What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-28 compared with 2022-07-28 · 193 added, 160 removed, 244 unchanged (59% of the section changed)

13 unchanged sentences

Unless otherwise noted, all financial amounts, excluding tabular information, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are rounded to the nearest million dollar amount, and all percentages, excluding tabular information, are rounded to the nearest percentage point.

Equity Offering

On August 12, 2022, we entered into a Securities Purchase Agreement with certain investors for the sale (the "Equity Offering") in a private placement by us of 17,071,311 shares (the "Shares") our common stock, par value $0.0001 per share, at a price of $3.05 per share.

The aggregate gross proceeds from the Equity Offering were approximately $52.1 million, before deducting offering expenses paid by us of approximately $1.7 million.

We intend to use the net proceeds from the Equity Offering to fund general corporate purposes, including capital expenditures, working capital and repayment of debt.

The original issuance of the Shares in the Equity Offering was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).

The Company subsequently filed a registration statement on Form S-3 (the “Registration Statement”) with the SEC registering the Shares, which Registration Statement was declared effective by the SEC on September 23, 2022.

Reclassification of Amortization of Acquired Intangible Assets

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

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

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.

These reclassifications also

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

This reclassification resulted in $9.7 million and $29.4 million of expense recorded to Amortization of acquired technology within Total cost of revenue in the three and nine months ended September 30, 2021, respectively, and decreases to Amortization of acquired intangible assets within Total operating expenses of $9.7 million and $29.4 million, respectively.

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 nine months ended September 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 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.

We reported a loss from operations of $3.3 million for the three months ended September 30, 2022 and income from operations of $2.0 million for the three months ended September 30, 2021.

We reported a loss from operations of $49.6 million for the nine months ended September 30, 2022 and income from operations of $2.3 million for the nine months ended September 30, 2021.

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

Our revenue was $207.1 million and $210.4 million in the three months ended September 30, 2022 and 2021, respectively.

Our gross profit and gross margin were $104.3 million and 50.4%, respectively, in the three months ended September 30, 2022, and $110.7 million and 52.6%, respectively, in the three months ended September 30, 2021.

Our revenue was $586.1 million and $614.4 million in the nine months ended September 30, 2022 and 2021, respectively.

Our gross profit and gross margin were $286.9 million and 49.0%, respectively, in the nine months ended September 30, 2022, and $329.9 million and 53.7%, respectively, in the nine months ended September 30, 2021.

The lower revenue in the nine months 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 $124.7 million and $142.4 million in the three months ended September 30, 2022 and 2021, respectively.

Gross profit and gross margin for this segment were $76.4 million and 61.3%, respectively, in the three months ended September 30, 2022, and $89.0 million and 62.5%, respectively, in the three months ended September 30, 2021.

Revenue from our Cloud and Edge segment was $371.6 million and $409.3 million in the nine months ended September 30, 2022 and 2021, respectively.

Gross profit and gross margin for this segment were $227.4 million and 61.2%, respectively, in the nine months ended September 30, 2022, and $255.4 million and 62.4%, respectively, in the nine months ended September 30, 2021.

Revenue from our IP Optical Networks segment was $82.4 million and $68.0 million in the three months ended September 30, 2022 and 2021, respectively.

Gross profit and gross margin for this segment were $27.9 million and 33.8%, respectively, in the three months ended September 30, 2022, and $21.7 million and 31.9%, respectively, in the three months ended September 30, 2021.

Revenue from our IP Optical Networks segment was $214.6 million and $205.1 million in the nine months ended September 30, 2022 and 2021, respectively.

Gross profit and gross margin for this segment were $59.5 million and 27.7%, respectively, in the nine months ended September 30, 2022, and $74.5 million and 36.3%, respectively, in the nine months ended September 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.

Our operating expenses were $107.6 million and $108.7 million in the three months ended September 30, 2022 and 2021, respectively, and $336.5 million and $327.5 million in the nine months ended September 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.

