Ribbon Communications Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the financial condition and results of operations of Ribbon Communications Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the U.S. Securities and Exchange Commission on March 31, 2023 . Overview We are a leading global provider of communications technology to service providers and enterprises. We provide a broad range of software and high-performance hardware products, solutions and services that enable the secure delivery of data and voice communications for residential consumers and for small, medium and large enterprises and industry verticals such as finance, education, government, utilities and transportation. Our 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. Headquartered in Plano, Texas, we have a global presence with research and development and/or sales and support locations in over thirty countries around the world. Key Trends and Economic Factors Affecting Ribbon Supplier Disruptions . Ongoing uncertainty in the global economy, including as a result of inflation and the war in Ukraine, continue to disrupt various manufacturing, commodity and financial markets and have increased volatility, and continue to impede global supply chains. Our ability to deliver our solutions as agreed upon with our customers depends in part on the ability of our global contract manufacturers, vendors, licensors and other business partners to deliver products or perform services we have procured from them. Continued uncertain global economic conditions, may cause our customers to restrict spending or delay purchases for an indeterminate period of time and consequently cause our revenues to decline. Further, such factors may negatively impact our operating costs resulting in a reduction in net income. The degree to which the ongoing COVID-19 pandemic, the ongoing military conflict in Ukraine and the high inflationary and rising interest rate environment impacts our future business, financial position and results of operations will depend on developments beyond our control, including the duration of the global economic downturn that has resulted from these factors. The Ongoing Military Conflict in Ukraine. The uncertainty resulting from the military conflict in Ukraine and the threat for expansion of the conflict has resulted in some of our customers delaying purchases from us. Further, the U.S. and other European countries have imposed sanctions against Russia in connection with the conflict. These sanctions currently prohibit our ability to sell certain products and services. The sanctions continue to evolve and further changes in the current sanctions could further limit our ability to sell products and services to customers in Russia and, our ability to collect on outstanding accounts receivable from such customers. If we are further limited in our ability to sell products and services to Russia and other countries for an extended period, it could have a material impact on our financial results. Inflation and Interest Rates . We continue to see near-term impacts on our business due to inflation, including ongoing global price pressures driving up energy prices, component costs, freight premiums, and other operating costs above normal rates. Although headline inflation in the United States and Europe appears to be nearing a peak, as gasoline and natural gas prices recede from the latest spike, core inflation (excluding food and energy prices) remains elevated and is a source of continued cost pressure on businesses and households. Interest rates have increased significantly as central banks in developed countries attempt to subdue inflation while government deficits and debt remain at high levels in many global markets. Accordingly, the eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital for our business. Presentation Unless otherwise noted, all financial amounts, excluding tabular information, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are rounded to the nearest million dollar amount, and all percentages, excluding tabular information, are rounded to the nearest percentage point. 32 Private Placement On March 28 , 2023, we 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 (the "Warrants") to purchase shares of our common stock, par value $0.0001 per share (the "Private Placement"), at an exercise price of $3.77 per share. The proceeds from the Private Placement were approximately $53.4 million, including approximately $10 million from existing related party stockholders. For additional detail on the Private Placement, see Note 11 - Preferred Stock and Warrants to our condensed consolidated financial statements. Operating Segments Our Chief Operating Decision Maker assesses our performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge operating segment ("Cloud and Edge") and the IP Optical Networks operating segment ("IP Optical Networks"). For additional details regarding our operating segments, see Note 13 - Operating Segment Information