Ribbon munications (US:RBBN)2022-10-28 16:20markdown [Cautionary Note Regarding Forward-Looking Statements](index=3&type=section&id=Cautionary%20Note%20Regarding%20Forward-Looking%20Statements) This section provides a cautionary note regarding forward-looking statements, emphasizing inherent risks and uncertainties [Forward-Looking Statements](index=3&type=page&id=Forward-Looking%20Statements) This section highlights that the report contains forward-looking statements subject to various risks and uncertainties, including supply chain disruptions, litigation, COVID-19 impacts, acquisition integration failures, and macroeconomic conditions. It cautions against undue reliance on these statements and notes that actual results may differ materially - The report contains forward-looking statements regarding future expenses, results of operations, financial position, integration activities, capital structure, credit facility compliance, restructuring, and impacts from geopolitical events (Ukraine war) and the COVID-19 pandemic[9](index=9&type=chunk) - Key risks and uncertainties include supply chain disruptions (component availability, geopolitical instabilities), litigation, COVID-19 impacts on sales and demand, failure to realize ECI acquisition benefits, unpredictable revenue fluctuations, credit facility compliance, cybersecurity risks, and macroeconomic conditions like inflation[9](index=9&type=chunk) - The company cautions against relying on forward-looking statements, as inherent uncertainties and risks may cause actual results to differ materially[9](index=9&type=chunk) [PART I FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This part presents the unaudited condensed consolidated financial information for the company [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Ribbon Communications Inc.'s unaudited condensed consolidated financial statements for the period ended September 30, 2022, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, significant transactions, and financial positions [Condensed Consolidated Balance Sheets](index=4&type=page&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's financial position, including assets, liabilities, and equity Selected Balance Sheet Data (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Cash and cash equivalents | $55,670 | $103,915 | | Total current assets | $422,399 | $480,990 | | Total assets | $1,224,635 | $1,347,737 | | Total current liabilities | $298,093 | $344,453 | | Long-term debt, net of current | $310,770 | $350,217 | | Total liabilities | $735,466 | $820,571 | | Total stockholders' equity | $489,169 | $527,166 | - Cash and cash equivalents decreased by **$48.2 million (46.4%)** from December 31, 2021, to September 30, 2022[13](index=13&type=chunk) - Total assets decreased by **$123.1 million (9.1%)** and total liabilities decreased by **$85.1 million (10.4%)** over the nine-month period[13](index=13&type=chunk) [Condensed Consolidated Statements of Operations](index=5&type=page&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the company's revenues, expenses, and net loss for the periods presented Selected Statements of Operations Data (in thousands) | Metric (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenue | $207,127 | $210,398 | $586,121 | $614,380 | | Gross profit | $104,318 | $110,654 | $286,923 | $329,867 | | (Loss) income from operations | $(3,296) | $1,992 | $(49,589) | $2,340 | | Net loss | $(18,416) | $(59,431) | $(118,571) | $(80,877) | | Basic loss per share | $(0.12) | $(0.40) | $(0.78) | $(0.55) | - Total revenue decreased by **1.6%** for the three months and **4.6%** for the nine months ended September 30, 2022, compared to the prior year periods[15](index=15&type=chunk) - The company reported an operating loss of **$3.3 million** for the three months and **$49.6 million** for the nine months ended September 30, 2022, a **significant decline** from operating income in the prior year periods[15](index=15&type=chunk) [Condensed Consolidated Statements of Comprehensive Loss](index=6&type=page&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) This section presents the company's net loss and other comprehensive income components Selected Comprehensive Loss Data (in thousands) | Metric (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(18,416) | $(59,431) | $(118,571) | $(80,877) |\n| Other comprehensive income, net of tax | $1,724 | $1,053 | $19,349 | $7,117 |\n| Comprehensive loss, net of tax | $(16,692) | $(58,378) | $(99,222) | $(73,760) | - Other comprehensive income **significantly increased** for the nine months ended September 30, 2022, primarily due to unrealized gains on interest rate