 %, or the prime rate announced from time to time in The Wall Street Journal, plus a margin of 6.50 % per year. The Term B Loan 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 2020 Credit Facility) occurring prior to the six month anniversary of the First Amendment Effective Date. The Company was 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. The First Amendment reduced the Borrower's ability to incur new tranches of term loans, or increases in commitments under the Amended 2020 Term Loan Facility or the 2020 Revolving Credit Facility. Specifically, such indebtedness could be 89 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) incurred up to an aggregate dollar amount equal to 75 % of the Company's Consolidated Adjusted EBITDA (as defined in the 2020 Credit Facility), reduced from 100 % prior to the First Amendment, as of the most recently ended fiscal quarter for which financial statements had been delivered to the lenders, plus additional amounts, so long as the Borrower's Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) does not exceed 2.25 :1.00, reduced from 2.75 :1.00 under the 2020 Credit Facility. The First Amendment also reduced the amount of Unrestricted Cash (as defined in the 2020 Credit Facility) used in calculating the Borrower's Consolidated Net Leverage Ratio from $ 25 million to $ 10 million. On December 1, 2020, the Borrowers entered into a Second Amendment to the 2020 Credit Facility to obtain consent for an equity exchange with AVCT in connection with the Kandy Sale, as well as to amend certain other provisions of the 2020 Credit Facility. At December 31, 2020, the Company had an outstanding Term A Loan balance of $ 318.5 million at an average interest rate of 3.4 %, and an outstanding Term B Loan balance of $ 74.6 million at an average interest rate of 8.4 %. The 2020 Revolving Credit Facility did not have an outstanding balance but had $ 5.6 million of letters of credit outstanding with an interest rate of 2.5 %. On March 3, 2021 (the "Third Amendment Effective Date"), the Company, the Borrower and certain of its subsidiaries 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 the Borrower 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 cancelled, 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") with the same terms as the Term A Loan. The Company wrote off $ 2.5 million of capitalized debt issuance costs in connection with the Third Amendment, which is included in Interest expense, net, in the Company's consolidated statement of operations for the year ended December 31, 2021. The Company is 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. The Third Amendment increased the Borrower's ability to incur new incremental revolving commitments or term loans. Such indebtedness can be incurred up to an aggregate dollar limit equal to 100 % of the Company's Consolidated Adjusted EBITDA (as defined in the 2020 Credit Facility) as of the most recently ended fiscal quarter for which financial statements have been delivered to the Lenders, plus additional amounts, so long as the Borrower's Consolidated Net Leverage Ratio (as defined in the Credit Agreement) does not exceed 2.75 :1.00, increased from 2.25 :1.00 under the First Amendment. The Third Amendment also increased the amount of Unrestricted Cash (as defined in the 2020 Credit Facility) used in calculating the Borrower's Consolidated Net Leverage Ratio from $ 10 million to $ 25 million. On March 10, 2022, the Borrowers 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, the Company made a $ 15.0 million prepayment that was applied to the final payment due on the maturity date. At December 31, 2021, the Company 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 %. The Company was in compliance with all covenants of the 2020 Credit Facility at both December 31, 2021 and 2020. Short-Term Loan From time to time, the Company may enter into uncommitted and unsecured short-term loans which it uses for financing exports in China. Three of these loans, aggregating $ 3.5 million at a weighted average interest rate of 3.97 %, were entered into in March 2020, two of which were with China Zheshang Bank and one of which was with Bank of Communications Hangzhou Branch. These loans expired and were paid in full at various dates in June and July 2020. In July 2020, the Company entered into an uncommitted and unsecured short-term loan in the amount of $ 0.7 million at an interest rate of 4.0 % with Bank of 90 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Communications Hangzhou Branch. This loan expired and was paid in full in November 2020. The Company did not have any such short-term loans outstanding at December 31, 2021 and 2020. Letters of Credit and Performance and Bid Bonds The Company uses letters of credit and performance and bid bonds in the course of its business. At December 31, 2021, the Company had $ 30.1 million of letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees"), comprised of the $ 4.3 million of letters of credit under the 2020 Credit Agreement described above (the "Letters of Credit") and $ 25.8 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under various uncommitted facilities. At December 31, 2020, the Company had $ 32.6 million of Guarantees, comprised of the $ 5.6 million of Letters of Credit and $ 27.0 million of Other Guarantees under various uncommitted facilities. At December 31, 2021 and 2020, the Company had cash collateral of $ 2.6 million and $ 2.7 million, respectively, supporting the Guarantees under its uncommitted facilities, which are reported in Restricted cash in the consolidated balance sheets. Promissory Note In connection with the GENBAND Merger, on October 27, 2017, the Company issued a promissory note for $ 22.5 million to certain of GENBAND's equityholders (the "Promissory Note"). The Promissory Note did not amortize and the principal thereon was payable in full on the third anniversary of its execution. Interest on the Promissory Note was payable quarterly in arrears and accrued at a rate of 7.5 % per year for the first six months after issuance, and thereafter at a rate of 10 % per year. Interest that was not paid on the interest payment date would increase the principal amount of the Promissory Note. On April 29, 2019, concurrently with the closing of the 2019 Credit Facility as discussed above, the Company repaid in full all outstanding amounts under the Promissory Note, aggregating $ 24.7 million. The Company did not incur any early termination penalties in connection with this repayment. (15) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company is exposed to financial market risk related to foreign currency fluctuations and changes in interest rates. These exposures are actively monitored by management. To manage the volatility related to the exposure to changes in interest rates, the Company has entered into a derivative financial instrument. Management's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates. Ribbon's policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. Ribbon does not hold or issue derivative financial instruments for trading or speculative purposes. The Company records derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a specific risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge, or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk even though hedge accounting does not apply or the Company elects not to apply hedge accounting. Cash Flow Hedge of Interest Rate Risk The 2020 Term Loan Facility had outstanding balances of $ 375.5 million and $ 393.1 million at December 31, 2021 and 2020, respectively. The 2020 Revolving Credit Facility was undrawn at both December 31, 2021 and 2020. Borrowings under the 2020 Credit Agreement have variable interest rates based on LIBOR (see Note 14). As a result of exposure to interest rate movements, during March 2020, the Company entered into an interest rate swap arrangement, which effectively converted its 91 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) $ 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 at December 31, 2021 and 2020 was $ 400 million, and the swap matures on March 3, 2025, the same date the 2020 Credit Facility matures. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company is using an interest rate swap as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is recorded in accumulated other comprehensive 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 credit facilities under the 2020 Credit Facility, and the Company has accounted for this derivative as an effective hedge. Any ineffective portion of the change in the fair value of the derivative would be recognized directly in earnings. Amounts reported in accumulated other comprehensive income (loss) related to the Company's derivative are reclassified to interest expense as interest is accrued on the Company’s variable-rate debt. Based upon projected forward rates, the Company estimates that as of December 31, 2021, $ 2.1 million may be reclassified as an increase to interest expense over the next twelve months. The impact of the Company’s derivative financial instrument on its consolidated statement of comprehensive income (loss) for the years ended December 31, 2021 and 2020 was as follows (in thousands): Year ended December 31, 2021 2020 Gain (loss) recognized in other comprehensive income (loss) on derivative (effective portion) $ 9,505 $ ( 12,671 ) Amount reclassified from accumulated other comprehensive income (loss) to interest expense (effective portion) 3,254 1,723 $ 12,759 $ ( 10,948 ) The fair values and locations in the consolidated balance sheet at December 31, 2021 and 2020 of the Company's derivative assets (liabilities) designated as a hedging instrument were as follows (in thousands): December 31, Balance sheet location 2021 2020 Interest rate derivative - liability derivative Accrued expenses and other $ ( 2,054 ) $ ( 3,157 ) Interest rate derivative - liability derivative Other long-term liabilities — ( 7,791 ) Interest rate derivative - asset derivative Other assets 3,865 — $ 1,811 $ ( 10,948 ) The Company has classified the interest rate derivative net asset of $ 1.8 million at December 31, 2021 and a liability of $ 10.9 million at December 31, 2020 respectively, as Level 2 fair value measurements within the fair value hierarchy (see Note 6). (16) REVENUE RECOGNITION The Company's