to our condensed consolidated financial statements. Financial Overview Financial Results We reported losses from operations of $35.2 million and $39.1 million for the three months ended March 31, 2023 and 2022, respectively. Our revenue was $186.2 million and $173.2 million in the three months ended March 31, 2023 and 2022, respectively. Our gross profit and gross margin were $81.4 million and 43.7%, respectively, in the three months ended March 31, 2023, and $78.1 million and 45.1%, respectively, in the three months ended March 31, 2022. The higher revenue in the three months of 2023 compared to 2022 is due to $8.3 million of higher IP Optical sales and $4.7 million of higher Cloud and Edge product sales. Revenue from our Cloud and Edge segment was $114.5 million and $109.8 million in the three months ended March 31, 2023 and 2022, respectively. Gross profit and gross margin for this segment were $66.1 million and 57.7% , respectively, in the three months ended March 31, 2023, and $62.7 million and 57.1%, respectively, in the three months ended March 31, 2022. Revenue from our IP Optical Networks segment was $71.7 million and $63.4 million in the three months ended March 31, 2023 and 2022, respectively. Gross profit and gross margin for this segment were $15.3 million and 21.4% , respectively, in the three months ended March 31, 2023, and $15.3 million and 24.2%, respectively, in the three months ended March 31, 2022. Our operating expenses were $116.6 million and $117.1 million in the three months ended March 31, 2023 and 2022, respectively. The slightly decreased operating expenses are primarily related to lower sales and marketing and R&D expenses, partially offset by higher restructuring and related expense and higher general and administrative expense. Operating expenses for the three months ended March 31, 2023 included $7.3 million of amortization of acquired intangible assets, $1.6 million of acquisition-, disposal- and integration-related expense, and $6.9 million of restructuring and related expense. Operating expenses for the three months ended March 31, 2022 included $7.3 million of amortization of acquired intangible assets, $1.8 million of acquisition-, disposal- and integration-related expense, and $4.8 million of restructuring and related expense. We recorded stock-based compensation expense of $5.8 million and $4.3 million in the three months ended March 31, 2023 and 2022, respectively. These amounts are included as components of both Cost of revenue and Operating expenses in our condensed consolidated statements of operations. See "Results of Operations" in this MD&A for a discussion of the changes in our revenue and expenses for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Restructuring and Cost Reduction Initiatives 2023 Restructuring Plan . In February 2023, our 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 are subject to local law and consultation requirements. We recorded restructuring and related expense of $5.7 million in the three months ended March 31, 2023 in connection 33 with the 2023 Restructuring Plan. The amount for the three months ended March 31, 2023 was comprised entirely of severance and related costs. We anticipate that we will record future expense for severance of approximately $4 million in connection with the 2023 Restructuring Plan. 2022 Restructuring Plan . In February 2022, our Board of Directors approved a strategic restructuring program (the "2022 Restructuring Plan") to streamline the Company's operations in order to support the Company's investment in critical growth areas. The 2022 Restructuring Plan includes, 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. We recorded restructuring and related expense of $1.2 million and $4.2 million in the three months ended March 31, 2023 and 2022, respectively, in connection with the 2022 Restructuring Plan. The amount for the three months ended March 31, 2023 was comprised of $1.0 million for variable and other facilities-related costs and $0.2 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease. The amount for the three months ended March 31, 2022 was comprised of $4.2 million for severance and related costs for approximately 50 employees. We anticipate that we will record future expense for severance and facility consolidations aggregating approximately $7 million in connection with the 2022 Restructuring Plan. Accelerated Rent Amortization. Accelerated rent amortization is recognized from the date that we commence the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date. We recorded $0.2 million and for accelerated rent amortization in the three months ended March 31, 2023. We did not record accelerated rent amortization in the three months ended March 31, 2022. We continue to evaluate our properties included in our restructuring plans for accelerated amortization and/or right-of-use asset impairment. We may incur additional future expense if we are unable to sublease other locations included in these initiatives. Critical