Ribbon Communications Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 58 Consolidated Balance Sheets as of December 31, 202 2 an d 20 21 61 Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020 62 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2022, 2021 and 2020 63 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2022, 2021 and 2020 64 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 65 Notes to Consolidated Financial Statements 67 57 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Ribbon Communications Inc . Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Ribbon Communications, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition — Refer to Notes 2 and 16 to the financial statements Critical Audit Matter Description The Company recognizes revenue from two primary sources: products and services. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct. When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services, including when they are sold separately to similar customers, in order to estimate standalone selling price. 58 Management is required to use judgment to develop its estimates of standalone selling price. Auditing the Company’s estimates of standalone selling price required a high degree of auditor judgment and an increased extent of effort, including the need to involve our data analytics specialists to assist in the testing of the standalone selling price analyses given the judgment required by management in this area. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the testing of management’s estimation of standalone selling prices included the following, among others: • We tested the effectiveness of controls over revenue, including those over the determination of estimated standalone selling price. • We evaluated whether management’s significant accounting policies related to the estimation of standalone selling price were appropriate. • With the assistance of our data analytics specialists, we evaluated the estimated standalone selling price analyses prepared by the Company, including testing the underlying detail of customer arrangements and the mathematical accuracy of the calculations. Goodwill – IP Optical Networks Reporting Unit – Refer to Notes 2 and 10 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company used a combination of the income and market approaches to estimate reporting unit fair value. With respect to the income approach, management is required to make significant estimates and assumptions related to discount rates and forecasts of future revenue and profit margin. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance was $301 million as of December 31, 2022, of which $76 million was allocated to the IP Optical Networks Reporting Unit (“IP Optical”). Given the significant judgments made by management to estimate the fair value of IP Optical, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the discount rate and forecasts of future revenue and profit margin required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the discount rate and forecasts of future revenue and profit margin, used by management to estimate the fair value of IP Optical, included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of IP Optical, such as controls related to management’s selection of the discount rate and forecasts of future revenue and profit margin. • We evaluated management’s ability to accurately forecast future revenues and profit margin by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s revenue and profit margin forecasts by comparing the forecasts to: ◦ Historical revenues and profit margins. ◦ Internal communications to management and the Board of Directors. ◦ Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies. • With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate by: 59 ◦ Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation. ◦ Developing a range of independent estimates and comparing those to the discount rate selected by management. /s/ Deloitte & Touche LLP Dallas, Texas March 31, 2023 We have served as the Company's auditor since 2005. 60 RIBBON COMMUNICATIONS INC. Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 67,101 $ 103,915 Restricted cash 161 2,570 Accounts receivable, net 267,244 282,917 Inventory 75,423 54,043 Other current assets 68,057 37,545 Total current assets 477,986 480,990 Property and equipment, net 44,832 47,685 Intangible assets, net 294,728 350,730 Goodwill 300,892 300,892 Investments — 43,931 Deferred income taxes 53,649 47,287 Operating lease right-of-use assets 44,888 53,147 Other assets 38,589 23,075 $ 1,255,564 $ 1,347,737 Liabilities and Stockholders' Equity Current liabilities: Current portion of term debt $ 20,058 $ 20,058 Accounts payable 95,810 97,121 Accrued expenses and other 85,270 100,752 Operating lease liabilities 15,416 17,403 Deferred revenue 113,939 109,119 Total current liabilities 330,493 344,453 Long-term debt, net of current 306,270 350,217 Operating lease liabilities, net of current 46,183 55,196 Deferred revenue, net of current 19,254 20,619 Deferred income taxes 3,750 8,116 Other long-term liabilities 31,187 41,970 Total liabilities 737,137 820,571 Commitments and contingencies (Note 25) Stockholders' equity: Preferred stock, $ 0.01 par value; 10,000,000 shares authorized; none issued and outstanding — — Common stock, 240,000,000 shares authorized, $ 0.0001 par value, 168,324,995 shares issued and outstanding at December 31, 2022; 148,895,308 shares issued and outstanding at December 31, 2021 17 15 Additional paid-in capital 1,941,569 1,875,234 Accumulated deficit ( 1,453,744 ) ( 1,355,661 ) Accumulated other comprehensive income 30,585 7,578 Total stockholders' equity 518,427 527,166 $ 1,255,564 $ 1,347,737 See notes to the consolidated financial statements. 61 RIBBON COMMUNICATIONS INC. Consolidated Statements of Operations (in thousands, except per share data) Year ended December 31, 2022 2021 2020 Revenue: Product $ 442,680 $ 453,042 $ 467,912 Service 377,080 391,915 375,883 Total revenue 819,760 844,957 843,795 Cost of revenue: Product 245,145 214,745 204,772 Service 142,137 147,209 145,916 Amortization of acquired technology 31,542 38,343 42,290 Total cost of revenue 418,824 400,297 392,978 Gross profit 400,936 444,660 450,817 Operating expenses: Research and development 203,676 194,948 194,525 Sales and marketing 147,766 150,279 139,318 General and administrative 51,053 53,661 63,286 Amortization of acquired intangible assets 29,646 28,283 18,620 Impairment of goodwill — 116,000 — Acquisition-, disposal- and integration-related 6,286 7,632 17,164 Restructuring and related 10,833 11,653 16,235 Total operating expenses 449,260 562,456 449,148 (Loss) income from operations ( 48,324 ) ( 117,796 ) 1,669 Interest expense, net ( 19,780 ) ( 15,831 ) ( 21,042 ) Other (expense) income, net ( 44,495 ) ( 74,516 ) 112,690 (Loss) income before income taxes ( 112,599 ) ( 208,143 ) 93,317 Income tax benefit (provision) 14,516 30,958 ( 4,726 ) Net (loss) income $ ( 98,083 ) $ ( 177,185 ) $ 88,591 (Loss) earnings per share: Basic $ ( 0.63 ) $ ( 1.20 ) $ 0.64 Diluted $ ( 0.63 ) $ ( 1.20 ) $ 0.61 Shares used to compute (loss) earnings per share: Basic 156,668 147,575 138,967 Diluted 156,668 147,575 144,650 See notes to the consolidated financial statements. 62 RIBBON COMMUNICATIONS INC. Consolidated Statements of Comprehensive (Loss) Income (in thousands) Year ended December 31, 2022 2021 2020 Net (loss) income $ ( 98,083 ) $ ( 177,185 ) $ 88,591 Other comprehensive income (loss), net of tax: Unrealized gain (loss) on interest rate swap, net of reclassifications and amortization into earnings 19,321 12,759 ( 10,948 ) Foreign currency translation adjustments ( 792 ) ( 239 ) 894 Employee retirement benefits 4,478 — 2,585 Other comprehensive income (loss), net of tax 23,007 12,520 ( 7,469 ) Comprehensive (loss) income, net of tax $ ( 75,076 ) $ ( 164,665 ) $ 81,122 See notes to the consolidated financial statements. 63 RIBBON COMMUNICATIONS INC. Consolidated Statements of Stockholders' Equity (in thousands, except share data) Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit (loss) income equity Balances, January 1, 2020 110,471,995 $ 11 $ 1,747,784 $ ( 1,267,067 ) $ 2,527 $ 483,255 Exercise of stock options 38,288 70 70 Vesting of restricted stock awards and units 2,246,690 1 1 Vesting of performance-based stock units 323,752 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 472,028 ) ( 1,674 ) ( 1,674 ) Shares issued as consideration in connection with the acquisition of ECI Telecom Group Ltd. 32,500,000 3 108,547 108,550 Shares issued as consideration in connection with acquisition of Anova Data, Inc. 316,551 1,630 1,630 Stock-based compensation expense 13,899 13,899 Other comprehensive loss ( 7,469 ) ( 7,469 ) Net income 88,591 88,591 Balances, December 31, 2020 145,425,248 15 1,870,256 ( 1,178,476 ) ( 4,942 ) 686,853 Exercise of stock options 13,815 24 24 Vesting of restricted stock awards and units 3,653,552 — Vesting of performance-based stock units 1,557,656 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 1,754,963 ) ( 14,464 ) ( 14,464 ) Stock-based compensation expense 19,418 19,418 Other comprehensive income 12,520 12,520 Net loss ( 177,185 ) ( 177,185 ) Balances, December 31, 2021 148,895,308 15 1,875,234 ( 1,355,661 ) 7,578 527,166 Exercise of stock options 708 1 1 Vesting of restricted stock awards and units 3,075,543 — Vesting of performance-based stock units 179,184 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 897,059 ) ( 2,784 ) ( 2,784 ) Common stock issued in equity offering 17,071,311 2 52,065 52,067 Issuance costs related to equity offering ( 1,654 ) ( 1,654 ) Stock-based compensation expense 18,707 18,707 Other comprehensive income 23,007 23,007 Net loss ( 98,083 ) ( 98,083 ) Balances, December 31, 2022 168,324,995 $ 17 $ 1,941,569 $ ( 1,453,744 ) $ 30,585 $ 518,427 See notes to the consolidated financial statements. 64 RIBBON COMMUNICATIONS INC. Consolidated Statements of Cash Flows (in thousands) Year ended December 31, 2022 2021 2020 Cash flows from operating activities: Net (loss) income $ ( 98,083 ) $ ( 177,185 ) $ 88,591 Adjustments to reconcile net (loss) income to cash flows (used in) provided by operating activities: Depreciation and amortization of property and equipment 15,295 16,962 17,188 Amortization of intangible assets 61,188 66,626 60,910 Amortization of debt issuance costs 2,308 4,763 5,673 Stock-based compensation 18,707 19,418 13,899 Impairment of goodwill — 116,000 — Deferred income taxes ( 18,251 ) ( 45,596 ) ( 4,616 ) Gain on sale of business ( 62 ) ( 2,772 ) ( 83,552 ) Decrease (increase) in fair value of investments 41,291 71,252 ( 30,296 ) Reduction to deferred purchase consideration — — ( 70 ) Foreign currency exchange losses 1,576 5,002 2,961 Changes in operating assets and liabilities: Accounts receivable 14,285 ( 47,279 ) 9,578 Inventory ( 32,099 ) ( 9,029 ) 11,842 Other operating assets 2,109 9,958 44,343 Accounts payable ( 448 ) 34,482 ( 49,561 ) Accrued expenses and other long-term liabilities ( 37,635 ) ( 50,324 ) 20,629 Deferred revenue 3,455 6,904 ( 5,955 ) Net cash (used in) provided by operating activities ( 26,364 ) 19,182 101,564 Cash flows from investing activities: Purchases of property and equipment ( 10,254 ) ( 17,132 ) ( 26,721 ) Purchases of software licenses ( 3,300 ) — — Business acquisitions, net of cash acquired — — ( 346,852 ) Proceeds from sale of business 1,418 2,944 — Proceeds from the sale of fixed assets — — 43,500 Net cash used in investing activities ( 12,136 ) ( 14,188 ) ( 330,073 ) Cash flows from financing activities: Borrowings under revolving line of credit 73,625 — 615 Principal payments on revolving line of credit ( 73,625 ) — ( 8,615 ) Proceeds from issuance of long-term debt — 74,625 478,500 Principal payments of term debt ( 45,058 ) ( 92,176 ) ( 134,188 ) Principal payments of finance leases ( 595 ) ( 903 ) ( 1,258 ) Payment of debt issuance costs ( 1,046 ) ( 789 ) ( 14,147 ) Proceeds from equity offering 52,067 — — Payment of equity offering issuance costs ( 1,654 ) — — Proceeds from the exercise of stock options 1 24 70 Payment of tax withholding obligations related to net share settlements of restricted stock awards ( 2,784 ) ( 14,464 ) ( 1,674 ) Net cash provided by (used in) financing activities 931 ( 33,683 ) 319,303 Effect of exchange rate changes on cash and cash equivalents ( 1,654 ) ( 523 ) 260 Net (decrease) increase in cash and cash equivalents ( 39,223 ) ( 29,212 ) 91,054 Cash, cash equivalents and restricted cash, beginning of year 106,485 135,697 44,643 65 RIBBON COMMUNICATIONS INC. Consolidated Statements of Cash Flows (continued) (in thousands) Year ended December 31, 2022 2021 2020 Cash, cash equivalents and restricted cash, end of year $ 67,262 $ 106,485 $ 135,697 Supplemental disclosure of cash flow information: Interest paid $ 19,336 $ 14,867 $ 15,546 Income taxes paid $ 16,988 $ 14,447 $ 9,293 Income tax refunds received $ 1,251 $ 1,488 $ 1,163 Supplemental disclosure of non-cash investing activities: Capital expenditures incurred, but not yet paid $ 2,559 $ 2,269 $ 3,749 Inventory transfers to property and equipment $ 2,896 $ 676 $ 818 Software license acquired through investment disposal $ 1,886 $ — $ — Business acquisition purchase consideration - common stock issued $ — $ — $ 108,550 Business acquisition purchase consideration - deferred payments $ — $ — $ 1,630 Supplemental disclosure of non-cash financing activities: Total fair value of restricted stock awards, restricted stock units, performance-based stock awards and performance-based stock units on date vested $ 9,858 $ 40,751 $ 7,927 See notes to the consolidated financial statements. 66 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (1) NATURE OF THE BUSINESS Ribbon Communications Inc. ("Ribbon" or the "Company") is a leading global provider of communications technology to service providers and enterprises. The Company provides a broad range of software and high-performance hardware products, network solutions, and services that enable the secure delivery of data and voice communications, and high-bandwidth networking and connectivity for residential consumers and for small, medium, and large enterprises and industry verticals such as finance, education, government, utilities, and transportation. Ribbon's mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance, and elasticity. The Company is headquartered in Plano, Texas, and has a global presence with research and development, or sales and support locations in over thirty countries around the world. (2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States ("GAAP"). On December 1, 2020 (the "Kandy Sale Date"), American Virtual Cloud Technologies, Inc. ("AVCT") completed the purchase of the Company's cloud-based enterprise service business (the "Kandy Communications Business"). The revenue and expenses of the Kandy Communications Business are excluded from the Company's consolidated financial statements for the period subsequent to the Kandy Sale Date. On March 3, 2020 (the "ECI Acquisition Date"), the Company merged with ECI Telecom Group Ltd ("ECI") (the "ECI Acquisition"). The financial results of ECI are included in the Company's consolidated financial statements for the period subsequent to the ECI Acquisition Date. Equity Offering On August 12, 2022, the Company entered into a Securities Purchase Agreement with certain investors for the sale (the "Equity Offering") in a private placement by the Company of 17,071,311 shares (the "Shares") of the Company’s 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, including $ 10.0 million from existing related party shareholders, before deducting offering expenses paid by the Company of approximately $ 1.7 million. The Company intends to continue 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. Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Ribbon and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates and Judgments The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and 67 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) judgments relied upon in preparing these consolidated financial statements include accounting for business combinations, revenue recognition for multiple element arrangements, inventory valuations, assumptions used to determine the fair value of stock-based compensation, intangible assets, goodwill, debentures and warrants, legal contingencies and recoverability of Ribbon's net deferred tax assets and the related valuation allowances. Ribbon regularly assesses these estimates and records changes in estimates in the period in which they become known. Ribbon bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates. Reclassifications Certain reclassifications, not affecting previously reported net income (loss), have been made to the previously issued financial statements to conform to the current year presentation. Business Combinations The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired in the business combination that are not individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. Revenue Recognition The Company derives revenue from two primary sources: products and services. Product revenue includes the Company's hardware and software that function together to deliver the products' essential functionality. Software and hardware are also sold on a standalone basis. Services include customer support (software updates, upgrades and technical support), consulting, design services, installation services and training. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct. When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services, including when they are sold separately to similar customers, in order to estimate standalone selling price. The Company's software licenses typically provide a perpetual right to use the Company's software. The Company also sells term-based software licenses that expire and Software-as-a-Service ("SaaS")-based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software and hardware are delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. Product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. The Company begins to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period. The Company offers warranties on its products. Certain of the Company's warranties are considered to be assurance-type in nature, ensuring the product is functioning as intended. Assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations. The Company does not allow and has no history of accepting product returns. 68 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Services revenue includes revenue from customer support and other professional services. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. The Company sells its customer support contracts at a percentage of list or net product price. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year . The Company's professional services include consulting, technical support, resident engineer services, design services and installation services. Because control transfers over time, revenue is recognized based on progress toward completion of the performance obligation. The method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the input method to measure progress for its contracts because it believes such method best depicts the transfer of assets to the customer, which occurs as the Company incurs costs for the contracts. However, in some instances, the Company uses the output method because it best depicts the transfer of asset to the customer. Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. When the measure of progress is based upon expended labor, progress toward completion is measured as the ratio of labor time expended to date versus the total estimated labor time required to complete the performance obligation. Revenue is recorded proportionally as costs are incurred or as labor is expended. Costs to fulfill these obligations include internal labor as well as subcontractor costs. Customer training includes courses offered by the Company. The related revenue is typically recognized as the training services are performed. Operating Segments The Company's chief operating decision maker (the "CODM") is its president and chief executive officer. Effective in the fourth quarter of 2020 and in connection with the ECI Acquisition, the CODM began to assess the Company's performance based on the performance of two separate lines of business within Ribbon: the Cloud and Edge segment ("Cloud and Edge") and the IP Optical Networks segment ("IP Optical Networks"). Financial Instruments The carrying amounts of Ribbon's financial instruments that approximate their fair values include accounts receivable, equity securities and convertible warrants received as sale consideration, accounts payable and borrowings under a revolving credit facility. Ribbon's term debt balance as of December 31, 2022 of $ 330.4 million had a fair value of approximately $ 323.0 million. Financial instruments with remaining maturities or that are due within one year from the balance sheet date are classified as current. Financial instruments with maturities or that are payable more than one year from the balance sheet date are classified as noncurrent. Fair Value Option - Investment in AVCT The Company received debentures and warrants as sale consideration in connection with the sale of the Kandy Communications Business. On September 8, 2021 (the "Debenture Conversion Date"), the debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares") (see Note 4 for a discussion of the valuation of the debentures, warrants and Debenture Shares). In connection with the conversion of the debentures to the Debenture Shares, the Company elected to use the fair value option to account for its equity investment in AVCT as permitted under Accounting Standards Codification ("ASC") 825, Financial Instruments ("ASC 825"), which then refers to ASC 820, Fair Value Measurement ("ASC 820") to provide the fair value framework for valuing such investments. In accordance with ASC 820, the Company recorded the investment in AVCT at fair value, with changes in fair value recorded as a component of Other (expense) income, net, in the consolidated statements of operations. On August 29, 2022, the Company and AVCT entered into a settlement agreement which provided for, amongst other things, the cancellation of the Company's investment in the Debenture Shares and the Warrants with an aggregate fair value of $ 2.6 million. Pursuant to the settlement agreements, the Company and AVCT also entered into a Wind Down Agreement, pursuant to which a Reseller Agreement between the parties, as previously amended, was terminated, and the Company was 69 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) granted a non-exclusive perpetual license to use and modify certain intellectual property owned by AVCT comprising WebRTC gateway technology that is integrated with Ribbon’s SBCs and Application Servers. As consideration, the Company paid AVCT $ 2.5 million in cash, the Debenture Shares were redeemed and canceled, and the Warrants were terminated and canceled. The perpetual license granted by AVCT is classified as Intangible assets, net in the Company's consolidated balance sheet as of December 31, 2022 in the amount of $ 3.9 million. Restricted Cash The Company classifies as restricted cash all cash pledged as collateral to secure long-term obligations and all cash whose use is otherwise limited by contractual provisions. At December 31, 2022, the Company had $ 0.2 million of restricted cash, representing restricted short-term bank deposits pledged to secure certain performance and financial bonds as security for the Company's obligations under tenders, and contracts. At December 31, 2021, the Company had $ 2.6 million of restricted cash, representing restricted short-term bank deposits pledged to secure certain performance and financial bonds as security for the Company's obligations under tenders, contracts and to one of its main subcontractors . Transfers of Financial Assets The Company's IP Optical Networks segment maintains customer receivables factoring agreements with a number of financial institutions. Under the terms of these agreements, the Company may transfer receivables to the financial institutions, on a non-recourse basis, provided that the financial institutions approve the receivables in advance. The Company maintains credit insurance policies from major insurance providers or obtains letters of credit from the customers for a majority of its factored trade receivables. The Company accounts for the factoring of its financial assets as a sale of the assets and records the factoring fees, when incurred, as a component of interest expense in the consolidated statements of operations, and the proceeds from the sales of receivables are included in cash from operating activities in the consolidated statements of cash flows. During the year ended December 31, 2022, the Company received $ 73.4 million of cash from the sale of certain accounts receivable and recorded $ 1.1 million of interest expense in connection with these transactions. During the year ended December 31, 2021, the Company received $ 118.5 million of cash from the sale of certain accounts receivable and recorded $ 0.8 million of interest expense in connection with these transactions. Foreign Currency Translation For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Accumulated other comprehensive income. For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Other expense (income), net. Realized and unrealized foreign currency exchange gains and losses arising from transactions denominated in currencies other than the subsidiary's functional currency are reflected in earnings. The Company records its foreign currency gains (losses) as a component of Other (expense) income, net. The Company recognized net foreign currency losses of $ 1.6 million, $ 5.0 million and $ 3.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. Inventory Inventory is recorded at the lower of cost or market value using the first-in, first-out convention. The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer 70 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) demand, technology developments or other economic factors. Ribbon writes down evaluation equipment (equipment at customer sites for testing and evaluation) at the time of shipment to its customers, as it is probable that the inventory value will not be realized. Deferred product costs represent deferred cost of revenue for product shipments to customers prior to satisfaction of Ribbon's revenue recognition criteria. The Company classifies inventory that is not expected to be consumed within one year from the balance sheet date as noncurrent and includes such inventory as a component of Other assets. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from two to five years . Leasehold improvements are amortized over the lesser of the lease term or five years . When an asset is sold or retired, the cost and related accumulated depreciation or amortization are eliminated, and the resulting gain or loss, if any, is recognized in (Loss) income from operations in the consolidated statement of operations. The Company reviews property and equipment for impairment in the same manner as intangible assets discussed below. Software development costs associated with internal use software are incurred in three stages of development: the preliminary project stage, the application development stage and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property and equipment. Internal use software is amortized on a straight-line basis over its estimated useful life of three years , beginning when the software is ready for its intended use. Intangible Assets and Goodwill The Company's intangible assets are comprised of in-process research and development, developed technology, customer relationships, trade names, and internal use software. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable based upon the estimated undiscounted cash flows. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the Company will recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset. The Company amortizes its intangible assets over their respective useful lives, with the exception of in-process research and development, which has an indefinite life until the product is generally available, at which time such asset is typically reclassified to developed technology, and the Company begins to amortize this asset. See Note 10 for additional information regarding the Company's intangible assets. Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested for impairment at least annually, or more frequently if indicators of potential impairment exist, by comparing the fair value of the Company's reporting unit to its carrying value. The Company's annual test for impairment of goodwill is completed as of October 1. As described above, effective in the fourth quarter of 2020, the Company determined that it has two operating segments: Cloud and Edge, and IP Optical Networks. For the purpose of testing goodwill for impairment, all goodwill is assigned to a reporting unit, which may be either an operating segment or a portion of an operating segment. The Company's reporting units are its operating segments. The Company performs a fair value analysis using both an income and market approach, which encompasses a discounted cash flow analysis and a guideline public company analysis using selected multiples. The Company assesses each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and the methodologies are weighted appropriately. Any impairment charges are reported separately in the Company's consolidated statements of operations. Stock-Based Compensation The Company's stock-based compensation cost is measured at the grant date based on the fair value of the award and is 71 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of the awards that will be forfeited. The Company uses the Black-Scholes valuation model for estimating the fair value of stock options on the grant date. The fair value of stock option awards is affected by the Company's stock price as well as valuation assumptions, including the volatility of Ribbon's stock price, expected term of the option, risk-free interest rate and expected dividends. The Company may grant to certain of its executives and certain other employees performance-based stock units ("PSUs") that include a market condition. The Company uses a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the volatility of each entity and the pair-wise covariance between each entity. These results are then used to calculate the grant date fair values of the PSUs. The Company is required to record expense for the PSUs with market conditions through their respective final vesting dates regardless of the number of shares that are ultimately earned. Once the grant date criteria have been met for a fiscal year performance period, the Company records stock-based compensation expense based on its assessment of the probability that the respective performance condition will be achieved and the level, if any, of such achievement. The Compensation Committee determines the number of shares earned, if any, after the Company's financial results for each fiscal year performance period are finalized. Upon the determination by the Compensation Committee of the number of shares that will be received upon vesting, such number of shares becomes fixed and the unamortized expense is recorded through the remainder of the service period, at which time any Performance PSUs earned, will vest pending each executive's continued employment with the Company through that date. Concentration of Risk The financial instruments that potentially subject Ribbon to concentrations of credit risk are cash, restricted cash and accounts receivable. The Company's cash equivalents and investments were managed by one financial institution at December 31, 2022. Historically, the Company has not experienced significant losses due to such bank depository concentration. The Company's investments at December 31, 2021 consisted of securities of AVCT (see Note 4). Certain components and software licenses from third parties used in Ribbon's products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt Ribbon's delivery of products and thereby materially adversely affect Ribbon's revenue and operating results. Advertising Costs Advertising costs are expensed as incurred and included as a component of Sales and marketing expense in the Company's consolidated statements of operations. Advertising expenses were $ 1.5 million, $ 1.6 million and $ 0.8 million for the years ended December 31, 2022, 2021 and 2020, respectively. Loss Contingencies and Reserves Ribbon is subject to ongoing business risks arising in the ordinary course of business, including legal claims, that affect the estimation process of the carrying value of assets, the recording of liabilities and the possibility of various loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. Ribbon regularly evaluates current information available to determine whether such amounts should be adjusted and records changes in estimates in the period they become known. An allowance for doubtful accounts is estimated based on the Company's assessment of the collectability of specific customer accounts. Ribbon accrues for royalties for technology that it licenses from vendors based on established royalty rates and usage. Ribbon is periodically contacted by third parties who claim that Ribbon's products infringe on certain intellectual property of a third party. Ribbon evaluates these claims and accrues amounts when it is probable that the obligation has been incurred and the amounts are reasonably estimable. 72 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Warranty The Company records warranty liabilities for estimated costs of fulfilling its obligations under standard limited hardware and software warranties at the time of sale. The specific warranty terms and conditions vary depending upon the country in which the Company does business, but generally includes material costs, technical support, labor and associated overhead over a period ranging from one to three years . At December 31, 2022, the Company's liability for product warranties was $11.9 million of which $ 5.3 million was current and included in Accrued expenses and other and $ 6.6 million was long-term and included in Other long-term liabilities in the Company's consolidated balance sheet. At December 31, 2021, the Company's liability for product warranties was $ 13.1 million, of which $ 5.9 million was current and included in Accrued expenses and other, and $ 7.2 million was long-term and included in Other long-term liabilities in the Company's consolidated balance sheet. Research and Development Grants The Company records grants received from the Office of the Innovation Authority of the Israeli Ministry of Economics (the "IIA") as a reduction to Research and development expense. Royalties payable to the IIA are recognized pursuant to sales of related products and are included in Cost of revenue - product (see Note 25). Accounting for Leases The Company accounts for its leases in accordance with Accounting Standards Codification ("ASC") 842, Leases ("ASC 842") (see Note 20). The Company has operating and finance leases for corporate offices, research and development facilities, and certain equipment. Operating leases are reported separately in the Company's consolidated balance sheets at December 31, 2022 and 2021. The Company has no finance leases as of December 31, 2022. Assets acquired under finance leases are included in Property and equipment, net, in the consolidated balance sheets at December 31, 2021. The Company determines if an arrangement is a lease at inception. A contract is determined to contain a lease component if the arrangement provides the Company with a right to control the use of an identified asset. Lease agreements may include lease and non-lease components. In such instances for all classes of underlying assets, the Company does not separate lease and non-lease components but rather, accounts for the entire arrangement under leasing guidance. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term. For operating leases, lease expense for minimum fixed lease payments is recognized on a straight-line basis over the lease term. The expense for finance leases includes both interest and amortization expense components, with the interest component calculated based on the effective interest method and the amortization component calculated based on straight-line amortization of the right-of-use asset over the lease term. Lease contracts may contain variable lease costs, such as common area maintenance, utilities and tax reimbursements that vary over the term of the contract. Variable lease costs are not included in minimum fixed lease payments and as a result, are excluded from the measurement of the right-of-use assets and lease liabilities. The Company expenses all variable lease costs as incurred. Accounting for Income Taxes Deferred tax assets and liabilities are recognized for the expected future consequences of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities and operating loss carryforwards, using tax rates expected to be in effect for the years in which the differences are expected to reverse. The Company records valuation allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized. The Company has provided for income taxes on the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2022, excluding Ireland and Israel, which are indefinitely reinvested. Accordingly, the Company is required to recognize and record deferred taxes for 2022 on the entire outside basis differences related to the foreign subsidiaries, the largest of these differences being undistributed earnings. The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of the benefit attributable to the position is recognized. 