RIBBON COMMUNICATIONS INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

The following discussion of the financial condition and results of operations of
Ribbon Communications Inc. should be read in conjunction with the condensed
consolidated financial statements and the related notes thereto included
elsewhere in this Quarterly Report on Form 10-Q and the audited financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended December 31, 2021, which was filed with the U.S.
Securities and Exchange Commission on March 11, 2022.

Insight


We are a leading global provider of communications technology to service
providers and enterprises. We provide a broad range of software and
high-performance hardware products, solutions and services that enable the
secure delivery of data and voice communications for residential consumers and
for small, medium and large enterprises and industry verticals such as finance,
education, government, utilities and transportation. Our mission is to create a
recognized global technology leader providing cloud-centric solutions that
enable the secure exchange of information, with unparalleled scale, performance
and elasticity. Headquartered in Plano, Texas, we have a global presence with
research and development and/or sales and support locations in over thirty-five
countries around the world.

Impact of COVID-19 on our business


The COVID-19 pandemic has had a negative effect on the global economy,
disrupting the various manufacturing, commodity and financial markets and
increasing volatility, and has impeded global supply chains, including that of
our IP Optical Networks segment. Continued uncertain global economic conditions
as a result of the continuing COVID-19 pandemic, particularly in areas
experiencing higher case numbers as a result of new variants, may cause our
customers to restrict spending or delay purchases for an indeterminate period of
time and consequently cause our revenues to decline. In addition, our ability to
deliver our solutions as agreed upon with our customers depends on the ability
of our global contract manufacturers, vendors, licensors and other business
partners to deliver products or perform services we have procured from them. The
degree to which the continuing COVID-19 pandemic impacts our future business,
financial position and results of operations will depend on developments beyond
our control, including the effectiveness of vaccines over the long-term or with
respect to new variants, the frequency and duration of future waves of
infection, the extent of actions to contain or treat the virus, how quickly and
to what extent normal economic and operating conditions can result after new
future waves, and the severity and duration of the global economic downturn that
has resulted from the pandemic.

Presentation


Unless otherwise noted, all financial amounts, excluding tabular information, in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") are rounded to the nearest million dollar amount, and all
percentages, excluding tabular information, are rounded to the nearest
percentage point.

Reclassification of amortization of acquired intangible assets


In 2021, we reclassified amounts recorded for amortization of certain acquired
intangible assets in prior presentations from Total operating expenses under the
caption "Amortization of acquired intangible assets" to Total cost of revenue
under the caption "Amortization of acquired technology" in the consolidated
statements of operations. Our management believes this presentation aids in the
comparability of our financial statements to industry peers. These
reclassifications did not impact our operating income (loss), net income (loss)
or earnings (loss) per share for any historical periods. These reclassifications
also did not impact our condensed consolidated balance sheets or statements of
cash flows.

This reclassification resulted in $10.1 million recorded to Amortization of
acquired technology within Total cost of revenue and a decrease of $10.1 million
to Amortization of acquired intangible assets within Total operating expenses in
the three months ended March 31, 2021. The increase to Total cost of revenue
decreased our gross profit as a percentage of revenue ("gross margin") by
approximately five percentage points.

Operating segments

Our chief operating decision maker evaluates our performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge operating segment (“Cloud and Edge”) and the Optical IP Networks operating segment (“Optical IP Networks”). For further details regarding our operating segments, see Note 12 – Operating segment information to our condensed consolidated financial statements.

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Financial Overview

Financial Results

We reported operating losses of $39.1 million and $12.6 million for the three months ended March 31, 2022 and 2021, respectively.


Our revenue was $173.2 million and $192.8 million in the three months ended
March 31, 2022 and 2021, respectively. Our gross profit and gross margin were
$78.1 million and 45.1%, respectively, in the three months ended March 31, 2022,
and $100.5 million and 52.1%, respectively, in the three months ended March 31,
2021.

Revenue from our Cloud and Edge segment was $109.8 million and $125.4 million in
the three months ended March 31, 2022 and 2021, respectively. Gross profit and
gross margin for this segment were $62.7 million and 57.1%, respectively, in the
three months ended March 31, 2022, and $77.5 million and 61.8%, respectively, in
the three months ended March 31, 2021.

Revenue from our IP Optical Networks segment was $63.4 million and $67.4 million
in the three months ended March 31, 2022 and 2021, respectively. Gross profit
and gross margin for this segment were $15.3 million and 24.2%, respectively, in
the three months ended March 31, 2022, and $23.0 million and 34.1%,
respectively, in the three months ended March 31, 2021.