swaps[18](index=18&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=page&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This section outlines changes in stockholders' equity, including common stock and accumulated deficit Selected Stockholders' Equity Data (in thousands, except shares) | Metric (in thousands, except shares) | September 30, 2022 | December 31, 2021 | | :----------------------------------- | :----------------- | :---------------- | | Common stock shares outstanding | 168,093,446 | 148,895,308 | | Additional paid-in capital | $1,936,457 | $1,875,234 |\n| Accumulated deficit | $(1,474,232) | $(1,355,661) |\n| Accumulated other comprehensive income | $26,927 | $7,578 |\n| Total stockholders' equity | $489,169 | $527,166 | - Total stockholders' equity decreased by **$38.0 million** from December 31, 2021, to September 30, 2022, primarily due to net loss, partially offset by an equity offering and other comprehensive income[21](index=21&type=chunk)[23](index=23&type=chunk) - The company issued **17,071,311 shares** of common stock in an equity offering, contributing **$52.1 million** to additional paid-in capital[21](index=21&type=chunk)[23](index=23&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=page&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section reports cash inflows and outflows from operating, investing, and financing activities Selected Cash Flow Data (in thousands) | Metric (in thousands) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash (used in) provided by operating activities | $(42,462) | $7,899 |\n| Net cash used in investing activities | $(13,044) | $(11,335) |\n| Net cash provided by (used in) financing activities | $6,207 | $(28,017) |\n| Net decrease in cash, cash equivalents and restricted cash | $(50,550) | $(31,942) |\n| Cash, cash equivalents and restricted cash, end of period | $55,935 | $103,755 | - Operating activities shifted from providing **$7.9 million** in cash in 2021 to using **$42.5 million** in 2022, primarily due to net loss, higher inventory, and lower accounts payable[31](index=31&type=chunk) - Financing activities provided **$6.2 million** in 2022, driven by **$52.1 million** from an equity offering, partially offset by **$40.0 million** in debt principal payments[31](index=31&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=page&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations of accounting policies, transactions, and financial positions [(1) BASIS OF PRESENTATION](index=11&type=page&id=(1)%20BASIS%20OF%20PRESENTATION) This note describes Ribbon Communications Inc.'s business as a global provider of communications technology, the basis for preparing its unaudited condensed consolidated financial statements, details of an August 2022 equity offering, and the reclassification of amortization of acquired intangible assets to cost of revenue for improved comparability. It also outlines the company's two operating segments: Cloud and Edge, and IP Optical Networks, and discusses significant accounting policies, estimates, restricted cash, financial asset transfers, going concern considerations, and recent accounting pronouncements - Ribbon Communications Inc. is a global provider of communications technology, offering software and hardware products, network solutions, and services for secure data and voice communications[36](index=36&type=chunk) - On August 12, 2022, the company completed an Equity Offering, selling **17,071,311 shares** of common stock at **$3.05 per share**, generating approximately **$52.1 million** in gross proceeds, intended for general corporate purposes including debt repayment[39](index=39&type=chunk) - The company reclassified amortization of certain acquired intangible assets from 'Total operating expenses' to 'Cost of revenue' (Amortization of acquired technology) in Q4 2021 to enhance comparability with industry peers[42](index=42&type=chunk) - The company's operations are assessed based on two segments: Cloud and Edge (VoIP, VoLTE, VoNR, UC&C solutions) and IP Optical Networks (IP networking, optical transport for 5G, metro, edge aggregation)[41](index=41&type=chunk)[146](index=146&type=chunk)[147](index=147&type=chunk) - The company projects **compliance with financial covenants** for at least one year from the financial statements' issuance date, partly due to using a portion of the Equity Offering capital in covenant ratio calculations[54](index=54&type=chunk) [(2) EARNINGS (LOSS) PER SHARE](index=14&type=page&id=(2)%20EARNINGS%20(LOSS)%20PER%20SHARE) This note details the calculation of basic and diluted earnings (loss) per share, noting that for periods with net loss, potential