What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-28 compared with 2022-05-10 · 218 added, 136 removed, 186 unchanged (66% of the section changed)

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Impact of COVID-19 on Our Business

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

Continued uncertain global economic conditions as a result of the continuing COVID-19 pandemic, particularly in areas experiencing higher case numbers as a result of new variants, may cause our customers to restrict spending or delay purchases for an indeterminate period of time and consequently cause our revenues to decline.

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

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

The degree to which the continuing COVID-19 pandemic impacts our future business, financial position and results of operations will depend on developments beyond our control, including the effectiveness of vaccines over the long-term or with respect to new variants, the frequency and duration of future waves of infection, the extent of actions to contain or treat the virus, how quickly and to what extent normal economic and operating conditions can result after new future waves, and the severity and duration of the global economic downturn that has resulted from the pandemic.

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

This reclassification resulted in $10.1 million recorded to Amortization of acquired technology within Total cost of revenue and a decrease of $10.1 million to Amortization of acquired intangible assets within Total operating expenses in the three months ended March 31, 2021.

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

This reclassification resulted in $9.7 million and $19.8 million of expense recorded to Amortization of acquired technology within Total cost of revenue in the three and six months ended June 30, 2021, respectively, and decreases to Amortization of acquired intangible assets within Total operating expenses of $9.7 million and $19.8 million.

The increases to Total cost of revenue decreased our gross profit as a percentage of revenue ("gross margin") by approximately five percentage points in both the three and six months ended June 30, 2021, respectively.

Operating Segments

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

For additional details regarding our operating segments, see Note 12 - Operating Segment Information to our condensed consolidated financial statements.

For additional details regarding our operating segments, see Note 12 - Operating Segment Information to

our condensed consolidated financial statements.

Financial Overview

Financial Results

We reported losses from operations of $39.1 million and $12.6 million for the three months ended March 31, 2022 and 2021, respectively.

Our revenue was $173.2 million and $192.8 million in the three months ended March 31, 2022 and 2021, respectively.

Our gross profit and gross margin were $78.1 million and 45.1%, respectively, in the three months ended March 31, 2022, and $100.5 million and 52.1%, respectively, in the three months ended March 31, 2021.

Revenue from our Cloud and Edge segment was $109.8 million and $125.4 million in the three months ended March 31, 2022 and 2021, respectively.

Gross profit and gross margin for this segment were $62.7 million and 57.1%, respectively, in the three months ended March 31, 2022, and $77.5 million and 61.8%, respectively, in the three months ended March 31, 2021.

Revenue from our IP Optical Networks segment was $63.4 million and $67.4 million in the three months ended March 31, 2022 and 2021, respectively.

Gross profit and gross margin for this segment were $15.3 million and 24.2%, respectively, in the three months ended March 31, 2022, and $23.0 million and 34.1%, respectively, in the three months ended March 31, 2021.

Our operating expenses were $117.1 million and $113.1 million in the three months ended March 31, 2022 and 2021, respectively.

Operating expenses for the three months ended March 31, 2022 included $7.3 million of amortization of acquired intangible assets, $1.8 million of acquisition-, disposal- and integration-related expense, and $4.8 million of restructuring and related expense.

Operating expenses for the three months ended March 31, 2021 included $5.8 million of amortization of acquired intangible assets, $1.2 million of acquisition-, disposal- and integration-related expense, and $6.0 million of restructuring and related expense.

We recorded stock-based compensation expense of $4.3 million and $5.1 million in the three months ended March 31, 2022 and 2021, respectively.

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

See "Results of Operations" in this MD&A for a discussion of the changes in our revenue and expenses for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

We reported a loss from operations of $7.2 million for the three months ended June 30, 2022 and income from operations of $13.0 million for the three months ended June 30, 2021.

We reported a loss from operations of $46.3 million for the six months ended June 30, 2022 and income from operations of $0.3 million for the six months ended June 30, 2021.

The loss from operations in 2022 is primarily related to the impact from higher supply chain costs and the incremental investment in R&D within our IP Optical Networks segment.

Our revenue was $205.8 million and $211.2 million in the three months ended June 30, 2022 and 2021, respectively.

Our gross profit and gross margin were $104.6 million and 50.8%, respectively, in the three months ended June 30, 2022, and $118.7 million and 56.2%, respectively, in the three months ended June 30, 2021.

Our revenue was $379.0 million and $404.0 million in the six months ended June 30, 2022 and 2021, respectively.

Our gross profit and gross margin were $182.6 million and 48.2%, respectively, in the six months ended June 30, 2022, and $219.2 million and 54.3%, respectively, in the six months ended June 30, 2021.

The lower revenue in the first half of 2022 compared to 2021 is primarily related to lower SBC sales and lower service revenue from Service Provider VoIP Network Transformation projects completing in the first quarter.

Revenue from our Cloud and Edge segment was $137.1 million and $141.4 million in the three months ended June 30, 2022 and 2021, respectively.

Gross profit and gross margin for this segment were $88.3 million and 64.4%, respectively, in the three months ended June 30, 2022, and $88.8 million and 62.8%, respectively, in the three months ended June 30, 2021.

Revenue from our Cloud and Edge segment was $246.9 million and $266.8 million in the six months ended June 30, 2022 and 2021, respectively.

Gross profit and gross margin for this segment were $151.0 million and 61.2%, respectively, in the six months ended June 30, 2022, and $166.4 million and 62.3%, respectively, in the six months ended June 30, 2021.

