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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and the related notes included in Item 8, "Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those disclosed in Item 1A, “Risk Factors”, elsewhere in this Annual Report on Form 10-K, in other documents filed with the SEC and otherwise publicly disclosed. Please refer to “Cautionary Note Regarding Forward-Looking Statements” above for additional information. For a complete description of our business and other important information, please refer to Item 1 of Part I of this Annual Report on Form 10-K.

Overview

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, network solutions, and services that enable the secure delivery of data and voice communications, and high-bandwidth networking and connectivity for residential consumers and for small, medium, and large enterprises and industry verticals such as finance, education, government, utilities, and transportation. 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. We are headquartered in Plano, Texas, and have a global presence with research and development or sales and support locations in over thirty countries around the world.

Key Trends and Economic Factors Affecting Ribbon

Supplier Disruptions.Ongoing uncertainty in the global economy due to inflation, the wars in Israel and Ukraine, national security concerns and other factors, continue to disrupt various manufacturing, commodity and financial markets, increase volatility, and impede global supply chains.Our ability to deliver our solutions as agreed upon with our customers depends in part 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.

Continued uncertain global economic conditions, may cause our customers to restrict spending or delay purchases for an indeterminate period of time and consequently cause our revenues to decline.Further, such factors may negatively impact our operating costs resulting in a reduction in net income. The degree to which the ongoing wars in Israel and Ukraine and the inflationary and high interest rate environment impacts our future business, financial position and results of operations will depend on developments beyond our control, including the duration of the global economic downturn that has resulted from these factors.

The Ongoing Wars in Israel and Ukraine. The uncertainty resulting from the wars in Israel and Ukraine and the threat for expansion of one or both of these wars could result in some of our customers delaying purchases from us. As a result of safety concerns, we may close our offices in Israel from time to time. Although our employees in these offices have the ability to work remotely and business continuity plans are in place to address any medium- or long-term disruptions that could result from the closure of these offices, the office closures and general effects of employees operating in a region at war could have a negative impact on our operations. Further, a number of our employees in Israel are members of the military reserves and subject to immediate call-up in response to the war in Israel. Following the terrorist attacks in Israel in October 2023, a number of our employees have been activated for military duty and we expect that additional employees will also be activated if the war in Israel continues. While we have business continuity plans in place to address the military call-ups, it could affect the timing of projects in the short-term as the work is shifted to other team members both inside and outside of Israel.

Further, the U.S. and other European countries have imposed sanctions and trade restrictions against Russia in connection with the war in Ukraine. These sanctions and restrictions currently prohibit our ability to sell certain products and services. The sanctions continue to evolve and further changes in the current sanctions or trade restrictions could further limit our ability to sell products and services to customers in Russia and, our ability to collect on outstanding accounts receivable from such customers. If we are further limited in our ability to sell products and services to Russia and other countries for an extended period, it could have a material impact on our financial results.

Inflation and Interest Rates. We continue to see near-term impacts on our business due to inflation, including ongoing global price pressures driving up energy prices, component costs, freight premiums, and other operating costs above normal rates. Although headline inflation in the United States and Europe appears to have reached a peak, core inflation (excluding food and energy prices) remains elevated and is a source of continued cost pressure on businesses and households. Interest rates have increased significantly as central banks in developed countries attempt to subdue inflation while government deficits and debt remain at high levels in many global markets. Accordingly, the eventual implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital for our business.

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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.

Private Placement

On March 28, 2023, we issued 55,000 shares of newly designated Series A Preferred Stock (the "Preferred Stock") to investors in a private placement offering at a price of $970 per share, along with 4.9 million warrants (the "Warrants") to purchase shares of our common stock, par value $0.0001 per share (the "Private Placement"), at an exercise price of $3.77 per share. The proceeds from the Private Placement were approximately $53.4 million, including approximately $10 million from existing related party stockholders. For additional detail on the Private Placement, see Note 16 - Preferred Stock and Warrants to our consolidated financial statements.

2023 Restructuring Plan

In February 2023, our Board of Directors approved a strategic restructuring program (the "2023 Restructuring Plan") to streamline our operations in order to support our investment in critical growth areas. The 2023 Restructuring Plan includes, among other things, charges related to a workforce reduction. Any potential positions eliminated in countries outside the United States are subject to local law and consultation requirements.

We recorded restructuring and related expense of $9.9 million in the year ended December 31, 2023 in connection with the 2023 Restructuring Plan for severance related costs. We anticipate that we will record nominal future expense for severance in connection with the 2023 Restructuring Plan.

Operating Segments

Our CODM assesses our performance based on the performance of two separate organizations within Ribbon, the Cloud and Edge operating segment ("Cloud and Edge") and the IP Optical Networks operating segment ("IP Optical Networks"). For additional details regarding our operating segments, see Note 18 - Operating Segment Information to our consolidated financial statements.

Financial Overview

Financial Results

We reported a loss from operations of $24.3 million for 2023 and $48.3 million for 2022. We reported a net loss of $66.2 million for 2023 and $98.1 million for 2022.

Our revenue was $826.3 million in 2023, comprised of $477.6 million attributable to Cloud and Edge and $348.7 million attributable to IP Optical Networks. Our revenue was $819.8 million in 2022, comprised of $508.2 million attributable to Cloud and Edge and $311.6 million attributable to IP Optical Networks. Our gross profit was $408.1 million in 2023, comprised of $300.0 million attributable to Cloud and Edge and $108.1 million attributable to IP Optical Networks. Our gross profit was $400.9 million in 2022, comprised of $310.3 million attributable to Cloud and Edge and $90.6 million attributable to IP Optical Networks. Our gross margin was 49.4% in 2023 and 48.9% in 2022. In 2023, our Cloud and Edge gross margin was 62.8% and our IP Optical Networks gross margin was 31.0%. In 2022, our Cloud and Edge gross margin was 61.1% and our IP Optical Networks gross margin was 29.1%.

Our operating expenses were $432.4 million in 2023 and $449.3 million in 2022. Our 2023 operating expenses included $28.6 million of amortization of acquired intangible assets, $4.5 million of acquisition-, disposal- and integration-related expense, and $16.2 million of restructuring and related expense. Our 2022 operating expenses included $29.6 million of amortization of acquired intangible assets, $6.3 million of acquisition-, disposal- and integration-related expense, and $10.8 million of restructuring and related expense.

We recorded stock-based compensation expense of $21.8 million in 2023 and $18.7 million in 2022.

See "Results of Operations" in this MD&A for additional discussion of our results of operations for the years ended December 31, 2023 and 2022.

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Restructuring and Cost Reduction Initiatives

In February 2023, our Board of Directors approved the 2023 Restructuring Plan to streamline our operations in order to support our investment in critical growth areas. The 2023 Restructuring Plan includes, among other things, charges related to a workforce reduction. Any potential positions eliminated in countries outside the United States are subject to local law and consultation requirements. We recorded restructuring and related expense of $9.9 million in 2023 in connection with the 2023 Restructuring Plan for severance related costs for approximately 200 employees. We anticipate that we will record nominal future expense for severance in connection with the 2023 Restructuring Plan.

In February 2022, our Board of Directors approved the 2022 Restructuring Plan to streamline our operations in order to support our investment in critical growth areas. The 2022 Restructuring Plan includes, among other things, charges related to a consolidation of facilities and a workforce reduction. Any positions eliminated in countries outside the United States are subject to local law and consultation requirements. In connection with the 2022 Restructuring Plan, we recorded restructuring and related expense of $6.3 million in 2023, comprised of $5.3 million for variable and other facilities-related costs and $1.0 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease. In 2022, we recorded $10.2 million of expense for the 2022 Restructuring Plan, comprised of $3.3 million for variable and other facilities-related costs, $1.6 million for accelerated amortization of lease assets no longer being used with no ability or intent to sublease, and $5.3 million for severance and related costs for approximately 70 employees. We anticipate that we will expense $5 million in 2024 related to the 2022 Restructuring Plan.

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 Initiative"). In connection with the 2020 Restructuring Initiative, we eliminated duplicate functions arising from the ECI Acquisition in support of our efforts to integrate the two companies. In connection with the 2020 Restructuring Initiative, we recorded no expense in 2023, a nominal amount of restructuring and related expense in 2022 and $4.7 million of such expense in 2021. The 2021 amount was comprised of $4.6 million for severance and related costs for approximately 60 employees and $0.1 million for variable and other facilities-related costs. All amounts will be fully paid in 2024. We do not expect to record any future restructuring and related expense under the 2020 Restructuring Initiative.

In 2019, we implemented a restructuring plan to streamline our global footprint, improve our operations and enhance our customer delivery (the "2019 Restructuring Initiative"). The 2019 Restructuring Initiative includes facility consolidations, refinement of our research and development activities, and a reduction in workforce. The facility consolidations under the 2019 Restructuring Initiative (the "Facilities Initiative") included a consolidation of our North Texas sites into a single campus, housing engineering, customer training and support, and administrative functions, as well as a reduction or elimination of certain excess and duplicative facilities worldwide. In addition, the Facilities Initiative included consolidating our global software laboratories and server farms into two lower cost North American sites. We continue to evaluate our properties included in the Facilities Initiative for accelerated amortization and/or right-of-use asset impairment. We expect that the actions under the Facilities Initiative will be substantially completed in 2024. In connection with the 2019 Restructuring Initiative, we recorded no restructuring and related expense in 2023, $0.7 million in 2022 comprised entirely of facilities related expense and $7.0 million of such expense in 2021, comprised of $5.7 million for variable and other facilities-related costs and $1.3 million of net expense for accelerated amortization of lease assets. The amount of $1.3 million for accelerated amortization of lease assets was comprised of $3.4 million of expense, partially offset by $2.1 million of income related to a lease modification for one of our restructured lease facilities. The amount initially accrued for severance and related costs under this 2019 Restructuring Initiative was paid in 2021.

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 $1.0 million, $1.6 million and $3.4 million of expense for accelerated rent amortization in the years ended December 31, 2023, 2022 and 2021, respectively. These amounts are included as components of Restructuring and related expense in our statements of operations, reducing our Operating lease right-of-use assets in our consolidated balance sheets at the end of each respective year. We continue to evaluate our properties included in the Facilities Initiative 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 the Facilities Initiative.

Critical Accounting Policies and Estimates

This MD&A is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make

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estimates and judgments that affect the reported amounts of assets, liabilities, revenue 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. The significant accounting policies that we believe are the most critical include revenue recognition, the valuation of inventory, debentures and warrants received as sale consideration, warranty accruals, loss contingencies and reserves, stock-based compensation, the Preferred Stock and Warrants, 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 consolidated financial statements.

Revenue Recognition. We derive revenue from two primary sources: products and services. Product revenue is generated from sales of our stand-alone software, as well as software with attached hardware that function together to deliver the products' essential functionality. Both software and hardware are also sold on a standalone basis. Services include customer support (software updates and technical support), consulting, design services, installation services and training. A typical contract includes both product and services. Generally, contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. SSPs are typically estimated using all observable transactions, including when products and services are sold on a standalone basis.

