Ribbon Communications Inc. 10-Q

Item 1. Financial Statements RIBBON COMMUNICATIONS INC. Condensed Consolidated Balance Sheets (in thousands, except share and per share data) (unaudited) June 30, 2024 December 31, 2023 Assets Current assets: Cash and cash equivalents $ 64,558 $ 26,494 Restricted cash 2,850 136 Accounts receivable, net 210,954 268,421 Inventory 79,216 77,521 Other current assets 46,576 46,146 Total current assets 404,154 418,718 Property and equipment, net 40,824 41,820 Intangible assets, net 212,052 238,087 Goodwill 300,892 300,892 Deferred income taxes 78,067 69,761 Operating lease right-of-use assets 33,901 39,783 Other assets 35,562 35,092 $ 1,105,452 $ 1,144,153 Liabilities and Stockholders' Equity Current liabilities: Current portion of term debt $ 3,500 $ 35,102 Accounts payable 64,333 85,164 Accrued expenses and other 92,847 91,687 Operating lease liabilities 12,347 15,739 Deferred revenue 99,547 113,381 Total current liabilities 272,574 341,073 Long-term debt, net of current 333,979 197,482 Warrant liability 6,170 5,295 Preferred stock liability, $ 0.01 par value per share; 10,000,000 shares authorized, none issued and outstanding at June 30, 2024; 55,000 shares issued and outstanding at December 31, 2023 ($ 56,650 liquidation preference) — 53,337 Operating lease liabilities, net of current 34,858 38,711 Deferred revenue, net of current 16,632 19,218 Deferred income taxes 5,616 5,616 Other long-term liabilities 30,601 30,658 Total liabilities 700,430 691,390 Commitments and contingencies (Note 19) Stockholders' equity: Common stock, $ 0.0001 par value per share; 240,000,000 shares authorized; 174,437,242 shares issued and outstanding at June 30, 2024; 172,083,667 shares issued and outstanding at December 31, 2023 17 17 Additional paid-in capital 1,964,304 1,958,909 Accumulated deficit ( 1,567,127 ) ( 1,519,950 ) Accumulated other comprehensive income 7,828 13,787 Total stockholders' equity 405,022 452,763 $ 1,105,452 $ 1,144,153 See notes to the unaudited condensed consolidated financial statements. 4 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Operations (in thousands, except per share data) (unaudited) Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Revenue: Product $ 99,133 $ 117,347 $ 186,743 $ 210,665 Service 93,487 93,271 185,541 186,112 Total revenue 192,620 210,618 372,284 396,777 Cost of revenue: Product 54,845 67,927 100,639 129,990 Service 33,376 33,782 68,740 69,087 Amortization of acquired technology 6,532 7,439 13,083 14,828 Total cost of revenue 94,753 109,148 182,462 213,905 Gross profit 97,867 101,470 189,822 182,872 Operating expenses: Research and development 43,489 47,776 89,252 99,080 Sales and marketing 32,984 33,905 67,700 69,304 General and administrative 14,901 14,346 30,092 28,391 Amortization of acquired intangible assets 6,508 7,260 13,214 14,524 Acquisition-, disposal- and integration-related — 498 — 2,140 Restructuring and related 1,920 4,307 4,985 11,244 Total operating expenses 99,802 108,092 205,243 224,683 Loss from operations ( 1,935 ) ( 6,622 ) ( 15,421 ) ( 41,811 ) Interest expense, net ( 3,879 ) ( 6,766 ) ( 9,866 ) ( 13,188 ) Other (expense) income, net ( 9,503 ) ( 2,688 ) ( 17,016 ) 2,084 Loss before income taxes ( 15,317 ) ( 16,076 ) ( 42,303 ) ( 52,915 ) Income tax provision ( 1,499 ) ( 5,403 ) ( 4,874 ) ( 6,869 ) Net loss $ ( 16,816 ) $ ( 21,479 ) $ ( 47,177 ) $ ( 59,784 ) Loss per share: Basic $ ( 0.10 ) $ ( 0.13 ) $ ( 0.27 ) $ ( 0.35 ) Diluted $ ( 0.10 ) $ ( 0.13 ) $ ( 0.27 ) $ ( 0.35 ) Weighted average shares used to compute loss per share: Basic 173,793 170,103 173,110 169,326 Diluted 173,793 170,103 173,110 169,326 See notes to the unaudited condensed consolidated financial statements. 5 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Comprehensive Loss (in thousands) (unaudited) Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Net loss $ ( 16,816 ) $ ( 21,479 ) $ ( 47,177 ) $ ( 59,784 ) Other comprehensive income (loss), net of tax: Unrealized loss on interest rate swap, net of reclassifications and amortization into earnings ( 4,698 ) ( 1,322 ) ( 6,019 ) ( 7,222 ) Reclassification of gain to other income (expense), net upon sale of interest rate swap — — — ( 5,099 ) Foreign currency translation adjustments 176 ( 434 ) 60 ( 585 ) Other comprehensive loss, net of tax ( 4,522 ) ( 1,756 ) ( 5,959 ) ( 12,906 ) Comprehensive loss, net of tax $ ( 21,338 ) $ ( 23,235 ) $ ( 53,136 ) $ ( 72,690 ) See notes to the unaudited condensed consolidated financial statements. 6 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Stockholders' Equity (in thousands, except shares) (unaudited) Three months ended June 30, 2024 Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit (loss) income equity Balances, April 1, 2024 172,714,429 $ 17 $ 1,962,602 $ ( 1,550,311 ) $ 12,350 $ 424,658 Vesting of restricted stock awards and units 2,138,848 — Vesting of performance-based stock units 257,390 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 673,425 ) ( 1,792 ) ( 1,792 ) Stock-based compensation expense 3,494 3,494 Other comprehensive loss ( 4,522 ) ( 4,522 ) Net loss ( 16,816 ) ( 16,816 ) Balances, June 30, 2024 174,437,242 $ 17 $ 1,964,304 $ ( 1,567,127 ) $ 7,828 $ 405,022 Six months ended June 30, 2024 Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit (loss) income equity Balances, January 1, 2024 172,083,667 $ 17 $ 1,958,909 $ ( 1,519,950 ) $ 13,787 $ 452,763 Exercise of stock options 8,624 17 17 Vesting of restricted stock awards and units 3,027,037 — Vesting of performance-based stock units 288,672 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 970,758 ) ( 2,638 ) ( 2,638 ) Stock-based compensation expense 8,016 8,016 Other comprehensive loss ( 5,959 ) ( 5,959 ) Net loss ( 47,177 ) ( 47,177 ) Balances, June 30, 2024 174,437,242 $ 17 $ 1,964,304 $ ( 1,567,127 ) $ 7,828 $ 405,022 See notes to the unaudited condensed consolidated financial statements. 7 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Stockholders' Equity (in thousands, except shares) (unaudited) Three months ended June 30, 2023 Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit (loss) income equity Balances, April 1, 2023 169,229,979 $ 17 $ 1,945,525 $ ( 1,492,049 ) $ 19,435 $ 472,928 Exercise of stock options 344 1 1 Vesting of restricted stock awards and units 2,294,295 — Shares of restricted stock returned to the Company under net share settlements to satisfy tax withholding obligations ( 566,218 ) ( 1,563 ) ( 1,563 ) Stock-based compensation expense 6,116 6,116 Other comprehensive loss ( 1,756 ) ( 1,756 ) Net loss ( 21,479 ) ( 21,479 ) Balances, June 30, 2023 170,958,400 $ 17 $ 1,950,079 $ ( 1,513,528 ) $ 17,679 $ 454,247 Six months ended June 30, 2023 Accumulated Additional other Total Common stock paid-in Accumulated comprehensive stockholders' Shares Amount capital deficit (loss) income equity Balances, January 1, 2023 168,324,995 $ 17 $ 1,941,569 $ ( 1,453,744 ) $ 30,585 $ 518,427 Exercise of stock options 917 2 2 Vesting of restricted stock awards and units 3,314,572 — 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 ( 1,063,155 ) ( 3,456 ) ( 3,456 ) Stock-based compensation expense 11,964 11,964 Other comprehensive loss ( 12,906 ) ( 12,906 ) Net loss ( 59,784 ) ( 59,784 ) Balances, June 30, 2023 170,958,400 $ 17 $ 1,950,079 $ ( 1,513,528 ) $ 17,679 $ 454,247 See notes to the unaudited condensed consolidated financial statements. 8 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Six months ended June 30, 2024 June 30, 2023 Cash flows from operating activities: Net loss $ ( 47,177 ) $ ( 59,784 ) Adjustments to reconcile net loss to cash flows provided by operating activities: Depreciation and amortization of property and equipment 6,770 7,059 Amortization of intangible assets 26,297 29,352 Amortization of debt issuance costs and original issue discount 3,445 1,793 Amortization of accumulated other comprehensive gain related to interest rate swap ( 8,196 ) ( 2,062 ) Stock-based compensation 8,016 11,964 Deferred income taxes ( 8,104 ) ( 6,946 ) Gain on sale of swap — ( 7,301 ) Change in fair value of warrant liability 875 ( 1,318 ) Change in fair value of preferred stock liability 8,091 1,456 Dividends accrued on preferred stock liability 2,743 1,272 Payment of dividends accrued on preferred stock liability ( 6,686 ) — Foreign currency exchange losses (gains) 2,023 ( 1,080 ) Changes in operating assets and liabilities: Accounts receivable 56,146 21,534 Inventory ( 4,405 ) ( 2,221 ) Other operating assets 8,854 13,486 Accounts payable ( 20,541 ) ( 1,740 ) Accrued expenses and other long-term liabilities ( 8,407 ) 2,343 Deferred revenue ( 16,422 ) 767 Net cash provided by operating activities 3,322 8,574 Cash flows from investing activities: Purchases of