Washington, D.C. 20549
SYNCHRONOSS TECHNOLOGIES, INC.
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
SYNCHRONOSS TECHNOLOGIES, INC.
SYNCHRONOSS TECHNOLOGIES, INC.
SYNCHRONOSS TECHNOLOGIES, INC.
1. Description of Business
Synchronoss Technologies, Inc. (the(“Synchronoss” or the “Company” or “Synchronoss”) is a leading innovatorglobal software and services company that provides essential technologies for the mobile transformation of business. The Company’s portfolio, which is targeted at the Consumer and Enterprise markets, contains offerings such as personal cloud, solutions, software-based activation, secure mobility,secure-mobility, identity management and securescalable messaging for mobile carriers, enterprises, retailers and OEMs across the globe. Synchronoss’ software provides innovative service provider and enterprise solutions that drive billions of transactions on a wide range of connected devices across the world’s leading networks. The Company’s solutions include: activation and provisioning software for devices and services, cloud-based sync, backup, storage and content management capabilities, broadband connectivity solutions, analytics, white label messaging, identity/access management and secure mobility management that enable communications service providers (CSPs), cable operators/multi-services operators (MSOs) and original equipment manufacturers (OEMs) with embedded connectivity (e.g. smartphones, laptops, tablets and mobile Internet devices (MIDs), such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers, medium and large enterprises and their consumers as well as other customers to accelerate and monetize value-added services for secure and broadband networks and connected devices.
The condensed consolidated financial statements include the accounts of the Company, its wholly‑ownedwholly-owned subsidiaries and variable interest entities (VIE)(“VIE”) in which the Company is the primary beneficiary and entities in which the Company has a controlling interest. TheInvestments in less than majority-owned companies in which the Company has no unconsolidated subsidiaries or investmentsdoes not have a controlling interest, but does have significant influence, are accounted for underas equity method investments. Investments in less than majority-owned companies in which the equityCompany does not have the ability to exert significant influence over the operating and financial policies of the investee are accounted for using the cost method. All material intercompany transactions and accounts are eliminated in consolidation. The results reported in these consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. Certain amounts from the prior year’s financial statements have been reclassified to conform to the current year’s presentation.
For further information about the Company’s basis of presentation and consolidation or its significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual reportAnnual Report on Form 10-K for the year ended December 31, 2015.2017.
The Company utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company'sCompany’s marketable securities investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No transfers of assets between Level 1, Level 2 and Level 3 of the fair value measurement hierarchy occurred during the ninethree months ended September 30, 2016.March 31, 2018.
Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders'stockholders’ equity. There were no sales of marketable securities during the quarters ended March 31, 2018 and 2017. The cost of securities sold is based on the specific identification method. The Company evaluates investments with unrealized losses to determine if the losses are other than temporary. The Company has determined that the gross unrealized losses as of September 30, 2016at March 31, 2018 and December 31, 20152017 are temporary. In making this determination, the Company considered the financial condition, credit ratings and near-term prospects of the issuers, the underlying collateral of the investments, and the magnitude of the losses as compared to the cost and the length of time the investments have been in an unrealized loss position. Additionally, while the Company classifies the securities as available-for-sale,available for sale, the Company does not currently intend to sell such investments and it is more likely than not to recover the carrying value prior to being required to sell such investments.
The changes in fair value of the Company’s Level 3 redeemable noncontrolling interests during the ninethree months ended September 30, 2016March 31, 2018 were as follows:
5. AcquisitionInvestments Affiliates and Related Transactions
Acquisition-related costs recognized during the nine months ended September 30, 2016 and 2015 including transaction costs such as legal, accounting, valuation and other professional services, were $2.9 million and $1.0 million, respectively and are included in the selling, general and administrative expenses on the condensed consolidated statements of income. | |
(A) | The Company collected less than $0.1 million from STIN customers, on behalf of STIN, which remained outstanding as of March 31, 2018. This amount has been classified in short term restricted cash and in accrued expenses on the Condensed Consolidated Balance Sheets. |
| |
(B) | These amounts principally included revenues generated from the Cloud and Telephony Support Services agreement and pass-through of vendor expenses incurred during the transition and assignment of vendor contracts. |
6. Stockholders’ Equity
Stock-Based CompensationDebt
The following table summarizes information about stock-based compensation:Total debt consists of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Stock options | $ | 1,989 |
| | $ | 2,221 |
| | $ | 5,957 |
| | $ | 6,361 |
|
Restricted stock awards | 6,786 |
| | 5,776 |
| | 18,794 |
| | 14,398 |
|
ESPP Plan | 206 |
| | 150 |
| | 656 |
| | 475 |
|
Total stock-based compensation before taxes | $ | 8,981 |
| | $ | 8,147 |
| | $ | 25,407 |
| | $ | 21,234 |
|
Tax benefit | $ | 2,949 |
| | $ | 2,570 |
| | $ | 8,311 |
| | $ | 6,701 |
|
The total stock-based compensation cost related to unvested equity awards as of September 30, 2016 was approximately $73.4 million. The expense is expected to be recognized over a weighted-average period of approximately 2.65 years. |
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Convertible Senior Notes | $ | 230,000 |
| | $ | 230,000 |
|
Unamortized debt issuance costs (1) | (1,943 | ) | | (2,296 | ) |
Total debt, carrying value | $ | 228,057 |
| | $ | 227,704 |
|
Total short term debt, carrying value | $ | — |
| | $ | — |
|
Total long-term debt, carrying value | $ | 228,057 |
| | $ | 227,704 |
|
| |
(1) | Unamortized debt issuance costs is related to Convertible Senior Notes. |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Stock Options
The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock options. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Expected stock price volatility | 46 | % | | 46 | % | | 45 | % | | 48 | % |
Risk-free interest rate | 1.27 | % | | 1.27 | % | | 1.16 | % | | 1.26 | % |
Expected life of options (in years) | 3.98 |
| | 3.98 |
| | 4.00 |
| | 4.00 |
|
Expected dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % |
Weighted-average fair value (grant date) of the options | $ | 15.53 |
| | $ | 15.53 |
| | $ | 11.08 |
| | $ | 16.54 |
|
The following table summarizes information about stock options outstanding as of September 30, 2016:
|
| | | | | | | | | | | | | |
Options | | Number of Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding at December 31, 2015 | | 2,348 |
| | $ | 31.04 |
| | | | |
Options Granted | | 862 |
| | 30.85 |
| | | | |
Options Exercised | | (432 | ) | | 21.74 |
| | | | |
Options Cancelled | | (169 | ) | | 36.38 |
| | | | |
Outstanding at September 30, 2016 | | 2,609 |
| | $ | 32.17 |
| | 4.76 | | $ | 24,664 |
|
Vested at September 30, 2016 | | 2,445 |
| | $ | 32.08 |
| | 4.68 | | $ | 23,261 |
|
Exercisable at September 30, 2016 | | 1,129 |
| | $ | 29.97 |
| | 3.08 | | $ | 13,049 |
|
The below table summarizes additional information related to stock options:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Total intrinsic value for stock options exercised | $ | 2,157 |
| | $ | 3,597 |
| | $ | 5,796 |
| | $ | 15,141 |
|
Fair value of vested options | 3,571 |
| | 2,064 |
| | 27,241 |
| | 18,741 |
|
Awards of Restricted Stock and Performance Stock
A summary of the Company’s unvested restricted stock at September 30, 2016, and changes during the nine months ended September 30, 2016, is presented below:
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| | | | | | | |
Non-Vested Restricted Stock | | Number of Awards | | Weighted- Average Grant Date Fair Value |
Non-vested at December 31, 2015 | | 1,412 |
| | $ | 36.80 |
|
Granted | | 907 |
| | 33.90 |
|
Vested | | (569 | ) | | 35.68 |
|
Forfeited | | (134 | ) | | 38.85 |
|
Non-vested at September 30, 2016 | | 1,616 |
| | $ | 35.40 |
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Employee Stock Purchase Plan
On February 1, 2012, the Company established a ten year Employee Stock Purchase Plan (“ESPP” or “the Plan”) for certain eligible employees. The Plan is to be administered by the Company’s Board of Directors. The total number of shares available for purchase under the Plan is 500 thousand shares of the Company’s Common Stock. Employees participate over a six month period through payroll withholdings and may purchase, at the end of the six month period, the Company’s Common Stock at the lower of 85% of the fair market value on the first day of the offering period or the fair market value on the purchase date. No participant will be granted a right to purchase Common Stock under the Plan if such participant would own more than 5% of the total combined voting power of the Company. In addition, no participant may purchase more than a thousand shares of Common Stock within any purchase period or with a value greater than $25 thousand in any calendar year.
Treasury Stock
On February 4, 2016, the Company's Board of Directors authorized a stock repurchase program to purchase up to $100 million of the Company's outstanding Common Stock. Under the program, the Company may purchase shares of its Common Stock in the open market, through block trades or otherwise at prices deemed appropriate by the Company. The timing and amount of repurchase transactions under the program will depend on available working capital and other factors as determined by the Board of Directors and management.
As of September 30, 2016, a total of 1.3 million shares have been purchased under the program for an aggregate purchase price of $40 million. The Company classifies Common Stock repurchased as Treasury Stock on its balance sheet.
7. Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) was as follows:
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) attributable to Synchronoss | $ | 7,676 |
| | $ | 9,645 |
| | $ | (4,717 | ) | | $ | 35,360 |
|
Translation adjustments | 2,645 |
| | (971 | ) | | 6,089 |
| | (11,681 | ) |
Unrealized gain on securities, (net of tax) | 147 |
| | 255 |
| | 145 |
| | 389 |
|
Net income (loss) on intra-entity foreign currency transactions, (net of tax) | 300 |
| | 65 |
| | 662 |
| | (2,047 | ) |
Total comprehensive income attributable to Synchronoss | $ | 10,768 |
| | $ | 8,994 |
| | $ | 2,179 |
| | $ | 22,021 |
|
The changes in accumulated other comprehensive income (loss) during the nine months ended September 30, 2016, are as follows:
|
| | | | | | | | | | | | | | | |
| Foreign Currency | | Unrealized (Loss) Income on Intra-Entity Foreign Currency Transactions | | Unrealized Holding Gains (Losses) on Available-for-Sale Securities | | Total |
Balance at December 31, 2015 | $ | (34,092 | ) | | $ | (4,292 | ) | | $ | (300 | ) | | $ | (38,684 | ) |
Other comprehensive income | 6,089 |
| | 809 |
| | 305 |
| | 7,203 |
|
Tax effect | — |
| | (147 | ) | | (160 | ) | | (307 | ) |
Total comprehensive income | 6,089 |
|
| 662 |
|
| 145 |
|
| 6,896 |
|
Balance at September 30, 2016 | $ | (28,003 | ) |
| $ | (3,630 | ) |
| $ | (155 | ) |
| $ | (31,788 | ) |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
8. Goodwill and Intangibles
Goodwill
The Company records goodwill which represents the excess of the purchase price over the fair value of assets acquired, including other definite-lived intangible assets. Goodwill is reviewed annually for impairment or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
The changes in goodwill during the nine months ended September 30, 2016 are as follows:
|
| | | |
Balance at December 31, 2015 | $ | 221,271 |
|
Acquisition | 93,930 |
|
Reclassifications, adjustments and other | (3,033 | ) |
Translation adjustments | 3,017 |
|
Balance at September 30, 2016 | $ | 315,185 |
|
The reclassification adjustment of $3.0 million is primarily related to a change in the Company’s deferred tax asset in connection with a pre-acquisition tax loss.
Other Intangible Assets
Intangible assets consist primarily of trade names, technology, and customer lists and relationships. These intangible assets are amortized on the straight‑line method over the estimated useful life. Amortization expense for the nine months ended September 30, 2016 and the year ended December 31, 2015 was $35.0 million and $28.6 million, respectively.
The Company’s intangible assets consist of the following:
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| | | | | | | | | | | |
| September 30, 2016 |
| Cost | | Accumulated Amortization | | Net |
Trade name | $ | 2,541 |
| | $ | (2,012 | ) | | $ | 529 |
|
Technology | 162,744 |
| | (55,546 | ) | | 107,198 |
|
Customer lists and relationships | 137,645 |
| | (47,901 | ) | | 89,744 |
|
Capitalized software and patents | 23,874 |
| | (5,679 | ) | | 18,195 |
|
| $ | 326,804 |
|
| $ | (111,138 | ) |
| $ | 215,666 |
|
|
| | | | | | | | | | | |
| December 31, 2015 |
| Cost | | Accumulated Amortization | | Net |
Trade name | $ | 1,531 |
| | $ | (1,372 | ) | | $ | 159 |
|
Technology | 130,200 |
| | (35,336 | ) | | 94,864 |
|
Customer lists and relationships | 105,864 |
| | (33,969 | ) | | 71,895 |
|
Capitalized software and patents | 11,406 |
| | (4,002 | ) | | 7,404 |
|
| $ | 249,001 |
| | $ | (74,679 | ) | | $ | 174,322 |
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Estimated future amortization expense of its intangible assets for the next five years is as follows:
|
| | | |
Year ending December 31, | |
|
2016 | $ | 12,079 |
|
2017 | 49,338 |
|
2018 | 46,218 |
|
2019 | 38,984 |
|
2020 | 25,302 |
|
2021 | 13,161 |
|
9. Debt
Credit Facility
In September 2013, the Company entered into a Credit Agreement (the “Credit Facility”) with JP Morgan Chase Bank, N.A., as the administrative agent, Wells Fargo Bank, National Association, as the syndication agent and Capital One, National Association and KeyBank National Association, as co-documentation agents. The Credit Facility, which was used for general corporate purposes, was a $100 million unsecured revolving line of credit that matures on September 27, 2018. The Company paid a commitment fee in the range of 25 to 35 basis points on the unused balance of the revolving credit facility under the Credit Agreement. Synchronoss had the right to request an increase in the aggregate principal amount of the Credit Facility to $150 million.
Interest on the borrowings were based upon LIBOR plus a 2.25 basis point margin. All outstanding balances under the Credit Facility were repaid on July 7, 2016 and the Credit Facility was terminated and replaced with the Amended Credit Facility.
Amended Credit Facility
On July 7, 2016, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Administrative Agent”) and the several lenders party thereto (the “Amended Credit Facility”). The Amended Credit Facility, which will be used for general corporate purposes, is a $250 million unsecured revolving line of credit that matures on July 7, 2021, subject to terms and conditions set forth therein. The Company pays a commitment fee in the range of 15 to 30 basis points on the unused balance of the revolving credit facility under the Credit Agreement. Synchronoss has the right to request an increase in the aggregate principal amount of the Amended Credit Facility to $350 million.