Our operating expenses were $117.1 million and $113.1 million in the three
months ended March 31, 2022 and 2021, respectively. Operating expenses for the
three months ended March 31, 2022 included $7.3 million of amortization of
acquired intangible assets, $1.8 million of acquisition-, disposal- and
integration-related expense, and $4.8 million of restructuring and related
expense. Operating expenses for the three months ended March 31, 2021 included
$5.8 million of amortization of acquired intangible assets, $1.2 million of
acquisition-, disposal- and integration-related expense, and $6.0 million of
restructuring and related expense.

We recorded stock-based compensation expense of $4.3 million and $5.1 million in
the three months ended March 31, 2022 and 2021, respectively. These amounts are
included as components of both Cost of revenue and Operating expenses in our
condensed consolidated statements of operations.

See "Results of Operations" in this MD&A for a discussion of the changes in our
revenue and expenses for the three months ended March 31, 2022 compared to the
three months ended March 31, 2021.

Restructuring and cost reduction initiatives


2022 Restructuring Plan. In February 2022, our 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 is expected to include, 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.

We recorded restructuring and related expense of $4.2 million for severance and
related costs for approximately 50 employees in connection with the 2022
Restructuring Plan in the three months ended March 31, 2022. We anticipate that
we will record future expense for severance and facility consolidations
aggregating approximately $16 million in connection with the 2022 Restructuring
Plan.

2020 and 2019 Restructuring Plans. In 2020, we implemented a restructuring plan
to eliminate certain positions and redundant facilities, primarily in connection
with the ECI Acquisition, to further streamline our global footprint and improve
our operations (the "2020 Restructuring Plan"). The 2020 Restructuring Plan
included facility consolidations and a reduction in workforce to eliminate
redundant functions arising from our acquisition of ECI Telecom Group Ltd. in
2020 (the "ECI Acquisition") and support our efforts to integrate the two
companies. At March 31, 2022, the 2020 Restructuring Plan had a remaining
accrual of $0.8 million for severance costs that are expected to be paid out
over the next year.

In June 2019, we implemented a restructuring plan to streamline our global
footprint, improve our operations and enhance our customer delivery (the "2019
Restructuring Plan"). The 2019 Restructuring Plan included facility
consolidations, refinement of our research and development activities, and a
reduction in workforce. At March 31, 2022, the 2019 Restructuring Plan had a
remaining accrual of $1.4 million for facility costs that remain in the plan and
which will be paid out over the various lease terms, which range from one to six
years.
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Accelerated Rent Amortization. Accelerated rent amortization is recognized from
the date that we commence 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. We recorded $3.4 million for accelerated rent amortization in the
three months ended March 31, 2021. We did not record accelerated rent
amortization in the three months ended March 31, 2022. We continue to evaluate
our properties included in our restructuring plans for accelerated amortization
and/or right-of-use asset impairment. We may incur additional future expense if
we are unable to sublease other locations included in these initiatives.

Significant Accounting Policies and Estimates


Management's discussion and analysis of financial condition and results of
operations is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates and judgments on
historical experience, knowledge of current conditions and beliefs of what could
occur in the future given available information. We consider the following
accounting policies to be both those most important to the portrayal of our
financial condition and those that require the most subjective judgment: revenue
recognition, the valuation of inventory, the valuation of our investment in
American Virtual Cloud Technologies Inc. (the "AVCT Investment"), warranty
accruals, loss contingencies and reserves, stock-based compensation, business
combinations, goodwill and intangible assets, accounting for leases, and
accounting for income taxes. If actual results differ significantly from
management's estimates and projections, there could be a material effect on our
condensed consolidated financial statements. There were no significant changes
to our critical accounting policies from January 1, 2022 through March 31, 2022.
For a further discussion of our other critical accounting policies and
estimates, please refer to our Annual Report on Form 10-K for the year ended
December 31, 2021.

Results of Operations

Three months completed March 31, 2022 and 2021

Revenue. Turnover for the three months ended March 31, 2022 and 2021 was as follows (in thousands, except percentages):

                                                                      Decrease
                                  Three months ended               from prior year
                               March 31,      March 31,
                                 2022           2021               $                %
              Product         $  81,990      $  97,889      $      (15,899)      (16.2) %
              Service            91,208         94,883              (3,675)       (3.9) %
              Total revenue   $ 173,198      $ 192,772      $      (19,574)      (10.2) %



Segment revenue for the three months ended March 31, 2022 and 2021 was as follows (in thousands):

                                     Three months ended March 31, 2022                             Three months ended March 31, 2021
                                                  IP Optical                                                    IP Optical
                           Cloud and Edge          Networks             Total            Cloud and Edge          Networks             Total
Product                   $      37,635          $   44,355          $  81,990          $      50,152          $   47,737          $  97,889
Service                          72,171              19,037             91,208                 75,270              19,613             94,883
Total revenue             $     109,806          $   63,392          $ 173,198          $     125,422          $   67,350          $ 192,772





The decrease in our product revenue in the three months ended March 31, 2022
compared to the three months ended March 31, 2021 was primarily the result of
lower sales of our Cloud and Edge SBC products and network transformation
products, coupled with lower sales of IP Optical Networks products.

