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BASIS OF PRESENTATION | 3 Months Ended
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Mar. 31, 2022
Accounting Policies [Abstract] |
BASIS OF PRESENTATION | BASIS OF PRESENTATION Business Ribbon Communications Inc. ("Ribbon" or the "Company") is a leading global provider of communications technology to service providers and enterprises. The Company provides a broad range of software and high-performance hardware products, network solutions and services that enable the secure delivery of data and voice communications, and high-bandwidth networking and connectivity for residential consumer and for small, medium and large enterprises, and industry verticals such as finance, education, government, utilities and transportation. Ribbon's mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance and elasticity. The Company is headquartered in Plano, Texas, and has a global presence with research and development or sales and support locations in over thirty-five countries around the world. Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring items, necessary for their fair presentation with accounting principles generally accepted in the United States of America ("GAAP") and with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year or any future interim period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "Annual Report"), which was filed with the SEC on March 11, 2022. Operating Segments The Company's chief operating decision maker (the "CODM") is its President and Chief Executive Officer. The CODM assesses the Company's performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge segment ("Cloud and Edge") and the IP Optical Networks segment ("IP Optical Networks"). Reclassifications In the fourth quarter of 2021, the Company 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 Cost of revenue under the caption "Amortization of acquired technology" in the condensed consolidated statements of operations. The Company's management believes this presentation aids in the comparability of its financial statements to industry peers. This reclassification did not impact the condensed consolidated balance sheets or statements of cash flows for any historical periods. The Company reports depreciation of property and equipment related to production activities as components of Cost of revenue. This reclassification for the three months ended March 31, 2021 was as follows (in thousands):
|  |  |  |  | Three months ended March 31, 2021
|  |  |  |  |  |  |  |  |  |  |  |  | Prior presentation |  | Amounts reclassified |  | Revised presentation
Product revenue |  |  |  |  |  |  |  |  |  |  |  |  | $ | 97,889 |  |  |  |  | $ | 97,889 |
Service revenue |  |  |  |  |  |  |  |  |  |  |  |  | 94,883 |  |  |  |  | 94,883 |
Total revenue |  |  |  |  |  |  |  |  |  |  |  |  | 192,772 |  |  | — |  |  | 192,772 |
Cost of revenue - product |  |  |  |  |  |  |  |  |  |  |  |  | 44,445 |  |  |  |  | 44,445 |
Cost of revenue - service |  |  |  |  |  |  |  |  |  |  |  |  | 37,780 |  |  |  |  | 37,780 |
Amortization of acquired technology |  |  |  |  |  |  |  |  |  |  |  |  | — |  |  | 10,061 |  |  | 10,061 |
Total cost of revenue |  |  |  |  |  |  |  |  |  |  |  |  | 82,225 |  |  | 10,061 |  |  | 92,286 |
Total gross profit |  |  |  |  |  |  |  |  |  |  |  |  | 110,547 |  |  | (10,061) |  |  | 100,486 |
Research and development |  |  |  |  |  |  |  |  |  |  |  |  | 47,410 |  |  |  |  | 47,410 |
Sales and marketing |  |  |  |  |  |  |  |  |  |  |  |  | 37,218 |  |  |  |  | 37,218 |
General and administrative |  |  |  |  |  |  |  |  |  |  |  |  | 15,553 |  |  |  |  | 15,553 |
Amortization of acquired intangible assets |  |  |  |  |  |  |  |  |  |  |  |  | 15,823 |  |  | (10,061) |  |  | 5,762 |
Acquisition-, disposal- and integration-related |  |  |  |  |  |  |  |  |  |  |  |  | 1,197 |  |  |  |  | 1,197 |
Restructuring and related |  |  |  |  |  |  |  |  |  |  |  |  | 5,950 |  |  |  |  | 5,950 |
Total operating expenses |  |  |  |  |  |  |  |  |  |  |  |  | 123,151 |  |  | (10,061) |  |  | 113,090 |
Loss from operations |  |  |  |  |  |  |  |  |  |  |  |  | $ | (12,604) |  |  | $ | — |  |  | $ | (12,604) |
Significant Accounting Policies The Company's significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in the Annual Report. There were no material changes to the significant accounting policies during the three months ended March 31, 2022. Principles of Consolidation The condensed consolidated financial statements include the accounts of Ribbon and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Use of Estimates and Judgments The preparation of financial statements in conformity with GAAP requires Ribbon to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and judgments relied upon in preparing these condensed consolidated financial statements include accounting for business combinations, revenue recognition for multiple element arrangements, inventory valuations, assumptions used to determine the fair value of stock-based compensation, intangible asset and goodwill valuations, including impairments, legal contingencies