Interest on the borrowing was based upon LIBOR plus a 1.99 basis point margin. As of September 30, 2016, the Company had an outstanding balance of $38 million on the Amended Credit Facility.
The Amended Credit Facility is subject to certain financial covenants. As of September 30, 2016, the Company was in compliance with all required covenants.
Interest expense and commitment fees under the Credit Facility and the Amended Credit Facility were as follows:
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Commitment fees | $ | 154 |
| | $ | 89 |
| | $ | 272 |
| | $ | 241 |
|
Interest expense | 230 |
| | — |
| | 753 |
| | — |
|
Convertible Senior Notes
On August 12, 2014, the Company issued $230.0 million aggregate principal amount of its 0.75% Convertible Senior Notes due in 2019 (the “2019 Notes”). The 2019 Notes mature on August 15, 2019, and bear interest at a rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. The Company accounted for the $230.0 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance which are presented net of the face value of the 2019 Notes on the balance sheet.Condensed Consolidated Balance Sheets.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The 2019 Notes are senior, unsecured obligations of the Company, and are convertible into shares of its common stock based on a conversion rate of 18.8072 shares per $1,000 principal amount of 2019 Notes which is equivalent to an initial conversion price of approximately $53.17 per share. The Company will satisfy any conversion of the 2019 Notes with shares of the Company’s common stock. The 2019 Notes are convertible at the note holders’ option prior to their maturity and if specified corporate transactions occur. The issue price of the 2019 Notes was equal to their face amount.
Holders of the 2019 Notes who convert their notes in connection with a qualifying fundamental change, as defined in the related indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, following the occurrence of a fundamental change, holders may require that the Company repurchase some or all of the 2019 Notes for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. As of September 30, 2016,March 31, 2018, none of these conditions existed with respect to the 2019 Notes and as a result, the 2019 Notes are classified as long term.
Included in the definition of a fundamental change is whether the Company’s common stock ceases to be listed or quoted on Nasdaq. In May 2018, trading of the Company’s common stock has been suspended on Nasdaq, however, it has not been delisted (see Note 13 - Subsequent Events Review).
The 2019 Notes are the Company’s direct senior unsecured obligations and rank equal in right of payment to all of the Company’s existing and future unsecured and unsubordinated indebtedness.
Interest expense for the Company’s 2019 Notes related to the contractual interest coupon is $0.4 million.
At September 30, 2016,March 31, 2018, the carrying amount of the liability was $225.9$228.1 million and the outstanding principal of the 2019 Notes was $230$230.0 million, with an effective interest rate of approximately 1.39%1.38%. The fair value of the 2019 Notes was $248.3$220.4 million at September 30, 2016.March 31, 2018. The fair value of the liability of the 2019 Notes was determined using a discounted cash flow model based on current market interest rates available to the Company. These inputs are corroborated by observable market data for similar liabilities and therefore classified within Level 2 of the fair-value hierarchy.
The Company is required to meet all SEC filing requirements and deadlines in order to be in compliance with the 2019 Notes. In the event that the Company does not meet the filing requirements, the noteholders are entitled to receive additional interest of 0.25% up to 180 days from the date of the notice of default and 0.50% thereafter up to 360 days. The Company may agree to pay additional interest to the holders by notifying holders and the trustee within 90 days from the notice of default. If the Company decides to pay that interest, but has not remedied the event within 360 days from the notice of default, it will be in default. If the Company fails to elect to pay that additional interest, it will be in default if it does not remedy the event within the 90 days period.
The Company received a notice of default from holders of more than 25% of the outstanding principal amount of the 2019 Notes on October 13, 2017. Based on the terms of the 2019 Notes, the Company will be obligated to begin paying additional interest starting January 11, 2018 (the 90th day following the Company’s receipt of the notice of default). The Company is required to record a derivative related to this contingent interest as a liability and expense in its financial statements due to the late filings of the Company’s quarterly reports on Form 10-Q in 2017. At March 31, 2018, the recorded contingent interest derivative liability within accrued expenses and corresponding interest expense was approximately $0.1 million.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Interest expense for
The following table summarizes the Company’s 2019 Notes related to the contractual interest coupon was:expense:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Contractual interest expense | $ | 431 |
| | $ | 431 |
| | $ | 1,294 |
| | $ | 1,293 |
|
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Amended Credit Facility | | | | |
Amortization of debt issuance costs | | $ | — |
| | $ | 748 |
|
Commitment fee | | — |
| | 25 |
|
Interest on borrowings | | — |
| | 24 |
|
2017 Term Facility | | | | |
Amortization of debt issuance costs | | — |
| | 616 |
|
Interest on borrowings | | — |
| | 7,348 |
|
Revolving Facility | | | | |
Amortization of debt issuance costs | | — |
| | 154 |
|
Commitment fee | | — |
| | 147 |
|
Interest on borrowings | | — |
| | — |
|
Convertible Senior Notes | | | | |
Amortization of debt issuance costs | | 353 |
| | 353 |
|
Interest on borrowings | | 431 |
| | 431 |
|
Additional interest on default | | 129 |
| | 288 |
|
Capital leases | | 242 |
| | 243 |
|
Other | | 92 |
| | 240 |
|
Total | | $ | 1,247 |
| | $ | 10,617 |
|
10.7. Accumulated Other Comprehensive Income/ (Loss)
The changes in accumulated other comprehensive (loss) during the three months ended March 31, 2018, were as follows:
|
| | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustment | | Unrealized (Loss) Income on Intra-Entity Foreign Currency Transactions | | Unrealized Holding Gains (Losses) on Available-for-Sale Securities | | Total |
Balance at December 31, 2017 | $ | (20,284 | ) | | $ | (3,085 | ) | | $ | (4 | ) | | $ | (23,373 | ) |
Other comprehensive (income) | 2,872 |
| | 786 |
| | (21 | ) | | 3,637 |
|
Tax effect | — |
| | 43 |
| | — |
| | 43 |
|
Total comprehensive (income) | 2,872 |
| | 829 |
| | (21 | ) | | 3,680 |
|
Balance at March 31, 2018 | $ | (17,412 | ) | | $ | (2,256 | ) | | $ | (25 | ) | | $ | (19,693 | ) |
8. Stockholders’ Equity
There were no significant changes to Company’s authorized capital stock and preferred stock during the period of March 31, 2018 from December 31, 2017.
Common Stock
Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held. Dividends on common stock will be paid when, and if, declared by the Company’s Board of Directors. No dividends have ever been declared or paid by the Company.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Preferred Stock
There were no shares of preferred stock outstanding as of December 31, 2017. The Board of Directors is authorized to issue preferred shares and has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of preferred stock.
On February 15, 2018, the Company issued Series A Convertible Participating Perpetual Preferred Stock (the “Series A Preferred Stock”), par value $0.0001 per share. As of March 31, 2018, there were 185 shares of Series A Preferred Stock outstanding. Prior to or contemporaneously with the consummation of the Preferred Transaction, Synchronoss agreed to file the Series A Certificate and enter into the Investor Rights Agreement with Silver setting forth certain registration, governance and preemptive rights of Silver with respect to Synchronoss discussed below.
In accordance with the terms of the PIPE Purchase Agreement with Silver on February 15, 2018, the Company exercised it’s option to complete the Preferred Transaction. In connection with the issuance of the Series A Preferred Stock, the Company (i) filed the Series A Certificate and (ii) entered into the Investor Rights Agreement. Pursuant to the PIPE Purchase Agreement, at the closing, the Company paid to Siris $5.0 million as a reimbursement of Silver’s reasonable costs and expenses incurred in connection with the Preferred Transaction. In connection with exeucution of the Preferred Transaction, Silver delivered 5,994,667 shares of Synchronoss common stock, which have been recorded as Treasury shares as of March 31, 2018.
Certificate of Designation of the Series A Preferred Stock
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series A Preferred Stock are set forth in the Series A Certificate. Under the Series A Certificate, the holders of the Series A Preferred Stock are entitled to receive, on each share of Series A Preferred Stock on a quarterly basis, an amount equal to the dividend rate of 14.5% divided by four and multiplied by the then-applicable Liquidation Preference (as defined in the Series A Certificate) per share of Series A Preferred Stock (collectively, the “Preferred Dividends”). The Preferred Dividends are due on January 1, April 1, July 1 and October 1 of each year (each, a “Series A Dividend Payment Date”). The Company may choose to pay the Preferred Dividends in cash or in additional shares of Series A Preferred Stock. In the event the Company does not declare and pay a dividend in-kind or in cash on any Series A Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. In addition, the Series A Preferred Stock participates in dividends declared and paid on shares of the Company’s common stock.
Each share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal to the “Conversion Price” (as that term is defined in the Series A Certificate) multiplied by the then applicable “Conversion Rate” (as that term is defined in the Series A Certificate). Each share of Series A Preferred Stock is initially convertible into 55.5556 shares of common stock, representing an initial “conversion price” of approximately $18.00 per share of common stock. The Conversion Rate is subject to equitable proportionate adjustment in the event of stock splits, recapitalizations and other events set forth in the Series A Certificate.
On and after the fifth anniversary of February 15, 2018, holders of shares of Series A Preferred Stock have the right to cause the Company to redeem each share of Series A Preferred Stock for cash in an amount equal to the sum of the current liquidation preference and any accrued dividends. Each share of Series A Preferred Stock is also redeemable at the option of the holder upon the occurrence of a “Fundamental Change” (as that term is defined in the Series A Certificate) at a specified premium. In addition, the Company is also permitted to redeem all outstanding shares of the Series A Preferred Stock at any time (i) within the first 30 months of the date of issuance for the sum of the then-applicable Liquidation Preference, accrued but unpaid dividends and a make whole amount and (ii) following the 30-month anniversary of the date of issuance for the sum of the then-applicable Liquidation Preference and the accrued but unpaid dividends.
The holders of a majority of the Series A Preferred Stock, voting separately as a class, are entitled at each of the Company’s annual meetings of stockholders or at any special meeting called for the purpose of electing directors (or by written consent signed by the holders of a majority of the then-outstanding shares of Series A Preferred Stock in lieu of such a meeting): (i) to nominate and elect two members of the Company’s Board of Directors for so long as the Preferred Percentage (as defined in the Series A Certificate) is equal to or greater than 10%; and (ii) to nominate and elect one member of the Company’s Board of Directors for so long as the Preferred Percentage is equal to or greater than 5% but less than 10%.
For so long as the holders of shares of Series A Preferred Stock have the right to nominate at least one director, the Company is required to obtain the prior approval of Silver prior to taking certain actions, including: (i) certain dividends, repayments and
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
redemptions; (ii) any amendment to the Company’s certificate of incorporation that adversely effects the rights, preferences, privileges or voting powers of the Series A Preferred Stock; (iii) issuances of stock ranking senior or equivalent to shares of Series A Preferred Stock (including additional shares of Series A Preferred Stock) in the priority of payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of us; (iv) changes in the size of the Company’s Board of Directors; (v) any amendment, alteration, modification or repeal of the charter of the Company’s Nominating and Corporate Governance Committee of the Board of Directors and related documents; and (vi) any change in the Company’s principal business or the entry into any line of business outside of the Company’s existing lines of businesses. In addition, in the event that the Company is in EBITDA Non-Compliance (as defined in the Series A Certificate) or the undertaking of certain actions would result in the Company exceeding a specified pro forma leverage ratio, then the prior approval of Silver would be required to incur indebtedness (or alter any debt document) in excess of $10.0 million, enter or consummate any transaction where the fair market value exceeds $5.0 million individually or $10.0 million in the aggregate in a fiscal year or authorize or commit to capital expenditures in excess of $25.0 million in a fiscal year.
Each holder of Series A Preferred Stock has one vote per share on any matter on which holders of Series A Preferred Stock are entitled to vote separately as a class, whether at a meeting or by written consent. The holders of Series A Preferred Stock are permitted to take any action or consent to any action with respect to such rights without a meeting by delivering a consent in writing or electronic transmission of the holders of the Series A Preferred Stock entitled to cast not less than the minimum number of votes that would be necessary to authorize, take or consent to such action at a meeting of stockholders. In addition to any vote (or action taken by written consent) of the holders of the shares of Series A Preferred Stock as a separate class provided for in the Series A Certificate or by the General Corporation Law of the State of Delaware, the holders of shares of the Series A Preferred Stock are entitled to vote with the holders of shares of common stock (and any other class or series that may similarly be entitled to vote on an as-converted basis with the holders of common stock) on all matters submitted to a vote or to the consent of the stockholders of the Company (including the election of directors) as one class.
Under the Series A Certificate, if Silver and certain of its affiliates have elected to effect a conversion of some or all of their shares of Series A Preferred Stock and if the sum, without duplication, of (i) the aggregate number of shares of the Company’s common stock issued to such holders upon such conversion and any shares of the Company’s common stock previously issued to such holders upon conversion of Series A Preferred Stock and then held by such holders, plus (ii) the number of shares of the Company’s common stock underlying shares of Series A Preferred Stock that would be held at such time by such holders (after giving effect to such conversion), would exceed the 19.9% of the issued and outstanding shares of the Company’s voting stock on an as converted basis (the “Conversion Cap”), then such holders would only be entitled to convert such number of shares as would result in the sum of clauses (i) and (ii) (after giving effect to such conversion) being equal to the Conversion Cap (after giving effect to any such limitation on conversion). Any shares of Series A Preferred Stock which a holder has elected to convert but which, by reason of the previous sentence, are not so converted, will be treated as if the holder had not made such election to convert and such shares of Series A Preferred Stock will remain outstanding. Also, under the Series A Certificate, if the sum, without duplication, of (i) the aggregate voting power of the shares previously issued to Silver and certain of its affiliates held by such holders at the record date, plus (ii) the aggregate voting power of the shares of Series A Preferred Stock held by such holders as of such record date, would exceed 19.99% of the total voting power of the Company’s outstanding voting stock at such record date, then, with respect to such shares, Silver and certain of its affiliates are only entitled to cast a number of votes equal to 19.99% of such total voting power. The limitation on conversion and voting ceases to apply upon receipt of the requisite approval of holders of the Company’s common stock under the applicable listing standards.