The software licenses typically provide a perpetual right to use our software. We also sell term-based software licenses that expire and Software-as-as-Service ("SaaS")-based software, which are referred to as subscription arrangements. We do not customize our software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software and hardware are delivered before related services are provided and are functional without professional services or customer support. We have concluded that our software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. The product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point that the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. We begin to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period.

Service revenue includes revenue from customer support and other professional services. We offer warranties on our products. Certain of our warranties are considered to be assurance-type in nature, ensuring that the product is functioning as intended. Assurance-type warranties do not represent separate performance obligations. We also sell separately-priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations. We do not allow and have no history of accepting product returns.

Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. We sell our customer support contracts at a percentage of list or net product price related to the support. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.

Our professional services include consulting, technical support, resident engineer services, design services and installation services. Because control transfers over time, revenue is recognized based on progress toward completion of the performance obligation. The method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. We generally use the input method to measure progress for our contracts because we believe it best depicts the transfer of assets to the customer which occurs as we incur costs for the contracts. However, in some instances, we use the output method because it best depicts the transfer of asset to the customer. Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. When the measure of progress is based upon expended labor, progress toward completion is measured as the ratio of labor time expended to date versus the total estimated labor time required to complete the performance obligation. Revenue is recorded proportionally as costs are incurred or as labor is expended. Costs to fulfill these obligations include internal labor as well as subcontractor costs.

We offer customer training courses, for which the related revenue is typically recognized as the training services are performed.

Our contracts with customers often include promises to transfer multiple products and services to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

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Judgment is required to determine the SSP for each distinct performance obligation. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.

Valuation of Inventory. We review inventory for both potential obsolescence and potential loss of value periodically. In this review, we make assumptions about the future demand for and market value of the inventory and, based on these assumptions, estimate the amount of any excess, obsolete or slow-moving inventory.

We write down our inventories if they are considered to be obsolete or at levels in excess of forecasted demand. In these cases, inventory is written down to estimated realizable value based on historical usage and expected demand. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technical obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could be required and would be reflected in the cost of revenue in the period the revision is made. To date, we have not been required to revise any of our assumptions or estimates used in determining our inventory valuations.

We write down our evaluation equipment at the time of shipment to our customers, as it is not probable that the inventory value will be realizable.

Investments. We received debentures (the "Debentures") and warrants (the "AVCT Warrants") as sale consideration in connection with our December 1, 2020 sale of the Kandy Communications Business to American Virtual Cloud Technologies, Inc. ("AVCT") (the "Kandy Sale"). On September 8, 2021 (the "Debenture Conversion Date"), the Debentures were converted into shares of AVCT common stock (the "Debenture Shares"). In connection with the conversion of the Debentures to the Debenture Shares, we elected to use the fair value option to account for its equity investment in AVCT as permitted under Accounting Standards Codification ("ASC") 825, Financial Instruments ("ASC 825"), which then refers to ASC 820, Fair Value Measurement ("ASC 820") to provide the fair value framework for valuing such investments. In accordance with ASC 820, we recorded the investment in AVCT at fair value, with changes in fair value recorded as a component of Other (expense) income, net, in the consolidated statements of operations.

On August 29, 2022, we and AVCT entered into a settlement agreement which provided for, amongst other things, the cancellation of our investment in the Debenture Shares and the AVCT Warrants. Pursuant to the settlement agreement, we also entered into a Wind Down Agreement with AVCT, pursuant to which a Reseller Agreement between the parties, as previously amended, was terminated, and we were granted a non-exclusive perpetual license to use and modify certain intellectual property owned by AVCT comprising WebRTC gateway technology that is integrated with Ribbon's SBCs and Application Servers. The perpetual license granted by AVCT is classified as Intangible assets, net in our consolidated balance sheets.

Warranty Accruals. We record warranty liabilities for estimated costs of fulfilling our obligations under standard limited hardware and software warranties at the time of sale. The liability for standard warranties is included in Accrued expenses and other and Other long-term liabilities in our consolidated balance sheet. The specific warranty terms and conditions vary depending upon the country in which we do business, but generally include material costs, technical support, labor and associated overhead over a period ranging from one to three years. We provide for the estimated costs to fulfill customer warranty obligations for certain of our products upon recognition of the related revenue. Warranty is included as a component of Cost of revenue in our consolidated statements of operations, and is determined based on actual warranty cost experience, estimates of component failure rates and our management's industry experience. Our sales contracts do not permit the right of return of the product by the customer after the product has been accepted.

Loss Contingencies and Reserves. We are subject to ongoing business risks arising in the ordinary course of business that affect the estimation process of the carrying value of assets, the recording of liabilities and the possibility of various loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We regularly evaluate current information available to determine whether such amounts should be adjusted and record changes in estimates in the period they become known. We are subject to various legal claims. We reserve for legal contingencies and legal fees when the amounts are probable and reasonably estimable.

Stock-Based Compensation. Our stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period.

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We use the Black-Scholes valuation model for estimating the fair value on the date of grant of employee stock options. Determining the fair value of stock option awards at the grant date requires judgment regarding certain valuation assumptions, including the volatility of our stock price, expected term of the option, risk-free interest rate and expected dividends. Changes in such assumptions and estimates could result in different fair values and could therefore impact our earnings. Such changes, however, would not impact our cash flows. The fair value of restricted stock awards, restricted stock units and performance-based awards is based upon our stock price on the grant date.

We grant performance-based stock units, some of which include a market condition, to certain of our executives and certain other employees. We use a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the volatility of each entity, and the pair-wise covariance between each entity. These results are then used to calculate the grant date fair values. We are required to record expense through the respective final vesting dates regardless of the number of shares that are ultimately earned. Once the grant date criteria have been met for a fiscal year performance period, we record stock-based compensation expense based on our assessment of the probability that the respective performance condition will be achieved and the level, if any, of such achievement. The Compensation Committee determines the number of shares earned, if any, after our financial results for each fiscal year performance period are finalized. Upon determination by the Compensation Committee of the number of shares that will be received upon vesting, such number of shares becomes fixed and the unamortized expense is recorded through the remainder of the service period, at which time any performance-based stock units earned will vest pending each executive's continued employment with us through that date.

The amount of stock-based compensation expense recorded in any period for unvested awards requires estimates of the amount of stock-based awards that are expected to be forfeited prior to vesting, as well as assumptions regarding the probability that performance-based stock awards without market conditions will be earned.

Preferred Stock and Warrants. We account for the Preferred Stock and Warrants as liability-classified instruments based on an assessment of their specific terms in accordance with ASC Topic 480, Distinguishing Liabilities from Equity. The fair value option was elected for the Preferred Stock, as we consider fair value to best reflect the expected future economic value. These liabilities are remeasured to fair value at each reporting date using the same valuation methodology applied upon issuance. The Preferred Stock is considered to be debt for our Consolidated Net Leverage Ratio covenant calculation required under our 2020 Credit Facility.

Business Combinations. We allocate the purchase price of acquired companies to identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired in the business combination that are not individually identified and separately recognized. Significant management judgments and assumptions are required in determining the fair value of assets acquired and liabilities assumed, particularly acquired intangible assets which are principally based upon estimates of the future performance and cash flows expected from the acquired business and applied discount rates. While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at a business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. If different assumptions are used, it could materially impact the purchase price allocation and our financial position and results of operations. Any adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period are included in operating results in the period in which the adjustments are determined. Intangible assets typically are comprised of in-process research and development, developed technology, customer relationships, trade names and internal use software.

Goodwill and Intangible Assets. Goodwill is not amortized, but instead is tested for impairment annually, or more frequently if indicators of potential impairment exist. Intangible assets with estimated lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by comparing the carrying amount of the asset to future net undiscounted pretax cash flows expected to be generated by the asset. If these comparisons indicate that an asset is not recoverable, we will recognize an impairment loss for the amount by which the carrying value of the asset exceeds the related estimated fair value.

We perform a fair value analysis for each reporting unit using both an income and market approach, which encompasses a discounted cash flow analysis and a guideline public company analysis using selected multiples. We assesse each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and the methodologies are weighted appropriately. Any impairment charges are reported separately in our consolidated statements of operations.

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Judgment is required in determining whether an event has occurred that may impair the value of goodwill, identifiable intangible assets or other long-lived assets. Factors that could indicate an impairment may exist include significant underperformance relative to plan or long-term projections, strategic changes in business strategy, significant negative industry or economic trends, a significant change in circumstances relative to a large customer, a significant decline in our stock price for a sustained period and a decline in our market capitalization to below net book value. We must make assumptions about future control premiums, market comparables, cash flows, operating plans, discount rates and other factors to determine recoverability.

Our annual testing for impairment of goodwill is completed as of October 1. For the purpose of testing goodwill for impairment, all goodwill is assigned to a reporting unit, which may be either an operating segment or a portion of an operating segment. Our reporting units are our two operating segments, Cloud and Edge and IP Optical Networks. For our annual impairment testing, we perform a fair value analysis using both an Income and Market approach, which encompasses a discounted cash flow analysis and a guideline public company analysis using selected multiples. We assess each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and the methodologies are weighted appropriately.

Based upon the completion of our 2023 and 2022 annual test for goodwill impairment, we determined that there was no impairment of goodwill for either of our reporting units. The results of our 2021 impairment test determined that the carrying value of our IP Optical Networks segment exceeded its fair value. The amount of the impairment of $116.0 million was recorded in the fourth quarter of 2021 and is reported separately in our consolidated statement of operations for the year ended December 31, 2021. We determined that there was no impairment of our Cloud and Edge segment in 2021.

Leases. We account for our leases in accordance with Accounting Standards Codification ("ASC") 842, Leases ("ASC 842"). We have operating leases for corporate offices, and research and development facilities and historically had finance leases for certain equipment. Operating leases are reported separately in our consolidated balance sheets. Assets acquired under finance leases, if any, are included in Property and equipment, net, in the consolidated balance sheets.

We determine if an arrangement is a lease at inception. A contract is determined to contain a lease component if the arrangement provides us with a right to control the use of an identified asset. Lease agreements may include lease and non-lease components. In such instances for all classes of underlying assets, we do not separate lease and non-lease components but rather, account for the entire arrangement under leasing guidance. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term.

For operating leases, lease expense for minimum fixed lease payments is recognized on a straight-line basis over the lease term. The expense for finance leases includes both interest and amortization expense components, with the interest component calculated based on the effective interest method and the amortization component calculated based on straight-line amortization of the right-of-use asset over the lease term. Lease contracts may contain variable lease costs, such as common area maintenance, utilities and tax reimbursements that vary over the term of the contract. Variable lease costs are not included in minimum fixed lease payments and as a result, are excluded from the measurement of the right-of-use assets and lease liabilities. We expense all variable lease costs as incurred.

Accounting for Income Taxes. Our provision for income taxes is comprised of both current taxes and deferred taxes. The current income tax provision is generally calculated as the estimated taxes payable or refundable on tax returns to be filed for the year ended December 31, 2023. We provide for deferred income taxes based on temporary differences between financial and taxable income, net operating loss carryforwards, tax credit carryforwards and any required valuation allowances.