Revenue from indirect sales through our channel partner program was 29% and 21%
of our product revenue in the three months ended March 31, 2022 and 2021,
respectively. Revenue from sales to enterprise customers was 27% and 23% of our
product revenue in the three months ended March 31, 2022 and 2021, respectively.
These sales were made through both our direct sales team and indirect sales
channel partners.

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The timing of completion of customer projects and the satisfaction of revenue recognition criteria may cause our product revenues to fluctuate from period to period.

Services revenue primarily includes hardware and software maintenance and support (“Maintenance Revenue”) and network design, installation and other professional services (“Professional Services Revenue”).

Services revenue for the three months ended March 31, 2022 and 2021 included the following (in thousands, except percentages):

                                                                          Decrease
                                     Three months ended                from prior year
                                  March 31,       March 31,
                                     2022           2021               $                %
         Maintenance             $   68,605      $  68,705      $         (100)       (0.1) %
         Professional services       22,603         26,178             
(3,575)      (13.7) %
                                 $   91,208      $  94,883      $       (3,675)       (3.9) %




Segment services revenue for the three months ended March 31, 2022 and 2021 included the following (in thousands):

                                            Three months ended March 31, 2022                           Three months ended March 31, 2021
                                                         IP Optical                                                  IP Optical
                                  Cloud and Edge          Networks             Total          Cloud and Edge          Networks             Total
Maintenance                       $     55,030          $   13,575         

$68,605 $54,673 $14,032 $68,705
Professional services

                   17,141               5,462            22,603                20,597               5,581            26,178
 Total service revenue            $     72,171          $   19,037          $ 91,208          $     75,270          $   19,613          $ 94,883




Maintenance revenue was essentially flat in the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase in maintenance revenue from our Cloud and Edge segment was nearly offset by the decline in maintenance revenue from our Optical IP Networks segment.


Professional services revenue from our Cloud and Edge segment decreased by $3
million in three months ended March 31, 2022 compared to the three months ended
March 31, 2021 due to scheduling delays in several network transformation
projects. We expect these delayed projects will be completed later in the
current year.

The following client has contributed 10% or more of our revenue in the completed three month periods March 31, 2022 and 2021:

                                                    Three months ended
                                                                  March 31,      March 31,
           Customer                                                 2022           2021
           Verizon Communications Inc.                               13%            16%



Revenue from customers domiciled outside the United States comprised 56% and 59%
of revenue in the three months ended March 31, 2022 and 2021, respectively. Due
to the timing of project completions, we expect that the domestic and
international components as a percentage of revenue may fluctuate from quarter
to quarter and year to year.

Our deferred product revenue was $9 million and $10 million at March 31, 2022
and December 31, 2021, respectively. Our deferred service revenue was $119
million and $120 million at March 31, 2022 and December 31, 2021, respectively.
Our deferred revenue balance may fluctuate because of the timing of revenue
recognition, customer payments, maintenance contract renewals, contractual
billing rights and maintenance revenue deferrals included in multiple element
arrangements.

We expect our total revenue to increase in 2022 compared to 2021 due to both increased customer spending and continued cross-selling opportunities.


Cost of Revenue/Gross Margin. Our cost of revenue consists primarily of amounts
paid to third-party manufacturers for purchased materials and services,
royalties, inventory valuation adjustments, warranty costs, manufacturing and
services personnel and related costs, and amortization of acquired technology.
Our cost of revenue and gross margins for the three
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months ended March 31, 2022 and 2021 were as follows (in thousands, except
percentages):

                                                                            Increase (decrease)
                                           Three months ended                 from prior year
                                        March 31,      March 31,
                                          2022           2021                 $                  %
Cost of revenue:
Product                                $  51,209      $  44,445                   6,764        15.2  %
Service                                   35,667         37,780                  (2,113)       (5.6) %
Amortization of acquired technology        8,267         10,061                  (1,794)      (17.8) %
Total cost of revenue                  $  95,143      $  92,286                   2,857         3.1  %

Gross profit                           $  78,055      $ 100,486      $          (22,431)      (22.3) %


Gross margin     45.1  %      52.1  %





Our cost of revenue and gross margins for the three months ended March 31, 2022 and 2021 were as follows (in thousands, except percentages):