typical performance obligations include the following: Performance Obligation When Performance Obligation is Typically Satisfied When Payment is Typically Due Software and Product Revenue Software licenses (perpetual or term) Upon transfer of control; typically, when made available for download (point in time) Generally, within 30 days of invoicing except for term licenses, which may be paid for over time Software licenses (subscription) Upon activation of hosted site (over time) Generally, within 30 days of invoicing Hardware When control of the hardware passes to the customer; typically, upon delivery (point in time) Generally, within 30 days of invoicing Software upgrades Upon transfer of control; typically, when made available for download (point in time) Generally, within 30 days of invoicing Customer Support Revenue Customer support Ratably over the course of the support contract (over time) Generally, within 30 days of invoicing Professional Services Other professional services (excluding training services) As work is performed (over time) Generally, within 30 days of invoicing (upon completion of services) Training When the class is taught (point in time) Generally, within 30 days of services being performed Significant Judgments The Company's contracts with customers often include promises to transfer multiple products and services to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company typically has more than one standalone selling price ("SSP") for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the SSP. Deferred Revenue Deferred revenue is a contract liability representing amounts collected from or invoiced to customers in excess of revenue recognized. This results primarily from the billing of annual customer support agreements where the revenue is recognized over the term of the agreement. The value of deferred revenue will increase or decrease based on the timing of invoices and recognition of revenue. Disaggregation of Revenue The Company disaggregates its revenue from contracts with customers based on the nature of the products and services and the geographic regions in which each customer is domiciled. The Company's total revenue for the years ended December 31, 2021, 2020 and 2019 was disaggregated geographically as follows: 92 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2021 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 196,058 $ 132,683 $ 47,296 $ 376,037 Europe, Middle East and Africa 138,203 79,475 30,349 248,027 Asia Pacific 92,803 41,945 18,183 152,931 Other 25,978 32,218 9,766 67,962 $ 453,042 $ 286,321 $ 105,594 $ 844,957 Year ended December 31, 2020 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 201,347 $ 132,661 $ 48,611 $ 382,619 Europe, Middle East and Africa 149,567 73,475 25,226 248,268 Asia Pacific 90,201 36,628 19,627 146,456 Other 26,797 32,052 7,603 66,452 $ 467,912 $ 274,816 $ 101,067 $ 843,795 Year ended December 31, 2019 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 170,937 $ 133,271 $ 37,085 $ 341,293 Europe, Middle East and Africa 42,262 43,186 12,279 97,727 Asia Pacific 30,617 27,798 10,721 69,136 Other 18,214 29,973 6,768 54,955 $ 262,030 $ 234,228 $ 66,853 $ 563,111 The Company's product revenue from its direct sales program and from indirect sales through its channel partner program for the years ended December 31, 2021, 2020 and 2019 was as follows (in thousands): Year ended December 31, 2021 2020 2019 Indirect sales through channel program $ 117,065 $ 134,876 $ 94,639 Direct sales 335,977 333,036 167,391 $ 453,042 $ 467,912 $ 262,030 The Company's product revenue from sales to enterprise customers and from sales to service provider customers for the years ended December 31, 2021, 2020 and 2019 was as follows (in thousands): Year ended December 31, 2021 2020 2019 Sales to enterprise customers $ 111,494 $ 138,469 $ 70,548 Sales to service provider customers 341,548 329,443 191,482 $ 453,042 $ 467,912 $ 262,030 The Company's product revenue and service revenue components by segment for the years ended December 31, 2021, 2020 and 2019 was as follows (in thousands): 93 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2021 2020 2019 Product revenue Cloud and Edge 248,570 275,445 262,030 IP Optical Networks 204,472 192,467 — Total product revenue 453,042 467,912 262,030 Service revenue Maintenance Cloud and Edge 228,321 229,035 234,228 IP Optical Networks 58,000 45,781 — Total maintenance revenue 286,321 274,816 234,228 Professional services Cloud and Edge 79,765 78,790 66,853 IP Optical Networks 25,829 22,277 — Total professional services revenue 105,594 101,067 66,853 Total service revenue 391,915 375,883 301,081 Revenue Contract Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, which are contract assets, and customer advances and deposits, which are contract liabilities, in the Company's consolidated balance sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Completion of services and billing may occur subsequent to revenue recognition, resulting in contract assets. The Company may receive advances or deposits from its customers before revenue is recognized, resulting in contract liabilities which are classified as deferred revenue. These assets and liabilities are reported in the Company's consolidated balance sheets on a contract-by-contract basis as of the end of each reporting period. Changes in the contract asset and liability balances during the years ended December 31, 2021 and 2020 were not materially impacted by any factors other than billing and revenue recognition. Nearly all of the Company's deferred revenue balance is related to services revenue, primarily customer support contracts. Unbilled receivables stem primarily from engagements where services have been performed; however, billing cannot occur until services are completed. In some arrangements, the Company allows customers to pay for term-based software licenses and products over the term of the software license. The Company also sells SaaS-based software under subscription arrangements, with payment terms over the term of the SaaS agreement. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables that are anticipated to be invoiced in the next twelve months are included in Accounts receivable on the Company's consolidated balance sheets. The changes in the Company's accounts receivable, unbilled receivables and deferred revenue balances for the years ended December 31, 2021 and 2020 were as follows (in thousands): Accounts receivable Unbilled accounts receivable Deferred revenue (current) Deferred revenue (long-term) Balance at January 1, 2021 $ 179,331 $ 58,407 $ 96,824 $ 26,010 Increase (decrease), net 29,641 15,538 12,295 ( 5,391 ) Balance at December 31, 2021 $ 208,972 $ 73,945 $ 109,119 $ 20,619 Accounts receivable Unbilled accounts receivable Deferred revenue (current) Deferred revenue (long-term) Balance at January 1, 2020 $ 168,502 $ 24,204 $ 100,406 $ 20,482 Increase (decrease), net 10,829 34,203 ( 3,582 ) 5,528 Balance at December 31, 2020 $ 179,331 $ 58,407 $ 96,824 $ 26,010 The Company recognized approximately $ 94 million of revenue in the year ended December 31, 2021 that was recorded as deferred revenue at December 31, 2020 and approximately $ 99 million of revenue in the year ended December 31, 2020 that was recorded as deferred revenue at December 31, 2019. Of the Company's deferred revenue reported as long-term in its 94 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) consolidated balance sheet at December 31, 2021, the Company expects that approximately $ 12 million will be recognized as revenue in 2023, approximately $ 6 million will be recognized as revenue in 2024 and approximately $ 3 million will be recognized as revenue in 2025 and beyond. All freight-related customer invoicing is recorded as revenue, while the shipping and handling costs that occur after control of the promised goods or services transfer to the customer are reported as fulfillment costs, a component of Cost of revenue - product in the Company's consolidated statements of operations. Deferred Commissions Cost Sales commissions earned by the Company's employees are considered incremental and recoverable costs of obtaining a contract with a customer. The payments related to these costs have been deferred on our consolidated balance sheet and are being amortized over the expected life of the customer contract, which is five years . At December 31, 2021 and 2020, the Company had $ 3.8 million and $ 4.1 million, respectively, of deferred sales commissions capitalized. (17) OPERATING SEGMENT INFORMATION The Company has two reportable segments, which are intended to align with the manner in which the business is managed: Cloud and Edge, and IP Optical Networks. The Cloud and Edge segment provides secure and reliable software and hardware products, solutions and services for enabling Voice over Internet Protocol ("VoIP") communications, Voice over Long-Term Evolution ("VoLTE") and Voice Over 5G ("VoNR") communications and Unified Communications and Collaboration ("UC&C") within service provider and enterprise networks and from the cloud. The Cloud and Edge products are increasingly software-centric and cloud-native for deployment on private, public or hybrid cloud infrastructures, in data centers, on enterprise premises and within service provider networks. Ribbon's Cloud and Edge product portfolio consists of our Session Border Controller ("SBC") products and our Network Transformation ("NTR") products. The IP Optical Networks segment provides high-performance, secure 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. The Company has not provided segment asset information as such information is not provided to the CODM and accordingly, asset information is not used in assessing segment performance. Segment revenue and expense included in the tables below represent direct revenue and expense attributable to each segment. Please see Note 10 for information regarding the allocation of goodwill between segments. The CODM utilizes revenue and adjusted gross profit to measure and assess each segment's performance. The Company calculates adjusted gross profit by excluding from cost of revenue: amortization of acquired technology, stock-based compensation, acquisition-related inventory adjustments and acquisition-related facilities adjustments, and may also exclude other items in future periods