Revenue from our IP Optical Networks segment was $68.7 million and $69.8 million in the three months ended June 30, 2022 and 2021, respectively.

Gross profit and gross margin for this segment were $16.3 million and 23.7%, respectively, in the three months ended June 30, 2022, and $29.9 million and 42.8%, respectively, in the three months ended June 30, 2021.

Revenue from our IP Optical Networks segment was $132.1 million and $137.1 million in the six months ended June 30, 2022 and 2021, respectively.

Gross profit and gross margin for this segment were $31.6 million and 23.9%, respectively, in the six months ended June 30, 2022, and $52.9 million and 38.5%, respectively, in the six months ended June 30, 2021.

Gross margin in 2022 is lower than 2021 due to higher component and logistics costs, as well as increased investment in customer service to support our expanded global footprint.

Our operating expenses were $111.8 million and $105.8 million in the three months ended June 30, 2022 and 2021, respectively, and $228.9 million and $218.9 million in the six months ended June 30, 2022 and 2021, respectively.

The increased operating expenses are primarily related to higher R&D investment in our IP Optical Networks segment to support the expansion of the portfolio.

Operating expenses for the three months ended June 30, 2022 included $7.5 million of amortization of acquired intangible assets, $1.5 million of acquisition-, disposal- and integration-related expense, and $2.9 million of restructuring and related expense.

Operating expenses for the three months ended June 30, 2021 included $7.5 million of amortization of acquired intangible assets, $1.1 million of acquisition-, disposal- and integration-related expense, and $2.8 million of restructuring and related expense.

Operating expenses for the six months ended June 30, 2022 included $14.8 million of amortization of acquired intangible assets, $3.4 million of acquisition-, disposal- and integration-related expense, and $7.7 million of restructuring and related expense.

Operating expenses for the six months ended June 30, 2021 included $13.2 million of amortization of acquired intangible assets, $2.2 million of acquisition-, disposal- and integration-related expense, and $8.8 million of restructuring and related expense.

We recorded stock-based compensation expense of $4.4 million and $4.8 million in the three months ended June 30, 2022 and 2021, respectively, and $8.7 million and $9.9 million in the six months ended June 30, 2022 and 2021, respectively These amounts are included as components of both Cost of revenue and Operating expenses in our condensed consolidated statements of operations.

See "Results of Operations" in this MD&A for a discussion of the changes in our revenue and expenses for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021.

Restructuring and Cost Reduction Initiatives

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

We recorded restructuring and related expense of $4.2 million for severance and related costs for approximately 50 employees in connection with the 2022 Restructuring Plan in the three months ended March 31, 2022.

We recorded restructuring and related expense of $2.9 million and $7.1 million in the three and six months ended June 30, 2022, respectively, in connection with the 2022 Restructuring Plan.

The amount for the three months ended June 30, 2022 was comprised of $1.1 million for variable and other facilities-related costs, $1.0 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease, and $0.8 million for severance and related costs for approximately 10 employees.

The amount for the six months ended June 30, 2022 was comprised of $5.0 million for severance and related costs for approximately 60 employees, $1.1 million for variable and other facilities-related costs and $1.0 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease.

We anticipate that we will record future expense for severance and facility consolidations aggregating approximately $13 million in connection with the 2022 Restructuring Plan.

2020 and 2019 Restructuring Plans .

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

The 2020 Restructuring Plan included facility consolidations and a reduction in workforce to eliminate redundant functions arising from our acquisition of ECI Telecom Group Ltd.

in 2020 (the "ECI Acquisition") and support our efforts to integrate the two companies.

At March 31, 2022, the 2020 Restructuring Plan had a remaining accrual of $0.8 million for severance costs that are expected to be paid out over the next year.

In June 2019, we implemented a restructuring plan to streamline our global footprint, improve our operations and enhance our customer delivery (the "2019 Restructuring Plan").

The 2019 Restructuring Plan included facility consolidations, refinement of our research and development activities, and a reduction in workforce.

At March 31, 2022, the 2019 Restructuring Plan had a remaining accrual of $1.4 million for facility costs that remain in the plan and which will be paid out over the various lease terms, which range from one to six years.

Accelerated Rent Amortization.

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

We recorded $3.4 million for accelerated rent amortization in the three months ended March 31, 2021.

We did not record accelerated rent amortization in the three months ended March 31, 2022.

We recorded $1.0 million and $3.4 million for accelerated rent amortization in the six months ended June 30, 2022 and 2021, respectively.

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

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

There were no significant changes to our critical accounting policies from January 1, 2022 through March 31, 2022.

There were no significant changes to our critical accounting policies from January 1, 2022 through June 30, 2022.

For a further discussion of our other critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2021.