                                     Three months ended March 31, 2022                           Three months ended March 31, 2021
                                                  IP Optical                                                  IP Optical
                           Cloud and Edge          Networks             Total          Cloud and Edge          Networks             Total
Product                    $     16,999          $   34,210          $ 51,209          $     13,421          $   31,024          $ 44,445
Service                          24,899              10,768            35,667                27,839               9,941            37,780
Amortization of acquired
technology                        5,176               3,091             8,267                 6,639               3,422            10,061
Total cost of revenue      $     47,074          $   48,069          $ 95,143          $     47,899          $   44,387          $ 92,286


          Total gross margin     57.1  %      24.2  %      45.1  %      61.8  %      34.1  %      52.1  %






The decrease in our gross margin in the three months ended March 31, 2022
compared to the three months ended March 31, 2021 was primarily due to higher
component costs, expedite and production fees, and logistics expenses in both of
our segments, product and customer mix, which decreased our gross margin by
seven percentage points.

We believe our gross margin may decline in 2022 compared to 2021 due to higher expected sales from IP Optical Networks, which has lower margins due to the higher hardware content of its products, and higher production costs. high as a result of ongoing global supply chain issues. .


Research and Development Expenses. Research and development expenses consist
primarily of salaries and related personnel expenses and prototype costs for the
design, development, testing, and enhancement of our products. Research and
development expenses for the three months ended March 31, 2022 and 2021 were as
follows (in thousands, except percentages):

                                                                        Increase
                                                                     from prior year
                                 March 31,      March 31,
                                   2022           2021               $                %
           Three months ended   $  52,690      $  47,410      $        5,280        11.1  %



The increase in our research and development expenses in the three months ended
March 31, 2022 compared to the three months ended March 31, 2021 was primarily
due to $4 million of higher product development costs and $3 million of higher
employee-related expenses in our IP Optical Networks segment, partially offset
by lower expenses in our Cloud and Edge segment aggregating $2 million.

Some aspects of our research and development efforts require significant
short-term expenditures, the timing of which may cause significant variability
in our expenses. We believe that rapid technological innovation is critical to
our long-term success, and we are tailoring our investments to meet the
requirements of our customers and market. We believe that our research and
development expense will increase modestly in 2022 compared to 2021, primarily
due to our incremental investment in critical
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growth areas, partially offset by cost savings from the 2022 Restructuring Plan.


Sales and Marketing Expenses. Sales and marketing expenses primarily consist of
salaries and related personnel costs, commissions, travel and entertainment
expenses, promotions, customer trial and evaluations inventory, and other
marketing and sales support expenses. Sales and marketing expenses for the three
months ended March 31, 2022 and 2021 were as follows (in thousands, except
percentages):

                                                                        Increase
                                                                     from prior year
                              March 31,      March 31,
                                2022           2021                   $                   %
        Three months ended   $  37,619      $  37,218      $         401                1.1  %



The increase in sales and marketing expenses in the three months ended March 31,
2022 compared to the three months ended March 31, 2021 was attributable to
higher expenses in our IP Optical Networks segment, partially offset by lower
Cloud and Edge expenses, principally employee-related costs.

We expect our sales and marketing spend in 2022 to be in line with 2021 levels.


General and Administrative Expenses. General and administrative expenses consist
primarily of salaries and related personnel costs for executive and
administrative personnel, and audit, legal and other professional fees. General
and administrative expenses for the three months ended March 31, 2022 and 2021
were as follows (in thousands, except percentages):

                                                                        Decrease
                                                                     from prior year
                                 March 31,      March 31,
                                   2022           2021               $                %
           Three months ended   $  12,862      $  15,553      $       (2,691)      (17.3) %



The decrease in general and administrative expenses in the three months ended
March 31, 2022 compared to the three months ended March 31, 2021 was primarily
attributable to lower employee-related expenses of $1.4 million and $1.1 million
in our Cloud and Edge and IP Optical Networks segments, respectively, in the
current year period.

Although our general and administrative expenses decreased by 17% in the three months ended March 31, 2022 compared to the three months ended March 31, 2021we expect our general and administrative expenses to decline only slightly for the full year of 2022 from our 2021 levels.


Amortization of Acquired Intangible Assets. Amortization of acquired intangible
assets included in Operating expenses for the three months ended March 31, 2022
and 2021 was as follows (in thousands, except percentages):

                                                                         Increase
                                                                      from prior year
                                March 31,       March 31,
                                   2022            2021               $                %
          Three months ended   $    7,275      $    5,762      $        1,513        26.3  %



The increase in amortization of acquired intangible assets included in operating
expenses ("Opex Amortization") in the three months ended March 31, 2022 compared
to the three months ended March 31, 2021 was primarily due to higher expense
related to customer lists recorded in connection with the ECI Acquisition. Opex
Amortization is not recorded on a straight-line basis; rather, it is recorded in
relation to expected future cash flows. Accordingly, such expense may vary from
one period to the next.

