Ribbon Communications Inc. 10-Q

Item 1. Financial Statements RIBBON COMMUNICATIONS INC. Condensed Consolidated Balance Sheets (in thousands, except share and per share data) (unaudited) September 30, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 24,501 $ 67,262 Accounts receivable, net 242,183 267,244 Inventory 70,184 75,423 Other current assets 53,620 68,057 Total current assets 390,488 477,986 Property and equipment, net 42,319 44,832 Intangible assets, net 251,053 294,728 Goodwill 300,892 300,892 Deferred income taxes 63,422 53,649 Operating lease right-of-use assets 39,167 44,888 Other assets 34,274 38,589 $ 1,121,615 $ 1,255,564 Liabilities and Stockholders' Equity Current liabilities: Current portion of term debt $ 30,087 $ 20,058 Revolving credit facility 10,000 — Accounts payable 73,873 95,810 Accrued expenses and other 89,076 85,270 Operating lease liabilities 14,901 15,416 Deferred revenue 107,536 113,939 Total current liabilities 325,473 330,493 Long-term debt, net of current 206,908 306,270 Warrant liability 5,052 — Preferred stock liability, $ 0.01 par value per share; 10,000,000 shares authorized, 55,000 shares issued and outstanding at September 30, 2023 ($ 56,650 liquidation preference); none issued and outstanding at December 31, 2022 49,855 — Operating lease liabilities, net of current 38,282 46,183 Deferred revenue, net of current 17,865 19,254 Deferred income taxes 3,729 3,750 Other long-term liabilities 30,523 31,187 Total liabilities 677,687 737,137 Commitments and contingencies (Note 19) Stockholders' equity: Common stock, $ 0.0001 par value per share; 240,000,000 shares authorized; 171,417,372 shares issued and outstanding at September 30, 2023; 168,324,995 shares issued and outstanding at December 31, 2022 17 17 Additional paid-in capital 1,954,586 1,941,569 Accumulated deficit ( 1,527,029 ) ( 1,453,744 ) Accumulated other comprehensive income 16,354 30,585 Total stockholders' equity 443,928 518,427 $ 1,121,615 $ 1,255,564 See notes to the unaudited condensed consolidated financial statements. 4 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Operations (in thousands, except per share data) (unaudited) Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Revenue: Product $ 108,501 $ 111,152 $ 319,166 $ 305,809 Service 94,660 95,975 280,772 280,312 Total revenue 203,161 207,127 599,938 586,121 Cost of revenue: Product 59,436 59,866 189,426 169,226 Service 33,065 35,175 102,152 106,049 Amortization of acquired technology 7,157 7,768 21,985 23,923 Total cost of revenue 99,658 102,809 313,563 299,198 Gross profit 103,503 104,318 286,375 286,923 Operating expenses: Research and development 46,229 49,366 145,309 153,159 Sales and marketing 32,795 36,365 102,099 109,827 General and administrative 12,885 12,118 41,276 37,881 Amortization of acquired intangible assets 7,216 7,508 21,740 22,296 Acquisition-, disposal- and integration-related 842 988 2,982 4,372 Restructuring and related 2,680 1,269 13,924 8,977 Total operating expenses 102,647 107,614 327,330 336,512 Income (loss) from operations 856 ( 3,296 ) ( 40,955 ) ( 49,589 ) Interest expense, net ( 7,143 ) ( 5,266 ) ( 20,331 ) ( 13,869 ) Other expense, net ( 2,620 ) ( 3,732 ) ( 536 ) ( 42,760 ) Loss before income taxes ( 8,907 ) ( 12,294 ) ( 61,822 ) ( 106,218 ) Income tax provision ( 4,594 ) ( 6,122 ) ( 11,463 ) ( 12,353 ) Net loss $ ( 13,501 ) $ ( 18,416 ) $ ( 73,285 ) $ ( 118,571 ) Loss per share: Basic $ ( 0.08 ) $ ( 0.12 ) $ ( 0.43 ) $ ( 0.78 ) Diluted $ ( 0.08 ) $ ( 0.12 ) $ ( 0.43 ) $ ( 0.78 ) Weighted average shares used to compute loss per share: Basic 171,190 158,921 169,955 152,795 Diluted 171,190 158,921 169,955 152,795 See notes to the unaudited condensed consolidated financial statements. 5 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Comprehensive Loss (in thousands) (unaudited) Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Net loss $ ( 13,501 ) $ ( 18,416 ) $ ( 73,285 ) $ ( 118,571 ) Other comprehensive income (loss), net of tax: Unrealized gain (loss) on interest rate swap, net of reclassifications and amortization into earnings ( 1,322 ) 1,726 ( 8,544 ) 21,248 Reclassification of gain to other expense, net upon sale of interest rate swap — — ( 5,099 ) — Foreign currency translation adjustments ( 3 ) ( 144 ) ( 588 ) ( 1,157 ) Employee retirement benefits — 142 — ( 742 ) Other comprehensive income (loss), net of tax ( 1,325 ) 1,724 ( 14,231 ) 19,349 Comprehensive loss, net of tax $ ( 14,826 ) $ ( 16,692 ) $ ( 87,516 ) $ ( 99,222 ) See notes to the unaudited condensed consolidated financial statements. 6 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Stockholders' Equity (in thousands, except shares) (unaudited) Three months ended September 30, 2023 Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit (loss) income equity Balance at July 1, 2023 170,958,400 $ 17 $ 1,950,079 $ ( 1,513,528 ) $ 17,679 $ 454,247 Exercise of stock options 6,899 13 13 Vesting of restricted stock awards and units 612,818 — Vesting of performance-based stock units — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 160,745 ) ( 456 ) ( 456 ) Stock-based compensation expense 4,950 4,950 Other comprehensive loss ( 1,325 ) ( 1,325 ) Net loss ( 13,501 ) ( 13,501 ) Balance at September 30, 2023 171,417,372 $ 17 $ 1,954,586 $ ( 1,527,029 ) $ 16,354 $ 443,928 Nine months ended September 30, 2023 Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit (loss) income equity Balance at January 1, 2023 168,324,995 $ 17 $ 1,941,569 $ ( 1,453,744 ) $ 30,585 $ 518,427 Exercise of stock options 7,816 15 15 Vesting of restricted stock awards and units 3,927,390 — Vesting of performance-based stock units 381,071 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 1,223,900 ) ( 3,912 ) ( 3,912 ) Stock-based compensation expense 16,914 16,914 Other comprehensive loss ( 14,231 ) ( 14,231 ) Net loss ( 73,285 ) ( 73,285 ) Balance at September 30, 2023 171,417,372 $ 17 $ 1,954,586 $ ( 1,527,029 ) $ 16,354 $ 443,928 See notes to the unaudited condensed consolidated financial statements. 7 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Stockholders' Equity (in thousands, except shares) (unaudited) Three months ended September 30, 2022 Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit income equity Balance at July 1, 2022 150,459,784 $ 15 $ 1,881,942 $ ( 1,455,816 ) $ 25,203 $ 451,344 Exercise of stock options 353 1 1 Vesting of restricted stock units 800,999 — Vesting of performance-based stock units 3,433 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 242,434 ) ( 738 ) ( 738 ) 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 4,841 4,841 Other comprehensive income 1,724 1,724 Net loss ( 18,416 ) ( 18,416 ) Balance at September 30, 2022 168,093,446 $ 17 $ 1,936,457 $ ( 1,474,232 ) $ 26,927 $ 489,169 Nine months ended September 30, 2022 Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit income equity Balance at January 1, 2022 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 units 2,808,137 — 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 ( 861,202 ) ( 2,684 ) ( 2,684 ) 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 13,495 13,495 Other comprehensive income 19,349 19,349 Net loss ( 118,571 ) ( 118,571 ) Balance at September 30, 2022 168,093,446 $ 17 $ 1,936,457 $ ( 1,474,232 ) $ 26,927 $ 489,169 See notes to the unaudited condensed consolidated financial statements. 