Operating expenses for the three months ended September 30, 2022 included $7.5 million of amortization of acquired intangible assets, $1.0 million of acquisition-, disposal- and integration-related expense, and $1.3 million of restructuring and related expense.

Operating expenses for the three months ended September 30, 2021 included $7.5 million of amortization of acquired intangible assets, $2.0 million of acquisition-, disposal- and integration-related expense, and $1.8 million of restructuring and related expense.

Operating expenses for the nine months ended September 30, 2022 included $22.3 million of amortization of acquired intangible assets, $4.4 million of acquisition-, disposal- and integration-related

expense, and $9.0 million of restructuring and related expense.

Operating expenses for the nine months ended September 30, 2021 included $20.8 million of amortization of acquired intangible assets, $4.2 million of acquisition-, disposal- and integration-related expense, and $10.5 million of restructuring and related expense.

We recorded stock-based compensation expense of $4.8 million and $4.6 million in the three months ended September 30, 2022 and 2021, respectively, and $13.5 million and $14.4 million in the nine months ended September 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 nine months ended September 30, 2022 compared to the three and nine months ended September 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 $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 recorded restructuring and related expense of $1.3 million and $8.3 million in the three and nine months ended September 30, 2022, respectively, in connection with the 2022 Restructuring Plan.

The amount for the three months ended September 30, 2022 was comprised of $1.0 million for variable and other facilities-related costs, $0.6 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease, and $(0.3) million for severance and related costs.

The amount for the nine months ended September 30, 2022 was comprised of $4.7 million for severance and related costs for approximately 60 employees, $2.0 million for variable and other facilities-related costs and $1.6 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 $9 million in connection with the 2022 Restructuring Plan.

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

We recorded $1.6 million and $3.4 million for accelerated rent amortization in the nine months ended September 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 June 30, 2022.

There were no significant changes to our critical accounting policies from January 1, 2022 through September 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 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 and nine months ended September 30, 2022 and 2021

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

Three months ended Decrease

from prior year

2022 June 30,

September 30,

2022 September 30,

Product $ 111,152 $ 111,726 $ (574) (0.5) %

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Total revenue $ 207,127 $ 210,398 $ (3,271) (1.6) %

Six months ended Decrease

Nine months ended Decrease

from prior year

2022 June 30,

September 30,

2022 September 30,

Product $ 305,809 $ 322,744 $ (16,935) (5.2) %

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Total revenue $ 586,121 $ 614,380 $ (28,259) (4.6) %

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

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

Three months ended September 30, 2022 Three months ended September 30, 2021

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

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Total revenue $ 124,685 $ 82,442 $ 207,127 $ 142,437 $ 67,961 $ 210,398

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

Nine months ended September 30, 2022 Nine months ended September 30, 2021

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

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Total revenue $ 371,571 $ 214,550 $ 586,121 $ 409,280 $ 205,100 $ 614,380

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.

The slight decrease in our product revenue in the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily the result of lower sales of our Cloud and Edge network transformation products as key customers continued the deployment of products purchased earlier in the year, partially offset by higher sales of our IP Optical Networks products and Cloud and Edge Analytics solution.

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

We also estimate a reduction in our revenue of approximately $2 million and $3 million, respectively, in the three and nine months ended September 30, 2022, from the strong US dollar relative to sales in foreign currencies.

Service revenue in our Cloud and Edge segment was lower in the nine months ended September 30, 2022 compared with the same period in 2021 due to a smaller number of Network Transformation projects completing during the period.

Revenue from indirect sales through our channel partner program was 31% and 23% of our product revenue in the three months ended September 30, 2022 and 2021, respectively, and 28% and 22% of our product revenue in the nine months ended September 30, 2022 and 2021, respectively.

The increase in channel sales reflects stronger deployments through systems integrators as well as sell-thru our Service Provider channel partners, for both IP Optical and Cloud and Edge solutions.

Revenue from sales to enterprise customers was 30% and 18% of our product revenue in the three months ended

September 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.