Acquisition-, Disposal- and Integration-Related. Acquisition-, disposal- and
integration-related expenses include those expenses related to acquisitions that
we would otherwise not have incurred. Acquisition- and disposal-related expenses
include professional and services fees, such as legal, audit, consulting, paying
agent and other fees. Integration-related expenses represent incremental costs
related to combining our systems and processes with those of acquired
businesses, such as third-party consulting and other third-party services.

Our acquisition, disposal and integration expenses were $1.8 million
and $1.2 million within three months

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March 31, 2022 and 2021, respectively. The amount for the three months ended
March 31, 2022 primarily relates to integration-related expenses. The amount for
the three months ended March 31, 2021 was comprised of $1.0 million of
integration-related expenses and $0.2 million for professional and services fees
in connection with the sale of our Kandy Communications business to American
Cloud Technologies, Inc. ("AVCT") on December 1, 2020 (the "Kandy Sale").


Restructuring and Related. We have been committed to streamlining our operations
and reducing operating costs by closing and consolidating certain facilities and
reducing our worldwide workforce. Please see the additional discussion of our
restructuring initiatives in the "Restructuring and Cost Reduction Initiatives"
section of the Overview of this MD&A.

We recorded restructuring and related expense of $4.8 million and $6.0 million
in the three months ended March 31, 2022 and March 31, 2021, respectively.
Although we have eliminated positions as part of our restructuring initiatives,
we continue to hire in certain areas that we believe are important to our future
growth.

Interest Expense, Net. Interest income and interest expense for the three months
ended March 31, 2022 and 2021 were as follows (in thousands, except
percentages):

                                                                           Decrease
                                      Three months ended                from prior year
                                   March 31,       March 31,
                                      2022           2021               $                %
        Interest income           $       39      $   1,485      $       (1,446)      (97.4) %
        Interest expense              (4,040)        (7,304)             (3,264)      (44.7) %

Interest expense, net $(4,001) ($5,819) $(1,818) (31.2)%






We recorded nominal interest income in the three months ended March 31, 2022. We
received debentures (the "Debentures") and warrants in connection with the Kandy
Sale. The Debentures bore interest at 10% per annum. We recorded $1.5 million of
interest income in the three months ended March 31, 2021, which was added to the
principal amount of the Debentures, and which is included in Interest expense,
net, in our condensed consolidated statement of operations for that period. The
Debentures were converted to shares of AVCT common stock on September 8, 2021.
Interest expense in the three months ended March 31, 2022 primarily represented
interest and debt issuance costs in connection with the 2020 Credit Facility (as
defined below). Interest expense in the three months ended March 31, 2021 was
primarily comprised of interest and debt issuance costs in connection with the
2020 Credit Facility, including the write-off of $2.5 million of capitalized
debt issuance costs in connection with the Third Amendment (as defined below).

Other Expense, Net. We recorded other expense, net, aggregating $28.8 million
and $25.4 million in the three months ended March 31, 2022 and 2021,
respectively. The primary component in both periods was losses from the change
in the fair value of the AVCT Investment, which were $27.0 million and $23.9
million in the three months ended March 31, 2022 and 2021, respectively.

Income Taxes. We recorded an income tax benefit of $1.9 million in the three
months ended March 31, 2022 and an income tax provision of $0.8 million in the
three months ended March 31, 2021. These amounts reflect our estimates of the
effective rates expected to be applicable for the respective full fiscal years,
adjusted for any discrete events, which are recorded in the period that they
occur. These estimates are reevaluated each quarter based on our estimated tax
rate for the full fiscal year. The estimated effective tax rate includes the
impact of valuation allowances in various jurisdictions.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (the "TCJA") eliminates the
option to deduct research and development expenditures currently and requires
taxpayers to amortize them over five years pursuant to IRC Section 174. Although
Congress is considering legislation that would defer the amortization
requirement to later years, we have no assurance that the provision will be
repealed or otherwise modified. If this provision of the TCJA is not repealed or
otherwise modified, it will materially reduce our operating cash flows in 2022.

Off-balance sheet arrangements


We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future material effect on our financial position, changes in
financial position, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.