Accounting Policies and Estimates This MD&A is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment: revenue recognition, the valuation of inventory, debentures and warrants received as sale consideration, warranty accruals, loss contingencies and reserves, stock-based compensation, our Preferred Stock and Warrants, business combinations, goodwill and intangible assets, accounting for leases, and accounting for income taxes. If actual results differ significantly from management's estimates and projections, there could be a material effect on our condensed consolidated financial statements. There was one significant change to our critical accounting policies during the three months ended March 31, 2023 with the addition of a policy for accounting for our Preferred Stock and Warrants that were issued in the Private Placement on March 28, 2023 as follows: Preferred Stock and Warrants We account for the Preferred Stock and Warrants as liability-classified instruments based on an assessment of their specific terms in accordance with ASC Topic 480, Distinguishing Liabilities from Equity . The fair value option was elected for the Preferred Stock, as we consider fair value to best reflect the expected future economic value. These liabilities will be remeasured to fair value at each reporting date using the same valuation methodology as originally applied upon issuance. For further discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2022. 34 Results of Operations Three months ended March 31, 2023 and 2022 Revenue. Revenue for the three months ended March 31, 2023 and 2022 was as follows (in thousands, except percentages): Three months ended Increase from prior year March 31, 2023 March 31, 2022 $ % Product $ 93,318 $ 81,990 $ 11,328 13.8 % Service 92,841 91,208 1,633 1.8 % Total revenue $ 186,159 $ 173,198 $ 12,961 7.5 % Segment revenue for the three months ended March 31, 2023 and 2022 was as follows (in thousands): Three months ended March 31, 2023 Three months ended March 31, 2022 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Product $ 42,839 $ 50,479 $ 93,318 $ 37,635 $ 44,355 $ 81,990 Service 71,641 21,200 92,841 72,171 19,037 91,208 Total revenue $ 114,480 $ 71,679 $ 186,159 $ 109,806 $ 63,392 $ 173,198 The increase in our product revenue in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was the result of $6 million of higher sales of our IP Optical Networks products and $5 million of higher sales of our Cloud and Edge products . The increase in revenue from the sale of IP Optical Networks products was attributable to sales improving across almost all regions and multiple new customer wins. The increase in revenue from the sale of Cloud and Edge products was primarily attributable to higher sales to enterprise customers of our SBC products. Revenue from sales to enterprise customers was 29% and 27% of our product revenue in the three months ended March 31, 2023 and 2022, respectively. These sales were made through both our direct sales team and indirect sales channel partners. Cloud and Edge sales to Enterprise customers in the first three months of 2023 increased approximately 62% compared with the same period of 2022. Revenue from indirect sales through our channel partner program was 38% and 29% of our product revenue in the three months ended March 31, 2023 and 2022, respectively. The increase in channel sales reflects stronger deployments through systems integrators as well as sell-thru our Service Provider channel partners. The timing of the completion of customer projects and revenue recognition criteria satisfaction may cause our product revenue to fluctuate from one period to the next. Service revenue is primarily comprised of hardware and software maintenance and support (“maintenance revenue”) and network design, installation and other professional services (“professional services revenue”). Service revenue for the three months ended March 31, 2023 and 2022 was comprised of the following (in thousands, except percentages): Three months ended Increase/(Decrease) from prior year March 31, 2023 March 31, 2022 $ % Maintenance $ 70,588 $ 68,605 $ 1,983 2.9 % Professional services 22,253 22,603 (350) (1.5) % $ 92,841 $ 91,208 $ 1,633 1.8 % 35 Segment service revenue for the three months ended March 31, 2023 and 2022 was comprised of the following (in thousands): Three months ended March 31, 2023 Three months ended March 31, 2022 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Maintenance $ 54,810 $ 15,778 $ 70,588 $ 55,030 $ 13,575 $ 68,605 Professional services 16,831 5,422 22,253 17,141 5,462 22,603 Total service revenue $ 71,641 $ 21,200 $ 92,841 $ 72,171 $ 19,037 $ 91,208 The 2.9% increase in maintenance revenue in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to higher IP Optical Network segment maintenance fees from the growing installed base of product. Professional services revenue was relatively flat in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 for both of our segments. The