dilutive common shares are excluded as their effect would be antidilutive Weighted Average Shares Outstanding (in thousands) | Metric (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Weighted average shares outstanding - basic | 158,921 | 148,184 | 152,795 | 147,204 |\n| Weighted average shares outstanding - diluted | 158,921 | 148,184 | 152,795 | 147,204 | - Options and unvested restricted/performance-based stock units totaling **14.4 million shares (2022)** and **10.9 million shares (2021)** were excluded from diluted EPS calculations due to their antidilutive effect during periods of net loss[61](index=61&type=chunk) [(3) INVENTORY](index=15&type=page&id=(3)%20INVENTORY) This note provides a breakdown of the company's inventory, showing an increase in on-hand final assemblies and finished goods, as well as deferred cost of goods sold, from December 31, 2021, to September 30, 2022 Inventory Breakdown (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | On-hand final assemblies and finished goods inventories | $77,244 | $57,360 |\n| Deferred cost of goods sold | $3,887 | $1,474 |\n| Current portion of inventory | $70,286 | $54,043 | - Current inventory increased by **$16.2 million (30.1%)** from December 31, 2021, to September 30, 2022[63](index=63&type=chunk) [(4) INTANGIBLE ASSETS AND GOODWILL](index=15&type=page&id=(4)%20INTANGIBLE%20ASSETS%20AND%20GOODWILL) This note details the company's intangible assets and goodwill, including their cost, accumulated amortization, and net carrying value. It also provides estimated future amortization expense and the allocation of goodwill by operating segment, noting no changes to goodwill carrying value in the nine months ended September 30, 2022 Intangible Assets Net Carrying Value (in thousands) | Intangible Asset (in thousands) | September 30, 2022 Net Carrying Value | December 31, 2021 Net Carrying Value | | :------------------------------ | :------------------------------------ | :----------------------------------- | | In-process research and development | $34,000 | $34,000 |\n| Developed technology | $101,186 | $124,987 |\n| Customer relationships | $168,895 | $190,487 |\n| Trade names | $552 | $1,256 |\n| Software licenses | $5,064 | — |\n| Total Intangible Assets, net | $309,697 | $350,730 | Goodwill by Segment (in thousands) | Goodwill by Segment (in thousands) | September 30, 2022 | September 30, 2021 | | :--------------------------------- | :----------------- | :----------------- | | Cloud and Edge | $224,896 | $224,896 |\n| IP Optical Networks | $75,996 | $191,996 |\n| Total Goodwill | $300,892 | $416,892 | - Total intangible assets, net, decreased by **$41.0 million (11.7%)** from December 31, 2021, to September 30, 2022[64](index=64&type=chunk) - Goodwill for the IP Optical Networks segment decreased by **$116.0 million** due to accumulated impairment losses, while Cloud and Edge goodwill **remained stable**[68](index=68&type=chunk) [(5) INVESTMENTS AND FAIR VALUE HIERARCHY](index=16&type=page&id=(5)%20INVESTMENTS%20AND%20FAIR%20VALUE%20HIERARCHY) This note details the company's investment in AVCT, which was comprised of debentures and warrants, later converted to common stock. It explains the settlement agreement with AVCT in August 2022, resulting in the cancellation of the investment and the acquisition of a perpetual software license. The note also outlines the fair value hierarchy used for financial instruments - The company's investment in AVCT, valued at **$43.9 million** as of December 31, 2021, was **fully canceled** on August 29, 2022, through a settlement agreement[72](index=72&type=chunk) - As part of the settlement, Ribbon acquired a non-exclusive perpetual license for WebRTC gateway technology from AVCT for **$2.5 million cash**, recorded as an intangible asset of **$4.4 million**[70](index=70&type=chunk) Losses from AVCT Investment (in thousands) | Metric (in thousands) | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :----------------------------- | | Losses from change in fair value of AVCT Investment | $1,900 | $41,300 | [(6) ACCRUED EXPENSES AND OTHER](index=17&type=page&id=(6)%20ACCRUED%20EXPENSES%20AND%20OTHER) This note provides a breakdown of accrued expenses, showing a slight decrease in total accrued expenses from December 31, 2021, to September 30, 2022, primarily due to lower employee compensation and related costs Accrued Expenses and Other (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Employee compensation and related costs | $29,460 | $38,040 |\n| Professional fees | $15,564 | $14,365 |\n| Other | $54,237 | $48,347 |\n| Total Accrued expenses and other | $99,261 | $100,752 | - Total accrued expenses