Ribbon Communications Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the financial condition and results of operations of Ribbon Communications Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the U.S. Securities and Exchange Commission on February 28, 2024 . Overview We are a leading global provider of communications technology to service providers and enterprises. We provide a broad range of software and high-performance hardware products, 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. Our mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance and elasticity. We are headquartered in Plano, Texas, and have a global presence with research and development or sales and support locations in over thirty countries around the world. Key Trends and Economic Factors Affecting Ribbon Supplier Disruptions. Ongoing uncertainty in the global economy due to inflation, the wars in Israel and Ukraine, national security concerns and other factors, continue to disrupt various manufacturing, commodity and financial markets, increase volatility, and impede global supply chains. Our ability to deliver our solutions as agreed upon with our customers depends in part on the ability of our global contract manufacturers, vendors, licensors and other business partners to deliver products or perform services we have procured from them. Continued uncertain global economic conditions may cause our customers to restrict spending or delay purchases for an indeterminate period of time and consequently cause our revenues to decline. Further, such factors may negatively impact our operating costs resulting in a reduction in net income. The degree to which the ongoing wars in Israel and Ukraine and the inflationary and high interest rate environment impacts our future business, financial position and results of operations will depend on developments beyond our control, including the duration of the global economic downturn that has resulted from these factors. The Ongoing Wars in Israel and Ukraine . The uncertainty resulting from the wars in Israel and Ukraine and the threat for expansion of one or both of these wars could result in some of our customers delaying purchases from us. As a result of safety concerns, we may close our offices in Israel from time to time. Although our employees in these offices have the ability to work remotely and business continuity plans are in place to address any medium- or long-term disruptions that could result from the closure of these offices, the office closures and general effects of employees operating in a region at war could have a negative impact on our operations. Further, a number of our employees in Israel are members of the military reserves and subject to immediate call-up in response to the war in Israel. Following the terrorist attacks in Israel in October 2023, a number of our employees have been activated for military duty and we expect that additional employees will also be activated if the war in Israel continues. While we have business continuity plans in place to address the military call-ups, it could affect the timing of projects in the short-term as the work is shifted to other team members both inside and outside of Israel. Further, the U.S. and other European countries have imposed sanctions and trade restrictions against Russia in connection with the war in Ukraine. These sanctions and restrictions currently prohibit our ability to sell certain products and services. The sanctions continue to evolve and further changes in the current sanctions or trade restrictions could further limit our ability to sell products and services to customers in Russia and, our ability to collect on outstanding accounts receivable from such customers. If we are further limited in our ability to sell products and services to Russia and other countries for an extended period, it could have a material impact on our financial results. Inflation and Interest Rates. We continue to see near-term impacts on our business due to inflation, including ongoing global price pressures driving up energy prices, component costs, freight premiums, and other operating costs above normal rates. Although headline inflation in the United States and Europe appears to have reached a peak, core inflation (excluding food and energy prices) remains elevated and is a source of continued cost pressure on businesses and households. Interest rates have increased significantly as central banks in developed countries attempt to subdue inflation while government deficits and debt remain at high levels in many global markets. Accordingly, the eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital for our business. 