following customers contributed 10% or more of our revenue in the three month periods ended March 31, 2023 and 2022: Three months ended Customer March 31, 2023 March 31, 2022 Verizon Communications Inc. 11% 13% Revenue from customers domiciled outside the United States was approximately 56% in both the three months ended March 31, 2023 and 2022. Due to the timing of project completions, we expect that the domestic and international components as a percentage of revenue may fluctuate from quarter to quarter and year to year. Our deferred product revenue was $26 million and $29 million at March 31, 2023 and December 31, 2022, respectively. Our deferred service revenue was $114 million and $104 million at March 31, 2023 and December 31, 2022, respectively. Our deferred revenue balance may fluctuate because of the timing of revenue recognition, customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple element arrangements. We expect that our total revenue will increase modestly for 2023 compared to 2022 primarily as our strategy to grow our IP Optical market share gains momentum. The primary source of revenue growth in 2023 is anticipated to come from the addition of several new products in our IP Routing portfolio. Cost of Revenue/Gross Margin. Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased materials and services, royalties, amortization of acquired technology, inventory valuation adjustments, warranty costs, and manufacturing and services personnel and related costs. Our cost of revenue, gross profit and gross margin for the three months ended March 31, 2023 and 2022 were as follows (in thousands, except percentages): Three months ended Increase (decrease) from prior year March 31, 2023 March 31, 2022 $ % Cost of revenue: Product $ 62,063 $ 51,209 10,854 21.2 % Service 35,305 35,667 (362) (1.0) % Amortization of acquired technology 7,389 8,267 (878) (10.6) % Total cost of revenue $ 104,757 $ 95,143 9,614 10.1 % Gross profit $ 81,402 $ 78,055 $ 3,347 4.3 % Gross margin 43.7 % 45.1 % 36 Our segment cost of revenue, gross profit and gross margin for the three months ended March 31, 2023 and 2022 were as follows (in thousands, except percentages): Three months ended March 31, 2023 Three months ended March 31, 2022 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Product $ 20,920 $ 41,143 $ 62,063 $ 16,999 $ 34,210 $ 51,209 Service 23,954 11,351 35,305 24,899 10,768 35,667 Amortization of acquired technology 3,529 3,860 7,389 5,176 3,091 8,267 Total cost of revenue $ 48,403 $ 56,354 $ 104,757 $ 47,074 $ 48,069 $ 95,143 Gross profit $ 66,077 $ 15,325 $ 81,402 $ 62,732 $ 15,323 $ 78,055 Gross margin 57.7 % 21.4 % 43.7 % 57.1 % 24.2 % 45.1 % Our gross margin decreased by one percentage point in the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to lower margins in our IP Optical Networks segment, partially offset by slightly higher margins in our Cloud and Edge segment. The decrease in gross margin of approximately three percentage points in our IP Optical Networks segment was primarily attributable to the impact of ramping up several new products, customer mix, and higher supply chain costs. We believe that our IP Optical Networks segment gross margin will improve over the remaining quarters of 2023. Our overall gross margins may decrease in 2023 compared to 2022 as a result of higher expected sales from IP Optical Networks, which has lower margins due to the higher hardware content in its products and higher production costs. Research and Development. Research and development ("R&D") expenses consist primarily of salaries and related personnel expenses and prototype costs for the design, development, testing, and enhancement of our products. R&D expenses for the three months ended March 31, 2023 and 2022 were as follows (in thousands, except percentages): Decrease from prior year March 31, 2023 March 31, 2022 $ % Three months ended $ 51,304 $ 52,690 $ (1,386) (2.6) % The slight decrease in our R&D expenses in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was attributable to approximately $2 million of lower expenses in our Cloud and Edge segment, partially offset by approximately $1 million of higher expenses in our IP Optical Networks segment. The increased investment in IP Optical Networks R&D is focused on significantly expanding our portfolio of IP Routing solutions, adding additional features to our Optical Transport portfolio, and investment in a next generation SDN management and orchestration platform. Some aspects of our R&D efforts require significant short-term expenditures, the timing of which may cause significant variability in our expenses. We believe that rapid technological innovation is critical to our long-term success, and we are tailoring our investments to meet the requirements of our customers and market. We believe that our R&D expenses in 2023 will decrease compared to 2022, with reduced investment in both segments in areas such as element management and sustaining engineering, as well as cost savings from the 2023 and 2022 Restructuring Plans. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and related personnel costs, commissions, travel and entertainment expenses, promotions, customer trial and evaluations inventory and other marketing and sales support expenses. Sales and marketing expenses for the three months ended March 31, 2023 and 2022 were as follows (in thousands, except percentages): 37 Decrease from prior year March 31, 2023 March 31, 2022 $ % Three months ended $ 35,399 $ 37,619 $ (2,220) (5.9) % The decrease in sales and marketing expenses in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily a result of a global sales organization re-alignment that reduced management layers as well as lower investment in under-performing regions, resulting in a reduction of expenses of approximately $1 million in each of our two segments. We believe that our sales and marketing expenses will be lower in 2023 compared to 2022 as we benefit from the re-aligned global sales structure and continue to implement additional efficiencies. General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related personnel costs for executive and administrative personnel, and audit, legal and other professional fees. General and administrative expenses for the three months ended March 31, 2023 and 2022 were as follows (in thousands, except percentages): Increase from prior year March 31, 2023 March 31, 2022 $ % Three months ended $ 14,045 $ 12,862 $ 1,183 9.2 % The increase in general and administrative expenses in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily attributable to higher stock-based compensation and professional fees, with equally higher costs in each of our two segments. We believe that our general and administrative expenses in 2023 will increase slightly compared to our 2022 levels, primarily due to higher employee costs and as a result of inflation. Amortization of Acquired Intangible Assets included in Operating expenses. Amortization of acquired intangible assets included in Operating expenses ("Opex Amortization") for the three months ended March 31, 2023 and 2022 was as follows (in thousands, except percentages): Decrease from prior year March 31, 2023 March 31, 2022 $ % Three months ended $ 7,264 $ 7,275 $ (11) (0.2) % Opex Amortization was flat for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Opex Amortization is not recorded on a straight-line basis; rather, it is recorded in relation to expected future cash flows. Accordingly, such expense may vary from one period to the next. Acquisition-, Disposal- and Integration-Related. Acquisition-, disposal- and integration-related expenses include those expenses related to acquisitions that we would otherwise not have incurred. Acquisition- and disposal-related expenses include professional and services fees, such as legal, audit, consulting, paying agent and other fees. Integration-related expenses represent incremental costs related to combining our systems and processes with those of acquired businesses, such as third-party consulting and other third-party services. Our acquisition-, disposal- and integration-related expenses were $1.6 million and $1.8 million in the three months ended March 31, 2023 and 2022, respectively. The amounts for the three months ended March 31, 2023 and 2022 primarily related to integration-related expenses. Restructuring and Related. We have been committed to streamlining our operations and reducing operating costs by closing and consolidating certain facilities and reducing our worldwide workforce. Please see the additional discussion of our restructuring initiatives in the "Restructuring and Cost Reduction Initiatives" section of the Overview of this MD&A. 38 We recorded restructuring and related expense of $6.9 million and $4.8 million in the three months ended March 31, 2023 and 2022, respectively. Although we have eliminated positions as part of our restructuring initiatives, we continue to hire in certain areas that we believe are important to our future growth. Interest Expense, Net. Interest income and interest expense for the three months ended March 31, 2023 and 2022 were as follows (in thousands, except percentages): Three months ended Increase from prior year March 31, 2023 March 31, 2022 $ % Interest income $ 59 $ 39 $ 20 51.3 % Interest expense (6,481) (4,040) 2,441 60.4 % Interest expense, net $ (6,422) $ (4,001) $ 2,421 60.5 % Interest expense in the three months ended March 31, 2023 and 2022 represents interest and amortization of debt issuance costs in connection with the 2020 Credit Facility (as defined below). The increase in Interest expense in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 of $2.4 million was primarily due to $1.4 million of higher margin costs on our 2020 Term Loan, the write off of $0.5 million of debt issuance costs in conjunction with the Sixth Amendment to the 2020 Credit Facility that was effective March 30, 2023, and $0.4 of higher costs in 2023 for factoring certain