and other decreased by **$1.5 million (1.5%)** from December 31, 2021, to September 30, 2022[78](index=78&type=chunk) [(7) WARRANTY ACCRUALS](index=18&type=page&id=(7)%20WARRANTY%20ACCRUALS) This note outlines the changes in the company's warranty accrual balance, showing a slight decrease from January 1, 2022, to September 30, 2022, due to settlements exceeding current period provisions Warranty Accrual Activity (in thousands) | Metric (in thousands) | Nine months ended Sep 30, 2022 | | :-------------------- | :----------------------------- | | Balance at January 1, 2022 | $13,120 |\n| Current period provisions | $3,970 |\n| Settlements | $(4,318) |\n| Balance at September 30, 2022 | $12,772 | - The warranty accrual balance decreased by **$0.3 million (2.6%)** over the nine months ended September 30, 2022[80](index=80&type=chunk) [(8) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES](index=18&type=page&id=(8)%20RESTRUCTURING%20AND%20FACILITIES%20CONSOLIDATION%20INITIATIVES) This note details the company's restructuring and facilities consolidation initiatives, including the 2022 Restructuring Plan. It outlines the types of expenses incurred, such as severance, variable facilities-related costs, and accelerated amortization of lease assets, and provides a summary of accrual activity Restructuring and Related Expense (in thousands) | Metric (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Restructuring and related expense | $1,269 | $1,767 | $8,977 | $10,547 | - The 2022 Restructuring Plan, approved in February 2022, aims to streamline operations through facility consolidation and workforce reduction, with **$8.3 million** in related expenses incurred in the nine months ended September 30, 2022[85](index=85&type=chunk)[87](index=87&type=chunk) - The 2022 plan included **$4.7 million** for severance for approximately **60 employees**, **$2.0 million** for variable facilities-related costs, and **$1.6 million** for accelerated amortization of lease assets[87](index=87&type=chunk) [(9) DEBT](index=19&type=page&id=(9)%20DEBT) This note provides a comprehensive overview of the company's 2020 Credit Facility, including its structure, covenants, and amendments. It details the Term Loan and Revolving Credit Facility, interest rates, and compliance with financial covenants, as well as information on letters of credit and performance bonds - The 2020 Credit Facility provides **$500 million** in commitments, including a **$400 million** Term Loan Facility and a **$100 million** Revolving Credit Facility[90](index=90&type=chunk) - The company entered into a Fifth Amendment on June 30, 2022, which increased the Maximum Consolidated Net Leverage Ratio and reduced the minimum Consolidated Fixed Charge Coverage Ratio for 2022, and included a **$10.0 million** voluntary prepayment[106](index=106&type=chunk)[108](index=108&type=chunk) Debt and Guarantees (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Outstanding balance under 2020 Term Loan | $335,500 | $375,500 |\n| Average interest rate (Term Loan) | 5.4% | 3.4% |\n| Letters of credit outstanding | $3,300 | $4,300 |\n| Total Guarantees outstanding | $9,500 | $30,100 | - The company was in **compliance with all covenants** of the 2020 Credit Facility at both September 30, 2022, and December 31, 2021[109](index=109&type=chunk) [(10) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES](index=22&type=page&id=(10)%20DERIVATIVE%20INSTRUMENTS%20AND%20HEDGING%20ACTIVITIES) This note describes the company's use of derivative financial instruments, specifically an interest rate swap, to manage exposure to interest rate risk on its variable-rate debt. It details the notional amount adjustments, the accounting treatment for cash flow hedges, and the fair value of the derivative - The company uses an interest rate swap to convert its variable-rate term loan (based on one-month LIBOR) to an aggregate fixed rate of 0.904% plus a leverage-based margin[114](index=114&type=chunk) - In July and August 2022, the company sold **$60 million** of the notional amount of its interest rate swap, reducing it to **$340 million**, which approximates the current term loan debt[115](index=115&type=chunk) Fair Value of Interest Rate Derivative (in thousands) | Metric (in thousands) | September 30, 2022 | December 31, 2021 | | :-------------------- | :----------------- | :---------------- | | Fair value of interest rate derivative (asset) | $26,283 | $1,811 | - The company estimates that **$11 million** may be reclassified as a decrease to interest expense over the next twelve months from accumulated other comprehensive income related to the derivative[118](index=118&type=chunk) [(11) REVENUE