73 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The tax benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50 % likely of being realized upon resolution of the contingency. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. Defined Benefit Plans The Company has defined benefit plans for some of its employees at various international locations. The Company recognizes retirement benefit assets or liabilities in the consolidated balance sheets reflecting the funded status of pension and other retirement benefit plans. Retirement benefit assets and liabilities are adjusted for the difference between the benefit obligations and the plan assets at fair value (measured at year-end), with the offset recorded directly to stockholders' equity through accumulated other comprehensive income (loss), net of tax. The amount recorded in stockholders' equity represents the after-tax unamortized actuarial gains or losses, unamortized transition obligations and unamortized prior service costs. Recent Accounting Pronouncements In 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. 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. 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): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"), which amends ASC 805, Business Combinations (Topic 805) , to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an acquiring entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers (Topic 606) ("ASC 606"). Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. While primarily related to contract assets and contract liabilities that were accounted for by the acquiree in accordance with ASC 606, ASU 2021-08 also applies to contract assets and contract liabilities from other contracts to which the provisions of ASC 606 apply, such as contract liabilities from the sale of nonfinancial assets within the scope of ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) . ASU 2021-08 is effective for the Company January 1, 2023. The Company believes that the adoption of ASU 2021-08 could have a material impact on its consolidated financial statements for periods including and subsequent to significant business acquisitions. In January 2021 the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope ("ASU 2021-01"), which refines the scope of ASC 848, Reference Rate Reform , and clarifies some of its guidance as part of the FASB's monitoring of global reference rate reform activities. ASU 2021-01 permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets (the "discounting transition"). In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 ("ASU 2022-06") which extends the date through which companies can utilize optional expedients and exceptions allowed in Topic 848 from December 31, 2022 to December 31, 2024. The adoption of ASU 2021-01 and ASU 2022-06 did not have a material impact on the Company's consolidated financial statements. (3) BUSINESS ACQUISITIONS ECI On the ECI Acquisition Date, Ribbon completed its merger transaction with ECI in accordance with the terms of the Agreement and Plan of Merger, dated as of November 14, 2019, by and among Ribbon, ECI, an indirect wholly-owned 74 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) subsidiary of Ribbon ("Merger Sub"), Ribbon Communications Israel Ltd. and ECI Holding (Hungary) Kft pursuant to which Merger Sub merged with and into ECI, with ECI surviving such merger as a wholly-owned subsidiary of Ribbon. Prior to the ECI Acquisition Date, ECI was a privately-held global provider of end-to-end packet optical transport and software-defined networking ("SDN") and network function virtualization ("NFV") solutions for service providers, enterprises and data center operators. As consideration for ECI, Ribbon issued the ECI shareholders and certain others 32.5 million shares of Ribbon common stock with a fair value of $ 108.6 million (the "Stock Consideration") and paid $ 322.5 million of cash (the "Cash Consideration"), comprised of $ 183.3 million to repay ECI's outstanding debt, including both principal and interest, and $ 139.2 million paid to ECI's selling shareholders. In addition, ECI shareholders received $ 33.4 million from the sale of certain of ECI's real estate assets. Cash Consideration was financed through cash on hand and committed debt financing consisting of a new $ 400 million term loan facility and $ 100 million revolving credit facility, which was undrawn at the ECI Acquisition Date. The ECI Acquisition has been accounted for as a business combination and the financial results of ECI have been included in the Company's consolidated financial statements for the period subsequent to the ECI Acquisition. The Company's financial results for the year ended December 31, 2020 included $ 260.5 million of revenue and $ 52.9 million of net loss attributable to ECI. The Company finalized the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities in the fourth quarter of 2020. A summary of the allocation of the purchase consideration for ECI is as follows (in thousands): Fair value of consideration transferred: Cash consideration: Repayment of ECI outstanding debt obligations $ 183,266 Cash paid to selling shareholders 139,244 Payment to selling shareholders from sale of ECI real estate assets 33,400 Less cash and restricted cash acquired ( 9,058 ) Net cash consideration 346,852 Fair value of Ribbon stock issued 108,550 Fair value of total consideration $ 455,402 Fair value of assets acquired and liabilities assumed: Current assets, net of cash and restricted cash acquired $ 120,203 Property and equipment 54,913 Intangible assets: In-process research and development 34,000 Developed technology 111,900 Customer relationships 116,000 Trade names 3,000 Goodwill 191,996 Other noncurrent assets 37,528 Deferred revenue ( 4,369 ) Other current liabilities ( 146,618 ) Deferred revenue, net of current ( 3,726 ) Deferred tax liability ( 13,308 ) Other long-term liabilities ( 46,117 ) $ 455,402 The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired in-process research and development, developed technology, customer relationships and trade name intangible assets. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates 75 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of customer attrition, technology obsolescence and revenue growth projections. The Company is amortizing the identifiable intangible assets arising from the ECI Acquisition in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 12.38 years (see Note 10). Goodwill results from assets that are not separately identifiable as part of the transaction and is not deductible for tax purposes. Pro Forma Results The following unaudited pro forma information presents the combined results of operations of Ribbon and ECI for the years ended December 31, 2020 as if the ECI Acquisition had been completed on January 1, 2019, with adjustments to give effect to pro forma events that are directly attributable to the ECI Acquisition. These pro forma adjustments include an increase in research and development expense related to the conformance of ECI's cost capitalization policy to Ribbon's, additional amortization expense for the acquired identifiable intangible assets, a decrease in historical ECI interest expense reflecting the extinguishment of certain of ECI's debt as a result of the ECI Acquisition, and an increase in interest expense reflecting the new debt entered into by the Company in connection with the ECI Acquisition. Pro forma adjustments also include the elimination of acquisition- and integration-related costs directly attributable to the acquisition from the year ended December 31, 2020. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of the operations of Ribbon and ECI. Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the ECI Acquisition occurred at January 1, 2019 , nor are they intended to represent or be indicative of future results of operations (in thousands, except per share amounts): Year ended December 31, 2020 (unaudited) Revenue $ 869,002 Net income $ 97,036 Diluted earnings per share $ 0.65 Acquisition-, Disposal- and Integration-Related Expenses Acquisition-related expenses include those expenses related to acquisitions that would otherwise not have been incurred by the Company, including professional and services fees, such as legal, audit, consulting, paying agent and other fees, and expenses related to cash payments to certain former executives of the acquired businesses in connection with their employment agreements. Disposal-related expenses are professional and services fees related to disposals of subsidiaries or portions of the business. Integration-related expenses represent incremental costs related to combining the Company and its business acquisitions, such as third-party consulting and other third-party services related to merging the previously separate companies' systems and processes. The disposal-related expenses in the year ended December 31, 2022 primarily relate to costs incurred from the sale of one of our foreign subsidiaries. The disposal-related expenses in the year ended December 31, 2021 relate to the Kandy Sale (as defined below). The acquisition-related professional and services fees recorded in the year ended December 31, 2020 primarily related to the ECI Acquisition and the disposal-related expenses related to the Company's sale of the Kandy Communications Business. The components of Acquisition-, disposal- and integration-related expenses incurred in the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands): 76 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2022 2021 2020 Professional and services fees (acquisition-related) $ — $ 165 $ 13,441 Professional and services fees (disposal-related) 414 329 1,890 Integration-related expenses 5,872 7,138 1,833 $ 6,286 $ 7,632 $ 17,164 (4) SALE OF KANDY COMMUNICATIONS BUSINESS On August 5, 2020, the Company announced that it had entered into a definitive agreement (the "Kandy Purchase Agreement") with American Virtual Cloud Technologies, Inc. ("AVCT") to sell the Kandy Communications Business. Under the Kandy Purchase Agreement, AVCT would purchase the assets and assume certain liabilities associated with the Kandy Communications Business, as well as all of the outstanding interests in Kandy Communications LLC, a subsidiary of the Company (the "Kandy Sale"). On December 1, 2020, the Company completed the Kandy Sale. The assets acquired and liabilities assumed by AVCT in connection with the Kandy Sale were primarily comprised of accounts receivable, property and equipment, trade accounts payable and employee-related accruals. As consideration, AVCT paid Ribbon $ 45.0 million, subject to certain adjustments, in the form of units of AVCT’s securities (the “AVCT Units”), with each AVCT Unit consisting of: (i) $ 1,000 in principal amount of AVCT’s Series A-1 convertible debentures (the “Debentures”); and (ii) one warrant to purchase 100 shares of AVCT common stock, $ 0.0001 par value (the “Warrants”). The Company received 43,778 AVCT Units as sale consideration on the Kandy Sale Date (the "Kandy Sale Consideration"). The Debentures bore interest at a rate of 10 % per annum, which was added to the principal amount of the Debenture. The entire principal amount of each Debenture, together with accrued and unpaid interest thereon, was due and payable on the earlier of the May 1, 2023 maturity date or the occurrence of a Change in Control as defined in the Kandy Purchase Agreement. Each Debenture was convertible, in whole or in part, at any time at the Company's option into that number of shares of AVCT common stock, calculated by dividing the principal amount being converted, together with all accrued and unpaid interest thereon, by the applicable conversion price, initially $ 3.45 . The Debentures were subject to mandatory conversion if the AVCT stock price was at or above $ 6.00 per share for 40 trading days in any 60 consecutive trading day period, subject to the satisfaction of certain other conditions. The conversion price was subject to customary adjustments including, but not limited to, stock dividends, stock splits and reclassifications. As of February 19, 2021, the stock price had traded above $ 6.00 for 40 days within a 60 consecutive trading day period, and accordingly, on September 8, 2021 (the "Debenture Conversion Date"), upon the completion of customary regulatory filings by AVCT, the Debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares"). The Warrants were independent of the Debentures and entitled the Company to purchase 4,377,800 shares of AVCT common stock at an exercise price of $ 0.01 per share. The Warrants expire on December 1, 2025, and were immediately exercisable on the Kandy Sale Date. The Company had not exercised any of the Warrants as of December 31, 2021. The Company was also subject to a lock-up provision which limited the Company's ability to sell any shares of the AVCT common stock underlying the AVCT Units prior to June 1, 2021 (the "Lock-Up Period"), except in certain transactions. The Company determined that the AVCT Units had a fair value of $ 84.9 million at the Kandy Sale Date, comprised of the Debentures with a fair value of $ 66.3 million and the Warrants with a fair value of $ 18.6 million. The value of the net assets sold to AVCT totaled $ 1.3 million, resulting in a gain on the sale of $ 83.6 million. The gain on the Kandy Sale is included as a component of Other (expense) income , net, in the consolidated statement of operations for the year ended December 31, 2020. The Company calculated the fair value of the Debentures using a Lattice-based valuation approach, which utilizes a binomial tree to model the different paths the price of AVCT's common stock might take over the Debentures' life by using assumptions regarding the stock price volatility and risk-free interest rate. These results were then used to calculate the fair value of the Debentures at each measurement date. The Company used the Black-Scholes valuation model for estimating the fair value of the Warrants at each measurement date. The fair value of the Warrants is affected by AVCT's stock price as well as valuation assumptions, including the volatility of AVCT's stock price, expected term of the option, risk-free interest rate and expected dividends. Both the Lattice and Black-Scholes valuation models are based on available market data, giving consideration to all of the rights and obligations of each instrument and precluding the use of "blockage" discounts or premiums in determining the 77 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) fair value of a large block of financial instruments. After the expiration of the Lock-Up Period and prior to the Debenture Conversion Date, the Company valued the AVCT Units at each measurement date by multiplying the closing stock price of AVCT common stock by the number of shares upon conversion of the Debentures and Warrants. At December 31, 2021, the Company valued the Debenture Shares and Warrants (collectively, the "AVCT Investment") by multiplying the closing stock price of AVCT common stock by the number of Debenture Shares and Warrants it held. At December 31, 2021, the fair value of the AVCT Investment was $ 43.9 million. The Company recorded a loss of $ 74.8 million in the year ended December 31, 2021 arising from the change in the fair value of the AVCT Investment, and recorded a gain of $ 30.3 million in the year ended December 31, 2020 arising from the change in the fair value of the AVCT Units. These amounts are included as components of Other (expense) income, net, in the Company's consolidated statements of operations. The Company recorded $ 3.5 million of interest income in the year ended December 31, 2021, which was added to the principal amount of the Debentures prior to the Debenture Conversion Date, and which is included in Interest expense, net, in the consolidated statement of operations. The fair value of the AVCT Investment at December 31, 2021 is reported as Investments in the Company's consolidated balance sheets. The AVCT Investment is classified as a Level 1 fair value measurement at December 31, 2021 (see Note 6). The Company evaluated the nature of the AVCT Investment at December 31, 2021, and determined that it represented an equity interest on a diluted basis of approximately 15 %. The Company determined that it was not the primary beneficiary of AVCT as it did not have the power to direct the activities that most significantly impact the AVCT Investment's economic performance, and therefore concluded that the Company had neither significant influence nor a controlling interest arising from the AVCT Investment that would require consolidation as of December 31, 2021. On August 29, 2022, the Company and AVCT entered into a settlement agreement which provided for, amongst other things, the cancellation of the Company's investment in the Debenture Shares and the Warrants with an aggregate fair value of $ 2.6 million. Pursuant to the settlement agreements, the Company and AVCT also entered into a Wind Down Agreement, pursuant to which a Reseller Agreement between the parties, as previously amended, was terminated, and the Company was granted a non-exclusive perpetual license to use and modify certain intellectual property owned by AVCT comprising WebRTC gateway technology that is integrated with Ribbon’s SBCs and Application Servers. As consideration, the Company paid AVCT $ 2.5 million in cash, the Debenture Shares were redeemed and canceled, and the Warrants were terminated and canceled. The perpetual license granted by AVCT is classified as Intangible assets, net in the Company's consolidated balance sheet as of December 31, 2022 in the amount of $ 3.9 million. The Company had no investment in AVCT as of December 31, 2022 due to the settlement agreement entered into on August 29, 2022. The Company recorded losses of $ 41.3 million in the year ended December 31, 2022, representing the change in the fair value of the AVCT Investment. The results of the Kandy Communications Business are excluded from the Company's consolidated results for the period subsequent to the Kandy Sale Date. (5) EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. For periods in which the Company reports net income, diluted net income per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period unless the effect is antidilutive. The calculations of shares used to compute basic and diluted earnings (loss) per share are as follows (in thousands): Year ended December 31, 2022 2021 2020 Weighted average shares outstanding—basic 156,668 147,575 138,967 Potential dilutive common shares — — 5,683 Weighted average shares outstanding—diluted 156,668 147,575 144,650 78 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Options to purchase the Company's common stock and unvested restricted and performance-based stock units aggregating 14.5 million shares and 10.6 million shares were excluded from the computation of diluted loss per share for the years ended December 31, 2022 and 2021, respectively, because their effect would have been antidilutive. Options to purchase the Company's common stock aggregating 0.2 million shares were excluded from the computation of diluted earnings per share for the year ended December 31, 2020 because their effect would have been antidilutive. (6) INVESTMENTS AND FAIR VALUE HIERARCHY The Company's policy and historical practice has been to invest in debt instruments, primarily U.S. government-backed, municipal and corporate obligations, which management believes to be high quality (investment grade) credit instruments. At December 31, 2021, the Company's investments were comprised of the AVCT Investment (see Note 4). On a quarterly basis, the Company reviews its investments, if any, to determine if there have been any events that could create a credit impairment. Fair Value Hierarchy Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows: Level 1. Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Level 2. Level 2 applies to assets or liabilities for which there are inputs that are directly or indirectly observable in the marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets). Level 3. Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. The classification of each asset or liability fair value measurement within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Market activity is presumed to be orderly in the absence of evidence of forced or disorderly sales, although such sales may still be indicative of fair value. Applicable accounting guidance precludes the use of blockage factors or liquidity adjustments due to the quantity of securities held by an entity. (7) ACCOUNTS RECEIVABLE, NET Accounts receivable, net, consisted of the following (in thousands): December 31, 2022 2021 Accounts receivable $ 268,671 $ 284,187 Allowance for doubtful accounts ( 1,427 ) ( 1,270 ) Accounts receivable, net $ 267,244 $ 282,917 The Company's allowance for doubtful accounts activity was as follows (in thousands): 79 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, Balance at beginning of year Charges to expense Charges (credits) to other accounts Write-offs Balance at end of year 2022 $ 1,270 $ 100 $ 159 $ ( 102 ) $ 1,427 2021 $ 776 $ 553 $ 85 $ ( 144 ) $ 1,270 2020 $ 913 $ 686 $ 94 $ ( 917 ) $ 776 (8) INVENTORY Inventory consisted of the following (in thousands): December 31, 2022 2021 On-hand final assemblies and finished goods inventories $ 85,888 $ 57,360 Deferred cost of goods sold 1,449 1,474 87,337 58,834 Less noncurrent portion (included in Other assets) ( 11,914 ) ( 4,791 ) Current portion $ 75,423 $ 54,043 (9) PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): December 31, Useful Life 2022 2021 Equipment 2 - 5 years $ 76,674 $ 74,769 Software 2 - 5 years 33,639 32,804 Furniture and fixtures 3 - 5 years 3,168 3,188 Leasehold improvements Shorter of the estimated lease term or useful life 35,448 34,640 148,929 145,401 Less accumulated depreciation and amortization ( 104,097 ) ( 97,716 ) Property and equipment, net $ 44,832 $ 47,685 The Company recorded depreciation and amortization expense related to property and equipment of $ 15.3 million for the year ended December 31, 2022, $ 17.0 million for the year ended December 31, 2021 and $ 17.2 million for the year ended December 31, 2020. During each of these years, the Company disposed of certain property and equipment that was fully depreciated at the time of disposal, which resulted in reductions in both Cost and Accumulated depreciation. Property and equipment under finance leases included in the amounts above were as follows (in thousands): December 31, 2022 2021 Cost $ — $ 2,050 Less accumulated depreciation — ( 1,763 ) Property and equipment under finance leases, net $ — $ 287 80 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The net book values of the Company's property and equipment by geographic area were as follows (in thousands): December 31, 2022 2021 United States $ 23,143 $ 24,683 Canada 3,471 5,184 Asia/Pacific 8,152 8,174 Europe 833 1,157 Israel 8,860 7,859 Other 373 628 $ 44,832 $ 47,685 (10) INTANGIBLE ASSETS AND GOODWILL The Company's intangible assets at December 31, 2022 and 2021 consisted of the following (in thousands): December 31, 2022 Weighted average amortization period (years) Cost Accumulated amortization Net carrying value Developed technology 7.84 $ 340,380 $ 212,448 $ 127,932 Customer relationships 11.86 268,140 106,385 161,755 Trade names 3.88 5,000 4,658 342 Software licenses 3.00 5,186 487 4,699 9.51 $ 618,706 $ 323,978 $ 294,728 December 31, 2021 Weighted average amortization period (years) Cost Accumulated amortization Net carrying value In-process research and development * $ 34,000 $ — $ 34,000 Developed technology 7.93 306,380 181,393 124,987 Customer relationships 11.86 268,140 77,653 190,487 Trade names 3.88 5,000 3,744 1,256 Internal use software 3.00 730 730 — 9.17 $ 614,250 $ 263,520 $ 350,730 * An in-process research and development intangible asset has an indefinite life until the product is generally available, at which time such asset is typically reclassified to developed technology and the Company begins to amortize the asset. In the fourth quarter of 2022, the Company reclassified an in-process research and development intangible asset to developed technology, as the associated products and features related to 5G technology became generally available. Estimated future amortization expense for the Company's intangible assets at December 31, 2022 was as follows (in thousands): Years ending December 31, 2023 $ 56,882 2024 50,717 2025 44,006 2026 38,965 2027 33,936 Thereafter 70,222 $ 294,728 Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable 81 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) intangible assets acquired. For the purpose of testing goodwill for impairment, all goodwill is assigned to a reporting unit, which may be either an operating segment or a portion of an operating segment. The Company determined in the fourth quarter of 2020 that it had two operating segments: Cloud and Edge, and IP Optical Networks, at which time it was determined that the goodwill assigned to these two segments was $ 224.9 million and $ 192.0 million, respectively. The Company's reporting units are its operating segments. Our annual testing for impairment of goodwill is completed as of October 1. Upon completion of the 2022 annual test for goodwill impairment, the Company determined that there was no impairment of goodwill in either of its reporting units. Based on the results of the 2021 impairment test, the Company determined that the carrying value of its IP Optical Networks segment exceeded its fair value and the amount of the impairment was $ 116.0 million. This impairment charge was recorded in the fourth quarter of 2021 and is reported separately in the Company's consolidated statement of operations. In the 2021 impairment test, the Company determined that there was no impairment of its Cloud and Edge segment. The changes in the carrying value of the Company's goodwill in the years ended December 31, 2022 and 2021 were as follows (in thousands): Cloud and Edge IP Optical Networks Total Balance at January 1, 2021 (1) $ 224,896 $ 191,996 $ 416,892 Impairment of goodwill — ( 116,000 ) ( 116,000 ) Balance at December 31, 2021 (1)(2) 224,896 75,996 300,892 Activity — — — Balance at December 31, 2022 (1)(2) $ 224,896 $ 75,996 $ 300,892 (1) Balance is presented net of accumulated impairment losses of $ 167.4 million for the Cloud and Edge segment. (2) Balance is presented net of an impairment loss of $ 116.0 million for the IP Optical Networks segment. The components of goodwill at December 31, 2021 and 2022 were as follows (in thousands): Cloud and Edge IP Optical Networks Total Balance at December 31, 2021 Goodwill $ 392,302 $ 191,996 $ 584,298 Accumulated impairment losses ( 167,406 ) ( 116,000 ) ( 283,406 ) 224,896 75,996 300,892 Balance at December 31, 2022 Goodwill $ 392,302 $ 191,996 $ 584,298 Accumulated impairment losses ( 167,406 ) ( 116,000 ) ( 283,406 ) $ 224,896 $ 75,996 $ 300,892 (11) ACCRUED EXPENSES AND OTHER Accrued expenses and other consisted of the following (in thousands): December 31, 2022 2021 Employee compensation and related costs $ 25,994 $ 38,040 Professional fees 17,195 14,365 Other 42,081 48,347 $ 85,270 $ 100,752 82 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (12) WARRANTY The changes in the Company's warranty accrual balance in the years ended December 31, 2022 and 2021 were as follows (in thousands): Year ended December 31, Balance at beginning of year Provision Settlements Balance at end of year 2022 $ 13,120 $ 4,605 $ ( 5,868 ) $ 11,857 2021 $ 14,855 $ 3,777 $ ( 5,512 ) $ 13,120 (13) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES The Company recorded restructuring and related expense aggregating $ 10.8 million, $ 11.7 million and $ 16.2 million in the years ended December 31, 2022, 2021 and 2020, respectively. Restructuring and related expense includes restructuring expense (primarily severance and related costs), estimated future variable lease costs for vacated properties with no intent or ability of sublease, and accelerated rent amortization expense. For restructuring events that involve lease assets and liabilities, the Company applies lease reassessment and modification guidance and evaluates the right-of-use assets for potential impairment. If the Company plans to exit all or distinct portions of a facility and does not have the ability or intent to sublease, the Company will accelerate the amortization of each of those lease components through the vacate date. The accelerated amortization is recorded as a component of Restructuring and related expense in the Company's consolidated statements of operations. Related variable lease expenses will continue to be expensed as incurred through the vacate date, at which time the Company will reassess the liability balance to ensure it appropriately reflects the remaining liability associated with the premises and record a liability for the estimated future variable lease costs. Accelerated amortization of lease assets is recognized from the date that the Company commences the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date. Amounts of accelerated rent amortization that are included as a component of restructuring and related expense are not included in the tables below, as the liability for the total lease payments for each respective facility is included as a component of Operating lease liabilities in the Company's consolidated balance sheets at December 31, 2022 and 2021, both current and noncurrent (see Note 20). The Company may incur additional future expense if it is unable to sublease other locations included in the Facilities Initiative. The components of restructuring and related expense for the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands): Year ended December 31, 2022 2021 2020 Severance and related costs $ 5,230 $ 4,618 $ 12,025 Variable and other facilities-related costs 3,992 5,710 3,605 Accelerated amortization of lease assets due to cease-use 1,611 1,325 605 $ 10,833 $ 11,653 $ 16,235 83 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Accelerated Rent Amortization Accelerated amortization of lease assets is recognized from the date that the Company commences the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date. The liability for the total lease payments for each respective facility is included as a component of Operating lease liabilities in the Company's consolidated balance sheets at December 31, 2022 and 2021, both current and noncurrent (see Note 20). The Company may incur additional future expense if it is unable to sublease other locations included in its restructuring initiatives. 2022 Restructuring Plan On February 14, 2022, the Company's Board of Directors approved a strategic restructuring program (the "2022 Restructuring Plan") to streamline the Company's operations in order to support the Company's investment in critical growth areas. The 2022 Restructuring Plan is expected to include, among other things, charges related to a consolidation of facilities and a workforce reduction. Any positions eliminated in countries outside the United States are subject to local law and consultation requirements. The Company recorded restructuring and related expense of $10.2 million in connection with the 2022 Restructuring Initiative in the year ended December 31, 2022. The amount for the year ended December 31, 2022 was comprised of $ 5.3 million for severance and related costs for approximately 70 employees, $ 3.3 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. The Company estimates that it will record approximately $ 8.0 million of future expense under the 2022 Restructuring Plan. A summary of the 2022 Restructuring Plan accrual activity for the year ended December 31, 2022 is as follows (in thousands): Balance at January 1, 2022 Initiatives charged to expense Cash payments Net transfer to operating lease accounts Balance at December 31, 2022 Severance $ — $ 5,287 $ ( 4,123 ) $ — $ 1,164 Variable and other facilities-related costs — 3,299 ( 2,409 ) — 890 Accelerated amortization of lease assets due to cease-use — 1,611 — ( 1,611 ) — $ — $ 10,197 $ ( 6,532 ) $ ( 1,611 ) $ 2,054 2020 Restructuring Initiative In 2020, the Company implemented a restructuring plan to eliminate certain positions and redundant facilities, primarily in connection with the ECI Acquisition, to further streamline the Company's global footprint and improve its operations (the "2020 Restructuring Initiative"). The 2020 Restructuring Initiative includes facility consolidations and a reduction in workforce. In connection with this initiative, the Company is eliminating functions arising from the ECI Acquisition and supporting its efforts to integrate the two companies. The Company recorded restructuring and related expense of less than $ 0.1 million and $ 4.7 million in connection with the 2020 Restructuring Initiative in the years ended December 31, 2022 and 2021 , respectively. The 2021 amount was comprised of $ 4.6 million for severance and related costs for approximately 60 employees and $ 0.1 million for variable and other facilities-related costs. The Company expects these amounts will be fully paid in 2023. The Company estimates that it will record nominal, if any, future expense under the 2020 Restructuring Initiative. Summaries of the 2020 Restructuring Initiative accrual activity for the years ended December 31, 2022 and 2021 are as follows (in thousands): 84 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2022 Balance at January 1, 2022 Initiatives charged to expense Adjustments for changes in estimate Cash payments Balance at December 31, 2022 Severance $ 1,895 $ — $ ( 57 ) $ ( 1,782 ) 56 Facilities 60 34 — ( 94 ) — $ 1,955 $ 34 $ ( 57 ) $ ( 1,876 ) $ 56 Year ended December 31, 2021 Balance at January 1, 2021 Initiatives charged to expense Adjustments for changes in estimate Cash payments Balance at December 31, 2021 Severance $ 5,237 $ 4,618 $ — $ ( 7,960 ) 1,895 Facilities 1,256 742 ( 670 ) ( 1,268 ) 60 $ 6,493 $ 5,360 $ ( 670 ) $ ( 9,228 ) $ 1,955 2019 Restructuring and Facilities Consolidation Initiative In June 2019, the Company implemented a restructuring plan to further streamline the Company's global footprint, improve its operations and enhance its customer delivery (the "2019 Restructuring Initiative"). The 2019 Restructuring Initiative includes facility consolidations, refinement of the Company's research and development activities, and a reduction in workforce. The facility consolidations under the 2019 Restructuring Initiative (the "Facilities Initiative") include a consolidation of the Company's North Texas sites into a single campus, housing engineering, customer training and support, and administrative functions, as well as a reduction or elimination of certain excess and duplicative facilities worldwide. In addition, the Company is substantially consolidating its global software laboratories and server farms into two lower cost North American sites. The Company continues to evaluate its properties included in the Facilities Initiative for accelerated amortization and/or right-of-use asset impairment. The Company expects that the actions under the Facilities Initiative will be completed in 2023. In connection with the 2019 Restructuring Initiative, the Company recorded restructuring and related expense of $ 0.7 million, $ 7.0 million, and $ 2.3 million in the years ended December 31, 2022, 2021 and 2020, respectively. The amount recorded in 2022 was for facilities related costs. The amount recorded in 2021 was comprised of $ 5.7 million for variable and other facilities-related costs and $ 1.3 million of net expense for accelerated amortization of lease assets. The amount for accelerated amortization of lease assets includes income of $ 2.1 million related to a lease modification for one of the Company's restructured facilities. The amount recorded in 2020 was comprised of $ 0.5 million for severance and related costs for approximately 5 employees, $ 1.7 million for variable and other facilities-related costs and $ 0.1 million for accelerated amortization of lease assets. The Company estimates that it will record nominal, if any, future expense under the 2019 Restructuring Initiative. Summaries of the 2019 Restructuring Initiative accrual activity for the years ended December 31, 2022 and 2021 are as follows (in thousands): Year ended December 31, 2022 Balance at January 1, 2022 Initiatives charged to expense Net transfer to operating lease liability accounts Cash payments Balance at December 31, 2022 Severance $ — $ — $ — $ — $ — Facilities 1,594 658 — ( 1,004 ) 1,248 $ 1,594 $ 658 $ — $ — $ ( 1,004 ) $ — $ 1,248 85 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2021 Balance at January 1, 2021 Initiatives charged to expense Adjustments for changes in estimate Net transfer to operating lease liability accounts Cash payments Balance at December 31, 2021 Severance $ 173 $ — $ — $ — $ ( 173 ) $ — Facilities 766 9,006 ( 2,043 ) ( 1,325 ) ( 4,810 ) 1,594 $ 939 $ 9,006 $ ( 2,043 ) $ ( 1,325 ) $ ( 4,983 ) $ 1,594 Balance Sheet Classification The current portions of accrued restructuring were $ 1.3 million and $ 1.9 million at December 31, 2022 and 2021 , respectively, and are included as components of Accrued expenses in the consolidated balance sheets. The long-term portions of accrued restructuring are included as components of Other long-term liabilities in the consolidated balance sheets. The long-term portions of accrued restructuring were $ 2.0 million and $ 1.6 million at December 31, 2022 and 2021 , respectively. (14) DEBT 2019 Credit Facility On April 29, 2019, the Company, as guarantor, and Ribbon Communications Operating Company, Inc., as borrower, entered into a syndicated, amended and restated credit facility (the "2019 Credit Facility"), which provided for a $ 50 million term loan facility that was advanced in full on April 29, 2019, and a $ 100 million revolving line of credit. Revolving loans under the 2019 Credit Facility bore interest at the Borrower’s option at either the Eurodollar (LIBOR) rate plus a margin ranging from 1.50 % to 3.00 % per year or the base rate plus a margin ranging from 0.50 % to 2.00 % per year. The 2019 Credit Facility was superseded by the 2020 Credit Facility, which was entered into on March 3, 2020, and which is discussed below. 