and recoverability of Ribbon's net deferred tax assets and the related valuation allowances. Ribbon regularly assesses these estimates and records changes in estimates in the period in which they become known. Ribbon bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates. Restricted Cash The Company classifies as restricted cash all cash pledged as collateral to secure long-term obligations and all cash whose use is otherwise limited by contractual provisions. At both March 31, 2022 and December 31, 2021, the Company had $2.6 million of restricted cash, representing restricted short-term bank deposits pledged to secure certain performance and financial bonds as security for the Company's obligations under tenders, contracts and to one of its main subcontractors. Transfers of Financial Assets The Company maintains customer receivables factoring agreements with a number of financial institutions, primarily for IP Optical Networks sales outside of the United States. Under the terms of these agreements, the Company may transfer receivables to the financial institutions, on a non-recourse basis, provided that the financial institutions approve the receivables in advance. The Company maintains credit insurance policies from major insurance providers or obtains letters of credit from the customers for a majority of its factored trade receivables. The Company accounts for the factoring of its financial assets as a sale of the assets and records the factoring fees, when incurred, as a component of interest expense in the condensed consolidated statements of operations, and the proceeds from the sales of receivables are included in cash from operating activities in the condensed consolidated statements of cash flows. During the three months ended March 31, 2022, the Company received $18.0 million of cash from the sale of certain accounts receivable and recorded $0.2 million of interest expense in connection with these transactions. During the three months ended March 31, 2021, the Company received $31.3 million of cash from the sale of certain accounts receivable and recorded $0.2 million of interest expense in connection with these transactions. Going Concern Assessment and Management Plans The accompanying condensed consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Under the 2020 Credit Facility (as defined in Note 9), the Company is required to maintain compliance with certain financial covenants (see Note 9). As of March 31, 2022, the Company was in compliance with its financial covenants. Due to the impact of market conditions on its forecast, including supply chain disruptions, higher costs, and other geopolitical instabilities and disputes, the Company projects it may not maintain compliance with its 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 (as defined in Note 9) to accelerate the maturity of the 2020 Credit Facility. As of the date of the issuance of these condensed consolidated financial statements, the Company currently does 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 the Company to pay down debt in order to remain in compliance with its financial covenants. The Company has or is in the process of obtaining agreements with certain vendors and with certain lending institutions that allow the Company to factor additional trade receivables. In addition, the Company has to ability to sell its derivative financial instrument and its investment in equity securities, which had an aggregate fair market value of $34 million as of March 31, 2022. Lastly, the Company would evaluate the timing of its capital spending and extension of its payment terms with vendors as needed. In addition to the above plans, the Company has entered into discussions with its Lenders to seek a further amendment to the 2020 Credit Facility to adjust the covenants, and believes the likelihood of completion is reasonably likely. However, an amendment has not been finalized and is not within the Company's control. The Company believes its plans are probable of being successfully implemented, which will result in adequate cash to allow the Company to pay down debt to meet its financial covenant requirements. 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 the Company January 1, 2023, with early adoption permitted. The Company believes that the adoption of ASU 2021-08 could have a material impact on its 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 the Company 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 the Company's consolidated financial statements.

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- Definition The entire disclosure for the organization, consolidation and basis of presentation of financial statements disclosure, and significant accounting policies of the reporting entity. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -URI http://asc.fasb.org/topic&trid=2122149 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -URI http://asc.fasb.org/topic&trid=2197479 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 275 -URI http://asc.fasb.org/topic&trid=2134479 + Details
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