accounts receivable. Our interest expense for the three months ended March 31, 2023 and 2022 benefited from our interest rate swap, which was sold in March 2023. See Note 10 to our condensed consolidated financial statements. Other (Expense) Income, Net . We recorded other income, net of $4.8 million and other expense, net of $28.8 million in the three months ended March 31, 2023 and 2022, respectively. Other income in the three months ended March 31, 2023 was primarily attributable to the gain of $7.3 million recognized from Accumulated other comprehensive income in connection with the sale of our interest rate swap, partially offset by $3.5 million of costs incurred in the Private Placement. The primary component of the loss in the three months ended March 31, 2022 was the $27.0 million decline in the fair value of the AVCT Investment which was cancelled in a settlement agreement in August 2022. Income Taxes. We recorded an income tax provision of $1.5 million and an income tax benefit of $1.9 million in the three months ended March 31, 2023 and 2022, respectively. These amounts reflect our estimates of the effective rates expected to be applicable for the respective full fiscal years, adjusted for any discrete events, which are recorded in the period in which they occur. These estimates are reevaluated each quarter based on our estimated tax rate for the full year. The estimated effective tax rate includes the impact of valuation allowances in various jurisdictions. We intend to continue to maintain a valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the respective allowances. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial position, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 39 Liquidity and Capital Resources Our condensed consolidated statements of cash flows are summarized as follows (in thousands): Three months ended March 31, 2023 March 31, 2022 Change Net loss $ (38,305) $ (69,975) $ 31,670 Adjustments to reconcile net loss to cash flows provided by operating activities 9,542 45,568 (36,026) Changes in operating assets and liabilities 39,896 39,437 459 Net cash provided by operating activities $ 11,133 $ 15,030 $ (3,897) Net cash used in investing activities $ (2,413) $ (3,471) $ 1,058 Net cash used in financing activities $ (30,119) $ (22,395) $ (7,724) We had cash and restricted cash aggregating $46 million and $67 million at March 31, 2023 and December 31, 2022, respectively. We had cash held by our non-U.S. subsidiaries aggregating $35 million and $15 million at March 31, 2023 and December 31, 2022, respectively. If we elect to repatriate all of the funds held by our non-U.S. subsidiaries as of March 31, 2023, we do not believe that the amounts of potential withholding taxes that would arise from the repatriation would have a material effect on our liquidity. We currently maintain the Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), which we entered into on March 3, 2020, by and among us, as a guarantor, Ribbon Communications Operating Company, Inc., as the borrower ("Borrower"), Citizens Bank, N.A. ("Citizens"), Santander Bank, N.A., and others as lenders, ("Lenders"). For additional details regarding the terms of the 2020 Credit Facility, see Note 9 to our condensed consolidated financial statements. On March 10, 2022, we 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 we made a $15.0 million prepayment that was applied to the final payment due on the maturity date. On June 30, 2022, we 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 our Consolidated Net Leverage Ratio for any quarter is greater than 4.50:1.00. Specifically, loans incurred bear interest, at our 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. The Fifth Amendment also allows us to incur junior secured or unsecured debt in an amount no less than $50 million, subject to certain conditions, including the requirement that 50% of the aggregate amount of such incurred debt (net of certain costs, fees and other amounts) must be applied to prepay the 2020 Credit Facility, and compliance with certain leverage ratio-based covenant exceptions. In connection with the Fifth Amendment, we made a $10.0 million voluntary prepayment that was applied to the final payment due on the maturity date. Subsequent to the Fifth Amendment, we are required to make quarterly principal payments on the 2020 Term Loan aggregating approximately $5.0 million per quarter through March 31, 2024 and $10.0 million in each of the three quarters thereafter, with the remaining and final payment due on the maturity date in March 2025. On March 24, 2023, we entered into the Sixth Amendment to the 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 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 and the sublimit available for 40 letters of credit was reduced from $30 million to $20 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 with the margin now fixed at 4.5%. In conjunction with the Sixth Amendment, we made a $75 million prepayment that was