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BUSINESS ACQUISITIONS | 9 Months Ended
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Sep. 30, 2020
Business Combinations [Abstract] |
BUSINESS ACQUISITIONS | BUSINESS ACQUISITIONS ECI On the ECI Merger Date, Ribbon completed its previously announced merger transaction with ECI in accordance with the terms of the Agreement and Plan of Merger, dated as of November 14, 2019, by and among Ribbon, ECI, an indirect wholly-owned subsidiary of Ribbon ("Merger Sub"), Ribbon Communications Israel Ltd. and ECI Holding (Hungary) kft, pursuant to which Merger Sub merged with and into ECI, with ECI surviving such merger as a wholly-owned subsidiary of Ribbon. Prior to the ECI Merger Date, ECI was a privately-held global provider of end-to-end packet-optical transport and software-defined networking ("SDN") and network function virtualization ("NFV") solutions for service providers, enterprises and data center operators. Ribbon believes the ECI Merger positions the Company for growth and enhances its competitive strengths by expanding its product portfolio beyond solutions primarily supporting voice applications to include data applications and optical networking. As consideration for the ECI Merger, Ribbon issued the ECI shareholders and certain others 32.5 million shares of Ribbon common stock with a fair value of $108.6 million (the "Stock Consideration") and paid $322.5 million of cash, comprised of $183.3 million to repay ECI's outstanding debt, including both principal and interest, and $139.2 million paid to ECI's selling shareholders (the "Cash Consideration"). In addition, ECI shareholders received $33.4 million from the sale of certain of ECI's real estate assets. Cash Consideration was financed through cash on hand and committed debt financing consisting of a new $400 million term loan facility and new $100 million revolving credit facility, which was undrawn at the ECI Merger Date. The ECI Merger has been accounted for as a business combination and the financial results of ECI have been included in the Company's condensed consolidated financial statements for the periods subsequent to the ECI Merger. The Company's financial results for the three months ended September 30, 2020 include $77.6 million of revenue and $11.2 million of net loss attributable to ECI. The Company's financial results for the nine months ended September 30, 2020 include $171.1 million of revenue and $31.9 million of net loss attributable to ECI for the periods subsequent to the ECI Merger. As of September 30, 2020, the valuation of acquired assets, identifiable intangible assets and certain assumed liabilities was preliminary. The Company is continuing the process of investigating the facts and circumstances existing as of the ECI Merger Date, including certain assets acquired and liabilities assumed, as well as estimated future cash flows, in order to finalize its valuation. During the second quarter of 2020, the Company recorded changes to the initial preliminary purchase price allocation. The primary adjustments recorded in the period since the ECI Merger Date included reductions of $10.4 million and $7.0 million to current and noncurrent inventory, respectively, and increases to identifiable intangible assets aggregating $11.0 million, comprised of $3.0 million to in-process research and development, $5.0 million to developed technology, $2.0 million to customer relationships and $1.0 million to trade names. These adjustments, as well as other immaterial adjustments to other balance sheet accounts, resulted in a net increase to goodwill of $2.5 million. The preliminary allocation of purchase consideration to the fair value of assets acquired and liabilities assumed includes a noncurrent asset of $5.7 million that represents an indemnification receivable from ECI's selling shareholders for certain liabilities for uncertain tax positions in accordance with the Agreement and Plan of Merger. The Company expects to finalize the valuation of the assets acquired and liabilities assumed by the first quarter of 2021. A summary of the preliminary allocation of the purchase consideration for ECI is as follows (in thousands):
Fair value of consideration transferred: |
Cash consideration: |
Repayment of ECI outstanding debt obligations | $ | 183,266 |
Cash paid to selling shareholders | 139,244 |
Payment to selling shareholders from sale of ECI real estate assets | 33,400 |
Less cash and restricted cash acquired | (9,058) |
Net cash consideration | 346,852 |
Fair value of Ribbon stock issued | 108,550 |
Fair value of total consideration | $ | 455,402 |
Fair value of assets acquired and liabilities assumed: |
Current assets, net of cash and restricted cash acquired | $ | 120,203 |
Property and equipment | 54,913 |
Intangible assets: |
In-process research and development | 34,000 |
Developed technology | 111,900 |
Customer relationships | 116,000 |
Trade names | 3,000 |
Goodwill | 191,996 |
Other noncurrent assets | 50,716 |
Deferred revenue | (4,369) |
Other current liabilities | (146,618) |
Deferred revenue, net of current | (3,726) |
Deferred tax liability | (13,308) |
Other long-term liabilities | (59,305) |
| $ | 455,402 |