that the Company believes are not part of the Company's core business. Adjusted gross profit is not a financial measure determined in accordance with U.S. GAAP, may not be comparable to similarly titled measures used by other companies; and should not be considered a substitute for gross profit or other results reported in accordance with U.S. GAAP. See below for a reconciliation of adjusted gross profit to gross profit which is the most directly comparable U.S. GAAP measure. Financial information for the IP Optical Networks segment is not presented for the year ended December 31, 2019, as this segment arose from the ECI Acquisition in 2020. The tables below provide revenue, adjusted gross profit and depreciation expense by reportable segment for the years ended December 31, 2021, 2020 and 2019 (in thousands): 95 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, Revenue 2021 2020 2019 Segment revenue: Cloud and Edge $ 556,656 $ 583,270 $ 563,111 IP Optical Networks 288,301 260,525 — Total revenue $ 844,957 $ 843,795 $ 563,111 Year ended December 31, Adjusted gross profit 2021 2020 2019 Segment adjusted gross profit: Cloud and Edge $ 370,504 $ 385,137 $ 355,211 IP Optical Networks 114,496 110,845 — Total segment adjusted gross profit 485,000 495,982 355,211 Stock-based compensation expense ( 1,997 ) ( 875 ) ( 554 ) Amortization of acquired technology ( 38,343 ) ( 42,290 ) ( 37,573 ) Acquisition-related inventory and facilities adjustments — ( 2,000 ) — Gross profit $ 444,660 $ 450,817 $ 317,084 Year ended December 31, Depreciation expense 2021 2020 2019 Segment depreciation expense: Cloud and Edge $ 12,269 $ 12,111 $ 11,949 IP Optical Networks 4,693 5,077 — Total depreciation expense $ 16,962 $ 17,188 $ 11,949 (18) MAJOR CUSTOMERS The following customers contributed 10% or more of the Company's revenue in at least one of the years ended December 31, 2021, 2020 and 2019: Year ended December 31, 2021 2020 2019 Verizon Communications Inc. 16 % 15 % 17 % AT&T Inc. * * 12 % * Less than 10% of total revenue. At December 31, 2021, one customer accounted for 10% or more of the Company's accounts receivable balance, representing approximately 15 % of total accounts receivable. At December 31, 2020, one customer accounted for 10% or more of the Company's accounts receivable balance, representing approximately 12 % of total accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains an allowance for doubtful accounts and such losses have been within management's expectations. (19) COMMON STOCK REPURCHASES In the second quarter of 2019, the Company's Board of Directors (the "Board") approved a stock repurchase program (the "Repurchase Program") pursuant to which the Company could repurchase up to $ 75 million of its common stock prior to April 18, 2021 (the "Program Expiration Date"). The stock repurchases were funded using the Company's working capital. During the year ended December 31, 2019, the Company spent $ 4.5 million, including transaction fees, to repurchase and retire 1.0 million shares of its common stock under the Repurchase Program. The Company did not repurchase any common stock during the year ended December 31, 2020 or in the period from January 1, 2021 through the Program Expiration Date. The Company had $ 70.5 million remaining for future repurchases upon the expiration of the Repurchase Program. 96 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (20) STOCK-BASED COMPENSATION PLANS 2019 Stock Incentive Plan At the Company's annual meeting of stockholders held on June 5, 2019, the Company's stockholders approved the Ribbon Communications Inc. Incentive Award Plan (the "2019 Plan"). The 2019 Plan had previously been approved by the Board, subject to stockholder approval. At the Company's annual meeting of stockholders held on June 2, 2020, the Company's stockholders approved an amendment to the 2019 Plan to increase the number of shares of the Company's common stock authorized for issuance under the 2019 Plan by 7.5 million shares. Under the 2019 Plan, the Company may grant awards aggregating up to 14.5 million shares of common stock (subject to adjustment in the event of stock splits and other similar events), plus 5.1 million shares of common stock that remained available for issuance under the Company's Amended and Restated Stock Incentive Plan (the "2007 Plan") on June 5, 2019, plus any shares covered by awards under the 2007 Plan (or the Company's other prior equity compensation plans) that again become available for grant pursuant to the provisions of the 2007 Plan. The 2019 Plan provides for the grant of options to purchase the Company's common stock ("stock options"), stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), performance-based stock awards ("PSAs"), restricted stock units ("RSUs"), performance-based stock units ("PSUs") and other stock- or cash-based awards. Awards can be granted under the 2019 Plan to the Company's employees, officers and non-employee directors, as well as consultants and advisors of the Company and its subsidiaries. At December 31, 2021, there were 3,985,451 shares available for future issuance under the 2019 Plan. 2007 Plan The Company's 2007 Plan provided for the award of stock options, SARs, RSAs, RSUs, PSAs, PSUs and other stock-based awards to employees, officers, non-employee directors, consultants and advisors of the Company and its subsidiaries. On and following June 5, 2019, with the exception of shares underlying awards outstanding as of that date, no additional shares may be granted under the 2007 Plan. 2002 Stock Option Plan In connection with the Edgewater Acquisition, the Company assumed Edgewater's Amended and Restated 2002 Stock Option Plan, converted all then-outstanding options to purchase Edgewater common stock (the "Assumed Options") to Ribbon stock options (the "Ribbon Replacement Options"), and subsequently renamed it the 2002 Stock Option Plan (the "2002 Plan"). The Ribbon Replacement Options are vesting under the same schedules as the respective Edgewater Options. The fair values of the Assumed Options were estimated using a Black-Scholes option pricing model. The Company recorded $ 0.7 million as additional purchase consideration for the fair value of the Assumed Options. The fair value of the Ribbon Replacement Options attributable to future service totaled $ 1.0 million, which will be fully expensed in 2022. At December 31, 2021, there were 105,495 shares available for future grant as stock options. 2012 Stock Incentive Plan In connection with the acquisition of Performance Technologies, Inc. ("PT"), the Company assumed PT's 2012 Amended Performance Technologies, Incorporated Omnibus Incentive Plan, and subsequently renamed it the 2012 Stock Incentive Plan (the "2012 Plan"). In December 2014, all of the unissued shares under the 2012 Plan were transferred to the 2007 Plan. Any outstanding awards under the 2012 Plan that in the future expire, terminate, are canceled, surrendered or forfeited, or are repurchased by the Company will be returned to the 2019 Plan. Accordingly, at December 31, 2021 there were no shares available for future issuance under the 2012 Plan. 2008 Stock Incentive Plan In connection with the acquisition of Network Equipment Technologies, Inc. ("NET"), the Company assumed NET's 2008 Equity Incentive Plan and subsequently renamed it the 2008 Stock Incentive Plan (the "2008 Plan"). In December 2014, all of the unissued shares under the 2008 Plan were transferred to the 2007 Plan. Any outstanding awards under the 2008 Plan that in 97 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) the future expire, terminate, are canceled, surrendered or forfeited, or are repurchased by the Company will be returned to the 2019 Plan. Accordingly, at December 31, 2021 there were no shares available for future issuance under the 2008 Plan. Executive Equity Arrangements Inducement Awards In connection with his appointment as President and Chief Executive Officer of Ribbon, and as an inducement for Bruce McClelland's ("Mr. McClelland") commencement of employment, the Company awarded Mr. McClelland sign-on equity grants, comprised of 462,963 RSUs and a PSU grant with both market service conditions (the "Inducement PSUs") on March 16, 2020. The RSUs vested and were released to Mr. McClelland on March 16, 2021. Subject to Mr. McClelland's continued employment, the Inducement PSUs are eligible to vest and be settled in up to 4,750,000 shares of Ribbon common stock upon the achievement of specified share price thresholds on or prior to September 1, 2024. The first share price threshold for Mr. McClelland's Inducement PSUs was achieved on February 26, 2021, and accordingly, 1,333,333 shares were released to him. These releases are included in the applicable tables below. Performance-Based Stock Grants In addition to granting RSAs and RSUs and the aforementioned Inducement PSUs, to its executives and certain of its employees, the Company also grants PSUs to certain of its executives. PSU Grants . In 2021, 2020 and 2019, the Company granted certain of its executives (the "2021 PSUs", "2020 PSUs" and "2019 PSUs", respectively), of which 60 % of each executive's PSU grant had both performance service conditions (the "Performance PSUs") and 40 % had both market and service conditions (the "Market PSUs"). Each executive's Performance PSU grant is comprised of three consecutive fiscal year performance periods beginning in the year of grant (each, a "Fiscal Year Performance Period"), with one-third of the Performance PSUs attributable to each Fiscal Year Performance Period. The number of shares that will be vest for each Fiscal Year Performance Period, if any, will be based on the achievement of certain metrics related to the Company's financial performance for the applicable year on a standalone basis (each, a "Fiscal Year Performance Condition"). The Company's achievement of the goals for each Fiscal Year Performance Condition (and the number of shares of Company common stock to vest as a result thereof) are being measured on a linear sliding scale in relation to specific threshold, target and stretch performance conditions, with any shares earned vesting in the first quarter of the fiscal year following the third Performance Period of the grant, pending each executive's continued employment with the Company through that date. The number of shares of common stock underlying the