34 Presentation Unless otherwise noted, all financial amounts, excluding tabular information, in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are rounded to the nearest million dollar amount, and all percentages, excluding tabular information, are rounded to the nearest percentage point. Operating Segments Our Chief Operating Decision Maker assesses our performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge operating segment ("Cloud and Edge") and the IP Optical Networks operating segment ("IP Optical Networks"). For additional details regarding our operating segments, see Note 13 - Operating Segment Information to our condensed consolidated financial statements. Financial Overview Financial Results We reported a loss from operations of $13.5 million and $35.2 million for the three months ended March 31, 2024 and 2023, respectively. Our revenue was $179.7 million and $186.2 million in the three months ended March 31, 2024 and 2023, respectively. Our gross profit and gross margin were $92.0 million and 51.2%, respectively, in the three months ended March 31, 2024, and $81.4 million and 43.7%, respectively, in the three months ended March 31, 2023. The lower revenue in the three months ended March 31, 2024 compared to 2023 is due to $12.8 million of lower Cloud and Edge sales, primarily to U.S. Service Providers, partially offset by $6.3 million of higher IP Optical sales in Europe, the Middle East and Africa ("the EMEA region"). Revenue from our Cloud and Edge segment was $101.7 million and $114.5 million in the three months ended March 31, 2024 and 2023, respectively. Gross profit and gross margin for this segment were $64.4 million and 63.4% , respectively, in the three months ended March 31, 2024, and $66.1 million and 57.7%, respectively, in the three months ended March 31, 2023. Revenue from our IP Optical Networks segment was $78.0 million and $71.7 million in the three months ended March 31, 2024 and 2023, respectively. Gross profit and gross margin for this segment were $27.5 million and 35.3% , respectively, in the three months ended March 31, 2024, and $15.3 million and 21.4%, respectively, in the three months ended March 31, 2023. Our operating expenses were $105.4 million and $116.6 million in the three months ended March 31, 2024 and 2023, respectively. The decreased operating expenses are primarily related to lower research and development ("R&D") and restructuring related expenses. Operating expenses for the three months ended March 31, 2024 included $6.7 million of amortization of acquired intangible assets, and $3.1 million of restructuring and related expense. Operating expenses for the three months ended March 31, 2023 included $7.3 million of amortization of acquired intangible assets, $1.6 million of acquisition-, disposal- and integration-related expense, and $6.9 million of restructuring and related expense. We recorded stock-based compensation expense of $4.5 million and $5.8 million in the three months ended March 31, 2024 and 2023, respectively. These amounts are included as components of both Cost of revenue and Operating expenses in our condensed consolidated statements of operations. See "Results of Operations" in this MD&A for a discussion of the changes in our revenue and expenses for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Restructuring and Cost Reduction Initiatives In February 2023, our Board of Directors approved a strategic restructuring program (the "2023 Restructuring Plan") to streamline our operations in order to support our 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. We recorded restructuring and related expense of $1.6 million and $5.7 million in the three months ended March 31, 2024 and 2023, respectively, in connection with the 2023 Restructuring Plan for severance related costs. We anticipate that we will record nominal future expense for severance in connection with the 2023 Restructuring Plan. 35 In February 2022, our Board of Directors approved a strategic restructuring program (the "2022 Restructuring Plan") to streamline our operations in order to support our 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. In connection with the 2022 Restructuring Plan, we recorded restructuring and related expense of $1.4 million and $1.2 million in the three months ended March 31, 2024 and 2023, respectively. The amount for the three months ended March 31, 2024 was related to variable and other facilities-related costs. The amount for the three months ended March 31, 2023 was comprised of $1.0 million for variable and other facilities-related costs and $0.2 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease. We anticipate that we will record approximately $4 million of expense in the remainder of 2024 related to the 2022 Restructuring Plan. For facilities that are part of a restructuring plan, for which we have no intent or ability to enter into a sublease, we recognize accelerated rent amortization over the period from the date that we commence the plan to fully or partially vacate a facility through the final vacate date. We did not record accelerated rent amortization in the three months ended March 31, 2024. We recorded $0.2 million of accelerated rent amortization in the three months ended March 31, 2023 . We continue to evaluate our properties included in our restructuring plans for accelerated amortization and/or right-of-use asset impairment. We may incur additional future expense if we are unable to sublease other locations included in these initiatives. Critical Accounting