Ribbon Communications Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 59 Consolidated Balance Sheets as of December 31, 202 3 and 202 2 62 Consolidated Statements of Operations for the years ended December 31, 202 3 , 202 2 and 202 1 63 Consolidated Statements of Comprehensive Loss for the years ended December 31, 202 3 , 202 2 and 202 1 64 Consolidated Statements of Stockholders' Equity for the years ended December 31, 202 3 , 202 2 and 202 1 65 Consolidated Statements of Cash Flows for the years ended December 31, 202 3 , 202 2 and 202 1 66 Notes to Consolidated Financial Statements 68 58 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Ribbon Communications Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Ribbon Communications, Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition — Refer to Notes 2 and 17 to the financial statements Critical Audit Matter Description The Company recognizes revenue from two primary sources: products and services. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct. When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services, including when they are sold separately to similar customers, in order to estimate standalone selling price. Management is required to use judgment to develop its estimates of standalone selling price. Auditing the Company’s estimates of standalone selling price required a high degree of auditor judgment and an increased extent of effort, including the need to involve our data analytics specialists to assist in the testing of the standalone selling price analyses given the judgment required by management in this area. 59 How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the testing of management’s estimation of standalone selling prices included the following, among others: a. We tested the effectiveness of controls over revenue, including those over the determination of estimated standalone selling price. a. We evaluated whether management’s significant accounting policies related to the estimation of standalone selling price were appropriate. a. With the assistance of our data analytics specialists, we evaluated the estimated standalone selling price analyses prepared by the Company, including testing the underlying detail of customer arrangements and the mathematical accuracy of the calculations. Goodwill – Cloud and Edge and IP Optical Networks Reporting Units – Refer to Notes 2 and 10 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company used a combination of the income and market approaches to estimate reporting unit fair value. With respect to the income approach, management is required to make significant estimates and assumptions related to discount rates and forecasts of future revenue and profit margin. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance was $301 million as of December 31, 2023, of which $225 million was allocated to the Cloud and Edge Reporting unit and $76 million was allocated to the IP Optical Networks Reporting Unit (“IP Optical”). Given the significant judgments made by management to estimate the fair value of the Cloud and Edge and IP Optical Reporting Units, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the discount rate and forecasts of future revenue and profit margin required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the discount rate and forecasts of future revenue and profit margin, used by management to estimate the fair value of the Cloud and Edge Reporting Unit and IP Optical Reporting Unit, included the following, among others: a. We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the Cloud and Edge Reporting Unit and IP Optical Reporting Unit, such as controls related to management’s selection of the discount rate and forecasts of future revenue and profit margin. a. We evaluated management’s ability to accurately forecast future revenues and profit margin by comparing actual results to management’s historical forecasts. a. We evaluated the reasonableness of management’s revenue and profit margin forecasts by comparing the forecasts to: i. Historical revenues and profit margins. ii. Internal communications to management and the Board of Directors. iii. Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies. a. With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate by: i. Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation. ii. Developing a range of independent estimates and comparing those to the discount rate selected by management. 60 /s/ Deloitte & Touche LLP Dallas, Texas February 28, 2024 We have served as the Company's auditor since 2005. 61 RIBBON COMMUNICATIONS INC. Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 26,630 $ 67,262 Accounts receivable, net 268,421 267,244 Inventory 77,521 75,423 Other current assets 46,146 68,057 Total current assets 418,718 477,986 Property and equipment, net 41,820 44,832 Intangible assets, net 238,087 294,728 Goodwill 300,892 300,892 Deferred income taxes 69,761 53,649 Operating lease right-of-use assets 39,783 44,888 Other assets 35,092 38,589 $ 1,144,153 $ 1,255,564 Liabilities and Stockholders' Equity Current liabilities: Current portion of term debt $ 35,102 $ 20,058 Accounts payable 85,164 95,810 Accrued expenses and other 91,687 85,270 Operating lease liabilities 15,739 15,416 Deferred revenue 113,381 113,939 Total current liabilities 341,073 330,493 Long-term debt, net of current 197,482 306,270 Warrant liability 5,295 — Preferred stock liability, $ 0.01 par value per share; 10,000,000 shares authorized, 55,000 shares issued and outstanding at December 31, 2023 ($ 56,650 liquidation preference); none issued and outstanding at December 31, 2022 53,337 — Operating lease liabilities, net of current 38,711 46,183 Deferred revenue, net of current 19,218 19,254 Deferred income taxes 5,616 3,750 Other long-term liabilities 30,658 31,187 Total liabilities 691,390 737,137 Commitments and contingencies (Note 26) Stockholders' equity: Common stock, 240,000,000 shares authorized, $ 0.0001 par value, 172,083,667 shares issued and outstanding at December 31, 2023; 168,324,995 shares issued and outstanding at December 31, 2022 17 17 Additional paid-in capital 1,958,909 1,941,569 Accumulated deficit ( 1,519,950 ) ( 1,453,744 ) Accumulated other comprehensive income 13,787 30,585 Total stockholders' equity 452,763 518,427 $ 1,144,153 $ 1,255,564 See notes to the consolidated financial statements. 62 RIBBON COMMUNICATIONS INC. Consolidated Statements of Operations (in thousands, except per share data) Year ended December 31, 2023 2022 2021 Revenue: Product $ 445,150 $ 442,680 $ 453,042 Service 381,189 377,080 391,915 Total revenue 826,339 819,760 844,957 Cost of revenue: Product 250,609 245,145 214,745 Service 139,357 142,137 147,209 Amortization of acquired technology 28,290 31,542 38,343 Total cost of revenue 418,256 418,824 400,297 Gross profit 408,083 400,936 444,660 Operating expenses: Research and development 190,660 203,676 194,948 Sales and marketing 137,460 147,766 150,279 General and administrative 54,962 51,053 53,661 Amortization of acquired intangible assets 28,601 29,646 28,283 Impairment of goodwill — — 116,000 Acquisition-, disposal- and integration-related 4,476 6,286 7,632 Restructuring and related 16,209 10,833 11,653 Total operating expenses 432,368 449,260 562,456 Loss from operations ( 24,285 ) ( 48,324 ) ( 117,796 ) Interest expense, net ( 27,320 ) ( 19,780 ) ( 15,831 ) Other expense, net ( 3,768 ) ( 44,495 ) ( 74,516 ) Loss before income taxes ( 55,373 ) ( 112,599 ) ( 208,143 ) Income tax (provision) benefit ( 10,833 ) 14,516 30,958 Net loss $ ( 66,206 ) $ ( 98,083 ) $ ( 177,185 ) Loss per share: Basic $ ( 0.39 ) $ ( 0.63 ) $ ( 1.20 ) Diluted $ ( 0.39 ) $ ( 0.63 ) $ ( 1.20 ) Shares used to compute loss per share: Basic 170,408 156,668 147,575 Diluted 170,408 156,668 147,575 See notes to the consolidated financial statements. 63 RIBBON COMMUNICATIONS INC. Consolidated Statements of Comprehensive Loss (in thousands) Year ended December 31, 2023 2022 2021 Net loss $ ( 66,206 ) $ ( 98,083 ) $ ( 177,185 ) Other comprehensive income (loss), net of tax: Unrealized gain (loss) on interest rate swap, net of reclassifications and amortization into earnings ( 10,015 ) 19,321 12,759 Reclassification of gain to other expense, net upon sale of interest rate swap ( 5,099 ) — — Foreign currency translation adjustments ( 506 ) ( 792 ) ( 239 ) Employee retirement benefits ( 1,178 ) 4,478 — Other comprehensive income (loss), net of tax ( 16,798 ) 23,007 12,520 Comprehensive loss, net of tax $ ( 83,004 ) $ ( 75,076 ) $ ( 164,665 ) See notes to the consolidated financial statements. 64 RIBBON COMMUNICATIONS INC. Consolidated Statements of Stockholders' Equity (in thousands, except share data) Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit (loss) income equity Balances, January 1, 2021 145,425,248 $ 15 $ 1,870,256 $ ( 1,178,476 ) $ ( 4,942 ) $ 686,853 Exercise of stock options 13,815 24 24 Vesting of restricted stock awards and units 3,653,552 — Vesting of performance-based stock units 1,557,656 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 1,754,963 ) ( 14,464 ) ( 14,464 ) Stock-based compensation expense 19,418 19,418 Other comprehensive income 12,520 12,520 Net loss ( 177,185 ) ( 177,185 ) Balances, December 31, 2021 148,895,308 15 1,875,234 ( 1,355,661 ) 7,578 527,166 Exercise of stock options 708 1 1 Vesting of restricted stock awards and units 3,075,543 — Vesting of performance-based stock units 179,184 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 897,059 ) ( 2,784 ) ( 2,784 ) Common stock issued in equity offering 17,071,311 2 52,065 52,067 Issuance costs related to equity offering ( 1,654 ) ( 1,654 ) Stock-based compensation expense 18,707 18,707 Other comprehensive income 23,007 23,007 Net loss ( 98,083 ) ( 98,083 ) Balances, December 31, 2022 168,324,995 17 1,941,569 ( 1,453,744 ) 30,585 518,427 Exercise of stock options 7,816 15 15 Vesting of restricted stock awards and units 4,840,738 — 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 ( 1,470,953 ) ( 4,481 ) ( 4,481 ) Stock-based compensation expense 21,806 21,806 Other comprehensive loss ( 16,798 ) ( 16,798 ) Net loss ( 66,206 ) ( 66,206 ) Balances, December 31, 2023 172,083,667 $ 17 $ 1,958,909 $ ( 1,519,950 ) $ 13,787 $ 452,763 See notes to the consolidated financial statements. 65 RIBBON COMMUNICATIONS INC. Consolidated Statements of Cash Flows (in thousands) Year ended December 31, 2023 2022 2021 Cash flows from operating activities: Net loss $ ( 66,206 ) $ ( 98,083 ) $ ( 177,185 ) Adjustments to reconcile net loss to cash flows (used in) provided by operating activities: Depreciation and amortization of property and equipment 14,105 15,295 16,962 Amortization of intangible assets 56,891 61,188 66,626 Amortization of debt issuance costs 3,241 2,308 4,763 Amortization of accumulated other comprehensive gain related to interest rate swap ( 5,575 ) — — Stock-based compensation 21,806 18,707 19,418 Impairment of goodwill — — 116,000 Deferred income taxes ( 9,196 ) ( 18,251 ) ( 45,596 ) Gain on sale of business — ( 62 ) ( 2,772 ) Decrease in fair value of investments — 41,291 71,252 Gain on sale of swap ( 7,301 ) — — Change in fair value of warrant liability ( 201 ) — — Change in fair value of preferred stock liability 1,548 — — Dividends accrued on preferred stock liability 3,935 — — Foreign currency exchange losses ( 44 ) 1,576 5,002 Changes in operating assets and liabilities: Accounts receivable 5,726 14,285 ( 47,279 ) Inventory ( 10,701 ) ( 32,099 ) ( 9,029 ) Other operating assets 34,834 2,109 9,958 Accounts payable ( 10,498 ) ( 448 ) 34,482 Accrued expenses and other long-term liabilities ( 14,684 ) ( 37,635 ) ( 50,324 ) Deferred revenue ( 593 ) 3,455 6,904 Net cash provided by (used in) operating activities 17,087 ( 26,364 ) 19,182 Cash flows from investing activities: Purchases of property and equipment ( 9,381 ) ( 10,254 ) ( 17,132 ) Purchases of software licenses ( 100 ) ( 3,300 ) — Proceeds from sale of business — 1,418 2,944 Net cash used in investing activities ( 9,481 ) ( 12,136 ) ( 14,188 ) Cash flows from financing activities: Borrowings under revolving line of credit 97,000 73,625 — Principal payments on revolving line of credit ( 97,000 ) ( 73,625 ) — Proceeds from issuance of long-term debt — — 74,625 Principal payments of term debt ( 95,058 ) ( 45,058 ) ( 92,176 ) Principal payments of finance leases — ( 595 ) ( 903 ) Payment of debt issuance costs ( 1,685 ) ( 1,046 ) ( 789 ) 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 24 Payment of tax withholding obligations related to net share settlements of restricted stock awards ( 4,481 ) ( 2,784 ) ( 14,464 ) Net cash (used in) provided by financing activities ( 47,859 ) 931 ( 33,683 ) Effect of exchange rate changes on cash and cash equivalents ( 379 ) ( 1,654 ) ( 523 ) Net decrease in cash and cash equivalents ( 40,632 ) ( 39,223 ) ( 29,212 ) Cash and cash equivalents, beginning of year 67,262 106,485 135,697 Cash and cash equivalents, end of year $ 26,630 $ 67,262 $ 106,485 66 RIBBON COMMUNICATIONS INC. Consolidated Statements of Cash Flows (continued) (in thousands) Year ended December 31, 2023 2022 2021 Supplemental disclosure of cash flow information: Interest paid $ 25,573 $ 19,336 $ 14,867 Income taxes paid $ 18,876 $ 16,988 $ 14,447 Income tax refunds received $ 1,611 $ 1,251 $ 1,488 Supplemental disclosure of non-cash investing activities: Capital expenditures incurred, but not yet paid $ 2,578 $ 2,559 $ 2,269 Inventory transfers to property and equipment $ 1,693 $ 2,896 $ 676 Software license acquired through investment disposal $ — $ 1,886 $ — 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 $ 15,571 $ 9,858 $ 40,751 See notes to the consolidated financial statements. 