Performance PSUs that can be earned will in no event exceed 200 % of the Performance PSUs. Shares subject to the Performance PSUs that fail to be earned will be forfeited. The Market PSUs have one three-year performance period, beginning January 1 in the year of grant and ending on December 31, three years thereafter (the "Market Performance Period"). The number of shares subject to the Market PSUs that will vest, if any, will be dependent upon the Company's total shareholder return ("TSR") compared with the TSR of the companies included in the Nasdaq Telecommunications Index for the applicable Market Performance Period, measured by the Compensation Committee after the Market Performance Period ends, with any shares earned vesting in the first quarter of the fiscal year following the respective Market Performance Period, pending each executive's continued employment with the Company through that date. The number of shares of common stock underlying the Market PSUs that can be earned will in no event exceed 200 % of the Market PSUs. Shares subject to the Market PSUs that fail to be earned will be forfeited. In addition, in connection with his appointment as Executive Vice President and General Manager, Packet Optical Networking, the Company granted Sam Bucci 133,333 PSUs (the "Bucci Stock Price PSUs") with both market and service conditions. Subject to Mr. Bucci's continued employment, the Bucci Stock Price PSUs were eligible to vest and be settled in shares of Ribbon common stock upon the achievement of a specific share price threshold on or prior to January 31, 2022. The price share threshold was met on February 12, 2021 and the shares vested and were released on February 15, 2021. This release is included in the applicable table below. 2021 PSUs . In the year ended December 31, 2021, the Company granted certain of its executives an aggregate of 684,425 PSUs, of which 341,359 PSUs had both performance and service conditions (the "2020 Performance PSUs"), 227,571 PSUs 98 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) had both market and service conditions (the "2021 Market PSUs"), and 115,495 PSUs had both revenue performance and service conditions (the "2021 Revenue PSUs"). The three Fiscal Year Performance Periods for the 2021 Performance PSUs are the years ended December 31, 2021, 2022 and 2023 (respectively, the "2021 Performance Period", "2022 Performance Period" and "2023 Performance Period"). The 2021 Revenue PSUs had a one-year performance period, the year ended December 31, 2021, and shares earned, if any, will vest on March 15, 2022. 2020 PSUs . In 2020, the Company granted certain of its executives an aggregate of 823,369 PSUs, of which 494,020 PSUs had both performance and service conditions (the “2020 Performance PSUs”) and 329,349 had both market and service conditions (the “2020 Market PSUs”). The three Fiscal Year Performance Periods for the 2020 Performance PSUs are the years ended December 31, 2020, 2021 and 2022 (respectively, the “2020 Performance Period”, “2021 Performance Period” and “2022 Performance Period”). 2019 PSUs . In March and April 2019, the Company granted certain of its executives an aggregate of 872,073 PSUs, of which 523,244 PSUs had both performance and service conditions (the "Performance PSUs") and 348,829 PSUs had both market and service conditions (the "Market PSUs"). The three Fiscal Year Performance Periods for the 2019 Performance PSUs are the years ended December 31, 2019, 2020 and 2021 (respectively, the “2019 Performance Period”, “2020 Performance Period” and “2021 Performance Period”). In the third quarter of 2019, the Company adjusted the goals for the 2019 Performance Period to reflect the changes to the Company's calculation of certain metrics. There was no incremental expense in connection with this modification. At December 31, 2021, the Company determined that the grant date criteria for the 2022 Performance Period and 2023 Performance Period had not been met, as the goals for these performance periods had not been established by the Company. Accordingly, no expense has been recorded related to these performance periods. Accounting for Performance PSUs . Once the grant date criteria have been met for a Fiscal Year Performance Period, the Company records stock-based compensation expense for the respective shares underlying the PSUs based on its assessment of the probability that the respective performance condition will be achieved and the level, if any, of such achievement. The Compensation Committee determines the number of shares earned, if any, after the Company's financial results for each Fiscal Year Performance Period are finalized. Upon the determination by the Compensation Committee of the number of shares that will be received upon vesting of the related Performance PSUs, such number of shares becomes fixed and the unamortized expense is recorded through the remainder of the service period, at which time such Performance PSUs earned, if any, will vest, pending each executive's continued employment with the Company through that date. Accounting for Market PSUs . PSUs that include a market condition require the use of a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the volatility of each entity and the pair-wise covariance between each entity. These results are then used to calculate the grant date fair values of the respective PSUs. The Company is required to record expense for the PSUs with market conditions through their respective final vesting dates regardless of the number of shares that are ultimately earned. Employee Bonus Program For the year ended December 31, 2021, the Company added an equity component to its cash bonus program for eligible employees, under which RSUs with a grant date fair value equal to 50 % of each employee's target cash bonus were granted to each such employee ("Bonus RSUs"). Correspondingly, cash target bonuses for eligible employees were reduced by 50 %. The Company implemented this program to expand the opportunities for stock ownership more broadly throughout the Company. The Bonus RSUs will vest over three years , with the final vest occurring on March 15, 2024. The Bonus RSU grants are included in the applicable table below. Accelerated Vesting of Stock Units In connection with the separation of several executives from the Company in the years ended December 31, 2021, 2020 and 2019, the Company accelerated the vesting of certain of their outstanding RSUs and PSUs in accordance with their respective terms of employment with the Company. At December 31, 2021, there was the potential for a portion of certain other PSUs aggregating approximately 40,000 shares to be released to two of these former executives on a pro rata basis subject 99 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) to achievement of the related performance or market conditions for the performance periods through their respective 2021 separation dates. Stock Options The Company has not granted stock options since 2017. Outstanding stock options granted under the Company's plans expire either seven or ten years from the date of grant. The grant date fair value of stock options, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Forfeitures are estimated based on historical experience. The activity related to the Company's outstanding stock options during the year ended December 31, 2021 was as follows: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) Outstanding at January 1, 2021 207,710 $ 12.69 Exercised ( 13,815 ) $ 1.76 Expired ( 9,726 ) $ 17.60 Outstanding at December 31, 2021 184,169 $ 13.25 2.59 $ 174 Vested or expected to vest at December 31, 2021 184,169 $ 13.25 2.59 $ 174 Exercisable at December 31, 2021 184,134 $ 13.26 2.59 $ 174 The total intrinsic values of options exercised were $ 0.1 million for the year ended December 31, 2021, $ 0.1 million for the year ended December 31, 2020 and $ 0.5 million for the year ended December 31, 2019. The Company received cash from option exercises of approximately $ 24,000 in the year ended December 31, 2021, $ 0.1 million in the year ended December 31, 2020 and $ 0.2 million in the year ended December 31, 2019. Restricted Stock Grants - Restricted Stock Awards and Restricted Stock Units The Company's outstanding restricted stock grants consist of both RSAs and RSUs. Holders of unvested RSAs have voting rights and rights to receive dividends, if declared; however, these rights are forfeited if the underlying unvested RSA shares are forfeited. Holders of unvested RSUs do not have such voting and dividend rights. The grant date fair value of restricted stock grants, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period. The fair value of restricted stock grants is determined based on the market value of the Company's shares on the date of grant. The activity related to the Company's RSAs for the year ended December 31, 2021 was as follows: Shares Weighted Average Grant Date Fair Value Unvested balance at January 1, 2021 86,983 $ 7.04 Vested ( 86,983 ) $ 7.04 Unvested balance at December 31, 2021 — $ — 100 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The activity related to the Company's RSUs for the year ended December 31, 2021 was as follows: Shares Weighted Average Grant Date Fair Value Unvested balance at January 1, 2021 6,531,110 $ 3.32 Granted 3,268,789 $ 8.44 Vested ( 3,566,569 ) $ 3.32 Forfeited ( 843,719 ) $ 4.76 Unvested balance at December 31, 2021 5,389,611 $ 6.19 The total grant date fair value of vested restricted stock grant shares was $ 12.5 million in the year ended December 31, 2021, $ 11.2 million in the year ended December 31, 2020 and $ 9.9 million in the year ended December 31, 2019. Performance-Based Stock Units Holders of unvested PSUs do not have voting and dividend rights. The Company recognizes stock-based compensation expense for PSUs without market conditions on a straight-line basis, with the amount recorded based upon the expected level of achievement as of each period-end, recording cumulative adjustments in the period when the expected level of achievement changes. The Company recognizes the grant date fair value of PSUs on a graded attribution basis through the vest date of the respective awards so long as it remains probable that the related service conditions will be satisfied. The activity related to the Company's PSUs for the year ended December 31, 2021 was as follows: Shares Weighted Average Grant Date Fair Value Unvested balance at January 1, 2021 6,035,931 $ 1.56 Granted 701,208 $ 10.11 Vested ( 1,557,656 ) $ 1.08 Forfeited ( 191,607 ) $ 6.11 Unvested balance at December 31, 2021 4,987,876 $ 2.87 The total grant date fair value of vested performance-based stock grant shares was $ 1.7 million in the year ended December 31, 2021, $ 1.8 million in the year ended December 31, 2020 and $ 0.1 million in the year ended December 31, 2019. Stock-Based Compensation The consolidated statements of operations included stock-based compensation for the years ended December 31, 2021, 2020 and 2019 as follows (in thousands): Year ended December 31, 2021 2020 2019 Product cost of revenue $ 313 $ 174 $ 76 Service cost of revenue 1,684 701 478 Research and development 4,253 2,968 1,898 Sales and marketing 7,218 4,129 3,028 General and administrative 5,950 5,927 7,121 $ 19,418 $ 13,899 $ 12,601 There was an income tax benefit for employee stock-based compensation expense for the years ended December 31, 2021 and 2020. There was no income tax benefit for the year ended December 31, 2019 due to the valuation allowance recorded. At December 31, 2021, there was $ 25.4 million, net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested stock options, RSUs and PSUs. This expense is expected to be recognized over a weighted average period of approximately two years . 