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Cash and capital resources


Our condensed consolidated statements of cash flows are summarized as follows
(in thousands):

                                                                  Three months ended
                                                             March 31,          March 31,
                                                                2022               2021              Change
Net loss                                                    $ (69,975)     

($44,687) ($25,288)
Adjustments to reconcile net loss to cash provided by (used in) operating activities

                                 45,568             52,700             (7,132)
Changes in operating assets and liabilities                    39,437            (14,225)            53,662

Net cash provided by (used in) operating activities $15,030

    $  (6,212)         $  21,242
Net cash used in investing activities                       $  (3,471)         $  (5,357)         $   1,886
Net cash used in by financing activities                    $ (22,395)         $ (14,777)         $  (7,618)




Our cash and restricted cash aggregated $95 million at March 31, 2022 and $106
million at December 31, 2021. These amounts included cash and restricted cash
aggregating $55 million at March 31, 2022 and $60 million at December 31, 2021
held by our non-U.S. subsidiaries. If we elected to repatriate all excess funds
held by our non-U.S. subsidiaries as of March 31, 2022, we do not believe that
the amounts of potential withholding taxes that would arise from the
repatriation would have a material effect on our liquidity.

We currently maintain the Senior Secured Credit Facilities Credit Agreement (as
amended, the "2020 Credit Facility"), by and among us, as a guarantor, Ribbon
Communications Operating Company, Inc., as the borrower ("Borrower"), Citizens
Bank, N.A. ("Citizens"), as administrative agent, a lender, issuing lender,
swingline lender, joint lead arranger and bookrunner, Santander Bank, N.A., as a
lender, joint lead arranger and bookrunner, and the other lenders party thereto
(each, together with Citizens Bank, N.A. and Santander Bank, N.A., referred to
individually as a "Lender", and collectively, the "Lenders"). For additional
details regarding the terms of the 2020 Credit Facility, see Note 9 to our
condensed consolidated financial statements.

On March 3, 2021 (the "Third Amendment Effective Date"), we entered into a Third
Amendment to Credit Agreement (the "Third Amendment"), which further amended the
2020 Credit Facility. The Third Amendment provided for an incremental term loan
facility to us in the original principal amount of $74.6 million, the proceeds
of which were used on the Third Amendment Effective Date to consummate an open
market purchase of all outstanding amounts under the Term B Loan. Upon the
consummation of the open market purchase, the Term B Loans were assigned to the
Borrower and immediately canceled, such that the outstanding amount under the
Term A Loan and incremental term loan facility were combined and held by the
Lenders (the "2020 Term Loan").

On March 10, 2022, we entered into a Fourth Amendment to the 2020 Credit
Facility (the "Fourth Amendment") to increase the Maximum Consolidated Net
Leverage Ratio (as defined in the 2020 Credit Facility) to 4.25:1.00 for the
first quarter of 2022 and 4.50:1.00 for the second quarter of 2022, with
reductions in subsequent quarters through the third quarter of 2023, when the
ratio will be fixed at 3.00:1.00. In connection with the Fourth Amendment, we
made a $15.0 million prepayment that was applied to the final payment due on the
maturity date.

Subsequent to the Fourth Amendment, we are required to make quarterly principal
payments on the 2020 Term Loan aggregating approximately $20 million per year
for the next two years and $30 million in the following year, with the final
payment approximating $285 million due on the maturity date.

At March 31, 2022, we had an outstanding 2020 Term Loan balance of $355.5
million at an average interest rate of 3.4% and $4.4 million of letters of
credit outstanding with an interest rate of 2.5%. We were in compliance with all
covenants of the 2020 Credit Facility at both March 31, 2022 and December 31,
2021.

We are exposed to financial market risk related to foreign currency fluctuations
and changes in interest rates. These exposures are actively monitored by
management. To manage the volatility related to the exposure to changes in
interest rates, we have entered into a derivative financial instrument.
Management's objective is to reduce, where it is deemed appropriate to do so,
fluctuations in earnings and cash flows associated with changes in interest
rates. Our policies and practices are to use derivative financial instruments
only to the extent necessary to manage exposures. We do not hold or issue
derivative financial instruments for trading or speculative purposes.

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As a result of exposure to interest rate movements, during March 2020, we
entered into an interest rate swap arrangement, which effectively converted our
$400 million term loan with its variable interest rate based upon one-month
LIBOR to an aggregate fixed rate of 0.904%, plus a leverage-based margin as
defined in the 2020 Credit Facility. The notional amount of this swap as of
March 31, 2022 was $400 million, and the swap matures on March 3, 2025, the same
date the 2020 Credit Facility matures.