RECOGNITION](index=24&type=page&id=(11)%20REVENUE%20RECOGNITION) This note explains the company's revenue recognition policies and provides disaggregated revenue data - Revenue is derived from two primary sources: products (hardware and software) and services (customer support, consulting, design, installation, training)[122](index=122&type=chunk) - Product revenue is typically recognized upon transfer of control (e.g., software download, hardware delivery), while service revenue is recognized ratably over the contract term (maintenance) or as work is performed (professional services)[124](index=124&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk) Revenue by Type (in thousands) | Revenue Type (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Product revenue | $111,152 | $111,726 | $305,809 | $322,744 |\n| Service revenue | $95,975 | $98,672 | $280,312 | $291,636 |\n| Total revenue | $207,127 | $210,398 | $586,121 | $614,380 | Deferred Revenue (in thousands) | Deferred Revenue (in thousands) | September 30, 2022 | December 31, 2021 | | :------------------------------ | :----------------- | :---------------- | | Deferred revenue (current) | $90,139 | $109,119 |\n| Deferred revenue (long-term) | $22,185 | $20,619 | - Deferred revenue primarily relates to customer support contracts, with approximately **$85 million** recognized in the nine months ended September 30, 2022, from balances at December 31, 2021[139](index=139&type=chunk)[142](index=142&type=chunk) [(12) OPERATING SEGMENT INFORMATION](index=28&type=page&id=(12)%20OPERATING%20SEGMENT%20INFORMATION) This note provides financial information for the company's reportable operating segments Segment Revenue (in thousands) | Segment Revenue (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :----------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cloud and Edge | $124,685 | $142,437 | $371,571 | $409,280 |\n| IP Optical Networks | $82,442 | $67,961 | $214,550 | $205,100 |\n| Total Revenue | $207,127 | $210,398 | $586,121 | $614,380 | Segment Adjusted Gross Profit (in thousands) | Segment Adjusted Gross Profit (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Cloud and Edge | $81,524 | $95,998 | $243,196 | $276,170 |\n| IP Optical Networks | $31,287 | $24,918 | $69,556 | $84,544 |\n| Total Segment Adjusted Gross Profit | $112,811 | $120,916 | $312,752 | $360,714 | - Cloud and Edge segment revenue decreased by **12.5%** for the three months and **9.2%** for the nine months ended September 30, 2022, while IP Optical Networks revenue increased by **21.3%** and **4.6%** respectively[151](index=151&type=chunk) [(13) MAJOR CUSTOMERS](index=29&type=page&id=(13)%20MAJOR%20CUSTOMERS) This note identifies major customers contributing significantly to the company's revenue Major Customer Revenue Contribution | Customer | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Verizon Communications Inc. | 13% | 18% | 16% | 17% |\n| AT&T | 10% | <10% | <10% | <10% | - Verizon Communications Inc. remained a major customer, contributing **13%** and **16%** of revenue for the three and nine months ended September 30, 2022, respectively[152](index=152&type=chunk) - AT&T became a major customer in the three months ended September 30, 2022, contributing **10%** of total revenue[152](index=152&type=chunk) [(14) STOCK-BASED COMPENSATION PLANS](index=30&type=page&id=(14)%20STOCK-BASED%20COMPENSATION%20PLANS) This note details the company's stock-based compensation plans and related expenses - The 2019 Plan allows for various equity awards to employees, officers, and directors, with an additional **10.0 million shares** authorized in May 2022[155](index=155&type=chunk)[156](index=156&type=chunk) Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :---------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total stock-based compensation expense | $4,841 | $4,561 | $13,495 | $14,411 | - As of September 30, 2022, there was **$26.7 million** of unrecognized stock-based compensation expense, expected to be recognized over approximately two years[174](index=174&type=chunk) [(15) LEASES](index=33&type=page&id=(15)%20LEASES) This note outlines the company's accounting for operating and finance leases - The company has operating and finance leases for corporate offices, R&D facilities, and equipment, with operating leases reported separately on the balance sheet[175](index=175&type=chunk) Lease Liabilities (in thousands) | Lease Liabilities (in thousands) | September 30, 2022 | December 31, 2021 | | :------------------------------- | :----------------- | :---------------- | | Total lease liabilities | $64,917 | $73,166 | Lease Expense (in thousands) | Lease