101 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Common Stock Reserved At December 31, 2021, there were 4,090,946 total shares of common stock reserved for future issuance under the Company's equity plans. However, of that amount 105,495 shares are only authorized for issuance as stock options. The Company's policy is to issue authorized but unissued shares upon the exercise of stock options, to grant restricted common stock, to settle restricted stock units and performance-based stock units. (21) LEASES The Company has operating and finance leases for corporate offices, research and development facilities, and certain equipment. Operating leases are reported separately in the Company's consolidated balance sheet at December 31, 2021 and 2020. Assets acquired under finance leases are included in Property and equipment, net, in the consolidated balance sheets at December 31, 2021 and 2020. The Company determines if an arrangement is a lease at inception. A contract is determined to contain a lease component if the arrangement provides the Company with a right to control the use of an identified asset. Lease agreements may include lease and non-lease components. In such instances for all classes of underlying assets, the Company does not separate lease and non-lease components but rather, accounts for the entire arrangement under leasing guidance. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term. Right-of-use assets and lease liabilities are initially measured based on the present value of the future minimum fixed lease payments (i.e., fixed payments in the lease contract) over the lease term at the commencement date. As the Company's existing leases do not have a readily determinable implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future minimum fixed lease payments. The Company calculates its incremental borrowing rate to reflect the interest rate that it would have to pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment over a similar term and considers its historical borrowing activities and market data from entities with comparable credit ratings in this determination. The measurement of the right-of-use asset also includes any lease payments made prior to the commencement date (excluding any lease incentives) and initial direct costs incurred. The Company assessed its right-of-use assets for impairment as of December 31, 2021 and 2020 and determined no impairment had occurred. Lease terms may include options to extend or terminate the lease and the Company incorporates such options in the lease term when it has the unilateral right to make such an election and it is reasonably certain that the Company will exercise that option. In making this determination, the Company considers its prior renewal and termination history and planned usage of the assets under lease, incorporating expected market conditions. For operating leases, lease expense for minimum fixed lease payments is recognized on a straight-line basis over the lease term. The expense for finance leases includes both interest and amortization expense components, with the interest component calculated based on the effective interest method and the amortization component calculated based on straight-line amortization of the right-of-use asset over the lease term. Lease contracts may contain variable lease costs, such as common area maintenance, utilities and tax reimbursements that vary over the term of the contract. Variable lease costs are not included in minimum fixed lease payments and as a result, are excluded from the measurement of the right-of-use assets and lease liabilities. The Company expenses all variable lease costs as incurred. In connection with the 2020 Restructuring Initiative, the Company accelerated amortization totaling $ 0.8 million in the year ended December 31, 2021 for leased facilities that were vacated in 2021 as part of the consolidation of certain sites following the ECI Acquisition. The Company did not record estimated future variable lease costs in the year ended December 31, 2021 related to the 2020 Restructuring Initiative. The Company did not record any accelerated amortization or estimated future variable lease costs in the year ended December 31, 2020 related to the 2020 Restructuring Initiative. In connection with the 2019 Restructuring Initiative, certain lease assets related to facilities are being partially or fully vacated as the Company consolidates its facilities. The Company has no plans to enter into sublease agreements for certain 102 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) facilities. The Company accelerated amortization of $ 3.4 million, $ 0.6 million and $ 3.7 million in the years ended December 31, 2021, 2020 and 2019, respectively, for leased facilities that were vacated in the respective years. The Company also recorded liabilities aggregating $ 1.4 million and $ 0.9 million in the years ended December 31, 2021 and 2019, respectively, for all future estimated variable lease costs related to these facilities. The Company did not record liabilities for future estimated variable lease costs in the year ended December 31, 2020. This incremental accelerated amortization and accrual for all estimated future variable lease costs are included in Restructuring and related expense in the Company's consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019. At December 31, 2021 and 2020, the Company had accruals of $ 1.6 million and $ 0.8 million, respectively, for all future anticipated variable lease costs related to these facilities. The Company may incur additional future expense if it is unable to sublease other locations included in the Facilities Initiative. In addition, in the year ended December 31, 2021, this accelerated amortization and provision for future estimated variable lease costs was partially offset by the recognition of $ 2.1 million of income in conjunction with lease amendments that modified the Company's obligation and rentable square footage at a site in North Carolina. The Company leases its corporate offices and other facilities under operating leases, which expire at various times through 2032. In December 2020, the Company began relocating from its former leased Plano, Texas facility to its new leased facility on Chase Oaks Boulevard, also located in Plano, Texas. The Company's relocation to the new corporate headquarters was completed in the first quarter of 2021. The Company's right-of-use lease assets and lease liabilities at December 31, 2021 and 2020 were as follows (in thousands): December 31, Classification 2021 2020 Assets: Operating lease assets Operating lease right-of-use assets $ 53,147 $ 69,757 Finance lease assets* Property and equipment, net 287 983 Total leased assets $ 53,434 $ 70,740 Liabilities: Current: Operating Operating lease liabilities $ 17,403 $ 17,023 Finance Accrued expenses and other 503 902 Noncurrent: Operating Operating lease liabilities, net of current 55,196 72,614 Finance Other long-term liabilities 64 568 Total lease liabilities $ 73,166 $ 91,107 * Finance lease assets were recorded net of accumulated depreciation of $ 1.8 million and $ 1.9 million at December 31, 2021 and December 31, 2020, respectively. The components of lease expense for the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands): Year ended December 31, 2021 2020 2019 Operating lease cost* $ 21,828 $ 19,582 $ 13,865 Finance lease cost: Amortization of leased assets 695 1,200 1,106 Interest on lease liabilities 67 173 265 Short-term lease cost 13,250 20,687 19,460 Variable lease costs (costs excluded from minimum fixed lease payments)** 4,030 2,713 3,264 Sublease income ( 1,496 ) ( 1,087 ) ( 374 ) Net lease cost $ 38,374 $ 43,268 $ 37,586 103 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) * Operating lease costs for the years ended December 31, 2021, 2020 and 2019 include $ 3.4 million, $ 0.6 million, and $ 3.7 million, respectively, of accelerated amortization for certain assets partially or fully vacated with no intent or ability to sublease. Operating lease cost for the year ended December 31, 2021 also includes $ 2.1 million of income related to a lease modification for one of these assets. ** Variable lease costs for the years ended December 31, 2021 and 2019 included accruals of $ 1.4 million and $ 0.9 million, respectively, for all future estimated variable expenses related to certain assets partially or fully vacated with no intent or ability to sublease. No such variable costs were accrued in the year ended December 31, 2020. Cash flow information related to the Company's leases for the years ended December 31, 2021 and 2020 was as follows (in thousands): Year ended December 31, 2021 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 22,365 $ 19,161 10,559 Operating cash flows from finance leases $ 67 $ 173 265 Financing cash flows from finance leases $ 903 $ 1,279 913 Other information related to the Company's leases as of December 31, 2021 and 2020 was as follows (in thousands): December 31, 2021 2020 Weighted average remaining lease term (years): Operating leases 6.25 6.59 Finance leases 1.00 1.70 Weighted average discount rate: Operating leases 5.61 % 5.67 % Finance leases 4.15 % 6.15 % Future minimum fixed lease payments under noncancelable leases at December 31, 2021 were as follows (in thousands): December 31, 2021 Operating Finance leases leases 2022 $ 20,729 $ 517 2023 17,970 63 2024 10,503 — 2025 7,593 — 2026 6,543 — 2027 and beyond 24,477 — Total lease payments 87,815 580 Less: interest ( 15,216 ) ( 13 ) Present value of lease liabilities $ 72,599 $ 567 (22) EMPLOYEE DEFINED CONTRIBUTION PLANS The Company offers 401(k) savings plans to eligible employees. The Company matches 50 % of each employee's contributions to the 401(k) program up to 4 % of the employee's eligible earnings, for a maximum match of 2 % of eligible earnings. The Company recorded expense related to its employee defined contribution plans aggregating $ 3.5 million, $ 3.4 million and $ 4.0 million in the years ended December 31, 2021, 2020 and 2019, respectively. 