67 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (1) NATURE OF THE BUSINESS Ribbon Communications Inc. ("Ribbon" or the "Company") is a leading global provider of communications technology to service providers and enterprises. The Company provides a broad range of software and high-performance hardware products, network solutions, and services that enable the secure delivery of data and voice communications, and high-bandwidth networking and connectivity for residential consumers and for small, medium, and large enterprises and industry verticals such as finance, education, government, utilities, and transportation. Ribbon's mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance, and elasticity. The Company is headquartered in Plano, Texas, and has a global presence with research and development, or sales and support locations in over thirty countries around the world. (2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States ("GAAP"). 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 16). Equity Offering On August 12, 2022, the Company entered into a Securities Purchase Agreement with certain investors for the sale (the "Equity Offering") in a private placement by the Company of 17,071,311 shares (the "Shares") of the Company’s common stock, par value $ 0.0001 per share, at a price of $ 3.05 per share. The aggregate gross proceeds from the Equity Offering were approximately $ 52.1 million, including $ 10.0 million from existing related party shareholders, before deducting offering expenses paid by the Company of approximately $ 1.7 million. The original issuance of the Shares in the Equity Offering was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Company subsequently filed a registration statement on Form S-3 (the “Registration Statement”) with the SEC registering the Shares, which Registration Statement was declared effective by the SEC on September 23, 2022. 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 Principles of Consolidation The accompanying consolidated financial statements include the accounts of Ribbon and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. 68 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Use of Estimates and Judgments The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and judgments relied upon in preparing these consolidated financial statements include accounting for business combinations, revenue recognition for multiple element arrangements, inventory valuations, assumptions used to determine the fair value of stock-based compensation and the Preferred Stock and Warrants, intangible asset and goodwill valuations, including impairments, debentures and warrants , warranty accruals, legal contingencies and recoverability of Ribbon's net deferred tax assets and the related valuation allowances. Ribbon regularly assesses these estimates and records changes in estimates in the period in which they become known. Ribbon bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates. Reclassifications Certain reclassifications, not affecting previously reported net income (loss), have been made to the previously issued financial statements to conform to the current year presentation. Business Combinations The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired in the business combination that are not individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. Revenue Recognition The Company derives revenue from two primary sources: products and services. Product revenue includes the Company's hardware and software that function together to deliver the products' essential functionality. Software and hardware are also sold on a standalone basis. Services include customer support (software updates, upgrades and technical support), consulting, design services, installation services and training. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct. When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services, including when they are sold separately to similar customers, in order to estimate standalone selling price. The Company's software licenses typically provide a perpetual right to use the Company's software. The Company also sells term-based software licenses that expire and Software-as-a-Service ("SaaS")-based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software and hardware are delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. Product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. The Company begins to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period. 69 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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 . 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. 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. The Preferred Stock is considered to be debt for our Consolidated Net Leverage Ratio covenant calculation required under our 2020 Credit Facility. 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 consolidated statements of operations. Financial Instruments The carrying amounts of the Company's cash equivalents, accounts receivable, accounts payable and borrowings under a revolving credit facility in the Consolidated Balance Sheets approximates fair value due to the immediate or short-term nature of these financial instruments. Ribbon's term debt balance as of December 31, 2023 and 2022 of $ 235.4 million and $ 330.4 million, respectively, had a fair value of approximately $ 235.1 million and $ 323.0 million , respectively. Our Preferred Stock and Warrants liabilities as of December 31, 2023 had a combined fair value of $ 58.6 million , including cumulative dividends on the Preferred Stock of $ 3.9 million . Financial instruments with remaining maturities or that are due within one year from the balance sheet date are classified as current. Financial instruments with maturities or that are payable more than one year from the balance sheet date are classified as noncurrent. 70 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Fair Value Option - Investment in AVCT The Company received debentures (the "Debentures") and warrants (the "AVCT Warrants") as sale consideration in connection with its December 1, 2020 sale of the Kandy Communications Business to American Virtual Cloud Technologies, Inc. ("AVCT") (the "Kandy Sale"). On September 8, 2021 (the "Debenture Conversion Date"), the Debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares"). In connection with the conversion of the Debentures to the Debenture Shares, the Company elected to use the fair value option to account for its equity investment in AVCT as permitted under Accounting Standards Codification ("ASC") 825, Financial Instruments ("ASC 825"), which then refers to ASC 820, Fair Value Measurement ("ASC 820") to provide the fair value framework for valuing such investments. In accordance with ASC 820, the Company recorded the investment in AVCT at fair value, with changes in fair value recorded as a component of Other (expense) income, net, in the consolidated statements of operations. See Note 4 for a discussion of the valuation of the Debentures, AVCT warrants and Debenture Shares. 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. See Note 4 for a description of the settlement agreement with AVCT. Transfers of Financial Assets The Company's IP Optical Networks segment maintains customer receivables factoring agreements with a number of financial institutions. Under the terms of these agreements, the Company may transfer receivables to the financial institutions, on a non-recourse basis, provided that the financial institutions approve the receivables in advance. The Company maintains credit insurance policies from major insurance providers or obtains letters of credit from the customers for a majority of its factored trade receivables. The Company accounts for the factoring of its financial assets as a sale of the assets and records the factoring fees, when incurred, as a component of interest expense in the consolidated statements of operations, and the proceeds from the sales of receivables are included in cash from operating activities in the consolidated statements of cash flows. Factoring of accounts receivable and associated fees for the years ended December 31, 2023 and 2022 were as follows (in thousands): December 31, 2023 2022 Accounts receivable sold $ 106,705 $ 74,523 Less factoring fees ( 2,736 ) ( 1,085 ) Net cash proceeds $ 103,969 $ 73,438 Foreign Currency Translation For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Accumulated other comprehensive income. For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Other expense, net. Realized and unrealized foreign currency exchange gains and losses arising from transactions denominated in currencies other than the subsidiary's functional currency are reflected in earnings. The Company records its foreign currency gains (losses) as a component of Other expense, net. The Company recognized net foreign currency losses of less than $ 0.1 million, $ 1.6 million and $ 5.0 million for the years ended December 31, 2023, 2022 and 2021, respectively. 71 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Inventory Inventory is recorded at the lower of cost or market value using the first-in, first-out convention. The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors. Ribbon writes down evaluation equipment (equipment at customer sites for testing and evaluation) at the time of shipment to its customers, as it is probable that the inventory value will not be realized. Deferred product costs represent deferred cost of revenue for product shipments to customers prior to satisfaction of Ribbon's revenue recognition criteria. The Company classifies inventory that is not expected to be consumed within one year from the balance sheet date as noncurrent and includes such inventory as a component of Other assets. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from two to five years . Leasehold improvements are amortized over the lesser of the lease term or five years . When an asset is sold or retired, the cost and related accumulated depreciation or amortization are eliminated, and the resulting gain or loss, if any, is recognized in Loss from operations in the consolidated statement of operations. The Company reviews property and equipment for impairment in the same manner as intangible assets discussed below. Software development costs associated with internal use software are incurred in three stages of development: the preliminary project stage, the application development stage and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property and equipment. Internal use software is amortized on a straight-line basis over its estimated useful life of three years , beginning when the software is ready for its intended use. Intangible Assets and Goodwill The Company's intangible assets are comprised of in-process research and development, developed technology, customer relationships, trade names, and internal use software. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable based upon the estimated undiscounted cash flows. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the Company will recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset. The Company amortizes its intangible assets over their respective useful lives, with the exception of in-process research and development, which has an indefinite life until the product is generally available, at which time such asset is typically reclassified to developed technology, and the Company begins to amortize this asset. See Note 10 for additional information regarding the Company's intangible assets. Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested for impairment at least annually, or more frequently if indicators of potential impairment exist, by comparing the fair value of the Company's reporting unit to its carrying value. The Company's annual test for impairment of goodwill is completed as of October 1. For the purpose of testing goodwill for impairment, all goodwill is assigned to a reporting unit, which may either be an operating segment or a portion of an operating segment. The Company's reporting units are its two operating segments, Cloud and Edge and IP Optical Networks. The Company performs a fair value analysis for each reporting unit using both an income and market approach, which encompasses a discounted cash flow analysis and a guideline public company analysis using selected multiples. The Company assesses each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and the methodologies are weighted appropriately. Any impairment charges are reported separately in the Company's consolidated statements of operations. 