Form of Investor Rights Agreement
Concurrently with the closing of the Preferred Transaction, Synchronoss and Silver entered into an Investor Rights Agreement. Under the terms of the Investor Rights Agreement, Silver and Synchronoss have agreed that, effective as of the closing of the Preferred Transaction, the Board of Directors of Synchronoss will consist of ten members. From and after the closing of the Preferred Transaction, so long as the holders of Series A Preferred Stock have the right to nominate a member to the Board of Directors pursuant to the Series A Certificate, the Board of Directors of Synchronoss will consist of (i) two directors nominated and elected by the holders of shares of Series A Preferred Stock; (ii) four directors who meet the independence criteria set forth in the applicable listing standards (each of whom will be initially agreed upon by Synchronoss and Silver); and (iii) four other directors, two of whom shall satisfy the independence criteria of the applicable listing standards and, as of the closing of the Preferred Transaction, one of whom shall be the individual then serving as chief executive officer of Synchronoss and one of whom shall be the current chairman of the Board of Directors of Synchronoss as of the date of execution of the Investors Rights Agreement. Following the closing of the Preferred Transaction, so long as the holders of Series A Preferred Stock have the right to nominate
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
at least one director to the Board of Directors of Synchronoss pursuant to the Series A Certificate, Silver will have the right to designate two members of the Nominating and Corporate Governance Committee of the Board of Directors.
Pursuant to the terms of the Investor Rights Agreement, neither Silver nor its affiliates may transfer any shares of Series A Preferred Stock subject to certain exceptions (including transfers to affiliates that agree to be bound by the terms of the Investor Rights Agreement).
For so long as Silver has the right to appoint a director to the Board of Directors of Synchronoss, without the prior approval by a majority of directors voting who are not appointed by the holders of shares of Series A Preferred Stock, neither Silver nor its affiliates will directly or indirectly purchase or acquire any debt or equity securities of Synchronoss (including equity-linked derivative securities) if such purchase or acquisition would result in Silver’s Standstill Percentage (as defined in the Investor Rights Agreement) being in excess of 30%. However, the foregoing standstill restrictions would not prohibit the purchase of shares pursuant to the PIPE Purchase Agreement or the receipt of shares of Series A Preferred Stock issued as Preferred Dividends pursuant to the Series A Certificate, shares of Common Stock received upon conversion of shares of Series A Preferred Stock or receipt of any shares of Series A Preferred Stock, Common Stock or other securities of the Company otherwise paid as dividends or as an increase of the Liquidation Preference (as defined in the Series A Certificate) or distributions thereon. Silver will also have preemptive rights with respect to issuances of securities of Synchronoss in order to maintain its ownership percentage.
Under the terms of the Investor Rights Agreement, Silver will be entitled to (i) three demand registrations, with no more than two demand registrations in any single calendar year and provided that each demand registration must include at least 10% of the shares of Common Stock held by Silver, including shares of Common Stock issuable upon conversion of shares of Series A Preferred Stock and (ii) unlimited piggyback registration rights with respect to primary issuances and all other issuances.
Registration Rights
There were no significant changes to Company’s registration rights during the period of March 31, 2018 from December 31, 2017.
Stock Plans
There were no significant changes to Company’s Stock Plans during the period of March 31, 2018 from December 31, 2017. As of March 31, 2018, there were 1.9 million shares available for grant or award under the Company’s 2015 Plan and 1.3 million shares available for the grant or award under the Company’s new hire equity incentive plan.
Stock-Based Compensation
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included in operating expense categories, as follows:
|
| | | | | | | |
| Three Months Ended March 31, 2018 |
| 2018 | | 2017 |
Cost of revenues | $ | 1,112 |
| | $ | 1,737 |
|
Research and development | 1,540 |
| | 2,027 |
|
Selling, general and administrative | 4,534 |
| | 4,347 |
|
Total stock-based compensation expense | $ | 7,186 |
| | $ | 8,111 |
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table summarizes information about stock-based compensation:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Stock options | $ | 1,760 |
| | $ | 1,453 |
|
Restricted stock awards | 5,426 |
| | 6,395 |
|
Employee Stock Purchase Plan | — |
| | 263 |
|
Total stock-based compensation before taxes | $ | 7,186 |
| | $ | 8,111 |
|
Tax benefit | $ | 2,423 |
| | $ | 1,207 |
|
The total stock-based compensation cost related to unvested equity awards as of March 31, 2018 was approximately $46.7 million. The expense is expected to be recognized over a weighted-average period of approximately 2.42 years.
Replacement Awards
On January 19, 2017, certain equity awards granted under the Intralinks Holdings, Inc. 2010 Equity Incentive Plan and the Intralinks Holdings, Inc. 2007 Stock Option and Grant Plan (together, the “Intralinks Plans”) were assumed by the Company’s 2015 Equity Incentive Plan (the “2015 Plan”). The assumed awards are subject to the vesting and service conditions of the 2015 Plan. Subsequently, these were accelerated as part of the Intralinks Transaction.
Among the equity awards assumed were restricted stock units subject to market-based performance targets in order for them to vest. Vesting is subject to continued service requirements through the vesting date. The grant date fair value for such unvested restricted stock units was estimated using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the performance period. Stock-based compensation expense for such unvested restricted stock units is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied. All of these awards were canceled during 2017 pursuant to termination of related employees.
Stock Options
There were no significant changes to Company’s Stock Option Plans during the period of March 31, 2018 from December 31, 2017.
The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock options. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Expected stock price volatility | 64.5 | % | | 42.8 | % |
Risk-free interest rate | 2.5 | % | | 1.7 | % |
Expected life of options (in years) | 4.09 |
| | 4.00 |
|
Expected dividend yield | 0.0 | % | | 0.0 | % |
Weighted-average fair value (grant date) of the options | $ | 4.17 |
| | $ | 9.28 |
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table summarizes information about stock options outstanding as of March 31, 2018:
|
| | | | | | | | | | | | | |
Options | | Number of Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding at December 31, 2017 | | 3,950 |
| | $ | 21.54 |
| | | | |
Options Granted | | 84 |
| | 8.15 |
| | | | |
Options Exercised | | — |
| | — |
| | | | |
Options Cancelled | | (76 | ) | | 29.17 |
| | | | |
Outstanding at March 31, 2018 | | 3,958 |
| | $ | 21.11 |
| | 5.25 | | $ | 971 |
|
Vested at March 31, 2018 | | 1,287 |
| | $ | 32.35 |
| | 3.51 | | $ | — |
|
Exercisable at March 31, 2018 | | 1,287 |
| | $ | 32.35 |
| | 3.51 | | $ | — |
|
The below table summarizes additional information related to the Company’s awards:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Total intrinsic value for stock options exercised | $ | — |
| | $ | 997 |
|
Awards of Restricted Stock and Performance Stock
There were no significant changes to Company’s restricted stock award (“Restricted Stock”) and performance stock plan during the period of March 31, 2018 from December 31, 2017.
A summary of the Company’s unvested restricted stock at March 31, 2018, and changes during the three months ended March 31, 2018, is presented below:
|
| | | | | | | |
Unvested Restricted Stock | | Number of Awards | | Weighted- Average Grant Date Fair Value |
Unvested at December 31, 2017 | | 2,064 |
| | $ | 22.75 |
|
Granted | | 229 |
| | 8.23 |
|
Vested | | (381 | ) | | 31.68 |
|
Forfeited | | (57 | ) | | 25.55 |
|
Unvested at March 31, 2018 | | 1,855 |
| | $ | 17.77 |
|
Restricted stock awards are granted subject to other service conditions or service and performance conditions (“Performance-Based Awards”). Restricted stock and performance-based awards are measured at the closing stock price at the date of grant and are recognized straight line over the requisite service period.
Employee Stock Purchase Plan
On February 1, 2012, the Company established a ten-year Employee Stock Purchase Plan (“ESPP” or “the Plan”) for certain eligible employees. The Plan is administered by the Company’s Board of Directors. The total number of shares available for purchase under the Plan is 500 thousand shares of the Company’s common stock. Employees participate over a six month period through payroll withholdings and may purchase, at the end of the six month period, the Company’s common stock at the lower of 85% of the fair market value on the first day of the offering period or the fair market value on the purchase date. No participant will be granted a right to purchase common stock under the Plan if such participant would own more than 5% of the total combined voting power of the Company. In addition, no participant may purchase more than a thousand shares of common stock within any purchase period or with a value greater than $25 thousand in any calendar year. The Plan was suspended indefinitely as of July 27, 2017.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Share Repurchase Program
There were no repurchases in 2018.
9. Restructuring
In March 2016 and December 2016, the Company initiated the preliminary phase of a work-force reduction as part of a corporate restructuring, with reductions occurring across all levels and departments within the Company. This measure wasCompany, primarily in an effort to reduce costs subsequent to an acquisition or divestiture. These measures were intended to reduce costs and to align the Company’s resources with its key strategic priorities. The Company authorized additional work force reduction initiatives throughout 2017 and in period ending March 2018. As of September 30, 2016,March 31, 2018, there were $0.4$1.0 million of accrued restructuring charges on the balance sheet.Condensed Consolidated Balance Sheets.
A summary of the Company’s restructuring accrual at September 30, 2016March 31, 2018 and changes during the ninethree months ended September 30, 2016, isMarch 31, 2018, are presented below:
| | | Balance at December 31, 2015 | | Charges | | Payments | | Balance at September 30, 2016 | Balance at December 31, 2017 | | Charges | | Payments | | Balance at March 31, 2018 |
Employment termination costs | $ | — |
| | $ | 5,139 |
| | $ | (4,816 | ) | | $ | 323 |
| $ | 474 |
| | $ | 1,108 |
| | $ | (612 | ) | | $ | 970 |
|
Facilities consolidation | 54 |
| | — |
| | (10 | ) | | 44 |
| 24 |
| | — |
| | (4 | ) | | 20 |
|
Total | $ | 54 |
| | $ | 5,139 |
| | $ | (4,826 | ) | | $ | 367 |
| $ | 498 |
| | $ | 1,108 |
| | $ | (616 | ) | | $ | 990 |
|
10. Income Taxes
The Company recognized approximately $6.9$0.1 million and $14.9$8.7 million in related income tax expense and benefit during the three and nine months ended September 30, 2016,March 31, 2018 and 2017, respectively. The effective tax rate was approximately 59% and 1,143%(0.3)% for the three and nine months ended September 30, 2016,March 31, 2018, which was higherlower than the U.S. federal statutory rate primarily due to the unfavorable impactfull valuation allowances recorded in the fourth quarter of losses in foreign jurisdictions which have lower tax rates than2017. The Company considered all available evidence, including historical profitability and projections of future taxable income together with new evidence, both positive and negative, that could affect the U.S. as well as the unfavorable impactview of the fair market value adjustment forfuture realization of deferred tax assets. As a result of the Razorsight contingent consideration. Additionally, the effective tax rate for the nine months ended September 30, 2016assessment, no change was impactedrecorded by the recording of a non-cash income tax provisionCompany to establish a $2.9 millionthe valuation allowance which reduced the deferred tax asset related to the current net operating losses of certain foreign subsidiaries. The Company reviews the expected annual effective income tax rate and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and forecasted permanent book-to-tax differences, and changes resulting from the impact of tax law changes. The early adoption of ASU 2016-09 resulted in a decrease in the effective tax rate forduring the three months ended September 30, 2016 of 2% and an increase in the effective tax rate for the nine months ended September 30, 2016 of 51%.March 31, 2018.
11. Earnings per Common Share
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (Redeemable Convertible Preferred Stock - Participation with Dividends on Common Stock that contain preferred dividend) in the computation of EPS pursuant to the two-class method. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share from continued and discontinued operations.
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Numerator - Basic: | | | |
Net loss from continuing operations | $ | (37,977 | ) | | $ | (45,452 | ) |
Net loss attributable to redeemable noncontrolling interests | 1,285 |
| | 2,889 |
|
Preferred stock dividend | (3,353 | ) | | — |
|
Net (loss) income from continuing operations attributable to Synchronoss | (40,045 | ) | | (42,563 | ) |
| | | |
Income from discontinued operations, net of taxes | $ | — |
| | $ | (16,134 | ) |
Net (loss) income attributable to Synchronoss | (40,045 | ) | | (58,697 | ) |
| | | |
Numerator - Diluted: | | | |
Net (loss) income from continuing operations attributable to Synchronoss | (40,045 | ) | | (42,563 | ) |
Income effect for interest on convertible debt, net of tax | — |
| | — |
|
Net loss from continuing operations adjusted for the convertible debt | (40,045 | ) | | (42,563 | ) |
| | | |
Income from discontinued operations, net of taxes | $ | — |
| | $ | (16,134 | ) |
Net loss attributable to Synchronoss | (40,045 | ) | | (58,697 | ) |
| | | |
Denominator: | | | |
Weighted average common shares outstanding — basic | 42,181 |
| | 44,212 |
|
Dilutive effect of: | | | |
Shares from assumed conversion of convertible debt 1 | — |
| | — |
|
Shares from assumed conversion of preferred stock 2 | — |
| | — |
|
Options and unvested restricted shares | — |
| | — |
|
Weighted average common shares outstanding — diluted | 42,181 |
| | 44,212 |
|
| | | |
Basic EPS | | | |
Continuing operations | $ | (0.95 | ) | | $ | (0.96 | ) |
Discontinued operations | $ | — |
| | $ | (0.37 | ) |
| $ | (0.95 | ) | | $ | (1.33 | ) |
Diluted EPS | | | |
Continuing operations | $ | (0.95 | ) | | $ | (0.96 | ) |
Discontinued operations | — |
| | (0.37 | ) |
| $ | (0.95 | ) | | $ | (1.33 | ) |
| | | |
Anti-dilutive stock options excluded | 2,441 |
| | 1,698 |
|
1The calculation for each period does not include the effect of assumed conversion of convertible debt of 4,325,646 shares, which is based on 18.8072 shares per $1,000 principal amount of the 2019 Notes.
2 The calculation for each period does not include the effect of assumed conversion of preferred stock of 10,277,786 shares, which is based on 55.5556 shares per $1,000 principal amount of the preferred stock, because the effect would have been anti–dilutive.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
12. Commitments and Contingencies
In the ordinary course of business, the Company is regularly subject to various claims, suits, regulatory inquiries and investigations. The Company records a liability for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss can be reasonably estimated. Management has also identified certain other legal matters where they believe an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that resolving claims against the Company, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the Company’s business, financial position, results of operations, or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. The Company also evaluates other contingent matters, including income and non-income tax contingencies, to assess the likelihood of an unfavorable outcome and estimated extent of potential loss. It is possible that an unfavorable outcome of one or more of these lawsuits or other contingencies could have a material impact on the liquidity, results of operations, or financial condition of the Company.