104 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (23) NON-U.S. EMPLOYEE DEFINED BENEFIT PLANS The Company has defined benefit retirement plans that cover certain employees at various international locations. The Company's policy is to contribute amounts at least sufficient to satisfy the minimum amount required by applicable law and regulations or to directly pay benefits where appropriate. Benefits under the defined benefit plans are typically based either on years of service and the employee's compensation (generally during a fixed number of years immediately before retirement) or on annual credits. The range of assumptions that are used for these non-U.S. defined benefit plans reflect the different economic environments within the various countries. In the year ended December 31, 2020, the Company assumed ECI's defined benefit plans in connection with the ECI Acquisition. These plans exist in several international locations where severance pay is either required by law for voluntary terminations or upon reaching a statutory retirement age. The Company adopted ECI's policy to fund notional accounts each month in the name of each employee to satisfy not only the severance amounts required by the applicable laws and regulations in certain countries, but also to satisfy severance for other types of terminations not necessarily required by law, but paid in accordance with company policy. Benefits funded and paid under these plans are based upon years of service and the employees' current compensation. At the ECI Acquisition Date, ECI accounted for these plans under the shutdown approach allowed under ASC 715, Compensation - Retirement Benefits (Topic 715) ("ASC 715") . Beginning December 31, 2020, in order to be consistent with the accounting methodology utilized for Ribbon's other defined benefit plans, the Company began to account for the ECI assumed plans using the actuarial cost approach, which is also allowed under ASC 715 for these types of plans. The range of assumptions that are utilized for these plans reflects the different economic environments within each country where such severance indemnities are required. In 2020, regulatory changes occurred in the Netherlands that changed the Company's defined benefit pension plan there from a participating plan to a non-participating plan. This plan amendment triggered settlement accounting, resulting in a gain of $ 1.6 million, which is included in Other (expense) income, net, in the Company's consolidated statement of operations for the year ended December 31, 2020. Prior to the amendment, the Company's Netherlands pension plan provided defined benefit accruals which were financed by insurance contracts that had a profit sharing feature. The pension benefits accrued were subject to future increases based on final earnings at the end of employment (the final average earnings formula). With the amendment in 2020, the final average earnings formula was frozen and the insurance contracts were converted to fully paid contracts. Following the amendment, pension accruals are now based upon a new formula that only considers current earnings (the career earnings formula) with the benefits still financed through insurance contracts. Ribbon has no further liability for pension benefits earned prior to the amendment as they are fully paid contracts. In addition, the insurance contract for the new benefit accruals has no profit sharing feature. Therefore, Ribbon has no current or future obligation to pay pension benefits promised in the Netherlands beyond the payment of premiums to the insurance company. During the year ended December 31, 2019, in conjunction with the 2019 Restructuring Initiative, there were reductions in force that significantly reduced benefits that can be earned under the plan in one of our international locations that resulted in an immaterial curtailment loss. Settlement accounting was triggered in the year ended December 31, 2019 related to a reduction in force in one of the Company's locations in 2018, resulting in an immaterial settlement gain. A reconciliation of the changes in the benefit obligations and fair value of the assets of the defined benefit plans for the years ended December 31, 2021 and 2020, the funded status of the plans, and the amounts recognized in the consolidated balance sheets as of December 31, 2021 and 2020 were as follows (in thousands): 105 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2021 2020 Changes in projected benefit obligations: Projected benefit obligation, beginning of year $ 25,067 $ 11,784 Business combination — 17,963 Service cost 1,321 1,459 Interest cost 523 46 Participant contributions — — Plan amendments ( 3,801 ) ( 4,440 ) Benefits and expenses paid ( 1,040 ) ( 1,976 ) Net actuarial loss on obligation 4,868 231 Projected benefit obligation, end of year $ 26,938 $ 25,067 Changes in plan assets: Fair value of plan assets, beginning of year $ 14,350 $ 1,830 Business combination — 13,188 Actual return on plan assets 981 1,077 Plan amendments — ( 588 ) Employer contributions 989 798 Participant contributions 23 21 Benefits paid ( 1,040 ) ( 1,976 ) Fair value of plan assets, end of year $ 15,303 $ 14,350 Funded status at end of year $ ( 11,635 ) $ ( 10,717 ) Amounts recognized in accumulated other comprehensive loss consist of: Net actuarial loss $ ( 4,045 ) $ ( 102 ) Amounts recognized in the consolidated balance sheets consist of: Accrued expenses and other (current pension liability) $ ( 461 ) $ ( 435 ) Other long-term liabilities (non-current pension liability) ( 11,174 ) ( 10,282 ) Net amount recognized $ ( 11,635 ) $ ( 10,717 ) The increase in the underfunded status of the Company's defined benefit plans at December 31, 2021 compared to December 31, 2020 was primarily the result of the larger net actuarial loss in the current year, partially offset by lower benefit payments. Plans with underfunded or non-funded accumulated benefit obligations at December 31, 2021 and 2020 were as follows (in thousands): December 31, 2021 2020 Aggregate projected benefit obligation $ 26,938 $ 25,067 Aggregate accumulated benefit obligation $ 20,695 $ 20,746 Aggregate fair value of plan assets $ 15,303 $ 14,350 106 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Net periodic benefit costs for the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands): Year ended December 31, 2021 2020 2019 Service cost $ 1,321 $ 1,459 $ 335 Interest cost 523 46 140 Expected return on plan assets ( 314 ) ( 343 ) ( 14 ) Plan asset expenses — 20 21 Curtailment charge (credit) — — 13 Settlement (credit) charge — ( 1,557 ) 115 Amortization of net loss 81 — — Net periodic benefit costs $ 1,611 $ ( 375 ) $ 610 The Company made benefit payments of $ 1.0 million, $ 2.0 million and $ 0.7 million in the years ended December 31, 2021, 2020 and 2019, respectively. These benefit payments included $ 0.7 million of one-time lump sum payments to participants in the year ended December 31, 2019. No one-time lump sum payments were made to participants in the years ended December 31, 2021 and 2020. Expected benefit payments for the next ten years are as follows (in thousands): Years ending December 31, 2022 $ 2,644 2023 1,465 2024 1,230 2025 1,498 2026 1,235 2027 to 2031 10,673 $ 18,745 The changes in plan assets and benefit obligations recognized in other comprehensive income (loss) before tax for the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands): Year ended December 31, 2021 2020 2019 Net (gain) loss $ 4,045 $ ( 558 ) $ 2,526 Settlement gain — ( 1,557 ) — Total recognized in comprehensive income (loss) $ 4,045 $ ( 2,115 ) $ 2,526 The Company defers all actuarial gains and losses resulting from variances between actual results and economic estimates or actuarial assumptions. The unrecognized actuarial gains and losses are recorded as unrealized pension actuarial gains (losses) in the Company's consolidated balance sheets as a component of Accumulated other comprehensive income. These unrecognized gains and losses are amortized as a component of net periodic benefit cost when the net gains and losses exceed 10 % of the greater of the market value of plan assets or the projected benefit obligation at the beginning of the year. Amortization of the amount included in Accumulated other comprehensive income into net periodic benefit cost is expected to total $ 0.1 million for the year ended December 31, 2022. The principal weighted average assumptions used to determine the benefit obligation at December 31, 2021 and 2020 were as follows: December 31, 2021 2020 Discount rate 2.24 % 2.16 % Rate of compensation increase 3.90 % 2.41 % The principal weighted average assumptions used to determine net period benefit cost for the years ended December 31, 2021, 2020 and 2019 were as follows: 107 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2021 2020 2019 Discount rate 2.16 % 0.68 % 1.30 % Expected long-term return on plan assets 2.06 % 0.21 % 1.12 % Rate of compensation increase 2.41 % 2.88 % 2.83 % Assumed discount rates are used in the measurement of the projected and accumulated benefit obligations, as well as the service and interest cost components of net periodic pension cost. Estimated discount rates reflect the rates at which the pension benefits could be effectively settled. For each defined