property and equipment ( 5,613 ) ( 4,091 ) Purchases of software licenses ( 263 ) — Net cash used in investing activities ( 5,876 ) ( 4,091 ) Cash flows from financing activities: Borrowings under revolving line of credit 44,106 30,000 Principal payments on revolving line of credit ( 44,106 ) ( 30,000 ) Proceeds from issuance of term debt 342,300 — Principal payments of term debt ( 235,395 ) ( 85,029 ) Payment of debt issuance costs ( 3,978 ) ( 1,572 ) Proceeds from issuance of preferred stock and warrant liabilities — 53,350 Payment of preferred stock liability ( 56,850 ) — Proceeds from the exercise of stock options 17 2 Payment of tax obligations related to vested stock awards and units ( 2,638 ) ( 3,456 ) Net cash provided by (used in) financing activities 43,456 ( 36,705 ) Effect of exchange rate changes on cash and cash equivalents ( 124 ) ( 394 ) Net increase (decrease) in cash and cash equivalents 40,778 ( 32,616 ) Cash, cash equivalents and restricted cash, beginning of year 26,630 67,262 Cash, cash equivalents and restricted cash, end of period $ 67,408 $ 34,646 9 RIBBON COMMUNICATIONS INC. Condensed Consolidated Statements of Cash Flows (continued) (in thousands) (unaudited) Six months ended June 30, 2024 June 30, 2023 Supplemental disclosure of cash flow information: Interest paid $ 12,222 $ 11,617 Income taxes paid $ 9,664 $ 6,945 Income tax refunds received $ 991 $ 430 Supplemental disclosure of non-cash investing activities: Capital expenditures incurred, but not yet paid $ 1,786 $ 2,150 Inventory transfers to property and equipment $ 954 $ 963 Supplemental disclosure of non-cash financing activities: Fair value of vested restricted and performance-based stock grants $ 9,095 $ 11,724 See notes to the unaudited condensed consolidated financial statements. 10 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (unaudited) (1) BASIS OF PRESENTATION Business Ribbon Communications Inc. ("Ribbon" or the "Company") is a leading global provider of communications technology to service providers and enterprises. The Company provides a broad range of software and high-performance hardware products, network solutions, and services that enable the secure delivery of data and voice communications, and high-bandwidth networking and connectivity for residential consumers and for small, medium, and large enterprises and industry verticals such as finance, education, government, utilities, and transportation. Ribbon's mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance, and elasticity. The Company is headquartered in Plano, Texas, and has a global presence with research and development, or sales and support locations in over thirty countries around the world. Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring items, necessary for their fair presentation with accounting principles generally accepted in the United States of America ("GAAP") and with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year or any future interim period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2023, as amended (the "Annual Report"), which was filed with the SEC on February 28, 2024 . Operating Segments The Company's chief operating decision maker (the "CODM") is its president and chief executive officer. The CODM assesses the Company's performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge segment ("Cloud and Edge") and the IP Optical Networks segment ("IP Optical Networks"). Significant Accounting Policies The Company's significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in the Annual Report. There were no material changes to the significant accounting policies during the six months ended June 30, 2024. Principles of Consolidation The condensed consolidated financial statements include the accounts of Ribbon and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Use of Estimates and Judgments The preparation of financial statements in conformity with GAAP requires 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 condensed consolidated financial statements include 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, 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 11 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates. Restricted Cash The Company classifies as restricted cash all cash pledged as collateral to secure long-term obligations and all cash otherwise limited in use by contractual provisions. At June 30, 2024 and December 31, 2023, the Company had $ 2.9 million and $ 0.1 million of restricted cash, respectively, representing restricted short-term bank deposits pledged to secure certain guarantees and surety bonds as security for the Company's obligations under tenders, and contracts. Transfers of Financial Assets The Company's IP Optical Networks segment maintains customer receivables factoring agreements with a number of financial institutions. Under the terms of these agreements, the Company may transfer receivables to the financial institutions, on a non-recourse basis, provided that the financial institutions approve the receivables in advance. The Company maintains credit insurance policies from major insurance providers or obtains letters of credit from the customers for a majority of its factored trade receivables. The Company accounts for the factoring of its financial assets as a sale of the assets and records the factoring fees, when incurred, as a component of interest expense in the condensed consolidated statements of operations, and the proceeds from the sales of receivables are included in cash from operating activities in the condensed consolidated statements of cash flows. Factoring of accounts receivable and associated fees for the three and six months ended June 30, 2024 and 2023 were as follows (in thousands): Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Accounts receivable sold 25,970 27,266 46,962 48,327 Less factoring fees ( 543 ) ( 815 ) ( 934 ) ( 1,270 ) Net cash proceeds 25,427 26,451 46,028 47,057 Going Concern Assessment The accompanying condensed consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In the Company's condensed consolidated financial statements for the period ended March 31, 2024, substantial doubt was raised about the Company's ability to continue as a going concern due to the lack of sufficient cash on hand or available liquidity to repay its obligations under the 2020 Credit Facility (as defined in Note 9) that was scheduled to mature on March 3, 2025. In response to these conditions, management's plans included refinancing the 2020 Credit Facility and the Company entered into a binding commitment letter for such refinancing on May 15, 2024. The refinancing contemplated by the binding commitment letter closed on June 21, 2024. See Note 9 for a description of the 2024 Senior Secured Credit Facilities Credit Agreement, the proceeds of which were used to, among other things, repay all amounts outstanding under the 2020 Credit Facility. As a result, there is no longer substantial doubt about the ability of the Company 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 12 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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. The Company is closely monitoring developments and evaluating the impacts these new rules will have on its tax rate, including eligibility to qualify for these safe harbor rules. Based upon preliminary calculations for calendar year 2024, the Company anticipates that it will meet the safe harbors in most jurisdictions, and any remaining top-up tax should be immaterial. (2) EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. For periods in which the Company reports net income, diluted net earnings per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period, unless the effect is antidilutive. The shares used to compute loss per share were as follows (in thousands): Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Weighted average shares outstanding - basic 173,793 170,103 173,110 169,326 Potential dilutive common shares — — — — Weighted average shares outstanding - diluted 173,793 170,103 173,110 169,326 Options to purchase the Company's common stock and unvested restricted and performance-based stock units aggregating 11.9 million and 14.1 million shares were excluded from the computation of diluted loss per share for the three and six months ended June 30, 2024 and 2023, respectively, because their effect would have been antidilutive. 