Policies and Estimates This MD&A is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. The significant accounting policies that we believe are the most critical include revenue recognition, the valuation of inventory, warranty accruals, loss contingencies and reserves, stock-based compensation, the Preferred Stock and Warrants, business combinations, goodwill and intangible assets, accounting for leases, and accounting for income taxes. If actual results differ significantly from management's estimates and projections, there could be a material effect on our condensed consolidated financial statements. There were no significant changes to our critical accounting policies from January 1, 2024 through March 31, 2024. For a further discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2023. Results of Operations Three months ended March 31, 2024 and 2023 Revenue. Revenue for the three months ended March 31, 2024 and 2023 was as follows (in thousands, except percentages): Three months ended Decrease from prior year March 31, 2024 March 31, 2023 $ % Product $ 87,610 $ 93,318 $ (5,708) (6.1) % Service 92,054 92,841 (787) (0.8) % Total revenue $ 179,664 $ 186,159 $ (6,495) (3.5) % Segment revenue for the three months ended March 31, 2024 and 2023 was as follows (in thousands): Three months ended March 31, 2024 Three months ended March 31, 2023 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Product $ 31,513 $ 56,097 $ 87,610 $ 42,839 $ 50,479 $ 93,318 Service 70,156 21,898 92,054 71,641 21,200 92,841 Total revenue $ 101,669 $ 77,995 $ 179,664 $ 114,480 $ 71,679 $ 186,159 36 The decrease in our product revenue in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was the result of $11 million of lower sales of our Cloud and Edge products, partially offset by $5 million of higher sales of our IP Optical Networks products . The decrease in revenue from the sale of Cloud and Edge products was primarily attributable to lower sales to U.S. Service Providers, partially offset by increased sales to Enterprise customers, including U.S. Federal agencies to support voice network modernization. The increase in revenue from the sale of IP Optical Networks products was primarily attributable to higher sales in Israel and Eastern Europe following the introduction of new products and capabilities, including support for Long Haul Optical Transport, 5G Cell Site Routers, and a new series of IP Routers. Revenue from sales to enterprise customers was 43% and 29% of our product revenue in the three months ended March 31, 2024 and 2023, respectively. These sales were made through both our direct sales team and indirect sales channel partners. The increase in enterprise sales reflects stronger sales of our products to customers in the government sector. Revenue from indirect sales through our channel partner program was 52% and 38% of our product revenue in the three months ended March 31, 2024 and 2023, respectively. The increase in channel sales reflects stronger IP Optical Networks deployments through systems integrators as well as sell-thru our Service Provider channel partners in Eastern Europe. The timing of the completion of customer projects and revenue recognition criteria satisfaction may cause our product revenue to fluctuate from one period to the next. Service revenue is primarily comprised of hardware and software maintenance and support (“maintenance revenue”) and network design, installation and other professional services (“professional services revenue”). Service revenue for the three months ended March 31, 2024 and 2023 was comprised of the following (in thousands, except percentages): Three months ended Increase/(Decrease) from prior year March 31, 2024 March 31, 2023 $ % Maintenance $ 68,381 $ 70,588 $ (2,207) (3.1) % Professional services 23,673 22,253 1,420 6.4 % $ 92,054 $ 92,841 $ (787) (0.8) % Segment service revenue for the three months ended March 31, 2024 and 2023 was comprised of the following (in thousands): Three months ended March 31, 2024 Three months ended March 31, 2023 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Maintenance $ 53,196 $ 15,185 $ 68,381 $ 54,810 $ 15,778 $ 70,588 Professional services 16,960 6,713 23,673 16,831 5,422 22,253 Total service revenue $ 70,156 $ 21,898 $ 92,054 $ 71,641 $ 21,200 $ 92,841 Maintenance revenue was 3.1% lower in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily due to modestly lower renewal rates with several Cloud & Edge customers and the timing of renewals in the IP Optical Networks segment. Professional services revenue was higher in the three months ended March 31, 2024 compared to the same period in 2023 by 6.4% primarily due to growing sales of IP Optical Networks services in the EMEA region. 