8 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Nine months ended September 30, 2023 September 30, 2022 Cash flows from operating activities: Net loss $ ( 73,285 ) $ ( 118,571 ) Adjustments to reconcile net loss to cash flows used in operating activities: Depreciation and amortization of property and equipment 10,603 11,688 Amortization of intangible assets 43,725 46,219 Amortization of debt issuance costs 2,517 1,697 Amortization of accumulated other comprehensive gain related to interest rate swap ( 3,818 ) — Stock-based compensation 16,914 13,495 Deferred income taxes ( 3,617 ) ( 19,071 ) Decrease in fair value of investments — 41,291 Gain on sale of swap ( 7,301 ) — Change in fair value of warrant liability ( 444 ) — Change in fair value of preferred stock liability ( 572 ) — Dividends accrued on preferred stock liability 2,573 — Foreign currency exchange losses 1,174 830 Changes in operating assets and liabilities: Accounts receivable 31,345 44,604 Inventory ( 4,327 ) ( 24,002 ) Other operating assets 27,785 6,066 Accounts payable ( 22,276 ) ( 22,311 ) Accrued expenses and other long-term liabilities ( 16,255 ) ( 6,983 ) Deferred revenue ( 7,793 ) ( 17,414 ) Net cash used in operating activities ( 3,052 ) ( 42,462 ) Cash flows from investing activities: Purchases of property and equipment ( 6,620 ) ( 9,744 ) Purchases of software licenses — ( 3,300 ) Net cash used in investing activities ( 6,620 ) ( 13,044 ) Cash flows from financing activities: Borrowings under revolving line of credit 67,000 58,625 Principal payments on revolving line of credit ( 57,000 ) ( 58,625 ) Principal payments of term debt ( 90,044 ) ( 40,044 ) Principal payments of finance leases — ( 433 ) Payment of debt issuance costs ( 1,572 ) ( 1,046 ) Proceeds from equity offering — 52,067 Payment of equity offering issuance costs — ( 1,654 ) Proceeds from issuance of preferred stock and warrant liabilities 53,350 — Proceeds from the exercise of stock options 15 1 Payment of tax withholding related to net share settlements of restricted stock awards ( 3,912 ) ( 2,684 ) Net cash (used in) provided by financing activities ( 32,163 ) 6,207 Effect of exchange rate changes on cash and cash equivalents ( 926 ) ( 1,251 ) Net decrease in cash and cash equivalents ( 42,761 ) ( 50,550 ) Cash and cash equivalents, beginning of year 67,262 106,485 Cash and cash equivalents, end of period $ 24,501 $ 55,935 9 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Cash Flows (continued) (in thousands) (unaudited) Nine months ended September 30, 2023 September 30, 2022 Supplemental disclosure of cash flow information: Interest paid $ 18,606 $ 13,179 Income taxes paid $ 9,721 $ 14,653 Income tax refunds received $ 1,160 $ 643 Supplemental disclosure of non-cash investing activities: Capital expenditures incurred, but not yet paid $ 2,505 $ 989 Software license acquired through investment disposal $ — $ 1,886 Inventory transfers to property and equipment $ 1,524 $ 1,705 Supplemental disclosure of non-cash financing activities: Total fair value of restricted stock awards, restricted stock units and performance-based stock units on date vested $ 13,454 $ 9,092 See notes to the unaudited condensed consolidated financial statements. 10 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (unaudited) (1) BASIS OF PRESENTATION 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. Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring items, necessary for their fair presentation with accounting principles generally accepted in the United States of America ("GAAP") and with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year or any future interim period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2022, as amended (the "Annual Report"), which was filed with the SEC on March 31, 2023 . Private Placement Offering 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 (the "Warrants") to purchase shares of the Company's common stock, par value $ 0.0001 per share (the "Private Placement"), at the 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 (See Note 11). Operating Segments The Company's chief operating decision maker (the "CODM") is its president and chief executive officer. The CODM assesses the Company's performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge segment ("Cloud and Edge") and the IP Optical Networks segment ("IP Optical Networks"). Significant Accounting Policies The Company's significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in the Annual Report. There were no material changes to the significant accounting policies during the nine months ended September 30, 2023, except for the addition of the accounting policy below for the Preferred Stock and Warrants issued in the Private Placement on March 28, 2023. Preferred Stock and Warrants The Company accounts 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 the Company considers fair value to best reflect the expected future economic value. These liabilities are remeasured to fair value at each reporting date using the same valuation methodology applied upon issuance. 11 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) The value of the Preferred Stock is calculated using the Black-Derman-Toy (BDT) stochastic yield lattice model to capture the optimal timing of repayment, increasing dividend rate and other features, and the value of the Warrants is calculated using the Black-Scholes Pricing Model. Changes in the fair value of the Preferred Stock and Warrants are reported as Other expense, net in the Company's condensed consolidated statements of operations. Principles of Consolidation The condensed consolidated financial statements include the accounts of Ribbon and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Use of Estimates and Judgments The preparation of financial statements in conformity with GAAP requires Ribbon to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and judgments relied upon in preparing these condensed 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 and the Preferred Stock and Warrants , intangible asset and goodwill valuations, including impairments, 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. 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 condensed consolidated statements of operations, and the proceeds from the sales of receivables are included in cash from operating activities in the condensed consolidated statements of cash flows. Factoring of accounts receivable and associated fees for the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands): Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Accounts receivable sold 24,701 16,926 73,028 57,640 Less factoring fees ( 752 ) ( 281 ) ( 2,022 ) ( 757 ) Net cash proceeds 23,949 16,645 71,006 56,883 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 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 12 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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 the Company's 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 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. (2) 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 earnings 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 shares used to compute loss per share were as follows (in thousands): Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Weighted average shares outstanding - basic 171,190 158,921 169,955 152,795 Potential dilutive common shares — — — — Weighted average shares outstanding - diluted 171,190 158,921 169,955 152,795 Options to purchase the Company's common stock and unvested restricted and performance-based stock units aggregating 14.4 million shares were excluded from the computation of diluted loss