72 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Stock-Based Compensation The Company's stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of the awards that will be forfeited. The Company uses the Black-Scholes valuation model for estimating the fair value of stock options on the grant date. The fair value of stock option awards is affected by the Company's stock price as well as valuation assumptions, including the volatility of Ribbon's stock price, expected term of the option, risk-free interest rate and expected dividends. The Company may grant to certain of its executives and certain other employees performance-based stock units ("PSUs") that include a market condition. The Company uses a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the volatility of each entity and the pair-wise covariance between each entity. These results are then used to calculate the grant date fair values of the PSUs. The Company is required to record expense for the PSUs with market conditions through their respective final vesting dates regardless of the number of shares that are ultimately earned. Once the grant date criteria have been met for a fiscal year performance period, the Company records stock-based compensation expense based on its assessment of the probability that the respective performance condition will be achieved and the level, if any, of such achievement. The Compensation Committee determines the number of shares earned, if any, after the Company's financial results for each fiscal year performance period are finalized. Upon the determination by the Compensation Committee of the number of shares that will be received upon vesting, such number of shares becomes fixed and the unamortized expense is recorded through the remainder of the service period, at which time any Performance PSUs earned, will vest pending each executive's continued employment with the Company through that date. Concentration of Risk The financial instruments that potentially subject Ribbon to concentrations of credit risk are cash and accounts receivable. The Company's cash equivalents were managed by one financial institution at December 31, 2023 . Historically, the Company has not experienced significant losses due to such bank depository concentration. Certain components and software licenses from third parties used in Ribbon's products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt Ribbon's delivery of products and thereby materially adversely affect Ribbon's revenue and operating results. Advertising Costs Advertising costs are expensed as incurred and included as a component of Sales and marketing expense in the Company's consolidated statements of operations. Advertising expenses were $ 1.2 million , $ 1.5 million and $ 1.6 million for the years ended December 31, 2023, 2022 and 2021, respectively. Loss Contingencies and Reserves Ribbon is subject to ongoing business risks arising in the ordinary course of business, including legal claims, that affect the estimation process of the carrying value of assets, the recording of liabilities and the possibility of various loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. Ribbon regularly evaluates current information available to determine whether such amounts should be adjusted and records changes in estimates in the period they become known. An allowance for doubtful accounts is estimated based on the Company's assessment of the collectability of specific customer accounts. Ribbon accrues for royalties for technology that it licenses from vendors based on established royalty rates and usage. Ribbon is periodically contacted by third parties who claim that Ribbon's products infringe on certain intellectual property of a third party. Ribbon evaluates these claims and accrues amounts when it is probable that the obligation has been incurred and the amounts are reasonably estimable. 73 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Warranty The Company records warranty liabilities for estimated costs of fulfilling its obligations under standard limited hardware and software warranties at the time of sale. The specific warranty terms and conditions vary depending upon the country in which the Company does business, but generally includes material costs, technical support, labor and associated overhead over a period ranging from one to three years . At December 31, 2023, the Company's liability for product warranties was $ 12.2 million of which $ 5.4 million was current and included in Accrued expenses and other and $ 6.8 million was long-term and included in Other long-term liabilities in the Company's consolidated balance sheet. At December 31, 2022, the Company's liability for product warranties was $ 11.9 million, of which $ 5.3 million was current and included in Accrued expenses and other, and $ 6.6 million was long-term and included in Other long-term liabilities in the Company's consolidated balance sheet. Research and Development Grants The Company records grants received from the Office of the Innovation Authority of the Israeli Ministry of Economics (the "IIA") as a reduction to Research and development expense. Royalties payable to the IIA are recognized pursuant to sales of related products and are included in Cost of revenue - product (see Note 26). Accounting for Leases The Company accounts for its leases in accordance with Accounting Standards Codification ("ASC") 842, Leases ("ASC 842") (see Note 21). The Company has operating leases for corporate offices, and research and development facilities. Operating leases are reported separately in the Company's consolidated balance sheets at December 31, 2023 and 2022. The Company has no finance leases as of December 31, 2023 or 2022. 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. Lease expense for minimum fixed lease payments is recognized on a straight-line basis over the lease term. The expense for finance leases would include both interest and amortization expense components, with the interest component calculated based on the effective interest method and the amortization component calculated based on straight-line amortization of the right-of-use asset over the lease term. Lease contracts may contain variable lease costs, such as common area maintenance, utilities and tax reimbursements that vary over the term of the contract. Variable lease costs are not included in minimum fixed lease payments and as a result, are excluded from the measurement of the right-of-use assets and lease liabilities. The Company expenses all variable lease costs as incurred. Accounting for Income Taxes Deferred tax assets and liabilities are recognized for the expected future consequences of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities and operating loss carryforwards, using tax rates expected to be in effect for the years in which the differences are expected to reverse. The Company records valuation allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized. The Company has provided for income taxes on the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2023, excluding Ireland and Israel, which are indefinitely reinvested. Accordingly, the Company is required to recognize and record deferred taxes for 2023 on the entire outside basis differences related to the foreign subsidiaries, the largest of these differences being undistributed earnings. The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of the benefit attributable to the position is recognized. 74 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The tax benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50 % likely of being realized upon resolution of the contingency. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. Defined Benefit Plans The Company has defined benefit plans for some of its employees at various international locations. The Company recognizes retirement benefit assets or liabilities in the consolidated balance sheets reflecting the funded status of pension and other retirement benefit plans. Retirement benefit assets and liabilities are adjusted for the difference between the benefit obligations and the plan assets at fair value (measured at year-end), with the offset recorded directly to stockholders' equity through Other comprehensive income (loss), net of tax. The amount recorded in stockholders' equity represents the after-tax unamortized actuarial gains or losses, unamortized transition obligations and unamortized prior service costs. Recent Accounting Pronouncements In December 2023, the Financial Accounting Standards Board (the "FASB") issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which increases the disclosure requirements around rate reconciliation information and certain types of income taxes companies are required to pay. ASU 2023-09 will be effective for the Company beginning in 2025, with early adoption permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which improves reportable segment disclosure requirements, including enhancement of the disclosures of significant segment expenses and interim disclosure requirements, to enable investors to better understand an entity's overall performance and assess potential future cash flows. ASU 2023-07 will be effective for the Company annually beginning in 2024 and on an interim basis beginning in 2025, with early adoption permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures. In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's disclosure Update and Simplification Initiative (“ASU 2023-06”), which amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification. This ASU was issued in response to and to align GAAP with the SEC's August 2018 final rule that updates and simplifies disclosure requirements. The effective date for the Company for each amendment will be the date on which the SEC's removal of that related disclosure requirement becomes effective, with early adoption prohibited. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures. On February 1, 2023, the FASB staff noted that they believe that the Pillar 2 tax, established by the OECD and intended to apply for tax years beginning in 2024, would be an alternative minimum tax and therefore deferred tax assets would not need to be recognized related to this parallel taxing system. On February 2, 2023, the OECD issued administrative guidance providing transition and safe harbor rules around the implementation of the Pillar 2 global minimum tax. Under an additional transitional safe harbor released July 17, 2023, the undertaxed profits rule top-up tax will not be applied by any constituent entity's jurisdiction of residence with respect to income earned by a company's ultimate parent entity in its jurisdiction of residence, if the ultimate parent entity's jurisdiction has a corporate tax rate of at least 20%. This transition safe harbor will apply to fiscal years beginning on or before December 31, 2025 and ending before December 31, 2026. We are closely monitoring developments and evaluating the impacts these new rules will have on our tax rate, including eligibility to qualify for these safe harbor rules. Based upon preliminary calculations for calendar year 2024, we anticipate that we will meet the safe harbors in most jurisdictions, and any remaining top-up tax should be immaterial. In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310, Receivables (Topic 310) , and requires entities to provide disclosures about current period gross write-offs by year of origination. Also, ASU 2022-02 updates the requirements related to accounting for credit losses under ASC 326, Financial Instruments – Credit Losses (Topic 326) , and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 was effective for 75 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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. (3) BUSINESS ACQUISITIONS On March 3, 2020, Ribbon completed its merger transaction with ECI Telecom Group Ltd ("ECI") in accordance with the terms of the Agreement and Plan of Merger, dated as of November 14, 2019 (the "ECI Acquisition"). Prior to the ECI Acquisition, ECI was a privately-held global provider of end-to-end packet optical transport and software-defined networking ("SDN") and network function virtualization solutions for service providers, enterprises and data center operators. The ECI Acquisition was accounted for as a business combination and the financial results of ECI are included in the Company's consolidated financial statements. Costs related to the integration of the Company and ECI are included in the Acquisition-, disposal- and integration-related expenses in the table below. Acquisition-, Disposal- and Integration-Related Expenses Acquisition-related expenses include those expenses related to acquisitions that would otherwise not have been incurred by the Company, including professional and services fees, such as legal, audit, consulting, paying agent and other fees, and expenses related to cash payments to certain former executives of the acquired businesses in connection with their employment agreements. Disposal-related expenses are professional and services fees related to disposals of subsidiaries or portions of the business. Integration-related expenses represent incremental costs related to combining the Company and its business acquisitions, such as third-party consulting and other third-party services related to merging the previously separate companies' systems and processes. The disposal-related expenses in the year ended December 31, 2022 primarily relate to costs incurred from the sale of one of our foreign subsidiaries. The disposal-related expenses in the year ended December 31, 2021 relate to the Kandy Sale (as defined below). The integration-related expenses in the years ended December 31, 2023, 2022 and 2021 relate to the ECI Acquisition. The components of Acquisition-, disposal- and integration-related expenses incurred in the years ended December 31, 2023, 