Expense (in thousands) | Three months ended Sep 30, 2022 | Nine months ended Sep 30, 2022 | | :--------------------------- | :------------------------------ | :----------------------------- | | Operating lease cost | $5,233 | $15,401 |\n| Short-term lease cost | $3,610 | $10,451 |\n| Variable lease costs | $1,424 | $3,283 |\n| Net lease cost | $9,831 | $27,952 | - Restructuring plans led to accelerated amortization of lease assets (**$0.6 million** for Q3 2022, **$1.6 million** for YTD Q3 2022) and accruals for future variable lease costs (**$0.7 million** for Q3 2022, **$1.0 million** for YTD Q3 2022)[181](index=181&type=chunk)[188](index=188&type=chunk) [(16) INCOME TAXES](index=36&type=page&id=(16)%20INCOME%20TAXES) This note discusses the company's income tax provisions, effective tax rates, and valuation allowances Income Tax Provision (in thousands) | Metric (in thousands) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------- | :----------------------------- | :----------------------------- | | Income tax provision | $(12,353) | $(5,411) | - The company recognized a **$6.8 million** tax benefit in Q3 2022 from releasing a valuation allowance on a capital loss deferred tax asset related to its AVCT investment[192](index=192&type=chunk) - The Tax Cuts and Jobs Act of 2017 (TCJA) requires amortization of R&D expenditures over a minimum of **five years** starting in **2022**, which could materially reduce operating cash flows if not repealed or modified[193](index=193&type=chunk) [(17) COMMITMENTS AND CONTINGENCIES](index=36&type=page&id=(17)%20COMMITMENTS%20AND%20CONTINGENCIES) This note details the company's commitments, including royalty payments and ongoing legal proceedings - The company has a maximum possible future royalty commitment of **$31.0 million** to the IIA, including **$4.6 million** of unpaid accrued royalties, for products developed with Israeli government R&D grants[194](index=194&type=chunk) - The Miller Complaint, a class action securities lawsuit alleging misleading forward-looking statements, had its motion to dismiss **denied on October 20, 2022**[199](index=199&type=chunk) - Charter Communications filed two breach of contract complaints against Ribbon subsidiaries in September 2022, seeking monetary damages related to indemnification obligations[200](index=200&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Ribbon Communications Inc.'s financial condition and results of operations for the three and nine months ended September 30, 2022, compared to the prior year. It covers an overview of the business, the impact of COVID-19, details of the equity offering, reclassification of amortization, segment performance, financial results, restructuring initiatives, critical accounting policies, and a detailed analysis of revenue, costs, and expenses. It also discusses liquidity, capital resources, cash flows, and recent accounting pronouncements [Overview](index=38&type=page&id=Overview) This overview introduces Ribbon Communications Inc. as a global provider of communications technology - Ribbon Communications Inc. is a leading global provider of communications technology, offering secure data and voice solutions for service providers and enterprises, with a mission to be a cloud-centric technology leader[203](index=203&type=chunk) - The COVID-19 pandemic continues to **negatively affect** the global economy, supply chains, and may cause customers to restrict spending, impacting the company's revenue and ability to deliver solutions[204](index=204&type=chunk) - An equity offering in August 2022 raised approximately **$52.1 million** gross proceeds from the sale of **17,071,311 common shares**, intended for general corporate purposes including debt repayment[206](index=206&type=chunk) - The reclassification of amortization of acquired intangible assets to 'Amortization of acquired technology' within cost of revenue decreased gross margin by approximately **five percentage points** in both the three and nine months ended September 30, 2021[210](index=210&type=chunk) [Financial Overview](index=39&type=page&id=Financial%20Overview) This section summarizes the company's financial performance, reporting operating losses for the periods presented Key Financial Metrics (in millions) | Metric (in millions) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $207.1 | $210.4 | $586.1 | $614.4 |\n| Gross profit | $104.3 | $110.7 | $286.9 | $329.9 |\n| Gross margin | 50.4% | 52.6% | 49.0% | 53.7% |\n| Operating expenses | $107.6 | $108.7 | $336.5 | $327.5 |\n| (Loss) income from operations | $(3.3) | $2.0 | $(49.6) | $2.3 | - The company reported an operating loss of **$3.3 million** for