37 The following customer contributed 10% or more of our revenue in the three months ended March 31, 2024 and 2023: Three months ended Customer March 31, 2024 March 31, 2023 Verizon Communications Inc. * 11% * Less than 10% of total revenue. Revenue from customers domiciled outside the United States was 60% and 56% in the three months ended March 31, 2024 and 2023, respectively. Due to the timing of project completions, we expect that the domestic and international components as a percentage of revenue may fluctuate from quarter to quarter and year to year. Our deferred product revenue was $11 million and $17 million at March 31, 2024 and December 31, 2023, respectively. Our deferred service revenue was $114 million and $116 million at March 31, 2024 and December 31, 2023, respectively. Our deferred revenue balance may fluctuate as a result of the timing of revenue recognition, customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple element arrangements. We expect that our total revenue in 2024 will increase compared to our 2023 revenue as our IP Optical sales continue to grow. From a regional perspective, we anticipate continued IP Optical revenue growth in 2024 from North America, Europe, the Middle East and Africa, and Central and Latin America. In the Cloud & Edge segment, we anticipate growth in Enterprise, including U.S. Federal agencies, offsetting lower spending from U.S. Service Providers in the first half of 2024. Cost of Revenue/Gross Margin. Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased materials and services, royalties, amortization of acquired technology, inventory valuation adjustments, warranty costs, and manufacturing and services personnel and related costs. Our cost of revenue, gross profit and gross margin for the three months ended March 31, 2024 and 2023 were as follows (in thousands, except percentages): Three months ended Increase (decrease) from prior year March 31, 2024 March 31, 2023 $ % Cost of revenue: Product $ 45,794 $ 62,063 (16,269) (26.2) % Service 35,364 35,305 59 0.2 % Amortization of acquired technology 6,551 7,389 (838) (11.3) % Total cost of revenue $ 87,709 $ 104,757 (17,048) (16.3) % Gross profit $ 91,955 $ 81,402 $ 10,553 13.0 % Gross margin 51.2 % 43.7 % Our segment cost of revenue, gross profit and gross margin for the three months ended March 31, 2024 and 2023 were as follows (in thousands, except percentages): Three months ended March 31, 2024 Three months ended March 31, 2023 Cloud and Edge IP Optical Networks Total Cloud and Edge IP Optical Networks Total Product $ 11,408 $ 34,386 $ 45,794 $ 20,920 $ 41,143 $ 62,063 Service 23,604 11,760 35,364 23,954 11,351 35,305 Amortization of acquired technology 2,227 4,324 6,551 3,529 3,860 7,389 Total cost of revenue $ 37,239 $ 50,470 $ 87,709 $ 48,403 $ 56,354 $ 104,757 Gross profit $ 64,430 $ 27,525 $ 91,955 $ 66,077 $ 15,325 $ 81,402 Gross margin 63.4 % 35.3 % 51.2 % 57.7 % 21.4 % 43.7 % 38 Our gross margin was higher with an 8% increase overall in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, with higher margins in both of our segments. Our IP Optical Networks segment's g ross margin increased by 14% primarily attributable to higher sales volume, favorable customer and product mix, lower product costs, and improved absorption of fixed costs from higher sales. Our Cloud and Edge segment's gross margin increased by 6% primarily due to favorable product mix and lower amortization of acquired technology costs . We believe that our IP Optical Networks segment gross margin will approximately maintain current levels for the remainder of 2024. Our overall corporate gross margin may decrease in 2024 compared to 2023 as a result of higher expected sales from IP Optical Networks, which has lower margins due to the higher hardware content in its products and higher production costs. Research and Development. R&D expenses consist primarily of salaries and related personnel expenses and prototype costs for the design, development, testing, and enhancement of our products. R&D expenses for the three months ended March 31, 2024 and 2023 were as follows (in thousands, except percentages): Decrease from prior year March 31, 2024 March 31, 2023 $ % Three months ended $ 45,763 $ 51,304 $ (5,541) (10.8) % The decrease in our R&D expenses in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily attributable to lower expenses in our IP Optical Networks segment. The reduced expenses are a combination of lower employee headcount and outside subcontractors resulting from the cost savings implemented in the 2023 Restructuring Plan. Our IP Optical Networks R&D investment is focused on significantly expanding our portfolio of IP Routing solutions, adding additional features and capabilities to our Optical Transport portfolio, and supporting features in our next generation SDN management and orchestration platform. Some aspects of our R&D efforts require significant short-term expenditures, the timing of which may cause variability in our expenses. We believe that rapid technological innovation is critical to our long-term success, and we are tailoring our investments to meet the requirements of our customers and market. We believe that our R&D expenses will remain consistent for the rest of 2024 and will be lower than 2023 overall, with reduced investment in both segments in areas such as sustaining engineering, as well as a full year benefit from the cost savings implemented in the 2023 Restructuring Plan. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and related personnel costs, commissions, travel and entertainment expenses, promotions, customer trial and evaluations inventory and other marketing and sales support expenses. Sales and marketing expenses for the three months ended March 31, 2024 and 2023 were as follows (in thousands, except percentages): Decrease from prior year March 31, 2024 March 31, 2023 $ % Three months ended $ 34,716 $ 35,399 $ (683) (1.9) % The decrease in sales and marketing expenses in 2024 as compared to 2023 is primarily a result of a global sales organization realignment that reduced management layers, as well as reduced investment in under-performing regions. In the three months ended March 31, 2024 compared to the three months ended March 31, 2023, we achieved an equal reduction of expenses in both of our operating segments. We believe that our sales and marketing expenses in 2024 will be similar to 2023 as we continue to benefit from the realigned global sales structure. General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related personnel costs for executive and administrative personnel, and audit, legal and other professional fees. General and administrative expenses for the three months ended March 31, 2024 and 2023 were as follows (in thousands, except percentages): 39 Increase from prior year March 31, 2024 March 31, 2023 $ % Three months ended $ 15,191 $ 14,045 $ 1,146 8.2 % The increase in general and administrative expenses in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily attributable to higher stock-based and other incentive compensation. We believe that our general and administrative expenses in 2024 will increase slightly compared to our 2023 levels, primarily due to higher employee costs and as a result of inflation. Amortization of Acquired Intangible Assets included in Operating expenses. Amortization of acquired intangible assets included in Operating expenses ("Opex Amortization") for the three months ended March 31, 2024 and 2023 was as follows (in thousands, except percentages): Decrease from prior year March 31, 2024 March 31, 2023 $ % Three months ended $ 6,706 $ 7,264 $ (558) (7.7) % Opex Amortization was lower for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. We record our amortization in relation to expected future cash flows rather than on a straight-line basis. Accordingly, such expense may vary from one period to the next. Acquisition-, Disposal- and Integration-Related. Acquisition-, disposal- and integration-related expenses include those expenses related to acquisitions that we would otherwise not have incurred. Acquisition- and disposal-related expenses include professional and services fees, such as legal, audit, consulting, paying agent and other fees. Integration-related expenses represent incremental costs related to combining our systems and processes with those of acquired businesses, such as third-party consulting and other third-party services. We recorded no such expenses in the three months ended March 31, 2024 compared to $1.6 million of such expenses recorded in the three months ended March 31, 2023. These costs were related to integration following the Company's acquisition of ECI and included license fees for systems in the process of being retired. Restructuring and Related. We have been committed to streamlining our operations and reducing operating costs by closing and consolidating certain facilities and reducing our worldwide workforce. Please see the additional discussion of our restructuring initiatives in the "Restructuring and Cost Reduction Initiatives" section of the Overview of this MD&A. We recorded restructuring and related expense of $3.1 million and $6.9 million in the three months ended March 31, 2024 and 2023, respectively. Although we have eliminated positions as part of our restructuring initiatives, we continue to hire in certain areas that we believe are important to our future growth. Interest Expense, Net. Interest expense and interest income for the three months ended March 31, 2024 and 2023 were as follows (in thousands, except percentages): Three months ended Increase (decrease) from prior year March 31, 2024 March 31, 2023 $ % Interest income $ 106 $ 59 $ 47 79.7 % Interest expense (6,093) (6,481) $ (388) (6.0) % Interest expense, net $ (5,987) $ (6,422) $ (435) (6.8) % Our Interest income was nominal in 2024 and 2023. Interest expense in the three months ended March 31, 2024 and 2023 was primarily comprised of interest and amortization of debt issuance costs related to the 2020 Credit Facility (as defined below). Our interest expense for the three months ended March 31, 2023 benefited from our interest rate swap, which was sold in March 2023. See Note 10 to our condensed consolidated financial statements for a discussion of the sale of our interest rate 40 swap. Other (Expense) Income, Net . We recorded other expense, net of $7.5 million and other income, net of $4.8 million in the three months ended March 31, 2024 and 2023, respectively. Other expense in the three months ended March 31, 2024 was primarily comprised