Legal Matters
On May 1, 2017, May 2, 2017, June 8, 2017 and June 14, 2017, four putative class actions were filed against the Company and certain of its officers and directors in the United States District Court for the District of New Jersey (the “Securities Law Action”). After these cases were consolidated, the court appointed as lead plaintiff Employees’ Retirement System of the State of Hawaii, which filed, on November 20, 2017, a consolidated amended complaint purportedly on behalf of purchasers of our common stock between February 3, 2016 and June 13, 2017. The consolidated amended complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and it alleges, among other things, that the defendants made false and misleading statements of material information concerning the Company’s financial results, business operations, and prospects. The plaintiff seeks unspecified damages, fees, interest, and costs. On February 2, 2018, the defendants filed a motion to dismiss the consolidated amended complaint in its entirety, with prejudice, which remains pending. We believe that the asserted claims lack merit, and we intend to defend against all of the claims vigorously. Due to the inherent uncertainties of litigation, we cannot predict the outcome of the actions at this time, and we can give no assurance that the asserted claims will not have a material adverse effect on our financial position or results of operations.
On September 15, 2017, October 24, 2017, October 27, 2017 and October 30, 2017, Synchronoss shareholders filed derivative lawsuits against certain of the Company’s officers and directors and the Company (as nominal defendant) in the United States District Court for the District of New Jersey (the “Derivative Suits”). These lawsuits purport to allege claims related to breaches of fiduciary duties and unjust enrichment. The allegations in the Derivative Suits relate to substantially the same facts as those underlying the Securities Law Action described above. The plaintiffs seek unspecified damages and for the Company to take steps to improve its corporate governance and internal procedures. The plaintiffs in the Derivative Suits in which service of the complaints was effectuated have agreed to stay proceedings pending the court’s decision on the defendants’ motion to dismiss in the Securities Laws Action. The Company believes that the asserted claims lack merit, and we intend to defend against all of the claims vigorously. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the Derivative Suits at this time, and the Company can give no assurance that the asserted claims will not have a material adverse effect on the Company’s financial position or results of operations.
On October 7, 2014, the Company filed an amended complaint in the United States District Court for the District of New Jersey (Civ Act. No. 3:14-cv-06220) against F-Secure, Corporation and F-Secure, Inc. (collectively, “F-Secure"), claiming that F-Secure has infringed, and continues to infringe, several of the Company’s patents. In February 2015, Synchronossthe Company entered into a patent license and settlement agreement with F-Secure Corporation and F-Secure, Inc. whereby the Company granted each of these companies (but not their subsidiaries or affiliates) a limited license to Synchronoss’our patents. As a result of entering into the patent license and settlement agreement, the parties filed a joint stipulation to dismiss the above complaint.
The Company’sOur 2011 acquisition agreement with Miyowa SA (“Miyowa”) provided that former shareholders of Miyowa SA would be eligible for earn-out payments to the extent specified business milestones were achieved following the acquisition. In December 2013, Eurowebfund and Bakamar, two former shareholders of Miyowa SA, filed a complaint against the Company in the Commercial Court of Paris, France claiming that they are entitled to certain earn-out payments under the acquisition agreement. The Company was served with a copy of this complaint in January 2014. On December 3, 2015, the Court dismissed all claims in the complaint against the Company. On December 19, 2015, the former shareholders of Miyowa filed an appeal with the Court of Appeal of Paris, France, appealing the Court’s decision. AlthoughOn January 11, 2018, the Company cannot predictCourt of Appeal of Paris, France, dismissed the outcomeappeal. The plaintiffs have informed us that they will not be appealing this decision.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
On July 11, 2017, Shareholder Representative Services LLC, on behalf of the appeal, or estimate any potential loss ifpersons entitled to receive merger consideration (the “Sellers”) in connection with our acquisition of Razorsight, commenced arbitration against us with respect to a dispute over the outcome is adverse,amount due to the inherent uncertaintiesSellers as additional consideration. Under the Razorsight purchase agreement, the Sellers are entitled to a percentage of litigation,any revenue recognized by us generated from the Company believessale or licensing of Razorsight products in 2016 after a specific revenue threshold is obtained. The parties disagreed over the positionsdetermination of Eurowebfund and Bakamar are without merit, and the Company intends to vigorously defend all claims brought by them.amount of revenue we recognized in 2016. The parties entered into an agreement resolving the arbitration in May 2018.
TheExcept as set forth above, the Company is not currently subject to any legal proceedings that could have a material adverse effect on its operations; however, it may from time to time become a party to various legal proceedings arising in the ordinary course of its business. The Company is currently the plaintiff in several patent infringement cases. The defendants in several of these cases have filed counterclaims. Although the Company cannot predict the outcome of the cases at this time due to the inherent uncertainties of litigation, the Company continues to pursue its claims and believes that the counterclaims are without merit, and the Company intends to defend all of such counterclaims.
Nasdaq Compliance
On May 16, 2017, we received notice from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) indicating that we were not in compliance with Nasdaq Listing Rule 5250(c)(1) (the “Rule”), which requires timely filing of periodic reports with the SEC, because we had not yet filed our Form 10-Q for the quarterly period ended March 31, 2017. The notice indicated that we had until July 17, 2017 to submit a plan to regain compliance with Nasdaq’s continued listing requirements. On July 17, 2017, we timely submitted our plan to Nasdaq detailing how we plan to regain compliance with Nasdaq’s continued listing requirements.
On July 26, 2017, the Nasdaq granted us an exception from its continued listing requirements until November 13, 2017 to file all delinquent periodic reports, including our delinquent Form 10-Q for the quarterly period ended March 31, 2017. In connection with our delinquency in filing our Form 10-Q for the quarterly period ended June 30, 2017, Nasdaq has requested an update to our original plan to regain compliance with Nasdaq’s continued listing requirements.
On August 16, 2017, we received notice from the Nasdaq indicating that we were not in compliance with the Rule because we had not yet filed our Form 10-Q for the quarterly period ended June 30, 2017.
On November 15, 2017, we received a letter from the Staff of the Nasdaq notifying us that since we remain delinquent in filing our Form 10-Q for the quarterly periods ended March 31, 2017, June 30, 2017 and September 30, 2017, we have not regained compliance with the Rule. Previously, Nasdaq granted us an extension until November 13, 2017 to file all delinquent periodic reports. As described in the letter, as a result of the continued delinquency, our common stock is subject to being delisted unless we timely request a hearing before a Nasdaq Hearings Panel (the “Panel”).
On December 6, 2017, the Company received a letter from the Nasdaq granting the Company’s request to extend the stay of suspension pending a hearing before the Panel, in late January 2018. In early February 2018, the Nasdaq granted us an extension until May 10, 2018 to regain compliance with Nasdaq’s listing requirements.
On February 6, 2018, the Company received a notification letter from a Hearings Advisor from the Nasdaq Office of General Counsel informing the Company that the Panel granted the Company’s request for an extension until May 10, 2018 to become current with its filings with the SEC. Additionally, the extension was subject to the Company providing the Panel with periodic updates regarding its ongoing restatement of its financial statements and providing the Panel with an update issued to investors on or before March 31, 2018. The Panel granted the Company the maximum possible extension until the expiration of the Panel’s discretion to allow continued listing while the Company remained out of compliance with Nasdaq’s continued listing requirements. To comply with the Nasdaq extension requirements, the Company issued an update to investors on March 28, 2018.
13. Subsequent Events Review
Nasdaq Compliance
On May 4, 2018, the Company informed the Panel of its determination that it would be unable to satisfy the May 10, 2018 deadline. On May 11, 2018, the Company received a notification letter from the Panel indicating that trading in the Company’s
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
common stock was suspended effective at the open of business on May 14, 2018. The Panel also determined to delist the Company’s shares from Nasdaq after applicable appeal periods have lapsed. The Company has evaluatedappealed the decision to the Nasdaq Listing and Hearing Review Council. During the appeal process, the Company’s stock remains listed however trading in the Company’s common stock on Nasdaq remains suspended. While the Company’s common stock is suspended from trading on Nasdaq, the Company’s shares are currently quoted on the OTC Markets under the trading symbol SNCR.
Acquisition of honeybee
In May 2018, the Company completed the acquisition of the honeybee software business, a provider of digital solutions targeted at optimizing the customer experience from Dixons Carphone plc. honeybee offers a digital transformation platform that makes it easier for companies to design and launch omni-channel customer journeys. The Company paid cash consideration of approximately $10.7 million. Customers of the honeybee platform, such as mobile operators and other communication service providers, can rapidly create and adapt digital sales processes for contact centers, retail stores, and online channels. This reduces complexity for the end-user as well as internal employees, while delivering a single customer experience at all subsequent events through November 8, 2016.touch-points and improved business outcomes such as reduced cost and increased revenue.
2019 Notes Notice
On June 13, 2018, The Bank of New York Mellon, in its capacity as trustee (the “Trustee”) under the indenture dated as of August 12, 2014 (the “Indenture”) governing for the Company’s 2019 Notes, filed a verified complaint with the Court of Chancery of the State of Delaware, captioned The Bank of New York Mellon, as Indenture Trustee v. Synchronoss Technologies, Inc. (the “BNY Action”). The BNY Action complaint alleges that a “Fundamental Change” has occurred under the Indenture as a result of the Company’s Common Stock ceasing to be listed or quoted on Nasdaq and that an event of default under the Indenture has occurred as a result of our failure to provide a notice of such Fundamental Change which, if true, following notice from holders of more than 25% of the outstanding principal under the Notes would trigger the acceleration of the principal and interest outstanding under the 2019 Notes. The Company intends to defend against all of the claims vigorously. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the BNY Action at this time, and the Company can give no assurance that the asserted claims will not have a material adverse effect on the Company’s financial position or results of operations.
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The discussions give effect to the restatement adjustments made to the previously reported Consolidated Financial Statements for the years ended December 31, 2016 and December 31, 2015. For additional information and a detailed discussion of the restatement, see “Note 15 - Restatement of Previously Issued Consolidated Financial Statements” of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q. The following discussion and analysis should be read in conjunction with the information set forth in our consolidated financial statementsCondensed Consolidated Financial Statements and the related notes included elsewhere in Item 1 “Financial Information” of this quarterly report on Form 10-Q10-Q.
The words “Synchronoss,” “we,” “our,” “ours,” “us,” and in our annual report Form 10-K for the year ended December 31, 2015.“Company” refer to Synchronoss Technologies, Inc. and its consolidated subsidiaries. This quarterly report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “hopes,” “should,” “continues,” “seeks,” “likely” or similar expressions, indicate a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. We caution investors not to place substantial reliance on the forward-looking statements included in this quarterly report. These statements speak only as of the date of this quarterly report, (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments. All numbers are expressed in thousands unless otherwise stated.
Overview
We areSynchronoss Technologies, Inc. (“Synchronoss” or the “Company”) is a leading innovatorglobal software and services company that provides essential technologies for the mobile transformation of business. The Company’s portfolio, which is targeted at the Consumer and Enterprise markets, contains offerings such as personal cloud, solutions, software-based activation, secure mobility,secure-mobility, identity management and securescalable messaging for mobile carriers, enterprises, retailers and OEMs across the globe. Our software provides innovative service provider and enterprise solutions that drive billions of transactions on a wide range of connected devices across the world’s leading networks. Our solutions include: activation and provisioning software for devices and services, cloud-based sync, backup, storage and content management capabilities, broadband connectivity solutions, analytics, white label messaging, identity/access management and secure mobility management that enable communications service providers (CSPs), cable operators/multi-services operators (MSOs) and original equipment manufacturers (OEMs) with embedded connectivity (e.g. smartphones, laptops, tablets and MIDs, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers, medium and large enterprises and their consumers as well as other customers to accelerate and monetize value-added services for secure and broadband networks and connected devices.
Our Activation Software, Synchronoss Personal Cloud™ and Enterpriseplatforms, products and platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and “back-office” infrastructure-related systems and processes. Our customers rely on our solutions and technology to automatesolutions. These essential technologies create a better way of delivering the process of activation and content and settings management for their subscribers’ devices while delivering additional communication services.
Our Synchronoss Activation solution navigates the variety of complex back-end systems of CSPs to provide a best-in-class ordering system by orchestrating the workflow and consolidated automated customer care services. This allows CSPs using our platforms to realize the full benefits of their offerings. The platforms also support, among other automated transaction areas, credit card billing, inventory management, and trouble ticketing. In addition to this, the platform supports customer activation related transactions and other and other services which include managing access service requests, local service requests, local number portability, and directory listings.
Our Synchronoss Personal Cloud™ solution seamlessly transfers content from an old device to a new device, and syncs, backs up and connects consumer’s content from multiple smart devices to our cloud platform. This allows carrier customers to protect and manage their growing cache of personally generated,transformative mobile content over long periods of time.
Our Synchronoss Enterprise solutions support an advanced mobility digital experience for businesses and consumers for accessing and protecting their information. Our identity and access management platform helps consumers and business users to securely authenticate access to online websites to conduct e-commerce transactions or access important data. Our secure mobility platforms help users safely and securely store and share important data. Our solutions are based on understanding assumptions on the behaviors of individuals through the capture of who they are, what they are doing and how, where and when they are doing it. This allows our platforms to help reduce fraud, improve cybersecurity detection/prevention and overall productivity. Our identity and access solution supports both consumers by allowing them to self-register and verify their identity, while providing non-intrusive multi-factor authentication and businesses the ability to be sure the correct person is doing the transaction. The secure mobility solution combines the identity platform with a “bring your own device” (BYOD) platformexperiences that is based on a secure container for accessing data, applications, content and personal information management tools like email, calendar, messaging and notes.
Our Synchronoss Messaging is a white label messaging platform for service providers and offers a full rangeenterprises need to help them stay ahead of deployment options including full integration with on premise systems, hybrid deployment support for optimal mix of technologiesthe curve in competition, innovation, productivity, growth and protecting existing investments, and full cloud deployment for both SaaS and hosted models. Synchronoss Messaging features a distributed systems management console (messaging security, administration console for user and domain provisioning and management, integration with Nagios for monitoring and alerts) with support for smartphones, tablets and connected devices (support for leading protocols including iCal, CalDAV, CardDAV, EAS, IMAP/IDLE), Native Mobile App for iOS and Android for mail, contacts, calendar and task management.operational efficiency.
OurSynchronoss’ products and platforms are designed to be carrier-grade, highly available, flexible and scalable, to enableenabling multiple converged communication services to be managed across multiplea range of distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets allowing usoutlets. This business model allows the Company to meet the rapidly changing and convergingconverged services and connected devices offered by ourtheir customers. OurSynchronoss’ products, platforms and solutions enable our Enterpriseits enterprise and service provider customers to acquire, retain and service subscribers and employees quickly, reliably and cost-effectively with white label and custom-branded solutions. OurSynchronoss customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and enterprise-wide sharing/collaboration with connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of ourthe Company’s platforms enable new revenue streams and retention opportunities for ourtheir customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud, while optimizingCloud. By using the Company’s technologies, Synchronoss customers can optimize their cost of operations andwhile enhancing their customer experience. We
The Company currently operateoperates in and market ourmarkets their solutions and services directly through ourtheir sales organizations in North America, Europe, the Middle East and Asia-Pacific.Africa (“EMEA”), and the Asia-Pacific region. Synchronoss delivers essential technologies for mobile transformation to two primary types of customers: service provider and enterprise customers in regulated verticals and use cases.