Our objectives in using interest rate derivatives are to add stability to
interest expense and to manage our exposure to interest rate movements. To
accomplish this objective, we are using an interest rate swap as part of our
interest rate risk management strategy. Interest rate swaps designated as cash
flow hedges involve the receipt of variable amounts from a counterparty in
exchange for making fixed-rate payments over the life of the agreements without
exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and
that qualify as cash flow hedges is recorded in accumulated other comprehensive
income in the condensed consolidated balance sheet and is subsequently
reclassified into earnings in the period that the hedged forecasted transactions
affect earnings. During the three months ended March 31, 2022 and 2021, such a
derivative was used to hedge the variable cash flows associated with the 2020
Credit Facility. Any ineffective portion of the change in fair value of the
derivative would be recognized directly in earnings. However, during the three
months ended March 31, 2022 and 2021, we recorded no hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to our
derivative will be reclassified to interest expense as interest is accrued on
our variable-rate debt. Based upon projected forward rates, we estimate as of
March 31, 2022 that $2.7 million may be reclassified as a decrease to interest
expense over the next 12 months.

We use letters of credit, performance and bid bonds in the course of our
business. At March 31, 2022, we had letters of credit, bank guarantees, and
performance and bid bonds outstanding (collectively, "Guarantees") aggregating
$30.7 million, comprised of the $4.4 million of letters of credit under the 2020
Credit Facility described above (the "Letters of Credit") and $26.3 million of
bank guarantees and performance and bid bonds (collectively, the "Other
Guarantees") under various uncommitted facilities. At December 31, 2021, we had
$30.1 million of Guarantees, comprised of $4.3 million of Letters of Credit and
$25.8 million of Other Guarantees. At both March 31, 2022 and December 31, 2021,
the Company had cash collateral of $2.6 million supporting the Guarantees, which
are reported as Restricted cash in our condensed consolidated balance sheets.

Cash flow from operating activities


Our primary source of cash from operating activities has been from cash
collections from our customers. We expect cash flows from operating activities
to be affected by increases and decreases in sales volumes and timing of
collections, and by purchases and shipments of inventory. Our primary uses of
cash for operating activities have been for personnel costs and investment in
our research and development and in our sales and marketing, and general and
administrative departments.

Cash provided by operating activities in the three months ended March 31, 2022
was $15.0 million, primarily resulting from lower accounts receivable and
certain non-cash expenses, such as the decrease in the fair value of the AVCT
Investment, amortization of intangible assets, stock-based compensation,
depreciation and amortization of property and equipment, and foreign currency
losses. These amounts were partially offset by our net loss, higher inventory,
lower accrued expenses and other long-term liabilities, and a non-cash
adjustment to deferred income taxes. Our lower accounts receivable was primarily
due to the collection in the quarter of seasonally higher amounts outstanding at
December 31, 2021.

Our operating activities used $6.2 million in the three months ended March 31,
2021, primarily the result of our net loss, lower accrued expenses and other
long-term liabilities, lower accounts payable, and higher inventory. These
amounts were partially offset by lower accounts receivable, higher deferred
revenue, lower other operating assets, and certain non-cash expenses, such as
the decrease in the fair value of the AVCT Investment, amortization of
intangible assets, stock-based compensation, depreciation and amortization of
property and equipment, and amortization of debt issuance costs. Our lower
accounts receivable was primarily due to the collection in the quarter of
seasonally higher amounts outstanding at December 31, 2020. The decrease in
accrued expenses and other long-term liabilities was primarily due to the cash
payments in the quarter related to our employee cash bonus program.

Cash flow from investing activities


Our investing activities used $3.5 million and $5.4 million of cash in the three
months ended March 31, 2022 and 2021, respectively, to purchase property and
equipment.
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Cash flow from financing activities


Our financing activities used $22.4 million of cash in the three months ended
March 31, 2022, primarily due to $20.0 million of principal payments on the 2020
Credit Facility, including the $15.0 million incremental principal payment in
connection with the Fourth Amendment, and $1.8 million for the payment of tax
withholding obligations related to the net share settlement of restricted stock
awards upon vesting. Payments of debt issuance costs and principal payments of
finance leases totaled less than $1 million.

Our financing activities used $14.8 million of cash in the three months ended
March 31, 2021, primarily due to $74.6 million of proceeds from the incremental
loan obtained in connection with the Third Amendment, which amount was used to
consummate an open market purchase of all outstanding amounts under the Term B
Loan, $11.2 million for the payment of tax withholding obligations related to
the net share settlement of restricted stock awards upon vesting, and $77.1
million of principal payments of term debt, including the $74.6 million payoff
of the Term B Loan in connection with the Third Amendment, $0.8 million of
payments of debt issuance costs, and $0.3 million for principal payments of
finance leases.