We assess the recoverability of all deferred tax assets recorded on the balance sheet and provide any necessary valuation allowances as required. In evaluating our ability to realize our deferred tax assets, we consider all available positive and negative evidence, including our past operating results, the existence of cumulative income in the most recent years, changes in our business operations, and our forecast of future taxable income. In determining future taxable income, we make assumptions, including the amount of state, federal and international pre-tax income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage our underlying businesses. Such assessment is completed on a jurisdiction-by-jurisdiction basis.

We have provided for income taxes on the undistributed earnings of our non-U.S. subsidiaries as of December 31, 2023, excluding Ireland and Israel, which are indefinitely reinvested. Accordingly, we are required to recognize deferred taxes for 2023 on the outside basis differences related to the foreign subsidiaries, the largest of these differences being undistributed earnings.

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We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position's sustainability and is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of recognized tax benefit is still appropriate. The recognition and measurement of tax benefits require significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

Results of Operations

Years Ended December 31, 2023 and 2022

Revenue. Revenue for the years ended December 31, 2023 and 2022 was as follows (in thousands, except percentages):

Year endedDecember 31, Increasefrom prior year

Segment revenue for the years ended December 31, 2023 and 2022 was as follows (in thousands):

The increase in our product revenue in 2023 compared to 2022 was primarily the result of $33 million of higher sales of our IP Optical Networks products, offset by $31 million of lower sales of our Cloud and Edge products.The increase in revenue from the sale of IP Optical Networks products was primarily attributable to higher sales in India and the U.S. markets following the introduction of new products and capabilities, including support for Long Haul Optical Transport, 5G Cell Site Routers, and a new series of IP Routers.The decrease in revenue from the sale of Cloud and Edge products was primarily attributable to lower sales to U.S. Tier One service providers, partially offset by increased sales to Enterprise customers, including U.S. Federal agencies to support voice network modernization.

Revenue from sales to enterprise customers was 32% and 28% of our product revenue in 2023 and 2022, respectively. These sales were made through both our direct sales team and indirect sales channel partners.

Revenue from indirect sales through our channel partner program was 35% and 30% of our product revenue in 2023 and 2022, respectively. The increase in channel sales reflects stronger deployments through systems integrators as well as sell-through from our Service Provider channel partners.

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

Service revenue is primarily comprised of software and hardware maintenance and support (“maintenance revenue”) and network design, installation and other professional services (“professional services revenue”).

Service revenue for the years ended December 31, 2023 and 2022 was comprised of the following (in thousands, except percentages):

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Year endedDecember 31, Increase (decrease)from prior year

Segment service revenue for the years ended December 31, 2022 and 2021 was comprised of the following (in thousands):

Total service revenue from our Cloud and Edge segment was slightly higher in 2023 compared to 2022 due to a $3 million increase in professional services revenue and a decline in maintenance revenue. The increase in professional services revenue is related to the timing and completion of certain projects to both service providers and enterprise customers. The lower maintenance revenue reflects decommissioning of older equipment with several customers. Service revenue from our IP Optical Networks segment increased by 4.2% in 2023 compared to 2022, primarily due to an increase in projects driven by higher product sales.

The following customer contributed 10% or more of our revenue in the years ended December 31, 2023 and 2022:

Year endedDecember 31,

Verizon Communications Inc. 11% 15%

Revenue earned from customers domiciled outside the United States was 58% and 57% of total revenue in 2023 and 2022, respectively. Due to the timing of project completions, we expect that the domestic and international components as a percentage of our revenue may fluctuate from quarter to quarter and year to year. Our total revenue for the years ended December 31, 2023 and 2022 was disaggregated geographically as follows (in thousands):

Our deferred product revenue was $17 million at December 31, 2023 and $29 million at December 31, 2022. Our deferred service revenue was $116 million at December 31, 2023 and $104 million at December 31, 2022. Our deferred revenue balance may fluctuate as a result of the timing of revenue recognition, customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple element arrangements.

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We expect that our total revenue in 2024 will increase compared to our 2023 total revenue as our IP Optical sales continue to grow. From a regional perspective, we anticipate continued IP Optical revenue growth in 2024 from North America, Europe, the Middle East and Africa, and Central and Latin America. In the Cloud & Edge segment, we anticipate continued growth in Enterprise including U.S. Federal agencies, offsetting lower spending from U.S. service providers.

Cost of Revenue/Gross Margin. Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased materials and services, royalties, amortization of acquired technology, inventory valuation adjustments, warranty costs, and manufacturing and services personnel and related costs. Our cost of revenue, gross profit and gross margin for the years ended December 31, 2023 and 2022 were as follows (in thousands, except percentages):

Year endedDecember 31, Increase (decrease)from prior year

Cost of revenue:

Our segment cost of revenue, gross profit and gross margin for the years ended December 31, 2023 and 2022 were as follows (in thousands, except percentages):

Our gross margin was slightly higher with a 0.5 percentage point increase in 2023 compared to 2022. This increase was the result of higher margins in both of our segments. The higher margin in our IP Optical segment was due to higher sales volume, favorable mix, lower product costs and royalties, and improved absorption of fixed costs from higher sales. The higher margin in our Cloud and Edge segment was primarily attributable to favorable product mix and lower product costs, including lower amortization of acquired technology costs.

We believe that our IP Optical Networks segment gross margin will improve in 2024 compared to 2023. Our overall consolidated gross margin may decrease in 2024 as a result of higher expected sales from IP Optical Networks, which has lower margins due to the higher hardware content in its products and higher production costs.

Research and Development. Research and development ("R&D") expenses consist primarily of salaries and related personnel expenses and prototype costs for the design, development, testing and enhancement of our products. R&D expenses for the years ended December 31, 2023 and 2022 were as follows (in thousands, except percentages):

Year endedDecember 31, Decreasefrom prior year

The decrease in our research and development expenses in 2023 compared to 2022 was primarily attributable to approximately $8 million of lower expenses in our IP Optical Networks segment and approximately $5 million of lower expenses in our Cloud and Edge segment. The reduced expenses are a combination of lower employee headcount and outside subcontractors.

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Our IP Optical Networks R&D investment is focused on significantly expanding our portfolio of IP Routing solutions, adding additional features and capabilities to our Optical Transport portfolio, and supporting features in our next generation SDN management and orchestration platform.

Some aspects of our R&D 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 R&D expenses will continue to decrease modestly in 2024, with reduced investment in both segments in areas such as sustaining engineering, as well as a full year benefit of the cost savings implemented in the 2023 Restructuring Plan.

Sales and Marketing. Sales and marketing expenses consist primarily 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 years ended December 31, 2023 and 2022 were as follows (in thousands, except percentages):

Year endedDecember 31, Decreasefrom prior year

The decrease in sales and marketing expenses in 2023 compared to 2022 was primarily a result of a global sales organization re-alignment that reduced management layers, as well as reduced investment in under-performing regions. In the year 2023 compared to 2022, this resulted in a reduction of expenses of approximately $7 million in our IP Optical Networks segment and approximately $3 million in our Cloud & Edge segment.

We believe that our sales and marketing expenses will be modestly lower in 2024 compared to 2023 as we continue to benefit from the realigned global sales structure and continue to implement additional efficiencies.

General and Administrative. 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 years ended December 31, 2023 and 2022 were as follows (in thousands, except percentages):

Year endedDecember 31, Increasefrom prior year

The increase in general and administrative expenses in 2023 compared to 2022 was primarily attributable to higher stock-based and other incentive compensation.

We believe that our general and administrative expenses in 2024 will increase slightly compared to our 2023 levels, primarily due to higher employee costs and as a result of inflation.

Amortization of Acquired Intangible Assets included in Operating expenses. Amortization of acquired intangible assets included in Operating expenses ("Opex Amortization") for the years ended December 31, 2023 and 2022 was as follows (in thousands, except percentages):

Year endedDecember 31, Decreasefrom prior year

Opex Amortization was lower in 2023 compared to 2022 due to our method of amortization. We record our amortization in relation to expected future cash flows rather than on a straight-line basis. 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

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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.

We recorded $4.5 million of acquisition-, disposal- and integration-related expenses in 2023 compared to $6.3 million in 2022. These costs were related to integration following the ECI Acquisition and included license fees for systems in the process of being retired.

Restructuring and Related. We are committed to streamlining 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 $16.2 million in 2023, comprised of $9.9 million for severance and related costs, and $6.3 million for variable and other facilities-related costs, including $1.0 million of net expense for the accelerated amortization of lease assets. We recorded $10.8 million of restructuring and related expense in 2022, comprised of $5.3 million for severance and related costs, and $5.5 million for variable and other facilities-related costs, including $1.6 million of net expense for the accelerated amortization of lease assets. 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 expense and interest income for the years ended December 31, 2023 and 2022 were as follows (in millions, except percentages):

Year endedDecember 31, Increasefrom prior year

Interest income was nominal in 2023. Interest expense in 2023 was primarily comprised of costs related to the 2020 Credit Facility (as defined below), consisting of $25.5 million of interest on our term loan and revolver, $3.2 million of amortization of debt issuance costs, $0.5 million of which related to the March 2023 Sixth Amendment to the 2020 Credit Facility. We also incurred $4.3 million of fees related to factoring certain accounts receivable. Our interest expense, amortization of debt issuance costs, and factoring fees were partially offset by $5.6 million of amortization of gains in Accumulated other comprehensive income from the sales of our interest rate swap. Our interest expense for the years ended December 31, 2023 and 2022 benefited from our interest rate swap, which was sold in March 2023. See Note 14 to our consolidated financial statements.

Interest income was nominal in 2022. Interest expense in 2022 was primarily comprised of $16.0 million of interest on our outstanding term debt, $2.3 million in the aggregate related to amortization of debt issuance costs in connection with the 2020 Credit Facility (as defined below) and $1.7 million primarily related to factoring certain accounts receivable.

Other (Expense) Income, Net. We recorded other expense, net, aggregating $3.8 million in 2023, primarily comprised of the $5.3 million fair value adjustment of our Preferred Stock and Warrants, including dividends on the Preferred Stock, and $3.5 million of costs incurred in the Private Placement, partially offset by the gain of $7.3 million recognized from Accumulated other comprehensive income in connection with the sale of our interest rate swap. We recorded other expense, net of $44.5 million in 2022, primarily comprised of $41.3 million of losses resulting from the change in the fair value of the AVCT Investment.

Income Taxes. We recorded an income tax provision of $10.8 million and income tax benefit of $14.5 million in 2023 and 2022, respectively. The change from a tax benefit in 2022 to a tax provision in 2023 is a result of changes in the jurisdictional mix of pre-tax book income between those jurisdictions that have a valuation allowance and those that do not.

During 2023 and 2022, we performed an analysis to determine if, based on all available evidence, we considered it more likely than not that some portion or all of the recorded deferred tax assets will not be realized in a future period. As a result of our evaluations, in 2023, for the U.S. deferred tax assets, we concluded that deferred tax assets are generally realizable, with the exception of certain federal and state net operating loss carryforwards, as well as certain tax credits, that are not anticipated to be utilized. Accordingly, we have maintained a valuation allowance on our U.S. deferred tax assets of $23.9 million. As a result of our evaluations for Israel, we maintained a full valuation allowance against our net deferred tax assets in Israel.