Revenues
We generate a substantial portionmajority of our revenues on a per-transactionper transaction or subscription basis, which is derived from contracts that extend up to 60 months from execution. For
During the three months ended September 30, 2016March 31, 2018, the Company made significant changes in its accounting policies over revenue recognition, to align with the adoption of ASU 2014-09, “Revenue from Contracts with Customers” (“ASC 606” or “Topic 606”). These updates are described in Note 2 - Basis of Presentation and 2015, we derived approximately 66% and 73%, respectively, of our revenues from transactions processed and subscription arrangements.Consolidation.
Historically, our revenues have been directly impacted by the number of transactions processed.
The future success of our business depends on the continued growth of consumerBusiness to Business and businessBusiness to Business to Consumer driving customer transactions, and ascontinued expansion of our platforms into the TMT Market globally through Digital Transformation, Messaging, Cloud and IoT markets. As such, the volume of transactions that we process could fluctuateand our ability to expand our footprint in TMT and globally may result in revenue fluctuations on a quarterly basis. See “Current Trends Affecting Our Results of Operations” for certain matters regarding future results of operations.
Most of our revenues are recorded in U.S. dollars but as we continue to expand our footprint with international carriers and increase the extent of recording our international activities in local currencies, we will become subject to currency translation risk that could affect our future net sales as reported in U.S. dollars.
Each ofVerizon and AT&T together represent our largest customers and Verizon accountedaccount for more than 10%the majority of our net revenues for the three monthsquarters ended September 30, 2016March 31, 2018 and 2015. AT&T and Verizon in the aggregate accounted for 71% and 75% of our revenues for the three months ended September 30, 2016 and 2015,2017, respectively. Our agreements with AT&TThese contract typically run for three to five yearsyears. The loss of either Verizon or AT&T as a customer would have a material negative impact on our company. However, we believe that the costs incurred to replace Synchronoss’ solutions would be substantial.
Key Developments
Intralinks Acquisition and cover bothDivestiture
On January 19, 2017, we completed the acquisition of Intralinks. In connection with the acquisition, we entered into a $900 million credit agreement with the lending institutions from time to time parties thereto and Goldman Sachs Bank USA (“Goldman”), as administrative agent, collateral agent, swingline lender and a letter of credit issuer (the “2017 Credit Agreement”). Intralinks is a global technology feeprovider of SaaS solutions for secure enterprise content collaboration within and exception handlingamong organizations. Intralinks’ cloud-based solutions enable organizations to securely manage, control, track, search, exchange and collaborate on sensitive information inside and outside the firewall. The total purchase price consideration consisted of the repayment of existing Intralinks indebtedness, and non-cash consideration for services rendered on unvested Intralinks equity awards that were converted into Synchronoss equity awards on the acquisition date. The acquisition was primarily funded from the proceeds of the 2017 Credit Agreement entered into on the date of acquisition.
On June 23, 2017, we received a non-binding indication of interest from Siris to acquire the Company. In light of the indication of interest, our Board of Directors decided to explore a broad range of strategic alternatives that would have the potential to unlock shareholder value. In October 2017, we concluded our review of strategic alternatives and determined that the best approach for us to achieve our goal of maximizing shareholder value was to focus on our core TMT business, divest non-core assets and improve our balance sheet strength, cash position and potential profitability. Under the terms of certain definitive agreements, investment funds affiliated with Siris acquired all of the stock of our wholly-owned subsidiary, Intralinks, for consideration of cash and an investment in convertible preferred equity of the Company.
On October 17, 2017, we announced our entry into definitive agreements for the sale of Intralinks, and the right to purchase a newly created series of preferred stock of Synchronoss to affiliates of Siris. Subject to the terms and conditions set forth in a share purchase agreement, dated as of October 17, 2017 (the “Share Purchase Agreement”), among Synchronoss, Intralinks and Impala Private Holdings II, LLC, an affiliate of Siris (“Impala”), Impala agreed to acquire from us the issued and outstanding shares of common stock of Intralinks for approximately $977.3 million in cash plus a potential contingent payment of up to $25.0 million, subject to an adjustment for cash, debt and working capital (the “Intralinks Transaction”). The total amount of funds used to complete the Intralinks Transaction and related transactions and pay related fees and expenses was approximately $1.0 billion, which was funded through a combination of equity and debt financing obtained by Impala.
On November 14, 2017, we completed the sale of Intralinks and on February 15, 2018, we completed the issuance of shares of a newly created series of preferred stock of Synchronoss to affiliates of Siris. In connection with the consummation of the Intralinks divestiture, we utilized a portion of the proceeds from the Intralinks divestiture to repay all outstanding obligations under our previously existing 2017 Credit Agreement, effective as of November 14, 2017. The aggregate payoff amount was approximately $898 million and included all accrued interest, fees and prepayment penalties. The operations of Intralinks were presented as discontinued operations in 2017.
For further details, see Note 3 - Acquisitions and Divestitures of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Other Recent Divestitures
On February 1, 2017, we completed the divestiture of our SpeechCycle business for consideration of $13.5 million to an unrelated third party. The net proceeds, exclusive of amounts placed in escrow, were approximately $12.5 million. As part of the divestiture, we entered into a one-year transition services agreement with the acquirer to support various indirect activities such
as customer software support, technical support services and maintenance and support services. We haverecorded a Master Services Agreement, with Statementspre-tax gain of Work for each$4.9 million as a result of the AT&T businessesdivestiture which we support. Eachis included in other income (expense), net in the Condensed Consolidated Statement of our agreements with Verizon typically have a similar duration, subjectOperations.
For further details, see Note 3 - Acquisitions and Divestitures of the Notes to a Master Services Agreement, withCondensed Consolidated Financial Statements in Item 1 of Work. See “Risk Factors” for certain matters bearing risks on our future results of operations.this Form 10-Q.
Current Trends Affecting Our Results of Operations
Growth inBusiness from our service provider and enterprise solutions are beingSynchronoss Personal Cloud solution has been driven by the massive penetration and use of smart devices on a global basis. The following major trends drive our investment decisionsgrowth in acquisitions and development of product and solutions:
Activation. Service Provider consolidation continues in the US and Internationally. As CSP’s merge with MSOs and TV Providers there is an urgency provisioning new subscribers with devices and new value-add service bundles, while driving cost out of the business. Synchronoss Activation is poised to create new efficiencies in often underserved digital channels as a way to quickly provision combined subscriber bases and utilize traditionally underperforming and lower cost digital sales channels.
PersonalCloud. Shorter carrier customer contracts and lease programs have resulted in faster device upgrade cycles by customers resulting in increased device order transactions and activations. With mobile devices globally that are becoming content rich and acting as a replacement forrich. As these devices replace other traditional devices like PC’s, the ability to securely back up content from mobile devices, sync it with other devices and share it with others in their community of family, friends and business associates hashave become an essential need. The major Tier 1 carriers are also publicly discussing achieving 500% penetration (multiple connected devices per user) by enabling connectivity to non-traditional devices.needs and subscriber expectations. Such devices include smartphones, connected cars, personal health and wellness devices and connected home.home devices. The need for these devices to be activated and managed and the contents from themof these devices to be stored in a common cloud are also expected to be drivers of our businessesbusiness in the longlonger term.
Business from our traditional Synchronoss Messaging business (Email) has been driven by a resurgence in the need for white label secure messaging platforms that favor the MNO’s business objectives and are not beholden to the objectives of a sponsoring OTT platform. Messaging drives higher subscriber engagement than any other application in the market today and holds the potential to stimulate new revenue from traditional services and third party brands. OTT global success has driven MNO’S to look at opportunities to preempt and compete with the OTT’S which has potential opportunity for Synchronoss. Future growth will be driven by the need of TMT companies including (and especially) MNO’s to embrace MaaP to converse with subscribers in an efficient, automated way (streamlining the costs and increasing the effectiveness of self-care, as well as the yield of cross-sell upselling of service plans, devices, bundles, etc). The Synchronoss Advanced Messaging Platform provides state of the art RCS-driven features including the ability to support advanced Peer to Peer communications and introduce new revenue streams driven by commerce and advertising via Application to Person capabilities.
Companies in the TMT market all face the dilemma of attempting to pivot their businesses to digital execution in order to create experiences that meet the expectations of their subscribers, generate new revenues and streamline costs creating healthier margins at a faster time to market than they have ever operated before. Their challenges feature the lack of skill set to conceptualize and run day to day digital operations and the lack of resources to integrate their legacy back end systems to enact digital experiences that achieve their business objectives. The growth of Synchronoss Digital Platforms will be driven by the ability to provide TMT companies’ desire to obtain digital transformation solutions as quickly as possible while educating them on the ability to operate a digital business efficiently. Our Platform as a Service (“PaaS”) model provides a desirable alternative to heavy CAPEX spending options often tried internally. The ability for our platforms to create low/no code, new customer digital journeys, virtually on the fly, give TMT Companies the ability to operate new experiences and businesses without heavily investing in development resources.
Synchronoss Advanced Messaging, Cloud products such as Personal Cloud, Mobile Content Transfer, Backup & Transfer and Out of Box Experience (OOBE)Digital Platforms are poised to respondbring Internet of Things initiatives to this trendlife across MNO and TMT companies creating new use cases that will help stimulate the commercial growth of the robust potential of the IoT market. As new devices and sensors come online in connected cities, Synchronoss, partnering with white label, securecarriers like AT&T, has technology to unify and scalable products for mobile devices.
Secure Mobility. As Enterprise looks to increase productivity, it turns to mobile. Yet it finds itself confronted with the serious logistical challenges of not only managing stringent security requirements, but also accommodating the personalharness data from legacy systems; provide analytic insights that fuel automated communications, via our Advanced Messaging Platform between sensors, devices of its employees as a lower cost and more employee-friendly option. This trend of Bring Your Own Device (BYOD) is now prevalent enough that regulated industries are investigating new ways to merge Wall Street level regulated securitypeople; and privacy with main stream usability standards of Facebook, Twitter, Slacker and other third party mobile services. Inherent in this challenge is managing multi-factor authentication, policy driven credential management and fraud protection as employees move in and out of “work” selves and “Home” selves – or even in, out or between companies. In addition to being able to manage different personas, the ability to create more productive work flows employing predictive analytics is taking on a higher value as a desirable function of a secure mobility platform. Our Secure Mobility platform enables Enterprise to pivot quickly into the regulated BYOD work environment and realize cost savings as well as productivity gains.
Messaging. Messaging as a medium is moving beyond standard email. Messaging is fast becoming an interface for commerce. With the emergence of messaging giants such as What’s App, Line, Facebook and others, companies are using advanced messaging to create commerce opportunities to give subscribers visibility to smart transactions within a very sticky, high frequency environment. Chat bots, operating on AI fueled from semantic analysis of messaging content are the latest entrants to create a “messaging user interface” thatcommon storage reservoir with our secure cloud. There is linking subscribersopportunity in many areas of the IoT ecosystem for Synchronoss to support utilizing our Activation, Cloud and third parties together across multiple channels. Service providers are not adopting new messaging clients to compete with highly competitive and viral Over the Top (OTT) players. Instead they are adopting monetization techniques used by those players to extend subscriber information into third party applications and chat interfaces creating stickier commerce opportunities. We are working closely with customers, especially in the Asia Pacific market, to evolve Service Provider messaging into a cloud-centric commerce offering utilizing personal cloud, identity management and other advanced messaging protocols that will open up new revenue streams and allow Operators to compete with OTT providers in new ways.Analytics tools.
To support our expected growth, which will be driven by thethese favorable industry trends mentioned above, we continue to look for opportunities to improve our operating efficiencies, such as the utilization of offshore technical and non-technical resources for our exception handling center management as well as routine software maintenance activities. We alsowill leverage modular components from our existing software platforms to build new products. We believe that these opportunities will continue to provide future benefits and position us to supportfor future revenue growth. In addition, we anticipate further automation of the transactions generated by our more mature customers and additional transaction types. Our cost of services can fluctuate from period to period based upon the level of automation and the on-boarding of new transaction and service types. We are also making investments in new research and development of new products designed to enable us to grow rapidly in the mobile wireless market. Our purchase of capital assets and equipment may also increase based on aggressive deployment, subscriber growth and promotional offers for free or bundled storage by our major Tier 1 carrier customers.
We continue to advanceexpand our plans forplatforms into the expansion of our platforms' footprint with broadband carriersconverging TMT, MNO, Digital and international mobile carriersIoT spaces to supportenable connected devices andto do more things across multiple networks, through our focus on transaction managementbrands and cloud-based services for back up, synchronization and sharing of content.communities. Our initiatives with AT&T, Verizon, WirelessSprint, British Telecom, Softbank and other CSPs continue to grow both with regard to our current businessesbusiness as well as our new products. Weproduct offerings.We are also exploring additional opportunities through merger and acquisition activities to support our customer, product and geographic diversification strategies.
Results of operations for the three months ended March 31, 2018 compared to the three months ended March 31, 2017
The following table presents an overview of our results of operations for the three months ended March 31, 2018 and 2017:
|
| | | | | | | | | | | |
| Three months ended March 31, |
| 2018 | 2017 | 2018 vs 2017 |
| $ | | $ | | $ Change |
| (in thousands) |
Net revenues | $ | 83,709 |
| | $ | 86,097 |
| | $ | (2,388 | ) |
Cost of revenues* | 44,549 |
| | 46,055 |
| | (1,506 | ) |
Research and development | 20,905 |
| | 25,489 |
| | (4,584 | ) |
Selling, general and administrative | 38,110 |
| | 38,815 |
| | (705 | ) |
Restructuring charges | 1,108 |
| | 2,998 |
| | (1,890 | ) |
Depreciation and amortization | 23,271 |
| | 24,087 |
| | (816 | ) |
Total costs and expenses | 127,943 |
| | 137,444 |
| | (9,501 | ) |
Loss from continuing operations | $ | (44,234 | ) | | $ | (51,347 | ) | | $ | 7,113 |
|
|
| | |
* | Cost of revenues excludes depreciation and amortization which is shown separately. |
Net revenues decreased $2.4 million to $83.7 million for the three months ended March 31, 2018, compared to the same period in 2017. This was due to an $16.0 million decrease in Cloud revenues primarily resulting from a change in the business model related to one of our largest personal cloud customers and a decrease in subscription and professional services of $5.0 million; a decrease of $4.4 million in Digital Transformation due to a reduction in professional services revenue; offset by an increase in Messaging revenue of $12.8 million primarily due to the delivery of an advanced messaging solution to a customer in the Japanese market. In addition, revenues increased by $10.2 million as a result of the company’s implementation of ASC 606. This resulted in an increase in Digital Transformation revenues of $5.9 million; Cloud revenue of $4.9 million and a decrease in Messaging revenue of $0.6 million.