2022 and 2021 were as follows (in thousands): Year ended December 31, 2023 2022 2021 Professional and services fees (acquisition-related) $ — $ — $ 165 Professional and services fees (disposal-related) — 414 329 Integration-related expenses 4,476 5,872 7,138 $ 4,476 $ 6,286 $ 7,632 76 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (4) SALE OF KANDY COMMUNICATIONS BUSINESS The Company completed the Kandy Sale on December 1, 2020 (the "Kandy Sale Date"). As consideration, AVCT paid Ribbon $ 45.0 million, subject to certain adjustments, in the form of Debentures and AVCT Warrants (collectively the "AVCT Units"). The Company received 43,778 AVCT Units as sale consideration. The Debentures bore interest at a rate of 10 % per annum, which was added to the principal amount of the Debentures. The Debentures were subject to mandatory conversion if the AVCT stock price was at or above $ 6.00 per share for 40 trading days in any 60 consecutive trading day period, subject to the satisfaction of certain other conditions. As of February 19, 2021, the stock price had traded above $ 6.00 for 40 days within a 60 consecutive trading day period, and accordingly, on September 8, 2021 (the "Debenture Conversion Date"), upon the completion of customary regulatory filings by AVCT, the Debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares"). The AVCT Warrants were independent of the Debentures and entitled the Company to purchase 4,377,800 shares of AVCT common stock at an exercise price of $ 0.01 per share. The Company calculated the fair value of the Debentures at each measurement date using a Lattice-based valuation approach, which utilizes a binomial tree to model the different paths the price of AVCT's common stock might take over the Debentures' life by using assumptions regarding the stock price volatility and risk-free interest rate. The Company used the Black-Scholes valuation model for estimating the fair value of the AVCT Warrants at each measurement date. The fair value of the AVCT Warrants was affected by AVCT's stock price as well as valuation assumptions, including the volatility of AVCT's stock price, expected term of the option, risk-free interest rate and expected dividends. Both the Lattice and Black-Scholes valuation models are based on available market data, giving consideration to all of the rights and obligations of each instrument and precluding the use of "blockage" discounts or premiums in determining the fair value of a large block of financial instruments. The Company recorded a loss of $ 74.8 million in the year ended December 31, 2021 arising from the change in the fair value of the AVCT Investment. This loss was included as a component of Other expense net, in the Company's consolidated statements of operations. The Company recorded $ 3.5 million of interest income in the year ended December 31, 2021, which was added to the principal amount of the Debentures prior to the Debenture Conversion Date, and which is included in Interest expense, net, in the consolidated statement of operations. 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 agreement, 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 consolidated balance sheet as of December 31, 2023 and 2022 in the amount of $ 2.4 million and $ 3.9 million, respectively. The Company had no investment in AVCT as of December 31, 2023 or 2022 due to the settlement agreement entered into on August 29, 2022. The Company recorded losses of $ 41.3 million in the year ended December 31, 2022, representing the change in the fair value of the AVCT Investment. The results of the Kandy Communications Business are excluded from the Company's consolidated results for all periods subsequent to the Kandy Sale Date. (5) EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. For periods in which the Company reports net income, diluted net income per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the 77 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) period unless the effect is antidilutive. The shares used to compute loss per share were as follows (in thousands): Year ended December 31, 2023 2022 2021 Weighted average shares outstanding—basic 170,408 156,668 147,575 Potential dilutive common shares — — — Weighted average shares outstanding—diluted 170,408 156,668 147,575 Options to purchase the Company's common stock and unvested restricted and performance-based stock units aggregating 13.5 million shares , 14.5 million shares, and 10.6 million shares were excluded from the computation of diluted loss per share for the years ended December 31, 2023, 2022 and 2021, respectively, because their effect would have been antidilutive. As of December 31, 2023, the potential number of dilutive shares from the Warrants totaled 4.9 million shares. However, there was no impact on weighted average shares outstanding from these Warrants for the year ended December 31, 2023 as the average share price of the Company's common stock 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. (6) FAIR VALUE HIERARCHY Fair Value Hierarchy Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows: Level 1. Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. The Company had no assets or liabilities fair valued using Level 1 input at December 31, 2023 or 2022. 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). At December 31, 2023, the Company determined the fair value of its defined benefit plans' assets using Level 2 input. At December 31, 2022, the Company determined the fair value of its interest rate swap and its defined benefit plans' assets using Level 2 input. 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. At December 31, 2023, the fair value of the Company's Preferred Stock and Warrants were determined using Level 3 input. The Company had no assets or liabilities fair valued using Level 3 input at December 31, 2023 or 2022. 78 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (7) ACCOUNTS RECEIVABLE, NET Accounts receivable, net, consisted of the following (in thousands): December 31, 2023 2022 Accounts receivable $ 269,933 $ 268,671 Allowance for doubtful accounts ( 1,512 ) ( 1,427 ) Accounts receivable, net $ 268,421 $ 267,244 The Company's allowance for doubtful accounts activity was as follows (in thousands): Year ended December 31, Balance at beginning of year Charges to expense Charges (credits) to other accounts Write-offs Balance at end of year 2023 $ 1,427 $ 428 $ 143 $ ( 486 ) $ 1,512 2022 $ 1,270 $ 100 $ 159 $ ( 102 ) $ 1,427 2021 $ 776 $ 553 $ 85 $ ( 144 ) $ 1,270 (8) INVENTORY Inventory consisted of the following (in thousands): December 31, 2023 2022 On-hand final assemblies and finished goods inventories $ 93,077 $ 85,888 Deferred cost of goods sold 3,269 1,449 96,346 87,337 Less noncurrent portion (included in Other assets) ( 18,825 ) ( 11,914 ) Current portion $ 77,521 $ 75,423 (9) PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): December 31, Useful Life 2023 2022 Equipment 2 - 5 years $ 77,205 $ 76,674 Software 2 - 5 years 34,802 33,639 Furniture and fixtures 3 - 5 years 3,301 3,168 Leasehold improvements Shorter of the estimated lease term or useful life 36,383 35,448 151,691 148,929 Less accumulated depreciation and amortization ( 109,871 ) ( 104,097 ) Property and equipment, net $ 41,820 $ 44,832 The Company recorded depreciation and amortization expense related to property and equipment of $ 14.1 million for the year ended December 31, 2023, $ 15.3 million for the year ended December 31, 2022 and $ 17.0 million for the year ended December 31, 2021. During each of these years, the Company disposed of certain property and equipment that was fully depreciated at the time of disposal, which resulted in reductions in both Cost and Accumulated depreciation. 79 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The net book values of the Company's property and equipment by geographic area were as follows (in thousands): December 31, 2023 2022 United States $ 20,807 $ 23,143 Canada 3,175 3,471 Asia/Pacific 8,314 8,152 Europe 957 833 Israel 8,309 8,860 Other 258 373 $ 41,820 $ 44,832 (10) INTANGIBLE ASSETS AND GOODWILL The Company's intangible assets at December 31, 2023 and 2022 consisted of the following (in thousands): December 31, 2023 Weighted average amortization period (years) Cost Accumulated amortization Net carrying value Developed technology 7.84 $ 340,380 $ 239,066 $ 101,314 Customer relationships 11.86 268,140 134,743 133,397 Trade names 3.88 5,000 4,901 99 Software licenses 3.00 5,436 2,159 3,277 9.51 $ 618,956 $ 380,869 $ 238,087 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 December 31, 2023 was as follows (in thousands): Years ending December 31, 2024 $ 50,800 2025 44,089 2026 39,039 2027 33,935 2028 23,400 Thereafter 46,824 $ 238,087 Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. For the purpose of testing goodwill for impairment, all goodwill is assigned to a reporting unit, which may be either an operating segment or a portion of an operating segment. The Company's reporting units are its two operating segments, Cloud and Edge and IP Optical Networks. Annual testing for impairment of goodwill is completed as of October 1. 80 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Upon completion of the 2023 and 2022 annual tests for goodwill impairment, the Company determined that there was no impairment of goodwill in either of its reporting units. There was no change in the carrying value of the Company's goodwill in the years ended December 31, 2022 and 2023. The components of goodwill at December 31, 2022 and 2023 were as follows (in thousands): Cloud and Edge IP Optical Networks Total Balance at December 31, 2022 Goodwill $ 392,302 $ 191,996 $ 584,298 Accumulated impairment losses ( 167,406 ) ( 116,000 ) ( 283,406 ) 224,896 75,996 300,892 Balance at December 31, 2023 Goodwill $ 392,302 $ 191,996 $ 584,298 Accumulated impairment losses ( 167,406 ) ( 116,000 ) ( 283,406 ) $ 224,896 $ 75,996 $ 300,892 (11) ACCRUED EXPENSES AND OTHER Accrued expenses and other consisted of the following (in thousands): December 31, 2023 2022 Employee compensation and related costs $ 33,682 $ 25,994 Professional fees 19,702 17,195 Taxes payable 8,383 8,152 Other 29,920 33,929 $ 91,687 $ 85,270 (12) WARRANTY The changes in the Company's warranty accrual balance in the years ended December 31, 2023 and 2022 were as follows (in thousands): Year ended December 31, Balance at beginning of year Provision Settlements Balance at end of year 2023 $ 11,857 $ 5,875 $ ( 5,489 ) $ 12,243 2022 $ 13,120 $ 4,605 $ ( 5,868 ) $ 11,857 (13) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES The Company recorded restructuring and related expense aggregating $ 16.2 million, $ 10.8 million and $ 11.7 million in the years ended December 31, 2023, 2022 and 2021, respectively. Restructuring and related expense includes restructuring expense (primarily severance and related costs), estimated future variable and other lease costs for vacated properties with no intent or ability of sublease, and accelerated rent amortization expense. For restructuring events that involve lease assets and liabilities, the Company applies lease reassessment and modification guidance and evaluates the right-of-use assets for potential impairment. If the Company plans to exit all or distinct portions of a facility and does not have the ability or intent to sublease, the Company will accelerate the amortization of each of those lease components through the vacate date. The accelerated amortization is recorded as a component of Restructuring and related expense in the Company's consolidated statements of operations. Related variable lease expenses will continue to be expensed 81 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) as incurred through the vacate date, at which time the Company will reassess the liability balance to ensure it appropriately reflects the remaining liability associated with the premises and record a liability for the estimated future variable lease costs. Accelerated amortization of lease assets is recognized from the date that the Company commences the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date. Amounts of accelerated rent amortization that are included as a component of restructuring and related expense are not included in the tables below, as the liability for the total lease payments for each respective facility is included as a component of Operating lease liabilities in the Company's consolidated balance sheets at December 31, 2023 and 2022, both current and noncurrent (see Note 21). The Company may incur additional future expense if it is unable to sublease other locations included in the Facilities Initiative. The components of restructuring and related expense for the years ended December 31, 2023, 2022 and 2021 were as follows (in thousands): Year ended December 31, 2023 2022 2021 Severance and related costs $ 9,875 $ 5,230 $ 4,618 Variable and other facilities-related costs 5,326 3,992 5,710 Accelerated amortization of lease assets due to cease-use 1,008 1,611 1,325 $ 16,209 $ 10,833 $ 11,653 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 includes, 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 $ 9.9 million in 2023 in connection with the 2023 Restructuring Plan entirely for severance related costs. A summary of the 2023 Restructuring Plan accrual activity for the year ended December 31, 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 December 31, 2023 Severance $ — $ 9,875 $ ( 9,204 ) $ — $ 671 The Company estimates that it will record nominal future expense under the 2023 Restructuring Plan. 