The Organization for Economic Cooperation and Development (the "OECD") Pillar 2 global minimum tax rules are

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intended to apply for tax years beginning in 2024. On February 1, 2023, the FASB staff noted that they believe that the Pillar 2 tax would be an alternative minimum tax and therefore deferred tax assets would not need to be recognized related to this parallel taxing system. On February 2, 2023, the OECD issued administrative guidance providing transition and safe harbor rules around the implementation of the Pillar 2 global minimum tax. Under an additional transitional safe harbor released July 17, 2023, the undertaxed profits rule top-up tax will not be applied by any constituent entity's jurisdiction of residence with respect to income earned by a company's ultimate parent entity in its jurisdiction of residence, if the ultimate parent entity's jurisdiction has a corporate tax rate of at least 20%. This transition safe harbor will apply to fiscal years beginning on or before December 31, 2025 and ending before December 31, 2026. We are closely monitoring developments and evaluating the impacts these new rules will have on our tax rate, including eligibility to qualify for these safe harbor rules and do not expect Pillar 2 to have a significant impact on our financial statements.

Years Ended December 31, 2022 and 2021

For a comparison of our results of operations for the fiscal years ended December 31, 2022 and 2021, see "Part II, Item 7. MD&A" of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023.

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, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Liquidity and Capital Resources

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

Year endedDecember 31,

Net cash provided by (used in) operating activities $ 17,087 $ (26,364) $ 43,451

Net cash used in investing activities $ (9,481) $ (12,136) $ 2,655

Net cash (used in) provided by financing activities $ (47,859) $ 931 $ (48,790)

We had cash and cash equivalents aggregating $27 million and $67 million at December 31, 2023 and 2022, respectively. We had cash held by our non-U.S. subsidiaries aggregating approximately $16 million and $15 million at December 31, 2023 and 2022, respectively. If we elect to repatriate all of the funds held by our non-U.S. subsidiaries as of December 31, 2023, 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"), which we entered into on March 3, 2020, by and among us, as a guarantor, Ribbon Communications Operating Company, Inc., as the borrower ("Borrower"), Citizens Bank, N.A. ("Citizens"), Santander Bank, N.A., and others as lenders, ("Lenders"). For additional details regarding the terms of the 2020 Credit Facility, see Note 14 to our consolidated financial statements.

On March 10, 2022, we entered into the Fourth Amendment to the 2020 Credit Facility to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) and in conjunction we made a $15.0 million prepayment that was applied to the final payment due on the maturity date.

On June 30, 2022, we entered into the Fifth Amendment to the 2020 Credit Facility (the "Fifth Amendment") to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) for 2022, with the fourth quarter of 2022 increased to 4.75:1.00. In the first and second quarters of 2023, the Maximum Consolidated Net Leverage Ratio allowed declined to 3.25:1.00 and in all subsequent quarters the ratio will be fixed at 3.00:1.00. Also, the Fifth Amendment reduced the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the 2020 Credit Facility) in 2022, with the fourth quarter of 2022 reduced to 1.10:1.00 and in all subsequent quarters the ratio will be fixed at 1.25:1.00. In addition, the Fifth Amendment increased the maximum rate at which loans bear interest if our Consolidated Net Leverage Ratio for any quarter is greater than 4.50:1.00. Specifically, loans incurred were to bear interest, at our option, at either LIBOR plus a margin ranging from 1.50% to 4.50% per year, or the base rate plus 0.50%, or the prime rate plus a margin ranging from 0.50% to 3.50% per year. The Fifth

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Amendment allowed us to incur junior secured or unsecured debt in an amount no less than $50 million, subject to certain conditions, including the requirement that 50% of the aggregate amount of such incurred debt (net of certain costs, fees and other amounts) must be applied to prepay the 2020 Credit Facility, and compliance with certain leverage ratio-based covenant exceptions. In connection with the Fifth Amendment, we made a $10.0 million voluntary prepayment that was applied to the final payment due on the maturity date. Subsequent to the Fifth Amendment, we are required to make quarterly principal payments on the 2020 Term Loan aggregating approximately $5.0 million per quarter through March 31, 2024 and $10.0 million in each of the three quarters thereafter, with the final payment due on the maturity date in March 2025.

On March 24, 2023, we entered into the Sixth Amendment to the 2020 Credit Facility (the “Sixth Amendment”) that was effective March 30, 2023. The Sixth Amendment, among other things, increased the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility), with the first, second and third quarters of 2023 increasing to 4.50:1.00 and then decreasing to 4.25:1.00 and 4.00:1.00 in the fourth quarter of 2023 and the first quarter of 2024, respectively. In all subsequent quarters, the Maximum Consolidated Senior Net Leverage Ratio will be fixed at 3.00:1.00 and the Maximum Consolidated Net Leverage Ratio will be fixed at 4.00:1.00. Also, the Sixth Amendment reduced the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the 2020 Credit Facility) to 1.10:1.00 through the first quarter of 2024 and in all subsequent quarters the ratio will be fixed at 1.25:1.00. The Sixth Amendment reduced the maximum borrowings allowed under the 2020 Revolving Credit Facility from $100 million to $75 million and the sublimit available for letters of credit was reduced from $30 million to $20 million. In addition, the Sixth Amendment replaced LIBOR with the Secured Overnight Financing Rate ("SOFR") as the alternative rate that may be used by us for calculating interest owed under the 2020 Credit Facility, with the margin now fixed at 4.5%. In conjunction with the Sixth Amendment, we made a $75 million prepayment that was applied to the final payment due upon maturity in March 2025 of approximately $200.3 million. The $75 million prepayment was almost entirely funded with the net proceeds from the Private Placement and the sales of our interest rate swap. Debt issuance costs associated with the Sixth Amendment totaled $1.7 million and are being amortized on a straight-line basis over the remaining life of the 2020 Credit Facility to Interest expense, net.

At December 31, 2023, we had an outstanding balance under the 2020 Term Loan of $235.4 million at an average interest rate of 10.0% and $2.7 million of letters of credit outstanding with an interest rate of 4.5%. At December 31, 2022, we had an outstanding balance under the 2020 Term Loan of $330.4 million at an average interest rate of 5.4% and $3.3 million of letters of credit outstanding with an interest rate of 4.5%. Our interest rates under our 2020 Term Loan benefited from a hedge instrument that was in place, specifically a fixed rate swap, until the instrument was sold in March 2023 (see Note 15). We were in compliance with all covenants of the 2020 Credit Facility at both December 31, 2023 and 2022, including the current Consolidated Net Leverage Ratio calculation that considers our debt to include Preferred Stock.

We use letters of credit, bank guarantees, and performance and bid bonds in the course of our business. At December 31, 2023, we had $7.9 million of letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees"), comprised of $2.7 million of letters of credit under the 2020 Credit Facility described above (the "Letters of Credit") and $5.2 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees"). At December 31, 2022, we had $8.3 million of Guarantees, comprised of the $3.3 million of Letters of Credit and $5.0 million of Other Guarantees.

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 may enter into a derivative financial instrument. Management's objective has been 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.

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 swap was to mature on March 3, 2025, the same date the 2020 Credit Facility matures. On July 22, 2022, we sold $30 million of the notional amount of our interest rate swap back to our counterparty for $1.5 million, reducing the notional amount of this swap to $370 million. On August 16, 2022, we sold another $30 million of the notional amount of our interest rate swap back to our counterparty for $1.6 million, reducing the notional amount to $340 million, which approximated the term loan debt then outstanding. The gain in Accumulated other comprehensive income related to the $60 million notional amount sold of $3.1 million is being released into earnings on a straight-line basis over the remaining term of the 2020 Credit Facility as a decrease to interest expense, the amortization of which totaled $0.9 million for the year ended December 31, 2023. On March 24, 2023, we received $9.4 million, consisting of $0.4 million of interest and $9.0 million for the sale of $170 million of the $340 million notional amount of our interest rate swap back to our counterparty, reducing the notional amount to $170 million. On March 27,

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2023, we received $9.8 million, consisting of $0.4 million of interest and $9.4 million for the sale of the remaining $170 million of our interest rate swap back to our counterparty. The portion of the gain in Accumulated other comprehensive income related to the term loan debt prepaid on the date of the final sale of our swap totaled $7.3 million and was released into earnings immediately as Other expense, net. The portion of the gain in Accumulated other comprehensive income related to our remaining term loan debt balance totaled $12.0 million and is being released into earnings on a straight-line basis over the remaining term of the 2020 Credit Facility as a decrease to interest expense, the amortization of which was $4.7 million for the year ended December 31, 2023.

Our objectives in using interest rate derivatives have been to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we have used 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 an agreement without exchange of the underlying notional amount.

The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is recorded in Accumulated other comprehensive income in the consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the years ended December 31, 2023 and 2022, such a derivative was used to hedge the variable cash flows associated with the outstanding borrowings under the 2020 Credit Facility and we have accounted for this derivative as an effective hedge until the final portion of the swap was sold on March 27, 2023. Any ineffective portion of the change in fair value of the derivative was recognized directly in earnings. However, during the years ended December 31, 2023, 2022 and 2021, we recorded no hedge ineffectiveness. In the year ended December 31, 2023, we recorded $7.3 million of Other expense, net due to the sale of our interest rate swap arrangement.

Cash Flows 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 from 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.

Our operating activities provided $17 million of cash in 2023, primarily resulting from our net loss, which was more than offset by certain non-cash expenses, such as amortization of intangible assets, stock-based compensation, depreciation and amortization of property and equipment, amortization of debt issuance costs and the change in the fair value of our preferred stock and warrant liabilities, including dividends on our preferred stock, partially offset by deferred income taxes and the gain on the sale of our interest rate swap. Also, the changes in our operating assets and liabilities provided operating cash, including lower other operating assets and accounts receivable, partially offset by lower accrued expenses and other long-term liabilities, higher inventory, and lower accounts payable. Higher product revenue in our IP Optical Networks segment and lower operating expenses company-wide due to our various cost saving initiatives, including lower employee and facilities expenses, have all positively affected our operating cash flow in 2023.

Our operating activities used $26 million of cash in 2022, primarily resulting from our net loss, lower accrued expenses and other long-term liabilities, and higher inventory. The decrease in accrued expenses and other long-term liabilities was primarily due to employee-related cash payments and payments related to facilities, professional fees and royalties. These amounts were partially offset by certain non-cash expenses, such as amortization of intangible assets, the decrease in the fair value of the AVCT Investment, stock-based compensation, as well as depreciation and amortization of property and equipment.

Cash Flows from Investing Activities

Our investing activities used $9 million and $12 million of cash in 2023 and 2022, respectively. Our 2023 investing activities were used to purchase property and equipment and software licenses. Our 2022 investing activities were comprised of $10 million paid for purchases of property and equipment, and $3 million paid for purchases of software licenses, partially offset by $1 million of proceeds from the sale of a business.