Cost of revenues decreased $1.5 million to $44.5 million for the three months ended March 31, 2018, compared to the same period in 2017, due primarily to a $3.9 million decrease maintenance costs related as the company moves to a less capital intensive strategy; which was partially offset by a $2.5 million increase in personnel costs driven by growth in personnel to support our business.
Research and development expense decreased $4.6 million to $20.9 million for the three months ended March 31, 2018, compared to the same period in 2017 primarily due to a decrease in personnel related costs of $1.6 million driven by growth in personnel to support our business, and a $3.2 million reduction in professional fees due to higher prior year costs as a result of integration activities.
Selling, general and administrative expense decreased $0.7 million to $38.1 million for the three months ended March 31, 2018, compared to the same period in 2017 primarily due to a $12 million decrease in merger and acquisition costs driven by the prior year acquisition of Intralinks; partially offset by a $10 million increase in professional fees related to our financial restatement process.
Restructuring charges were $1.1 million for the three months ended March 31, 2018 related to employment termination of contracted employees with termination benefits.
Depreciation and amortization expense decreased $0.8 million to $23.3 million for the three months ended March 31, 2018, compared to the same period in 2017 primarily due to decreased acquisition activity combined with the expiration of amortizable assets.
Interest income increased $0.7 million to $3.6 million for the three months ended March 31, 2018, compared to the same period in 2017. Interest income increased primarily due to higher PIK note balance compared to the respective prior year period.
Interest expense decreased $9.4 million to $1.2 million for the three months ended March 31, 2018, compared to the same period in 2017 primarily due to a $7.6 million decrease related to the prior year increase in borrowings outstanding from a $900 million senior secured term loan (the “2017 Term Facility”), which was raised to fund the purchase of Intralinks, as well as
$0.7 million decrease related to the prior year write off of unamortized debt issuance costs due to the decrease in the borrowing capacity of our revolving credit facility of up to $200 million (the “Revolving Facility”).
Other income (expense), net increased $0.1 million to a net other expense of $4.3 million for the three months ended March 31, 2018, compared to a net other income of $4.2 million in the same period in 2017. Other net income increased primarily due to $3.8 million income from the remeasurement of mandatorily redeemable financial instrument, $1.1 million related to foreign currency exchange rate fluctuations; partially offset by the prior year $4.9 million pre-tax gain recognized on the divestiture of our SpeechCycle business.
Income tax. The Company recognized approximately $0.1 million and $8.7 million in related income tax expense and benefit during the three months ended March 31, 2018 and 2017, respectively. The effective tax rate was approximately 0.3% for the three months ended March 31, 2018, which was lower than the U.S. federal statutory rate primarily due to the recording of a non-cash income tax provision of $2.9 million in income tax expense to establish a valuation allowance. The Company considered all available evidence, including historical profitability and projections of future taxable income together with new evidence, both positive and negative, that could affect the view of the future realization of deferred tax assets. As a result of the assessment, a $2.8 million valuation allowance was recorded by the Company during the three months ended March 31, 2018.
The Company’s effective tax rate was approximately 16% for the three months ended March 31, 2017, which was lower than the U.S. federal statutory rate primarily due to the impact of losses in foreign jurisdictions which have lower tax rates than the U.S. The Company reviews the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and forecasted permanent book-to-tax differences, and changes resulting from the impact of tax law changes.
Liquidity and Capital Resources
As of March 31, 2018, our principal sources of liquidity have been cash provided by operations and proceeds from divestitures. Our cash, cash equivalents, marketable securities and restricted cash balance was $320.0 million at March 31, 2018. We anticipate that our principal uses of cash in the future will be to fund the expansion of our business through both organic growth and acquisition activities and the expansion of our customer base. Uses of cash will also include facility and technology expansion, significant integration and restructuring activities, capital expenditures, and working capital.
At March 31, 2018, our non-U.S. subsidiaries held approximately $41.4 million of cash and cash equivalents that are available for use by all of our operations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to U.S. tax for the incremental amount in excess of the foreign tax paid. Due to the timing and circumstances of repatriation of these earnings, if any, it is not practical to determine the unrecognized deferred tax liability related to the amount.
We believe that our existing cash, cash equivalents, marketable securities, expected positive cash flows generated from operations will be sufficient to fund our operations for the next twelve months based on our current business plans. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the "Forward-Looking Statements" section of this MD&A and Part I, Item 1A. “Risk Factors”, some of which are outside of our control.
Convertible Senior Notes
On August 12, 2014, we issued the 2019 Notes. The 2019 Notes mature on August 15, 2019, and bear interest at a rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. We accounted for the $230.0 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance. At March 31, 2018, the carrying amount of the liability was $228.1 million and the outstanding principal of the 2019 Notes was $230.0 million, with an effective interest rate of approximately 1.38%. For further details, see Note 7 - Debt of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Share Repurchase Program
There were no repurchases in 2017 or 2018.
Redeemable Shares
Under the terms of the Share Purchase Agreement, the Company issued Series A Preferred to Siris for consideration totaling $185.0 million, of which $97.7 million was paid in cash, with the remainder settled by Siris’ delivery of 5,994,667 shares of Synchronoss common stock. The Share Purchase Agreement also provided Siris with an option to put those shares to Synchronoss at price of $14.56 per share, or $87.3 million in the aggregate, if the Share Purchase Agreement was terminated. The Share Purchase Agreement required the Company to establish an escrow account of $87.3 million on the earlier date of the sale of Intralinks to Siris or the termination of the Share Purchase Agreement to fund our obligation under the put option. The option was exercised within five days of the termination of the Share Purchase Agreement.
Shares of Preferred Stock
In accordance with the terms of the Share Purchase Agreement dated as of October 17, 2017 (the “PIPE Purchase Agreement”), with Silver, on February 15, 2018, we issued to Silver 185,000 shares of our newly issued Series A Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share, in exchange for $97.7 million in cash and the transfer from Silver to us of the 5,994,667 shares of our common stock held by Silver (the “Preferred Transaction”). In connection with the issuance of the Series A Preferred Stock, we (i) filed the Series A Certificate and (ii) entered into an Investor Rights Agreement with Silver setting forth certain registration, governance and preemptive rights of Silver with respect to us (the “Investor Rights Agreement”). Pursuant to the PIPE Purchase Agreement, at the closing, we paid to Siris $5.0 million as a reimbursement of Silver’s reasonable costs and expenses incurred in connection with the Preferred Transaction.
Certificate of Designation of the Series A Preferred Stock
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series A Preferred Stock are set forth in the Series A Certificate. Under the Series A Certificate, the holders of the Series A Preferred Stock are entitled to receive Preferred Dividends. The Preferred Dividends are due on each Series A Dividend Payment Date. We may choose to pay the Preferred Dividends in cash or in additional shares of Series A Preferred Stock. In the event we do not declare and pay a dividend in-kind or in cash on any Series A Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. In addition, the Series A Preferred Stock participates in dividends declared and paid on shares of our common stock.
Each share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal to the “Conversion Price” (as that term is defined in the Series A Certificate) multiplied by the then applicable “Conversion Rate” (as that term is defined in the Series A Certificate). Each share of Series A Preferred Stock is initially convertible into 55.5556 shares of common stock, representing an initial “conversion price” of approximately $18.00 per share of common stock. The Conversion Rate is subject to equitable proportionate adjustment in the event of stock splits, recapitalizations and other events set forth in the Series A Certificate.
On and after the fifth anniversary of February 15, 2018, holders of shares of Series A Preferred Stock have the right to cause us to redeem each share of Series A Preferred Stock for cash in an amount equal to the sum of the current liquidation preference and any accrued dividends. Each share of Series A Preferred Stock is also redeemable at the option of the holder upon the occurrence of a “Fundamental Change” (as that term is defined in the Series A Certificate) at a specified premium. In addition, we are also permitted to redeem all outstanding shares of the Series A Preferred Stock at any time (i) within the first 30 months of the date of issuance for the sum of the then-applicable Liquidation Preference, accrued but unpaid dividends and a make whole amount and (ii) following the 30-month anniversary of the date of issuance for the sum of the then-applicable Liquidation Preference and the accrued but unpaid dividends.
The holders of a majority of the Series A Preferred Stock, voting separately as a class, are entitled at each of our annual meetings of stockholders or at any special meeting called for the purpose of electing directors (or by written consent signed by the holders of a majority of the then-outstanding shares of Series A Preferred Stock in lieu of such a meeting): (i) to nominate and elect two members of our Board of Directors for so long as the Preferred Percentage (as defined in the Series A Certificate) is equal to or greater than 10%; and (ii) to nominate and elect one member of our Board of Directors for so long as the Preferred Percentage is equal to or greater than 5% but less than 10%.
For so long as the holders of shares of Series A Preferred Stock have the right to nominate at least one director, we are required to obtain the prior approval of Silver prior to taking certain actions, including: (i) certain dividends, repayments and redemptions; (ii) any amendment to our certificate of incorporation that adversely effects the rights, preferences, privileges or voting powers of the Series A Preferred Stock; (iii) issuances of stock ranking senior or equivalent to shares of Series A Preferred Stock (including additional shares of Series A Preferred Stock) in the priority of payment of dividends or in the distribution of assets upon any
liquidation, dissolution or winding up of us; (iv) changes in the size of our Board of Directors; (v) any amendment, alteration, modification or repeal of the charter of our Nominating and Corporate Governance Committee of the Board of Directors and related documents; and (vi) any change in our principal business or the entry into any line of business outside of our existing lines of businesses. In addition, in the event that we are in EBITDA Non-Compliance (as defined in the Series A Certificate) or the undertaking of certain actions would result in us exceeding a specified pro forma leverage ratio, then the prior approval of Silver would be required to incur indebtedness (or alter any debt document) in excess of $10.0 million, enter or consummate any transaction where the fair market value exceeds $5.0 million individually or $10.0 million in the aggregate in a fiscal year or authorize or commit to capital expenditures in excess of $25.0 million in a fiscal year.
Each holder of Series A Preferred Stock has one vote per share on any matter on which holders of Series A Preferred Stock are entitled to vote separately as a class, whether at a meeting or by written consent. The holders of Series A Preferred Stock are permitted to take any action or consent to any action with respect to such rights without a meeting by delivering a consent in writing or electronic transmission of the holders of the Series A Preferred Stock entitled to cast not less than the minimum number of votes that would be necessary to authorize, take or consent to such action at a meeting of stockholders. In addition to any vote (or action taken by written consent) of the holders of the shares of Series A Preferred Stock as a separate class provided for in the Series A Certificate or by the General Corporation Law of the State of Delaware, the holders of shares of the Series A Preferred Stock are entitled to vote with the holders of shares of common stock (and any other class or series that may similarly be entitled to vote on an as-converted basis with the holders of common stock) on all matters submitted to a vote or to the consent of the stockholders of the Company (including the election of directors) as one class.
Under the Series A Certificate, if Silver and certain of its affiliates have elected to effect a conversion of some or all of their shares of Series A Preferred Stock and if the sum, without duplication, of (i) the aggregate number of shares of our common stock issued to such holders upon such conversion and any shares of our common stock previously issued to such holders upon conversion of Series A Preferred Stock and then held by such holders, plus (ii) the number of shares of our common stock underlying shares of Series A Preferred Stock that would be held at such time by such holders (after giving effect to such conversion), would exceed the 19.9% of the issued and outstanding shares of our voting stock on an as converted basis (the “Conversion Cap”), then such holders would only be entitled to convert such number of shares as would result in the sum of clauses (i) and (ii) (after giving effect to such conversion) being equal to the Conversion Cap (after giving effect to any such limitation on conversion). Any shares of Series A Preferred Stock which a holder has elected to convert but which, by reason of the previous sentence, are not so converted, will be treated as if the holder had not made such election to convert and such shares of Series A Preferred Stock will remain outstanding. Also, under the Series A Certificate, if the sum, without duplication, of (i) the aggregate voting power of the shares previously issued to Silver and certain of its affiliates held by such holders at the record date, plus (ii) the aggregate voting power of the shares of Series A Preferred Stock held by such holders as of such record date, would exceed 19.99% of the total voting power of our outstanding voting stock at such record date, then, with respect to such shares, Silver and certain of its affiliates are only entitled to cast a number of votes equal to 19.99% of such total voting power. The limitation on conversion and voting ceases to apply upon receipt of the requisite approval of holders of our common stock under the applicable listing standards.
Form of Investor Rights Agreement
Concurrently with the closing of the Preferred Transaction, Synchronoss and Silver entered into an Investor Rights Agreement. Under the terms of the Investor Rights Agreement, Silver and Synchronoss have agreed that, effective as of the closing of the Preferred Transaction, the Board of Directors of Synchronoss will consist of ten members. From and after the closing of the Preferred Transaction, so long as the holders of Series A Preferred Stock have the right to nominate a member to the Board of Directors pursuant to the Series A Certificate, the Board of Directors of Synchronoss will consist of (i) two directors nominated and elected by the holders of shares of Series A Preferred Stock; (ii) four directors who meet the independence criteria set forth in the applicable listing standards (each of whom will be initially agreed upon by Synchronoss and Silver); and (iii) four other directors, two of whom shall satisfy the independence criteria of the applicable listing standards and, as of the closing of the Preferred Transaction, one of whom shall be the individual then serving as chief executive officer of Synchronoss and one of whom shall be the current chairman of the Board of Directors of Synchronoss as of the date of execution of the Investors Rights Agreement. Following the closing of the Preferred Transaction, so long as the holders of Series A Preferred Stock have the right to nominate at least one director to the Board of Directors of Synchronoss pursuant to the Series A Certificate, Silver will have the right to designate two members of the Nominating and Corporate Governance Committee of the Board of Directors.
Pursuant to the terms of the Investor Rights Agreement, neither Silver nor its affiliates may transfer any shares of Series A Preferred Stock subject to certain exceptions (including transfers to affiliates that agree to be bound by the terms of the Investor Rights Agreement).