Results of Operations

Three months ended March 31, 2022 and 2021

Revenue for the three months ended March 31, 2022 and 2021 was as follows (in thousands, except percentages):

Three and six months ended June 30, 2022 and 2021

Revenue for the three and six months ended June 30, 2022 and 2021 was as follows (in thousands, except percentages):

Three months ended Decrease

from prior year

2022 March 31,

2022 June 30,

Product $ 112,667 $ 113,129 $ (462) (0.4) %

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Total revenue $ 205,796 $ 211,210 $ (5,414) (2.6) %

Segment revenue for the three months ended March 31, 2022 and 2021 was as follows (in thousands):

Three months ended March 31, 2022 Three months ended March 31, 2021

Six months ended Decrease

from prior year

2022 June 30,

Product $ 194,657 $ 211,018 $ (16,361) (7.8) %

Service 184,337 192,964 (8,627) (4.5) %

Total revenue $ 378,994 $ 403,982 $ (24,988) (6.2) %

Segment revenue for the three and six months ended June 30, 2022 and 2021 was as follows (in thousands):

Three months ended June 30, 2022 Three months ended June 30, 2021

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

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Total revenue $ 137,080 $ 68,716 $ 205,796 $ 141,421 $ 69,789 $ 211,210

The decrease in our product revenue in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily the result of lower sales of our Cloud and Edge SBC products and network transformation products, coupled with lower sales of IP Optical Networks products.

Revenue from indirect sales through our channel partner program was 29% and 21% of our product revenue in the three months ended March 31, 2022 and 2021, respectively.

Revenue from sales to enterprise customers was 27% and 23% of our product revenue in the three months ended March 31, 2022 and 2021, respectively.

Six months ended June 30, 2022 Six months ended June 30, 2021

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

Product $ 101,760 $ 92,897 $ 194,657 $ 114,513 $ 96,505 $ 211,018

Service 145,126 39,211 184,337 152,330 40,634 192,964

Total revenue $ 246,886 $ 132,108 $ 378,994 $ 266,843 $ 137,139 $ 403,982

Our product revenue in the three months ended June 30, 2022 was essentially flat for both of our segments compared to the three months ended June 30, 2021, with slightly higher sales in the Asia Pacific region.

The decrease in our product revenue in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily the result of lower sales of our Cloud and Edge SBC products, coupled with slightly lower sales of IP Optical Networks products, partially offset by higher sales of our Cloud and Edge network transformation products.

Service revenue in our Cloud and Edge segment was lower in the first half of 2022 compared with 2021 due to a smaller number of Network Transformation projects completing during the period.

Revenue from indirect sales through our channel partner program was 25% and 24% of our product revenue in the three months ended June 30, 2022 and 2021, respectively, and 27% and 22% of our product revenue in the six months ended June 30, 2022 and 2021, respectively.

Revenue from sales to enterprise customers was 20% and 22% of our product revenue in the three months ended June 30, 2022 and 2021, respectively.

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

Revenue from sales to enterprise customers was 23% and 22% of our product revenue in the six months ended June 30, 2022 and 2021, respectively.

Cloud and Edge sales to Enterprise customers in the first half of 2022 were consistent with the same period of 2021.

IP Optical sales to Enterprise customers declined modestly over the same period.

The timing of the completion of customer projects and revenue recognition criteria satisfaction may cause our product revenue to fluctuate from one period to the next.

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

Service revenue for the three months ended March 31, 2022 and 2021 was comprised of the following (in thousands, except percentages):

Service revenue for the three and six months ended June 30, 2022 and 2021 was comprised of the following (in thousands, except percentages):

Three months ended Decrease

from prior year

2022 March 31,

2022 June 30,

Maintenance $ 69,458 $ 72,437 $ (2,979) (4.1) %

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$ 93,129 $ 98,081 $ (4,952) (5.0) %

Segment service revenue for the three months ended March 31, 2022 and 2021 was comprised of the following (in thousands):

Three months ended March 31, 2022 Three months ended March 31, 2021

Six months ended Decrease

from prior year

2022 June 30,

Maintenance $ 138,063 $ 141,142 $ (3,079) (2.2) %

Professional services 46,274 51,822 (5,548) (10.7) %

$ 184,337 $ 192,964 $ (8,627) (4.5) %

Segment service revenue for the three and six months ended June 30, 2022 and 2021 was comprised of the following (in thousands):

Three months ended June 30, 2022 Three months ended June 30, 2021

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

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Total service revenue $ 72,955 $ 20,174 $ 93,129 $ 77,060 $ 21,021 $ 98,081

Maintenance revenue was essentially flat in the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The increase in our Cloud and Edge segment's maintenance revenue was virtually offset by the decrease in our IP Optical Networks segment's maintenance revenue.

Professional services revenue from our Cloud and Edge segment decreased by $3 million in three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to scheduling delays in several network transformation projects.

We expect these delayed projects will be completed later in the current year.

The following customer contributed 10% or more of our revenue in the three month periods ended March 31, 2022 and 2021:

Three months ended

Customer March 31,

2022 March 31,

Six months ended June 30, 2022 Six months ended June 30, 2021

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

Maintenance $ 110,209 $ 27,854 $ 138,063 $ 112,659 $ 28,483 $ 141,142

Professional services 34,917 11,357 46,274 39,671 12,151 51,822

Total service revenue $ 145,126 $ 39,211 $ 184,337 $ 152,330 $ 40,634 $ 192,964

The decrease in maintenance revenue in the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 was attributable to lower revenue in our Cloud and Edge segment, reflecting timing variability in renewal timing.

The decrease in professional services revenue in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily attributable to $1 million of lower revenue from each of our segments.

The decrease in professional services revenue in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily attributable to approximately $5 million of lower revenue from our Cloud and Edge segment, due to a fewer number of VoIP Network Transformation projects completing in the first quarter of 2022.

The following customer contributed 10% or more of our revenue in the three month periods ended June 30, 2022 and 2021:

Three months ended Six months ended

Customer June 30,

2022 June 30,

2021 June 30,

2022 June 30,

Verizon Communications Inc.