Cash Flows from Financing Activities

Our financing activities used $48 million of cash in 2023, primarily due to $95 million of principal payments on our term debt, including a $75 million prepayment in connection with the Sixth Amendment to the 2020 Credit Facility, $2 million of debt issuance costs also paid in connection with the Sixth Amendment, and $4 million for the payment of tax withholding

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related to the net share settlements of restricted stock awards upon vesting. In addition, we received $53 million of proceeds from the issuance of the Preferred Stock and Warrants in the Private Placement.

Our financing activities provided $1 million of cash in 2022, primarily due to $50 million of net proceeds from the private placement by us of 17,071,311 shares of our common stock, par value $0.0001 per share, at a price of $3.05 per share on August 12, 2022 (the "Equity Offering"), partially offset by $45 million of principal payments on the 2020 Credit Facility, including the voluntary $15 million incremental principal payment in connection with the Fourth Amendment and voluntary $10 million incremental principal payment in connection with the Fifth Amendment, and $3 million for the payment of tax withholding obligations related to the net share settlements of restricted stock awards upon vesting. Payments of debt issuance costs and principal payments of finance leases together totaled approximately $2 million.

Based on our current expectations, we believe our current cash balance, the cash generated from our operations, and borrowings available under the 2020 Credit Facility, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least twelve months from the date of issuance of these financial statements. The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations at December 31, 2023, primarily comprised of our debt principal and interest obligations as described above, and our operating lease and purchase obligations. Our operating lease obligations totaled $65 million at December 31, 2023, with payments aggregating $19 million in 2024, $10 million in 2025, $9 million in 2026 and $27 million thereafter. Our purchase obligations totaled $114 million at December 31, 2023, with estimated payments aggregating $101 million in 2024 and $13 million thereafter. We anticipate devoting substantial capital resources to continue our research and development efforts, to maintain our sales, support and marketing, and for other general corporate activities. We further believe that our financial resources, along with managing discretionary expenses, will allow us to manage the ongoing impact of inflation and the supply chain disruptions on our business operations. Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates. 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.

Recent Accounting Pronouncements

In December 2023, the Financial Accounting Standards Board (the "FASB") issued ASU 2023-09, Income Taxes (Topic 740):Improvements to Income Tax Disclosures (“ASU 2023-09”), which increases the disclosure requirements around rate reconciliation information and certain types of income taxes companies are required to pay. ASU 2023-09 will be effective for us beginning in 2025, with early adoption permitted. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements and related disclosures.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which improves reportable segment disclosure requirements, including enhancement of the disclosures of significant segment expenses and interim disclosure requirements, to enable investors to better understand an entity's overall performance and assess potential future cash flows. ASU 2023-07 will be effective for us annually beginning in 2024 and on an interim basis beginning in 2025, with early adoption permitted. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements and related disclosures.

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's disclosure Update and Simplification Initiative (“ASU 2023-06”), which amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification. This ASU was issued in response to and to align GAAP with the SEC's August 2018 final rule that updates and simplifies disclosure requirements. The effective date for us for each amendment will be the date on which the SEC's removal of that related disclosure requirement becomes effective, with early adoption prohibited. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements and related disclosures.

On February 1, 2023, the FASB staff noted that they believe that the Pillar 2 tax, established by the OECD and intended to apply for tax years beginning in 2024, would be an alternative minimum tax and therefore deferred tax assets would not need to be recognized related to this parallel taxing system. On February 2, 2023, the OECD issued administrative guidance providing transition and safe harbor rules around the implementation of the Pillar 2 global minimum tax. Under an additional transitional safe harbor released July 17, 2023, the undertaxed profits rule top-up tax will not be applied by any constituent entity's jurisdiction of residence with respect to income earned by a company's ultimate parent entity in its jurisdiction of residence, if the ultimate parent entity's jurisdiction has a corporate tax rate of at least 20%. This transition safe harbor will apply to fiscal years beginning on or before December 31, 2025 and ending before December 31, 2026. We are closely monitoring developments and evaluating the impacts these new rules will have on our tax rate, including eligibility to qualify for these safe

56

harbor rules. Based upon preliminary calculations for calendar year 2024, we anticipate that we will meet the safe harbors in most jurisdictions, and any remaining top-up tax should be immaterial.

In March 2022, the Financial Accounting Standards Board (the "FASB") issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326):Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310, Receivables (Topic 310), and requires entities to provide disclosures about current period gross write-offs by year of origination. Also, ASU 2022-02 updates the requirements related to accounting for credit losses under ASC 326, Financial Instruments – Credit Losses (Topic 326), and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 became effective for us January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on our consolidated financial statements upon adoption.

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 was effective for us January 1, 2023. We believe 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. The following discussion about these market risks includes forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements.

Interest Rate Risk. To manage the volatility related to the exposure to changes in interest rates, we have historically entered into a derivative financial instrument, specifically an interest rate swap. Our objective has been 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.

In March 2023, we disposed of our interest rate swap by selling the remaining notional value totaling $340 million back to

our counterparty. We received $19.2 million from our counterparty, consisting of $0.8 million of interest and $18.4 million for

the sale and we recognized a gain from Accumulated other comprehensive income of $7.3 million to Other expense, net in

our consolidated statement of operations. Amounts remaining in Accumulated other comprehensive income related to our derivative totaled $12.0 million and are being amortized to interest expense over the remaining term of our variable-rate debt on a straight-line basis.

At December 31, 2023, we had outstanding debt totaling $235.4 million. A hypothetical movement of plus or minus 50 basis points in the interest rate of our outstanding debt would have changed our interest expense by approximately $1 million for the year ended December 31, 2023.

Foreign Currency Exchange Risk. As a global company operating in more than 30 countries, a significant portion of our revenues and expenses are denominated in currencies other than the U.S. Dollar. If the U.S. Dollar strengthens against these other currencies, our revenue for these transactions reported in U.S. Dollars would decline and our non-U.S. Dollar expenses would be inversely impacted, resulting in lower U.S. Dollar expenses.

A hypothetical 10% strengthening of the U.S. Dollar would have negatively impacted our revenues for the year ended December 31, 2023 by approximately $18 million. Because a higher proportion of our expenses are denominated in foreign currencies compared to our revenue, our net loss for the year ended December 31, 2023 would have been positively impacted by approximately $19 million.

57

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) 59

Consolidated Balance Sheets as of December 31, 2023 and 2022 62

Notes to Consolidated Financial Statements 68

58

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Ribbon Communications Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Ribbon Communications, Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition — Refer to Notes 2 and 17 to the financial statements

Critical Audit Matter Description

The Company recognizes revenue from two primary sources: products and services. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct. When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services, including when they are sold separately to similar customers, in order to estimate standalone selling price.

Management is required to use judgment to develop its estimates of standalone selling price. Auditing the Company’s estimates of standalone selling price required a high degree of auditor judgment and an increased extent of effort, including the need to involve our data analytics specialists to assist in the testing of the standalone selling price analyses given the judgment required by management in this area.

59

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the testing of management’s estimation of standalone selling prices included the following, among others:

a.We tested the effectiveness of controls over revenue, including those over the determination of estimated standalone selling price.

a.We evaluated whether management’s significant accounting policies related to the estimation of standalone selling price were appropriate.

a.With the assistance of our data analytics specialists, we evaluated the estimated standalone selling price analyses prepared by the Company, including testing the underlying detail of customer arrangements and the mathematical accuracy of the calculations.

Goodwill – Cloud and Edge and IP Optical Networks Reporting Units – Refer to Notes 2 and 10 to the financial statements

Critical Audit Matter Description

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company used a combination of the income and market approaches to estimate reporting unit fair value. With respect to the income approach, management is required to make significant estimates and assumptions related to discount rates and forecasts of future revenue and profit margin. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance was $301 million as of December 31, 2023, of which $225 million was allocated to the Cloud and Edge Reporting unit and $76 million was allocated to the IP Optical Networks Reporting Unit (“IP Optical”).

Given the significant judgments made by management to estimate the fair value of the Cloud and Edge and IP Optical Reporting Units, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the discount rate and forecasts of future revenue and profit margin required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the discount rate and forecasts of future revenue and profit margin, used by management to estimate the fair value of the Cloud and Edge Reporting Unit and IP Optical Reporting Unit, included the following, among others:

a.We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the Cloud and Edge Reporting Unit and IP Optical Reporting Unit, such as controls related to management’s selection of the discount rate and forecasts of future revenue and profit margin.

a.We evaluated management’s ability to accurately forecast future revenues and profit margin by comparing actual results to management’s historical forecasts.

a.We evaluated the reasonableness of management’s revenue and profit margin forecasts by comparing the forecasts to:

i.Historical revenues and profit margins.

ii.Internal communications to management and the Board of Directors.

iii.Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.

a.With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate by:

i.Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.

ii.Developing a range of independent estimates and comparing those to the discount rate selected by management.

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/s/ Deloitte & Touche LLP

Dallas, Texas

February 28, 2024

We have served as the Company's auditor since 2005.

61

RIBBON COMMUNICATIONS INC.

Consolidated Balance Sheets

(in thousands, except share and per share data)

Assets

Current assets:

Liabilities and Stockholders' Equity

Current liabilities:

Warrant liability 5,295 —

Operating lease liabilities, net of current 38,711 46,183

Commitments and contingencies (Note 26)

Stockholders' equity:

Accumulated other comprehensive income 13,787 30,585

See notes to the consolidated financial statements.

62

RIBBON COMMUNICATIONS INC.

Consolidated Statements of Operations

(in thousands, except per share data)

Year ended December 31,

Revenue:

Cost of revenue:

Operating expenses:

Impairment of goodwill — — 116,000

Acquisition-, disposal- and integration-related 4,476 6,286 7,632

Loss per share:

Shares used to compute loss per share:

See notes to the consolidated financial statements.

63

RIBBON COMMUNICATIONS INC.

Consolidated Statements of Comprehensive Loss

(in thousands)

Year ended December 31,

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments (506) (792) (239)

Employee retirement benefits (1,178) 4,478 —

See notes to the consolidated financial statements.

64

RIBBON COMMUNICATIONS INC.

Consolidated Statements of Stockholders' Equity

(in thousands, except share data)

Accumulated

Additional other Total

Common stock paid-in Accumulated comprehensive stockholders'

Shares Amount capital deficit (loss) income equity

Vesting of restricted stock awards and units 3,653,552 —

Vesting of performance-based stock units 1,557,656 —

Exercise of stock options 708 1 1

Vesting of restricted stock awards and units 3,075,543 —

Vesting of performance-based stock units 179,184 —

Issuance costs related to equity offering (1,654) (1,654)

Vesting of restricted stock awards and units 4,840,738 —

Vesting of performance-based stock units 381,071 —

See notes to the consolidated financial statements.

65

RIBBON COMMUNICATIONS INC.