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 13 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) "Warrants") to purchase shares of the Company's common stock, par value $ 0.0001 per share (the "Private Placement"), at the exercise price of $ 3.77 per share. The proceeds from the Private Placement were approximately $ 53.4 million, including approximately $ 10 million from existing related party stockholders (See Note 11). On June 25, 2024, the Company redeemed the Preferred Stock with a portion of the proceeds from the refinancing of the 2020 Credit Facility at a rate of 103 % for a total of approximately $ 63.5 million. The Warrants remain outstanding and without modification. See Note 9 for a description of the refinancing of the 2020 Credit Facility. As of June 30, 2024 and 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 three and six months ended June 30, 2024 and 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 accrued on the Preferred Stock were not an adjustment to net income (loss) used for the calculation of diluted earnings (loss) per share as these dividends were included in the fair value adjustment of the Preferred Stock which was reflected in Other (expense) income, net until the redemption of the Preferred Stock on June 25, 2024. (3) INVENTORY Inventory at June 30, 2024 and December 31, 2023 consisted of the following (in thousands): June 30, 2024 December 31, 2023 On-hand final assemblies and finished goods inventories $ 97,266 $ 93,077 Deferred cost of goods sold 2,530 3,269 99,796 96,346 Less noncurrent portion (included in Other assets) ( 20,580 ) ( 18,825 ) Current portion $ 79,216 $ 77,521 (4) INTANGIBLE ASSETS AND GOODWILL The Company's intangible assets at June 30, 2024 and December 31, 2023 consisted of the following (in thousands): June 30, 2024 Weighted average amortization period (years) Cost Accumulated amortization Net carrying value Developed technology 7.84 $ 340,380 $ 251,232 $ 89,148 Customer relationships 11.86 268,140 147,904 120,236 Trade names 3.88 5,000 4,954 46 Software licenses 3.00 5,698 3,076 2,622 9.50 $ 619,218 $ 407,166 $ 212,052 14 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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 Estimated future amortization expense for the Company's intangible assets at June 30, 2024 was as follows (in thousands): Years ending December 31, Remainder of 2024 $ 24,558 2025 44,176 2026 39,126 2027 33,969 2028 23,400 2029 18,379 Thereafter 28,444 $ 212,052 There were no changes to the carrying value of the Company's goodwill in the six months ended June 30, 2024 and 2023. The components of goodwill at both June 30, 2024 and 2023 were as follows (in thousands): Cloud and Edge IP Optical Networks Total Goodwill $ 392,302 $ 191,996 $ 584,298 Accumulated impairment losses ( 167,406 ) ( 116,000 ) ( 283,406 ) $ 224,896 $ 75,996 $ 300,892 (5) FAIR VALUE HIERARCHY The carrying amounts of the Company's cash equivalents, accounts receivable, accounts payable and borrowings under a revolving credit facility in the condensed 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 June 30, 2024 and December 31, 2023 of $ 350.0 million and $ 235.4 million, respectively, had a fair value of approximately $ 350.0 million and $ 235.1 million, respectively. Our Warrant liability had a fair value of $ 6.2 million and $ 5.3 million as of June 30, 2024 and December 31, 2023, respectively. Our Preferred Stock had a fair value of $ 53.3 million as of December 31, 2023 and was fully redeemed on June 25, 2024. 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 June 30, 2024 or December 31, 2023. 15 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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. There were no significant changes to the Company's defined benefit plans' assets during the six months ended June 30, 2024 that required the calculation of their fair value as of June 30, 2024. 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. Level 3 input was used to determine the fair value of the Company's Warrants at June 30, 2024 and the fair value of the Company's Preferred Stock and Warrants at December 31, 2023. (6) ACCRUED EXPENSES AND OTHER Accrued expenses at June 30, 2024 and December 31, 2023 consisted of the following (in thousands): June 30, 2024 December 31, 2023 Employee compensation and related costs $ 34,467 $ 33,682 Professional fees 22,007 19,702 Taxes payable 5,126 8,383 Other 31,247 29,920 $ 92,847 $ 91,687 (7) WARRANTY ACCRUALS The changes in the Company's accrual balance in the six months ended June 30, 2024 were as follows (in thousands): Balance at January 1, 2024 $ 12,243 Current period provisions 2,824 Settlements ( 2,628 ) Balance at June 30, 2024 $ 12,439 (8) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES The Company recorded restructuring and related expense aggregating $ 1.9 million and $ 4.3 million in the three months ended June 30, 2024 and 2023, respectively and $ 5.0 million and $ 11.2 million in the six months ended June 30, 2024 and 2023, respectively. Restructuring and related expense includes restructuring expense (primarily severance and related costs), estimated future variable lease costs for vacated properties with no intent or ability of sublease, and accelerated rent amortization expense. For restructuring events that involve lease assets and liabilities, the Company applies lease reassessment and modification guidance and evaluates the right-of-use assets for potential impairment. If the Company plans to exit all or distinct portions of a facility and does not have the ability or intent to sublease, the Company will accelerate the amortization of each of those lease components through the vacate date. The accelerated amortization is recorded as a component of Restructuring and related expense in the Company's condensed consolidated statements of operations. Related variable lease expenses will continue to be expensed as incurred through the vacate date, at which time the Company will reassess the liability balance to ensure it appropriately reflects the remaining liability associated with the premises and record a liability for the estimated future variable lease costs. 16 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Accelerated amortization of lease assets is recognized from the date that the Company commences the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date. Accelerated amortization of lease assets that are included as a component of restructuring and related expense are excluded from the restructuring accrual activity tables below, as the liability for lease payments for these facilities is included as a component of current and noncurrent Operating lease liabilities in the Company's condensed consolidated balance sheets at June 30, 2024 and December 31, 2023 (see Note 16). The Company may incur additional future expense if it is unable to sublease other locations included in the Company's facilities consolidation initiatives. Restructuring and related expense for the three and six months ended June 30, 2024 and 2023 was comprised of the following (in thousands): Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Severance and related costs $ 359 $ 2,843 $ 1,975 $ 8,551 Variable and other facilities-related costs 1,561 $ 1,125 3,010 2,131 Accelerated amortization of lease assets due to cease-use — $ 339 — 562 $ 1,920 $ 4,307 $ 4,985 $ 11,244 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. In connection with the 2023 Restructuring Plan, the Company recorded restructuring and related expense of $ 0.4 million and $ 2.0 million in the three and six months ended June 30, 2024, respectively, consisting entirely of severance related costs. A summary of the 2023 Restructuring Plan accrual activity for the six months ended June 30, 2024 is as follows (in thousands): Balance at January 1, 2024 Initiatives charged to expense Cash payments Net transfer to operating lease accounts Balance at June 30, 2024 Severance $ 671 $ 1,975 $ ( 1,852 ) $ — $ 794 2022 Restructuring Plan On February 14, 2022, the Company's Board of Directors approved a strategic restructuring program (the "2022 Restructuring Plan") to streamline the Company's operations in order to support the Company's investment in critical growth areas. The 2022 Restructuring Plan includes, among other things, charges related to a consolidation of facilities and a workforce reduction. Any positions eliminated in countries outside the United States are subject to local law and consultation requirements. The Company recorded restructuring and related expense of $ 1.6 million and $ 3.0 million in the three and six months ended June 30, 2024, respectively, in connection with the 2022 Restructuring Plan for variable and other facilities-related costs. A summary of the 2022 Restructuring Plan accrual activity for the six months ended June 30, 2024 is as follows (in thousands): Balance at January 1, 2024 Initiatives charged to expense Cash payments Balance at June 30, 2024 Variable and other facilities-related costs $ 468 3,010 ( 3,086 ) $ 