Revenue from customers domiciled outside the United States comprised 56% and 59% of revenue in the three months ended March 31, 2022 and 2021, respectively.

20% 17% 17% 16%

Revenue from customers domiciled outside the United States was approximately 52% of revenue in both the three months ended June 30, 2022 and 2021 and 54% and 55% of revenue in the six months ended June 30, 2022 and 2021, respectively.

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

Our deferred product revenue was $9 million and $10 million at March 31, 2022 and December 31, 2021, respectively.

Our deferred service revenue was $119 million and $120 million at March 31, 2022 and December 31, 2021, respectively.

Our deferred product revenue was $11 million and $10 million at June 30, 2022 and December 31, 2021, respectively.

Our deferred service revenue was $115 million and $120 million at June 30, 2022 and December 31, 2021, respectively.

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

We expect that our total revenue will increase in 2022 compared to 2021 as a result of both increased customer spend and continued cross-selling opportunities.

We expect that our total revenue will increase for 2022 compared to 2021 as a result of both increased customer spend and continued cross-selling opportunities.

Cost of Revenue/Gross Margin.

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

Our cost of revenue and gross margins for the three

months ended March 31, 2022 and 2021 were as follows (in thousands, except percentages):

Our cost of revenue, gross profit and gross margins for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands, except percentages):

Three months ended Increase (decrease)

from prior year

2022 March 31,

2022 June 30,

Cost of revenue:

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Gross margin 50.8 % 56.2 %

Our segment cost of revenue and gross margins for the three months ended March 31, 2022 and 2021 were as follows (in thousands, except percentages):

Three months ended March 31, 2022 Three months ended March 31, 2021

Six months ended Increase (decrease)

from prior year

2022 June 30,

Cost of revenue:

Product $ 109,360 $ 91,086 $ 18,274 20.1 %

Service 70,874 73,922 (3,048) (4.1) %

Amortization of acquired technology 16,155 19,761 (3,606) (18.2) %

Total cost of revenue $ 196,389 $ 184,769 $ 11,620 6.3 %

Gross profit $ 182,605 $ 219,213 $ (36,608) (16.7) %

Gross margin 48.2 % 54.3 %

Our segment cost of revenue, gross profit and gross margins for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands, except percentages):

Three months ended June 30, 2022 Three months ended June 30, 2021

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

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Total cost of revenue $ 48,830 $ 52,416 $ 101,246 $ 52,585 $ 39,898 $ 92,483

Total gross margin 57.1 % 24.2 % 45.1 % 61.8 % 34.1 % 52.1 %

The decrease in our gross margin in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to higher component costs, expedite and production fees, and logistics expenses in both of our segments, product and customer mix, which decreased our gross margin by seven percentage points.

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

Gross profit $ 88,250 $ 16,300 $ 104,550 $ 88,836 $ 29,891 $ 118,727

Gross margin 64.4 % 23.7 % 50.8 % 62.8 % 42.8 % 56.2 %

Six months ended June 30, 2022 Six months ended June 30, 2021

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

Product $ 36,036 $ 73,324 $ 109,360 $ 32,533 $ 58,553 $ 91,086

Service 49,932 20,942 70,874 54,685 19,237 73,922

Amortization of acquired technology 9,936 6,219 16,155 13,266 6,495 19,761

Total cost of revenue $ 95,904 $ 100,485 $ 196,389 $ 100,484 $ 84,285 $ 184,769

Gross profit $ 150,982 $ 31,623 $ 182,605 $ 166,359 $ 52,854 $ 219,213

Gross margin 61.2 % 23.9 % 48.2 % 62.3 % 38.5 % 54.3 %

Our gross margin decreased in the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 primarily due to lower margins in our IP Optical Networks segment.

The decrease was primarily attributable to product and customer mix, higher component costs, and higher freight and logistics expenses, which decreased our gross margin by five percentage points and six percentage points, respectively.

We anticipate improved gross margin in the second half of 2022 as elevated supply chain costs improve, and higher sales and better customer mix benefit from fixed operational costs further improving margins.

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

Research and Development Expenses.

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

Research and development expenses for the three months ended March 31, 2022 and 2021 were as follows (in thousands, except percentages):

Research and development expenses for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands, except percentages):

from prior year

2022 March 31,

2022 June 30,

Three months ended $ 51,103 $ 46,797 $ 4,306 9.2 %

The increase in our research and development expenses in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to $4 million of higher product development costs and $3 million of higher employee-related expenses in our IP Optical Networks segment, partially offset by lower expenses in our Cloud and Edge segment aggregating $2 million.

Six months ended $ 103,793 $ 94,207 $ 9,586 10.2 %

The increase in our research and development expenses in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily attributable to approximately $6 million of higher expenses in our IP Optical Networks segment partially offset by approximately $2 million of lower expenses in our Cloud and Edge segment.

The increase in our research and development expenses in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily attributable to approximately $14 million of higher expenses in our IP Optical Networks segment partially offset by approximately $4 million of lower expenses in our Cloud and Edge segment.

The increased investment in IP Optical Networks R&D is focused on significantly expanding our portfolio of IP Routing solutions, adding additional features to our Optical Transport portfolio, and investment in a next generation SDN management and orchestration platform.

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

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

We believe that our research and development expense will increase modestly in 2022 compared to 2021, primarily due to our incremental investment in critical

growth areas, partially offset by cost savings from the 2022 Restructuring Plan.