For so long as Silver has the right to appoint a director to the Board of Directors of Synchronoss, without the prior approval by a majority of directors voting who are not appointed by the holders of shares of Series A Preferred Stock, neither Silver nor its
affiliates will directly or indirectly purchase or acquire any debt or equity securities of Synchronoss (including equity-linked derivative securities) if such purchase or acquisition would result in Silver’s Standstill Percentage (as defined in the Investor Rights Agreement) being in excess of 30%. However, the foregoing standstill restrictions would not prohibit the purchase of shares pursuant to the PIPE Purchase Agreement or the receipt of shares of Series A Preferred Stock issued as Preferred Dividends pursuant to the Series A Certificate, shares of Common Stock received upon conversion of shares of Series A Preferred Stock or receipt of any shares of Series A Preferred Stock, Common Stock or other securities of the Company otherwise paid as dividends or as an increase of the Liquidation Preference (as defined in the Series A Certificate) or distributions thereon. Silver will also have preemptive rights with respect to issuances of securities of Synchronoss in order to maintain its ownership percentage.
Under the terms of the Investor Rights Agreement, Silver will be entitled to (i) three demand registrations, with no more than two demand registrations in any single calendar year and provided that each demand registration must include at least 10% of the shares of Common Stock held by Silver, including shares of Common Stock issuable upon conversion of shares of Series A Preferred Stock and (ii) unlimited piggyback registration rights with respect to primary issuances and all other issuances.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands):
|
| | | | | | | |
| Three months ended March 31, |
| 2018 | | 2017 |
Net cash provided by (used in): | | | |
Operating activities | $ | (9,389 | ) | | $ | (12,599 | ) |
Investing activities | (13,366 | ) | | (807,267 | ) |
Financing activities | 86,114 |
| | 850,210 |
|
Cash flows from operating activities for the three months ended March 31, 2018 was a $9.4 million use of cash, as compared to $12.6 million of cash used by operating activities for the same period in 2017. The decrease of cash used in operating activities of $3.2 million was primarily due to favorable changes in working capital of $12.7 million being partially offset by unfavorable changes in cash earnings of $9.5 million.
Cash flows from investingfor the three months ended March 31, 2018 was a use of cash of $13.4 million, as compared to $807.3 million in cash used for investing activities during the same period in 2017. The decrease of $793.9 million in cash used in investing activities was due primarily to cash used for the acquisition of Intralinks in 2017.
Cash flows from financing for three months ended March 31, 2018 was $86.1 million, as compared to $850.2 of cash provided by financing activities for the same period in 2017. The decrease of $764.1 million in cash provided from financing activites was primarily due to proceeds from the issuance of debt in relation to our acquisition of Intralinks in 2017, partially offset related debt issuance costs, the repayment of previously existing debt in 2017 and proceeds from the issuance of preferred stock in 2018.
Effect of Inflation
Although inflation generally affects us by increasing our cost of labor and equipment, we do not believe that inflation has had any material effect on our results of operations for the three months ended March 31, 2018 and 2017.
Contractual Obligations
Our contractual obligations consist of principal and interest related to our Convertible Senior Notes and 2017 Term Facility, contingent consideration, non-cancelable capital leases, operating leases or long-term agreements for office space, automobiles, office equipment and colocation services and contractual commitments under third-party hosting, software licenses and maintenance agreements. The following table summarizes our long‑term contractual obligations as of March 31, 2018 (in thousands).
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Remainder of 2018 | | 2019 - 2021 | | 2022 - 2023 | | Thereafter |
Capital lease obligations (1) | | $ | 15,077 |
| | $ | 2,220 |
| | $ | 4,420 |
| | $ | 2,563 |
| | $ | 5,874 |
|
Convertible Senior Notes | | 230,000 |
| | — |
| | 230,000 |
| | — |
| | — |
|
Interest (2) | | 2,372 |
| | 1,294 |
| | 1,078 |
| | — |
| | — |
|
Operating lease obligations | | 83,184 |
| | 7,795 |
| | 20,273 |
| | 18,187 |
| | 36,929 |
|
Purchase obligations (3) | | 16,020 |
| | 6,672 |
| | 9,348 |
| | — |
| | — |
|
Other long-term liabilities (4) | | 5,307 |
| | 171 |
| | 5,136 |
| | — |
| | — |
|
| | | | | | | | | | |
Total | | $ | 351,960 |
| | $ | 18,152 |
| | $ | 270,255 |
| | $ | 20,750 |
| | $ | 42,803 |
|
| |
(1) | Amount includes the Pennsylvania facility lease and the VCHS data center. |
| |
(2) | Represents the interest on the Convertible Senior Notes. |
| |
(3) | Amount represents obligations associated with colocation agreements and other customer delivery related purchase obligations. |
| |
(4) | Amount represents unrecognized tax positions recorded in our balance sheet. Although the timing of the settlement is uncertain, we believe this amount will be settled within 3 years. |
Uncertain Tax Positions
Unrecognized tax benefits of $9.3 million at March 31, 2018 are excluded from the table above as we are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. We do not expect that the balance of unrecognized tax benefits will significantly increase or decrease over the next twelve months.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on ourOur condensed consolidated financial statements whichand accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements in accordance with U.S. GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during a fiscal period. The SEC considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the Audit Committee, and the Audit Committee has reviewed our related disclosures in this Form 10-Q. Although we believe that our judgments and estimates are appropriate, correct and reasonable under the circumstances, actual results may differ from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See “RiskPart II, “Item 1A. Risk Factors” in this Form 10-Q for certain matters bearing risks on our future results of operations.
We believe that of ourDuring the three months ended March 31, 2018, the Company made significant changes in its accounting policies whichover revenue recognition, to align with the adoption of ASU 2014-09, “Revenue from Contracts with Customers,” (“ASC 606” or “Topic 606”). These updates are described in detail in Note 2 in our Annual Report on Form 10-K for- Basis of Presentation and Consolidation. Aside from the year ended December 31, 2015, the following accounting policies involve a greater degreeadoption of judgment and complexity. Accordingly, these are the policies which we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations:
Revenue Recognition and Deferred Revenue
Allowance for Doubtful Accounts
Income Taxes
Goodwill
Noncontrolling interest
Investments in Affiliates and Other Entities
Business Combinations
Stock-Based Compensation
ThereASC 606, there were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K during the ninethree months ended September 30, 2016.March 31, 2018. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 20152017 for a more complete discussion of our critical accounting policies and estimates.
Key Developments
On March 1, 2016, we acquired all outstanding shares of Openwave Messaging, Inc. for $124.5 million, net of working capital adjustments and liabilities assumed, comprised of $102.5 million paid in cash and $22 million paid in shares of our common stock, based upon the average market value of the common stock for the ten trading days prior to the acquisition date.
Openwave’s product portfolio includes its core complete messaging platform optimized for today’s most complex messaging requirements worldwide with a particular geographic strength in Asia Pacific. With this acquisition and combined with our current global footprint, we will have increased direct access to subscribers around the world for the Synchronoss Personal Cloud platform and bolster our go-to-market efforts internationally.
Results of Operations
Three months ended September 30, 2016compared to the three months ended September 30, 2015
The following table presents an overview of our results of operations for the three months ended September 30, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2016 | | 2015 | | 2016 vs 2015 |
| $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change |
| (in thousands) |
Net revenues | $ | 176,421 |
| | 100 | % | | $ | 150,874 |
| | 100 | % | | $ | 25,547 |
| | 17 | % |
Cost of services* | 77,230 |
| | 44 | % | | 63,438 |
| | 42 | % | | 13,792 |
| | 22 | % |
Research and development | 28,141 |
| | 16 | % | | 23,986 |
| | 16 | % | | 4,155 |
| | 17 | % |
Selling, general and administrative | 31,600 |
| | 18 | % | | 21,003 |
| | 14 | % | | 10,597 |
| | 50 | % |
Net change in contingent consideration obligation | 572 |
| | — | % | | — |
| | — | % | | 572 |
| | 100 | % |
Restructuring charges | 977 |
| | 1 | % | | 399 |
| | — | % | | 578 |
| | 145 | % |
Depreciation and amortization | 24,692 |
| | 14 | % | | 19,754 |
| | 13 | % | | 4,938 |
| | 25 | % |
Total costs and expenses | 163,212 |
| | 93 | % | | 128,580 |
| | 85 | % | | 34,632 |
| | 27 | % |
Income from operations | $ | 13,209 |
| | 7 | % | | $ | 22,294 |
| | 15 | % | | $ | (9,085 | ) | | (41 | )% |
|
| |
* | Cost of services excludes depreciation and amortization which is shown separately. |
Net revenues. Net revenues increased $25.5 million to $176.4 million for the three months ended September 30, 2016, compared to the same period in 2015. Transaction and subscription revenues as a percentage of sales were 66% or $117.1 million for the three months ended September 30, 2016, compared to 73% or $109.4 million for the same period in 2015. The $7.7 million increase in transaction and subscription revenue is primarily driven by new subscription arrangements as a result of our expansion with new customers. Professional service and license revenues as a percentage of sales were 34% or $59.3 million for the three months ended September 30, 2016, compared to 27% or $41.5 million for the same period in 2015. The increase in professional services and license revenue is primarily due to new license agreements and expansion of services with our customers.
Net revenues related to Activation Solutions decreased $0.3 million to $74.5 million for the three months ended September 30, 2016, compared to the same period in 2015. Net revenues related to Activation Solutions represented 42% for the three months ended September 30, 2016, compared to 50% for the same period in 2015. Net revenues related to our Cloud Solutions increased by $25.8 million to $101.9 million for the three months ended September 30, 2016, compared to the same period in 2015. This increase in our Cloud Solutions performance was a result of new cloud offerings with existing customers as well as increased international sales. Net revenues related to our Cloud Solutions represented 58% for the three months ended September 30, 2016, compared to 50% for the same period in 2015.
Expenses
Cost of services. Cost of services increased $13.8 million to $77.2 million for the three months ended September 30, 2016, compared to the same period in 2015, due primarily to increases in personnel and related costs, migration and integration of our acquired businesses. Personnel and related costs increased $5.0 million due to increased headcount from the Openwave acquisition and the launch of our Enterprise solution. Outside consulting expenses increased $5.7 million as a result of increased usage of third party exception handling vendors. Facility costs increased by $2.3 million which was primarily driven by increased costs for service contracts due to the expansion of our operational footprint.
Research and development. Research and development expense increased $4.2 million to $28.1 million for the three months ended September 30, 2016, compared to the same period in 2015 primarily due to an increase of $2.9 million in outside consultant expense which was driven by the launch of our Enterprise solution.
Selling, general and administrative. Selling, general and administrative expense increased $10.6 million to $31.6 million for the three months ended September 30, 2016, compared to the same period in 2015. The increase was driven by a $3.7 million increase in personnel and related costs which were impacted by increased headcount due to the launch of our Enterprise solution and our Openwave acquisition. There was an increase in professional services of $1.9 million related to accounting and legal costs resulting from our acquisitions and tax planning efforts. The remaining increase related to a $2.5 million increase in bad debt expense.
Net change in contingent consideration obligation. The net change in contingent consideration obligation was an increase of $0.6 million for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. This was due to an increase in the probability of achieving the contractual milestones associated with the Razorsight earn-out. There was no contingent consideration balance for the three months ended September 30, 2015 due to the completion of all prior earn-out periods.
Restructuring charges. Restructuring charges were $1.0 million for the three months ended September 30, 2016, related to employment termination costs as a result of the work‑force reduction plan started in March 2016 to reduce costs and align our resources with our key strategic priorities.
Depreciation and amortization. Depreciation and amortization expense increased $4.9 million to $24.7 million for the three months ended September 30, 2016, compared to the same period in 2015. This was primarily related to the increase in depreciable assets necessary for the continued expansion of our platforms and amortization of our newly acquired intangible assets related to our recent acquisitions.
Interest income. Interest income decreased $0.3 million to $0.3 million for the three months ended September 30, 2016, compared to the same period in 2015 due to a change in our portfolio allocations.
Interest expense. Interest expense increased $0.1 million to $1.6 million for the three months ended September 30, 2016, compared to the same period in 2015.
Other income (expense), net. Other income (expense) increased $0.9 million to $0.2 million for the three months ended September 30, 2016, compared to the same period in 2015. Other income (expense) increased primarily due to a one-time $0.5 million benefit from the restructuring of specific facility leases.
Income tax. We recognized approximately $6.9 million and $10.7 million in related income tax expenses during the three months ended September 30, 2016 and 2015, respectively. Our effective tax rate was approximately 59% for the three months ended September 30, 2016, which was higher than our U.S. federal statutory rate primarily due to the unfavorable impact of losses in foreign jurisdictions, which have lower tax rates than the U.S. and the unfavorable impact of the fair market value adjustment for the contingent consideration obligation related to the Razorsight earn-out. Our effective tax rate was approximately 53% for the three months ended September 30, 2015, which was higher than our U.S. federal statutory rate due to the unfavorable impact of losses in foreign jurisdictions, which have lower tax rates than the U.S. and the unfavorable impact of transaction costs related to the purchase of Razorsight, which are required to be capitalized for income tax purposes.
Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015
The following table presents an overview of our results of operations for the nine months ended September 30, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2016 | | 2015 | | 2016 vs 2015 |
| $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change |
| (in thousands) |
Net revenues | $ | 476,658 |
| | 100 | % | | $ | 421,620 |
| | 100 | % | | $ | 55,038 |
| | 13 | % |
Cost of services* | 217,004 |
| | 46 | % | | 172,013 |
| | 41 | % | | 44,991 |
| | 26 | % |
Research and development | 78,408 |
| | 16 | % | | 68,472 |
| | 16 | % | | 9,936 |
| | 15 | % |
Selling, general and administrative | 89,799 |
| | 19 | % | | 60,603 |
| | 14 | % | | 29,196 |
| | 48 | % |
Net change in contingent consideration obligation | 7,299 |
| | 2 | % | | — |
| | — | % | | 7,299 |
| | 100 | % |
Restructuring charges | 5,139 |
| | 1 | % | | 5,090 |
| | 1 | % | | 49 |
| | 1 | % |
Depreciation and amortization | 74,009 |
| | 16 | % | | 51,221 |
| | 12 | % | | 22,788 |
| | 44 | % |
Total costs and expenses | 471,658 |
| | 99 | % | | 357,399 |
| | 85 | % | | 114,259 |
| | 32 | % |
Income from operations | $ | 5,000 |
| | 1 | % | | $ | 64,221 |
| | 15 | % | | $ | (59,221 | ) | | (92 | )% |
|
| |
* | Cost of services excludes depreciation and amortization which is shown separately. |
Net revenues. Net revenues increased $55.0 million to $476.7 million for the nine months ended September 30, 2016, compared to the same period in 2015. Transaction and subscription revenues as a percentage of sales were 69% or $330.9 million for the nine months ended September 30, 2016 compared to 73% or $306.0 million for the same period in 2015. The increase in transaction and subscription revenue is primarily driven by new subscription arrangements as a result of our expansion with new customers. Professional service and license revenues as a percentage of sales were 31% or $145.7 million for the nine months ended September 30, 2016, compared to 27% or $115.6 million for the same period in 2015. The increase in professional services and license revenue is primarily due to new license agreements and expansion of services with our customers.