applied to the final payment due upon maturity in March 2025 of approximately $200.3 million. The $75 million prepayment was almost entirely funded with the net proceeds from the Private Placement and the sales of our interest rate swap. Debt issuance costs associated with the Sixth Amendment totaled $1.7 million and will be amortized on a straight line basis over the remaining life of the 2020 Credit Facility to Interest expense, net. At March 31, 2023, we had an outstanding balance under the 2020 Term Loan of $250.4 million at an average interest rate of 5.7% and $3.0 million of letters of credit outstanding with an interest rate of 4.5%. The Company's interest rates under our 2020 Term Loan for the three months ended March 31, 2023 and 2022 benefited from a hedge instrument that was in place, specifically a fixed rate swap, which was sold in March 2023 (see Note 10). We were in compliance with all covenants of the 2020 Credit Facility at both March 31, 2023 and December 31, 2022. We are 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, we entered into a derivative financial instrument. Management's objective has been to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates. Our policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. We do not hold or issue derivative financial instruments for trading or speculative purposes. As a result of exposure to interest rate movements, during March 2020, we entered into an interest rate swap arrangement, which effectively converted our $400 million term loan with its variable interest rate based upon one-month LIBOR to an aggregate fixed rate of 0.904%, plus a leverage-based margin as defined in the 2020 Credit Facility. On July 22, 2022, we sold $30 million of the notional amount of our interest rate swap back to our counterparty for $1.5 million, reducing the notional amount of this swap to $370 million. On August 16, 2022, we sold another $30 million of the notional amount of our interest rate swap back to our counterparty for $1.6 million, reducing the notional amount to $340 million , which approximated the term loan debt then 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 $0.3 million for the three months ended March 31, 2023. On March 24 , 2023, the Company received $9.4 million, consisting of $0.4 million of interest and $9.0 million for the sale of $170 million of its $340 million notional amount interest rate swap back to its counterparty, reducing the notional amount to $170 million. On March 27 , 2023, the Company received $9.8 million, consisting of $0.4 million of interest and $9.4 million for the sale of the remaining $170 million of its interest rate swap back to its counterparty. The portion of the gain in accumulated other comprehensive (loss) income related to the our paid term loan debt on the date of the final sale of our swap totaled $7.3 million and was released into earnings immediately as Other income (expense), net. The portion of the gain in accumulated other comprehensive (loss) income related to our remaining term loan debt balance totaled $12.0 million and will be released into earnings on a straight line basis over the remaining term of the 2020 Credit Facility as a decrease to interest expense beginning in the second quarter of 2023. Our objectives in using interest rate derivatives have been to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we have used an interest rate swap as part of our 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 making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income in the condensed consolidated balance sheet and are subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the three months ended March 31, 2023 and 2022, such a derivative was used to hedge the variable cash flows associated with the 2020 Credit Facility. Any ineffective portion of the change in fair value of the derivative is recognized directly in earnings. During the three months ended March 31, 2023, we recorded $7.3 million of Other income (expense), net due to the sale of our swap. There was no hedge ineffectiveness during the three months ended March 31, 2022. We use letters of credit, performance and bid bonds in the course of our business. At March 31, 2023, we had $7.2 million letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees"), comprised of the $3.0 million of letters of credit under the 2020 Credit Facility described above (the "Letters of Credit") and $4.2 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under various uncommitted facilities. At December 31, 2022, we had $8.3 million of Guarantees, comprised of $3.3 million of Letters of Credit and $5.0 million of 41 Other Guarantees. At both March 31, 2023 and December 31, 2022, the Company had cash collateral of $0.2 million supporting the Guarantees, which is reported as Restricted cash in our condensed consolidated balance sheets. Cash Flows from Operating Activities Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash flows from operating activities to