We believe that our research and development expense will increase modestly in 2022 compared to 2021, primarily due to our incremental investment in critical growth areas, partially offset by cost savings from the 2022 Restructuring Plan.

Sales and Marketing Expenses.

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

Sales and marketing expenses for the three months ended March 31, 2022 and 2021 were as follows (in thousands, except percentages):

Sales and marketing expenses for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands, except percentages):

from prior year

2022 March 31,

2022 June 30,

Three months ended $ 35,843 $ 34,881 $ 962 2.8 %

The increase in sales and marketing expenses in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was attributable to higher expenses in our IP Optical Networks segment, partially offset by lower Cloud and Edge expenses, principally employee-related costs.

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

Six months ended $ 73,462 $ 72,099 $ 1,363 1.9 %

The slight increase in sales and marketing expenses in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily attributable to approximately $2 million of higher expenses in our IP Optical Networks segment, partially offset by approximately $1 million of lower expense in our Cloud and Edge segment, primarily for travel related costs.

Our Sales and Marketing team is responsible for selling the entire portfolio of products and services, and expenses are allocated to each operating segment pro-rata based on revenue contribution.

The increase in sales and marketing expenses in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily attributable to approximately $3 million of higher expenses in our IP Optical Networks segment, primarily offset by approximately $2 million of lower expenses in our Cloud and Edge segment, primarily for travel related costs.

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

General and Administrative Expenses.

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

General and administrative expenses for the three months ended March 31, 2022 and 2021 were as follows (in thousands, except percentages):

General and administrative expenses for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands, except percentages):

Increase (decrease)

from prior year

2022 March 31,

2022 June 30,

Three months ended $ 12,901 $ 12,734 $ 167 1.3 %

The decrease in general and administrative expenses in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily attributable to lower employee-related expenses of $1.4 million and $1.1 million in our Cloud and Edge and IP Optical Networks segments, respectively, in the current year period.

Although our general and administrative expenses decreased 17% in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, we believe that our general and administrative expenses will decrease only slightly for the full year 2022 compared to our 2021 levels.

Six months ended $ 25,763 $ 28,287 $ (2,524) (8.9) %

Our general and administrative expenses were relatively flat in the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The decrease in general and administrative expenses in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily attributable to lower employee-related expenses in the current year period of approximately $1 million in each of our Cloud and Edge and IP Optical Networks segments.

Although our general and administrative expenses decreased 9% in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, we believe that our general and administrative expenses will decrease only slightly for the full year 2022 compared to our 2021 levels.

Amortization of Acquired Intangible Assets.

Amortization of acquired intangible assets included in Operating expenses for the three months ended March 31, 2022 and 2021 was as follows (in thousands, except percentages):

Amortization of acquired intangible assets included in Operating expenses ("Opex Amortization") for the three and six months ended June 30, 2022 and 2021 was as follows (in thousands, except percentages):

from prior year

2022 March 31,

2022 June 30,

Three months ended $ 7,513 $ 7,481 $ 32 0.4 %

The increase in amortization of acquired intangible assets included in operating expenses ("Opex Amortization") in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to higher expense related to customer lists recorded in connection with the ECI Acquisition.

Six months ended $ 14,788 $ 13,243 $ 1,545 11.7 %

The increase in Opex Amortization in both the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 was primarily due to higher expense related to customer lists recorded in connection with the ECI Acquisition.

Opex Amortization is not recorded on a straight-line basis;

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

Our acquisition-, disposal- and integration-related expenses were $1.8 million and $1.2 million in the three months ended

March 31, 2022 and 2021, respectively.

The amount for the three months ended March 31, 2022 primarily relates to integration-related expenses.

The amount for the three months ended March 31, 2021 was comprised of $1.0 million of integration-related expenses and $0.2 million for professional and services fees in connection with the sale of our Kandy Communications business to American Cloud Technologies, Inc.

Our acquisition-, disposal- and integration-related expenses were $1.5 million and $1.1 million in the three months ended June 30, 2022 and 2021, respectively, and $3.4 million and $2.2 million in the six months ended June 30, 2022 and 2021, respectively.

The amounts for the three and six months ended June 30, 2022 primarily related to integration-related expenses.

The amounts for the three and six months ended June 30, 2021 were primarily incurred for integration-related expenses and professional and services fees in connection with the sale of our Kandy Communications business to American Cloud Technologies, Inc.

("AVCT") on December 1, 2020 (the "Kandy Sale").

Restructuring and Related.

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

We have been committed to streamlining our operations and reducing operating costs by

closing and consolidating certain facilities and reducing our worldwide workforce.

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

We recorded restructuring and related expense of $4.8 million and $6.0 million in the three months ended March 31, 2022 and March 31, 2021, respectively.

We recorded restructuring and related expense of $2.9 million and $2.8 million in the three months ended June 30, 2022 and 2021, respectively, and $7.7 million and $8.8 million in the six months ended June 30, 2022 and 2021, respectively.

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

Interest Expense, Net.

Interest income and interest expense for the three months ended March 31, 2022 and 2021 were as follows (in thousands, except percentages):

Three months ended Decrease

Interest income and interest expense for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands, except percentages):

Three months ended Increase (decrease)

from prior year

2022 March 31,

2022 June 30,

Interest income $ 59 $ 1,259 $ (1,200) (95.3) %

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Interest expense, net $ (4,602) $ (3,048) $ 1,554 51.0 %

We recorded nominal interest income in the three months ended March 31, 2022.