benefit plan, the Company chooses an estimated discount rate from a readily available market index rate, based upon high-quality fixed income investments, specific to the country or economic zone in which the benefits are paid and taking into account the duration of the plan and the number of participants. The Company's plans in both the Netherlands and Switzerland are funded through insurance contracts, which have historically provided guaranteed interest credit. The fair value of these contracts is derived from the insurance companies' assessment of the minimum value of the benefits provided by the insurance contracts. The methodology used to value these plan assets has always assumed that the value of the plan assets equals the guaranteed insured benefits. For consistency, the same discount rate used in the valuation of the benefit obligations is used to place a value on the plan assets. The assets are assumed to grow each year in line with the discount rate, and therefore, the expected return on the assets is set equal to the discount rate. The fair value of the plan assets in Switzerland was $ 1.7 million at December 31, 2021 and $ 1.6 million at December 31, 2020. Due to the plan amendment in 2020 that changed the benefit structure of the Netherlands plan, the Company no longer has any obligation related to this plan beyond the payment of insurance premiums. Therefore, there is no projected benefit obligation and no plan assets in the Netherlands as of December 31, 2020. Plan assets for the Netherlands plan totaled $ 0.6 million at December 31, 2019. The Company classifies the fair value of its plan assets as Level 2 in the fair value hierarchy as discussed in Note 6. During the years ended December 31, 2021, 2020 and 2019, employees in the Netherlands and Switzerland made contributions to the respective pension plans aggregating $ 23,000 , $ 21,000 and $ 24,000 , respectively. Employee contributions to these plans are based on a fixed 5 % of the relevant pensionable earnings. The Company funds these plans by contributing at least the minimum amount required by applicable regulations and as recommended by an independent actuary. During the years ended December 31, 2021, 2020 and 2019, the Company contributed $ 1.0 million, $ 0.8 million and $ 0.1 million, respectively, to its pension plans. The Company expects to contribute $ 1.2 million to its defined benefit plans in 2022. (24) INCOME TAXES The components of (loss) income from continuing operations before income taxes consisted of the following (in thousands): Year ended December 31, 2021 2020 2019 (Loss) income before income taxes: United States $ ( 29,985 ) $ 123,817 $ ( 132,887 ) Foreign ( 178,158 ) ( 30,500 ) 9,994 $ ( 208,143 ) $ 93,317 $ ( 122,893 ) 108 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The (benefit) provision for income taxes from continuing operations consisted of the following (in thousands): Year ended December 31, 2021 2020 2019 (Benefit) provision for income taxes: Current: Federal $ 5,033 $ 677 $ 11 State 1,836 1,310 128 Foreign 7,661 7,355 1,744 Total current 14,530 9,342 1,883 Deferred: Federal 1,700 30,278 9,790 State 1,444 195 1,630 Foreign ( 23,484 ) ( 16,117 ) 383 Change in valuation allowance ( 25,148 ) ( 18,972 ) ( 6,504 ) Total deferred ( 45,488 ) ( 4,616 ) 5,299 Total $ ( 30,958 ) $ 4,726 $ 7,182 A reconciliation of the Company's effective tax rate for continuing operations to the statutory federal rate is as follows: Year ended December 31, 2021 2020 2019 U.S. statutory income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit ( 0.7 ) 1.1 ( 0.2 ) Foreign income taxes ( 1.4 ) 2.9 ( 1.0 ) Foreign deemed dividends 1.9 ( 2.7 ) ( 0.4 ) Stock-based compensation — 1.0 ( 0.7 ) Tax credits 1.6 ( 2.8 ) 2.8 Uncertain tax positions 0.5 0.5 ( 0.2 ) Valuation allowance 2.5 ( 20.3 ) ( 0.7 ) Goodwill amortization — 0.6 0.4 Tax reform — — ( 0.1 ) Goodwill impairment ( 11.7 ) — ( 25.4 ) Other permanent adjustments 0.9 1.8 ( 1.5 ) Permanent adjustments - foreign exchange 0.5 1.8 — Other, net ( 0.2 ) 0.2 0.2 Effective income tax rate 14.9 % 5.1 % ( 5.8 ) % 109 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The following is a summary of the significant components of deferred income tax assets and liabilities (in thousands): December 31, 2021 2020 Assets: Net operating loss carryforwards $ 437,669 $ 447,101 Capital loss carryforward 79,716 71,182 Research and development and other tax credits 41,556 51,431 Deferred revenue 3,472 3,184 Accrued expenses 7,505 13,557 Inventory 3,102 2,603 Stock-based compensation 1,689 1,668 Fixed assets 2,710 4,613 Lease liabilities 15,250 — Mark-to-market investments 1,714 — Other temporary differences 3,839 4,051 598,222 599,390 Valuation allowance ( 471,515 ) ( 496,439 ) Total deferred tax assets 126,707 102,951 Liabilities: Intangible assets ( 65,647 ) ( 75,794 ) Operating lease right-of-use assets ( 10,370 ) — Mark-to-market investments — ( 17,631 ) Unremitted foreign income ( 11,519 ) ( 15,717 ) Total deferred tax liabilities ( 87,536 ) ( 109,142 ) Total net deferred tax assets $ 39,171 $ ( 6,191 ) The deferred tax assets and liabilities based on tax jurisdictions are presented in the Company's consolidated balance sheets as follows: December 31, 2021 2020 Deferred income taxes - noncurrent assets $ 47,287 $ 10,651 Deferred income taxes - noncurrent liabilities ( 8,116 ) ( 16,842 ) $ 39,171 $ ( 6,191 ) The largest changes in the year ended December 31, 2021 compared to the year ended December 31, 2020 include an increase in recognized U.S. deferred tax assets due to a release of a portion of the valuation allowances, as well as a change in mark-to-market securities related to the AVCT Investment. At December 31, 2021, the Company had cumulative net operating losses ("NOLs") in the U.S. of $ 224.6 million. The Company, through the ECI Acquisition, also has $ 1.6 billion of Israel NOLs. The U.S. NOL carryforwards expire at various dates from 2022 through 2037. The Israel NOLs do not expire. The Company also has available federal, state and foreign income tax credit carryforwards of $ 23.4 million that expire in various periods. The Company has provided for income taxes on the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2021, excluding Ireland and Israel. These subsidiaries, excluding Ireland and Israel, are cost-plus or limited risk distributors that are not anticipated to need to use excess funds locally. Accordingly, the Company is required to recognize and record deferred taxes in 2021. The deferred taxes are recorded on the entire outside basis differences related to the foreign subsidiaries, the largest of these differences being undistributed earnings. Undistributed profits of Ireland and Israel, as well as other outside basis differences in foreign subsidiaries, were indefinitely reinvested in foreign operations. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings and outside basis differences was not practicable. 110 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Under the provisions of the Internal Revenue Code, the net operating losses and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service. Net operating losses and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership of significant shareholders over a three-year period in excess of 50 %, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as a similar state provision. As a result of the Edgewater Acquisition in 2018, the Company acquired approximately $ 34 million of net operating loss carryforwards and approximately $ 6 million of tax credit carryforwards. As a result of the ECI Acquisition, an additional $ 129.6 million of NOL was acquired related to the ECI U.S. subsidiary. Edgewater and ECI U.S. incurred ownership changes as a result of their acquisition by the Company, and thus the acquired net operating losses and credits are subject to limitations under IRC Sections 382 and 383. During 2021 and 2020, the Company performed an analysis to determine if, based on all available evidence, it considered it more likely than not that some portion or all of the recorded deferred tax assets will not be realized in a future period. As a result of the Company's evaluation, the Company concluded that there was sufficient positive evidence to release a portion of the Company's valuation allowance on its U.S. federal deferred tax assets, as the Company expects to have sufficient taxable income in future periods to utilize a portion of its net operating losses. Accordingly, the Company has maintained a valuation allowance against its U.S. deferred tax asset amounting to $ 30.5 million at December 31, 2021 and $ 73.0 million at December 31, 2020. The Company also maintains a valuation allowance against certain of its foreign deferred tax assets, predominantly Israel, amounting to approximately $ 441 million at December 31, 2021 and $ 423 million at December 31, 2020. The deferred tax assets recognized with no valuation allowance at December 31, 2021 and 2020 primarily relate to other foreign subsidiaries where recoverability is concluded to be more likely than not based on the Company's cost-plus compensation policy, as well as net operating losses and credits in the U.S. that are expected to be utilized prior to expiration. A reconciliation of the Company's unrecognized tax benefits is as follows (in thousands): Year ended December 31, 2021 2020 2019 Unrecognized tax benefits at January 1 $ 14,054 $ 2,932 $ 3,461 Increases related to current year tax positions 4,017 485 292 Increases related to prior period tax positions 3,168 11,209 — Decreases related to prior period tax positions ( 3,426 ) ( 572 ) ( 821 ) Unrecognized tax benefits at December 31 $ 17,813 $ 14,054 $ 2,932 The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. The Company had $ 21.0 million, $ 15.3 million and $ 3.6 million of unrecognized tax benefits, including penalties and interest, at December 31, 2021, 2020 and 2019, respectively. Of these amounts, $ 12.7 million, $ 13.9 million and $ 2.0 million represent the amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate for the years ended December 31, 2021, 2020 and 2019, respectively. The Company recorded liabilities for potential penalties and interest of $ 1.9 million, $ 0.5 million and $ 0.