Revenue from sales to enterprise customers was 26% and 21% of our product revenue in the nine months ended September 30, 2022 and 2021, respectively.

Cloud and Edge sales to Enterprise customers in the first nine months of 2022 increased slightly compared with the same period of 2021.

IP Optical sales to Enterprise customers increased approximately 21% 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 and six months ended June 30, 2022 and 2021 was comprised of the following (in thousands, except percentages):

Three months ended Decrease

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

Three months ended Increase/(Decrease)

from prior year

2022 June 30,

September 30,

2022 September 30,

Maintenance $ 71,989 $ 71,670 $ 319 0.4 %

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$ 95,975 $ 98,672 $ (2,697) (2.7) %

Six months ended Decrease

Nine months ended Decrease

from prior year

2022 June 30,

September 30,

2022 September 30,

Maintenance $ 210,052 $ 212,812 $ (2,760) (1.3) %

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$ 280,312 $ 291,636 $ (11,324) (3.9) %

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

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

Three months ended September 30, 2022 Three months ended September 30, 2021

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

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Total service revenue $ 73,364 $ 22,611 $ 95,975 $ 76,850 $ 21,822 $ 98,672

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

Nine months ended September 30, 2022 Nine months ended September 30, 2021

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

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Total service revenue $ 218,490 $ 61,822 $ 280,312 $ 229,180 $ 62,456 $ 291,636

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,

The 1.3% decrease in maintenance revenue in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily attributable to the effect of the strong US dollar on Cloud and Edge segment maintenance fees, offset by higher IP Optical Network segment maintenance fees from the growing installed base of product.

The decrease in professional services revenue in the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily attributable to fewer Cloud and Edge VoIP Network Transformation projects completing in the quarter.

The decrease in professional services revenue in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was also primarily attributable to fewer VoIP Network Transformation projects completing, particularly in the first quarter of 2022, as well as approximately $1 million of lower revenue from our IP Optical Network segment.

The following customers contributed 10% or more of our revenue in the three month periods ended September 30, 2022

Three months ended Nine months ended

Customer September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Verizon Communications Inc.

13% 18% 16% 17%

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.

AT&T 10% * * *

* Less than 10% of total revenue.

Revenue from customers domiciled outside the United States was approximately 58% and 56% of revenue in the three months ended September 30, 2022 and 2021, respectively, and 56% in both the nine months ended September 30, 2022 and 2021.

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 $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 product revenue was $12 million and $10 million at September 30, 2022 and December 31, 2021, respectively.

Our deferred service revenue was $100 million and $120 million at September 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 for 2022 compared to 2021 as a result of both increased customer spend and continued cross-selling opportunities.

We expect that our total revenue will decline slightly for 2022 compared to 2021 primarily as a result of lower customer spend in the first quarter of 2022.

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

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

Three months ended Increase (decrease)

from prior year

2022 June 30,

September 30,

2022 September 30,

Cost of revenue:

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Gross margin 50.4 % 52.6 %

Six months ended Increase (decrease)

Nine months ended Increase (decrease)

from prior year

2022 June 30,

September 30,

2022 September 30,

Cost of revenue:

5 unchanged sentences

Gross margin 49.0 % 53.7 %

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

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

Three months ended September 30, 2022 Three months ended September 30, 2021

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

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Gross margin 61.3 % 33.8 % 50.4 % 62.5 % 31.9 % 52.6 %

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

Nine months ended September 30, 2022 Nine months ended September 30, 2021

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

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Gross margin 61.2 % 27.7 % 49.0 % 62.4 % 36.3 % 53.7 %

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.

Our gross margin decreased in the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021.

The decrease in the gross margin in the three months ended September 30, 2022 compared to the same period in the prior year was primarily due to lower margins in our Cloud and Edge segment, partially offset by higher margins in our IP Optical Networks segment.

The decrease in the gross margin in the nine months ended September 30, 2022 compared to the same period in the prior year was primarily due to lower margins in our IP Optical Networks segment.