of the $3.5 million fair value adjustment of our Preferred Stock and Warrants, including dividends on the Preferred Stock, and foreign currency exchange losses of $1.1 million. Other income in the three months ended March 31, 2023 was primarily attributable to the gain of $7.3 million recognized from Accumulated other comprehensive income in connection with the sale of our interest rate swap, partially offset by $3.5 million of costs incurred in the Private Placement. Income Taxes. We recorded income tax provisions of $3.4 million and $1.5 million in the three months ended March 31, 2024 and 2023, respectively. These amounts reflect our estimates of the effective rates expected to be applicable for the respective full fiscal years, adjusted for any discrete events, which are recorded in the period that they occur. These estimates are reevaluated each quarter based on our estimated tax rate for the full year. The estimated effective tax rate includes the impact of valuation allowances in various jurisdictions. We intend to continue to maintain a valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the respective allowances. The Organization for Economic Cooperation and Development (the "OECD") Pillar 2 global minimum tax rules are intended to apply for tax years beginning in 2024. On February 1, 2023, the FASB staff noted that they believe that the Pillar 2 tax 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 and do not expect Pillar 2 to have a significant impact on our financial statements. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial position, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Liquidity and Capital Resources Our condensed consolidated statements of cash flows are summarized as follows (in thousands): Three months ended March 31, 2024 March 31, 2023 Change Net loss $ (30,361) $ (38,305) $ 7,944 Adjustments to reconcile net loss to cash flows provided by operating activities 22,156 9,542 12,614 Changes in operating assets and liabilities 21,305 39,896 (18,591) Net cash provided by operating activities $ 13,100 $ 11,133 $ 1,967 Net cash used in investing activities $ (2,663) $ (2,413) $ (250) Net cash used in financing activities $ (5,843) $ (30,119) $ 24,276 We had cash and cash equivalents aggregating $31 million and $27 million at March 31, 2024 and December 31, 2023, respectively. We had cash held by our non-U.S. subsidiaries aggregating $18 million and $16 million at March 31, 2024 and December 31, 2023, respectively. If we elect to repatriate all of the funds held by our non-U.S. subsidiaries as of March 31, 2024, we do not believe that the amounts of potential withholding taxes that would arise from the repatriation would have a material effect on our liquidity. We currently maintain the Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), which we entered into on March 3, 2020, by and among us, as a guarantor, Ribbon Communications Operating Company, Inc., 41 as the borrower ("Borrower"), Citizens Bank, N.A. ("Citizens"), Santander Bank, N.A., and others as lenders, ("Lenders"). For additional details regarding the terms of the 2020 Credit Facility, see Note 9 to our condensed consolidated financial statements. On March 24, 2023, we entered into the Sixth Amendment to the 2020 Credit Facility (the “Sixth Amendment”) effective March 30, 2023. The Sixth Amendment, among other things, increased the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility), with the first, second and third quarters of 2023 increasing to 4.50:1.00. In the fourth quarter of 2023 and the first quarter of 2024, the Maximum Consolidated Net Leverage Ratio declines to 4.25:1.00 and 4.00:1.00, respectively. In all subsequent quarters, the Maximum Consolidated Senior Net Leverage Ratio will be fixed at 3.00:1.00 and the Maximum Consolidated Net Leverage Ratio will be fixed at 4.00:1.00 . Also, the Sixth Amendment reduced the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the 2020 Credit Facility) to 1.10:1.00 through the first quarter of 2024 and in all subsequent quarters the ratio will be fixed at 1.25:1.00. The Sixth Amendment reduced the maximum borrowings allowed under the 2020 Revolving Credit Facility from $100 million to $75 million and the sublimit available for 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, we made a $75 million prepayment that was applied to the final payment due upon maturity in March 2025 of approximately $200.4 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 2020 Credit Facility, as amended, allows us to incur junior secured or unsecured debt in an amount no less than $50 million, subject to certain conditions, including the requirement that 50% of the aggregate amount of such incurred debt (net of certain costs, fees and other amounts) must be applied to prepay the 2020 Credit Facility and compliance with certain leverage ratio-based covenant exceptions. Q uarterly principal payments are required 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. At March 31, 2024, we had an outstanding balance under the 2020 Term Loan of $230.4 million at an average interest rate of 