Under the 2020 Credit Facility, we are required to maintain compliance with
certain financial covenants. As of March 31, 2022, we were in compliance with
our financial covenants. Due to the impact of market conditions on its forecast,
including supply chain disruptions, higher costs, and other geopolitical
instabilities and disputes, we project that we may not maintain compliance with
our financial covenants under the 2020 Credit Facility, as amended, for the
quarters ended June 30, 2022 and September 30, 2022. Failure to remain in
compliance would be an event of default that would permit the Lenders to
accelerate the maturity of the 2020 Credit Facility. As of the date of the
issuance of our condensed consolidated financial statements, we currently do not
have sufficient cash on hand or available liquidity to repay the outstanding
balance of $355.5 million as of March 31, 2022, in the event the debt is
accelerated.

Management's plans to avoid any potential event of default include raising
additional cash that would allow us to pay down debt in order to remain in
compliance with our financial covenants. We have or are in the process of
obtaining agreements with certain vendors and with certain lending institutions
that allow us to factor additional trade receivables. In addition, we have the
ability to sell our derivative financial instrument and our investment in equity
securities, which had an aggregate fair market value of $34 million as of March
31, 2022. Lastly, we would evaluate the timing of our capital spending and
extension of our payment terms with vendors as needed.

In addition to the above plans, we have entered into discussions with our
Lenders to seek a further amendment to the 2020 Credit Facility to adjust the
covenants, and we believe the likelihood of completion is reasonably likely.
However, an amendment has not been finalized and is not within our control.

We believe that our plans are likely to be successfully implemented, which will result in sufficient cash to enable us to repay debt to meet our financial covenants.


Based on our current expectations, we believe our current cash and available
borrowings under the 2020 Credit Facility, along with management's plans as
outlined above, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least twelve months. The rate at
which we consume cash is dependent on the cash needs of our future operations,
including our contractual obligations at March 31, 2022, primarily comprised of
our debt principal and interest obligations as described above, and our
operating lease and purchase obligations. Our operating lease obligations
totaled $82 million at March 31, 2022, with payments aggregating $15 million in
the remainder of 2022, $18 million in 2023, $10 million in 2024 and $39 million
thereafter. Our purchase obligations for 2022 aggregate $139 million. We
anticipate devoting substantial capital resources to continue our research and
development efforts, to maintain our sales, support and marketing, to complete
acquisition-related integration activities and for other general corporate
activities. We further believe that our financial resources, along with managing
discretionary expenses, will allow us to manage the anticipated impact of the
COVID-19 pandemic on our business operations. Looking ahead, we have developed
contingency plans to reduce costs further if the situation deteriorates. The
challenges posed by the COVID-19 pandemic on our business continue to evolve
rapidly. Consequently, we continue to evaluate our financial position in light
of future developments, particularly those relating to the COVID-19 pandemic.
However, it is difficult to predict future liquidity requirements with
certainty, and our cash and available borrowings under the 2020 Credit Facility
may not be sufficient to meet our future needs, which would require us to
refinance our debt and/or obtain additional financing. We may not be able to
refinance our debt or obtain additional financing on favorable terms or at all.


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Recent accounting pronouncements


In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):
Accounting for Contract Assets and Contract Liabilities from Contracts with
Customers ("ASU 2021-08"), which amends ASC 805, Business Combinations (Topic
805), to add contract assets and contract liabilities to the list of exceptions
to the recognition and measurement principles that apply to business
combinations and to require that an acquiring entity recognize and measure
contract assets and contract liabilities acquired in a business combination in
accordance with ASC 606, Revenue from Contracts with Customers (Topic 606) ("ASC
606"). Under current GAAP, an acquirer generally recognizes such items at fair
value on the acquisition date. While primarily related to contract assets and
contract liabilities that were accounted for by the acquiree in accordance with
ASC 606, ASU 2021-08 also applies to contract assets and contract liabilities
from other contracts to which the provisions of ASC 606 apply, such as contract
liabilities from the sale of nonfinancial assets within the scope of ASU
2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial
Assets (Subtopic 610-20). ASU 2021-08 is effective for us January 1, 2023, with
early adoption permitted. We believe that the adoption of ASU 2021-08 could have
a material impact on our consolidated financial statements for periods including
and subsequent to significant business acquisitions.

In January 2021 the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):
Scope ("ASU 2021-01"), which refines the scope of ASC 848, Reference Rate
Reform, and clarifies some of its guidance as part of the FASB's monitoring of
global reference rate reform activities. ASU 2021-01 permits entities to elect
certain optional expedients and exceptions when accounting for derivative
contracts and certain hedging relationships affected by changes in the interest
rates used for discounting cash flows, for computing variation margin
settlements, and for calculating price alignment interest in connection with
reference rate reform activities under way in global financial markets (the
"discounting transition"). ASU 2021-01 is effective for us prospectively in any
period through December 31, 2022 that a modification is made to the terms of the
derivatives affected by the discounting transition. The adoption of ASU 2021-01
did not have a material impact on our consolidated financial statements.

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Rufus T. Sifford