Q3 2022 and **$49.6 million** for YTD Q3 2022, compared to operating income in the prior year periods, mainly due to lower sales, higher supply chain costs, and increased R&D in IP Optical Networks[212](index=212&type=chunk) - The 2022 Restructuring Plan incurred **$8.3 million** in expenses for the nine months ended September 30, 2022, including severance for approximately **60 employees** and accelerated amortization of lease assets[221](index=221&type=chunk) [Results of Operations](index=41&type=page&id=Results%20of%20Operations) This section provides a detailed comparative analysis of the company's revenue, costs, and expenses Revenue by Type (in thousands) | Revenue (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Product | $111,152 | $111,726 | $305,809 | $322,744 |\n| Service | $95,975 | $98,672 | $280,312 | $291,636 |\n| Total Revenue | $207,127 | $210,398 | $586,121 | $614,380 | - Product revenue slightly decreased by **0.5%** for the three months and **5.2%** for the nine months ended September 30, 2022, primarily due to lower Cloud and Edge network transformation and SBC sales, partially offset by higher IP Optical Networks sales[224](index=224&type=chunk) - Service revenue decreased by **2.7%** for the three months and **3.9%** for the nine months ended September 30, 2022, mainly due to fewer Cloud and Edge VoIP Network Transformation projects completing[224](index=224&type=chunk)[230](index=230&type=chunk) Expense Breakdown (in thousands) | Expense (in thousands) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Research and development | $49,366 | $49,132 | $153,159 | $143,339 |\n| Sales and marketing | $36,365 | $36,113 | $109,827 | $108,212 |\n| General and administrative | $12,118 | $12,148 | $37,881 | $40,435 |\n| Interest expense, net | $(5,266) | $(2,969) | $(13,869) | $(11,836) |\n| Other expense, net | $(3,732) | $(57,702) | $(42,760) | $(65,970) | - R&D expenses increased by **6.9%** for the nine months ended September 30, 2022, driven by a **$16 million** increase in the IP Optical Networks segment for portfolio expansion and next-gen SDN management[240](index=240&type=chunk)[241](index=241&type=chunk) - Other expense, net, **significantly decreased** for both periods, primarily due to lower losses from the change in fair value of the AVCT Investment, which was canceled in August 2022[256](index=256&type=chunk) [Off-Balance Sheet Arrangements](index=47&type=page&id=Off-Balance%20Sheet%20Arrangements) The company states that it has no off-balance sheet arrangements that have a material effect on its financial position - The company has no off-balance sheet arrangements that are expected to have a material effect on its financial condition or results[259](index=259&type=chunk) [Liquidity and Capital Resources](index=48&type=page&id=Liquidity%20and%20Capital%20Resources) This section analyzes the company's liquidity and capital resources, including cash balances and cash flow activities Cash Flow Summary (in thousands) | Cash Flow (in thousands) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :----------------------- | :----------------------------- | :----------------------------- | | Net cash (used in) provided by operating activities | $(42,462) | $7,899 |\n| Net cash used in investing activities | $(13,044) | $(11,335) |\n| Net cash provided by (used in) financing activities | $6,207 | $(28,017) |\n| Net decrease in cash, cash equivalents and restricted cash | $(50,550) | $(31,942) |\n| Cash, cash equivalents and restricted cash, end of period | $55,935 | $103,755 | - Cash and restricted cash decreased from **$106 million** at December 31, 2021, to **$56 million** at September 30, 2022[261](index=261&type=chunk) - Operating activities used **$42.5 million** in cash in the nine months ended September 30, 2022, primarily due to net loss, higher inventory, and lower accounts payable[276](index=276&type=chunk) - Financing activities provided **$6.2 million** in cash, driven by **$50.4 million** net proceeds from the equity offering, partially offset by **$40.0 million** in debt principal payments[280](index=280&type=chunk) - The company projects **compliance with its financial covenants** for at least one year, leveraging the capital raised from the equity offering in covenant ratio calculations[283](index=283&type=chunk)[284](index=284&type=chunk) [Recent Accounting Pronouncements](index=51&type=page&id=Recent%20Accounting%20Pronouncements) This section discusses recent FASB Accounting Standards Updates and their potential impact on financial statements - ASU 2022-02 (Credit Losses), effective January 1, 2023, is not expected to have a material impact on consolidated