The decrease in both periods of two percentage points and five percentage points, respectively, was primarily attributable to product and customer mix, and to supply chain disruptions that have led to higher component costs, and higher freight and logistics expenses.

We also estimate a reduction in margin of approximately $2 million and $3 million, respectively, in the three and nine months ended September 30, 2022, from the strong US dollar relative to sales in foreign currencies.

We anticipate similar gross margin in the last quarter of 2022 for both segments, with the overall corporate average slightly lower depending on final sales mix.

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.

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

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

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

from prior year

2022 June 30,

September 30,

2022 September 30,

Three months ended $ 49,366 $ 49,132 $ 234 0.5 %

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.

Nine months ended $ 153,159 $ 143,339 $ 9,820 6.9 %

The slight increase in our research and development expenses in the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was attributable to approximately $2 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 nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily attributable to approximately $16 million of higher expenses in our IP Optical Networks segment, partially offset by approximately $6 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.

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

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

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

from prior year

2022 June 30,

September 30,

2022 September 30,

Three months ended $ 36,365 $ 36,113 $ 252 0.7 %

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.

Nine months ended $ 109,827 $ 108,212 $ 1,615 1.5 %

The slight increase in sales and marketing expenses in the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily attributable to approximately $1 million of higher expenses allocated to our IP Optical Networks segment, partially offset by approximately $1 million of lower expenses allocated to 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.

The increase in sales and marketing expenses in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily attributable to approximately $5 million of higher expenses allocated to our IP Optical Networks segment, partially offset by approximately $3 million of lower expenses allocated to our Cloud and Edge segment, primarily for employee-related and travel related costs.

We believe that our full year 2022 sales and marketing expenses will be slightly below 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 and six months ended June 30, 2022 and 2021 were as follows (in thousands, except percentages):

Increase (decrease)

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

from prior year

2022 June 30,

September 30,

2022 September 30,

Three months ended $ 12,118 $ 12,148 $ (30) (0.2) %

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.

Nine months ended $ 37,881 $ 40,435 $ (2,554) (6.3) %

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

The decrease in general and administrative expenses in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily attributable to lower employee-related expenses in the current year period of approximately $2 million in our IP Optical Networks segment and approximately $1 million of lower depreciation and amortization in our Cloud and Edge segment.

Although our general and administrative expenses decreased 6% in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, we believe that our general and administrative expenses for the full year 2022 will remain similar to our 2021 levels.

Our overall operating costs were lower by approximately $2 million and $4 million , respectively, in the three and nine months ended September 30, 2022 from the strong US dollar relative to expenses incurred in foreign currencies.

Amortization of Acquired Intangible Assets.

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):

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

Increase (decrease)

from prior year

2022 June 30,

September 30,

2022 September 30,

Three months ended $ 7,508 $ 7,547 $ (39) (0.5) %

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.

Nine months ended $ 22,296 $ 20,790 $ 1,506 7.2 %

The increase in Opex Amortization in the nine months ended September 30, 2022 compared to the nine months ended September 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 $1.5 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.

Our acquisition-, disposal- and integration-related expenses were $1.0 million and $2.0 million in the three months ended September 30, 2022 and 2021, respectively, and $4.4 million and $4.2 million in the nine months ended September 30, 2022 and 2021, respectively.

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

The amounts for the three and nine months ended September 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 $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.

We recorded restructuring and related expense of $1.3 million and $1.8 million in the three months ended September 30, 2022 and 2021, respectively, and $9.0 million and $10.5 million in the nine months ended September 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 and six months ended June 30, 2022 and 2021 were as follows (in thousands, except percentages):

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

Three months ended Increase (decrease)

from prior year

2022 June 30,

September 30,

2022 September 30,

Interest income $ 66 $ 924 $ (858) (92.9) %

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Interest expense, net $ (5,266) $ (2,969) $ 2,297 77.4 %

Six months ended Decrease

Nine months ended Increase (decrease)

from prior year

2022 June 30,

September 30,

2022 September 30,

Interest income $ 164 $ 3,668 $ (3,504) (95.5) %

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Interest expense, net $ (13,869) $ (11,836) $ 2,033 17.2 %

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

We recorded nominal interest income in the three and nine months ended September 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 $1.2 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.