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 $ 6.3 million and $ 10.2 million in connection with the 2022 Restructuring Initiative in the years ended December 31, 2023 and 2022, respectively. The amount for the year ended December 31, 2023 was comprised of $ 5.3 million for variable and other facilities-related costs and $ 1.0 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease. The amount for the year ended December 31, 2022 was comprised of $ 5.3 million for severance and related costs for approximately 70 employees, $ 3.3 million for variable and other facilities-related costs and $ 1.6 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease. The Company estimates that it will record approximately $ 5 million of expense in 2024 under the 2022 Restructuring Plan. A summary of the 2022 Restructuring Plan accrual activity for the years ended December 31, 2023 and 2022 are as follows (in thousands): 82 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Balance at January 1, 2023 Initiatives charged to expense Cash payments Net transfer to operating lease accounts Balance at December 31, 2023 Severance $ 1,164 $ — $ ( 1,164 ) $ — $ — Variable and other facilities-related costs 890 5,326 ( 5,748 ) — 468 Accelerated amortization of lease assets due to cease-use — 1,008 — ( 1,008 ) — $ 2,054 $ 6,334 $ ( 6,912 ) $ ( 1,008 ) $ 468 Balance at January 1, 2022 Initiatives charged to expense Cash payments Net transfer to operating lease accounts Balance at December 31, 2022 Severance $ — $ 5,287 $ ( 4,123 ) $ — $ 1,164 Variable and other facilities-related costs — 3,299 ( 2,409 ) — 890 Accelerated amortization of lease assets due to cease-use — 1,611 — ( 1,611 ) — $ — $ 10,197 $ ( 6,532 ) $ ( 1,611 ) $ 2,054 Balance Sheet Classification The current portions of accrued restructuring were $ 1.1 million and $ 1.3 million at December 31, 2023 and 2022 , respectively, and are included as components of Accrued expenses in the consolidated balance sheets. The long-term portions of accrued restructuring are included as components of Other long-term liabilities in the consolidated balance sheets. The long-term portions of accrued restructuring were $ 1.1 million and $ 2.0 million at December 31, 2023 and 2022 , respectively. (14) 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 of the Credit Agreement were used, in part, to pay off in full all obligations of the Company under the 2019 Credit Facility. The 2020 Credit Facility 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., 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). 83 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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). 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, which is included in Interest expense, net, in the Company's consolidated statement of operations for the year ended December 31, 2021. On March 10, 2022, the Company entered into the Fourth Amendment to the 2020 Credit Facility to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) and in conjunction, the Company made a $ 15.0 million prepayment that was applied to the final payment due on the maturity date. On June 30, 2022, the Company entered into the Fifth Amendment to the 2020 Credit Facility (the "Fifth Amendment") to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) for 2022, with the fourth quarter of 2022 increased to 4.75 :1.00, the first and second 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 were to 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 allowed 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 and then decreasing to 4.25 :1.00 and 4.00 :1.00 in the fourth quarter of 2023 and the first quarter of 2024, 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 84 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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. The Company's interest rates under the 2020 Term Loan b enefited from a hedge instrument that was in place, specifically a fixed rate swap, until the instrument was sold in March 2023 (see Note 15). As a result of the sale of the fixed rate swap, the ongoing interest rate is now 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 December 31, 2023 and 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 December 31, 2023 and 2022, respectively: December 31, 2023 December 31, 2022 Current portion of Term Debt $ 35,102 $ 20,058 Long-term Debt, net of Current: Long-term Debt, net of Current (Face Amount) $ 200,293 $ 310,395 Unamortized Debt Issuance Costs - Contra-Liability ( 2,811 ) ( 4,125 ) Long-term Debt, net of Current $ 197,482 $ 306,270 Total Face Amount of Borrowings $ 235,395 $ 330,453 Unamortized Debt Issuance Costs: Other Assets $ 557 $ 798 Long-Term Debt - Contra Liability 2,811 4,125 Total Unamortized Debt Issuance Costs $ 3,368 $ 4,923 Letters of Credit Outstanding $ 2,711 $ 3,272 Remaining Borrowing Capacity $ 72,289 $ 96,728 Average Interest Rates: Term Loan 10.0 % 5.4 % Letters of Credit 4.5 % 4.5 % The Company's debt maturities as of December 31, 2023 were as follows: Years ending December 31, 2024 35,102 2025 200,293 235,395 85 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Letters of Credit and Performance and Bid Bonds The Company uses letters of credit, bank guarantees, and performance and bid bonds in the course of its business. At December 31, 2023, the Company had $ 7.9 million of letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees"), comprised of the $ 2.7 million of letters of credit under the 2020 Credit Facility described above (the "Letters of Credit") and $ 5.2 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under 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 and $ 5.0 million of Other Guarantees. (15) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company is exposed to financial market risk related to foreign currency fluctuations and changes in interest rates. These exposures are actively monitored by management. To manage the volatility related to the exposure to changes in interest rates, the Company 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 $ 235.4 million and $ 330.4 million at December 31, 2023 and 2022 , respectively. The 2020 Revolving Credit Facility was undrawn at both December 31, 2023 and 2022 . Borrowings under the 2020 Credit Facility have variable interest rates based on LIBOR or SOFR (see Note 14). As a result of exposure to interest rate movements, during March 2020, the Company entered into an interest rate swap arrangement, which effectively converted its $ 400 million term loan with its variable interest rate based upon one-month LIBOR to an aggregate fixed rate of 0.904 %, plus a leverage-based margin as defined in the 2020 Credit Facility. On July 22, 2022, the Company sold $ 30 million of the notional amount of its interest rate swap back to its counterparty for $ 1.5 million, reducing the notional amount of this swap to $ 370 million. On August 16, 2022 the Company sold another $ 30 million of the notional amount of its interest rate swap back to its counterparty for $ 1.6 million, reducing the notional amount to $ 340 million, which approximated the current level of our term loan debt then outstanding. The gain in Accumulated other comprehensive 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 $ 0.9 million and $ 0.5 million for the years ended December 31, 2023 and 2022. 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 income related to the term loan debt prepaid on the date of the final sale of our swap totaled 86 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) $ 7.3 million and was released into earnings immediately as Other expense, net. The portion of the gain in Accumulated other comprehensive 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 amortization of which totaled $ 4.7 million for the year ended December 31, 2023. 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 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 consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the years ended December 31, 2023 and 2022 , such a derivative was used to hedge the variable cash flows associated with the credit facilities 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 consolidated statement of comprehensive (loss) income for the years ended December 31, 2023 and 2022 was as follows, net of tax (in thousands): Year ended December 31, 2023 2022 Gain (loss) recognized in other comprehensive income (loss) on swap, net of tax $ ( 2,715 ) $ 22,456 Amount reclassified from accumulated other comprehensive income to other expense, net upon sale of swap, net of tax ( 5,099 ) — Amount reclassified from accumulated other comprehensive income to interest expense ( 7,300 ) ( 3,135 ) Unrealized gain (loss) on interest rate swap, net of reclassifications and amortization $ ( 15,114 ) $ 19,321 The Company had no derivative assets or liabilities at December 31, 2023. The fair values and locations in the consolidated balance sheet 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 its interest rate derivative aggregating $ 25.4 million at December 31, 2022 , as Level 2 fair value measurements within the fair value hierarchy (see Note 6). (16) 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. 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 its 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. 87 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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 consolidated statements of operations. The Company determined the fair value of the Preferred Stock and Warrants using Level 3 input. The key assumptions input into the models utilized were as follows as of December 31, 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) 1.8 Warrants (Black-Scholes) Stock price $ 2.90 Strike price $ 3.77 Risk-free rate 3.95 % Volatility 60.5 % Dividend yield 0.0 % Time to expiration (years) 3.2 The changes in the Company's Preferred Stock and Warrant liabilities for the year ended December 31, 2023 were as follows (in thousands): Preferred stock liability Balance at January 1, 2023 $ — Issued 47,854 Cumulative dividends 3,935 Fair value change 1,548 Balance at December 31,2023 $ 53,337 Warrant liability Balance at January 1, 2023 $ — Issued 5,496 Fair value change ( 201 ) Balance at December 31,2023 $ 5,295 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 88 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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 the year ended December 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. 89 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (17) REVENUE RECOGNITION The Company's typical performance obligations include the following: Performance Obligation When Performance Obligation is Typically Satisfied When Payment is Typically Due Software and Product Revenue Software licenses (perpetual or term) Upon transfer of control; typically, when made available for download (point in time) Generally, within 30 days of invoicing except for term licenses, which may be paid for over time Software licenses (subscription) Upon activation of hosted site (over time) Generally, within 30 days of invoicing Hardware When control of the hardware passes to the customer; typically, upon delivery (point in time) Generally, within 30 days of invoicing Software upgrades Upon transfer of control; typically, when made available for download (point in time) Generally, within 30 days of invoicing Customer Support Revenue Customer support Ratably over the course of the support contract (over time) Generally, within 30 days of invoicing Professional Services Other professional services (excluding training services) As work is performed (over time) Generally, within 30 days of invoicing (upon completion of services) Training When the class is taught (point in time) Generally, within 30 days of services being performed Significant Judgments The Company's contracts with customers often include promises to transfer multiple products and services to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company typically has more than one standalone selling price ("SSP") for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the SSP. Deferred Revenue Deferred revenue is a contract liability representing amounts collected from or invoiced to customers in excess of revenue recognized. This results primarily from the billing of annual customer support agreements where the revenue is recognized over the term of the agreement. The value of deferred revenue will increase or decrease based on the timing of invoices and recognition of revenue. Disaggregation of Revenue The Company disaggregates its revenue from contracts with customers based on the nature of the products and services and the geographic regions in which each customer is domiciled. The Company's total revenue for the years ended December 31, 2023, 2022 and 2021 was disaggregated geographically as follows: 90 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2023 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 161,945 $ 133,737 $ 48,733 $ 344,415 Europe, Middle East and Africa 151,938 75,478 34,485 261,901 Asia Pacific 115,923 39,891 11,269 167,083 Other 15,344 30,546 7,050 52,940 $ 445,150 $ 279,652 $ 101,537 $ 826,339 Year ended December 31, 2022 