392 17 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Balance Sheet Classification The current portions of accrued restructuring were $ 1.1 million at both June 30, 2024 and December 31, 2023 and are included as components of Accrued expenses in the condensed consolidated balance sheets. The long-term portions of accrued restructuring are included as components of Other long-term liabilities in the condensed consolidated balance sheets. The long-term portions of accrued restructuring were $ 1.0 million and $ 1.1 million at June 30, 2024 and December 31, 2023, respectively. (9) DEBT 2024 Credit Facility On June 21 , 2024, the Company entered into a Senior Secured Credit Facilities Credit Agreement (the “2024 Credit Facility” and “2024 Credit Agreement”) as guarantor, with the Company’s wholly-owned subsidiary, Ribbon Communications Operating Company, Inc., as the borrower (the “Borrower”), HPS Investment Partners, LLC ("HPS"), as administrative agent, and HPS and WhiteHorse Capital Management, LLC ("WhiteHorse" and, together with HPS, the "Lenders"), pursuant to which the Lenders have provided the Company with a $ 385 million senior secured credit facility comprised of (i) a $ 350 million term loan (the “2024 Term Loan”) and (ii) a $ 35 million revolving credit facility (the “2024 Revolver”), including a $ 20 million sublimit for letters of credit. The proceeds received from the 2024 Term Loan were used to (a) repay 100 % of the amounts outstanding under the 2020 Credit Facility, (b) redeem in full the Preferred Stock and (c) pay fees and expenses related to the 2024 Credit Facility. Any excess proceeds are expected to be used by the Company for working capital and other general corporate purposes. The 2024 Term Loan and the 2024 Revolver bear interest, at the Borrower's option, at either the Alternate Base Rate (“ABR”) or Term Secured Overnight Financing Rate ("SOFR") with an Applicable Margin for each (all as defined in the 2024 Credit Agreement). Margins for the first six months are 5.25 % per annum for ABR Loans and 6.25 % per annum for SOFR Loans. Thereafter, margins vary based on the Company’s Consolidated Net Leverage Ratio, ranging from 4.75 % to 5.25 % per annum for ABR Loans and 5.75 % to 6.25 % per annum for SOFR Loans. The 2024 Term Loan and the 2024 Revolver will both mature on June 21, 2029. The 2024 Term Loan is to be repaid in equal quarterly installments: approximately $ 0.9 million beginning with the third quarter of 2024 through the second quarter of 2025; approximately $ 2.2 million beginning with the third quarter of 2025 and ending with the second quarter of 2027; and approximately $ 4.4 million quarterly thereafter, with the remaining principal balance of approximately $ 298.4 million due on the maturity date of June 21, 2029. In connection with the establishment of the 2024 Credit Facility, $ 7.7 million of original issue discount was withheld by the Lenders and the Company incurred $ 6.1 million of debt issuance costs for a total of $ 13.8 million that is being amortized to Interest expense, net over the term of the agreement. The 2024 Credit Facility requires compliance with a Maximum Consolidated Net Leverage Ratio (the "Financial Covenant"), as defined in the 2024 Credit Facility and tested on a quarterly basis. The Company was in compliance with the Financial Covenant as of June 30, 2024. The indebtedness and other obligations under the 2024 Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by the Company and its subsidiaries (together, the "Guarantors") . The 2024 Credit Facility is secured on a first-priority basis by a lien on substantially all assets of the Borrower and the Guarantors. 2020 Credit Facility On June 21, 2024, the Company used the proceeds from the 2024 Credit Facility to, among other things, repay all amounts outstanding under its Senior Secured Credit Facilities Credit Agreement, dated March 3, 2020 (as amended, the "2020 Credit Facility"), by and among the Company, as a guarantor, Ribbon Communications Operating Company, Inc., as the borrower (the "Borrower"), Citizens Bank, N.A., Santander Bank, N.A., and others as lenders ("Lenders"). The Company wrote off $ 2.0 million of debt issuance costs in conjunction with the early extinguishment of the 2020 Credit Facility. 18 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) The 2020 Credit Facility had a maturity date of March 2025 and 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 was available for swingline loans. The indebtedness and other obligations under the 2020 Credit Facility were unconditionally guaranteed on a senior secured basis by the Company, Edgewater Networks, Inc., a wholly-owned subsidiary of the Company, and GENBAND Inc., a wholly-owned subsidiary of the Company (together, the "Guarantors") . The 2020 Credit Facility was 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 required compliance with certain financial covenants, including a minimum Consolidated Fixed Charge Coverage Ratio and a maximum Consolidated Net Leverage Ratio (each as defined in the 2020 Credit Facility, and each tested on a quarterly basis). On 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), for the first, second and third quarters of 2023 to 4.50 :1.00. In the fourth quarter of 2023 and the first quarter of 2024, the Maximum Consolidated Net Leverage Ratio declined to 4.25 :1.00 and 4.00 :1.00, respectively. 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. 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 SOFR as the alternative rate available to the Company for calculating interest owed under the 2020 Credit Facility with the margin 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. 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 were being amortized on a straight-line basis over the remaining life of the 2020 Credit Facility and were written off in conjunction with the early extinguishment of the 2020 Credit Facility on June 21, 2024. The Company's interest rates under the 2020 Term Loan fo r the six months ended June 30, 2023 b enefited from a hedge instrument that was in place, specifically a fixed rate swap, which was sold in March 2023 (see Note 10). As a result of the fixed rate swap sold in March 2023, the ongoing interest rate was 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 December 31, 2023, including the current Consolidated Net Leverage Ratio calculation that considered the Company's debt to include Preferred Stock. The Company had the following outstanding borrowings, unamortized debt issuance costs and original issue discount, letters of credit, interest rates, and remaining borrowing capacity under the 2024 Credit Facility and the 2020 Credit Facility as of June 30, 2024 and December 31, 2023, respectively: 19 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) June 30, 2024 December 31, 2023 Current portion of Term Debt $ 3,500 $ 35,102 Long-term Debt, net of Current: Long-term Debt, net of Current (Face Amount) $ 346,500 $ 200,293 Original Issue Discount ( 6,961 ) — Unamortized Debt Issuance Costs - Contra-Liability ( 5,560 ) ( 2,811 ) Long-term Debt, net of Current $ 333,979 $ 197,482 Total Face Amount of Borrowings $ 350,000 $ 235,395 Unamortized Original Issue Discount and Debt Issuance Costs: Other Assets 1,238 557 Long-Term Debt - Contra Liability 12,521 2,811 Total Unamortized Original Issue Discount and Debt Issuance Costs $ 13,759 $ 3,368 Letters of Credit Outstanding $ — $ 2,711 Remaining Borrowing Capacity $ 35,000 $ 72,289 Average Interest Rates: Term Loan 11.6 % 10.0 % Letters of Credit — % 4.5 % The Company's debt maturities as of June 30, 2024 were as follows: Years ending December 31, Remainder of 2024 $ 1,750 2025 6,125 2026 8,750 2027 13,125 2028 17,500 2029 302,750 $ 350,000 Letters of Credit and Other Guarantees The Company uses letters of credit, bank guarantees, and surety bonds in the course of its business. At June 30, 2024, the Company had $ 9.5 million of letters of credit, bank guarantees, and surety bonds outstanding (collectively, "Guarantees") under various uncommitted facilities and no letters of credit outstanding under the 2024 Credit Facility. At December 31, 2023, the Company had Guarantees aggregating $ 7.9 million, comprised of the $ 2.7 million of letters of credit under the 2020 Credit Facility described above and $ 5.2 million of Other Guarantees. At June 30, 2024 and December 31, 2023, the Company had cash collateral of $ 2.9 million and $ 0.1 million, respectively, supporting the Guarantees, which are reported in Restricted cash in the Company's condensed consolidated balance sheets. (10) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company is exposed to financial market risk related to foreign currency fluctuations and changes