Consolidated Statements of Cash Flows

(in thousands)

Year ended December 31,

Cash flows from operating activities:

Depreciation and amortization of property and equipment 14,105 15,295 16,962

Impairment of goodwill — — 116,000

Gain on sale of business — (62) (2,772)

Decrease in fair value of investments — 41,291 71,252

Gain on sale of swap (7,301) — —

Change in fair value of warrant liability (201) — —

Change in fair value of preferred stock liability 1,548 — —

Dividends accrued on preferred stock liability 3,935 — —

Changes in operating assets and liabilities:

Cash flows from investing activities:

Purchases of software licenses (100) (3,300) —

Proceeds from sale of business — 1,418 2,944

Cash flows from financing activities:

Borrowings under revolving line of credit 97,000 73,625 —

Principal payments on revolving line of credit (97,000) (73,625) —

Proceeds from issuance of long-term debt — — 74,625

Principal payments of finance leases — (595) (903)

Proceeds from equity offering — 52,067 —

Payment of equity offering issuance costs — (1,654) —

Proceeds from issuance of preferred stock and warrant liabilities 53,350 — —

Proceeds from the exercise of stock options 15 1 24

Net cash (used in) provided by financing activities (47,859) 931 (33,683)

Effect of exchange rate changes on cash and cash equivalents (379) (1,654) (523)

66

RIBBON COMMUNICATIONS INC.

Consolidated Statements of Cash Flows (continued)

(in thousands)

Year ended December 31,

Supplemental disclosure of cash flow information:

Supplemental disclosure of non-cash investing activities:

Capital expenditures incurred, but not yet paid $ 2,578 $ 2,559 $ 2,269

Inventory transfers to property and equipment $ 1,693 $ 2,896 $ 676

Software license acquired through investment disposal $ — $ 1,886 $ —

Supplemental disclosure of non-cash financing activities:

See notes to the consolidated financial statements.

67

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements

(1) NATURE OF THE BUSINESS

Ribbon Communications Inc. ("Ribbon" or the "Company") is a leading global provider of communications technology to service providers and enterprises. The Company provides a broad range of software and high-performance hardware products, network solutions, and services that enable the secure delivery of data and voice communications, and high-bandwidth networking and connectivity for residential consumers and for small, medium, and large enterprises and industry verticals such as finance, education, government, utilities, and transportation. Ribbon's mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance, and elasticity. The Company is headquartered in Plano, Texas, and has a global presence with research and development, or sales and support locations in over thirty countries around the world.

(2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States ("GAAP").

Private Placement Offering

On March 28, 2023, the Company issued 55,000 shares of newly designated Series A Preferred Stock (the "Preferred Stock") to investors in a private placement offering at a price of $970 per share, along with 4.9 million warrants (the "Warrants") to purchase shares of the Company's common stock, par value $0.0001 per share (the "Private Placement"), at the exercise price of $3.77 per share. The proceeds from the Private Placement were approximately $53.4 million, including approximately $10 million from existing related party stockholders (See Note 16).

Equity Offering

On August 12, 2022, the Company entered into a Securities Purchase Agreement with certain investors for the sale (the "Equity Offering") in a private placement by the Company of 17,071,311 shares (the "Shares") of the Company’s common stock, par value $0.0001 per share, at a price of $3.05 per share. The aggregate gross proceeds from the Equity Offering were approximately $52.1 million, including $10.0 million from existing related party shareholders, before deducting offering expenses paid by the Company of approximately $1.7 million.

The original issuance of the Shares in the Equity Offering was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Company subsequently filed a registration statement on Form S-3 (the “Registration Statement”) with the SEC registering the Shares, which Registration Statement was declared effective by the SEC on September 23, 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").

Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Ribbon and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

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RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Use of Estimates and Judgments

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and judgments relied upon in preparing these 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 and the Preferred Stock and Warrants, intangible asset and goodwill valuations, including impairments, debentures and warrants, warranty accruals, legal contingencies and recoverability of Ribbon's net deferred tax assets and the related valuation allowances. Ribbon regularly assesses these estimates and records changes in estimates in the period in which they become known. Ribbon bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications, not affecting previously reported net income (loss), have been made to the previously issued financial statements to conform to the current year presentation.

Business Combinations

The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed and represents the expected future economic benefits arising from other assets acquired in the business combination that are not individually identified and separately recognized. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

Revenue Recognition

The Company derives revenue from two primary sources: products and services. Product revenue includes the Company's hardware and software that function together to deliver the products' essential functionality. Software and hardware are also sold on a standalone basis. Services include customer support (software updates, upgrades and technical support), consulting, design services, installation services and training. Generally, contracts with customers contain multiple performance obligations, consisting of products and services. For these contracts, the Company accounts for individual performance obligations separately if they are considered distinct.

When an arrangement contains more than one performance obligation, the Company will allocate the transaction price to each performance obligation on a relative standalone selling price basis. The Company utilizes the observable price of goods and services, including when they are sold separately to similar customers, in order to estimate standalone selling price.

The Company's software licenses typically provide a perpetual right to use the Company's software. The Company also sells term-based software licenses that expire and Software-as-a-Service ("SaaS")-based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software and hardware are delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. Product revenue is typically recognized upon transfer of control or when the software is made available for download, as this is the point the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. The Company begins to recognize software revenue related to the renewal of subscription software licenses at the start of the subscription period.

69

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

The Company offers warranties on its products. Certain of the Company's warranties are considered to be assurance-type in nature, ensuring the product is functioning as intended. Assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts which qualify as service-type warranties and represent separate performance obligations. The Company does not allow and has no history of accepting product returns.

Services revenue includes revenue from customer support and other professional services. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. The Company sells its customer support contracts at a percentage of list or net product price. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.

The Company's professional services include consulting, technical support, resident engineer services, design services and installation services. Because control transfers over time, revenue is recognized based on progress toward completion of the performance obligation. The method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the input method to measure progress for its contracts because it believes such method best depicts the transfer of assets to the customer, which occurs as the Company incurs costs for the contracts. However, in some instances, the Company uses the output method because it best depicts the transfer of asset to the customer. Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. When the measure of progress is based upon expended labor, progress toward completion is measured as the ratio of labor time expended to date versus the total estimated labor time required to complete the performance obligation. Revenue is recorded proportionally as costs are incurred or as labor is expended. Costs to fulfill these obligations include internal labor as well as subcontractor costs.

Customer training includes courses offered by the Company. The related revenue is typically recognized as the training services are performed.

Preferred Stock and Warrants

The Company accounts for the Preferred Stock and Warrants as liability-classified instruments based on an assessment of their specific terms in accordance with ASC Topic 480, Distinguishing Liabilities from Equity. The fair value option was elected for the Preferred Stock, as the Company considers fair value to best reflect the expected future economic value. These liabilities are remeasured to fair value at each reporting date using the same valuation methodology applied upon issuance. The Preferred Stock is considered to be debt for our Consolidated Net Leverage Ratio covenant calculation required under our 2020 Credit Facility.

The value of the Preferred Stock is calculated using the Black-Derman-Toy (BDT) stochastic yield lattice model to capture the optimal timing of repayment, increasing dividend rate and other features, and the value of the Warrants is calculated using the Black-Scholes Pricing Model.

Changes in the fair value of the Preferred Stock and Warrants are reported as Other expense, net in the Company's consolidated statements of operations.

Financial Instruments

The carrying amounts of the Company's cash equivalents, accounts receivable, accounts payable and borrowings under a revolving credit facility in the Consolidated Balance Sheets approximates fair value due to the immediate or short-term nature of these financial instruments. Ribbon's term debt balance as of December 31, 2023 and 2022 of $235.4 million and $330.4 million, respectively, had a fair value of approximately $235.1 million and $323.0 million, respectively. Our Preferred Stock and Warrants liabilities as of December 31, 2023 had a combined fair value of $58.6 million, including cumulative dividends on the Preferred Stock of $3.9 million.

Financial instruments with remaining maturities or that are due within one year from the balance sheet date are classified as current. Financial instruments with maturities or that are payable more than one year from the balance sheet date are classified as noncurrent.

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RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Fair Value Option - Investment in AVCT

The Company received debentures (the "Debentures") and warrants (the "AVCT Warrants") as sale consideration in connection with its December 1, 2020 sale of the Kandy Communications Business to American Virtual Cloud Technologies, Inc. ("AVCT") (the "Kandy Sale"). On September 8, 2021 (the "Debenture Conversion Date"), the Debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares"). In connection with the conversion of the Debentures to the Debenture Shares, the Company elected to use the fair value option to account for its equity investment in AVCT as permitted under Accounting Standards Codification ("ASC") 825, Financial Instruments ("ASC 825"), which then refers to ASC 820, Fair Value Measurement ("ASC 820") to provide the fair value framework for valuing such investments. In accordance with ASC 820, the Company recorded the investment in AVCT at fair value, with changes in fair value recorded as a component of Other (expense) income, net, in the consolidated statements of operations. See Note 4 for a discussion of the valuation of the Debentures, AVCT warrants and Debenture Shares.

On August 29, 2022, the Company and AVCT entered into a settlement agreement which provided for, amongst other things, the cancellation of the Company's investment in the Debenture Shares and the AVCT Warrants with an aggregate fair value of $2.6 million. See Note 4 for a description of the settlement agreement with AVCT.

Transfers of Financial Assets

The Company's IP Optical Networks segment maintains customer receivables factoring agreements with a number of financial institutions. Under the terms of these agreements, the Company may transfer receivables to the financial institutions, on a non-recourse basis, provided that the financial institutions approve the receivables in advance. The Company maintains credit insurance policies from major insurance providers or obtains letters of credit from the customers for a majority of its factored trade receivables. The Company accounts for the factoring of its financial assets as a sale of the assets and records the factoring fees, when incurred, as a component of interest expense in the consolidated statements of operations, and the proceeds from the sales of receivables are included in cash from operating activities in the consolidated statements of cash flows.

Factoring of accounts receivable and associated fees for the years ended December 31, 2023 and 2022 were as follows (in thousands):

December 31,

Foreign Currency Translation

For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Accumulated other comprehensive income.

For foreign subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities are translated into U.S. dollars at the current exchange rate on the balance sheet date. Nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Revenue and expense items are translated at average rates of exchange prevailing during each period. Translation adjustments for these subsidiaries are included in Other expense, net.

Realized and unrealized foreign currency exchange gains and losses arising from transactions denominated in currencies other than the subsidiary's functional currency are reflected in earnings.

The Company records its foreign currency gains (losses) as a component of Other expense, net. The Company recognized net foreign currency losses of less than $0.1 million, $1.6 million and $5.0 million for the years ended December 31, 2023, 2022 and 2021, respectively.

71

RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Inventory

Inventory is recorded at the lower of cost or market value using the first-in, first-out convention. The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors.

Ribbon writes down evaluation equipment (equipment at customer sites for testing and evaluation) at the time of shipment to its customers, as it is probable that the inventory value will not be realized.