financial statements[286](index=286&type=chunk) - ASU 2021-08 (Business Combinations), effective January 1, 2023, could have a material impact on consolidated financial statements for periods including significant business acquisitions[287](index=287&type=chunk) - ASU 2021-01 (Reference Rate Reform), effective prospectively through December 31, 2022, did not have a material impact on consolidated financial statements[288](index=288&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=52&type=page&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section addresses the company's exposure to financial market risks, including foreign currency and interest rates - The company is exposed to financial market risk from foreign currency fluctuations and changes in interest rates[289](index=289&type=chunk) - Derivative financial instruments, specifically an interest rate swap, are used to manage interest rate volatility and stabilize interest expense[290](index=290&type=chunk) - The fair value of the derivative was an asset of **$26.3 million** at September 30, 2022, with an estimated **$11.0 million** expected to be reclassified as a decrease to interest expense over the next twelve months[291](index=291&type=chunk) [Item 4. Controls and Procedures](index=52&type=page&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of disclosure controls and procedures and reports no material changes - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2022[292](index=292&type=chunk) - No material changes in internal control over financial reporting occurred during the fiscal quarter ended September 30, 2022[293](index=293&type=chunk) [PART II OTHER INFORMATION](index=53&type=section&id=PART%20II%20OTHER%20INFORMATION) This part includes legal proceedings, risk factors, equity sales, and other disclosures [Item 1. Legal Proceedings](index=53&type=page&id=Item%201.%20Legal%20Proceedings) This section refers to the detailed discussion of legal proceedings and claims in Note 17 - The company is involved in routine legal disputes and claims, with material proceedings detailed in Note 17 of the financial statements[295](index=295&type=chunk) - The outcome of litigation is inherently uncertain, and adverse resolutions could materially affect the company's financial condition and operating results[295](index=295&type=chunk) [Item 1A. Risk Factors](index=53&type=page&id=Item%201A.%20Risk%20Factors) This section outlines significant business risks and uncertainties, as detailed in the Annual Report on Form 10-K - The company's business is subject to significant risks and uncertainties, as detailed in its Annual Report on Form 10-K[296](index=296&type=chunk) - No material changes to the previously described risk factors occurred in the nine months ended September 30, 2022[296](index=296&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=53&type=page&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details issuer purchases of equity securities to satisfy tax withholding obligations Shares Repurchased (Number of Shares) | Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | | :------------------------------ | :----------------------------------- | :--------------------------- | | July 1, 2022 to July 31, 2022 | 6,748 | $3.18 |\n| August 1, 2022 to August 31, 2022 | 1,643 | $3.33 |\n| September 1, 2022 to September 30, 2022 | 234,043 | $3.02 |\n| Total | 242,434 | $3.03 | - The company repurchased **242,434 shares** of common stock during Q3 2022 at an average price of **$3.03 per share**, primarily to satisfy tax withholding obligations upon the vesting of restricted stock awards[297](index=297&type=chunk) [Item 5. Other Information](index=53&type=page&id=Item%205.%20Other%20Information) This section indicates that there is no other information to report under this item [Item 6. Exhibits](index=54&type=page&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including agreements and certifications - The report includes various exhibits such as merger agreements, purchase agreements, certificates of incorporation, by-laws, securities purchase agreements, registration rights agreements, and Sarbanes-Oxley Act certifications[299](index=299&type=chunk) [Signatures](index=55&type=section&id=Signatures) This section contains the required signatures certifying the submission of the Form 10-Q [Signatures](index=55&type=page&id=Signatures) This section contains the required signatures certifying the submission of the Form 10-Q - The report is signed by Miguel A. Lopez, Executive Vice President and Chief Financial Officer, on behalf of Ribbon Communications Inc. on October 28, 2022[304](index=304&type=chunk)[305](index=305&type=chunk)