per share for the three and nine months ended September 30, 2023 and 2022, because their effect would have been antidilutive. As of September 30, 2023, the potential number of dilutive shares from the Warrants totaled 4,858,090 shares. However, there was no impact on weighted average shares outstanding from these Warrants for the three and nine months ended September 30, 2023 as the average share price of the Company's common stock in each period was below the exercise price of $ 3.77 per share and their effect would have been antidilutive. Dividends payable on the Preferred Stock are not an adjustment to net income (loss) used for the calculation of diluted earnings (loss) per share as these dividends are included in the fair value adjustment of the Preferred Stock which is reflected in Other expense, net. 13 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) (3) INVENTORY Inventory at September 30, 2023 and December 31, 2022 consisted of the following (in thousands): September 30, 2023 December 31, 2022 On-hand final assemblies and finished goods inventories $ 87,503 $ 85,888 Deferred cost of goods sold 2,637 1,449 90,140 87,337 Less noncurrent portion (included in Other assets) ( 19,956 ) ( 11,914 ) Current portion $ 70,184 $ 75,423 (4) INTANGIBLE ASSETS AND GOODWILL The Company's intangible assets at September 30, 2023 and December 31, 2022 consisted of the following (in thousands): September 30, 2023 Weighted average amortization period (years) Cost Accumulated amortization Net carrying value Developed technology 7.84 $ 340,380 $ 233,201 $ 107,179 Customer relationships 11.86 268,140 127,908 140,232 Trade names 3.88 5,000 4,875 125 Software licenses 3.00 5,236 1,719 3,517 9.51 $ 618,756 $ 367,703 $ 251,053 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 Estimated future amortization expense for the Company's intangible assets at September 30, 2023 was as follows (in thousands): Years ending December 31, Remainder of 2023 $ 13,162 2024 50,733 2025 44,022 2026 38,978 2027 33,936 2028 23,400 Thereafter 46,822 $ 251,053 14 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) There were no changes to the carrying value of the Company's goodwill in the nine months ended September 30, 2023 and 2022. The components of goodwill at September 30, 2023 and 2022 were as follows (in thousands): Cloud and Edge IP Optical Networks Total Balance at September 30, 2023 Goodwill $ 392,302 $ 191,996 $ 584,298 Accumulated impairment losses ( 167,406 ) ( 116,000 ) ( 283,406 ) $ 224,896 $ 75,996 $ 300,892 Balance at September 30, 2022 Goodwill $ 392,302 $ 191,996 $ 584,298 Accumulated impairment losses ( 167,406 ) ( 116,000 ) ( 283,406 ) $ 224,896 $ 75,996 $ 300,892 (5) INVESTMENTS AND FAIR VALUE HIERARCHY The Company received debentures (the "Debentures") and warrants (the "AVCT Warrants") as sale consideration in connection with the sale of its Kandy Communications business on December 1, 2020 to American Virtual Cloud Technologies, Inc. ("AVCT"). The Debentures bore interest at a rate of 10 % per annum, which was added to the principal amount of the Debentures. On September 8, 2021 (the "Debenture Conversion Date"), the Debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares"). The AVCT Warrants entitled the Company to purchase 4,377,800 shares of AVCT common stock at an exercise price of $ 0.01 per share and were to expire on December 1, 2025. The Company's investment in AVCT (the "AVCT Investment") was comprised of the Debentures and AVCT Warrants for periods prior to the Debenture Conversion Date and the Debenture Shares and AVCT Warrants for periods subsequent to the Debenture Conversion Date. The Company recorded the AVCT Investment at fair value, with changes in fair value recorded as a component of Other (expense) income, net, in the condensed 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 AVCT 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 AVCT Warrants were terminated and canceled. The perpetual license granted by AVCT is classified as Intangible assets, net in the Company's condensed consolidated balance sheet as of September 30, 2023 and December 31, 2022 in the amount of $ 2.8 million and $ 3.9 million, respectively. The Company had no investment in AVCT as of September 30, 2023 or December 31, 2022 due to the settlement agreement entered into on August 29, 2022. The Company recorded losses of $ 1.9 million and $ 41.3 million in the three and nine months ended September 30, 2022, respectively, representing the change in the fair value of the AVCT Investment. The carrying amounts of the Company's financial instruments approximate their fair values and include cash equivalents, accounts receivable, accounts payable and borrowings under a revolving credit facility. Ribbon's term debt balance as of September 30, 2023 and December 31, 2022 of $ 240.4 million and $ 330.4 million, respectively, had a fair value of approximately $ 239.5 million and $ 323.0 million, respectively. Our Preferred Stock and Warrants liabilities had a combined fair value of $ 54.9 million as of September 30, 2023, including cumulative dividends on the Preferred Stock of $ 2.6 million. 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 15 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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. (6) ACCRUED EXPENSES AND OTHER Accrued expenses at September 30, 2023 and December 31, 2022 consisted of the following (in thousands): September 30, 2023 December 31, 2022 Employee compensation and related costs $ 29,363 $ 25,994 Professional fees 18,548 17,195 Taxes payable 8,066 8,152 Other 33,099 33,929 $ 89,076 $ 85,270 (7) WARRANTY ACCRUALS The changes in the Company's accrual balance in the nine months ended September 30, 2023 were as follows (in thousands): Balance at January 1, 2023 $ 11,857 Current period provisions 4,207 Settlements ( 4,070 ) Balance at September 30, 2023 $ 11,994 (8) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES The Company recorded restructuring and related expense aggregating $ 2.7 million and $ 1.3 million in the three months ended September 30, 2023 and 2022, respectively, and $ 13.9 million and $ 9.0 million in the nine months ended September 30, 2023 and 2022, 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 condensed 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. 16 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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. Accelerated amortization of lease assets that are included as a component of restructuring and related expense are excluded from the restructuring accrual activity tables below, as the liability for lease payments for these facilities is included as a component of current and noncurrent Operating lease liabilities in the Company's condensed consolidated balance sheets at September 30, 2023 and December 31, 2022 (see Note 16). The Company may incur additional future expense if it is unable to sublease other locations included in the Company's facilities consolidation initiatives. Restructuring and related expense for the three and nine months ended September 30, 2023 and 2022 was comprised of the following (in thousands): Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Severance and related costs $ 804 $ ( 358 ) $ 9,355 $ 4,623 Variable and other facilities-related costs 1,653 $ 970 3,784 2,734 Accelerated amortization of lease assets due to cease-use 223 $ 657 785 1,620 $ 2,680 $ 1,269 $ 13,924 $ 8,977 2023 Restructuring Plan 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 