Deferred product costs represent deferred cost of revenue for product shipments to customers prior to satisfaction of Ribbon's revenue recognition criteria. The Company classifies inventory that is not expected to be consumed within one year from the balance sheet date as noncurrent and includes such inventory as a component of Other assets.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from two to five years. Leasehold improvements are amortized over the lesser of the lease term or five years. When an asset is sold or retired, the cost and related accumulated depreciation or amortization are eliminated, and the resulting gain or loss, if any, is recognized in Loss from operations in the consolidated statement of operations. The Company reviews property and equipment for impairment in the same manner as intangible assets discussed below.

Software development costs associated with internal use software are incurred in three stages of development: the preliminary project stage, the application development stage and the post-implementation stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property and equipment. Internal use software is amortized on a straight-line basis over its estimated useful life of three years, beginning when the software is ready for its intended use.

Intangible Assets and Goodwill

The Company's intangible assets are comprised of in-process research and development, developed technology, customer relationships, trade names, and internal use software. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable based upon the estimated undiscounted cash flows. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the Company will recognize an impairment loss for the amount by which the carrying value of the asset or asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future operating cash flows or appraised values, depending on the nature of the asset. The Company amortizes its intangible assets over their respective useful lives, with the exception of in-process research and development, which has an indefinite life until the product is generally available, at which time such asset is typically reclassified to developed technology, and the Company begins to amortize this asset. See Note 10 for additional information regarding the Company's intangible assets.

Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but instead is tested for impairment at least annually, or more frequently if indicators of potential impairment exist, by comparing the fair value of the Company's reporting unit to its carrying value.

The Company's annual test for impairment of goodwill is completed as of October 1. For the purpose of testing goodwill for impairment, all goodwill is assigned to a reporting unit, which may either be an operating segment or a portion of an operating segment. The Company's reporting units are its two operating segments, Cloud and Edge and IP Optical Networks. The Company performs a fair value analysis for each reporting unit using both an income and market approach, which encompasses a discounted cash flow analysis and a guideline public company analysis using selected multiples. The Company assesses each valuation methodology based upon the relevance and availability of the data at the time the valuation is performed and the methodologies are weighted appropriately. Any impairment charges are reported separately in the Company's consolidated statements of operations.

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RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Stock-Based Compensation

The Company's stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of the awards that will be forfeited.

The Company uses the Black-Scholes valuation model for estimating the fair value of stock options on the grant date. The fair value of stock option awards is affected by the Company's stock price as well as valuation assumptions, including the volatility of Ribbon's stock price, expected term of the option, risk-free interest rate and expected dividends.

The Company may grant to certain of its executives and certain other employees performance-based stock units ("PSUs") that include a market condition. The Company uses a Monte Carlo simulation approach to model future stock price movements based upon the risk-free rate of return, the volatility of each entity and the pair-wise covariance between each entity. These results are then used to calculate the grant date fair values of the PSUs. The Company is required to record expense for the PSUs with market conditions through their respective final vesting dates regardless of the number of shares that are ultimately earned. Once the grant date criteria have been met for a fiscal year performance period, the Company records stock-based compensation expense based on its assessment of the probability that the respective performance condition will be achieved and the level, if any, of such achievement. The Compensation Committee determines the number of shares earned, if any, after the Company's financial results for each fiscal year performance period are finalized. Upon the determination by the Compensation Committee of the number of shares that will be received upon vesting, such number of shares becomes fixed and the unamortized expense is recorded through the remainder of the service period, at which time any Performance PSUs earned, will vest pending each executive's continued employment with the Company through that date.

Concentration of Risk

The financial instruments that potentially subject Ribbon to concentrations of credit risk are cash and accounts receivable. The Company's cash equivalents were managed by one financial institution at December 31, 2023. Historically, the Company has not experienced significant losses due to such bank depository concentration.

Certain components and software licenses from third parties used in Ribbon's products are procured from single sources of supply. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt Ribbon's delivery of products and thereby materially adversely affect Ribbon's revenue and operating results.

Advertising Costs

Advertising costs are expensed as incurred and included as a component of Sales and marketing expense in the Company's consolidated statements of operations. Advertising expenses were $1.2 million, $1.5 million and $1.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Loss Contingencies and Reserves

Ribbon is subject to ongoing business risks arising in the ordinary course of business, including legal claims, that affect the estimation process of the carrying value of assets, the recording of liabilities and the possibility of various loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. Ribbon regularly evaluates current information available to determine whether such amounts should be adjusted and records changes in estimates in the period they become known.

An allowance for doubtful accounts is estimated based on the Company's assessment of the collectability of specific customer accounts.

Ribbon accrues for royalties for technology that it licenses from vendors based on established royalty rates and usage. Ribbon is periodically contacted by third parties who claim that Ribbon's products infringe on certain intellectual property of a third party. Ribbon evaluates these claims and accrues amounts when it is probable that the obligation has been incurred and the amounts are reasonably estimable.

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RIBBON COMMUNICATIONS INC.

Notes to Consolidated Financial Statements (Continued)

Warranty

The Company records warranty liabilities for estimated costs of fulfilling its obligations under standard limited hardware and software warranties at the time of sale. The specific warranty terms and conditions vary depending upon the country in which the Company does business, but generally includes material costs, technical support, labor and associated overhead over a period ranging from one to three years.At December 31, 2023, the Company's liability for product warranties was $12.2 million of which $5.4 million was current and included in Accrued expenses and other and $6.8 million was long-term and included in Other long-term liabilities in the Company's consolidated balance sheet. At December 31, 2022, the Company's liability for product warranties was $11.9 million, of which $5.3 million was current and included in Accrued expenses and other, and $6.6 million was long-term and included in Other long-term liabilities in the Company's consolidated balance sheet.

Research and Development Grants

The Company records grants received from the Office of the Innovation Authority of the Israeli Ministry of Economics (the "IIA") as a reduction to Research and development expense. Royalties payable to the IIA are recognized pursuant to sales of related products and are included in Cost of revenue - product (see Note 26).

Accounting for Leases

The Company accounts for its leases in accordance with Accounting Standards Codification ("ASC") 842, Leases ("ASC 842") (see Note 21). The Company has operating leases for corporate offices, and research and development facilities. Operating leases are reported separately in the Company's consolidated balance sheets at December 31, 2023 and 2022. The Company has no finance leases as of December 31, 2023 or 2022.

The Company determines if an arrangement is a lease at inception. A contract is determined to contain a lease component if the arrangement provides the Company with a right to control the use of an identified asset. Lease agreements may include lease and non-lease components. In such instances for all classes of underlying assets, the Company does not separate lease and non-lease components but rather, accounts for the entire arrangement under leasing guidance. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term.

Lease expense for minimum fixed lease payments is recognized on a straight-line basis over the lease term. The expense for finance leases would include both interest and amortization expense components, with the interest component calculated based on the effective interest method and the amortization component calculated based on straight-line amortization of the right-of-use asset over the lease term. Lease contracts may contain variable lease costs, such as common area maintenance, utilities and tax reimbursements that vary over the term of the contract. Variable lease costs are not included in minimum fixed lease payments and as a result, are excluded from the measurement of the right-of-use assets and lease liabilities. The Company expenses all variable lease costs as incurred.

Accounting for Income Taxes

Deferred tax assets and liabilities are recognized for the expected future consequences of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities and operating loss carryforwards, using tax rates expected to be in effect for the years in which the differences are expected to reverse. The Company records valuation allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized.

The Company has provided for income taxes on the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2023, excluding Ireland and Israel, which are indefinitely reinvested. Accordingly, the Company is required to recognize and record deferred taxes for 2023 on the entire outside basis differences related to the foreign subsidiaries, the largest of these differences being undistributed earnings.

The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of the benefit attributable to the position is recognized.

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The tax benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon resolution of the contingency. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes.

Defined Benefit Plans

The Company has defined benefit plans for some of its employees at various international locations. The Company recognizes retirement benefit assets or liabilities in the consolidated balance sheets reflecting the funded status of pension and other retirement benefit plans. Retirement benefit assets and liabilities are adjusted for the difference between the benefit obligations and the plan assets at fair value (measured at year-end), with the offset recorded directly to stockholders' equity through Other comprehensive income (loss), net of tax. The amount recorded in stockholders' equity represents the after-tax unamortized actuarial gains or losses, unamortized transition obligations and unamortized prior service costs.

Recent Accounting Pronouncements

In December 2023, the Financial Accounting Standards Board (the "FASB") issued ASU 2023-09, Income Taxes (Topic 740):Improvements to Income Tax Disclosures (“ASU 2023-09”), which increases the disclosure requirements around rate reconciliation information and certain types of income taxes companies are required to pay. ASU 2023-09 will be effective for the Company beginning in 2025, with early adoption permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which improves reportable segment disclosure requirements, including enhancement of the disclosures of significant segment expenses and interim disclosure requirements, to enable investors to better understand an entity's overall performance and assess potential future cash flows. ASU 2023-07 will be effective for the Company annually beginning in 2024 and on an interim basis beginning in 2025, with early adoption permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures.

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's disclosure Update and Simplification Initiative (“ASU 2023-06”), which amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification. This ASU was issued in response to and to align GAAP with the SEC's August 2018 final rule that updates and simplifies disclosure requirements. The effective date for the Company for each amendment will be the date on which the SEC's removal of that related disclosure requirement becomes effective, with early adoption prohibited. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures.

On February 1, 2023, the FASB staff noted that they believe that the Pillar 2 tax, established by the OECD and intended to apply for tax years beginning in 2024, would be an alternative minimum tax and therefore deferred tax assets would not need to be recognized related to this parallel taxing system. On February 2, 2023, the OECD issued administrative guidance providing transition and safe harbor rules around the implementation of the Pillar 2 global minimum tax. Under an additional transitional safe harbor released July 17, 2023, the undertaxed profits rule top-up tax will not be applied by any constituent entity's jurisdiction of residence with respect to income earned by a company's ultimate parent entity in its jurisdiction of residence, if the ultimate parent entity's jurisdiction has a corporate tax rate of at least 20%. This transition safe harbor will apply to fiscal years beginning on or before December 31, 2025 and ending before December 31, 2026. We are closely monitoring developments and evaluating the impacts these new rules will have on our tax rate, including eligibility to qualify for these safe harbor rules. Based upon preliminary calculations for calendar year 2024, we anticipate that we will meet the safe harbors in most jurisdictions, and any remaining top-up tax should be immaterial.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326):Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310, Receivables (Topic 310), and requires entities to provide disclosures about current period gross write-offs by year of origination. Also, ASU 2022-02 updates the requirements related to accounting for credit losses under ASC 326, Financial Instruments – Credit Losses (Topic 326), and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 was effective for

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the Company January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on the Company's consolidated financial statements.

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 was effective for the Company January 1, 2023. 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.

(3) BUSINESS ACQUISITIONS

On March 3, 2020, Ribbon completed its merger transaction with ECI Telecom Group Ltd ("ECI") in accordance with the terms of the Agreement and Plan of Merger, dated as of November 14, 2019 (the "ECI Acquisition"). Prior to the ECI Acquisition, ECI was a privately-held global provider of end-to-end packet optical transport and software-defined networking ("SDN") and network function virtualization solutions for service providers, enterprises and data center operators.