Six months ended Decrease

from prior year

2022 June 30,

Interest income $ 98 $ 2,744 $ (2,646) (96.4) %

Interest expense (8,701) (11,611) (2,910) (25.1) %

Interest expense, net $ (8,603) $ (8,867) $ (264) (3.0) %

We recorded nominal interest income in the three and six months ended June 30, 2022.

We received debentures (the "Debentures") and warrants in connection with the Kandy Sale.

The Debentures bore interest at 10% per annum.

We recorded $1.5 million of interest income in the three months ended March 31, 2021, which was added to the principal amount of the Debentures, and which is included in Interest expense, net, in our condensed consolidated statement of operations for that period.

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

The Debentures were converted to shares of AVCT common stock on September 8, 2021.

Interest expense in the three months ended March 31, 2022 primarily represented interest and debt issuance costs in connection with the 2020 Credit Facility (as defined below).

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

Other Expense, Net .

We recorded other expense, net, aggregating $28.8 million and $25.4 million in the three months ended March 31, 2022 and 2021, respectively.

The primary component in both periods was losses from the change in the fair value of the AVCT Investment, which were $27.0 million and $23.9 million in the three months ended March 31, 2022 and 2021, respectively.

Interest expense in the three and six months ended June 30, 2022 primarily represented interest and debt issuance costs in connection with the 2020 Credit Facility (as defined below).

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

Other (Expense) Income, Net .

We recorded other expense, net, aggregating $10.2 million and other income, net of $17.2 million in the three months ended June 30, 2022 and 2021, respectively, and other expense, net, aggregating $39.0 million and $8.3 million in the six months ended June 30, 2022 and 2021, respectively.

The primary component in all periods was gains and losses from the change in the fair value of the AVCT Investment, which were a loss of $12.4 million and a gain of $12.1 million in the three months ended June 30, 2022 and 2021, respectively, and losses of $39.4 million and $11.8 million in the six months ended June 30, 2022 and 2021, respectively.

Income Taxes.

We recorded an income tax benefit of $1.9 million in the three months ended March 31, 2022 and an income tax provision of $0.8 million in the three months ended March 31, 2021.

We recorded income tax provisions of $6.2 million and $4.7 million in the six months ended June 30, 2022 and 2021, respectively.

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

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The estimated effective tax rate includes the impact of valuation allowances in various jurisdictions.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (the "TCJA") eliminates the option to deduct research and development expenditures currently and requires taxpayers to amortize them over five years pursuant to IRC Section 174.

Although Congress is considering legislation that would defer the amortization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified.

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

Three months ended

2022 March 31,

Six months ended

2022 June 30,

Net loss $ (100,155) $ (21,446) $ (78,709)

Adjustments to reconcile net loss to cash flows provided by (used in) operating activities 45,568 52,700 (7,132)

Adjustments to reconcile net loss to cash flows (used in) provided by operating activities 76,911 64,343 12,568

Changes in operating assets and liabilities (1,143) (34,867) 33,724

Net cash provided by (used in) operating activities $ 15,030 $ (6,212) $ 21,242

Net cash (used in) provided by operating activities $ (24,387) $ 8,030 $ (32,417)

Net cash used in investing activities $ (6,515) $ (7,626) $ 1,111

Net cash used in by financing activities $ (38,362) $ (20,858) $ (17,504)

Our cash and restricted cash aggregated $95 million at March 31, 2022 and $106 million at December 31, 2021.

These amounts included cash and restricted cash aggregating $55 million at March 31, 2022 and $60 million at December 31, 2021 held by our non-U.S.

Our cash and restricted cash aggregated $38 million at June 30, 2022 and $106 million at December 31, 2021.

These amounts included cash and restricted cash aggregating $36 million at June 30, 2022 and $60 million at December 31, 2021 held by our non-U.S.

subsidiaries.

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

subsidiaries as of March 31, 2022, we do not believe that the amounts of potential withholding taxes that would arise from the repatriation would have a material effect on our liquidity.

subsidiaries as of June 30, 2022, we do not believe that the amounts of potential withholding taxes that would arise from the repatriation would have a material effect on our liquidity.

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

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

Subsequent to the Fourth Amendment, we are required to make quarterly principal payments on the 2020 Term Loan aggregating approximately $20 million per year for the next two years and $30 million in the following year, with the final payment approximating $285 million due on the maturity date.

At March 31, 2022, we had an outstanding 2020 Term Loan balance of $355.5 million at an average interest rate of 3.4% and $4.4 million of letters of credit outstanding with an interest rate of 2.5%.

We were in compliance with all covenants of the 2020 Credit Facility at both March 31, 2022 and December 31, 2021.

Subsequent to the Fourth Amendment, we were required to make quarterly principal payments on the 2020 Term Loan aggregating approximately $20 million per year for the next two years and $30 million in the following year, with the final payment approximating $285 million due on the maturity date.

On June 30, 2022, the we entered into a Fifth Amendment to the 2020 Credit Facility (the "Fifth Amendment") to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) to 5.25:1.00 for the second quarter of 2022, 5.00:1.00 for the third quarter of 2022, and 4.75:1.00 for the fourth quarter of 2022.

Also, the Fifth Amendment reduced the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the 2020 Credit Facility) to 1.10:1.00 for the second, third and fourth quarters of 2022 and increased the maximum rate at which loans bear interest if our Consolidated Net Leverage Ratio for any quarter is greater than 4.50:1.00.