9.9% , and $3 million of letters of credit outstanding with an interest rate of 4.5%. The Company's interest rates under our 2020 Term Loan for the three months ended March 31, 2023 benefited from a hedge instrument that was in place, specifically a fixed rate swap, which was sold in March 2023 (see Note 10). We were in compliance with all covenants of the 2020 Credit Facility at both March 31, 2024 and December 31, 2023, including the current Consolidated Net Leverage Ratio calculation that considers our debt to include Preferred Stock. We use letters of credit, performance and bid bonds in the course of our business. At March 31, 2024, we had $9.7 million 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 $7.0 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under various uncommitted facilities. At December 31, 2023, we had $7.9 million of Guarantees, comprised of $2.7 million of Letters of Credit and $5.2 million of Other Guarantees. We are exposed to financial market risk related to foreign currency fluctuations and changes in interest rates. These exposures are actively monitored by management. To manage the volatility related to the exposure to changes in interest rates, we may enter into a derivative financial instrument. Management's objective has been to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates. Our policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. We do not hold or issue derivative financial instruments for trading or speculative purposes. As a result of exposure to interest rate movements, during March 2020, we entered into an interest rate swap arrangement, which effectively converted our $400 million term loan with its variable interest rate based upon one-month LIBOR to an aggregate fixed rate of 0.904%, plus a leverage-based margin as defined in the 2020 Credit Facility. On July 22, 2022, we sold $30 million of the notional amount of our interest rate swap back to our counterparty for $1.5 million, reducing the notional amount of this swap to $370 million. On August 16, 2022, we sold another $30 million of the notional amount of our interest rate swap back to our counterparty for $1.6 million, reducing the notional amount to $340 million , which approximated the term loan debt then outstanding. The gain in accumulated other comprehensive (loss) income related to the $60 million notional amount sold of $3.1 million is being released into earnings on a straight line basis over the remaining term of the 2020 Credit Facility as a decrease to interest expense, the amortization of which totaled $0.2 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively. On March 24 , 2023, the Company received $9.4 million, consisting of $0.4 million of interest and $9.0 million for the sale of $170 million of its $340 million notional amount interest rate swap back to its 42 counterparty, reducing the notional amount to $170 million. On March 27 , 2023, the Company received $9.8 million, consisting of $0.4 million of interest and $9.4 million for the sale of the remaining $170 million of its interest rate swap back to its counterparty. The portion of the gain in accumulated other comprehensive (loss) income related to the term loan debt prepaid on the date of the final sale of our swap totaled $7.3 million and was released into earnings immediately as Other expense, net. The portion of the gain in accumulated other comprehensive (loss) income related to our remaining term loan debt balance totaled $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 beginning in the second quarter of 2023, the amortization of which was $1.6 million for the three months ended March 31, 2024 . Our objectives in using interest rate derivatives have been to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we have used an interest rate swap as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of an agreement without exchange of the underlying notional amount. The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is recorded in Accumulated other comprehensive income in the condensed consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the three months ended March 31, 2023, such a derivative was used to hedge the variable cash flows associated with the outstanding borrowings under the 2020 Credit Facility and the Company 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 would be recognized directly in earnings. However, we recorded no hedge ineffectiveness over the life of our swap. During the three months ended March 31, 2023, we recorded $7.3 million of Other expense, net due to the sale of our swap. Cash Flows from Operating Activities Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash flows from operating activities to be affected by increases and decreases in sales volumes and timing of collections, and by purchases and shipments of inventory. Our primary uses of cash for operating activities have been for personnel costs and investment in our research and development and in our sales and marketing, and general and administrative departments. Our operating activities provided cash of $13.1 million in the