2020 Credit Facility On March 3, 2020, the Company entered into a Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), by and among the Company, as a guarantor, Ribbon Communications Operating Company, Inc., as the borrower ("Borrower"), Citizens Bank, N.A. ("Citizens"), Santander Bank, N.A., and others as lenders, ("Lenders"). The proceeds of the Credit Agreement were used, in part, to pay off in full all obligations of the Company under the 2019 Credit Facility. The 2020 Credit Facility provides for $ 500 million of commitments from the Lenders to the Borrower, comprised of $ 400 million in term loans (the "2020 Term Loan Facility") and a $ 100 million facility available for revolving loans (the "2020 Revolving Credit Facility"). Under the 2020 Revolving Credit Facility, a $ 30 million sublimit is available for letters of credit and a $ 20 million submit is available for swingline loans. The indebtedness and other obligations under the 2020 Credit Facility are unconditionally guaranteed on a senior secured basis by the Company, Edgewater Networks, Inc., a wholly-owned subsidiary of the Company, and GENBAND Inc., wholly-owned subsidiary of the Company (together, the "Guarantors") . The 2020 Credit Facility is secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors , including substantially all of the assets of the Company. The 2020 Credit Facility requires compliance with certain financial covenants, including a minimum Consolidated Fixed Charge Coverage Ratio and a maximum Consolidated Net Leverage Ratio (each as defined in the 2020 Credit Facility, and each tested on a quarterly basis). On August 18, 2020, the Company entered into the First Amendment to the 2020 Credit Facility in which $ 75 million of the 2020 Term Loan Facility was assigned from Citizens to a new lender and designated as the Term B Loan. The remaining $ 325 million of the 2020 Term Loan Facility was deemed the Term A Loan. The Term A Loan and the 2020 Revolving Credit Facility mature in March 2025 and bore interest at the Borrower's option at either the LIBOR rate plus a margin ranging from 1.50 % to 3.50 % per year, or the base rate plus 0.50 %, or the prime rate 86 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) plus a margin ranging from 0.50 % to 2.50 % per year (the "Applicable Margin"). The Applicable Margin varies depending on the Company's Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility). The Term B Loan was scheduled to mature in March 2026 and bore interest, at the Borrower's option, at either the LIBOR rate plus a margin of 7.50 % per year, or the base rate (the highest of the Federal Funds Effective Rate (as defined in the First Amendment) plus 0.50 %, or the prime rate. On December 1, 2020, the Company entered into the Second Amendment to the 2020 Credit Facility to obtain consent for an equity exchange with AVCT in connection with the Kandy Sale, as well as to amend certain other provisions of the 2020 Credit Facility. On March 3, 2021, the Company entered into the Third Amendment to the 2020 Credit Facility which provided for an incremental term loan facility in the principal amount of $ 74.6 million, the proceeds of which were used to consummate an open market purchase of all outstanding amounts under the Term B Loan, resulting in the assignment and immediate cancellation of the Term B Loan, such that the outstanding amount under the Term A Loan and incremental term loan facility were combined and held by the Lenders (the "2020 Term Loan") with the same terms as the Term A Loan. The Company wrote off $ 2.5 million of capitalized debt issuance costs in connection with the Third Amendment, which is included in Interest expense, net, in the Company's consolidated statement of operations for the year ended December 31, 2021. On March 10, 2022, the Company entered into the Fourth Amendment to the 2020 Credit Facility to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) and in conjunction the Company made a $ 15.0 million prepayment that was applied to the final payment due on the maturity date. On June 30, 2022, the Company entered into the 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) for 2022, with the fourth quarter of 2022 increased to 4.75 :1.00. In the 1st and 2nd quarters of 2023, the Maximum Consolidated Net Leverage Ratio allowed declines to 3.25 :1.00 and in all subsequent quarters the ratio will be fixed at 3.00 :1.00. Also, the Fifth Amendment reduced the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the 2020 Credit Facility) in 2022, with the fourth quarter of 2022 reduced to 1.10 :1.00 and in all subsequent quarters the ratio will be fixed at 1.25 :1.00. In addition, the Fifth Amendment increased the maximum rate at which loans bear interest if the Company's Consolidated Net Leverage Ratio for any quarter is greater than 4.50 :1.00. Specifically, loans incurred bear interest, at the Borrower’s option, at either LIBOR plus a margin ranging from 1.50 % to 4.50 % per year, or the base rate plus 0.50 %, or the prime rate plus a margin ranging from 0.50 % to 3.50 % per year. In addition, the Fifth Amendment allows the Company 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 2020 Credit Facility, and compliance with certain leverage ratio-based covenant exceptions. In connection with the Fifth Amendment, the Company made a $ 10.0 million voluntary prepayment that was applied to the final payment due on the maturity date. Subsequent to the Fifth Amendment, the Company is 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 December 31, 2022, the Company had an outstanding balance under the 2020 Term Loan of $ 330.4 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 %. At December 31, 2021, the Company had an outstanding balance under the 2020 Term Loan of $ 375.5 million at an average interest rate of 3.4 % and $ 4.3 million of letters of credit outstanding with an interest rate of 2.5 %. The Company was in compliance with all covenants of the 2020 Credit Facility at both December 31, 2022 and 2021 . Letters of Credit and Performance and Bid Bonds The Company uses letters of credit and performance and bid bonds in the course of its business. At December 31, 2022, the Company had $ 8.3 million of letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees"), comprised of the $ 3.3 million of letters of credit under the 2020 Credit Agreement described above (the "Letters of Credit") and $ 5.0 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under various uncommitted facilities. At December 31, 2021, the Company had Guarantees aggregating $ 30.1 million, comprised of the $ 4.3 million of Letters of Credit and $ 25.8 million of Other Guarantees. At December 31, 2022 and 2021 , the Company 87 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) had cash collateral of $ 0.2 million and $ 2.6 million, respectively, supporting the Guarantees, which are reported in Restricted cash in the consolidated balance sheets. (15) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company is exposed to financial market risk related to foreign currency fluctuations and changes in interest rates. These exposures are actively monitored by management. To manage the volatility related to the exposure to changes in interest rates, the Company has entered into a derivative financial instrument. Management's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates. Ribbon's policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. Ribbon does not hold or issue derivative financial instruments for trading or speculative purposes. The Company records derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a specific risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge, or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk even though hedge accounting does not apply or the Company elects not to apply hedge accounting. Cash Flow Hedge of Interest Rate Risk The 2020 Term Loan Facility had outstanding balances of $ 330.4 million and $ 375.5 million at December 31, 2022 and 2021 , respectively. The 2020 Revolving Credit Facility was undrawn at both December 31, 2022 and 2021 . Borrowings under the 2020 Credit Agreement have variable interest rates based on LIBOR (see Note 14). As a result of exposure to interest rate movements, during March 2020, the Company entered into an interest rate swap arrangement, which effectively converted its $ 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. On July 22, 2022, the Company sold $ 30 million of the notional amount of its interest rate swap back to its counterparty for $ 1.5 million, reducing the notional amount of this swap to $ 370 million. On August 16, 2022 the Company sold another $ 30 million of the notional amount of its interest rate swap back to its 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 $ 0.5 million for the year ended December 31, 2022. The notional amount of this swap at December 31, 2022 and 2021 was $ 340 million and $ 400 million, respectively. The swap matures on March 3, 2025, the same date the 2020 Credit Facility matures. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company is using an interest rate swap as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) in the consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the years ended December 31, 2022 and 2021 , such a derivative was used to hedge the variable cash flows associated with the credit facilities under the 2020 Credit Facility, 88 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) and the Company has accounted for this derivative as an effective hedge. Any ineffective portion of the change in the fair value of the derivative would be recognized directly in earnings. Amounts reported in accumulated other comprehensive income (loss) related to the Company's derivative are reclassified to interest expense as interest is accrued on the Company’s variable-rate debt. Based upon projected forward rates, the Company estimates that as of December 31, 2022, $ 13.2 million may be reclassified as a decrease to interest expense over the next twelve months. The impact of the Company’s derivative financial instrument on its consolidated statement of comprehensive income (loss) for the years ended December 31, 2022 and 2021 was as follows, net of tax (in thousands): Year ended December 31, 2022 2021 Gain recognized in other comprehensive income (loss) on interest rate swap, net of tax $ 22,456 $ 9,505 Amount reclassified from accumulated other comprehensive income (loss) to interest expense ( 3,135 ) 3,254 Unrealized gain (loss) on interest rate swap, net of reclassifications and amortization $ 19,321 $ 12,759 The fair values and locations in the consolidated balance sheet at December 31, 2022 and 2021 of the Company's derivative assets (liabilities) designated as a hedging instrument were as follows (in thousands): December 31, Balance sheet location 2022 2021 Interest rate derivative - asset derivative Other current assets $ 13,212 $ — Interest rate derivative - asset derivative Other assets 12,216 3,865 Interest rate derivative - liability derivative Accrued expenses and other — ( 2,054 ) Interest rate derivative - liability derivative Other long-term liabilities — — $ 25,428 $ 1,811 The Company has classified the interest rate derivative net asset of $ 25.4 million and $ 1.8 million at December 31, 2022 and 2021 , respectively, as Level 2 fair value measurements within the fair value hierarchy (see Note 6). 89 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (16) REVENUE RECOGNITION The Company's typical performance obligations include the following: Performance Obligation When Performance Obligation is Typically Satisfied When Payment is Typically Due Software and Product Revenue Software licenses (perpetual or term) Upon transfer of control; typically, when made available for download (point in time) Generally, within 30 days of invoicing except for term licenses, which may be paid for over time Software licenses (subscription) Upon activation of hosted site (over time) Generally, within 30 days of invoicing Hardware When control of the hardware passes to the customer; typically, upon delivery (point in time) Generally, within 30 days of invoicing Software upgrades Upon transfer of control; typically, when made available for download (point in time) Generally, within 30 days of invoicing Customer Support Revenue Customer support Ratably over the course of the support contract (over time) Generally, within 30 days of invoicing Professional Services Other professional services (excluding training services) As work is performed (over time) Generally, within 30 days of invoicing (upon completion of services) Training When the class is taught (point in time) Generally, within 30 days of services being performed Significant Judgments The Company's contracts with customers often include promises to transfer multiple products and services to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company typically has more than one standalone selling price ("SSP") for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the SSP. Deferred Revenue Deferred revenue is a contract liability representing amounts collected from or invoiced to customers in excess of revenue recognized. This results primarily from the billing of annual customer support agreements where the revenue is recognized over the term of the agreement. The value of deferred revenue will increase or decrease based on the timing of invoices and recognition of revenue. Disaggregation of Revenue The Company disaggregates its revenue from contracts with customers based on the nature of the products and services and the geographic regions in which each customer is domiciled. The Company's total revenue for the years ended December 31, 2022, 2021 and 2020 was disaggregated geographically as follows: 90 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2022 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 175,189 $ 132,655 $ 44,819 $ 352,663 Europe, Middle East and Africa 147,523 75,948 29,310 252,781 Asia Pacific 95,828 41,677 13,594 151,099 Other 24,140 31,815 7,262 63,217 $ 442,680 $ 282,095 $ 94,985 $ 819,760 Year ended December 31, 2021 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 196,058 $ 132,683 $ 47,296 $ 376,037 Europe, Middle East and Africa 138,203 79,475 30,349 248,027 Asia Pacific 92,803 41,945 18,183 152,931 Other 25,978 32,218 9,766 67,962 $ 453,042 $ 286,321 $ 105,594 $ 844,957 Year ended December 31, 2020 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 201,347 $ 132,661 $ 48,611 $ 382,619 Europe, Middle East and Africa 149,567 73,475 25,226 248,268 Asia Pacific 90,201 36,628 19,627 146,456 Other 26,797 32,052 7,603 66,452 $ 467,912 $ 274,816 $ 101,067 $ 843,795 The Company's product revenue from its direct sales program and from indirect sales through its channel partner program for the years ended December 31, 2022, 2021 and 2020 was as follows (in thousands): Year ended December 31, 2022 2021 2020 Indirect sales through channel program $ 131,998 $ 117,065 $ 134,876 Direct sales 310,682 335,977 333,036 $ 442,680 $ 453,042 $ 467,912 The Company's product revenue from sales to enterprise customers and from sales to service provider customers for the years ended December 31, 2022, 2021 and 2020 was as follows (in thousands): Year ended December 31, 2022 2021 2020 Sales to enterprise customers $ 125,664 $ 111,494 $ 138,469 Sales to service provider customers 317,016 341,548 329,443 $ 442,680 $ 453,042 $ 467,912 The Company's product revenue and service revenue components by segment for the years ended December 31, 2022, 2021 and 2020 was as follows (in thousands): 91 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2022 2021 2020 Product revenue Cloud and Edge 215,770 248,570 275,445 IP Optical Networks 226,910 204,472 192,467 Total product revenue 442,680 453,042 467,912 Service revenue Maintenance Cloud and Edge 222,238 228,321 229,035 IP Optical Networks 59,857 58,000 45,781 Total maintenance revenue 282,095 286,321 274,816 Professional services Cloud and Edge 70,130 79,765 78,790 IP Optical Networks 24,855 25,829 22,277 Total professional services revenue 94,985 105,594 101,067 Total service revenue 377,080 391,915 375,883 Revenue Contract Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, which are contract assets, and customer advances and deposits, which are contract liabilities, in the Company's consolidated balance sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Completion of services and billing may occur subsequent to revenue recognition, resulting in contract assets. The Company may receive advances or deposits from its customers before revenue is recognized, resulting in contract liabilities which are classified as deferred revenue. These assets and liabilities are reported in the Company's consolidated balance sheets on a contract-by-contract basis as of the end of each reporting period. Changes in the contract asset and liability balances during the years ended December 31, 2022 and 2021 were not materially impacted by any factors other than billing and revenue recognition. Nearly all of the Company's deferred revenue balance is related to services revenue, primarily customer support contracts. Unbilled receivables stem primarily from engagements where services have been performed; however, billing cannot occur until services are completed. In some arrangements, the Company allows customers to pay for term-based software licenses and products over the term of the software license. The Company also sells SaaS-based software under subscription arrangements, with payment terms over the term of the SaaS agreement. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables that are anticipated to be invoiced in the next twelve months are included in Accounts receivable on the Company's consolidated balance sheets. The changes in the Company's accounts receivable, unbilled receivables and deferred revenue balances for the years ended December 31, 2022 and 2021 were as follows (in thousands): Accounts receivable Unbilled accounts receivable Deferred revenue (current) Deferred revenue (long-term) Balance at January 1, 2022 $ 208,972 $ 73,945 $ 109,119 $ 20,619 Increase (decrease), net ( 38,003 ) 22,330 4,820 ( 1,365 ) Balance at December 31, 2022 $ 170,969 $ 96,275 $ 113,939 $ 19,254 Accounts receivable Unbilled accounts receivable Deferred revenue (current) Deferred revenue (long-term) Balance at January 1, 2021 $ 179,331 $ 58,407 $ 96,824 $ 26,010 Increase (decrease), net 29,641 15,538 12,295 ( 5,391 ) Balance at December 31, 2021 $ 208,972 $ 73,945 $ 109,119 $ 20,619 The Company recognized approximately $ 103 million of revenue in the year ended December 31, 2022 that was recorded as deferred revenue at December 31, 2021 and approximately $ 94 million of revenue in the year ended December 31, 2021 that was recorded as deferred revenue at December 31, 2020. Of the Company's deferred revenue reported as long-term in its 92 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) consolidated balance sheet at December 31, 2022, the Company expects that approximately $ 12 million will be recognized as revenue in 2024, approximately $ 5 million will be recognized as revenue in 2025 and approximately $ 2 million will be recognized as revenue in 2026 and beyond. All freight-related customer invoicing is recorded as revenue, while the shipping and handling costs that occur after control of the promised goods or services transfer to the customer are reported as fulfillment costs, a component of Cost of revenue - product in the Company's consolidated statements of operations. Deferred Commissions Cost Sales commissions earned by the Company's employees are considered incremental and recoverable costs of obtaining a contract with a customer. The payments related to these costs have been deferred on our consolidated balance sheet and are being amortized over the expected life of the customer contract, which is generally five years . At December 31, 2022 and 2021 , the Company had $ 3.6 million and $ 3.8 million, respectively, of deferred sales commissions capitalized. (17) OPERATING SEGMENT INFORMATION The Company has two reportable segments, which are intended to align with the manner in which the business is managed: Cloud and Edge, and IP Optical Networks. The Cloud and Edge segment provides secure and reliable software and hardware products, solutions and services for enabling Voice over Internet Protocol ("VoIP") communications, Voice over Long-Term Evolution ("VoLTE") and Voice Over 5G ("VoNR") communications and Unified Communications and Collaboration ("UC&C") within service provider and enterprise networks and from the cloud. The Cloud and Edge products are increasingly software-centric and cloud-native for deployment on private, public or hybrid cloud infrastructures, in data centers, on enterprise premises and within service provider networks. Ribbon's Cloud and Edge product portfolio consists of our Session Border Controller ("SBC") products and our Network Transformation ("NTR") products. The IP Optical Networks segment provides high-performance, secure solutions for IP networking and optical transport, supporting wireless networks including 5G, metro and edge aggregation, core networking, data center interconnect, legacy network transformation and transport solutions for wholesale carriers. This portfolio is offered to service provider, enterprise and industry verticals with critical transport network infrastructures including utilities, government, defense, transportation, and education and research. The Company has not provided segment asset information as such information is not provided to the CODM and accordingly, asset information is not used in assessing segment performance. Segment revenue and expense included in the tables below represent direct revenue and expense attributable to each segment. Please see Note 10 for information regarding the allocation of goodwill between segments. The CODM utilizes revenue and adjusted gross profit to measure and assess each segment's performance. The Company calculates adjusted gross profit by excluding from cost of revenue: amortization of acquired technology, stock-based compensation, acquisition-related inventory adjustments and acquisition-related facilities adjustments, and may also exclude other items in future periods that the Company believes are not part of the Company's core business. Adjusted gross profit is not a financial measure determined in accordance with U.S. GAAP, may not be comparable to similarly titled measures used by other companies, and should not be considered a substitute for gross profit or other results reported in accordance with U.S. GAAP. See below for a reconciliation of adjusted gross profit to gross profit which is the most directly comparable U.S. GAAP measure. The tables below provide revenue, adjusted gross profit and depreciation expense by reportable segment for the years ended December 31, 2022, 2021 and 2020 (in thousands): 93 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, Revenue 2022 2021 2020 Segment revenue: Cloud and Edge $ 508,137 $ 556,656 $ 583,270 IP Optical Networks 311,623 288,301 260,525 Total revenue $ 819,760 $ 844,957 $ 843,795 Year ended December 31, Adjusted gross profit 2022 2021 2020 Segment adjusted gross profit: Cloud and Edge $ 330,395 $ 370,504 $ 385,137 IP Optical Networks 104,711 114,496 110,845 Total segment adjusted gross profit 435,106 485,000 495,982 Stock-based compensation expense ( 2,628 ) ( 1,997 ) ( 875 ) Amortization of acquired technology ( 31,542 ) ( 38,343 ) ( 42,290 ) Acquisition-related inventory and facilities adjustments — — ( 2,000 ) Gross profit $ 400,936 $ 444,660 $ 450,817 Year ended December 31, Depreciation expense 2022 2021 2020 Segment depreciation expense: Cloud and Edge $ 10,758 $ 12,269 $ 12,111 IP Optical Networks 4,537 4,693 5,077 Total depreciation expense $ 15,295 $ 16,962 $ 17,188 (18) MAJOR CUSTOMERS The following customers contributed 10% or more of the Company's revenue in at least one of the years ended December 31, 2022, 2021 and 2020: Year ended December 31, 2022 2021 2020 Verizon Communications Inc. 15 % 16 % 15 % At December 31, 2022, no customer accounted for 10% or more of the Company's accounts receivable balance. At December 31, 2021, one customer accounted for 10% or more of the Company's accounts receivable balance, representing approximately 15 % of total accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains an allowance for doubtful accounts and such losses have historically been within management's expectations. (19) STOCK-BASED COMPENSATION PLANS The Company grants stock-based compensation to employees, officers and non-employee directors, as well as consultants and advisors of the Company and its subsidiaries under its Amended and Restated 2019 Incentive Award Plan (the "2019 Plan") which provides for the award of stock options, stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), performance-based stock awards ("PSAs"), restricted stock units ("RSUs"), performance-based stock units ("PSUs") and other stock- or cash-based awards. At the Company's annual meeting of stockholders held on May 25, 2022, the Company's stockholders approved an amendment to the 2019 Plan to increase the number of shares of the Company's common stock authorized for issuance under 94 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) the 2019 Plan by 10.0 million shares. Executive Equity Arrangements Inducement Awards In connection with his appointment as President and Chief Executive Officer of Ribbon on March 16, 2020, the Company awarded Bruce McClelland sign-on equity grants, comprised of RSUs and a PSU grant with both market and service conditions (the "Inducement PSUs"). Performance-Based Stock Grants In addition to granting RSAs and RSUs to its executives and certain of its employees, the Company also grants PSUs to certain of its executives and certain other employees. Vesting periods for RSAs, RSUs, and PSUs granted range from one to three years. PSUs granted consist of 60 % that have both performance and service conditions (the "Performance PSUs") and 40 % that have both market and service conditions (the "Market PSUs"). Each Performance PSU is comprised of three consecutive fiscal year performance periods beginning in the year of grant, with one-third of the Performance PSUs attributable to each fiscal year performance period. The Market PSUs have one three-year performance period, beginning January 1 in the year of grant and ending on December 31, three years thereafter. The number of shares of common stock underlying the PSUs that can be earned will not exceed 200 % of the Performance or Market PSUs. Shares subject to PSUs that fail to be earned will be forfeited. Restricted Stock Units The activity related to the Company's RSUs for the year ended December 31, 2022 was as follows: Shares Weighted Average Grant Date Fair Value Unvested balance at January 1, 2022 5,389,611 $ 6.19 Granted 6,096,248 $ 3.09 Vested ( 3,075,543 ) $ 5.87 Forfeited ( 760,569 ) $ 5.05 Unvested balance at December 31, 2022 7,649,747 $ 3.96 The total grant date fair value of restricted stock underlying RSUs that vested was $ 18.1 million in the year ended December 31, 2022, $ 12.5 million in the year ended December 31, 2021 and $ 11.2 million in the year ended December 31, 2020. Performance-Based Stock Units The activity related to the Company's PSUs for the year ended December 31, 2022 was as follows: Shares Weighted Average Grant Date Fair Value Unvested balance at January 1, 2022 4,987,876 $ 2.87 Granted 2,228,073 $ 3.27 Vested ( 179,184 ) $ 5.02 Forfeited ( 383,262 ) $ 7.82 Unvested balance at December 31, 2022 6,653,503 $ 2.52 The total grant date fair value of restricted stock underlying PSUs that vested was $ 0.9 million in the year ended December 31, 2022, $ 1.7 million in the year ended December 31, 2021 and $ 1.8 million in the year ended December 31, 2020. 95 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Stock-Based Compensation The consolidated statements of operations included stock-based compensation for the years ended December 31, 2022, 2021 and 2020 as follows (in thousands): Year ended December 31, 2022 2021 2020 Product cost of revenue $ 471 $ 313 $ 174 Service cost of revenue 2,157 1,684 701 Research and development 5,108 4,253 2,968 Sales and marketing 6,074 7,218 4,129 General and administrative 4,897 5,950 5,927 $ 18,707 $ 19,418 $ 13,899 There was an income tax benefit for employee stock-based compensation expense for the years ended December 31, 2022, 2021 and 2020. At December 31, 2022, there was $ 23.0 million, net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested RSUs and PSUs. This expense is expected to be recognized over a weighted average period of approximately two years . The Company issues authorized and unissued shares under its equity plans and at December 31, 2022, there were 5,027,305 total shares of common stock reserved for that purpose with 105,495 of those shares authorized only for issuance of shares upon exercise of stock options. (20) LEASES The Company has operating and finance leases for corporate offices, research and development facilities, and certain equipment. Operating leases are reported separately in the Company's consolidated balance sheet at December 31, 2022 and 2021 . Assets acquired under finance leases are included in Property and equipment, net, in the consolidated balance sheets at December 31, 2022 and 2021 . The Company determines if an arrangement is a lease at inception. A contract is determined to contain a lease component if the arrangement provides the Company with a right to control the use of an identified asset. Lease agreements may include lease and non-lease components. In such instances for all classes of underlying assets, the Company does not separate lease and non-lease components but rather, accounts for the entire arrangement under leasing guidance. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term. Right-of-use assets and lease liabilities are initially measured based on the present value of the future minimum fixed lease payments (i.e., fixed payments in the lease contract) over the lease term at the commencement date. As the Company's existing leases do not have a readily determinable implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future minimum fixed lease payments. The Company calculates its incremental borrowing rate to reflect the interest rate that it would have to pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment over a similar term and considers its historical borrowing activities and market data from entities with comparable credit ratings in this determination. The measurement of the right-of-use asset also includes any lease payments made prior to the commencement date (excluding any lease incentives) and initial direct costs incurred. The Company assessed its right-of-use assets for impairment as of December 31, 2022 and 2021 and determined no impairment had occurred. Lease terms may include options to extend or terminate the lease and the Company incorporates such options in the lease term when it has the unilateral right to make such an election and it is reasonably certain that the Company will exercise that option. In making this determination, the Company considers its prior renewal and termination history and planned usage of the assets under lease, incorporating expected market conditions. For operating leases, lease expense for minimum fixed lease payments is recognized on a straight-line basis over the lease term. The expense for finance leases includes both interest and amortization expense components, with the interest component calculated based on the effective interest method and the amortization component calculated based on straight-line amortization 96 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) of the right-of-use asset over the lease term. Lease contracts may contain variable lease costs, such as common area maintenance, utilities and tax reimbursements that vary over the term of the contract. Variable lease costs are not included in minimum fixed lease payments and as a result, are excluded from the measurement of the right-of-use assets and lease liabilities. The Company expenses all variable lease costs as incurred. Certain leased facilities are being partially or fully vacated as part of the 2022 Restructuring Plan and for some of those facilities, the Company has no plans to enter into sublease agreements. Accordingly, the Company accelerated the amortization of those lease assets through the planned cease-use date of each facility, resulting in additional amortization expense of $ 1.6 million in the year ended December 31, 2022. The Company also recorded expense of $ 1.0 million in the year ended December 31, 2022 for all estimated future variable lease costs related to those facilities. In connection with the 2020 Restructuring Plan, the Company accelerated amortization totaling $ 0.8 million in the year ended December 31, 2021 for leased facilities that were vacated in 2021 as part of the consolidation of certain sites following the ECI Acquisition. The Company did not record estimated future variable lease costs in the year ended December 31, 2021 related to the 2020 Restructuring Plan. The Company did not record any accelerated amortization or estimated future variable lease costs in the year ended December 31, 2022 or 2022 related to the 2020 Restructuring Plan. In connection with the 2019 Restructuring Initiative, certain lease assets related to facilities are being partially or fully vacated as the Company consolidates its facilities. The Company has no plans to enter into sublease agreements for certain facilities. The Company accelerated amortization of $ 3.4 million and $ 0.6 million in the years ended December 31, 2021 and 2020, respectively, for leased facilities that were vacated in the respective years. The Company also recorded liabilities aggregating $ 1.4 million in the year ended December 31, 2021 for all future estimated variable lease costs related to these facilities. The Company did not record liabilities for future estimated variable lease costs in the year ended December 31, 2020. The Company did not accelerate amortization or record liabilities for future estimated variable lease costs in the year ended December 31, 2022. All incremental accelerated amortization and accrual for all estimated future variable lease costs are included in Restructuring and related expense in the Company's consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020. At December 31, 2022 and 2021 , the Company had accruals of $ 2.0 million and $ 1.6 million, respectively, for all future anticipated variable lease costs related to these facilities. The Company may incur additional future expense if it is unable to sublease other locations included in the Facilities Initiative. In addition, in the year ended December 31, 2021, this accelerated amortization and provision for future estimated variable lease costs was partially offset by the recognition of $ 2.1 million of income in conjunction with lease amendments that modified the Company's obligation and rentable square footage at a site in North Carolina. The Company leases its corporate offices and other facilities under operating leases, which expire at various times through 2032. The Company's right-of-use lease assets and lease liabilities at December 31, 2022 and 2021 were as follows (in thousands): December 31, Classification 2022 2021 Assets: Operating lease assets Operating lease right-of-use assets $ 44,888 $ 53,147 Finance lease assets* Property and equipment, net — 287 Total leased assets $ 44,888 $ 53,434 Liabilities: Current: Operating Operating lease liabilities $ 15,416 $ 17,403 Finance Accrued expenses and other — 503 Noncurrent: Operating Operating lease liabilities, net of current 46,183 55,196 Finance Other long-term liabilities — 64 Total lease liabilities $ 61,599 $ 73,166 97 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) * Finance lease assets were fully depreciated at December 31, 2022 and were recorded net of accumulated depreciation of $ 1.8 million at December 31, 2021. The components of lease expense for the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands): Year ended December 31, 2022 2021 2020 Operating lease cost* $ 21,121 $ 21,828 $ 19,582 Finance lease cost: Amortization of leased assets 287 695 1,200 Interest on lease liabilities 13 67 173 Short-term lease cost 14,209 13,250 20,687 Variable lease costs (costs excluded from minimum fixed lease payments)** 4,007 4,030 2,713 Sublease income ( 1,647 ) ( 1,496 ) ( 1,087 ) Net lease cost $ 37,990 $ 38,374 $ 43,268 * Operating lease costs for the years ended December 31, 2022, 2021 and 2020 include $ 1.6 million, $ 3.4 million, and $ 0.6 million, respectively, of accelerated amortization for certain assets partially or fully vacated with no intent or ability to sublease. Operating lease cost for the year ended December 31, 2021 also includes $ 2.1 million of income related to a lease modification for one of these assets. ** Variable lease costs for the years ended December 31, 2022 and 2021 included accruals of $ 1.0 million and $ 1.4 million, respectively, for all future estimated variable expenses related to certain assets partially or fully vacated with no intent or ability to sublease. No such variable costs were accrued in the year ended December 31, 2020. Cash flow information related to the Company's leases for the years ended December 31, 2022 and 2021 was as follows (in thousands): Year ended December 31, 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 20,363 $ 22,365 19,161 Operating cash flows from finance leases $ 13 $ 67 173 Financing cash flows from finance leases $ 595 $ 903 1,279 Other information related to the Company's leases as of December 31, 2022 and 2021 was as follows (in thousands): December 31, 2022 2021 Weighted average remaining lease term (years): Operating leases 5.90 6.25 Finance leases — 1.00 Weighted average discount rate: Operating leases 5.79 % 5.61 % Finance leases — 4.15 % Future minimum fixed lease payments under noncancelable leases at December 31, 2022 were as follows (in thousands): 98 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) December 31, 2022 Operating Finance leases leases 2023 $ 18,384 $ — 2024 15,380 — 2025 8,249 — 2026 7,110 — 2027 6,429 — 2028 and beyond 18,210 — Total lease payments 73,762 — Less: interest ( 12,163 ) — Present value of lease liabilities $ 61,599 $ — (21) EMPLOYEE DEFINED CONTRIBUTION PLANS The Company offers 401(k) savings plans to eligible employees. The Company matches 50 % of each employee's contributions to the 401(k) program up to 4 % of the employee's eligible earnings, for a maximum match of 2 % of eligible earnings. The Company recorded expense related to its employee defined contribution plans aggregating $ 3.3 million, $ 3.5 million and $ 3.4 million in the years ended December 31, 2022, 2021 and 2020, respectively. (22) NON-U.S. EMPLOYEE DEFINED BENEFIT PLANS The Company has defined benefit retirement plans that cover certain employees at various international locations. The Company's policy is to contribute amounts at least sufficient to satisfy the minimum amount required by applicable law and regulations or to directly pay benefits where appropriate. Benefits under the defined benefit plans are typically based either on years of service and the employee's compensation (generally during a fixed number of years immediately before retirement) or on annual credits. The range of assumptions that are used for these non-U.S. defined benefit plans reflect the different economic environments within the various countries. In the year ended December 31, 2020, the Company assumed ECI's defined benefit plans in connection with the ECI Acquisition. These plans exist in several international locations where severance pay is either required by law for voluntary or involuntary terminations or upon reaching a statutory retirement age. The Company adopted ECI's policy to fund notional accounts each month in the name of each employee to satisfy not only the severance amounts required by the applicable laws and regulations in certain countries, but also to satisfy severance for other types of terminations not necessarily required by law, but paid in accordance with company policy. Benefits funded and paid under these plans are based upon years of service and the employees' current compensation. At the ECI Acquisition Date, ECI accounted for these plans under the shutdown approach allowed under ASC 715, Compensation - Retirement Benefits (Topic 715) ("ASC 715") . Beginning December 31, 2020, in order to be consistent with the accounting methodology utilized for Ribbon's other defined benefit plans, the Company began to account for the ECI assumed plans using the actuarial cost approach, which is also allowed under ASC 715 for these types of plans. The range of assumptions that are utilized for these plans reflects the different economic environments within each country where such severance indemnities are required. The Company expanded its actuarial valuation of defined benefit plans beginning with the year ended December 31, 2021 to include the severance plan for employees in India that are unaffiliated with the 2020 acquisition of ECI, thereby increasing the projected benefit obligation by $ 1.5 million as of December 31, 2021. In addition, the Company aligned the benefits for all employees in India in the year 2021 for consistency, including those employees assumed in the ECI Acquisition in 2020. This benefit alignment was considered a plan amendment for those former ECI employees, resulting in the establishment of a $( 3.8 ) million prior service credit in the year ended December 31, 2021. In 2020, regulatory changes occurred in the Netherlands that changed the Company's defined benefit pension plan there from a participating plan to a non-participating plan. This plan amendment triggered settlement accounting, resulting in a gain 99 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) of $ 1.6 million, which is included in Other (expense) income, net, in the Company's consolidated statement of operations for the year ended December 31, 2020. Prior to the amendment, the Company's Netherlands pension plan provided defined benefit accruals which were financed by insurance contracts that had a profit sharing feature. The pension benefits accrued were subject to future increases based on final earnings at the end of employment (the final average earnings formula). With the amendment in 2020, the final average earnings formula was frozen and the insurance contracts were converted to fully paid contracts. Following the amendment, pension accruals are now based upon a new formula that only considers current earnings (the career earnings formula) with the benefits still financed through insurance contracts. Ribbon has no further liability for pension benefits earned prior to the amendment as they are fully paid contracts. In addition, the insurance contract for the new benefit accruals has no profit sharing feature. Therefore, Ribbon has no current or future obligation to pay pension benefits promised in the Netherlands beyond the payment of premiums to the insurance company. A reconciliation of the changes in the benefit obligations and fair value of the assets of the defined benefit plans for the years ended December 31, 2022 and 2021, the funded status of the plans, and the amounts recognized in the consolidated balance sheets as of December 31, 2022 and 2021 were as follows (in thousands): Year ended December 31, 2022 2021 Changes in projected benefit obligations: Projected benefit obligation, beginning of year $ 26,938 $ 25,067 Service cost 1,355 1,321 Interest cost 563 523 Participant contributions — — Plan amendments — ( 3,801 ) Net actuarial (gain) loss on obligation ( 5,604 ) 4,868 Settlement ( 1,063 ) — Benefits and expenses paid ( 932 ) ( 1,040 ) Projected benefit obligation, end of year $ 21,257 $ 26,938 Changes in plan assets: Fair value of plan assets, beginning of year $ 15,303 $ 14,350 Actual return on plan assets ( 672 ) 981 Employer contributions 1,954 989 Participant contributions 39 23 Benefits paid ( 1,995 ) ( 1,040 ) Fair value of plan assets, end of year $ 14,629 $ 15,303 Funded status at end of year $ ( 6,628 ) $ ( 11,635 ) Amounts recognized in accumulated other comprehensive income consist of: Prior service (credit) cost $ ( 3,481 ) $ ( 3,801 ) Net actuarial (gain) loss ( 1,704 ) 4,045 $ ( 5,185 ) $ 244 Amounts recognized in the consolidated balance sheets consist of: Other assets (non-current pension asset) $ 552 $ — Accrued expenses and other (current pension liability) ( 803 ) ( 461 ) Other long-term liabilities (non-current pension liability) ( 6,377 ) ( 11,174 ) Net amount recognized $ ( 6,628 ) $ ( 11,635 ) The decrease in the underfunded status of the Company's defined benefit plans at December 31, 2022 compared to December 31, 2021 was primarily the result of the increase in the discount rates in the various countries, partially offset by continued benefit accruals. The source of the projected benefit obligation ("PBO") actuarial (gain) loss differed in each country. However, in aggregate, the effect of discount rate changes in 2022 represented the most significant contributor to the PBO actuarial (gain) loss. 100 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Plans with underfunded or non-funded accumulated benefit obligations at December 31, 2022 and 2021 were as follows (in thousands): December 31, 2022 2021 Aggregate projected benefit obligation $ 9,450 $ 26,938 Aggregate accumulated benefit obligation $ 7,418 $ 20,695 Aggregate fair value of plan assets $ 2,270 $ 15,303 Plans with overfunded accumulated benefit obligations at December 31, 2022 and 2021 were as follows (in thousands): December 31, 2022 2021 Aggregate projected benefit obligation $ 11,807 $ — Aggregate accumulated benefit obligation $ 9,547 $ — Aggregate fair value of plan assets $ 12,359 $ — Net periodic benefit costs for the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands): Year ended December 31, 2022 2021 2020 Service cost $ 1,355 $ 1,321 $ 1,459 Interest cost 563 523 46 Expected return on plan assets ( 266 ) ( 314 ) ( 343 ) Plan asset expenses — — — Settlement charge (credit) 808 — ( 1,557 ) Amortization of prior service cost ( 320 ) — — Amortization of net loss 275 81 20 Net periodic benefit costs $ 2,415 $ 1,611 $ ( 375 ) Expected benefit payments for the next ten years are as follows (in thousands): Years ending December 31, 2023 $ 2,863 2024 1,314 2025 1,562 2026 1,315 2027 1,584 2028 to 2032 11,326 $ 19,964 The changes in plan assets and benefit obligations recognized in other comprehensive income (loss) before tax for the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands): Year ended December 31, 2022 2021 2020 Net (gain) loss $ ( 4,666 ) $ 4,201 $ ( 503 ) Prior service (credit) cost — ( 3,801 ) — Amortization of net gain (loss) ( 275 ) ( 81 ) ( 20 ) Amortization of prior service credit (cost) 320 — — Settlement (charge) credit ( 808 ) — ( 1,557 ) Total recognized in other comprehensive income (loss) $ ( 5,429 ) $ 319 $ ( 2,080 ) The Company defers all actuarial gains and losses resulting from variances between actual results and economic estimates or actuarial assumptions. The unrecognized actuarial gains and losses are recorded as unrealized pension actuarial gains (losses) in the Company's consolidated balance sheets as a component of Accumulated other comprehensive income (loss). 101 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) These unrecognized gains and losses are amortized as a component of net periodic benefit cost when the net gains and losses exceed 10 % of the greater of the market value of plan assets or the projected benefit obligation at the beginning of the year. The principal weighted average assumptions used to determine the benefit obligation at December 31, 2022 and 2021 were as follows: December 31, 2022 2021 Discount rate 4.74 % 2.24 % Rate of compensation increase 4.02 % 3.90 % The principal weighted average assumptions used to determine net period benefit cost for the years ended December 31, 2022, 2021 and 2020 were as follows: Year ended December 31, 2022 2021 2020 Discount rate 2.24 % 2.16 % 0.68 % Expected long-term return on plan assets 1.79 % 2.06 % 0.21 % Rate of compensation increase 3.90 % 2.41 % 2.88 % Assumed discount rates are used in the measurement of the projected and accumulated benefit obligations, as well as the service and interest cost components of net periodic pension cost. Estimated discount rates reflect the rates at which the pension benefits could be effectively settled. For each defined benefit plan, the Company chooses an estimated discount rate from a readily available market index rate, based upon high-quality fixed income investments, specific to the country or economic zone in which the benefits are paid and taking into account the duration of the plan and the number of participants. The Company's plans in both the Netherlands and Switzerland are funded through insurance contracts, which have historically provided guaranteed interest credit. The fair value of these contracts is derived from the insurance companies' assessment of the minimum value of the benefits provided by the insurance contracts. The methodology used to value these plan assets has always assumed that the value of the plan assets equals the guaranteed insured benefits. For consistency, the same discount rate used in the valuation of the benefit obligations is used to place a value on the plan assets. The assets are assumed to grow each year in line with the discount rate, and therefore, the expected return on the assets is set equal to the discount rate. The fair value of the plan assets in Switzerland was $ 2.3 million at December 31, 2022 and $ 1.7 million at December 31, 2021. Due to the plan amendment in 2020 that changed the benefit structure of the Netherlands plan, the Company no longer has any obligation related to this plan beyond the payment of insurance premiums. Therefore, there is no projected benefit obligation and no plan assets in the Netherlands as of December 31, 2022, 2021 or 2020. The Company classifies the fair value of its plan assets as Level 2 in the fair value hierarchy as discussed in Note 6. During the years ended December 31, 2022 and 2021, employees in Switzerland made contributions to their pension plan aggregating $ 39,000 and $ 23,000 , respectively. Employee contributions to this plan are based on a fixed 5 % of the relevant pensionable earnings. The Company funds this plan by contributing at least the minimum amount required by applicable regulations and as recommended by an independent actuary. During the years ended December 31, 2022, 2021 and 2020, the Company contributed $ 2.0 million, $ 1.0 million and $ 0.8 million, respectively, to all of its pension plans. The Company expects to contribute $ 1.5 million to all of its defined benefit plans in 2023. 102 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (23) INCOME TAXES The components of (loss) income from continuing operations before income taxes consisted of the following (in thousands): Year ended December 31, 2022 2021 2020 (Loss) income before income taxes: United States $ ( 84,784 ) $ ( 29,985 ) $ 123,817 Foreign ( 27,815 ) ( 178,158 ) ( 30,500 ) $ ( 112,599 ) $ ( 208,143 ) $ 93,317 The (benefit) provision for income taxes from continuing operations consisted of the following (in thousands): Year ended December 31, 2022 2021 2020 (Benefit) provision for income taxes: Current: Federal $ ( 3,582 ) $ 5,033 $ 677 State 2,573 1,836 1,310 Foreign 4,744 7,661 7,355 Total current 3,735 14,530 9,342 Deferred: Federal ( 10,333 ) ( 38,027 ) 1,957 State ( 4,045 ) 97 ( 15 ) Foreign ( 3,873 ) ( 7,558 ) ( 6,558 ) Total deferred ( 18,251 ) ( 45,488 ) ( 4,616 ) Total $ ( 14,516 ) $ ( 30,958 ) $ 4,726 A reconciliation of the Company's effective tax rate for continuing operations to the U.S. statutory federal rate is as follows: Year ended December 31, 2022 2021 2020 U.S. statutory income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 1.8 ( 0.7 ) 1.1 Foreign income taxes ( 1.4 ) 0.5 0.2 Stock-based compensation ( 2.4 ) ( 0.1 ) 1.0 Tax credits 2.2 1.6 ( 2.8 ) Uncertain tax positions 1.3 0.5 0.5 Valuation allowance ( 3.8 ) 2.5 ( 20.3 ) Non-deductible goodwill impairment — ( 11.7 ) — Other permanent adjustments ( 2.6 ) 0.9 1.8 Permanent foreign exchange adjustments ( 1.4 ) 0.5 1.8 Other, net ( 1.8 ) ( 0.1 ) 0.8 Effective income tax rate 12.9 % 14.9 % 5.1 % 103 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The following is a summary of the significant components of deferred income tax assets and liabilities (in thousands): December 31, 2022 2021 Assets: Net operating loss carryforwards $ 413,773 $ 437,669 Capital loss carryforwards 99,505 79,716 Tax credit carryforwards 28,902 23,450 Capitalized research and development expenses 40,668 18,106 Deferred revenue 3,510 3,472 Accrued expenses 9,068 7,505 Inventory 2,820 3,102 Stock-based compensation 1,709 1,689 Fixed assets 2,506 2,710 Lease liabilities 12,829 15,250 Mark-to-market investments — 1,714 Other temporary differences 1,324 3,839 616,614 598,222 Valuation allowance ( 488,550 ) ( 471,515 ) Total deferred tax assets 128,064 126,707 Liabilities: Intangible assets ( 55,037 ) ( 65,647 ) Operating lease right-of-use assets ( 8,519 ) ( 10,370 ) Interest rate swap ( 6,168 ) — Unremitted foreign income ( 8,441 ) ( 11,519 ) Total deferred tax liabilities ( 78,165 ) ( 87,536 ) Total net deferred tax assets $ 49,899 $ 39,171 The deferred tax assets and liabilities based on tax jurisdictions are presented in the Company's consolidated balance sheets as follows: December 31, 2022 2021 Deferred income taxes - net noncurrent assets $ 53,649 $ 47,287 Deferred income taxes - net noncurrent liabilities ( 3,750 ) ( 8,116 ) $ 49,899 $ 39,171 At December 31, 2022, the Company had U.S. federal net operating losses ("NOLs") of $ 152.5 million. The Company also had U.S. state NOLs of $ 18.8 million. In addition, the Company had $ 1.6 billion of Israel NOLs through the ECI Acquisition. The U.S. federal NOL carryforwards expire between 2023 and 2037. The U.S. state NOLs begin to expire in 2023, and the Company also has indefinite-lived state NOLs. The Israel NOLs do not expire. The Company also has available federal, state and foreign income tax credit carryforwards of $ 28.9 million. The federal foreign tax credit carryforwards expire between 2030 and 2032. The state tax credits, which are primarily research and development credits, begin to expire in 2023, while others can be carried forward until exhausted. The foreign income tax credits expire in various periods. The Company has provided for income taxes on the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2022, excluding Ireland and Israel. These subsidiaries, excluding Ireland and Israel, are cost-plus or limited risk distributors that are not anticipated to need to use excess funds locally. Accordingly, the Company is required to recognize and record deferred taxes in 2022. The deferred taxes, which are primarily future withholding taxes, are recorded on the entire outside basis differences related to the foreign subsidiaries, the largest of these differences being undistributed earnings. Undistributed profits of Ireland and Israel, as well as other outside basis differences in foreign subsidiaries, were indefinitely reinvested in foreign operations. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings and outside basis differences was not practicable. 104 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Under the provisions of the Internal Revenue Code, the net operating losses and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service. Net operating losses and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership of significant shareholders over a three-year period in excess of 50 %, as defined under sections 382 and 383 of the Internal Revenue Code, as well as similar state provisions. As a result of the Sonus and GENBAND merger in 2017, the Company has $ 112.3 million of U.S. federal net operating loss carryforwards remaining as of December 31, 2022 with an annual section 382 limitation of $ 9.7 million. The Company believes these NOLs are fully realizable. As a result of the ECI Acquisition, the Company has $ 41.9 million of U.S. federal NOLs remaining as of December 31, 2022 with an annual section 382 limitation of $ 1.1 million. The Company does not believe all of these NOLs are realizable and, therefore, have recorded a partial valuation allowance against these NOLs. The Company performed an analysis to determine if, based on all available evidence, it considered it more likely than not that some portion or all of the recorded deferred tax assets will not be realized in a future period. Accordingly, the Company has recorded a valuation allowance against its U.S. deferred tax assets of $ 25.5 million at December 31, 2022 and $ 30.5 million at December 31, 2021. The Company also maintains a valuation allowance against certain of its foreign deferred tax assets, predominantly Israel, amounting to approximately $ 463 million at December 31, 2022 and $ 441 million at December 31, 2021. The deferred tax assets recognized with no valuation allowance at December 31, 2022 and 2021 primarily relate to other foreign subsidiaries where recoverability is concluded to be more likely than not based on the Company's cost-plus compensation policy, as well as NOLs and tax credits in the U.S. that are expected to be utilized prior to expiration. A reconciliation of the Company's unrecognized tax benefits is as follows (in thousands): Year ended December 31, 2022 2021 2020 Unrecognized tax benefits at January 1 $ 17,813 $ 14,054 $ 2,932 Increases related to current year tax positions 156 4,017 485 Increases related to prior period tax positions 40 3,168 11,209 Decreases related to the lapse of the applicable statute of limitations ( 560 ) ( 3,087 ) ( 122 ) Decreases related to prior period tax positions $ ( 5,448 ) $ ( 339 ) $ ( 450 ) Unrecognized tax benefits at December 31 $ 12,001 $ 17,813 $ 14,054 The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. The Company had $ 14.9 million, $ 21.0 million and $ 15.3 million of unrecognized tax benefits, including penalties and interest, at December 31, 2022, 2021 and 2020, respectively. Of these amounts, $ 11.2 million, $ 12.7 million and $ 13.9 million represent the amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate for the years ended December 31, 2022, 2021 and 2020, respectively. The Company recorded income tax expense (benefit) for potential penalties and interest of $( 0.3 ) million, $ 1.9 million and $ 0.5 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company had $ 2.9 million and $ 3.2 million accrued in Other long-term liabilities for penalties and interest at December 31, 2022 and 2021, respectively. The Company believes that it is reasonably possible that $(0.6) million in tax positions related to its unrecognized tax benefits will be recognized within the next twelve months. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as various state and foreign jurisdictions. Generally, the tax years 2018 through 2021 remain open to examination by the major taxing jurisdictions in which the Company operates. The Company's federal and state NOLs generated prior to 2018 could be adjusted on examination even though the year in which the loss was generated is otherwise closed by the statute of limitations. As of December 31, 2022, the Company had ongoing income tax audits in certain foreign countries. Management believes that an adequate provision has been recorded for any adjustments that may result from tax examinations. Under the Tax Cuts and Jobs Act of 2017, research and development costs are no longer fully deductible and are required to be capitalized and amortized for U.S. tax purposes effective January 1, 2022. The mandatory capitalization requirement increases our deferred tax assets and cash tax liabilities. 105 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) On August 16, 2022, Congress passed the Inflation Reduction Act of 2022 which introduced the 15% corporate alternative minimum tax on book income and a 1% excise tax on stock repurchases which are both effective January 1, 2023. We do not currently anticipate these new laws to have a material effect on the Company's financial position in the near term. A change in tax laws is one of many factors that impact the Company’s effective tax rate. The U.S. and other jurisdictions where the Company does business have had an extended focus on issues related to the taxation of multinational corporations. As a result, the tax laws in the U.S. and other countries in which the Company does business could change, and any such changes could adversely impact our effective tax rate, financial condition and results of operations. The Organization for Economic Co-operation and Development ("OECD"), an international association of 38 countries including the United States, has proposed changes to numerous long-standing tax principles (e.g. Pillar 1 and Pillar 2). These proposals, if finalized and adopted by the associated countries, will likely increase tax uncertainty and may adversely affect our provision for income taxes. (24) RELATED PARTIES The Company recognized revenue in the years ended December 31, 2022, 2021 and 2020 of $ 6.6 million, $ 4.5 million and $ 3.3 million, respectively, from its largest shareholder. Additionally, as discussed in Note 2, certain related party shareholders participated in the Equity Offering on August 12, 2022. (25) COMMITMENTS AND CONTINGENCIES Litigation Settlement As previously disclosed, the Company was involved in six lawsuits (together, the "Lawsuits") with Metaswitch Networks Ltd., Metaswitch Networks Corp. and Metaswitch Inc. (collectively, "Metaswitch"). In five of the Lawsuits, the Company was the plaintiff, and in three of those five lawsuits, the Company was also a counterclaim defendant. In the sixth case, the Company was the defendant. On April 22, 2019, the Company and Metaswitch agreed to a binding mediator's proposal that resolved the six Lawsuits between the Company and Metaswitch (the "Lawsuits"). The Company and Metaswitch signed a Settlement and Cross-License Agreement on May 29, 2019 (the "Royalty Agreement"). Pursuant to the terms of the Royalty Agreement, Metaswitch agreed to pay the Company an aggregate amount of $ 63.0 million, which included cash payments of $ 37.5 million during the second quarter of 2019 and $ 25.5 million payable in three installments annually, beginning June 26, 2020, with such installment payments accruing interest at a rate of 4 % per year. As part of the Royalty Agreement, the Company and Metaswitch (i) have released the other from all claims and liabilities; (ii) have licensed each party's existing patent portfolio to the other party; and (iii) have requested the applicable courts to dismiss the Lawsuits. The $ 63.0 million gain from the settlement is included in Other (expense) income, net, in the Company's consolidated statement of operations for the year ended December 31, 2019, and had notes receivable for future payments of $ 25.5 million, comprised of $ 8.5 million in Other current assets and $ 17.0 million in Other assets in the consolidated balance sheet. The Company received $ 37.5 million of aggregate payments from Metaswitch in the second quarter of 2019 and $ 9.5 million, including $ 1.0 million of interest, in the second quarter of 2020. On July 6, 2020, the Company and Metaswitch signed a First Supplemental Agreement to the Settlement and Cross-License Agreement (the "Supplemental Agreement") under which Metaswitch could elect to repay the outstanding amounts under the Royalty Agreement early in exchange for a reduction of $ 0.25 million to the outstanding principal, from $ 17.0 million to $ 16.75 million, and the payment of no further interest by Metaswitch effective June 26, 2020. The Company recorded the reduction to the outstanding principal as a reduction to interest income. On July 14, 2020, Metaswitch paid the Company the remaining outstanding balance of $ 16.75 million. Contingencies Liabilities for Royalty Payments to the IIA Prior to the ECI Acquisition, ECI had received research and development grants from the IIA. The Company assumed 106 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) ECI's contract with the IIA, which requires the Company to pay royalties to the IIA on proceeds from the sale of products which the Israeli government has supported by way of research and development grants. The royalties for grants prior to 2017 were calculated at the rates of 1.3 % to 5.0 % of the aggregated proceeds from the sale of such products developed at certain of the Company's R&D centers, up to an amount not exceeding 100 % of such grants plus interest at LIBOR. Effective for grants approved in 2017 and thereafter, interest was calculated at the higher of LIBOR plus 1.5 % to 2.75 %. At December 31, 2022, the Company's maximum possible future royalties commitment, including $ 3.8 million of unpaid royalties accrued at December 31, 2022, was $ 28.4 million, including interest of $ 1.4 million, based on estimates of future product sales, grants received from the IIA and not yet repaid, and management's estimation of products still to be sold. Litigation Miller Complaint. On November 8, 2018, Ron Miller, a purported stockholder of the Company, filed a Class Action Complaint (the "Miller Complaint") in the United States District Court for the District of Massachusetts (the "Massachusetts District Court") against the Company and three of its former officers (collectively, the "Defendants"), claiming to represent a class of purchasers of Sonus common stock during the period from January 8, 2015 through March 24, 2015 and alleging violations of the federal securities laws. Similar to a previous complaint entitled Sousa et al. vs. Sonus Networks, Inc. et al., which was dismissed with prejudice by an order dated June 6, 2017, the Miller Complaint claims that the Defendants made misleading forward-looking statements concerning Sonus' expected fiscal first quarter of 2015 financial performance, which statements were also the subject of an August 7, 2018 Securities and Exchange Commission Cease and Desist Order, whose findings the Company neither admitted nor denied. The Miller plaintiffs are seeking monetary damages. After the Miller Complaint was filed, several parties filed and briefed motions seeking to be selected by the Massachusetts District Court to serve as a Lead Plaintiff in the action. On June 21, 2019, the Massachusetts District Court appointed a group as Lead Plaintiffs and the Lead Plaintiffs filed an amended complaint on July 19, 2019. On August 30, 2019, the Defendants filed a motion to dismiss the Miller Complaint and, on October 4, 2019, the Lead Plaintiffs filed an opposition to the motion to dismiss. There was an oral argument on the motion to dismiss on February 12, 2020, and on October 20, 2022 the court denied the motion to dismiss. Discovery and class certification determination are on-going. Charter Complaints. On September 19, 2022, Charter Communications Operating, LLC (“Charter”) filed two complaints against two of the Company’s subsidiaries (Sonus Networks, Inc. and Ribbon Communications Operating Company, Inc.) alleging breach of contract with respect to indemnification obligations purportedly owed to Charter in connection with Charter’s legal dispute with Sprint Communications Company L.P., which was settled by Charter in March 2022. One complaint was filed in the Supreme Court of the State of New York, New York County; the other was filed by Charter as well as co-Plaintiffs Charter Communications Holding Company, LLC and Bright House Networks, LLC, in the Superior Court of the State of Delaware in and for New Castle County. In both suits, Charter is seeking monetary damages. The Company filed its answer in the New York Case on December 7, 2022 and in the Delaware case on January 9, 2023. Discovery is on-going and the court in the Delaware case has set a preliminary trial date of January 2025. In addition, the Company is often a party to disputes and legal proceedings that it considers routine and incidental to its business. Management does not expect the results of any of these actions to have a material effect on the Company's business or consolidated financial statements. (26) SUBSEQUENT EVENTS 2023 Restructuring On February 22, 2023 , the Company's Board of Directors approved a strategic restructuring program (the "2023 Restructuring Plan") to streamline the Company's operations in order to support the Company's investment in critical growth areas. The 2023 Restructuring Plan is expected to include, among other things, charges related to a consolidation of facilities and a workforce reduction. Any potential positions eliminated in countries outside the United States will be subject to local law and consultation requirements. The Company currently expects to record approximately $ 10 million of restructuring and related expense associated with the 2023 Restructuring Plan, almost entirely related to employee severance arrangements. The Company expects the 2023 Restructuring Plan will be substantially completed in 2023 . 107 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Issuance of Preferred Stock and Warrants, Sale of Interest Rate Swap, and Amendment of the 2020 Credit Facility On March 28 , 2023, the Company issued 55,000 shares of newly designated Series A Preferred Stock (the "Preferred Stock") to investors in a private placement offering at a price of $ 970 per share, along with 4.9 million warrants to purchase shares of the Company's common stock, par value $ 0.0001 per share (the "Private Placement"). The proceeds from the Private Placement were approximately $ 53.4 million, including approximately $ 10 million from existing related party shareholders. On March 24 , 2023, the Company sold $ 170 million of its $ 340 million notional amount interest rate swap back to its counterparty for $ 9.4 million, reducing the notional amount to $ 170 million. On March 27 , 2023, the Company sold the remaining $ 170 million of its interest rate swap back to its counterparty for $ 9.8 million. On March 24, 2023, the Company also entered into an amendment to its 2020 Credit Facility (the “Sixth Amendment”) effective March 30, 2023. The Sixth Amendment, among other things, increased the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility), with the first, second and third quarters of 2023 increasing to 4.50 :1.00. In the fourth quarter of 2023 and the first quarter of 2024, the Maximum Consolidated Net Leverage Ratio allowed then declines to 4.25 :1.00 and 4.00 :1.00, respectively. In all subsequent quarters, the Maximum Consolidated Senior Net Leverage Ratio will be fixed at 3.00 :1.00 and the Maximum Consolidated Net Leverage Ratio will be fixed at 4.00 :1.00 . Also, the Sixth Amendment reduced the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the 2020 Credit Facility) to 1.10 :1.00 through the first quarter of 2024 and in all subsequent quarters the ratio will be fixed at 1.25 :1.00. The Sixth Amendment reduced the maximum borrowings allowed under the 2020 Revolving Credit Facility from $ 100 million to $ 75 million. In addition, the Sixth Amendment replaced LIBOR with the Secured Overnight Financing Rate, or SOFR, as the alternative rate that may be used by the Company for calculating interest owed under the 2020 Credit Facility. In conjunction with the Sixth Amendment, the Company made a $ 75 million prepayment that was applied to the final payment due on the maturity date. The prepayment was almost entirely funded with the net proceeds from the Private Placement and the sales of our interest rate swap. (27) QUARTERLY RESULTS (UNAUDITED) The following tables present the Company's quarterly operating results for the years ended December 31, 2022 and 2021. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited consolidated quarterly results when read in conjunction with the Company's audited consolidated financial statements and related notes. First Quarter Second Quarter Third Quarter Fourth Quarter (In thousands, except per share data) Year ended December 31, 2022 Revenue $ 173,198 $ 205,796 $ 207,127 $ 233,639 Cost of revenue 95,143 101,246 102,809 119,626 Gross profit $ 78,055 $ 104,550 $ 104,318 $ 114,013 (Loss) income from operations $ ( 39,054 ) $ ( 7,239 ) $ ( 3,296 ) $ 1,265 Net (loss) income $ ( 69,975 ) $ ( 30,180 ) $ ( 18,416 ) $ 20,488 (Loss) earnings per share (2): Basic $ ( 0.47 ) $ ( 0.20 ) $ ( 0.12 ) $ 0.12 Diluted $ ( 0.47 ) $ ( 0.20 ) $ ( 0.12 ) $ 0.12 Shares used in computing (loss) earnings per share: Basic 149,167 150,190 158,921 168,163 Diluted 149,167 150,190 158,921 172,213 108 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) First Quarter Second Quarter Third Quarter Fourth Quarter (In thousands, except per share data) Year ended December 31, 2021 Revenue $ 192,772 $ 211,210 $ 210,398 $ 230,577 Cost of revenue (1) 92,286 92,483 99,744 115,784 Gross profit (1) $ 100,486 $ 118,727 $ 110,654 $ 114,793 Loss (income) from operations $ ( 12,604 ) $ 12,952 $ 1,992 $ ( 120,136 ) Net (loss) income $ ( 44,687 ) $ 23,241 $ ( 59,431 ) $ ( 96,308 ) Loss (earnings) per share (2): Basic $ ( 0.31 ) $ 0.16 $ ( 0.40 ) $ ( 0.65 ) Diluted $ ( 0.31 ) $ 0.15 $ ( 0.40 ) $ ( 0.65 ) Shares used in computing loss (earnings) per share: Basic 145,936 147,467 148,184 148,675 Diluted 145,936 154,160 148,184 148,675 __________________________________ (1) Reflects the increases to Cost of revenue arising from the reclassification of amortization of acquired technology from amortization of acquired intangible assets within operating expenses in 2021 of $ 10.1 million in the first quarter, $ 9.7 million in the second quarter and $ 9.7 million in the third quarter. See Note 2 for a discussion of the reclassification. (2) (Loss) earnings per share is calculated independently for each of the quarters presented; accordingly, the sum of the quarterly (loss) earnings per share amounts may not equal the total calculated for the year. 109 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.