Specifically, pursuant to the Fifth Amendment, loans incurred under the Senior

Secured Credit Facilities bear interest, at our option, at either LIBOR plus a margin ranging from 1.50% to 4.50% per year, or the base rate (the highest of the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50%, or the prime rate announced from time to time in The Wall Street Journal) plus a margin ranging from 0.50% to 3.50% per year (such margins being referred to as the “Applicable Margin”).

In addition, the Fifth Amendment allows us to incur junior secured or unsecured debt in an amount no less than $50 million, subject to certain conditions, including the requirement that 50% of the aggregate amount of such incurred debt (net of certain costs, fees and other amounts) must be applied to prepay the Senior Secured Credit Facilities, and compliance with certain leverage ratio-based covenant exceptions.

In connection with the Fifth Amendment, we made a $10.0 million voluntary prepayment that was applied to the final payment due on the maturity date.

Subsequent to the Fifth Amendment, we are required to make quarterly principal payments on the 2020 Term Loan aggregating approximately $5.0 million per quarter through March 31, 2024 and $10.0 million in each of the three quarters thereafter, with the final payment approximating $275 million due on the maturity date in March 2025.

At June 30, 2022, we had an outstanding balance under the 2020 Term Loan of $340.5 million at an average interest rate of 4.4% and $4.3 million million of letters of credit outstanding with an interest rate of 3.5%.

We were in compliance with all covenants of the 2020 Credit Facility at both June 30, 2022 and December 31, 2021.

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

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

The notional amount of this swap as of March 31, 2022 was $400 million, and the swap matures on March 3, 2025, the same date the 2020 Credit Facility matures.

The notional amount of this swap as of June 30, 2022 was $400 million, and the swap matures on March 3, 2025, the same date the 2020 Credit Facility matures.

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

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

During the three months ended March 31, 2022 and 2021, such a derivative was used to hedge the variable cash flows associated with the 2020 Credit Facility.

During the three and six months ended June 30, 2022 and 2021, such a derivative was used to hedge the variable cash flows associated with the 2020 Credit Facility.

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

However, during the three months ended March 31, 2022 and 2021, we recorded no hedge ineffectiveness.

However, during the three and six months ended June 30, 2022 and 2021, we recorded no hedge ineffectiveness.

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

Based upon projected forward rates, we estimate as of March 31, 2022 that $2.7 million may be reclassified as a decrease to interest expense over the next 12 months.

Based upon projected forward rates, we estimate as of June 30, 2022 that $8.0 million may be reclassified as a decrease to interest expense over the next 12 months.

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

At March 31, 2022, we had letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees") aggregating $30.7 million, comprised of the $4.4 million of letters of credit under the 2020 Credit Facility described above (the "Letters of Credit") and $26.3 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under various uncommitted facilities.

At June 30, 2022, we had letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees") aggregating $25.4 million million, comprised of the $4.3 million of letters of credit under the 2020 Credit Facility described above (the "Letters of Credit") and $21.1 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under various uncommitted facilities.

At December 31, 2021, we had $30.1 million of Guarantees, comprised of $4.3 million of Letters of Credit and $25.8 million of Other Guarantees.

At both March 31, 2022 and December 31, 2021, the Company had cash collateral of $2.6 million supporting the Guarantees, which are reported as Restricted cash in our condensed consolidated balance sheets.

At both June 30, 2022 and December 31, 2021, the Company had cash collateral of $2.0 million supporting the Guarantees, which is reported as Restricted cash in our condensed consolidated balance sheets.

Cash Flows from Operating Activities

Our primary source of cash from operating activities has been from cash collections from our customers.

We expect cash flows from operating activities to be affected by increases and decreases in sales volumes and timing of collections, and by purchases and shipments of inventory.

We expect cash flows from operating activities to be affected by increases and decreases in sales volumes and timing of collections, and by

purchases and shipments of inventory.

Our primary uses of cash for operating activities have been for personnel costs and investment in our research and development and in our sales and marketing, and general and administrative departments.

Cash provided by operating activities in the three months ended March 31, 2022 was $15.0 million, primarily resulting from lower accounts receivable and certain non-cash expenses, such as the decrease in the fair value of the AVCT Investment, amortization of intangible assets, stock-based compensation, depreciation and amortization of property and equipment, and foreign currency losses.

These amounts were partially offset by our net loss, higher inventory, lower accrued expenses and other long-term liabilities, and a non-cash adjustment to deferred income taxes.

Our lower accounts receivable was primarily due to the collection in the quarter of seasonally higher amounts outstanding at December 31, 2021.

Our operating activities used $6.2 million in the three months ended March 31, 2021, primarily the result of our net loss, lower accrued expenses and other long-term liabilities, lower accounts payable, and higher inventory.

These amounts were partially offset by lower accounts receivable, higher deferred revenue, lower other operating assets, and certain non-cash expenses, such as the decrease in the fair value of the AVCT Investment, amortization of intangible assets, stock-based compensation, depreciation and amortization of property and equipment, and amortization of debt issuance costs.

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

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

Cash used in operating activities in the six months ended June 30, 2022 was $24.4 million, primarily resulting from our net loss, higher inventory, and lower accrued expenses and deferred revenue.

These amounts were partially offset by certain non-cash expenses, such as the decrease in the fair value of the AVCT Investment, amortization of intangible assets, depreciation and amortization of property and equipment, as well as lower accounts receivable.