three months ended March 31, 2024 , primarily resulting from lower accounts receivable and other operating assets, and certain non-cash expenses such as amortization of intangible assets and stock-based compensation. These amounts were partially offset by our net loss and lower accounts payable, accrued expenses and other long-term liabilities, lower deferred revenue, higher inventory and certain non-cash items such as deferred income taxes. Higher product revenue in our IP Optical Networks segment and lower operating expenses company-wide due to our various cost saving initiatives, including lower employee and facilities expenses, continue to positively affect our operating cash flow. Cash provided by operating activities in the three months ended March 31, 2023 was $11.1 million, primarily resulting from lower accounts receivable and other operating assets, higher accrued expenses and other long-term liabilities, higher deferred revenue, and certain non-cash expenses such as amortization of intangible assets and stock-based compensation. These amounts were partially offset by our net loss and lower accounts payable, higher inventory and certain non-cash items such as deferred income taxes and the gain on sale of our interest rate swap. Cash Flows from Investing Activities Our investing activities used $2.7 million and $2.4 million of cash in the three months ended March 31, 2024 and 2023, respectively, to purchase property and equipment and software licenses. Cash Flows from Financing Activities Our financing activities used $5.8 million of cash in the three months ended March 31, 2024, primarily due to $5.0 million of principal payments on our term debt and $0.8 million for the payment of tax withholding related to the net share settlements of restricted stock awards upon vesting. In addition, we had $15.0 million of borrowings and $15.0 million of principal payments under our 2020 Revolving Credit Facility. Our financing activities used $30.1 million of cash in the three months ended March 31, 2023, primarily due to $80.0 million of principal payments, including a $75.0 million prepayment in connection with the Sixth Amendment to the 2020 43 Credit Facility, $1.6 million of debt issuance costs also paid in connection with the Sixth Amendment, and $1.9 million for the payment of tax withholding obligations related to the net share settlements of restricted stock awards upon vesting. In addition, we received $53.4 million of proceeds from the issuance of the Preferred Stock and Warrants in the Private Placement. The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations at March 31, 2024, primarily comprised of our debt principal and interest obligations as described above, and our operating lease and purchase obligations. Our operating lease obligations totaled $61.2 million at March 31, 2024, with payments aggregating $13.9 million in the remainder of 2024, $10.8 million in 2025, $9.0 million in 2026 and $27.5 million thereafter. Estimated payments for purchase obligations for the full year 2024 aggregate approximately $ 101 million . We anticipate devoting substantial capital resources to continue our R&D efforts, to maintain our sales, support and marketing, and for other general corporate activities. We believe that our financial resources, along with managing discretionary expenses, will allow us to manage the ongoing impact of inflation on our business operations. Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates. However, we do not have sufficient cash on hand or available liquidity to repay the $200.4 million due on March 3, 2025, the maturity date of our 2020 Credit Facility. In response to these conditions, management's plans include refinancing the 2020 Credit Facility. We have entered into a binding commitment letter (the "Commitment Letter") to refinance the 2020 Credit Facility. See Note 20 - Subsequent Event to our condensed consolidated financial statements. The refinance contemplated by the Commitment Letter is expected to close no later than June 30, 2024. However, because the credit facility contemplated by the Commitment Letter has not yet been finalized, it cannot be deemed to be within our control. As a result, such plans cannot be deemed probable and do not alleviate the substantial doubt raised about our ability to continue as a going concern. 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 us beginning in 2025, with early adoption permitted. We are currently evaluating the impact of this accounting standard update on our 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 us annually beginning in 2024 and on an interim basis beginning in 2025, with early adoption permitted. We are currently evaluating the impact of this accounting standard update on our 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 us for each amendment will be the date on which the SEC's removal of that related disclosure requirement becomes effective, with early adoption prohibited. We are currently evaluating the impact of this accounting standard update on our 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. 44