be affected by increases and decreases in sales volumes and timing of collections, and by purchases and shipments of inventory. Our primary uses of cash for operating activities have been for personnel costs and investment in our research and development and in our sales and marketing, and general and administrative departments. Cash provided by operating activities in the three months ended March 31, 2023 was $11.1 million, primarily resulting from lower accounts receivable and other operating assets, higher accrued expenses and other long term liabilities, higher deferred revenue, and certain non-cash expenses such as amortization of intangible assets, and stock-based compensation. These amounts were partially offset by our net loss and lower accounts payable, higher inventory and certain non-cash items such as deferred income taxes and the gain on sale of our interest rate swap. Our operating activities provided $15.0 million in the three months ended March 31, 2022, primarily resulting from lower accounts receivable and certain non-cash expenses, such as the decrease in the fair value of the AVCT Investment, amortization of intangible assets, stock-based compensation, depreciation and amortization of property and equipment, and foreign currency losses. These amounts were partially offset by our net loss, higher inventory, lower accrued expenses and other long-term liabilities, and a non-cash adjustment for deferred income taxes. Cash Flows from Investing Activities Our investing activities used $2.4 million and $3.5 million of cash in the three months ended March 31, 2023 and 2022, respectively, to purchase property and equipment. Cash Flows from Financing Activities Our financing activities used $30.1 million of cash in the three months ended March 31, 2023, primarily due to $80.0 million of principal payments, including a $75.0 million prepayment in connection with the Sixth Amendment to the 2020 Credit Facility, $1.6 million of debt issuance costs also paid in connection with the Sixth Amendment, and $1.9 million for the payment of tax withholding obligations related to the net share settlements of restricted stock awards upon vesting. In addition, we received $53.4 million of proceeds from the issuance of the Preferred Stock and Warrants in the Private Placement. Our financing activities used $22.4 million of cash in the three months ended March 31, 2022, primarily due to $20.0 million of principal payments on the 2020 Credit Facility, including the $15.0 million incremental principal payment in connection with the Fourth Amendment, and $1.8 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting. Payments of debt issuance costs and principal payments of finance leases totaled less than $1 million. Under the 2020 Credit Facility, we are required to maintain compliance with certain financial covenants. As of March 31, 2023, we were in compliance with our financial covenants. Based on our current expectations, we believe our current cash and available borrowings under the 2020 Credit Facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least twelve months. The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations at March 31, 2023, primarily comprised of our debt principal and interest obligations as described above, and our operating lease and purchase obligations. Our operating lease obligations totaled $69.7 million at March 31, 2023, with payments aggregating $13.8 million in the remainder of 2023, $15.5 million in 2024, $8.6 million in 2025 and $31.9 million thereafter. Estimated payments for purchase obligations for the full year 2023 aggregate approximately $143 m illion. We anticipate devoting substantial capital resources to continue our research and development efforts, to maintain our sales, support and marketing, to complete acquisition-related integration activities and for other general corporate activities. We further believe that our financial resources, along with managing discretionary expenses, will allow us to manage the ongoing impact of inflation and the supply chain disruptions on our business operations. Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates. However, it is difficult to predict future liquidity requirements with certainty, and our cash and available borrowings under the 2020 Credit Facility may not be sufficient to meet our future needs, which would require us to refinance our debt and/or obtain additional financing. We may not be able to refinance our debt or obtain additional financing on favorable terms or at all. 42 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 was effective for the Company January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on our consolidated financial statements. 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 was effective for us January 1, 2023. We believe that the adoption of ASU 2021-08 could have a material impact on our consolidated financial statements for periods including and subsequent to significant business acquisitions. 43