We recorded $0.9 million and $3.6 million of interest income in the three and nine months ended September 30, 2021, respectively, which was added to the principal amount of the Debentures, 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 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).

Interest expense in the three and nine months ended September 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 nine months ended September 30, 2021 was comprised of interest and debt issuance costs in connection with the 2020 Credit Facility, coupled with interest on finance leases.

Interest expense in the nine months ended September 30, 2021 also included 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.

We recorded other expense, net, aggregating $3.7 million and $57.7 million in the three months ended September 30, 2022 and 2021, respectively, and other expense, net, aggregating $42.8 million and $66.0 million in the nine months ended September 30, 2022 and 2021, respectively.

The primary component in all periods was losses from the change in the fair value of the AVCT Investment, which were $1.9 million and $56.5 million in the three months ended September 30, 2022 and 2021, respectively, and $41.3 million and $68.3 million in the nine months ended September 30, 2022 and 2021, respectively.

Income Taxes.

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

We recorded income tax provisions of $12.4 million and $5.4 million in the nine months ended September 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.

During the three months ended September 30, 2022, the Company recognized a tax benefit of $6.8M related to the release of a valuation allowance on the capital loss deferred tax asset related to its investment in AVCT.

The Company generated a capital loss from the cancellation of the AVCT Debenture Shares and Warrants, which it concluded will be carried back to offset capital gains recognized in a prior tax year.

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 a minimum of five years pursuant to IRC Section 174.

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

Six months ended

2022 June 30,

Nine months ended

September 30,

2022 September 30,

Net loss $ (118,571) $ (80,877) $ (37,694)

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Net cash used in investing activities $ (13,044) $ (11,335) $ (1,709)

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

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.

Net cash provided by (used in) financing activities $ 6,207 $ (28,017) $ 34,224

Our cash and restricted cash aggregated $56 million at September 30, 2022 and $106 million at December 31, 2021.

These amounts included cash and restricted cash aggregating $37 million at September 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 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.

subsidiaries as of September 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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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.

On June 30, 2022, 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.

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”).

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.

At September 30, 2022, we had an outstanding balance under the 2020 Term Loan of $335.5 million at an average interest rate of 5.4% and $3.3 million of letters of credit outstanding with an interest rate of 4.5%.

We were in compliance with all covenants of the 2020 Credit Facility at both September 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 June 30, 2022 was $400 million, and the swap matures on March 3, 2025, the same date the 2020 Credit Facility matures.

On July 22, 2022, we sold $30 million of the notional amount of our interest rate swap back to our counterparty for $1.5 million, reducing the notional amount of this swap to $370 million.

On August 16, 2022, we sold another $30 million of the notional amount of our interest rate swap back to our counterparty for $1.6 million, reducing the notional amount to $340 million, which approximates the current level of our term loan debt outstanding.

The gain in accumulated other comprehensive (loss) income related to the $60 million notional amount sold of $3.1 million is being released into earnings on a straight line basis over the remaining term of the 2020 Credit Facility as a decrease to interest expense, the amortization of which totaled $0.2 million for the three and nine months ended September 30, 2022.

The notional amount of this swap as of September 30, 2022 was $340 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 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.

During the three and nine months ended September 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 and six months ended June 30, 2022 and 2021, we recorded no hedge ineffectiveness.

However, during the three and nine months ended September 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 June 30, 2022 that $8.0 million may be reclassified as a decrease to interest expense over the next 12 months.

Based upon projected forward rates, we estimate as of September 30, 2022 that $11 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 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 September 30, 2022, we had letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees") aggregating $9.5 million , comprised of the $3.3 million of letters of credit under the 2020 Credit Facility described above (the "Letters of Credit") and $6.3 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 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.