in interest rates. These exposures are actively monitored by management. To manage the volatility related to the exposure to changes in interest rates, the Company may enter into derivative financial instruments. Management's objective has been to reduce, where it is 20 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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 2024 Term Loan Facility and the 2020 Term Loan Facility had outstanding balances of $ 350.0 million and $ 235.4 million at June 30, 2024 and December 31, 2023, respectively. The 2024 Revolving Credit Facility and the 2020 Revolving Credit Facility were undrawn at June 30, 2024 and December 31, 2023, respectively. Borrowings under the 2024 Credit Facility and the 2020 Credit Facility have variable interest rates based on SOFR (see Note 9). As a result of exposure to interest rate movements, during March 2020, the Company entered into an interest rate swap arrangement, which effectively converted its $ 400 million term loan with its variable interest rate based upon one-month LIBOR to an aggregate fixed rate of 0.904 %, plus a leverage-based margin as defined in the 2020 Credit Facility. On July 22, 2022, the Company sold $ 30 million of the notional amount of its interest rate swap back to its counterparty for $ 1.5 million, reducing the notional amount of this swap to $ 370 million. On August 16, 2022 the Company sold another $ 30 million of the notional amount of its interest rate swap back to its counterparty for $ 1.6 million, reducing the notional amount to $ 340 million, which approximated the current level of our term loan debt then outstanding. The gain in accumulated other comprehensive (loss) income related to the $ 60 million notional amount sold of $ 3.1 million was being released into earnings on a straight line basis over the remaining term of the 2020 Credit Facility as a decrease to interest expense until it was refinanced on June 21, 2024, the amortization of which totaled $ 0.2 million and $ 0.4 million for the three and six months ended June 30, 2024, respectively, and $ 0.2 million and $ 0.5 million for the three and six months ended June 30, 2023, respectively. The remaining unamortized gain in accumulated other comprehensive (loss) income of approximately $ 0.5 million was written off to interest expense in conjunction with the refinancing of the 2020 Credit Facility on June 21, 2024. See Note 9 for a description of the refinancing. On March 24 , 2023, the Company received $ 9.4 million, consisting of $ 0.4 million of interest and $ 9.0 million for the sale of $ 170 million of its $ 340 million notional amount interest rate swap back to its counterparty, reducing the notional amount to $ 170 million. On March 27 , 2023, the Company received $ 9.8 million, consisting of $ 0.4 million of interest and $ 9.4 million for the sale of the remaining $ 170 million of its interest rate swap back to its counterparty. The portion of the gain in accumulated other comprehensive (loss) income related to the term loan debt prepaid on the date of the final sale of our swap totaled $ 7.3 million and was released into earnings immediately as Other expense, net. The portion of the gain in accumulated other comprehensive (loss) income related to our remaining term loan debt balance was $ 12.0 million and was being released into earnings on a straight line basis over the remaining term of the 2020 Credit Facility as a decrease to interest expense until it was refinanced on June 21, 2024, the amortization of which totaled $ 1.4 million and $ 3.0 million for the three and six months ended June 30, 2024, respectively, and $ 1.6 million for both the three and six months ended June 30, 2023. The remaining unamortized gain in accumulated other comprehensive (loss) income of $ 4.4 million was written off to interest expense in conjunction with the refinancing of the 2020 Credit Facility on June 21, 2024. See Note 9 for a description of the refinancing. 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 21 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the related agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is recorded in accumulated other comprehensive income in the condensed consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the three and six months ended June 30, 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 have been recognized directly in earnings. However, there was no hedge ineffectiveness recorded over the life of the swap. Amounts reported in accumulated other comprehensive income related to the Company's derivative are reclassified to interest expense as interest is accrued on the Company’s variable-rate debt. The impact of the Company’s derivative financial instrument on its condensed consolidated statements of comprehensive (loss) income for the three and six months ended June 30, 2024 and 2023 was as follows, net of tax (in thousands): Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Gain (loss) recognized in other comprehensive income (loss) on swap, net of tax $ — $ — $ — $ ( 2,715 ) 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 ( 4,698 ) ( 1,322 ) ( 6,019 ) ( 4,507 ) Unrealized gain (loss) on interest rate swap, net of reclassifications and amortization $ ( 4,698 ) $ ( 1,322 ) $ ( 6,019 ) $ ( 12,321 ) The Company had no derivative assets or liabilities at June 30, 2024 or December 31, 2023. (11) PREFERRED STOCK AND WARRANTS On March 28, 2023, the Company issued 55,000 shares of Preferred Stock to investors in the Private Placement at a price of $ 970 per share, along with 4,858,090 Warrants with an exercise price of $ 3.77 per share. On June 25, 2024, the Company redeemed the Preferred Stock with a portion of the proceeds from the refinancing of the 2020 Credit Facility at a rate of 103 % for a total of approximately $ 63.5 million. The Warrants remain outstanding and without modification. See Note 9 for a description of the refinancing of the 2020 Credit Facility. The Company accounted for the Preferred Stock until it was redeemed and continues to account for the 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 considered 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. The value of the Preferred Stock was calculated quarterly through March 31, 2024 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 quarterly using the Black-Scholes Pricing Model. 22 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Changes in the fair value of the Preferred Stock and the Warrants are reported as Other expense, net in the Company's condensed consolidated statements of operations. The Company determined the fair value of the Warrants using Level 3 input. The key assumptions into the model utilized was as follows as of June 30, 2024: Warrants (Black-Scholes) Stock price $ 3.29 Strike price $ 3.77 Risk-free rate 4.52 % Volatility 61.5 % Dividend yield 0.0 % Time to expiration (years) 2.8 Fair value of Warrant per share $ 1.27 The changes in the Company's Preferred Stock and Warrant liabilities for the six months ended June 30, 2024 were as follows (in thousands): Preferred stock liability Balance at January 1, 2024 $ 53,337 Payable in-kind dividends 2,743 Reversal of fair value adjustments 5,605 Call premium (3%) 1,851 Redemption (June 25, 2024) $ ( 63,536 ) Balance at June 30, 2024 $ — Warrant liability Balance at January 1, 2024 $ 5,295 Fair value change 875 Balance at June 30, 2024 $ 6,170 The Preferred Stock, redeemed on June 25, 2024, was subordinate to the Company's indebtedness and senior to the Company’s common stock or other equity. Holders of the Preferred Stock were entitled to cumulative dividends that accrued quarterly. Dividends were payable in-kind during the first year at a rate of 9.25 %. At the Company’s option, the dividends were payable in-kind or in cash during the second year at a rate of 9.75 %. Dividends thereafter were to be payable in cash at a rate of 12.00 %. The proceeds from the Preferred Stock issuance were approximately $ 53.4 million, including $ 10.0 million from existing related party stockholders. Offering costs paid by the Company of approximately $ 3.5 million were recorded in Other expense, net in the year ended December 31, 2023. The net proceeds from the Private Placement were used for the repayment of debt. The Preferred Stock was redeemable on or after the first and second anniversaries of the closing date at a rate of 103 % and 102 %, respectively. The Warrants, which expire March 30, 2027, are immediately exercisable and upon an event such as a merger, consolidation, asset sale or similar change of control, 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 23 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) required the Company to file a registration statement on Form S-3 with the SEC within 30 days following the closing date of the Private Placement. The registration requirement was completed on May 19, 2023. (12) REVENUE RECOGNITION The Company derives revenue from two primary sources: products and services. Product revenue includes the Company's hardware and software that function together to deliver the products' essential functionality. Software and hardware are also sold on a standalone basis. Services include customer support (software updates, upgrades and technical support), consulting, design services, installation services and training. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct. When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services when they are sold separately to similar customers in order to estimate standalone selling price. The Company's software licenses typically provide a perpetual right to use the Company's software. The Company also sells term-based software licenses that expire and Software-as-a-Service ("SaaS")-based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software and hardware are delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. Product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. The Company begins to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period. The Company offers warranties on its products. Certain of the Company's warranties are considered to be assurance-type in nature, ensuring the product is functioning as intended. Assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations. The Company does not allow and has no history of accepting product returns. Services revenue includes revenue from customer support and other professional services. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. The Company sells its customer support contracts at a percentage of list or net product price. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year . 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. 24 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) The Company's typical performance obligations include the following: Performance Obligation When Performance Obligation is Typically Satisfied When Payment is Typically Due Software and Product Revenue Software licenses (perpetual or term) Upon transfer of control; typically, when made available for download (point in time) Generally, within 30 days of invoicing except for term licenses, which may be paid for over time Software licenses (subscription) Upon activation of hosted site (over time) Generally, within 30 days of invoicing Hardware When control of the hardware passes to the customer; typically, upon delivery (point in time) Generally, within 30 days of invoicing Software upgrades Upon transfer of control; typically, when made available for download (point in time) Generally, within 30 days of invoicing Customer Support Revenue Customer support Ratably over the course of the support contract (over time) Generally, within 30 days of invoicing Professional Services Other professional services (excluding training services) As work is performed (over time) Generally, within 30 days of invoicing (upon completion of services) Training When the class is taught (point in time) Generally, within 30 days of services being performed Significant Judgments The Company's contracts with customers often include promises to transfer multiple products and services to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is required to determine the standalone selling price ("SSP") for each distinct performance obligation. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the SSP. Deferred Revenue Deferred revenue is a contract liability representing amounts collected from or invoiced to customers in excess of revenue recognized. This results primarily from the billing of annual customer support agreements where the revenue is recognized over the term of the agreement. The value of deferred revenue will increase or decrease based on the timing of recognition of revenue. Disaggregation of Revenue The Company disaggregates its revenue from contracts with customers based on the nature of the products and services and the geographic regions in which each customer is domiciled. The Company's revenue for the three and six months ended June 25 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 30, 2024 and 2023 was disaggregated as follows: Three months ended June 30, 2024 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 35,368 $ 32,639 $ 13,462 $ 81,469 Europe, Middle East and Africa 33,239 17,491 8,188 58,918 Asia Pacific 26,081 9,759 2,597 38,437 Other 4,445 7,631 1,720 13,796 $ 99,133 $ 67,520 $ 25,967 $ 192,620 Three months ended June 30, 2023 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 53,545 $ 33,890 $ 11,842 $ 99,277 Europe, Middle East and Africa 28,831 17,998 7,679 54,508 Asia Pacific 31,810 10,164 2,269 44,243 Other 3,161 7,576 1,853 12,590 $ 117,347 $ 69,628 $ 23,643 $ 210,618 Six months ended June 30, 2024 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 61,975 $ 65,486 $ 25,122 $ 152,583 Europe, Middle East and Africa 74,928 35,187 15,886 126,001 Asia Pacific 42,714 20,000 5,524 68,238 Other 7,126 15,228 3,108 25,462 $ 186,743 $ 135,901 $ 49,640 $ 372,284 Six months ended June 30, 2023 Product revenue Service revenue (maintenance) Service revenue (professional services) Total revenue United States $ 91,612 $ 66,963 $ 22,695 $ 181,270 Europe, Middle East and Africa 56,266 38,125 14,254 108,645 Asia Pacific 57,425 19,536 5,413 82,374 Other 5,362 15,592 3,534 24,488 $ 210,665 $ 140,216 $ 45,896 $ 396,777 The Company's product revenue from indirect sales through its channel partner program and from its direct sales program for the three and six months ended June 30, 2024 and 2023 was as follows (in thousands): Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Indirect sales through channel partner program $ 31,282 $ 37,590 $ 76,957 $ 73,504 Direct sales 67,851 79,757 109,786 137,161 $ 99,133 $ 117,347 $ 186,743 $ 210,665 The Company's product revenue from sales to enterprise customers and from sales to service provider customers for the three and six months ended June 30, 2024 and 2023 was as follows (in thousands): 26 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Sales to enterprise customers $ 38,040 $ 37,707 $ 75,910 $ 65,119 Sales to service provider customers 61,093 79,640 110,833 145,546 $ 99,133 $ 117,347 $ 186,743 $ 210,665 The Company's product revenue and service revenue components by segment for the three and six months ended June 30, 2024 and 2023 were as follows (in thousands): Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Product revenue: Cloud and Edge $ 39,586 $ 52,352 $ 71,099 $ 95,191 IP Optical Networks 59,547 64,995 115,644 115,474 Total product revenue $ 99,133 $ 117,347 $ 186,743 $ 210,665 Service revenue: Maintenance: Cloud and Edge $ 52,663 $ 55,034 $ 105,859 $ 109,844 IP Optical Networks 14,857 14,594 30,042 30,372 Total maintenance revenue 67,520 69,628 135,901 140,216 Professional services: Cloud and Edge 18,306 17,870 35,266 34,701 IP Optical Networks 7,661 5,773 14,374 11,195 Total professional services revenue 25,967 23,643 49,640 45,896 Total service revenue $ 93,487 $ 93,271 $ 185,541 $ 186,112 Revenue Contract Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivable; unbilled receivables, which are contract assets; and customer advances and deposits, which are contract liabilities, in the Company's condensed consolidated balance sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Completion of services and billing may occur subsequent to revenue recognition, resulting in contract assets. The Company may receive advances or deposits from its customers before revenue is recognized, resulting in contract liabilities that are classified as deferred revenue. These assets and liabilities are reported in the Company's condensed consolidated balance sheets on a contract-by-contract basis as of the end of each reporting period. Changes in the contract asset and liability balances during the six months ended June 30, 2024 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 condensed consolidated balance sheets. The changes in the Company's accounts receivable, unbilled receivables and deferred revenue balances for the six months ended June 30, 2024 were as follows (in thousands): 27 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Accounts receivable Unbilled accounts receivable Deferred revenue (current) Deferred revenue (long-term) Balance at January 1, 2024 $ 186,938 $ 81,483 $ 113,381 $ 19,218 Increase (decrease), net ( 42,102 ) ( 15,365 ) ( 13,834 ) ( 2,586 ) Balance at June 30, 2024 $ 144,836 $ 66,118 $ 99,547 $ 16,632 The Company recognized approximately $ 78 million of