Our operating activities provided $8.0 million of cash in the six months ended June 30, 2021 primarily the result of lower accounts receivable and other operating assets, and slightly higher deferred revenue, coupled with our non-cash operating activities.

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

Our lower accounts receivable reflected typical mid-year seasonality.

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

Cash Flows from Investing Activities

Our investing activities used $3.5 million and $5.4 million of cash in the three months ended March 31, 2022 and 2021, respectively, to purchase property and equipment.

Our investing activities used $6.5 million of cash in the six months ended June 30, 2022 to purchase property and equipment.

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

Cash Flows from Financing Activities

Our financing activities used $22.4 million of cash in the three months ended March 31, 2022, primarily due to $20.0 million of principal payments on the 2020 Credit Facility, including the $15.0 million incremental principal payment in connection with the Fourth Amendment, and $1.8 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting.

Payments of debt issuance costs and principal payments of finance leases totaled less than $1 million.

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

Our financing activities used $38.4 million of cash in the six months ended June 30, 2022, primarily due to $35.0 million of principal payments on the 2020 Credit Facility, including the voluntary $15.0 million incremental principal payment in connection with the Fourth Amendment, voluntary $10.0 million incremental principal payment in connection with the Fifth Amendment and $1.9 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting.

Payments of debt issuance costs and principal payments of finance leases totaled approximately $1.4 million.

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

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

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

Under the 2020 Credit Facility, we are required to maintain compliance with certain financial covenants.

As of March 31, 2022, we were in compliance with our financial covenants.

Due to the impact of market conditions on its forecast, including supply chain disruptions, higher costs, and other geopolitical instabilities and disputes, we project that we may not maintain compliance with our financial covenants under the 2020 Credit Facility, as amended, for the quarters ended June 30, 2022 and September 30, 2022.

As of June 30, 2022, we were in compliance with our financial covenants.

Due to the impact of market conditions on our forecast, including supply chain disruptions, higher costs, and other geopolitical instabilities and disputes, we project that we may not maintain compliance with our financial covenants under the 2020 Credit Facility, as amended, for the quarter ended September 30, 2022.

Failure to remain in compliance would be an event of default that would permit the Lenders to accelerate the maturity of the 2020 Credit Facility.

As of the date of the issuance of our condensed consolidated financial statements, we currently do not have sufficient cash on hand or available liquidity to repay the outstanding balance of $355.5 million as of March 31, 2022, in the event the debt is accelerated.

Management's plans to avoid any potential event of default include raising additional cash that would allow us to pay down debt in order to remain in compliance with our financial covenants.

We have or are in the process of obtaining agreements with certain vendors and with certain lending institutions that allow us to factor additional trade receivables.

In addition, we have the ability to sell our derivative financial instrument and our investment in equity securities, which had an aggregate fair market value of $34 million as of March 31, 2022.

As of the date of the issuance of our condensed consolidated financial statements, we currently do not have sufficient cash on hand or available liquidity to repay the outstanding balance of $340.5 million as of June 30, 2022 in the event the debt was accelerated.

Management plans to avoid any potential event of default include raising additional cash that would allow us to pay down debt in order to remain in compliance with our financial covenants.

In addition, we have the ability to sell our derivative financial instrument, which had an aggregate fair market value of $21 million as of June 30 2022.

Lastly, we would evaluate the timing of our capital spending and extension of our payment terms with vendors as needed.

In addition to the above plans, we have entered into discussions with our Lenders to seek a further amendment to the 2020 Credit Facility to adjust the covenants, and we believe the likelihood of completion is reasonably likely.

However, an amendment has not been finalized and is not within our control.

We believe our plans are probable of being successfully implemented, which will result in adequate cash to allow us to pay down debt to meet our financial covenant requirements.

We believe our plans are probable of being successfully implemented, which along with our available cash on hand and liquidity from the factoring of receivables will result in adequate cash to allow us to pay down debt to meet our financial covenant requirements.

Based on our current expectations, we believe our current cash and available borrowings under the 2020 Credit Facility, along with management's plans as outlined above, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least twelve months.

The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations at March 31, 2022, primarily comprised of our debt principal and interest obligations as described above, and our operating lease and purchase obligations.

Our operating lease obligations totaled $82 million at March 31, 2022, with payments aggregating $15 million in the remainder of 2022, $18 million in 2023, $10 million in 2024 and $39 million thereafter.

Our purchase obligations for 2022 aggregate $139 million.

The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations at June 30, 2022, primarily comprised of our debt principal and interest obligations as described above, and our operating lease and purchase obligations.

Our operating lease obligations totaled $77.7 million at June 30, 2022, with payments aggregating $9.7 million in the remainder of 2022, $17.8 million in 2023, $10.8 million in 2024 and $39.4 million thereafter.

Estimated payments for purchase obligations for the full year 2022 aggregate approximately $139 m illion.

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

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Recent Accounting Pronouncements

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings (TDRs) for creditors in ASC 310, Receivables (Topic 310) , and requires entities to provide disclosures about current period gross write-offs by year of origination.

Also, ASU 2022-02 updates the requirements related to accounting for credit losses under ASC 326, Financial Instruments – Credit Losses (Topic 326) , and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty.

ASU 2022-02 is effective for the Company January 1, 2023, with early adoption permitted.

The Company believes that the adoption of ASU 2022-02 will not have a material impact on its consolidated financial statements upon adoption.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis