RIBBON COMMUNICATIONS INC. The following discussion of the financial condition and results of operations ofRibbon Communications Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theU.S. Securities and Exchange Commission onFebruary 26, 2021 .
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, solutions and services that enable the secure delivery of data and voice communications for residential consumers and for small, medium and large enterprises and industry verticals such as finance, education, government, utilities and transportation. Our mission is to create a recognized global technology leader providing increasingly cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance and elasticity. Headquartered inPlano, Texas , we have a global presence with research and development and/or sales and support locations in over thirty-five countries around the world.
Impact of COVID-19 on Our Business
In 2020, a novel strain of the coronavirus (COVID-19) was declared by theWorld Health Organization to be a global pandemic. The COVID-19 pandemic has had a negative effect on the global economy, disrupting the various manufacturing, commodity and financial markets and increasing volatility, and has impeded global supply chains, including that of our IP Optical Networks operating segment. Continued dampened global economic conditions as a result of the COVID-19 pandemic, especially in areas where a vaccine rollout is slower, such asAustralia andIndia , may cause our customers to restrict spending or delay purchases for an indeterminate period of time and consequently cause our revenues to decline. In addition, our ability to deliver our solutions as agreed upon with our customers depends on the ability of our global contract manufacturers, vendors, licensors and other business partners to deliver products or perform services we have procured from them. While, to date, we have not experienced material issues, if the ongoing COVID-19 pandemic impairs the ability of our business partners to support us on a timely basis, or negatively impacts the demand for our customers' other products and services, our ability to perform our customer contracts as well as the demand for our solutions may suffer. In addition, disruptions from the COVID-19 pandemic could include, and with respect to our IP Optical Networks operating segment have included, disruption of logistics necessary to import, export and deliver our solutions. The COVID-19 pandemic continues to limit in some locations, includingIndia , the ability of our employees to perform their work due to illness caused by the pandemic or local, state or federal orders requiring employees to remain at home. The degree to which the COVID-19 pandemic ultimately impacts our business, financial position and results of operations will depend on future developments beyond our control, including the effectiveness and timing of any vaccines, the frequency and duration of future waves of infection, the effectiveness and timing of any vaccines, the extent of actions to contain or treat the virus, how quickly and to what extent normal economic and operating conditions can resume, and the severity and duration of the global economic downturn that results from the pandemic. As a response to the ongoing COVID-19 pandemic, we have continued to implement plans to manage our costs. We have significantly reduced travel, marketing and other discretionary expenses except where necessary to meet customer or regulatory needs and acted to limit discretionary spending. To the extent the business disruption continues for an extended period, additional cost management actions will be considered. Any future asset impairment charges, increases in the allowance for doubtful accounts or restructuring charges could be more likely and will be dependent on the severity and duration of this crisis.
Reclassification of Amortization of Acquired Intangible Assets
In 2020, we reclassified amounts recorded for amortization of acquired intangible assets in prior presentations from Cost of revenue - product and Sales and marketing to a separate line included in operating expenses in our consolidated statements of operations. Our management believes this presentation enhances the comparability of our financial statements to industry peers. These reclassifications did not impact our operating income (loss), net income (loss) or earnings (loss) per share for any historical periods. These reclassifications also did not impact our consolidated balance sheets or consolidated statements of cash flows. This reclassification resulted in reductions in the three and six months endedJune 30, 2020 to Cost of revenue - product of$10.9 million and$19.9 million , respectively, and reductions to Sales and marketing of$3.7 million and$9.1 million , respectively, which amounts were reclassified to Amortization of acquired intangible assets. The reduction to Cost of revenue - 42 -------------------------------------------------------------------------------- product in the three months endedJune 30, 2020 increased our product gross profit as a percentage of product revenue ("product gross margin") and our total gross profit as a percentage of revenue ("total gross margin) by approximately nine percentage points and five percentage points, respectively. The reduction to Cost of revenue - product in the six months endedJune 30, 2020 increased our product gross margin and total gross margin by approximately ten percentage points and five percentage points, respectively.
Acquisition of
OnMarch 3, 2020 (the "ECI Acquisition Date"), we completed the acquisition of ECI in accordance with the terms of the Agreement and Plan of Merger, dated as ofNovember 14, 2019 , by and among Ribbon, an indirect wholly-owned subsidiary of Ribbon ("Merger Sub"),Ribbon Communications Israel Ltd. , ECI, andECI Holding (Hungary ) kft, pursuant to which Merger Sub merged with and into ECI, with ECI surviving such merger as a wholly-owned subsidiary of Ribbon (the "ECI Acquisition"). Prior to the ECI Acquisition Date, ECI was a privately-held global provider of end-to-end packet-optical transport and software-defined networking ("SDN") and network function virtualization ("NFV") solutions for service providers, enterprises and data center operators. Ribbon believes the ECI Acquisition positions the Company for growth and enhances its competitive strengths by expanding its product portfolio beyond solutions primarily supporting voice applications to include data applications and optical networking. As consideration for the ECI Acquisition, we issued the ECI shareholders and certain others 32.5 million shares of Ribbon common stock with a fair value of$108.6 million (the "Stock Consideration") and paid$322.5 million of cash, comprised of$183.3 million to repay ECI's outstanding debt, including both principal and interest, and$139.2 million paid to ECI's selling shareholders (the "Cash Consideration"). In addition, ECI shareholders received$33.4 million from the sale of certain of ECI's real estate assets. Cash Consideration was financed through cash on hand and committed debt financing consisting of a new$400 million term loan facility and new$100 million revolving credit facility, which was undrawn at the ECI Acquisition Date. The ECI Acquisition has been accounted for as a business combination and the financial results of ECI have been included in our consolidated financial statements for the periods subsequent to the ECI Acquisition Date.
Sale of Kandy Communications Business
OnDecember 1, 2020 (the "Kandy Sale Date"), we completed the sale of our Kandy Communications Business to American Virtual Cloud Technologies, Inc. ("AVCT"). AVCT purchased the assets and assumed certain liabilities associated with the Kandy Communications Business, as well as all of the outstanding interests inKandy Communications LLC , a subsidiary of the Company (the "Kandy Sale"). The assets acquired and liabilities assumed by AVCT in connection with the Kandy Sale were primarily comprised of accounts receivable, property and equipment, trade accounts payable and employee-related accruals. As consideration, AVCT paid us$45.0 million , subject to certain adjustments, in the form of units of AVCT's securities (the "AVCT Units"), with each AVCT Unit consisting of:$1,000 in principal amount of AVCT's Series A-1 convertible debentures (the "Debentures"); and (ii) one warrant to purchase 100 shares of AVCT common stock,$0.0001 par value (the "Warrants"), as consideration for the Kandy Sale. We received 43,778 AVCT Units as consideration on the Kandy Sale Date. The Debentures bear interest at a rate of 10% per annum, which is being added to the principal amount of the Debentures, except upon maturity, in which case accrued and unpaid interest is payable in cash. The entire principal of each Debenture, together with accrued and unpaid interest thereon, is due and payable on the earlier of theMay 1, 2023 maturity date or the occurrence of a Change in Control as defined in the definitive purchase agreement, as amended (the "Amended Kandy Agreement"). Each Debenture is convertible, in whole or in part, at any time at our option into that number of shares of AVCT common stock, calculated by dividing the principal amount being converted, together with all accrued and unpaid interest thereon, by the applicable conversion price, initially$3.45 . The Debentures are subject to mandatory redemption if the AVCT stock price is 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. The conversion price is subject to customary adjustments including, but not limited to, stock dividends, stock splits and reclassifications. At the Company's option, up to$5.0 million of the Debentures may be redeemed by AVCT at par in the event AVCT raises at least$50.0 million in its offering of AVCT Units. As ofFebruary 19, 2021 , the stock price had traded above$6.00 for 40 days within a 60 consecutive trading day period, and accordingly, the Debentures will be converted to shares of AVCT common stock upon the completion of customary regulatory filings by AVCT. Upon the expiration of the lock-up period, we began to value the Debentures at each measurement date by multiplying the closing stock price of AVCT common stock by the number of shares upon conversion of the Debentures. 43 -------------------------------------------------------------------------------- The Warrants are independent of the Debentures and entitle us to purchase 4,377,800 shares of AVCT common stock at an exercise price of$0.01 per share. The Warrants expire onDecember 1, 2025 , and were immediately exercisable on the Kandy Sale Date. We had not redeemed any of the Debentures or exercised any of the Warrants as ofJune 30, 2021 . We were also subject to a lock-up provision which limited our ability to sell any shares of AVCT common stock underlying the Debentures and the Warrants prior toJune 1, 2021 , except in certain transactions. We determined that the AVCT Units had a fair value of$84.9 million at the Kandy Sale Date, comprised of the Debentures with a fair value of$66.3 million and the Warrants with a fair value of$18.6 million . The value of the net assets sold to AVCT totaled$1.3 million , resulting in a gain on the sale of$83.6 million . We are calculating the fair value of the Debentures and Warrants at each quarter-end and recording any adjustments to the fair values in Other income (expense), net. AtJune 30, 2021 andDecember 31, 2020 , the aggregate fair value of the Debentures and Warrants was$106.0 million and$115.2 million , respectively. We recorded a gain of$12.1 million in the three months endedJune 30 , 2021and a loss of$11.8 million in the six months endedJune 30, 2021 arising from the change in the fair value of the Debentures and Warrants, and which is included as a component of Other income (expense), net, in our condensed consolidated statements of operations. We recorded$1.2 million and$2.7 million of interest income in the three and six months endedJune 30, 2021 , respectively, which was added to the principal of the Debentures, and which is included in Interest expense, net, in our condensed consolidated statements of operations. The fair values of the Debentures and Warrants are reported as Investments in our condensed consolidated balance sheets atJune 30, 2021 andDecember 31, 2020 . Operating Segments Effective in the fourth quarter of 2020 and in connection with the ECI Acquisition, our CODM began to assess 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"). Amounts attributable to IP Optical Networks in the six months endedJune 30, 2020 are for the period subsequent to the ECI Acquisition Date. For additional details regarding our operating segments, see Note 13 - Operating Segment Information to our condensed consolidated financial statements. Financial Overview Financial Results We reported income from operations of$13.0 million and$1.6 million for the three months endedJune 30, 2021 and 2020, respectively. We reported income from operations of$0.3 million for the six months endedJune 30, 2021 and a loss from operations of$27.1 million for the six months endedJune 30, 2020 . Our revenue was$211.2 million and$210.5 million in the three months endedJune 30, 2021 and 2020, respectively. Our total gross profit and total gross margin were$128.4 million and 60.8%, respectively, in the three months endedJune 30, 2021 , and$123.3 million and 58.6%, respectively, in the three months endedJune 30, 2020 . Our revenue was$404.0 million and$368.5 million in the six months endedJune 30, 2021 and 2020, respectively. Our total gross profit and total gross margin were$239.0 million and 59.2%, respectively, in the six months endedJune 30, 2021 , and$213.8 million and 58.0%, respectively, in the six months endedJune 30, 2020 . Revenue from our Cloud and Edge segment was$141.4 million and$146.9 million in the three months and endedJune 30, 2021 and 2020, respectively. Total gross profit and total gross margin for this segment were$95.5 million and 67.5% respectively, in the three months endedJune 30, 2021 , and$98.6 million and 67.1% in the three months endedJune 30, 2020 . Revenue from our Cloud and Edge segment was$266.8 million and$274.9 million in the six months endedJune 30, 2021 and 2020, respectively. Total gross profit and total gross margin for this segment were$179.6 million and 67.3% respectively, in the six months endedJune 30, 2021 , and$177.4 million and 64.5% in the six months endedJune 30, 2020 . Revenue from our IP Optical Networks segment was$69.8 million and$63.6 million in the three months endedJune 30, 2021 and 2020, respectively. Total gross profit and total gross margin for this segment were$33.0 million and 47.2% respectively, in the three months endedJune 30, 2021 , and$24.7 million and 38.8% in the three months endedJune 30, 2020 . Revenue from our IP Optical Networks segment was$137.1 million and$93.5 million in the six months endedJune 30, 2021 and 2020, respectively. Total gross profit and total gross margin for this segment were$59.3 million and 43.3% respectively, in the six months endedJune 30, 2021 , and$36.4 million and 38.9% in the six months endedJune 30, 2020 . 44 -------------------------------------------------------------------------------- Our operating expenses were$115.5 million and$121.7 million in the three months endedJune 30, 2021 and 2020, respectively. Operating expenses for the three months endedJune 30, 2021 included$17.2 million of amortization of acquired intangible assets,$1.1 million of acquisition-, disposal- and integration-related expense and$2.8 million of restructuring and related expense. Operating expenses for the three months endedJune 30, 2020 included$14.7 million of amortization of acquired intangible assets,$0.9 million of acquisition-, disposal- and integration-related expense and$5.4 million of restructuring and related expense. Our operating expenses were$238.6 million and$240.9 million in the six months endedJune 30, 2021 and 2020 respectively. Operating expenses for the six months endedJune 30, 2021 included$33.0 million of amortization of acquired intangible assets,$2.2 million of acquisition-, disposal- and integration-related expense and$8.8 million of restructuring and related expense. Our operating expenses for the six months endedJune 30, 2020 included$29.0 million of amortization of acquired intangible assets,$13.2 million of acquisition-, disposal- and integration-related expense and$7.4 million of restructuring and related expense. We recorded stock-based compensation expense of$4.8 million and$3.2 million in the three months endedJune 30, 2021 and 2020, respectively, and$9.9 million and$6.2 million in the six months endedJune 30, 2021 and 2020, respectively. These amounts are included as components of both Cost of revenue and Operating expenses in our condensed consolidated statements of operations. See "Results of Operations" in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for a discussion of the changes in our revenue and expenses for the three and six months endedJune 30, 2021 compared to the three and six months endedJune 30, 2020 .
Restructuring and Cost Reduction Initiatives
2020 Restructuring Initiative. 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 this initiative, we expect to eliminate duplicate functions arising from the ECI Acquisition and support our efforts to integrate the two companies. We recorded restructuring and related expense of$1.9 million and$4.7 million in connection with the 2020 Restructuring Initiative in the three months endedJune 30, 2021 and 2020, respectively, and$2.3 million and$5.8 million in the six months endedJune 30, 2021 and 2020, respectively. The amount recorded in the three months endedJune 30, 2021 was comprised of$1.9 million for severance and related costs for approximately 15 employees and nominal expense for variable costs related to restructured facilities. The amount recorded in the six monthsJune 30, 2021 was comprised of$2.6 million of severance and related costs for approximately 25 employees and$0.4 million for variable costs related to restructured facilities, offset by a credit of$0.7 million for changes in estimate to previously recorded facilities-related amounts. The amount recorded in the six months endedJune 30, 2020 , of which$4.7 million was recorded in the three months endedJune 30, 2020 and$1.1 million was recorded in the three months endedMarch 31, 2020 , represents severance and related costs for approximately 75 employees. We expect that the amount accrued for severance atJune 30, 2021 will be paid in 2021. We expect that we will record additional restructuring and related expense approximating$2 million under the 2020 Restructuring Initiative in the aggregate for severance and planned facility consolidations. 2019 Restructuring Initiative. InJune 2019 , we implemented a restructuring plan to further 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. In connection with this initiative, we expect to reduce our focus on hardware and hardware-based development over time and to increase our development focus on software virtualization, functional simplicity and important customer requirements. The facility consolidations under the 2019 Restructuring Initiative (the "Facilities Initiative") include a consolidation of ourNorth 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, we are substantially 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 completed in 2021. 45 -------------------------------------------------------------------------------- In connection with the 2019 Restructuring Initiative, we recorded restructuring and related expense of$0.9 million and$0.7 million in the three months endedJune 30, 2021 and 2020, respectively, and$6.5 million and$1.7 million in the six months endedJune 30, 2021 and 2020, respectively. The amount recorded in the three months endedJune 30, 2021 related to variable facilities costs. Of the amount recorded in the six months endedJune 30, 2021 ,$3.4 million was for accelerated amortization of lease assets and$3.1 million related to variable and other facilities-related costs in connection with facility consolidations. The amount recorded in the three months endedJune 30, 2020 primarily related to facility consolidations. The amount recorded in the six months endedJune 30, 2020 was comprised of$0.7 million for severance and related costs for five employees and$1.0 million related to facility consolidations. As ofJune 30, 2021 , the amounts accrued for severance and related costs had been paid in full. We estimate that we will record nominal, if any, additional restructuring and related expense in connection with this initiative. Accelerated Rent Amortization. Accelerated rent amortization is recognized from the date that we commence the plan to fully or partially vacate a facility, for which there is no intent or ability to enter into a sublease, through the final vacate date. We recorded$3.4 million and$0.1 million for accelerated rent amortization in the six months endedJune 30, 2021 and 2020, respectively, in connection with our 2019 Restructuring Initiative. These amounts are included as components of Restructuring and related expense. 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
Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment: revenue recognition, the valuation of inventory, the valuation of the Debentures and Warrants received as consideration in connection with the Kandy Sale, warranty accruals, loss contingencies and reserves, stock-based compensation, business combinations, goodwill and intangible assets, accounting for leases, and accounting for income taxes. If actual results differ significantly from management's estimates and projections, there could be a material effect on our condensed consolidated financial statements. There were no significant changes to our critical accounting policies fromJanuary 1, 2021 throughJune 30, 2021 . For a further discussion of our other critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Results of Operations
Three and six months ended
Revenue. Revenue for the three and six months ended
Increase (decrease)
Three months ended from prior year
June 30, June 30,
2021 2020 $ %
Product $ 113,129 $ 120,862 $ (7,733) (6.4) %
Service 98,081 89,631 8,450 9.4 %
Total revenue $ 211,210 $ 210,493 $ 717 0.3 %
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Increase
Six months ended from prior year
June 30, June 30,
2021 2020 $ %
Product $ 211,018 $ 196,761 $ 14,257 7.2 %
Service 192,964 171,714 21,250 12.4 %
Total revenue $ 403,982 $ 368,475 $ 35,507 9.6 %
Segment revenue for the three and six months ended June 30, 2021 and 2020 was as
follows (in thousands):
Three months ended June 30, 2021 Three months ended June 30, 2020
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Product $ 64,361 $ 48,768 $ 113,129 $ 72,310 $ 48,552 $ 120,862
Service 77,060 21,021 98,081 74,597 15,034 89,631
Total revenue $ 141,421 $ 69,789 $ 211,210 $ 146,907 $ 63,586 $ 210,493
Six months ended June 30, 2021 Six months ended June 30, 2020
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Product $ 114,513 $ 96,505 $ 211,018 $ 126,520 $ 70,241 $ 196,761
Service 152,330 40,634 192,964 148,418 23,296 171,714
Total revenue $ 266,843 $ 137,139 $ 403,982 $ 274,938 $ 93,537 $ 368,475
The decrease in our product revenue in the three months ended June 30, 2021
compared to the three months ended June 30, 2020 was primarily the result of
lower sales of our Cloud and Edge SBC products and the loss of revenue due to
the Kandy Sale, partially offset by higher revenue from sales of certain Cloud
and Edge software applications. Product revenue for our IP Optical Networks
segment was essentially flat in the three months ended June 30, 2021 compared to
the three months ended June 30, 2020 .
The increase in our product revenue in the six months ended June 30, 2021
compared to the six months ended June 30, 2020 was primarily attributable to the
inclusion of a full half-year of revenue from our IP Optical Networks segment,
compared to four months of revenue in the six months ended June 30, 2020 . This
increase was partially offset by lower sales of our Cloud and Edge SBC products
and the loss of revenue due to the Kandy Sale, partially offset by higher
revenue from sales of certain Cloud and Edge software applications.
Revenue from indirect sales through our channel partner program was
approximately 24% and 27% of our product revenue in the three months ended June
30, 2021 and 2020, respectively. Revenue from indirect sales through our channel
partner program was approximately 22% and 31% of our product revenue in the six
months ended June 30, 2021 and 2020, respectively.
Revenue from sales to enterprise customers was approximately 22% and 30% of our
product revenue in the three months ended June 30, 2021 and 2020, respectively.
Revenue from sales to enterprise customers was approximately 22% and 32% of our
product revenue in the six months ended June 30, 2021 and 2020, respectively.
These sales were made through both our direct sales team and indirect sales
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 hardware and software maintenance and support ("maintenance revenue") and network design, installation and other professional services ("professional services revenue").
Service revenue for the three and six months ended
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Increase
Three months ended from prior year
June 30, June 30,
2021 2020 $ %
Maintenance $ 72,437 $ 68,623 $ 3,814 5.6 %
Professional services 25,644 21,008 4,636 22.1 %
$ 98,081 $ 89,631 $ 8,450 9.4 %
Increase
Six months ended from prior year
June 30, June 30,
2021 2020 $ %
Maintenance $ 141,142 $ 129,691 $ 11,451 8.8 %
Professional services 51,822 42,023 9,799 23.3 %
$ 192,964 $ 171,714 $ 21,250 12.4 %
Segment service revenue for the three and six months ended
Three months ended June 30, 2021 Three months ended June 30, 2020
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Maintenance $ 57,986 $ 14,451
19,074 6,570 25,644 16,744 4,264 21,008
Total service revenue $ 77,060 $ 21,021 $ 98,081 $ 74,597 $ 15,034 $ 89,631
Six months ended June 30, 2021 Six months ended June 30, 2020
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Maintenance $ 112,659 $ 28,483 $ 141,142 $ 113,409 $ 16,282 $ 129,691
Professional services 39,671 12,151 51,822 35,009 7,014 42,023
Total service revenue $ 152,330 $ 40,634 $ 192,964 $ 148,418 $ 23,296 $ 171,714
The increase in maintenance revenue in the three months ended June 30, 2021
compared to the three months ended June 30, 2020 was primarily attributable to
approximately $4 million of higher revenue from our IP Optical Networks segment.
The increase in maintenance revenue in the six months ended June 30, 2021
compared to the six months ended June 30, 2020 was primarily due to
approximately $12 million of higher revenue from our IP Optical Networks
segment, partially offset by approximately $1 million of lower revenue from our
Cloud and Edge segment. The increase in IP Optical Networks maintenance revenue
in the six months ended June 30, 2021 was partially attributable to the
inclusion of a full half-year of revenue in the current year period, compared to
four months of revenue in the prior year period.
The increase in professional services revenue in the three months ended June 30,
2021 compared to the three months ended June 30, 2020 was equally attributable
to Cloud and Edge and IP Optical Networks segments, each of which accounted for
approximately $2 million of higher revenue in the current year quarter compared
to the same prior year quarter. The increase in professional services revenue in
the six months ended June 30, 2021 compared to the six months ended June 30,
2020 was attributable to approximately $5 million from each of our segments. The
increase in IP Optical Networks professional services revenue in the six months
ended June 30, 2021 was partially attributable to the inclusion of a full
half-year of revenue in the current year period, compared to four months of
revenue in the prior year period.
The following customer contributed 10% or more of our revenue in the three and
six month periods ended
48
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and 2020:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
Customer 2021 2020 2021 2020
Verizon Communications Inc. 17% 15% 16% 14%
Revenue from customers domiciled outside the United States was approximately 52%
of revenue in both the three months ended June 30, 2021 and 2020, and
approximately 55% and 51% of revenue in the six months ended June 30, 2021 and
2020, respectively. Due to the timing of project completions, we expect that the
domestic and international components as a percentage of revenue may fluctuate
from quarter to quarter and year to year.
Our deferred product revenue was approximately $7 million and $8 million at June
30, 2021 and December 31, 2020 , respectively. Our deferred service revenue was
approximately $117 million and $115 million at June 30, 2021 and December 31,
2020 , respectively. Our deferred revenue balance may fluctuate because of the
timing of revenue recognition, customer payments, maintenance contract renewals,
contractual billing rights and maintenance revenue deferrals included in
multiple element arrangements.
We expect that our total revenue in 2021 will increase compared to 2020 as a result of both increased customer spend and continued cross-selling opportunities.
Cost of Revenue/Gross Margin. Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased materials and services, royalties, inventory valuation adjustments, warranty costs, and manufacturing and services personnel and related costs. Our cost of revenue and gross margins for the three and six months endedJune 30, 2021 and 2020 were as follows (in thousands, except percentages): Decrease Three months ended from prior year June 30, June 30, 2021 2020 $ % Cost of revenue Product$ 46,641 $ 50,579 $ (3,938) (7.8) % Service 36,142 36,647 (505) (1.4) % Total cost of revenue$ 82,783 $ 87,226 $ (4,443) (5.1) % Gross margin Product 58.8 % 58.2 % Service 63.2 % 59.1 % Total gross margin 60.8 % 58.6 % Increase Six months ended from prior year June 30, June 30, 2021 2020 $ % Cost of revenue Product$ 91,086 $ 86,558 $ 4,528 5.2 % Service 73,922 68,126 5,796 8.5 % Total cost of revenue$ 165,008 $ 154,684 $ 10,324 6.7 % Gross margin Product 56.8 % 56.0 % Service 61.7 % 60.3 % Total gross margin 59.2 % 58.0 %
Our segment cost of revenue and gross margins for the three and six months ended
49
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Three months ended June 30, 2021 Three months ended June 30, 2020
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Product $ 19,112 $ 27,529 $ 46,641 $ 21,714 $ 28,865 $ 50,579
Service 26,846 9,296 36,142 26,602 10,045 36,647
Total cost of revenue $ 45,958 $ 36,825 $ 82,783 $ 48,316 $ 38,910 $ 87,226
Product 70.3 % 43.6 % 58.8 % 70.0 % 40.5 % 58.2 %
Service 65.2 % 55.8 % 63.2 % 64.3 % 33.2 % 59.1 %
Total gross margin 67.5 % 47.2 % 60.8 % 67.1 % 38.8 % 58.6 %
Six months ended June 30, 2021 Six months ended June 30, 2020
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Product $ 32,533 $ 58,553 $ 91,086 $ 43,251 $ 43,307 $ 86,558
Service 54,685 19,237 73,922 54,318 13,808 68,126
Total cost of revenue $ 87,218 $ 77,790 $ 165,008 $ 97,569 $ 57,115 $ 154,684
Product 71.6 % 39.3 % 56.8 % 65.8 % 38.3 % 56.0 %
Service 64.1 % 52.7 % 61.7 % 63.4 % 40.7 % 60.3 %
Total gross margin 67.3 % 43.3 % 59.2 % 64.5 % 38.9 % 58.0 %
Our product gross margin increased in the three months ended June 30, 2021
compared to the three months ended June 30, 2020 , primarily due to margin
improvement in our IP Optical Networks segment. The increase in product gross
margin of our IP Optical Networks segment was primarily attributable to customer
geography and product mix. The increase in our product gross margin in the six
months ended June 30, 2021 compared to the six months ended June 30, 2020 was
primarily due to margin improvement in our Cloud and Edge segment. This increase
was primarily attributable to the impact of the Kandy Sale and, to a lesser
extent, customer and product mix. We also had margin improvement in our IP
Optical Networks segment in the six months ended June 30, 2021 compared to the
same prior year period from the ECI Acquisition Date to June 30, 2020 .
The increase in our service gross margin in both the three and six months ended
June 30, 2021 compared to the three and six months ended June 30, 2020 was
primarily due to margin improvement in both of our segments. Our Cloud and Edge
segment's margin improvement was primarily due to lower fixed costs, while the
margin improvement in our IP Optical Networks segments was primarily
attributable to the segment's higher revenue in the current year periods against
its fixed cost base.
We believe that our total gross margin will decrease slightly in 2021 compared
to 2020, primarily due to higher expected sales from IP Optical Networks, which
have historically lower margins due to the higher hardware content in their
products.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and related personnel expenses and prototype costs for the
design, development, testing, and enhancement of our products. Research and
development expenses for the three and six months ended June 30, 2021 and 2020
were as follows (in thousands, except percentages):
Increase (decrease)
from prior year
June 30, June 30,
2021 2020 $ %
Three months ended $ 46,797 $ 51,796 $ (4,999) (9.7) %
Six months ended $ 94,207 $ 94,091 $ 116 0.1 %
The decrease in research and development expenses in the three months ended June
30, 2021 compared to the three months ended June 30, 2020 was primarily
attributable to approximately $6 million of lower expenses in our Cloud and Edge
segment,
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all primarily employee-related and product development costs, partially offset
by approximately
Our research and development expenses were essentially flat in the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 , with lower expenses in our Cloud and Edge segment related to the sale of Kandy. These reductions were partially offset by higher expenses in our IP Optical Networks segment, primarily due to the inclusion of a half-year of IP Optical Networks expense compared to only four months of expense in the prior year period, principally for employee- and infrastructure-related and product development costs. Some aspects of our research and development efforts require significant short-term expenditures, the timing of which may cause significant variability in our expenses. We believe that rapid technological innovation is critical to our long-term success, and we are tailoring our investments to meet the requirements of our customers and market. We believe that our research and development expense in 2021 will increase compared to 2020, primarily due to incremental investment in our IP Optical Networks segment to address the global market opportunity. Sales and Marketing Expenses. Sales and marketing expenses primarily consist of salaries and related personnel costs, commissions, travel and entertainment expenses, promotions, customer trial and evaluations inventory, and other marketing and sales support expenses. Sales and marketing expenses for the three and six months endedJune 30, 2021 and 2020 were as follows (in thousands, except percentages): Increase from prior year June 30, June 30, 2021 2020 $ % Three months ended$ 34,881 $ 33,898 $
983 2.9 %
Six months ended $ 72,099 $ 64,869 $ 7,230 11.1 %
The increase in sales and marketing expenses in the three months ended June 30,
2021 compared to the three months ended June 30, 2020 was primarily attributable
to approximately $2 million of higher expenses in our IP Optical Networks
segment, primarily for employee-related costs, partially offset by approximately
$1 million of lower expense in our Cloud and Edge segment, primarily for
employee-related costs.
The increase in sales and marketing expenses in the six months ended June 30,
2021 compared to the six months ended June 30, 2020 was primarily attributable
to the inclusion of a full half-year of IP Optical Networks expense, compared to
only four months of expense in the prior year period, which added approximately
$11 million in sales and marketing expenses, principally employee- and
infrastructure-related costs. This increase was partially offset by
approximately $4 million of lower expenses in our Cloud and Edge segment,
primarily employee-related and marketing costs.
We believe that our sales and marketing expenses will increase modestly in 2021
compared with 2020, primarily due to higher employee-related expenses and higher
costs, assuming COVID-19 restrictions continue to ease.
General and Administrative Expenses. General and administrative expenses consist
primarily of salaries and related personnel costs for executive and
administrative personnel, and audit, legal and other professional fees. General
and administrative expenses for the three and six months ended June 30, 2021 and
2020 were as follows (in thousands, except percentages):
Decrease
from prior year
June 30, June 30,
2021 2020 $ %
Three months ended $ 12,734 $ 15,094 $ (2,360) (15.6) %
Six months ended $ 28,287 $ 32,299 $ (4,012) (12.4) %
The decrease in general and administrative expenses in the three months ended
June 30, 2021 compared to the three months ended June 30, 2020 was primarily
attributable to approximately $2 million of lower professional fees and
approximately $1 million of lower employee-related expenses. The reduction in
professional fees in the three months ended June 30, 2021 was attributable to
both of our segments, while the reduction in employee-related expenses was
attributable to our IP Optical Networks segment.
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The decrease in general and administrative expenses in the six months ended June
30, 2021 compared to the six months ended June 30, 2020 was primarily
attributable to the absence in the current year period of approximately $2
million of litigation-related expense in our Cloud and Edge segment, coupled
with approximately $2 million of lower professional fees (i.e., consulting,
legal and audit fees) and approximately $1 million of net reductions in other
Cloud and Edge expenses. These reductions were partially offset by approximately
$1 million of IP Optical Networks expense, principally for employee-related
costs
We believe that our general and administrative expenses in 2021 will be consistent with our 2020 levels and decline in future years as we realize additional integration synergies.
Amortization of Acquired Intangible Assets. Amortization of acquired intangible assets for the three and months endedJune 30, 2021 and 2020 was as follows (in thousands, except percentages): Increase from prior year June 30, June 30, 2021 2020 $ % Three months ended$ 17,181 $ 14,669 $ 2,512 17.1 % Six months ended$ 33,004 $ 29,003 $ 4,001 13.8 % The increase in amortization of acquired intangible assets in both the three and six months endedJune 30, 2021 compared to the same prior year periods was primarily due to the recognition of such expense in relation to expected future cash flows; accordingly, amortization of intangible assets is not recorded on a straight-line basis, coupled with the inclusion of amortization expense for the full half-year in 2021, compared to four months of expense in the same prior year period. Acquisition-, Disposal- and Integration-Related Expenses. Acquisition-, disposal- and integration-related expenses include those expenses related to acquisitions that we would otherwise not have incurred. Acquisition- and disposal-related expenses include professional and services fees, such as legal, audit, consulting, paying agent and other fees. Integration-related expenses represent incremental costs related to combining our systems and processes with those of acquired businesses, such as third-party consulting and other third-party services.
Our acquisition-, disposal- and integration-related expenses for the three and
six months ended
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2021 2020 2021 2020
Professional and services fees (acquisition-related)
Professional and services fees (disposal-related) - - 241 -
Integration-related expenses 909 217 1,865 227
$ 1,052 $ 857 $ 2,249 $ 13,241
Our acquisition-related expenses in the three and six months ended June 30, 2020
primarily relate to the ECI Acquisition. The disposal-related expenses in the
six months ended June 30, 2021 relate to the Kandy Sale. Acquisition-, disposal-
and integration-related expenses are reported separately in the condensed
consolidated statements of operations.
Restructuring and Related Expense. We have been committed to streamlining our
operations and reducing operating costs by closing and consolidating certain
facilities and reducing our worldwide workforce. Please see the additional
discussion of our restructuring initiatives in the "Restructuring and Cost
Reduction Initiatives" section of the Overview of this MD&A.
We recorded restructuring and related expense of $2.8 million and $8.8 million
in the three and six months ended June 30, 2021 , respectively. We recorded
restructuring and related expense of $5.4 million and $7.4 million in the three
and six months ended June 30, 2020 , respectively. Although we have eliminated
positions as part of our restructuring initiatives, we continue to hire in
certain areas that we believe are important to our future growth. Restructuring
and related expense is reported separately in the condensed consolidated
statements of operations.
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Interest Expense, Net. Interest income and interest expense for the three and
six months ended June 30, 2021 and 2020 were as follows (in thousands, except
percentages):
Increase decrease)
Three months ended from prior year
June 30, June 30,
2021 2020 $ %
Interest income $ 1,259 $ 98 $ 1,161 1,184.7 %
Interest expense (4,307) (5,498) (1,191) (21.7) %
$ (3,048) $ (5,400) $ (2,352) (43.6) %
Increase
Six months ended from prior year
June 30, June 30,
2021 2020 $ %
Interest income $ 2,744 $ 416 $ 2,328 559.6 %
Interest expense (11,611) (9,211) 2,400 26.1 %
$ (8,867) $ (8,795) $ 72 0.8 %
Interest income in both the three and six months ended June 30, 2021 was
primarily due to the paid-in-kind interest on the Debentures, which was recorded
as an increase to the fair value of the Debentures. Interest expense in the
three and six months ended June 30, 2021 was comprised of interest and debt
issuance costs in connection with the 2020 Credit Facility (as defined below),
including the write-off of $2.5 million of capitalized debt insurance costs in
connection with the Third Amendment (as defined below), coupled with interest on
finance leases.