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 175,189 $ 132,655 $ 44,819 $ 352,663 Europe, Middle East and Africa 147,523 75,948 29,310 252,781 Asia Pacific 95,828 41,677 13,594 151,099 Other 24,140 31,815 7,262 63,217 $ 442,680 $ 282,095 $ 94,985 $ 819,760 Year ended December 31, 2021 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 196,058 $ 132,683 $ 47,296 $ 376,037 Europe, Middle East and Africa 138,203 79,475 30,349 248,027 Asia Pacific 92,803 41,945 18,183 152,931 Other 25,978 32,218 9,766 67,962 $ 453,042 $ 286,321 $ 105,594 $ 844,957 The Company's product revenue from its direct sales program and from indirect sales through its channel partner program for the years ended December 31, 2023, 2022 and 2021 was as follows (in thousands): Year ended December 31, 2023 2022 2021 Indirect sales through channel program $ 157,495 $ 131,998 $ 117,065 Direct sales 287,655 310,682 335,977 $ 445,150 $ 442,680 $ 453,042 The Company's product revenue from sales to enterprise customers and from sales to service provider customers for the years ended December 31, 2023, 2022 and 2021 was as follows (in thousands): Year ended December 31, 2023 2022 2021 Sales to enterprise customers $ 143,853 $ 125,664 $ 111,494 Sales to service provider customers 301,297 317,016 341,548 $ 445,150 $ 442,680 $ 453,042 91 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The Company's product revenue and service revenue components by segment for the years ended December 31, 2023, 2022 and 2021 was as follows (in thousands): Year ended December 31, 2023 2022 2021 Product revenue Cloud and Edge 184,730 215,770 248,570 IP Optical Networks 260,420 226,910 204,472 Total product revenue 445,150 442,680 453,042 Service revenue Maintenance Cloud and Edge 219,939 222,238 228,321 IP Optical Networks 59,713 59,857 58,000 Total maintenance revenue 279,652 282,095 286,321 Professional services Cloud and Edge 72,979 70,130 79,765 IP Optical Networks 28,558 24,855 25,829 Total professional services revenue 101,537 94,985 105,594 Total service revenue 381,189 377,080 391,915 Revenue Contract Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, which are contract assets, and customer advances and deposits, which are contract liabilities, in the Company's consolidated balance sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Completion of services and billing may occur subsequent to revenue recognition, resulting in contract assets. The Company may receive advances or deposits from its customers before revenue is recognized, resulting in contract liabilities which are classified as deferred revenue. These assets and liabilities are reported in the Company's consolidated balance sheets on a contract-by-contract basis as of the end of each reporting period. Changes in the contract asset and liability balances during the years ended December 31, 2023 and 2022 were not materially impacted by any factors other than billing and revenue recognition. Nearly all of the Company's deferred revenue balance is related to services revenue, primarily customer support contracts. Unbilled receivables stem primarily from engagements where services have been performed; however, billing cannot occur until services are completed. In some arrangements, the Company allows customers to pay for term-based software licenses and products over the term of the software license. The Company also sells SaaS-based software under subscription arrangements, with payment terms over the term of the SaaS agreement. Amounts recognized as revenue in excess of amounts billed are recorded as unbilled receivables. Unbilled receivables that are anticipated to be invoiced in the next twelve months are included in Accounts receivable on the Company's consolidated balance sheets. The changes in the Company's accounts receivable, unbilled receivables and deferred revenue balances for the years ended December 31, 2023 and 2022 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 15,969 ( 14,792 ) ( 558 ) ( 36 ) Balance at December 31, 2023 $ 186,938 $ 81,483 $ 113,381 $ 19,218 Accounts receivable Unbilled accounts receivable Deferred revenue (current) Deferred revenue (long-term) Balance at January 1, 2022 $ 208,972 $ 73,945 $ 109,119 $ 20,619 Increase (decrease), net ( 38,003 ) 22,330 4,820 ( 1,365 ) Balance at December 31, 2022 $ 170,969 $ 96,275 $ 113,939 $ 19,254 92 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The Company recognized approximately $ 108 million of revenue in the year ended December 31, 2023 that was recorded as deferred revenue at December 31, 2022 and approximately $ 103 million of revenue in the year ended December 31, 2022 that was recorded as deferred revenue at December 31, 2021. Of the Company's deferred revenue reported as long-term in its consolidated balance sheet at December 31, 2023, the Company expects that approximately $ 13 million will be recognized as revenue in 2025, approximately $ 4 million will be recognized as revenue in 2026 and approximately $ 2 million will be recognized as revenue in 2027 and beyond. All freight-related customer invoicing is recorded as revenue, while the shipping and handling costs that occur after control of the promised goods or services transfer to the customer are reported as fulfillment costs, a component of Cost of revenue - product in the Company's consolidated statements of operations. Deferred Commissions Cost Sales commissions earned by the Company's employees are considered incremental and recoverable costs of obtaining a contract with a customer. The payments related to these costs have been deferred on our consolidated balance sheet and are being amortized over the expected life of the customer contract, which is generally five years . At December 31, 2023 and 2022 , the Company had $ 3.0 million and $ 3.6 million, respectively, of deferred sales commissions capitalized. (18) OPERATING SEGMENT INFORMATION The Company has two reportable segments, which are intended to align with the manner in which the business is managed: Cloud and Edge, and IP Optical Networks. The Cloud and Edge segment provides secure and reliable software and hardware products, solutions and services for enabling Voice over Internet Protocol ("VoIP") communications, Voice over Long-Term Evolution ("VoLTE") and Voice Over 5G ("VoNR") communications and Unified Communications and Collaboration ("UC&C") within service provider and enterprise networks and from the cloud. The Cloud and Edge products are increasingly software-centric and cloud-native for deployment on private, public or hybrid cloud infrastructures, in data centers, on enterprise premises and within service provider networks. Ribbon's Cloud and Edge product portfolio consists of our Session Border Controller ("SBC") products and our Network Transformation products. The IP Optical Networks segment provides high-performance, secure solutions for IP networking and optical transport, supporting wireless networks including 5G, metro and edge aggregation, core networking, data center interconnect, legacy network transformation and transport solutions for wholesale carriers. This portfolio is offered to service provider, enterprise and industry verticals with critical transport network infrastructures including utilities, government, defense, transportation, and education and research. The Company has not provided segment asset information as such information is not provided to the CODM and accordingly, asset information is not used in assessing segment performance. Segment revenue and expense included in the tables below represent direct revenue and expense attributable to each segment. Please see Note 10 for information regarding the allocation of goodwill between segments. The CODM utilizes revenue and adjusted gross profit to measure and assess each segment's performance. The Company calculates adjusted gross profit by excluding from cost of revenue: amortization of acquired technology, stock-based compensation, acquisition-related inventory adjustments and acquisition-related facilities adjustments, and may also exclude other items in future periods that the Company believes are not part of the Company's core business. Adjusted gross profit is not a financial measure determined in accordance with U.S. GAAP, may not be comparable to similarly titled measures used by other companies, and should not be considered a substitute for gross profit or other results reported in accordance with U.S. GAAP. See below for a reconciliation of adjusted gross profit to gross profit which is the most directly comparable U.S. GAAP measure. The tables below provide revenue, adjusted gross profit and depreciation expense by reportable segment for the years ended December 31, 2023, 2022 and 2021 (in thousands): 93 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, Revenue 2023 2022 2021 Segment revenue: Cloud and Edge $ 477,647 $ 508,137 $ 556,656 IP Optical Networks 348,692 311,623 288,301 Total revenue $ 826,339 $ 819,760 $ 844,957 Year ended December 31, Adjusted gross profit 2023 2022 2021 Segment adjusted gross profit: Cloud and Edge $ 314,594 $ 330,395 $ 370,504 IP Optical Networks 124,436 104,711 114,496 Total segment adjusted gross profit 439,030 435,106 485,000 Stock-based compensation expense ( 2,657 ) ( 2,628 ) ( 1,997 ) Amortization of acquired technology ( 28,290 ) ( 31,542 ) ( 38,343 ) Gross profit $ 408,083 $ 400,936 $ 444,660 Year ended December 31, Depreciation expense 2023 2022 2021 Segment depreciation expense: Cloud and Edge $ 9,798 $ 10,758 $ 12,269 IP Optical Networks 4,307 4,537 4,693 Total depreciation expense $ 14,105 $ 15,295 $ 16,962 (19) MAJOR CUSTOMERS The following customers contributed 10% or more of the Company's revenue in at least one of the years ended December 31, 2023, 2022 and 2021: Year ended December 31, 2023 2022 2021 Verizon Communications Inc. 11 % 15 % 16 % At December 31, 2023 and 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. (20) 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 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. The Company estimates as of December 31, 2023 that the market conditions surrounding the PSUs granted will not be met by 94 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) the expiration date of September 1, 2024. Performance-Based Stock Grants In addition to granting RSAs and RSUs to its executives and certain of its employees, the Company also grants PSUs to certain of its executives and certain other employees. Vesting periods for RSAs, RSUs, and PSUs granted range from one to three years . PSUs granted consist of 60 % that have both performance and service conditions (the "Performance PSUs") and 40 % that have both market and service conditions (the "Market PSUs"). Each Performance PSU is comprised of three consecutive fiscal year performance periods beginning in the year of grant, with one-third of the Performance PSUs attributable to each fiscal year performance period. The Market PSUs have one three-year performance period, beginning January 1 in the year of grant and ending on December 31, three years thereafter. The number of shares of common stock underlying the PSUs that can be earned will not exceed 200 % of the Performance or Market PSUs. Shares subject to PSUs that fail to be earned will be forfeited. Restricted Stock Units The activity related to the Company's RSUs for the year ended December 31, 2023 was as follows: Shares Weighted Average Grant Date Fair Value Unvested balance at January 1, 2023 7,649,747 $ 3.96 Granted 4,991,829 $ 2.88 Vested ( 4,840,738 ) $ 3.99 Forfeited ( 709,470 ) $ 3.97 Unvested balance at December 31, 2023 7,091,368 $ 3.18 The total grant date fair value of restricted stock underlying RSUs that vested was $ 19.3 million in the year ended December 31, 2023, $ 18.1 million in the year ended December 31, 2022 and $ 12.5 million in the year ended December 31, 2021. Performance-Based Stock Units The activity related to the Company's PSUs for the year ended December 31, 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 ( 1,774,703 ) $ 4.05 Unvested balance at December 31, 2023 6,297,931 $ 2.07 The total grant date fair value of restricted stock underlying PSUs that vested was $ 2.6 million in the year ended December 31, 2023, $ 0.9 million in the year ended December 31, 2022 and $ 1.7 million in the year ended December 31, 2021. Stock-Based Compensation The consolidated statements of operations included stock-based compensation for the years ended December 31, 2023, 2022 and 2021 as follows (in thousands): 95 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2023 2022 2021 Product cost of revenue $ 510 $ 471 $ 313 Service cost of revenue 2,147 2,157 1,684 Research and development 4,933 5,108 4,253 Sales and marketing 7,111 6,074 7,218 General and administrative 7,105 4,897 5,950 $ 21,806 $ 18,707 $ 19,418 At December 31, 2023, there was $ 17.9 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 1.4 years. The Company issues authorized and unissued shares under its equity plans and at December 31, 2023, there were 3,959,285 total shares of common stock reserved for that purpose with 105,495 of those shares authorized only for issuance of shares upon exercise of stock options. (21) 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 consolidated balance sheets. Assets acquired under finance leases, if any, are included in Property and equipment, net, in the 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 December 31, 2023 and 