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. The Company had $ 3.2 million and $ 1.3 million accrued in Other long-term liabilities for penalties and interest at December 31, 2021 and 2020, respectively. The Company believes that it is reasonably possible that certain tax positions related to its unrecognized tax benefits will be effectively settled within the next twelve months. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as various state and foreign jurisdictions. Generally, the tax years 2017 through 2020 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company's federal NOLs generated prior to 2017 could be adjusted on examination even though the year in which the loss was generated is otherwise closed by the statute of limitations. As of December 31, 2021, the Company had ongoing income tax audits in certain foreign countries. Management believes that an adequate provision has been recorded for any adjustments that may result from tax examinations. (25) RELATED PARTIES As a portion of the consideration for the GENBAND Merger, on October 27, 2017, the Company issued a promissory note for $ 22.5 million to certain of GENBAND's equity holders who, following the GENBAND Merger. As described in Note 14 111 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) above, the promissory note did not amortize and the principal thereon was payable in full on the third anniversary of its execution. Interest on the promissory note was payable quarterly in arrears and accrued at a rate of 7.5 % per year for the first six months after issuance, and thereafter at a rate of 10 % per year. On April 29, 2019, the Company repaid in full all outstanding amounts under the Promissory Note, aggregating $ 24.7 million. The Company did not incur any early termination penalties in connection with this repayment. (26) COMMITMENTS AND CONTINGENCIES Litigation Settlement As previously disclosed, the Company was involved in six lawsuits (together, the "Lawsuits") with Metaswitch Networks Ltd., Metaswitch Networks Corp. and Metaswitch Inc. (collectively, "Metaswitch"). In five of the Lawsuits, the Company was the plaintiff, and in three of those five lawsuits, the Company was also a counterclaim defendant. In the sixth case, the Company was the defendant. On April 22, 2019, the Company and Metaswitch agreed to a binding mediator's proposal that resolved the six Lawsuits between the Company and Metaswitch (the "Lawsuits"). The Company and Metaswitch signed a Settlement and Cross-License Agreement on May 29, 2019 (the "Royalty Agreement"). Pursuant to the terms of the Royalty Agreement, Metaswitch agreed to pay the Company an aggregate amount of $ 63.0 million, which included cash payments of $ 37.5 million during the second quarter of 2019 and $ 25.5 million payable in three installments annually, beginning June 26, 2020, with such installment payments accruing interest at a rate of 4 % per year. As part of the Royalty Agreement, the Company and Metaswitch (i) have released the other from all claims and liabilities; (ii) have licensed each party's existing patent portfolio to the other party; and (iii) have requested the applicable courts to dismiss the Lawsuits. The $ 63.0 million gain from the settlement is included in Other (expense) income, net, in the Company's consolidated statement of operations for the year ended December 31, 2019, and had notes receivable for future payments of $ 25.5 million, comprised of $ 8.5 million in Other current assets and $ 17.0 million in Other assets in the consolidated balance sheet. The Company received $ 37.5 million of aggregate payments from Metaswitch in the second quarter of 2019 and $ 9.5 million, including $ 1.0 million of interest, in the second quarter of 2020. On July 6, 2020, the Company and Metaswitch signed a First Supplemental Agreement to the Settlement and Cross-License Agreement (the "Supplemental Agreement") under which Metaswitch could elect to repay the outstanding amounts under the Royalty Agreement early in exchange for a reduction of $ 0.25 million to the outstanding principal, from $ 17.0 million to $ 16.75 million, and the payment of no further interest by Metaswitch effective June 26, 2020. The Company recorded the reduction to the outstanding principal as a reduction to interest income. On July 14, 2020, Metaswitch paid the Company the remaining outstanding balance of $ 16.75 million. Contingencies Liabilities for Royalty Payments to the IIA Prior to the ECI Acquisition, ECI had received research and development grants from the IIA. The Company assumed ECI's contract with the IIA, which requires the Company to pay royalties to the IIA on proceeds from the sale of products which the Israeli government has supported by way of research and development grants. The royalties for grants prior to 2017 were calculated at the rates of 1.3 % to 5.0 % of the aggregated proceeds from the sale of such products developed at certain of the Company's R&D centers, up to an amount not exceeding 100 % of such grants plus interest at LIBOR. Effective for grants approved in 2017 and thereafter, interest was calculated at the higher of LIBOR plus 1.5 % to 2.75 %. At December 31, 2021, the Company's maximum possible future royalties commitment, including $ 4.3 million of unpaid royalties accrued at December 31, 2021, was $ 34.2 million, including interest of $ 1.9 million, based on estimates of future product sales, grants received from the IIA and not yet repaid, and management's estimation of products still to be sold. Litigation On November 8, 2018, Ron Miller, a purported stockholder of the Company, filed a Class Action Complaint (the "Miller Complaint") in the United States District Court for the District of Massachusetts (the "Massachusetts District Court") against the Company and three of its former officers (collectively, the "Defendants"), claiming to represent a class of purchasers of 112 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Sonus common stock during the period from January 8, 2015 through March 24, 2015 and alleging violations of the federal securities laws. Similar to a previous complaint entitled Sousa et al. vs. Sonus Networks, Inc. et al., which was dismissed with prejudice by an order dated June 6, 2017, the Miller Complaint claims that the Defendants made misleading forward-looking statements concerning Sonus' expected fiscal first quarter of 2015 financial performance, which statements were also the subject of an August 7, 2018 Securities and Exchange Commission Cease and Desist Order, whose findings the Company neither admitted nor denied. The Miller plaintiffs are seeking monetary damages. After the Miller Complaint was filed, several parties filed and briefed motions seeking to be selected by the Massachusetts District Court to serve as a Lead Plaintiff in the action. On June 21, 2019, the Massachusetts District Court appointed a group as Lead Plaintiffs and the Lead Plaintiffs filed an amended complaint on July 19, 2019. On August 30, 2019, the Defendants filed a motion to dismiss the Miller Complaint and, on October 4, 2019, the Lead Plaintiffs filed an opposition to the motion to dismiss. The Defendants filed a reply to such opposition on November 1, 2019. There was an oral argument on the motion to dismiss on February 12, 2020, but to date, the court has not ruled on the motion. In addition, the Company is often a party to disputes and legal proceedings that it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material effect on the Company's business or consolidated financial statements. (27) SUBSEQUENT EVENT On February 14, 2022, the Company's 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. The Company currently expects 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. The Company expects the 2022 Restructuring Plan will be substantially completed in 2022. (28) QUARTERLY RESULTS (UNAUDITED) The following tables present the Company's quarterly operating results for the years ended December 31, 2021 and 2020. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited consolidated quarterly results when read in conjunction with the Company's audited consolidated financial statements and related notes. 113 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) First Quarter Second Quarter Third Quarter Fourth Quarter (In thousands, except per share data) Year ended December 31, 2021 Revenue $ 192,772 $ 211,210 $ 210,398 $ 230,577 Cost of revenue (2) 92,286 92,483 99,744 115,784 Gross profit (2) $ 100,486 $ 118,727 $ 110,654 $ 114,793 (Loss) income from operations $ ( 12,604 ) $ 12,952 $ 1,992 $ ( 120,136 ) Net (loss) income $ ( 44,687 ) $ 23,241 $ ( 59,431 ) $ ( 96,308 ) (Loss) earnings per share (3): Basic $ ( 0.31 ) $ 0.16 $ ( 0.40 ) $ ( 0.65 ) Diluted $ ( 0.31 ) $ 0.15 $ ( 0.40 ) $ ( 0.65 ) Shares used in computing (loss) earnings per share: Basic 145,936 147,467 148,184 148,675 Diluted 145,936 154,160 148,184 148,675 First Quarter (1) Second Quarter Third Quarter Fourth Quarter (In thousands, except per share data) Year ended December 31, 2020 Revenue $ 157,982 $ 210,493 $ 231,118 $ 244,202 Cost of revenue (2) 76,412 98,176 107,807 110,583 Gross profit (2) $ 81,570 $ 112,317 $ 123,311 $ 133,619 Loss (income) from operations $ ( 28,740 ) $ 1,592 $ 11,917 $ 16,900 Net (loss) income $ ( 33,170 ) $ ( 8,251 ) $ 6,252 $ 123,760 Loss (earnings) per share (3): Basic $ ( 0.27 ) $ ( 0.06 ) $ 0.04 $ 0.85 Diluted $ ( 0.27 ) $ ( 0.06 ) $ 0.04 $ 0.81 Shares used in computing loss (earnings) per share: Basic 120,992 144,483 144,948 145,311 Diluted 120,992 144,483 151,680 153,441 __________________________________ (1) Includes the results of ECI for the period subsequent to March 3, 2020. (2) Reflects the increases to Cost of revenue arising from the reclassification of amortization of acquired technology from amortization of acquired intangible assets within operating expenses in 2021 of $ 10.1 million in the first quarter, $ 9.7 million in the second quarter and $ 9.7 million in the third quarter; and in 2020 of $ 9.0 million in the first quarter, $ 11.0 million in the second quarter, $ 11.6 million in the third quarter and $ 10.7 million in the fourth quarter. See Note 2 for a discussion of the reclassification. (3) (Loss) earnings per share is calculated independently for each of the quarters presented; accordingly, the sum of the quarterly (loss) earnings per share amounts may not equal the total calculated for the year. 114 Table of Contents RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.