At September 30, 2022 and December 31, 2021, the Company had cash collateral of $0.3 million and $2.6 million, respectively, supporting the Guarantees, which is reported as Restricted cash in our condensed consolidated balance sheets.

Cash Flows from Operating Activities

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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 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.

In addition, as a result of the supply chain disruptions over the past year, the company has invested in increased inventory levels in order to meet customer demand and to ensure availability of strategic material and components over the long-term horizon.

Cash used in operating activities in the nine months ended September 30, 2022 was $42.5 million, primarily resulting from our net loss, higher inventory, and lower accounts payable, accrued expenses and deferred revenue.

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

Our operating activities provided $7.9 million of cash in the nine months ended September 30, 2021, resulting from our net non-cash adjustments of $143.5 million, which was offset by our net loss of $80.9 million and net cash used in changes in our operating assets and liabilities of $54.7 million.

The net cash used in changes in our operating assets and liabilities was primarily attributable to a $58.7 million decrease in accrued expenses and other long-term liabilities and an $11.7 million decrease in deferred revenue.

These amounts were offset by lower operating assets of $11.3 million, higher accounts payable of $2.2 million and $1.9 million of lower accounts receivable.

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

Our lower accounts receivable and deferred revenue reflected typical mid-year seasonality.

Cash Flows from Investing Activities

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.

Our investing activities used $13.0 million of cash in the nine months ended September 30, 2022 to purchase property and equipment and software licenses.

Our investing activities used $11.3 million of cash in the nine months ended September 30, 2021, comprised of $14.3 million to purchase property and equipment, partially offset by $3.0 million of proceeds from the sale of our QualiTech business, which operates compliance testing laboratories in Israel for reliability and standardization testing for the high-tech industry, including testing in medical equipment, military equipment and vehicles.

Cash Flows from Financing Activities

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.

Our financing activities provided $6.2 million of cash in the nine months ended September 30, 2022, primarily due to $50.4 million of net proceeds from the Equity Offering, partially offset by $40.0 million of principal payments on the 2020 Credit Facility, including the voluntary $15.0 million incremental principal payment in connection with the Fourth Amendment and voluntary $10.0 million incremental principal payment in connection with the Fifth Amendment, and $2.7 million for the payment of tax withholding obligations related to the net share settlements of restricted stock awards upon vesting.

Payments of debt issuance costs and principal payments of finance leases together totaled approximately $1.5 million.

Our financing activities used $28.0 million of cash in the nine months ended September 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.

In addition, we used $14.0 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting, $87.2 million of principal payments of term debt, including the $74.6 million payoff of the Term B Loan in connection with the Third Amendment, and $1.0 million each of payments of debt issuance costs and principal payments of finance leases.

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

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.

In the second quarter of 2022, although we were in compliance with our financial covenants, we projected that we may not maintain compliance with our financial covenants under the 2020 Credit Facility for the quarter ended September 30, 2022 due to the impact of market conditions, including supply chain disruptions, higher costs, and other geopolitical instabilities and disputes.

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 $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.

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 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.

Under the terms of the 2020 Credit Facility, we are allowed, subject to certain limitations, to use a portion of the capital raised in the Equity Offering in the calculation of the covenant ratios for the quarter in which the Equity Offering was completed (quarter ended September 30, 2022) and for future calculation of the covenant ratios for which the third quarter of 2022 is included in the trailing twelve month period.

As a result, the Company currently projects that it will remain in

compliance with its financial covenants for at least one year from the date the condensed consolidated financial statements are issued.

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

The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations at September 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 $77.5 million at September 30, 2022, with payments aggregating $4.8 million in the remainder of 2022, $18.3 million in 2023, $15.4 million in 2024 and $39.0 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.

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

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

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Recent Accounting Pronouncements

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

In March 2022, the Financial Accounting Standards Board (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.

14 unchanged sentences

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