workforce reduction. Any potential positions eliminated in countries outside the United States are subject to local law and consultation requirements. The Company recorded restructuring and related expense of $ 0.9 million and $ 9.4 million in the three and nine months ended September 30, 2023, respectively, in connection with the 2023 Restructuring Plan entirely for severance related costs. A summary of the 2023 Restructuring Plan accrual activity for the nine months ended September 30, 2023 is as follows (in thousands): Balance at January 1, 2023 Initiatives charged to expense Cash payments Net transfer to operating lease accounts Balance at September 30, 2023 Severance $ — $ 9,355 $ ( 7,994 ) $ — $ 1,361 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 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. The Company recorded restructuring and related expense of $ 1.9 million and $ 4.6 million in the three and nine months ended September 30, 2023, respectively, in connection with the 2022 Restructuring Plan. The amount for the three months ended September 30, 2023 was comprised of $ 1.7 million for 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 nine months ended September 30, 2023 was comprised of $ 3.8 million for facilities-related costs and $ 0.8 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease. A summary of the 2022 Restructuring Plan accrual activity for the nine months ended September 30, 2023 is as follows (in thousands): 17 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Balance at January 1, 2023 Initiatives charged to expense Cash payments Net transfer to operating lease accounts Balance at September 30, 2023 Severance $ 1,164 $ — $ ( 1,010 ) $ — $ 154 Variable and other facilities-related costs 890 3,784 ( 4,148 ) — 526 Accelerated amortization of lease assets due to cease-use — 785 — ( 785 ) — $ 2,054 $ 4,569 $ ( 5,158 ) $ ( 785 ) $ 680 Balance Sheet Classification The current portions of accrued restructuring were $ 2.0 million and $ 1.3 million at September 30, 2023 and December 31, 2022, respectively, and are included as components of Accrued expenses in the condensed consolidated balance sheets. The long-term portions of accrued restructuring are included as components of Other long-term liabilities in the condensed consolidated balance sheets. The long-term portions of accrued restructuring were $ 1.2 million and $ 2.0 million at September 30, 2023 and December 31, 2022, respectively. (9) DEBT 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 from 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 originally provided 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 was originally available for letters of credit and a $ 20 million sublimit 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., a 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 originally 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 plus a margin ranging from 0.50 % to 2.50 % per year (the "Applicable Margin"). The Applicable Margin varied depending on the Company's Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility). 18 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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 sale of our Kandy Communications business, 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. 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, the 1st and 2nd quarters of 2023 declining to 3.25 :1.00, and in all subsequent quarters the ratio was to 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 was to be fixed at 1.25 :1.00. In addition, the Fifth Amendment increased the maximum rate at which loans were to bear interest if the Company's Consolidated Net Leverage Ratio for any quarter was greater than 4.50 :1.00. Specifically, loans incurred would 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. The Fifth Amendment also 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 remaining and final payment due on the maturity date in March 2025. On March 24, 2023, the Company 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 letters of credit was reduced from $ 30 million to $ 20 million. In addition, the Sixth Amendment replaced LIBOR with the Secured Overnight Financing Rate ("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, the Company 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 are being amortized on a straight line basis over the remaining life of the 2020 Credit Facility to Interest expense, net. 19 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) The Company's interest rates under the 2020 Term Loan fo r the nine months ended September 30, 2023 and 2022 b enefited from a hedge instrument that was in place, specifically a fixed rate swap, which was sold in March 2023 (see Note 10). As a result of the fixed rate swap sold in March 2023, the ongoing interest rate is based upon U.S. dollar SOFR plus a fixed margin of 4.5 %. The Company was in compliance with all covenants of the 2020 Credit Facility at both September 30, 2023 and December 31, 2022, including the current Consolidated Net Leverage Ratio calculation that considers the Company's debt to include Preferred Stock. The Company had the following outstanding borrowings, unamortized debt issuance costs, letters of credit, interest rates, and remaining borrowing capacity under the 2020 Credit Facility as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Revolving Credit Facility $ 10,000 $ — Current portion of Term Debt $ 30,087 $ 20,058 Long-term Debt, net of Current: Long-term Debt, net of Current (Face Amount) $ 210,323 $ 310,395 Unamortized Debt Issuance Costs - Contra-Liability ( 3,415 ) ( 4,125 ) Long-term Debt, net of Current $ 206,908 $ 306,270 Total Face Amount of Borrowings $ 250,410 $ 330,453 Unamortized Debt Issuance Costs: Other Assets $ 677 $ 798 Long-Term Debt - Contra Liability 3,415 4,125 Total Unamortized Debt Issuance Costs $ 4,092 $ 4,923 Letters of Credit Outstanding $ 2,985 $ 3,272 Remaining Borrowing Capacity $ 62,015 $ 96,728 Average Interest Rates: Revolving Credit Facility 9.9 % - Term Loan 9.9 % 5.4 % Letters of Credit 4.5 % 4.5 % The Company's debt maturities as of September 30, 2023 were as follows: Years ending December 31, Remainder of 2023 $ 15,015 2024 35,102 2025 200,293 $ 250,410 Letters of Credit and Other Guarantees The Company uses letters of credit and performance and bid bonds in the course of its business. At September 30, 2023, the Company had $ 6.7 million of 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 $ 3.7 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under 20 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) various uncommitted facilities. At December 31, 2022, the Company had Guarantees aggregating $ 8.3 million, comprised of the $ 3.3 million of Letters of Credit noted above and $ 5.0 million of Other Guarantees. (10) 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 may enter into derivative financial instruments. 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. 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 $ 240.4 million and $ 330.4 million at September 30, 2023 and December 31, 2022, respectively. The 2020 Revolving Credit Facility had an outstanding balance of $ 10.0 million at September 30, 2023 and was undrawn at December 31, 2022. Borrowings under the 2020 Credit Facility have variable interest rates based on LIBOR or SOFR (see Note 9). 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 approximated the current level of our 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 $ 0.2 million and $ 0.7 million for the three and nine months ended September 30, 2023, respectively. 