revenue in the six months ended June 30, 2024 that was recorded as deferred revenue at December 31, 2023 and approximately $ 71 million of revenue in the six months ended June 30, 2023 that was recorded as deferred revenue at December 31, 2022. Of the Company's deferred revenue reported as long-term in its condensed consolidated balance sheet at June 30, 2024, the Company expects that approximately $ 6 million will be recognized as revenue in 2025, approximately $ 6 million will be recognized as revenue in 2026 and approximately $ 5 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 condensed consolidated statements of operations. Deferred Commissions Cost Sales commissions earned by the Company's employees are considered incremental and recoverable costs of obtaining a contract with a customer. These costs have been deferred on our condensed consolidated balance sheet and are being amortized over the expected life of the customer contract, which is generally five years . At both June 30, 2024 and December 31, 2023, the Company had $ 3 million of deferred sales commissions capitalized. (13) OPERATING SEGMENT INFORMATION The Company has two reportable segments, which are intended to align with the manner in which the business is managed: Cloud and Edge, and IP Optical Networks. The Cloud and Edge segment provides secure and reliable software and hardware products, solutions and services for enabling Voice over Internet Protocol ("VoIP") communications, Voice over Long-Term Evolution ("VoLTE") and Voice Over 5G ("VoNR") communications, and Unified Communications and Collaboration ("UC&C") within service provider and enterprise networks and from the cloud. The Cloud and Edge products are increasingly software-centric and cloud-native for deployment on private, public or hybrid cloud infrastructures, in data centers, on enterprise premises and within service provider networks. Ribbon's Cloud and Edge product portfolio consists primarily of its Session Border Controller ("SBC") products and its Network Transformation products. The IP Optical Networks segment provides high-performance, secure solutions for IP networking and optical transport, supporting wireless networks including 5G, metro and edge aggregation, core networking, data center interconnect, legacy transformation and transport solutions for wholesale carriers. This portfolio is offered to service provider, enterprise and industry verticals with critical transport network infrastructures including utilities, government, defense, transportation, and education and research. The Company has not provided segment asset information as such information is not provided to the CODM and accordingly, asset information is not used in assessing segment performance. Segment revenue and expenses included in the tables below represent direct revenue and expense attributable to each segment. Please see Note 4 for information regarding the allocation of goodwill between segments. The CODM utilizes revenue and adjusted gross profit to measure and assess each segment's performance. The Company calculates adjusted gross profit by excluding from cost of revenue: amortization of acquired technology, stock-based compensation, and may also exclude other items in future periods that the Company believes are not part of the Company's core business. Adjusted gross profit is not a financial measure determined in accordance with U.S. GAAP, may not be comparable 28 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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 three and six months ended June 30, 2024 and 2023 (in thousands): Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Segment revenue: Cloud and Edge $ 110,555 $ 125,256 $ 212,224 $ 239,736 IP Optical Networks 82,065 85,362 160,060 157,041 Revenue $ 192,620 $ 210,618 $ 372,284 $ 396,777 Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Segment adjusted gross profit: Cloud and Edge $ 72,946 $ 83,299 $ 140,065 $ 153,274 IP Optical Networks 31,791 26,251 63,756 45,751 Total segment adjusted gross profit 104,737 109,550 203,821 199,025 Stock-based compensation expense ( 338 ) ( 641 ) ( 916 ) ( 1,325 ) Amortization of acquired technology ( 6,532 ) ( 7,439 ) ( 13,083 ) ( 14,828 ) Gross profit $ 97,867 $ 101,470 $ 189,822 $ 182,872 Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Segment depreciation expense: Cloud and Edge $ 2,324 $ 2,477 $ 4,657 $ 4,976 IP Optical Networks 1,052 1,072 2,113 2,083 Depreciation expense $ 3,376 $ 3,549 $ 6,770 $ 7,059 (14) MAJOR CUSTOMERS The following customer contributed 10% or more of the Company's revenue in the three and six months ended June 30, 2024 and 2023: Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Verizon Communications Inc. 12 % 11 % 11 % 11 % At June 30, 2024 and December 31, 2023, 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. 29 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) (15) STOCK-BASED COMPENSATION PLANS The Company grants stock-based compensation to employees, officers and non-employee directors, as well as consultants and advisors of the Company and its subsidiaries under its Amended and Restated 2019 Incentive Award Plan 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. As of June 30, 2024, the Company estimates that the market conditions surrounding the PSUs granted will not be met by 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 six months ended June 30, 2024 was as follows: Shares Weighted Average Grant Date Fair Value Unvested balance at January 1, 2024 7,091,368 $ 3.18 Granted 1,374,541 $ 3.22 Vested ( 3,027,037 ) $ 3.54 Forfeited ( 294,994 ) $ 3.21 Unvested balance at June 30, 2024 5,143,878 $ 2.98 The total grant date fair value of shares of restricted stock underlying RSUs that vested during the six months ended June 30, 2024 was $ 10.7 million. Performance-Based Stock Units The activity related to the Company's PSUs for the six months ended June 30, 2024 was as follows: 30 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Shares Weighted Average Grant Date Fair Value Unvested balance at January 1, 2024 6,297,931 $ 2.07 Granted 1,338,985 $ 4.32 Vested ( 288,672 ) $ 3.14 Forfeited ( 619,168 ) $ 5.82 Unvested balance at June 30, 2024 6,729,076 $ 2.13 The total grant date fair value of shares of restricted stock underlying PSUs that vested during the six months ended June 30, 2024 was $ 0.9 million. Stock-Based Compensation The condensed consolidated statements of operations include stock-based compensation for the three and six months ended June 30, 2024 and 2023 as follows (in thousands): Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Product cost of revenue $ 64 $ 115 $ 170 $ 264 Service cost of revenue 274 526 746 1,061 Research and development 616 1,300 1,684 2,562 Sales and marketing 954 2,142 2,111 4,271 General and administrative 1,586 2,033 3,305 3,806 $ 3,494 $ 6,116 $ 8,016 $ 11,964 At June 30, 2024, there was $ 19.0 million , net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested RSUs and PSUs. This expense is expected to be recognized over a weighted average period of approximately one year . (16) LEASES The Company has operating leases for corporate offices and research and development facilities and has historically had finance leases for certain equipment. Operating leases are reported separately in the Company's condensed consolidated balance sheets. Assets acquired under finance leases, if any, are included in Property and equipment, net, in the condensed consolidated balance sheets. The Company determines if an arrangement is a lease at inception. A contract is determined to contain a lease component if the arrangement provides the Company with a right to control the use of an identified asset. Lease agreements may include lease and non-lease components. In such instances for all classes of underlying assets, the Company does not separate lease and non-lease components but rather, accounts for the entire arrangement under leasing guidance. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term. Right-of-use assets and lease liabilities are initially measured based on the present value of the future minimum fixed lease payments (i.e., fixed payments in the lease contract) over the lease term at the commencement date. As the Company's existing leases do not have a readily determinable implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future minimum fixed lease payments. The Company calculates its incremental borrowing rate to reflect the interest rate that it would have to pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment over a similar term and considers its historical borrowing activities and market data from entities with comparable credit ratings in this determination. The 31 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) 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 June 30, 2024 and December 31, 2023 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 $ 0.4 million and $ 0.6 million, respectively, in the three and six months ended June 30, 2023. No such accelerated amortization was recorded in the three and six months ended June 30, 2024. The Company did not record estimated future variable lease costs in the three and six months ended June 30, 2024 or 2023 related to the 2022 Restructuring Plan. All incremental accelerated amortization and accruals for estimated future variable costs are included in Restructuring and related expense in the Company's condensed consolidated statements of operations. At June 30, 2024 and December 31, 2023, the Company had accruals of $ 1.3 million and $ 1.5 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. 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 June 30, 2024 and December 31, 2023 were as follows (in thousands): Classification June 30, 2024 December 31, 2023 Assets: Operating lease assets Operating lease right-of-use assets $ 33,901 $ 39,783 Liabilities: Current Operating Operating lease liabilities $ 12,347 $ 15,739 Non-Current Operating Operating lease liabilities, net of current 34,858 38,711 Total Operating lease liabilities $ 47,205 $ 54,450 The components of lease expense for the three and six months ended June 30, 2024 and 2023 were as follows (in thousands): 32 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) Three months ended Six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Operating lease cost* $ 4,107 $ 4,737 $ 8,306 $ 9,497 Short-term lease cost 3,413 3,663 6,854 7,090 Variable lease costs (costs excluded from minimum fixed lease payments)** 828 904 1,683 1,706 Sublease income ( 217 ) ( 393 ) ( 477 ) ( 823 ) Net lease cost $ 8,131 $ 8,911 $ 16,366 $ 17,470 * No accelerated amortization was recorded in the three and six months ended June 30, 2024. Operating lease costs for the three and six months ended June 30, 2023 included $ 0.4 million and $ 0.6 million, respectively, of accelerated amortization for certain assets partially or fully vacated with no intent or ability to sublease. ** No variable lease costs were accrued in the three and six months ended June 30, 2024 or 2023 for future estimated variable expenses related to certain assets partially or fully vacated with no intent or ability to sublease. Cash flows related to the Company's leases included in the measurement of operating lease liabilities were classified as operating cash flows and totaled $ 9.4 million and $ 9.6 million in the six months ended June 30, 2024 and 2023, respectively. Other information related to the Company's leases as of June 30, 2024 and December 31, 2023 was as follows: June 30, 2024 December 31, 2023 Weighted average remaining lease term (years): Operating leases 5.45 5.50 Weighted average discount rate: Operating leases 7.15 % 6.34 % Future minimum fixed lease payments under noncancelable leases at June 30, 2024 were as follows (in thousands): Operating leases Remainder of 2024 $ 9,118 2025 10,878 2026 9,121 2027 7,896 2028 6,440 2029 and beyond 13,153 Total lease payments 56,606 Less: interest ( 9,401 ) Present value of lease liabilities $ 47,205 (17) INCOME TAXES The Company recorded income tax provisions of $ 4.9 million and $ 6.9 million in the six months ended June 30, 2024 and 2023, respectively. These amounts reflect the Company's estimates of the effective rates expected to be applicable for the respective full years, adjusted for any discrete events, which are recorded in the period in which they occur. These estimates are reevaluated each quarter based on the Company's estimated tax expense for the full fiscal year. The estimated effective tax rate includes the impact of valuation allowances in various jurisdictions. The Company intends to continue to maintain a 33 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the respective allowances. (18) RELATED PARTIES The Company recognized revenue from its largest stockholder of $ 1.5 million and $ 5.0 million in the three months ended June 30, 2024 and 2023, respectively, and $ 3.0 million and $ 5.8 million in the six months ended June 30, 2024 and 2023, respectively. Also, certain related party stockholders participated in the Private Placement (See Note 11). (19) COMMITMENTS AND CONTINGENCIES Liabilities for Royalty Payments to the IIA Prior to the Company's acquisition of ECI Telecom Group Ltd. ("ECI"), ECI had received research and development grants from the Office of the Innovation Authority of the Israeli Ministry of Economics (the "IIA"). The Company assumed ECI's contract with the IIA, which requires the Company to pay royalties to the IIA on proceeds from the sale of products which the Israeli government has supported by way of research and development grants. The royalties for grants prior to 2017 were calculated at the rates of 1.3 % to 5.0 % of the aggregated proceeds from the sale of such products developed at certain of the Company's R&D centers, up to an amount not exceeding 100 % of such grants plus interest at LIBOR. Effective for grants approved in 2017 and subsequently, interest was calculated at the higher of LIBOR plus 1.5 % to 2.75 %. At June 30, 2024, the Company's maximum possible future royalties commitment, including $ 1.0 million of unpaid royalties accrued, was $ 19.6 million , including interest of $ 1.1 million , based on estimates of future product sales, grants received from the IIA not yet repaid, and management's estimation of products still to be sold. Litigation The Company is often a party to disputes and legal proceedings that it considers routine and incidental to its business, including those described below. The Company believes that it has meritorious defenses to the allegations made in the pending cases and intends to vigorously defend these lawsuits; however, the Company is unable currently to forecast the ultimate outcome of these or similar matters. Since it is difficult to predict the outcome of legal proceedings, it is possible that the ultimate outcomes could materially and adversely affect the Company’s business, financial position, results of operations or cash flows. Accordingly, with respect to these proceedings, the Company is currently unable to reasonably estimate the possible loss or range of possible loss. Miller Complaint. On November 8, 2018, Ron Miller, a purported stockholder of the Company, filed a Class Action Complaint (the "Miller Complaint") in the United States District Court for the District of Massachusetts (the "Massachusetts District Court") against the Company and three of its former officers (collectively, the "Defendants"), claiming to represent a class of purchasers of Sonus common stock during the period from January 8, 2015 through March 24, 2015 and alleging violations of the federal securities laws. Similar to a previous complaint entitled Sousa et al. vs. Sonus Networks, Inc. et al., which was dismissed with prejudice by an order dated June 6, 2017, the Miller Complaint claims that the Defendants made misleading forward-looking statements concerning Sonus' expected fiscal first quarter of 2015 financial performance, which statements were also the subject of an August 7, 2018 Securities and Exchange Commission Cease and Desist Order, whose findings the Company neither admitted nor denied. The Miller plaintiffs are seeking monetary damages. After the Miller Complaint was filed, several parties filed and briefed motions seeking to be selected by the Massachusetts District Court to serve as a Lead Plaintiff in the action. On June 21, 2019, the Massachusetts District Court appointed a group as Lead Plaintiffs and the Lead Plaintiffs filed an amended complaint on July 19, 2019. On August 30, 2019, the Defendants filed a motion to dismiss the Miller Complaint and, on October 4, 2019, the Lead Plaintiffs filed an opposition to the motion to dismiss. There was an oral argument on the motion to dismiss on February 12, 2020, and on October 20, 2022 the court denied the motion to dismiss. In June 2023, the Defendants agreed to a settlement in principle with the named plaintiffs, and final approval of the settlement was provided by the court on April 24, 2024. The settlement provided a release of all claims asserted 34 RIBBON COMMUNICATIONS INC. Notes to Condensed Consolidated Financial Statements (Continued) (unaudited) in the litigation to all Defendants, who continue to deny liability. The $ 4.5 million settlement amount was funded 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 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 new trial date of June 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. 35