The Company is still evaluating the fair value of acquired assets and assumed liabilities, and such values are subject to change. The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The Company used an income approach to value the acquired in-process research and development, developed technology, customer relationships and trade name intangible assets. The Company is still evaluating the forecast, and the value of these intangible assets could change materially as the Company finalizes the forecast and other inputs used to determine their fair values. The valuation for each of these intangible assets was based on estimated projections of expected cash flows to be generated by the assets, discounted to the present value at discount rates commensurate with perceived risk. The valuation assumptions take into consideration the Company's estimates of customer attrition, technology obsolescence and revenue growth projections. The Company is amortizing the identifiable intangible assets arising from the ECI Merger in relation to the expected cash flows from the individual intangible assets over their respective useful lives, which have a weighted average life of 12.38 years (see Note 6). Goodwill results from assets that are not separately identifiable as part of the transaction and is not deductible for tax purposes. Pro Forma Results The following unaudited pro forma information presents the condensed combined results of operations of Ribbon and ECI for the three and nine months ended September 30, 2020 and 2019 as if the ECI Merger had been completed on January 1, 2019, with adjustments to give effect to pro forma events that are directly attributable to the ECI Merger. These pro forma adjustments include an increase in research and development expense related to the conformance of ECI's cost capitalization policy to Ribbon's, additional amortization expense for the acquired identifiable intangible assets, a decrease in historical ECI interest expense reflecting the extinguishment of certain of ECI's debt as a result of the ECI Merger, and an increase in interest expense reflecting the new debt entered into by the Company in connection with the ECI Merger. Pro forma adjustments also include the elimination of acquisition- and integration-related costs directly attributable to the acquisition from the three and nine months ended September 30, 2020 and inclusion of such costs in the three and nine months ended September 30, 2019, respectively. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of the operations of Ribbon and ECI. Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the ECI Merger occurred at January 1, 2019, nor are they intended to represent or be indicative of future results of operations (in thousands, except per share amounts):
| Three months ended |  | Nine months ended
| September 30, 2020 |  | September 30, 2019 |  | September 30, 2020 |  | September 30, 2019
Revenue | $ | 231,118 |  |  | $ | 232,926 |  |  | $ | 624,800 |  |  | $ | 673,774 |
Net income (loss) | $ | 7,036 |  |  | $ | (4,795) |  |  | $ | (41,345) |  |  | $ | (31,023) |
Diluted earnings (loss) per share | $ | 0.05 |  |  | $ | (0.03) |  |  | $ | (0.29) |  |  | $ | (0.22) |
Anova Data, Inc. On the Anova Acquisition Date, the Company acquired the business and technology assets of Anova, a private company headquartered in Westford, Massachusetts that provides advanced analytics solutions (the "Anova Acquisition"). The Anova Acquisition was completed in accordance with the terms and conditions of an asset purchase agreement, dated as of January 31, 2019 (the "Anova Asset Purchase Agreement"). As consideration for the Anova Acquisition, Ribbon issued 2.9 million shares of Ribbon common stock with a fair value of $15.2 million to Anova's sellers and equity holders on the Anova Acquisition Date and held back an additional 330,000 shares with a fair value of $1.7 million (the "Anova Deferred Consideration"), of which 316,551 shares were issued after post-closing adjustments on March 4, 2020. The Anova Deferred Consideration was included as a component of Accrued expenses and other in the Company's condensed consolidated balance sheet at December 31, 2019. The Anova Acquisition was accounted for as a business combination and the financial results of Anova have been included in the Company's condensed consolidated financial statements for the periods subsequent to the Anova Acquisition Date. The results for the three and nine months ended September 30, 2019 were not significant to the Company's condensed consolidated financial statements and accordingly, the Company has not provided pro forma financial information. The Company finalized the valuation of the assets acquired and liabilities assumed in the fourth quarter of 2019. The purchase consideration aggregating $16.9 million was allocated to $11.2 million of identifiable intangible assets with a weighted average life of 6.25 years (see Note 6) and working capital items aggregating $0.1 million of net assets acquired. The remaining unallocated amount of $5.5 million was recorded as goodwill. The goodwill is deductible for tax purposes. Acquisition- and Integration-Related Expenses Acquisition- and integration-related expenses include those expenses related to acquisitions that would otherwise not have been incurred by the Company, including professional and services fees such as legal, audit, consulting, paying agent and other fees. These amounts include costs related to prior acquisitions, as well as nominal amounts related to acquisitive activities. Integration-related expenses represent incremental costs related to combining the Company and its business acquisitions, such as third-party consulting and other third-party services related to merging previously separate companies' systems and processes. The acquisition-related costs in the three months ended September 30, 2020 primarily related to the proposed sale of the Kandy Communications Business. The acquisition-related costs in the nine months ended September 30, 2020 primarily related to the ECI Merger. The acquisition-related costs in the three and nine months ended September 30, 2019 primarily related to the Anova Acquisition. The Company's acquisition- and integration-related expenses for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):
| Three months ended |  | Nine months ended
| September 30, 2020 |  | September 30, 2019 |  | September 30, 2020 |  | September 30, 2019
Professional and services fees (acquisition-related) | $ | 1,003 |  |  | $ | 743 |  |  | $ | 14,017 |  |  | $ | 2,569 |
Integration-related expenses | 363 |  |  | 954 |  |  | 590 |  |  | 4,292 |
| $ | 1,366 |  |  | $ | 1,697 |  |  | $ | 14,607 |  |  | $ | 6,861 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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