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 term loan debt prepaid on the date of the final sale of our swap totaled $ 7.3 million and was released into earnings immediately as Other expense, net. The portion of the gain in accumulated other comprehensive (loss) income related to our remaining term loan debt balance was $ 12.0 million and 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 21 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) amortization of which totaled $ 1.5 million and $ 3.1 million for the three and nine months ended September 30, 2023, respectively. The Company’s objectives in using interest rate derivatives have been to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has used 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 related 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 in the condensed consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the nine months ended September 30, 2023 and 2022, such a derivative was used to hedge the variable cash flows associated with the outstanding borrowings under the 2020 Credit Facility and the Company has accounted for this derivative as an effective hedge until the final portion of the swap was sold on March 27, 2023. Any ineffective portion of the change in the fair value of the derivative was recognized directly in earnings. Amounts reported in accumulated other comprehensive income related to the Company's derivative are reclassified to interest expense as interest is accrued on the Company’s variable-rate debt. The impact of the Company’s derivative financial instrument on its condensed consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2023 and 2022 was as follows, net of tax (in thousands): Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Gain (loss) recognized in other comprehensive income (loss) on derivative, net of tax $ — $ 3,056 $ ( 2,715 ) $ 21,685 Amount reclassified from accumulated other comprehensive income (loss) to other expense, net upon sale of swap, net of tax — — ( 5,099 ) — Amount reclassified from accumulated other comprehensive income (loss) to interest expense ( 1,322 ) ( 1,330 ) ( 5,829 ) ( 437 ) $ ( 1,322 ) $ 1,726 $ ( 13,643 ) $ 21,248 The Company had no derivative assets or liabilities at September 30, 2023. The fair values and locations in the condensed consolidated balance sheets at December 31, 2022 of the Company's derivative assets (liabilities) designated as a hedging instrument were as follows (in thousands): Balance sheet location December 31, 2022 Interest rate derivative - asset derivative Other current assets $ 13,212 Interest rate derivative - asset derivative Other assets 12,216 $ 25,428 The Company classified the interest rate derivative aggregating $ 25.4 million at December 31, 2022, as Level 2 fair value measurements within the fair value hierarchy (see Note 5). (11) PREFERRED STOCK AND WARRANTS On March 28, 2023, the Company issued 55,000 shares of Preferred Stock to investors in the Private Placement at a price of $ 970 per share, along with 4,858,090 Warrants with an exercise price of $ 3.77 per share. 22 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) The Company accounts 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 the Company considers fair value to best reflect the expected future economic value. These liabilities are remeasured to fair value at each reporting date using the same valuation methodology applied upon issuance using current input assumptions. The value of the Preferred Stock is calculated using the Black-Derman-Toy (BDT) stochastic yield lattice model to capture the optimal timing of repayment, increasing dividend rate and other features and the value of the Warrants is calculated using the Black-Scholes Pricing Model. Changes in the fair value of the Preferred Stock and Warrants are reported as Other expense, net in the Company's condensed consolidated statements of operations. The fair value of the Preferred Stock and Warrants are determined using Level 3 input and the key inputs into the models utilized were as follows as of September 30, 2023: Preferred Stock (BDT) Face value per share $ 1,000 Interest payments per year 4 Dividend rate - year 1 (paid in-kind) 9.25 % Dividend rate - year 2 (paid in-kind or in cash at the Company's choice) 9.75 % Dividend rate - thereafter (paid in cash) 12.00 % Yield volatility 25.0 % Time to maturity (in years) 2.0 Warrants (Black-Scholes) Stock price $ 2.68 Strike price $ 3.77 Risk-free rate 4.69 % Volatility 61.9 % Dividend yield 0.0 % Time to expiration (years) 3.5 The changes in the Company's Preferred Stock and Warrant liabilities from issuance in March 2023 through September 30, 2023 were as follows (in thousands): Preferred stock liability Balance at March 31, 2023 $ 47,854 Cumulative dividends 2,573 Fair value change ( 572 ) Balance at September 30, 2023 $ 49,855 Warrant liability Balance at March 31, 2023 $ 5,496 Fair value change ( 444 ) Balance at September 30, 2023 $ 5,052 23 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) The Preferred Stock is subordinate to Company indebtedness and senior to the Company’s common stock or other equity. Holders of the Preferred Stock are entitled to cumulative dividends that accrue quarterly through the September 30, 2025 maturity date. Dividends are payable in-kind during the first year at a rate of 9.25 %. At the Company’s option, the dividends are payable in-kind or in cash during the second year at a rate of 9.75 %. Dividends thereafter are payable in cash at a rate of 12.00 %. The proceeds from the Preferred Stock issuance were approximately $ 53.4 million, including $ 10.0 million from existing related party stockholders. Offering costs paid by the Company of approximately $ 3.5 million were recorded in Other expense, net in our condensed consolidated statement of operations in the three months ended March 31, 2023. The net proceeds from the Private Placement were used for the repayment of debt. The Preferred Stock is redeemable on or after the first and second anniversaries of the closing date at a rate of 103 % and 102 %, respectively. The Warrants are immediately exercisable and upon an event such as a merger, consolidation, asset sale or similar change of control, the Warrants may be exercised and the holders may vote the underlying shares of common stock. In connection with the Private Placement, the Company provided the investors with certain registration rights relating to the Preferred Stock, the Warrants and the shares of the Company’s common stock underlying the Warrants, that required the Company to file a registration statement on Form S-3 with the SEC within 30 days following the closing date of the Private Placement. The registration requirement was completed on May 19, 2023. (12) REVENUE RECOGNITION The Company derives revenue from two primary sources: products and services. Product revenue includes the Company's hardware and software that function together to deliver the products' essential functionality. Software and hardware are also sold on a standalone basis. Services include customer support (software updates, upgrades and technical support), consulting, design services, installation services and training. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct. When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services when they are sold separately to similar customers in order to estimate standalone selling price. The Company's software licenses typically provide a perpetual right to use the Company's software. The Company also sells term-based software licenses that expire and Software-as-a-Service ("SaaS")-based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software and hardware are delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. Product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. The Company begins to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period. The Company offers warranties on its products. Certain of the Company's warranties are considered to be assurance-type in nature, ensuring the product is functioning as intended. Assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations. The Company does not allow and has no history of accepting product returns. Services revenue includes revenue from customer support and other professional services. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. The Company sells its customer support contracts at a percentage of list or net product price. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year . 24 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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. 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 ("SSP") for each distinct performance obligation. The Company typically has more than one 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. 25 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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 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 revenue for the three and nine months ended September 30, 2023 and 2022 was disaggregated as follows: Three months ended September 30, 2023 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 40,162 $ 33,454 $ 12,440 $ 86,056 Europe, Middle East and Africa 31,969 18,268 8,120 58,357 Asia Pacific 32,070 10,016 3,043 45,129 Other 4,300 7,534 1,785 13,619 $ 108,501 $ 69,272 $ 25,388 $ 203,161 Three months ended September 30, 2022 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 42,373 $ 32,980 $ 11,684 $ 87,037 Europe, Middle East and Africa 42,454 20,022 7,147 69,623 Asia Pacific 19,077 11,382 3,186 33,645 Other 7,248 7,605 1,969 16,822 $ 111,152 $ 71,989 $ 23,986 $ 207,127 Nine months ended September 30, 2023 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 131,774 $ 100,417 $ 35,135 $ 267,326 Europe, Middle East and Africa 88,235 56,393 22,374 167,002 Asia Pacific 89,495 29,552 8,456 127,503 Other 9,662 23,126 5,319 38,107 $ 319,166 $ 209,488 $ 71,284 $ 599,938 Nine months ended September 30, 2022 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 128,056 $ 99,090 $ 33,689 $ 260,835 Europe, Middle East and Africa 95,392 56,464 20,503 172,359 Asia Pacific 64,471 31,178 10,791 106,440 Other 17,890 23,320 5,277 46,487 $ 305,809 $ 210,052 $ 70,260 $ 586,121 The Company's product revenue from indirect sales through its channel partner program and from its direct sales program for the three and nine months ended September 30, 2023 and 2022 was as follows (in thousands): 26 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Indirect sales through channel partner program $ 35,950 $ 34,382 $ 109,454 $ 86,335 Direct sales 72,551 76,770 209,712 219,474 $ 108,501 $ 111,152 $ 319,166 $ 305,809 The Company's product revenue from sales to enterprise customers and from sales to service provider customers for the three and nine months ended September 30, 2023 and 2022 was as follows (in thousands): Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Sales to enterprise customers $ 32,044 $ 33,136 $ 97,163 $ 78,056 Sales to service provider customers 76,457 78,016 222,003 227,753 $ 108,501 $ 111,152 $ 319,166 $ 305,809 The Company's product revenue and service revenue components by segment for the three and nine months ended September 30, 2023 and 2022, respectively were as follows (in thousands): Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Product revenue: Cloud and Edge $ 42,305 $ 51,321 $ 137,496 $ 153,081 IP Optical Networks 66,196 59,831 181,670 152,728 Total product revenue $ 108,501 $ 111,152 $ 319,166 $ 305,809 Service revenue: Maintenance: Cloud and Edge $ 55,004 $ 55,686 $ 164,848 $ 165,895 IP Optical Networks 14,268 16,303 44,640 44,157 Total maintenance revenue 69,272 71,989 209,488 210,052 Professional services: Cloud and Edge 18,456 17,678 53,157 52,595 IP Optical Networks 6,932 6,308 18,127 17,665 Total professional services revenue 25,388 23,986 71,284 70,260 Total service revenue $ 94,660 $ 95,975 $ 280,772 $ 280,312 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 condensed 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 that are classified as deferred revenue. These assets and liabilities are reported in the Company's condensed 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 nine months ended September 30, 2023 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. 27 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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 condensed consolidated balance sheets. The changes in the Company's accounts receivable, unbilled receivables and deferred revenue balances for the nine months ended September 30, 2023 were as follows (in thousands): Accounts receivable Unbilled accounts receivable Deferred revenue (current) Deferred revenue (long-term) Balance at January 1, 2023 $ 170,969 $ 96,275 $ 113,939 $ 19,254 Increase (decrease), net ( 15,120 ) ( 9,941 ) ( 6,403 ) ( 1,389 ) Balance at September 30, 2023 $ 155,849 $ 86,334 $ 107,536 $ 17,865 The Company recognized approximately $ 92 million of revenue in the nine months ended September 30, 2023 that was recorded as deferred revenue at December 31, 2022 and approximately $ 85 million of revenue in the nine months ended September 30, 2022 that was recorded as deferred revenue at December 31, 2021. Of the Company's deferred revenue reported as long-term in its condensed consolidated balance sheet at September 30, 2023, the Company expects that approximately $ 4 million will be recognized as revenue in 2024, approximately $ 9 million will be recognized as revenue in 2025 and approximately $ 5 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 condensed 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. Expense related to commission payments has been deferred on our condensed consolidated balance sheet and is being amortized over the expected life of the customer contract, which averages five years . The current and long-term portions of deferred commission expense are included as components of Other current assets and Other assets, respectively. The Company had capitalized deferred sales commissions of $ 3.4 million and $ 3.6 million as of September 30, 2023 and December 31, 2022, respectively. (13) 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 primarily of its Session Border Controller ("SBC") products and its 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 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. 