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 96 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) $ 1.0 million and $ 1.6 million in the years ended December 31, 2023 and 2022, respectively. No variable lease costs were accrued in the year ended December 31, 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 year ended December 31, 2022 included accruals of $ 1.0 million for all estimated future variable lease costs related to those facilities. The Company did not record any accelerated amortization or estimated future variable lease costs in the year ended December 31, 2023 or 2022 related to the 2020 Restructuring Plan. The Company accelerated amortization totaling $ 0.8 million in the year ended December 31, 2021 for certain leased facilities that were vacated in 2021 as part of the consolidation of certain sites following the ECI Acquisition. The Company did not record estimated future variable lease costs in the year ended December 31, 2021 related to the 2020 Restructuring Plan. In connection with the 2019 Restructuring Initiative, certain leased facilities were partially or fully vacated as the Company consolidated its facilities, with no plans to enter into sublease agreements for certain of those facilities. The Company did not accelerate amortization or record liabilities for future estimated variable lease costs in the years ended December 31, 2023 or 2022. In the year ended December 31, 2021, the Company accelerated amortization of $ 3.4 million for certain leased facilities that were vacated in those years and recorded liabilities aggregating $ 1.4 million for all future estimated variable lease costs related to those facilities. All incremental accelerated amortization and accrual for all estimated future variable lease costs are included in Restructuring and related expense in the Company's consolidated statements of operations for the years ended December 31, 2023, 2022 and 2021. At December 31, 2023 and 2022 , the Company had accruals of $ 1.5 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 Initiative. In addition, in the year ended December 31, 2021, this accelerated amortization and provision for future estimated variable lease costs was partially offset by the recognition of $ 2.1 million of income in conjunction with lease amendments that modified the Company's obligation and rentable square footage at a site in North Carolina. The Company leases its corporate offices and other facilities under operating leases, which expire at various times through 2033. The Company's right-of-use lease assets and lease liabilities at December 31, 2023 and 2022 were as follows (in thousands): December 31, Classification 2023 2022 Assets: Operating lease assets Operating lease right-of-use assets $ 39,783 $ 44,888 Liabilities: Current Operating Operating lease liabilities $ 15,739 $ 15,416 Non-Current Operating Operating lease liabilities, net of current 38,711 46,183 Total lease liabilities $ 54,450 $ 61,599 The components of lease expense for the years ended December 31, 2023, 2022 and 2021 were as follows (in thousands): 97 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2023 2022 2021 Operating lease cost* $ 18,767 $ 21,121 $ 21,828 Finance lease cost: Amortization of leased assets — 287 695 Interest on lease liabilities — 13 67 Short-term lease cost 13,978 14,209 13,250 Variable lease costs (costs excluded from minimum fixed lease payments)** 3,364 4,007 4,030 Sublease income ( 1,376 ) ( 1,647 ) ( 1,496 ) Net lease cost $ 34,733 $ 37,990 $ 38,374 * Operating lease costs for the years ended December 31, 2023, 2022 and 2021 include $ 1.0 million, $ 1.6 million, and $ 3.4 million, respectively, of accelerated amortization for certain assets partially or fully vacated with no intent or ability to sublease. Operating lease cost for the year ended December 31, 2021 also includes $ 2.1 million of income related to a lease modification for one of these assets. ** Variable lease costs for the years ended December 31, 2022 and 2021 included accruals of $ 1.0 million and $ 1.4 million, respectively, for all future estimated variable expenses related to certain assets partially or fully vacated with no intent or ability to sublease. No such variable costs were accrued in the year ended December 31, 2023. Cash flow information related to the Company's leases for the years ended December 31, 2023, 2022 and 2021 was as follows (in thousands): Year ended December 31, 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 19,021 $ 20,363 22,365 Operating cash flows from finance leases $ — $ 13 67 Financing cash flows from finance leases $ — $ 595 903 Other information related to the Company's leases as of December 31, 2023 and 2022 was as follows (in thousands): December 31, 2023 2022 Weighted average remaining lease term (years): Operating leases 5.50 5.90 Weighted average discount rate: Operating leases 6.34 % 5.79 % Future minimum fixed lease payments under noncancelable leases at December 31, 2023 were as follows (in thousands): Operating leases 2024 $ 18,542 2025 10,506 2026 8,676 2027 7,569 2028 6,305 2029 and beyond 13,181 Total lease payments 64,779 Less: interest ( 10,329 ) Present value of lease liabilities $ 54,450 98 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) (22) EMPLOYEE DEFINED CONTRIBUTION PLANS The Company offers 401(k) savings plans to eligible employees. The Company matches 50 % of each employee's contributions to the 401(k) program up to 4 % of the employee's eligible earnings, for a maximum match of 2 % of eligible earnings. The Company recorded expense related to its employee defined contribution plans aggregating $ 3.0 million, $ 3.3 million and $ 3.5 million in the years ended December 31, 2023, 2022 and 2021, respectively. (23) NON-U.S. EMPLOYEE DEFINED BENEFIT PLANS The Company has defined benefit retirement plans that cover certain employees at various international locations. The Company's policy is to contribute amounts at least sufficient to satisfy the minimum amount required by applicable law and regulations or to directly pay benefits where appropriate. Benefits under the defined benefit plans are typically based either on years of service and the employee's compensation (generally during a fixed number of years immediately before retirement) or on annual credits. The range of assumptions that are used for these non-U.S. defined benefit plans reflect the different economic environments within the various countries. A reconciliation of the changes in the benefit obligations and fair value of the assets of the defined benefit plans for the years ended December 31, 2023 and 2022, the funded status of the plans, and the amounts recognized in the consolidated balance sheets as of December 31, 2023 and 2022 were as follows (in thousands): 99 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2023 2022 Changes in projected benefit obligations: Projected benefit obligation, beginning of year $ 21,257 $ 26,938 Service cost 1,193 1,355 Interest cost 938 563 Participant contributions — — Plan amendments — — Net actuarial (gain) loss on obligation ( 402 ) ( 5,604 ) Settlement ( 1,773 ) ( 1,063 ) Benefits and expenses paid ( 444 ) ( 932 ) Projected benefit obligation, end of year $ 20,769 $ 21,257 Changes in plan assets: Fair value of plan assets, beginning of year $ 14,629 $ 15,303 Actual return on plan assets 183 ( 672 ) Employer contributions 975 1,954 Participant contributions 39 39 Benefits paid ( 2,217 ) ( 1,995 ) Fair value of plan assets, end of year $ 13,609 $ 14,629 Funded status at end of year $ ( 7,160 ) $ ( 6,628 ) Amounts recognized in accumulated other comprehensive income consist of: Prior service (credit) cost $ ( 3,161 ) $ ( 3,481 ) Net actuarial (gain) loss ( 1,100 ) ( 1,704 ) $ ( 4,261 ) $ ( 5,185 ) Amounts recognized in the consolidated balance sheets consist of: Other assets (non-current pension asset) $ 1,013 $ 552 Accrued expenses and other (current pension liability) ( 764 ) ( 803 ) Other long-term liabilities (non-current pension liability) ( 7,409 ) ( 6,377 ) Net amount recognized $ ( 7,160 ) $ ( 6,628 ) The increase in the underfunded status of the Company's defined benefit plans at December 31, 2023 compared to December 31, 2022 was primarily the result of significant lump sum payments in Israel of $ 1.8 million. Plans with underfunded or non-funded accumulated benefit obligations at December 31, 2023 and 2022 were as follows (in thousands): December 31, 2023 2022 Aggregate projected benefit obligation $ 10,811 $ 9,450 Aggregate accumulated benefit obligation $ 8,547 $ 7,418 Aggregate fair value of plan assets $ 2,638 $ 2,270 Plans with overfunded accumulated benefit obligations at December 31, 2023 and 2022 were as follows (in thousands): December 31, 2023 2022 Aggregate projected benefit obligation $ 9,958 $ 11,807 Aggregate accumulated benefit obligation $ 7,958 $ 9,547 Aggregate fair value of plan assets $ 10,971 $ 12,359 100 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Net periodic benefit costs for the years ended December 31, 2023, 2022 and 2021 were as follows (in thousands): Year ended December 31, 2023 2022 2021 Service cost $ 1,193 $ 1,355 $ 1,321 Interest cost 938 563 523 Expected return on plan assets ( 607 ) ( 266 ) ( 314 ) Plan asset expenses — — — Settlement charge (credit) ( 417 ) 808 — Amortization of prior service cost ( 320 ) ( 320 ) — Amortization of net (gain) loss ( 165 ) 275 81 Net periodic benefit costs $ 622 $ 2,415 $ 1,611 Expected benefit payments for the next ten years are as follows (in thousands): Years ending December 31, 2024 $ 1,436 2025 1,086 2026 1,423 2027 2,120 2028 2,435 2029 to 2033 10,733 $ 19,233 The changes in plan assets and benefit obligations recognized in other comprehensive income (loss) before tax for the years ended December 31, 2023, 2022 and 2021 were as follows (in thousands): Year ended December 31, 2023 2022 2021 Net loss (gain) $ 22 $ ( 4,666 ) $ 4,201 Prior service (credit) cost — — ( 3,801 ) Amortization of net gain (loss) 165 ( 275 ) ( 81 ) Amortization of prior service credit (cost) 320 320 — Settlement credit (charge) 417 ( 808 ) — Total recognized in other comprehensive income (loss) $ 924 $ ( 5,429 ) $ 319 The Company defers all actuarial gains and losses resulting from variances between actual results and economic estimates or actuarial assumptions. The unrecognized actuarial gains and losses are recorded as unrealized pension actuarial gains (losses) in the Company's consolidated balance sheets as a component of Accumulated other comprehensive income. These unrecognized gains and losses are amortized as a component of net periodic benefit cost when the net gains and losses exceed 10 % of the greater of the market value of plan assets or the projected benefit obligation at the beginning of the year. The principal weighted average assumptions used to determine the benefit obligation at December 31, 2023 and 2022 were as follows: December 31, 2023 2022 Discount rate 4.65 % 4.74 % Rate of compensation increase 3.95 % 4.02 % The principal weighted average assumptions used to determine net period benefit cost for the years ended December 31, 2023, 2022 and 2021 were as follows: 101 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Year ended December 31, 2023 2022 2021 Discount rate 4.74 % 2.24 % 2.16 % Expected long-term return on plan assets 4.34 % 1.79 % 2.06 % Rate of compensation increase 4.02 % 3.90 % 2.41 % Assumed discount rates are used in the measurement of the projected and accumulated benefit obligations, as well as the service and interest cost components of net periodic pension cost. Estimated discount rates reflect the rates at which the pension benefits could be effectively settled. For each defined benefit plan, the Company chooses an estimated discount rate from a readily available market index rate, based upon high-quality fixed income investments, specific to the country or economic zone in which the benefits are paid and taking into account the duration of the plan and the number of participants. The Company's plans in both the Netherlands and Switzerland are funded through insurance contracts, which have historically provided guaranteed interest credit. The fair value of these contracts is derived from the insurance companies' assessment of the minimum value of the benefits provided by the insurance contracts. The methodology used to value these plan assets has historically assumed that the value of the plan assets equals the guaranteed insured benefits. For consistency, the same discount rate used in the valuation of the benefit obligations is used to place a value on the plan assets. The assets are assumed to grow each year in line with the discount rate, and therefore, the expected return on the assets is set equal to the discount rate. The fair value of the plan assets in Switzerland was $ 2.6 million at December 31, 2023 and $ 2.3 million at December 31, 2022. Due to the plan amendment in 2020 that changed the benefit structure of the Netherlands plan, the Company no longer has any obligation related to this plan beyond the payment of insurance premiums. Therefore, there is no projected benefit obligation and no plan assets in the Netherlands. The Company classifies the fair value of its plan assets as Level 2 in the fair value hierarchy as discussed in Note 6. During the years ended December 31, 2023 and 2022, employees in Switzerland made contributions aggregating $ 39,000 each year. Employee contributions to