Interest income in the three and six months ended June 30, 2020 primarily
represents interest earned on the outstanding note receivable arising from
litigation that was settled in 2019. Interest expense in the three and six
months ended June 30, 2020 was comprised of interest and debt issuance costs in
connection with the 2020 Credit Facility, interest on other borrowings and
finance leases, and interest expense recorded in connection with the factoring
of certain accounts receivable. Interest expense in the six months ended June
30, 2020 also included the write-off of debt issuance costs in connection with
the retirement of the 2019 Credit Facility.
Income Taxes. We recorded provisions for income taxes of $4.7 million and $2.2
million in the six months ended June 30, 2021 and 2020, respectively. These
amounts reflect our estimates of the effective rates expected to be applicable
for the respective full fiscal years, adjusted for any discrete events, which
are recorded in the period that they occur. These estimates are reevaluated each
quarter based on our estimated tax rate for the full fiscal year. The estimated
effective tax rate includes the impact of valuation allowances in various
jurisdictions.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial position, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Liquidity and Capital Resources
Our condensed consolidated statements of cash flows are summarized as follows
(in thousands):
Six months ended
June 30, June 30,
2021 2020 Change
Net loss $ (21,446)
64,343 49,506 14,837
Changes in operating assets and liabilities (34,867) 28,627 (63,494)
Net cash provided by operating activities $ 8,030 $ 36,712 $ (28,682)
Net cash used in investing activities $ (7,626) $ (318,243) $ 310,617
Net cash (used in) provided by financing activities $ (20,858) $ 331,074 $ (351,932)
53-------------------------------------------------------------------------------- Our cash and restricted cash aggregated approximately$115 million atJune 30 , 2021and$136 million atDecember 31, 2020 . These amounts included cash and restricted cash aggregating approximately$32 million atJune 30, 2021 and$46 million atDecember 31, 2020 held by our non-U.S. subsidiaries. If we elected to repatriate all excess funds held by our non-U.S. subsidiaries as ofJune 30, 2021 , we do not believe that the amounts of potential withholding taxes that would arise from the repatriation would have a material effect on our liquidity. We currently maintain the Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), by and among us, as a guarantor,Ribbon Communications Operating Company, Inc. , as the borrower ("Borrower"),Citizens Bank, N.A. ("Citizens"), as administrative agent, a lender, issuing lender, swingline lender, joint lead arranger and bookrunner,Santander Bank, N.A ., as a lender, joint lead arranger and bookrunner, and the other lenders party thereto (each, together withCitizens Bank, N.A. andSantander Bank, N.A ., referred to individually as a "Lender", and collectively, the "Lenders"). For additional details regarding the terms of the 2020 Credit Facility, see Note 10 to our condensed consolidated financial statements. OnMarch 3, 2021 (the "Third Amendment Effective Date"), we entered into a Third Amendment to Credit Agreement (the "Third Amendment"), which further amended the 2020 Credit Facility. The Third Amendment provided for an incremental term loan facility to us in the original principal amount of$74.6 million , the proceeds of which were used on the Third Amendment Effective Date to consummate an open market purchase of all outstanding amounts under the Term B Loan. Upon the consummation of the open market purchase, the Term B Loans were assigned to the Borrower and immediately canceled, such that the outstanding amount under the Term A Loan and incremental term loan facility were combined and held by the Lenders (the "2020 Term Loan"). We are required to make quarterly principal payments on the 2020 Term Loan aggregating approximately$20 million per year in the first three years and$30 million in the fourth year, with the final payment approximating$300 million due on the maturity date. AtJune 30, 2021 , we had an outstanding 2020 Term Loan balance of$385.5 million at an average interest rate of 3.40% and$6.4 million of letters of credit outstanding with an interest rate of 2.50%. We were in compliance with all covenants of the 2020 Credit Facility at bothJune 30, 2021 andDecember 31, 2020 . We are exposed to financial market risk related to foreign currency fluctuations and changes in interest rates. These exposures are actively monitored by management. To manage the volatility related to the exposure to changes in interest rates, we have entered into a derivative financial instrument. Management's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates. Our policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. We do not hold or issue derivative financial instruments for trading or speculative purposes. As a result of exposure to interest rate movements, duringMarch 2020 , we entered into an interest rate swap arrangement, which effectively converted our$400 million term loan with its variable interest rate based upon one-month LIBOR to an aggregate fixed rate of 0.904%, plus a leverage-based margin as defined in the 2020 Credit Facility. The notional amount of this swap as ofJune 30, 2021 was$400 million , and the swap matures onMarch 3, 2025 , the same date the 2020 Credit Facility matures. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we are using an interest rate swap as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) in the condensed consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the three and six months endedJune 30, 2021 and 2020, such a derivative was used to hedge the variable cash flows associated with the 2020 Credit Facility. Any ineffective portion of the change in fair value of the derivative would be recognized directly in earnings. However, during the three and six months endedJune 30, 2021 and 2020, we recorded no hedge ineffectiveness. Amounts reported in accumulated other comprehensive income (loss) related to our derivative will be reclassified to interest expense as interest is accrued on our variable-rate debt. Based upon projected forward rates, we estimate as ofJune 30, 2021 that$3.2 million may be reclassified as an increase to interest expense over the next 12 months. 54 -------------------------------------------------------------------------------- From time to time, we enter into uncommitted and unsecured short-term loans to finance exports inChina . We did not have any such short-term loans outstanding atJune 30, 2021 andDecember 31, 2020 . We use letters of credit, performance and bid bonds in the course of our business. AtJune 30, 2021 , we had bank guarantees, performance and bid bonds under various uncommitted facilities (collectively, the "Guarantees") aggregating$24.9 million , and$6.4 million of letters of credit under the 2020 Credit Facility (the "Letters of Credit"). AtDecember 31, 2020 , we had Guarantees aggregating$27.0 million and$5.6 million of Letters of Credit. AtJune 30, 2021 andDecember 31, 2020 , we had cash collateral of$2.6 million and$2.7 million , respectively, supporting the Guarantees, which are included in Restricted cash in our condensed consolidated balance sheets. In the second quarter of 2019, our Board of Directors (the "Board") approved a stock repurchase program pursuant to which we could repurchase up to$75 million of the Company's common stock prior toApril 18, 2021 . Repurchases under the program could be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases depending on the market conditions and corporate discretion. This program did not obligate us to acquire any particular amount of common stock and the program could have been extended, modified, suspended or discontinued at any time at the Board's discretion. We did not repurchase any shares during the six months endedJune 30, 2021 or the year endedDecember 31, 2020 . AtDecember 31, 2020 , we had$70.5 million remaining under the Repurchase Program for future repurchases. The Repurchase Program expired onApril 18, 2021 .
Cash Flows from Operating Activities
Our operating activities provided
Cash provided by operating activities in the six months endedJune 30, 2021 was primarily the result of lower accounts receivable and other operating assets, and slightly higher deferred revenue, coupled with our non-cash operating activities. These amounts were partially offset by our net loss, lower accrued expenses and other long-term liabilities, lower accounts payable and higher inventory. Our lower accounts receivable reflected typical mid-year seasonality. The decrease in accrued expenses and other long-term liabilities was primarily due to the cash payments related to our employee cash bonus program, facilities, professional fees and royalties. Cash provided by operating activities in the six months endedJune 30, 2020 was primarily the result of lower accounts receivable, other operating assets and inventory, higher accrued expenses and other long-term liabilities, and our non-cash operating activities. These amounts were partially offset by our net loss and lower accounts payable. Our lower accounts receivable primarily reflected typical mid-year seasonality. The decrease in other operating assets was primarily due to the scheduled payment received in connection with a litigation settlement in 2019. The increase in accrued expenses and other long-term liabilities was primarily due to the derivative liability we recorded in connection with our interest rate swap, which we entered into in the first quarter of 2020.
Cash Flows from Investing Activities
Our investing activities used$7.6 million of cash in the six months endedJune 30, 2021 , comprised of$10.6 million to purchase property and equipment, partially offset by$2.9 million of proceeds from the sale of our QualiTech business, which operates compliance testing laboratories inIsrael for reliability and standardization testing for the high-tech industry, including testing in medical equipment, military equipment and vehicles. Our investing activities used$318.2 million of cash in the six months endedJune 30, 2020 , comprised of$346.9 million of cash paid as cash consideration for ECI and$14.9 million of investments in property and equipment. These amounts were partially offset by$43.5 million of cash proceeds from the sale of land in connection with the ECI Acquisition.
Cash Flows from Financing Activities
Our financing activities used$20.9 million of cash in the six months endedJune 30, 2021 . We received$74.6 million of proceeds from the incremental loan obtained in connection with the Third Amendment, which amount was used to consummate an open market purchase of all outstanding amounts under the Term B Loan. In addition, we used$12.1 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting, and$82.1 million of principal payments of term debt, including the$74.6 million payoff of the Term B Loan in connection with the Third Amendment,$0.8 million of payments of debt issuance costs and$0.5 million for principal payments of finance leases. 55 -------------------------------------------------------------------------------- Our financing activities provided$331.1 million of cash in the six months endedJune 30, 2020 , primarily due to$403.5 million of proceeds from term debt, which was comprised of$400.0 million of proceeds from the 2020 Credit Facility and$3.5 million of proceeds from short-term loans inChina for the financing of certain export activities. We also recorded$0.6 million of borrowings under the 2020 Credit Facility. These proceeds were partially offset by the repayment of amounts outstanding under the 2019 Credit Facility aggregating$56.7 million at the time we entered into the 2020 Credit Facility,$10.6 million for the payment of debt issuance costs in connection with the 2020 Credit Facility,$0.8 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting and$0.7 million for principal payments of finance leases. Based on our current expectations, we believe our current cash and available borrowings 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. The rate at which we consume cash is dependent on the cash needs of our future operations. We anticipate devoting substantial capital resources to continue our research and development efforts, to maintain our sales, support and marketing, to complete acquisition-related integration activities and for other general corporate activities. We further believe that our financial resources, along with managing discretionary expenses, will allow us to manage the anticipated impact of the COVID-19 pandemic on our business operations. Looking ahead, we have developed contingency plans to reduce costs further if the situation continues to deteriorate. The challenges posed by the COVID-19 pandemic on our business continue to evolve rapidly. Consequently, we continue to evaluate our financial position in light of future developments, particularly those relating to the COVID-19 pandemic. However, it is difficult to predict future liquidity requirements with certainty, and our cash and available borrowings under the 2020 Credit Facility may not be sufficient to meet our future needs, which would require us to refinance our debt and/or obtain additional financing. We may not be able to refinance our debt or obtain additional financing on favorable terms or at all.
Recent Accounting Pronouncements
The
The FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes ("ASU 2019-12"), which modifies ASC 740 to simplify
the accounting for income taxes. ASU 2019-12 addresses the accounting for hybrid
tax regimes, tax basis step-up in goodwill obtained in a transaction that is not
a business combination, separate financial statements of legal entities not
subject to tax, intraperiod tax allocation exception to incremental approach,
ownership changes in investments - changes from a subsidiary to an equity method
investment, ownership changes in investments - changes from an equity method
investment to a subsidiary, interim period accounting for enacted changes in tax
law and year-to-date loss limitation in interim period tax accounting.
The FASB issued the following accounting pronouncement, which we do not believe
will have a material impact on our condensed consolidated financial statements
upon adoption:
In January 2021 , the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):
Scope ("ASU 2021-01"), which refines the scope of Accounting Standards
Codification 848, Reference Rate Reform ("ASC 848") and clarifies some of its
guidance as part of the FASB's monitoring of global reference rate reform
activities. ASU 2021-01 permits entities to elect certain optional expedients
and exceptions when accounting for derivative contracts and certain hedging
relationships affected by changes in the interest rates used for discounting
cash flows, for computing variation margin settlements, and for calculating
price alignment interest in connection with reference rate reform activities
under way in global financial markets (the "discounting transition"). ASU
2021-01 is effective for us prospectively in any period through December 31,
2022 that a modification is made to the terms of the derivatives affected by the
discounting transition.
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