28 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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 expenses included in the tables below represent direct revenue and expense attributable to each segment. Please see Note 4 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 and stock-based compensation, 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 and 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 information regarding revenue, adjusted gross profit, and depreciation expense by reportable segment for the three and nine months ended September 30, 2023 and 2022 (in thousands): Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Segment revenue: Cloud and Edge $ 115,765 $ 124,685 $ 355,501 $ 371,571 IP Optical Networks 87,396 82,442 244,437 214,550 Revenue $ 203,161 $ 207,127 $ 599,938 $ 586,121 Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Segment adjusted gross profit: Cloud and Edge $ 78,455 $ 81,524 $ 231,729 $ 243,196 IP Optical Networks 32,862 31,287 78,613 69,556 Total segment adjusted gross profit 111,317 112,811 310,342 312,752 Stock-based compensation expense ( 657 ) ( 725 ) ( 1,982 ) ( 1,906 ) Amortization of acquired technology ( 7,157 ) ( 7,768 ) ( 21,985 ) ( 23,923 ) Gross profit $ 103,503 $ 104,318 $ 286,375 $ 286,923 Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Segment depreciation expense: Cloud and Edge $ 2,426 $ 2,753 $ 7,402 $ 8,153 IP Optical Networks 1,118 1,162 3,201 3,535 Depreciation expense $ 3,544 $ 3,915 $ 10,603 $ 11,688 29 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) (14) MAJOR CUSTOMERS The following customers contributed 10% or more of the Company's revenue in the three and nine months ended September 30, 2023 and 2022: Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Verizon Communications Inc. 11 % 13 % 11 % 16 % AT&T * 10 % * * * Less than 10% of total revenue. At September 30, 2023 and December 31, 2022, no customer accounted for 10% or more of the Company's accounts receivable balance. 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. (15) 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, as amended which provides for the award of stock options, stock appreciation rights, restricted stock awards ("RSAs"), performance-based stock awards, restricted stock units ("RSUs"), performance-based stock units ("PSUs") and other stock- or cash-based awards. 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. 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. 30 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Restricted Stock Units The activity related to the Company's RSUs for the nine months ended September 30, 2023 was as follows: Shares Weighted Average Grant Date Fair Value Unvested balance at January 1, 2023 7,649,747 $ 3.96 Granted 4,852,840 $ 2.90 Vested ( 3,927,390 ) $ 4.20 Forfeited ( 623,602 ) $ 4.05 Unvested balance at September 30, 2023 7,951,595 $ 3.19 The total grant date fair value of shares of restricted stock underlying RSUs that vested during the nine months ended September 30, 2023 was $ 16.5 million. Performance-Based Stock Units The activity related to the Company's PSUs for the nine months ended September 30, 2023 was as follows: Shares Weighted Average Grant Date Fair Value Unvested balance at January 1, 2023 6,653,503 $ 2.52 Granted 1,800,202 $ 3.26 Vested ( 381,071 ) $ 6.91 Forfeited ( 1,706,133 ) $ 4.05 Unvested balance at September 30, 2023 6,366,501 $ 2.09 The total grant date fair value of shares of restricted stock underlying PSUs that vested during the nine months ended September 30, 2023 was $ 2.6 million. Stock-Based Compensation The condensed consolidated statements of operations include stock-based compensation for the three and nine months ended September 30, 2023 and 2022 as follows (in thousands): Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Product cost of revenue $ 121 $ 133 $ 385 $ 339 Service cost of revenue 536 592 1,597 1,567 Research and development 1,259 1,289 3,821 3,735 Sales and marketing 1,402 1,567 5,673 4,418 General and administrative 1,632 1,260 5,438 3,436 $ 4,950 $ 4,841 $ 16,914 $ 13,495 At September 30, 2023, there was $ 22.7 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 . 31 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) (16) LEASES The Company has operating leases for corporate offices and research and development facilities and has historically had finance leases for certain equipment. Operating leases are reported separately in the Company's condensed consolidated balance sheets. Assets acquired under finance leases, if any, are included in Property and equipment, net, in the condensed consolidated balance sheets. 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 September 30, 2023 and December 31, 2022 and determined no impairment has occurred. Lease terms may include options to extend or terminate the lease and the Company incorporates such options in the lease term when it has the unilateral right to make such an election and it is reasonably certain that the Company will exercise that option. In making this determination, the Company considers its prior renewal and termination history and planned usage of the assets under lease, incorporating expected market conditions. For operating leases, lease expense for minimum fixed lease payments is recognized on a straight-line basis over the lease term. The expense for finance leases includes both interest and amortization expense components, with the interest component calculated based on the effective interest method and the amortization component calculated based on straight-line amortization of the right-of-use asset over the lease term. Lease contracts may contain variable lease costs, such as common area maintenance, utilities and tax reimbursements that vary over the term of the contract. Variable lease costs are not included in minimum fixed lease payments and as a result, are excluded from the measurement of the right-of-use assets and lease liabilities. The Company expenses all variable lease costs as incurred. 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 $ 0.2 million and $ 0.8 million, respectively, in the three and nine months ended September 30, 2023 and $ 0.6 million and $ 1.6 million in the three and nine months ended September 30, 2022, respectively. No variable lease costs were accrued in the three and nine months ended September 30, 2023 for future estimated variable expenses related to assets partially or fully vacated with no intent or ability to sublease. Variable lease costs for the three and nine months ended September 30, 2022 included accruals of $ 0.7 million and $ 1.0 million, respectively, for all future estimated variable expenses related to certain assets partially or fully vacated with no intent or ability to sublease. All accelerated amortization and accrual of future variable costs are recorded as Restructuring and related expense in the Company's condensed consolidated statements of operations. At September 30, 2023 and December 31, 2022, the Company had accruals of $ 1.6 million and $ 2.0 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 Consolidations Initiatives. The Company leases its corporate offices and other facilities under operating leases, which expire at various times through 32 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 2032. The Company's right-of-use lease assets and lease liabilities at September 30, 2023 and December 31, 2022 were as follows (in thousands): Classification September 30, 2023 December 31, 2022 Assets: Operating lease assets Operating lease right-of-use assets $ 39,167 $ 44,888 Liabilities: Current Operating Operating lease liabilities $ 14,901 $ 15,416 Non-Current Operating Operating lease liabilities, net of current 38,282 46,183 Total Operating lease liabilities $ 53,183 $ 61,599 The components of lease expense for the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands): Three months ended Nine months ended September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 Operating lease cost* $ 4,708 $ 5,233 $ 14,205 $ 15,401 Finance lease cost: Amortization of leased assets — 64 — 244 Interest