The ECI Acquisition was accounted for as a business combination and the financial results of ECI are included in the Company's consolidated financial statements. Costs related to the integration of the Company and ECI are included in the Acquisition-, disposal- and integration-related expenses in the table below.

Acquisition-, Disposal- and Integration-Related Expenses

Acquisition-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, and expenses related to cash payments to certain former executives of the acquired businesses in connection with their employment agreements. Disposal-related expenses are professional and services fees related to disposals of subsidiaries or portions of the business. 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 the previously separate companies' systems and processes.

The disposal-related expenses in the year ended December 31, 2022 primarily relate to costs incurred from the sale of one of our foreign subsidiaries. The disposal-related expenses in the year ended December 31, 2021 relate to the Kandy Sale (as defined below). The integration-related expenses in the years ended December 31, 2023, 2022 and 2021 relate to the ECI Acquisition.

The components of Acquisition-, disposal- and integration-related expenses incurred in the years ended December 31, 2023, 2022 and 2021 were as follows (in thousands):

Year ended December 31,

Professional and services fees (acquisition-related) $ — $ — $ 165

Professional and services fees (disposal-related) — 414 329

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(4) SALE OF KANDY COMMUNICATIONS BUSINESS

The Company completed the Kandy Sale on December 1, 2020 (the "Kandy Sale Date"). As consideration, AVCT paid Ribbon $45.0 million, subject to certain adjustments, in the form of Debentures and AVCT Warrants (collectively the "AVCT Units"). The Company received 43,778 AVCT Units as sale consideration.

The Debentures bore interest at a rate of 10% per annum, which was added to the principal amount of the Debentures. The Debentures were subject to mandatory conversion if the AVCT stock price was at or above $6.00 per share for 40 trading days in any 60 consecutive trading day period, subject to the satisfaction of certain other conditions. As of February 19, 2021, the stock price had traded above $6.00 for 40 days within a 60 consecutive trading day period, and accordingly, on September 8, 2021 (the "Debenture Conversion Date"), upon the completion of customary regulatory filings by AVCT, the Debentures were converted into 13,700,421 shares of AVCT common stock (the "Debenture Shares").

The AVCT Warrants were independent of the Debentures and entitled the Company to purchase 4,377,800 shares of AVCT common stock at an exercise price of $0.01 per share.

The Company calculated the fair value of the Debentures at each measurement date using a Lattice-based valuation approach, which utilizes a binomial tree to model the different paths the price of AVCT's common stock might take over the Debentures' life by using assumptions regarding the stock price volatility and risk-free interest rate. The Company used the Black-Scholes valuation model for estimating the fair value of the AVCT Warrants at each measurement date. The fair value of the AVCT Warrants was affected by AVCT's stock price as well as valuation assumptions, including the volatility of AVCT's stock price, expected term of the option, risk-free interest rate and expected dividends. Both the Lattice and Black-Scholes valuation models are based on available market data, giving consideration to all of the rights and obligations of each instrument and precluding the use of "blockage" discounts or premiums in determining the fair value of a large block of financial instruments.

The Company recorded a loss of $74.8 million in the year ended December 31, 2021 arising from the change in the fair value of the AVCT Investment. This loss was included as a component of Other expense net, in the Company's consolidated statements of operations. The Company recorded $3.5 million of interest income in the year ended December 31, 2021, which was added to the principal amount of the Debentures prior to the Debenture Conversion Date, and which is included in Interest expense, net, in the consolidated statement of operations.

On August 29, 2022, the Company and AVCT entered into a settlement agreement which provided for, amongst other things, the cancellation of the Company's investment in the Debenture Shares and the AVCT Warrants with an aggregate fair value of $2.6 million. Pursuant to the settlement agreement, the Company and AVCT also entered into a Wind Down Agreement, pursuant to which a Reseller Agreement between the parties, as previously amended, was terminated, and the Company was granted a non-exclusive perpetual license to use and modify certain intellectual property owned by AVCT comprising WebRTC gateway technology that is integrated with Ribbon’s SBCs and Application Servers.As consideration, the Company paid AVCT $2.5 million in cash, the Debenture Shares were redeemed and canceled, and the AVCT Warrants were terminated and canceled.The perpetual license granted by AVCT is classified as Intangible assets, net in the Company's consolidated balance sheet as of December 31, 2023 and 2022 in the amount of $2.4 million and $3.9 million, respectively.

The Company had no investment in AVCT as of December 31, 2023 or 2022 due to the settlement agreement entered into on August 29, 2022. The Company recorded losses of $41.3 million in the year ended December 31, 2022, representing the change in the fair value of the AVCT Investment.

The results of the Kandy Communications Business are excluded from the Company's consolidated results for all periods subsequent to the Kandy Sale Date.

(5) EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. For periods in which the Company reports net income, diluted net income per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the

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Notes to Consolidated Financial Statements (Continued)

period unless the effect is antidilutive.

The shares used to compute loss per share were as follows (in thousands):

Year ended December 31,

Potential dilutive common shares — — —

Options to purchase the Company's common stock and unvested restricted and performance-based stock units aggregating 13.5 million shares, 14.5 million shares, and 10.6 million shares were excluded from the computation of diluted loss per share for the years ended December 31, 2023, 2022 and 2021, respectively, because their effect would have been antidilutive.

As of December 31, 2023, the potential number of dilutive shares from the Warrants totaled 4.9 million shares. However, there was no impact on weighted average shares outstanding from these Warrants for the year ended December 31, 2023 as the average share price of the Company's common stock was below the exercise price of $3.77 per share and their effect would have been antidilutive.

Dividends payable on the Preferred Stock are not an adjustment to net income (loss) used for the calculation of diluted earnings (loss) per share as these dividends are included in the fair value adjustment of the Preferred Stock which is reflected in Other expense, net.

(6) FAIR VALUE HIERARCHY

Fair Value Hierarchy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

Level 1. Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. The Company had no assets or liabilities fair valued using Level 1 input at December 31, 2023 or 2022.

Level 2. Level 2 applies to assets or liabilities for which there are inputs that are directly or indirectly observable in the marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets). At December 31, 2023, the Company determined the fair value of its defined benefit plans' assets using Level 2 input. At December 31, 2022, the Company determined the fair value of its interest rate swap and its defined benefit plans' assets using Level 2 input.

Level 3. Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. At December 31, 2023, the fair value of the Company's Preferred Stock and Warrants were determined using Level 3 input. The Company had no assets or liabilities fair valued using Level 3 input at December 31, 2023 or 2022.

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(7) ACCOUNTS RECEIVABLE, NET

Accounts receivable, net, consisted of the following (in thousands):

December 31,

Allowance for doubtful accounts (1,512) (1,427)

The Company's allowance for doubtful accounts activity was as follows (in thousands):

(8) INVENTORY

Inventory consisted of the following (in thousands):

December 31,

On-hand final assemblies and finished goods inventories $ 93,077 $ 85,888

Less noncurrent portion (included in Other assets) (18,825) (11,914)

(9) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

December 31,

Less accumulated depreciation and amortization (109,871) (104,097)

The Company recorded depreciation and amortization expense related to property and equipment of $14.1 million for the year ended December 31, 2023, $15.3 million for the year ended December 31, 2022 and $17.0 million for the year ended December 31, 2021. During each of these years, the Company disposed of certain property and equipment that was fully depreciated at the time of disposal, which resulted in reductions in both Cost and Accumulated depreciation.

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The net book values of the Company's property and equipment by geographic area were as follows (in thousands):

December 31,

(10) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at December 31, 2023 and 2022 consisted of the following (in thousands):

Estimated future amortization expense for the Company's intangible assets at December 31, 2023 was as follows (in thousands):

Years ending December 31,

Goodwill is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. For the purpose of testing goodwill for impairment, all goodwill is assigned to a reporting unit, which may be either an operating segment or a portion of an operating segment. The Company's reporting units are its two operating segments, Cloud and Edge and IP Optical Networks. Annual testing for impairment of goodwill is completed as of October 1.

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Upon completion of the 2023 and 2022 annual tests for goodwill impairment, the Company determined that there was no impairment of goodwill in either of its reporting units. There was no change in the carrying value of the Company's goodwill in the years ended December 31, 2022 and 2023.

The components of goodwill at December 31, 2022 and 2023 were as follows (in thousands):

Cloud and Edge IP Optical Networks Total

(11) ACCRUED EXPENSES AND OTHER

Accrued expenses and other consisted of the following (in thousands):

December 31,

Employee compensation and related costs $ 33,682 $ 25,994

(12) WARRANTY

The changes in the Company's warranty accrual balance in the years ended December 31, 2023 and 2022 were as follows (in thousands):

(13) RESTRUCTURING AND FACILITIES CONSOLIDATION INITIATIVES

The Company recorded restructuring and related expense aggregating $16.2 million, $10.8 million and $11.7 million in the years ended December 31, 2023, 2022 and 2021, respectively. Restructuring and related expense includes restructuring expense (primarily severance and related costs), estimated future variable and other lease costs for vacated properties with no intent or ability of sublease, and accelerated rent amortization expense.

For restructuring events that involve lease assets and liabilities, the Company applies lease reassessment and modification guidance and evaluates the right-of-use assets for potential impairment. If the Company plans to exit all or distinct portions of a facility and does not have the ability or intent to sublease, the Company will accelerate the amortization of each of those lease components through the vacate date. The accelerated amortization is recorded as a component of Restructuring and related expense in the Company's consolidated statements of operations. Related variable lease expenses will continue to be expensed

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as incurred through the vacate date, at which time the Company will reassess the liability balance to ensure it appropriately reflects the remaining liability associated with the premises and record a liability for the estimated future variable lease costs.

Accelerated amortization of lease assets is recognized from the date that the Company commences the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date. Amounts of accelerated rent amortization that are included as a component of restructuring and related expense are not included in the tables below, as the liability for the total lease payments for each respective facility is included as a component of Operating lease liabilities in the Company's consolidated balance sheets at December 31, 2023 and 2022, both current and noncurrent (see Note 21). The Company may incur additional future expense if it is unable to sublease other locations included in the Facilities Initiative.

The components of restructuring and related expense for the years ended December 31, 2023, 2022 and 2021 were as follows (in thousands):

Year ended December 31,

Variable and other facilities-related costs 5,326 3,992 5,710

Accelerated amortization of lease assets due to cease-use 1,008 1,611 1,325

2023 Restructuring Plan

On February 22, 2023, the Company's Board of Directors approved a strategic restructuring program (the "2023 Restructuring Plan") to streamline the Company's operations in order to support the Company's investment in critical growth areas.The 2023 Restructuring Plan includes, among other things, charges related to a workforce reduction.Any potential positions eliminated in countries outside the United States are subject to local law and consultation requirements.

The Company recorded restructuring and related expense of $9.9 million in 2023 in connection with the 2023 Restructuring Plan entirely for severance related costs. A summary of the 2023 Restructuring Plan accrual activity for the year ended December 31, 2023 is as follows (in thousands):

The Company estimates that it will record nominal future expense under the 2023 Restructuring Plan.

2022 Restructuring Plan