this plan are based on a fixed 5 % of the relevant pensionable earnings. The Company funds this plan by contributing at least the minimum amount required by applicable regulations and as recommended by an independent actuary. During the years ended December 31, 2023, 2022 and 2021, the Company contributed $ 1.0 million, $ 2.0 million and $ 1.0 million, respectively, to all of its pension plans. The Company expects to contribute $ 1.5 million to all of its defined benefit plans in 2024. (24) INCOME TAXES The components of loss from continuing operations before income taxes consisted of the following (in thousands): Year ended December 31, 2023 2022 2021 Loss before income taxes: United States $ ( 5,363 ) $ ( 84,784 ) $ ( 29,985 ) Foreign ( 50,010 ) ( 27,815 ) ( 178,158 ) $ ( 55,373 ) $ ( 112,599 ) $ ( 208,143 ) 102 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The provision (benefit) for income taxes from continuing operations consisted of the following (in thousands): Year ended December 31, 2023 2022 2021 Provision (benefit) for income taxes: Current: Federal $ 9,927 $ ( 3,582 ) $ 5,033 State 2,790 2,573 1,836 Foreign 7,312 4,744 7,661 Total current 20,029 3,735 14,530 Deferred: Federal ( 10,417 ) ( 10,333 ) ( 38,027 ) State ( 1,059 ) ( 4,045 ) 97 Foreign 2,280 ( 3,873 ) ( 7,558 ) Total deferred ( 9,196 ) ( 18,251 ) ( 45,488 ) Total $ 10,833 $ ( 14,516 ) $ ( 30,958 ) A reconciliation of the Company's effective tax rate for continuing operations to the U.S. statutory federal rate is as follows: Year ended December 31, 2023 2022 2021 U.S. statutory income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit ( 2.1 ) 1.8 ( 0.7 ) Foreign income taxes ( 9.9 ) ( 1.4 ) 0.5 Stock-based compensation ( 5.4 ) ( 2.4 ) ( 0.1 ) Tax credits 7.7 2.2 1.6 Uncertain tax positions 2.0 1.3 0.5 Valuation allowance ( 27.0 ) ( 3.8 ) 2.5 Non-deductible goodwill impairment — — ( 11.7 ) Other permanent adjustments ( 1.3 ) ( 2.6 ) 0.9 Permanent foreign exchange adjustments ( 2.3 ) ( 1.4 ) 0.5 Other, net ( 2.3 ) ( 1.8 ) ( 0.1 ) Effective income tax rate ( 19.6 ) % 12.9 % 14.9 % 103 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) The following is a summary of the significant components of deferred income tax assets and liabilities (in thousands): December 31, 2023 2022 Assets: Net operating loss carryforwards $ 398,050 $ 413,773 Capital loss carryforwards 100,061 99,505 Tax credit carryforwards 29,541 28,902 Capitalized research and development expenses 58,959 40,668 Deferred revenue 2,042 3,510 Accrued expenses 10,901 9,068 Inventory 4,108 2,820 Stock-based compensation 1,506 1,709 Fixed assets 159 2,506 Lease liabilities 12,009 12,829 Other temporary differences 440 1,324 617,776 616,614 Valuation allowance ( 488,799 ) ( 488,550 ) Total deferred tax assets 128,977 128,064 Liabilities: Intangible assets ( 45,448 ) ( 55,037 ) Operating lease right-of-use assets ( 8,817 ) ( 8,519 ) Interest rate swap — ( 6,168 ) Unremitted foreign income ( 10,567 ) ( 8,441 ) Total deferred tax liabilities ( 64,832 ) ( 78,165 ) Total net deferred tax assets $ 64,145 $ 49,899 The deferred tax assets and liabilities based on tax jurisdictions are presented in the Company's consolidated balance sheets as follows: December 31, 2023 2022 Deferred income taxes - net noncurrent assets $ 69,761 $ 53,649 Deferred income taxes - net noncurrent liabilities ( 5,616 ) ( 3,750 ) $ 64,145 $ 49,899 At December 31, 2023, the Company had U.S. federal net operating losses ("NOLs") of $ 124.9 million . The Company also had U.S. state NOLs of $ 38.4 million . In addition, the Company had $ 1.6 billion of Israel NOLs. The U.S. federal NOL carryforwards expire between 2024 and 2037 . The U.S. state NOLs begin to expire in 2024 , and the Company also has indefinite-lived state NOLs. The Israel NOLs do not expire. The Company also has available federal, state and foreign income tax credit carryforwards of $ 29.5 million . The federal foreign tax credit carryforwards expire between 2030 and 2032 . The state tax credits, which are primarily research and development credits, begin to expire in 2024 , while others can be carried forward until exhausted. The foreign income tax credits expire in various periods. The Company has provided for income taxes on the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2023, excluding Ireland and Israel. These subsidiaries, excluding Ireland and Israel, are cost-plus or limited risk distributors that are not anticipated to need to use excess funds locally. Accordingly, the Company is required to recognize and record deferred taxes in 2023. The deferred taxes, which are primarily future withholding taxes, are recorded on the entire outside basis differences related to the foreign subsidiaries, the largest of these differences being undistributed earnings. Undistributed profits of Ireland and Israel, as well as other outside basis differences in foreign subsidiaries, were indefinitely reinvested in foreign operations. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings and outside basis differences was not practicable. 104 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) Under the provisions of the Internal Revenue Code, the net operating losses and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service. Net operating losses and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership of significant shareholders over a three-year period in excess of 50 % , as defined under sections 382 and 383 of the Internal Revenue Code, as well as similar state provisions. As a result of the Sonus and GENBAND merger in 2017, the Company has $ 102.6 million of U.S. federal net operating loss carryforwards remaining as of December 31, 2023 with an annual section 382 limitation of $ 9.7 million . The Company believes these NOLs are fully realizable. As a result of the ECI Acquisition in 2020, the Company has $ 23.5 million of U.S. federal NOLs remaining as of December 31, 2023 with an annual section 382 limitation of $ 1.1 million . The Company does not believe all of these NOLs are realizable and, therefore, have recorded a partial valuation allowance against these NOLs. The Company performed an analysis to determine if, based on all available evidence, it considered it more likely than not that some portion or all of the recorded deferred tax assets will not be realized in a future period. Accordingly, the Company has recorded a valuation allowance against its U.S. deferred tax assets of $ 23.4 million at December 31, 2023 and $ 25.5 million at December 31, 2022. The Company also maintains a valuation allowance against certain of its foreign deferred tax assets, predominantly Israel, amounting to approximately $ 465 million at December 31, 2023 and $ 463 million at December 31, 2022. The deferred tax assets recognized with no valuation allowance at December 31, 2023 and 2022 primarily relate to other foreign subsidiaries where recoverability is concluded to be more likely than not based on the Company's cost-plus compensation policy, as well as NOLs and tax credits in the U.S. that are expected to be utilized prior to expiration. A reconciliation of the Company's unrecognized tax benefits is as follows (in thousands): Year ended December 31, 2023 2022 2021 Unrecognized tax benefits at January 1 $ 12,001 $ 17,813 $ 14,054 Increases related to current year tax positions — 156 4,017 Increases related to prior period tax positions 52 40 3,168 Decreases related to the lapse of the applicable statute of limitations ( 821 ) ( 560 ) ( 3,087 ) Decreases related to prior period tax positions $ ( 300 ) $ ( 5,448 ) $ ( 339 ) Unrecognized tax benefits at December 31 $ 10,932 $ 12,001 $ 17,813 The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. The Company had $ 14.0 million , $ 14.9 million and $ 21.0 million of unrecognized tax benefits, including penalties and interest, at December 31, 2023, 2022 and 2021, respectively. Of these amounts, $ 10.5 million , $ 11.2 million and $ 12.7 million represent the amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate for the years ended December 31, 2023, 2022 and 2021, respectively. The Company recorded income tax expense (benefit) for potential penalties and interest of $ 0.2 million , $( 0.3 ) million and $ 1.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. The Company had $ 3.2 million and $ 2.9 million accrued in Other long-term liabilities for penalties and interest at December 31, 2023 and 2022, respectively. The Company believes that it is reasonably possible that $ 0.3 million in tax positions related to its unrecognized tax benefits will be recognized within the next twelve months. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as various state and foreign jurisdictions. Generally, the tax years 2019 through 2022 remain open to examination by the major taxing jurisdictions in which the Company operates. The Company's federal and state NOLs generated prior to 2019 could be adjusted on examination even though the year in which the loss was generated is otherwise closed by the statute of limitations. As of December 31, 2023, the Company had ongoing income tax audits in certain foreign countries. Management believes that an adequate provision has been recorded for any adjustments that may result from tax examinations. (25) RELATED PARTIES The Company recognized revenue from its largest stockholder of $ 12.8 million , $ 6.6 million and $ 4.5 million in the years ended December 31, 2023, 2022 and 2021, respectively. Additionally, as discussed in Note 16, certain related party 105 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) stockholders participated in the Private Placement. (26) COMMITMENTS AND CONTINGENCIES Contingencies Liabilities for Royalty Payments to the IIA Prior to the ECI Acquisition, ECI had received research and development grants from the IIA. The Company assumed ECI's contract with the IIA, which requires the Company to pay royalties to the IIA on proceeds from the sale of products which the Israeli government has supported by way of research and development grants. The royalties for grants prior to 2017 were calculated at the rates of 1.3 % to 5.0 % of the aggregated proceeds from the sale of such products developed at certain of the Company's R&D centers, up to an amount not exceeding 100 % of such grants plus interest at LIBOR. Effective for grants approved in 2017 and thereafter, interest was calculated at the higher of LIBOR plus 1.5 % to 2.75 %. At December 31, 2023, the Company's maximum possible future royalties commitment, including $ 1.3 million of unpaid royalties accrued, was $ 20.4 million, including interest of $ 0.9 million, based on estimates of future product sales, grants received from the IIA and not yet repaid, and management's estimation of products still to be sold. Litigation 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. The proposed $ 4.5 million settlement amount was deposited into escrow in the fourth quarter of 2023 by the provider of the Company's Directors and Officers liability insurance policy. 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 106 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) 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 complaint, WOW is seeking monetary damages. The Company filed its answer to the complaint on October 5, 2023. Discovery is on-going and the court has set a preliminary trial date of December 2024. (27) QUARTERLY RESULTS (UNAUDITED) The following tables present the Company's quarterly operating results for the years ended December 31, 2023 and 2022. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited consolidated quarterly results when read in conjunction with the Company's audited consolidated financial statements and related notes. First Quarter Second Quarter Third Quarter Fourth Quarter (In thousands, except per share data) Year ended December 31, 2023 Revenue $ 186,159 $ 210,618 $ 203,161 $ 226,401 Cost of revenue 104,757 109,148 99,658 104,693 Gross profit $ 81,402 $ 101,470 $ 103,503 $ 121,708 (Loss) income from operations $ ( 35,189 ) $ ( 6,622 ) $ 856 $ 16,670 Net (loss) income $ ( 38,305 ) $ ( 21,479 ) $ ( 13,501 ) $ 7,079 (Loss) earnings per share (1): Basic $ ( 0.23 ) $ ( 0.13 ) $ ( 0.08 ) $ 0.04 Diluted $ ( 0.23 ) $ ( 0.13 ) $ ( 0.08 ) $ 0.04 Shares used in computing (loss) earnings per share: Basic 168,541 170,103 171,190 171,755 Diluted 168,541 170,103 171,190 172,990 First Quarter Second Quarter Third Quarter Fourth Quarter (In thousands, except per share data) Year ended December 31, 2022 Revenue $ 173,198 $ 205,796 $ 207,127 $ 233,639 Cost of revenue 95,143 101,246 102,809 119,626 Gross profit $ 78,055 $ 104,550 $ 104,318 $ 114,013 (Loss) income from operations $ ( 39,054 ) $ ( 7,239 ) $ ( 3,296 ) $ 1,265 Net (loss) income $ ( 69,975 ) $ ( 30,180 ) $ ( 18,416 ) $ 20,488 (Loss) earnings per share (1): Basic $ ( 0.47 ) $ ( 0.20 ) $ ( 0.12 ) $ 0.12 Diluted $ ( 0.47 ) $ ( 0.20 ) $ ( 0.12 ) $ 0.12 Shares used in computing (loss) earnings per share: Basic 149,167 150,190 158,921 168,163 Diluted 149,167 150,190 158,921 172,213 107 RIBBON COMMUNICATIONS INC. Notes to Consolidated Financial Statements (Continued) __________________________________ (1) (Loss) earnings per share is calculated independently for each of the quarters presented; accordingly, the sum of the quarterly (loss) earnings per share amounts may not equal the total calculated for the year. 108 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.