on lease liabilities — 2 — 12 Short-term lease cost 3,454 3,610 10,544 10,451 Variable lease costs (costs excluded from minimum fixed lease payments)** 819 1,424 2,525 3,283 Sublease income ( 282 ) ( 502 ) ( 1,105 ) ( 1,439 ) Net lease cost $ 8,699 $ 9,831 $ 26,169 $ 27,952 * Operating lease costs for the three and nine months ended September 30, 2023 included $ 0.2 million and $ 0.8 million, respectively, of accelerated amortization for certain assets partially or fully vacated with no intent or ability to sublease. Operating lease costs for the three and nine months ended September 30, 2022 included $ 0.6 million and $ 1.6 million, respectively, of accelerated amortization for certain assets partially or fully vacated with no intent or ability to sublease. ** No variable lease costs were accrued in the three and nine months ended September 30, 2023 for future estimated variable expenses related to certain assets partially or fully vacated with no intent or ability to sublease. Variable lease costs for the three and nine months ended September 30, 2022 included accruals of $ 0.7 million and $ 1.0 million, respectively, for all future estimated variable expenses related to certain assets partially or fully vacated with no intent or ability to sublease. Cash flow information related to the Company's leases for the nine months ended September 30, 2023 and 2022 was as follows (in thousands): Nine months ended September 30, 2023 September 30, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 14,315 $ 15,662 Operating cash flows for finance leases $ — $ 12 Financing cash flows for finance leases $ — $ 433 33 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Other information related to the Company's leases as of September 30, 2023 and December 31, 2022 was as follows: September 30, 2023 December 31, 2022 Weighted average remaining lease term (years): Operating leases 5.64 5.90 Weighted average discount rate: Operating leases 6.19 % 5.79 % Future minimum fixed lease payments under noncancelable leases at September 30, 2023 were as follows (in thousands): Operating leases Remainder of 2023 $ 4,682 2024 16,983 2025 9,243 2026 7,517 2027 6,549 2028 18,418 Total lease payments 63,392 Less: interest ( 10,209 ) Present value of lease liabilities $ 53,183 (17) INCOME TAXES The Company recorded income tax provisions of $ 11.5 million and $ 12.4 million in the nine months ended September 30, 2023 and 2022, respectively. These amounts reflect the Company's estimates of the effective rates expected to be applicable for the respective full years, adjusted for any discrete events, which are recorded in the period in which they occur. These estimates are reevaluated each quarter based on the Company's estimated tax expense for the full fiscal year. The estimated effective tax rate includes the impact of valuation allowances in various jurisdictions. The Company intends to continue to maintain a valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the respective allowances. (18) RELATED PARTIES The Company recognized revenue from its largest stockholder of $ 1.3 million and $ 0.6 million in the three months ended September 30, 2023 and 2022, respectively, and $ 7.1 million and $ 1.7 million in the nine months ended September 30, 2023 and 2022 , respectively. Additionally, as discussed in Note 11, certain related party stockholders participated in the Private Placement. (19) COMMITMENTS AND CONTINGENCIES Liabilities for Royalty Payments to the IIA Prior to the Company's acquisition of ECI Telecom Group Ltd. ("ECI"), ECI had received research and development grants from the Office of the Innovation Authority of the Israeli Ministry of Economics (the "IIA"). The Company assumed ECI's contract with the IIA, which requires the Company to pay royalties to the IIA on proceeds from the sale of products which the Israeli government has supported by way of research and development grants. The royalties for grants prior to 2017 were calculated at the rates of 1.3 % to 5.0 % of the aggregated proceeds from the sale of such products developed at certain of the 34 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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 subsequently, interest was calculated at the higher of LIBOR plus 1.5 % to 2.75 %. At September 30, 2023, the Company's maximum possible future royalties commitment, including $ 1.8 million of unpaid royalties accrued, was $ 21.6 million , including interest of $ 0.9 million , based on estimates of future product sales, grants received from the IIA not yet repaid, and management's estimation of products still to be sold. Litigation The Company is often a party to disputes and legal proceedings that it considers routine and incidental to its business, including those described below. The Company believes that it has meritorious defenses to the allegations made in the pending cases and intends to vigorously defend these lawsuits; however, the Company is unable currently to forecast the ultimate outcome of these or similar matters. Since it is difficult to predict the outcome of legal proceedings, it is possible that the ultimate outcomes could materially and adversely affect the Company’s business, financial position, results of operations or cash flows. Accordingly, with respect to these proceedings, the Company is currently unable to reasonably estimate the possible loss or range of possible loss. 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. In June 2023, the Defendants agreed to a settlement in principle with the named plaintiffs, and the settlement was preliminarily approved by the court on October 18, 2023. The proposed settlement remains subject to final approval by the affected stockholders and the court. The court has set April 24, 2024 as the hearing date for final approval of the proposed settlement. If approved, the proposed settlement would provide a release of all claims asserted in the litigation to all Defendants, who continue to deny liability, and the proposed $ 4.5 million settlement amount is expected to be fully paid by the Company's Directors and Officers liability insurance. Charter Complaint. On September 19, 2022, Charter Communications Operating, LLC (“Charter”) filed two complaints against two of our 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, in New York County; the second complaint 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 complaints, Charter is seeking monetary damages. The Company filed its answer to the first complaint file in New York on December 7, 2022 and to the second complaint filed in Delaware on January 9, 2023. Discovery is on-going and the court in the Delaware complaint has set a preliminary trial date of January 2025. WideOpenWest Complaint. On August 9, 2023, WideOpenWest, Inc. and WideOpenWest Finance, LLC (collectively, “WOW”) filed a complaint against Ribbon alleging breach of contract with respect to indemnification obligations purportedly owed to WOW in connection with WOW’s legal dispute with Sprint Communications Company L.P., which was settled by WOW in the second quarter of 2023. The complaint was filed in the 429th Judicial District of the District Court of the State of Texas, in Collin County, Texas and has since been transferred to the 493rd Judicial District Court in Collin County. In the 35 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) complaint, WOW is seeking monetary damages. The Company filed its answer to the complaint on October 5, 2023. Discovery is on-going and no trial date has been set at this time. 36