Net revenues related to Activation Solutions decreased $0.6 million to $202.0 million for the nine months ended September 30, 2016, compared tothe same period in 2015. Net revenues related to Activation Solutions represented 42% for the nine months ended September 30, 2016, compared to 48% for the same period in 2015. Net revenues related to our Cloud Solutions increased by $55.6 million to $274.7 million of our revenues for the nine months ended September 30, 2016 compared to the same period in 2015. The increase in our Cloud Solution performance was a result of new cloud offerings with new and existing customers. Net revenues related to our Cloud Solutions represented 58% for the nine months ended September 30, 2016, compared to 52% for the same period in 2015.
Expenses
Cost of services. Cost of services increased $45.0 million to $217.0 million for the nine months ended September 30, 2016, compared to the same period in 2015, due primarily to increases in personnel and related costs, migration and integration of our acquired businesses. Personnel and related costs increased $11.0 million due to increased headcount from the Openwave acquisition and the launch of our Enterprise solution. Outside consulting expenses increased $15.3 million, of which $5.7 million of costs related to the launch of our Enterprise solution and increased usage of our third-party exception handling vendors. Facility costs increased by $16.3 million this was primarily driven by increased costs for service contracts due to the expansion of our operational footprint.
Research and development. Research and development expense increased $9.9 million to $78.4 million for the nine months ended September 30, 2016, compared to the same period in 2015 primarily due to an increase of $11.1 million in outside consultant expense which was mostly driven by the launch of our Enterprise solution offset by a $1.1 million decrease in personnel and related costs due to the capitalization of qualified software costs.
Selling, general and administrative. Selling, general and administrative expense increased $29.2 million to $89.8 million for the nine months ended September 30, 2016, compared to the same period in 2015. The increase was driven in part by a $13.3 million increase in personnel and related costs which were driven by additional headcount due to the launch of our Enterprise solution and our Openwave acquisition. There was also a $4.5 million increase in outside consultants, of which the most significant increase related to costs incurred for the launch of our Enterprise solution. The remaining increases included $2.5 million related to facilities and $3.3 million related to increases in bad debt expense.
Net change in contingent consideration obligation. The net change in contingent consideration obligation was a $7.3 million increase for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. This was due to an increase in the probability of achieving the contractual milestones associated with the Razorsight earn-out. There was no contingent consideration for the nine months ended September 30, 2015 due to the completion of all prior earn-out periods.
Restructuring charges. Restructuring charges were $5.1 million for the nine months ended September 30, 2016, related to employment termination costs as a result of the work‑force reduction plan started in March 2016 to reduce costs and align our resources with our key strategic priorities.
Depreciation and amortization. Depreciation and amortization expense increased $22.8 million to $74.0 million for the nine months ended September 30, 2016, compared to the same period in 2015, primarily related to the increase in depreciable assets necessary for the continued expansion of our platforms and amortization of our newly acquired intangible assets related to our recent acquisitions.
Interest expense. Interest expense increased $0.8 million to $5.0 million for the nine months ended September 30, 2016, compared to the same period in 2015 due to an increase of approximately $0.8 million related to the drawdown from the Amended Credit Facility.
Other income (expense), net. Other income (expense) increased $0.4 million to $0.2 million for the nine months ended September 30, 2016, compared to the same period in 2015. Other income (expense) increased primarily due to a one-time $0.5 million benefit from the restructuring of specific facility leases.
Income tax. We recognized approximately $14.9 million and $25.5 million in related income tax expense during the nine months ended September 30, 2016 and 2015, respectively. Our effective tax rate was approximately 1,143% for the nine months ended September 30, 2016, which was higher than our U.S. federal statutory rate primarily due to the unfavorable impact of losses in foreign jurisdictions, which have lower tax rates than the U.S., the unfavorable impact of the fair market value adjustment for the Razorsight contingent consideration obligation and the recording of a non-cash income tax provision to establish a valuation allowance. We considered all available evidence, including our historical profitability and projections of future taxable income together with new evidence, both positive and negative, that could affect the view of the future realization of deferred tax assets. As a result of our assessment, we recorded a $2.9 million valuation allowance which reduced the deferred tax asset related to our current net operating losses of certain foreign subsidiaries. Our effective tax rate was approximately 42% for the nine months ended September 30, 2015, which was higher than our U.S. federal statutory rate due to the unfavorable impact of losses in foreign jurisdictions We review the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and forecasted permanent book-to-tax differences, and changes resulting from the impact of tax law changes.
Liquidity and Capital Resources
Our principal source of liquidity has been cash provided by operations and borrowings on our Credit Facility. Our cash, cash equivalents and marketable securities balance was $144.3 million at September 30, 2016, a decrease of $89.4 million as compared to the balance at December 31, 2015. This decrease was primarily due to our acquisition of Openwave, the unfavorable timing of collections, purchases of fixed assets and repurchases of outstanding common stock under the Board approved repurchase program. This was offset by borrowings under the Credit Facility and cash provided by operations. We anticipate that our principal uses of cash in the future will be to fund the expansion of our business through both organic growth as well as possible acquisition activities and the expansion of our customer base. Uses of cash will also include facility and technology expansion, capital expenditures, and working capital.
At September 30, 2016, our non-U.S. subsidiaries held approximately $25.0 million of cash and cash equivalents that are available for use by all of our operations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries, except those acquired as part of the Openwave acquisition, will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to U.S. tax for the incremental amount in excess of the foreign tax paid. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practical to determine the unrecognized deferred tax liability related to the amount.
Credit Facility
In September 2013, we entered into a Credit Agreement (the “Credit Facility”) with JP Morgan Chase Bank, N.A., as the administrative agent, Wells Fargo Bank, National Association, as the syndication agent and Capital One, National Association and KeyBank National Association, as co-documentation agents. The Credit Facility, which was used for general corporate purposes, was a $100 million unsecured revolving line of credit that matures on September 27, 2018. We paid a commitment fee in the range of 25 to 35 basis points on the unused balance of the revolving credit facility under the Credit Agreement. We had the right to request an increase in the aggregate principal amount of the Credit Facility to $150 million.
Interest on the borrowing were based upon LIBOR plus a 2.25 basis point margin. All outstanding balances under the Credit Facility were repaid on July 7, 2016 and the Credit Facility was terminated and replaced with the Amended Credit Facility.
Amended Credit Facility
On July 7, 2016, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Administrative Agent”) and the several lenders party thereto (the “Amended Credit Facility”). The Amended Credit Facility, which will be used for general corporate purposes, is a $250 million unsecured revolving line of credit that matures on July 7, 2021, subject to terms and conditions set forth therein. We pay a commitment fee in the range of 15 to 30 basis points on the unused balance of the revolving credit facility under the Credit Agreement. We have the right to request an increase in the aggregate principal amount of the Amended Credit Facility to $350 million.
Interest on the borrowing was based upon LIBOR plus a 1.99 basis point margin. As of September 30, 2016, we have an outstanding balance of $38 million on our Amended Credit Facility.
The Amended Credit Facility is subject to certain financial covenants. As of September 30, 2016, we were in compliance with all required covenants.
Convertible Senior Notes
On August 12, 2014, we issued $230.0 million aggregate principal amount of 0.75% Convertible Senior Notes due in 2019 (the “2019 Notes”). The 2019 Notes mature on August 15, 2019, and bear interest at a rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. We accounted for the $230 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance. At September 30, 2016, the carrying amount of the liability was $225.9 million and the outstanding principal of the 2019 Notes was $230.0 million, with an effective interest rate of approximately 1.39%.
Share Repurchase Program
On February 4, 2016, we announced that our Board of Directors approved a share repurchase program under which we may repurchase up to $100 million of our outstanding common stock. We plan to make such purchases at prevailing prices over the next 12 to 18 months.
As of September 30, 2016, we repurchased approximately 1.3 million shares of our common stock for $40.0 million in connection with our existing share repurchase program.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands):
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2016 | | 2015 |
Net cash provided by (used in): | | | (As adjusted) |
Operating activities | $ | 56,484 |
| | $ | 76,574 |
|
Investing activities | (80,479 | ) | | (168,700 | ) |
Financing activities | (1,915 | ) | | (3,058 | ) |
Cash flows from operations. Net cash provided by operating activities for the nine months ended September 30, 2016 was $56.5 million, as compared to $76.6 million for the same period in 2015. Cash flows from operations decreased by approximately $20.1 million and was primarily impacted by the increased levels of net working capital, specifically, the unfavorable timing of collections.
Cash flows from investing. Net cash used in investing activities for the nine months ended September 30, 2016 was $80.5 million, as compared to $168.7 million used for the same period in 2015. The decrease of approximately $88.2 million was primarily due to decreased purchases of marketable securities.
Cash flows from financing. Net cash used in financing activities for the nine months ended September 30, 2016 was $1.9 million, as compared to $3.1 million used by financing activities for the same period in 2015. The decrease in net cash used in financing activities for the nine months ended September 30, 2016 of $1.1 million as compared to 2015 was primarily due to higher net borrowings of $38 million offset by share repurchases of $40 million.
We believe that our existing cash and cash equivalents, cash generated from our existing operations, our available credit facilities and other available sources of financing will be sufficient to fund our operations for the next twelve months based on our current business plans.
Effect of Inflation
Although inflation generally affects us by increasing our cost of labor and equipment, we do not believe that inflation has had any material effect on our results of operations for the nine months ended September 30, 2016 or 2015.
Impact of Recently Issued Accounting Standards
In August 2016, theFor a discussion of recently issued accounting standards see Note 2, “Basis of Presentation and Consolidation” included in Part I, Item 1. “Notes to Condensed Consolidated Financial Account Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, “StatementStatements (unaudited)” of Cash Flows” (“ASU 2016-15). This new guidance will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. ASU 2016-15 will require adoptionthis Quarterly Report on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. Management is currently evaluating the impact of ASU 2016-15 on our condensed consolidated financial statements.Form 10-Q.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications. The new standards are effective for public reporting companies for interim and annual periods beginning after December 15, 2017. Management is currently evaluating the effect that these ASUs will have on our consolidated financial statements and related disclosures. Management has not yet selected a transition method nor has it determined the effect of these standards on our ongoing financial reporting.
Impact of New Accounting Pronouncements
In March, 2016, the FASB released Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments may significantly impact net income, earnings per share, and the statement of cash flows. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. Management elected to early adopt this standard in the second quarter ended June 30, 2016.
ASU 2016-09 eliminates the requirement to estimate and apply a forfeiture rate to reduce stock compensation expense during the vesting period and, instead, account for forfeitures as they occur. ASU 2016-09 requires that this change be adopted using the modified retrospective approach. As such, we recorded a cumulative-effect adjustment of $1.0 million to adjust our retained earnings.
Under ASU 2016-09, excess tax benefits related to employee share-based payments are not reclassified from operating activities to financing activities in the statement of cash flows. We applied the effect of ASU 2016-09 to the presentation of excess tax benefits in the statement of cash flows, retrospectively. This change increased the net cash provided by operating activities and decreased net cash provided by financing activities by $4.7 million for the nine months ended September 30, 2015.
Under ASU 2016-09, cash paid when withholding shares for tax withholding purposes are classified as a financing activity in the statement of cash flows. ASU 2016-09 requires that this change be adopted retrospectively. The presentation requirements for cash flows related to employee taxes paid for withheld shares increased the net cash provided by operating activities and decreased net cash provided by financing activities by $15.5 million for the nine months ended September 30, 2015.
ASU 2016-09 eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. This decreased our effective tax rate for the three months ended September 30, 2016 by 2% and increased our effective tax rate by 51% for the nine months ended September 30, 2016. The ASU requires that this change be adopted prospectively. We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in our computation of diluted earnings per share for the three months ended September 30, 2016. This increased our diluted weighted average common shares outstanding by 43,762 shares and decreased the diluted weighted average common shares outstanding by 121,041 for the three and nine months ended September 30, 2016, respectively.
ASU 2016-09 eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before they can be recognized. Previously unrecognized deferred tax assets were recognized on a modified retrospective basis which resulted in a cumulative-effect adjustment to our retained earnings of $0.5 million.
Adoption of the new standard impacted our previously reported quarterly results as follows:
|
| | | | | | | |
| Three Months Ended March 31, 2016, |
| As reported | | As adjusted |
Income statement: | |
| | |
|
Provision for income taxes | $ | (3,965 | ) | | $ | (4,588 | ) |
Cash flows statement: | |
| | |
|
Net cash from operations | $ | 37,731 |
| | $ | 40,489 |
|
Net cash used in financing | (35,253 | ) | | (32,495 | ) |
Balance sheet: | |
| | |
|
Deferred tax liability | $ | 23,096 |
| | $ | 22,864 |
|
Additional paid-in capital | 535,326 |
| | 536,659 |
|
Retained earnings | 194,012 |
| | 192,911 |
|
Management adopted ASU 2015-03, “Interest- Imputation of Interest (subtopic 835-30); Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associate with Line of Credit Arrangements, during the first quarter of 2016, concurrently. The adoption of these ASUs required us to reclassify the deferred financing costs associated with our Convertible Senior Notes from other assets to long-term debt on a retrospective basis. Our consolidated balance sheets included deferred financing costs of $4.1 million and $5.1 million as of September 30, 2016 and December 31, 2015, respectively, which were reclassified from other assets to long-term debt. The debt issuance costs associated with our Credit Facility and Amended Credit Facility continue to be presented in other assets on the condensed consolidated balance sheets.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2016March 31, 2018 and December 31, 20152017 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our interests.investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
In additionThe following discussion about market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We deposit our excess cash in what we believe are high-quality financial instruments, primarily money market funds and certificates of deposit and, we may be exposed to market risks related to changes in interest rates. We do not actively manage the other information set forthrisk of interest rate fluctuations on our marketable securities; however, such risk is mitigated by the relatively short-term nature of these investments. These investments are denominated in this report, you should carefully consider the factors discussed in Part II, “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” inUnited States dollars.
The primary objective of our Annual Report on Form 10-Kinvestment activities is to preserve our capital for the year ended purpose of funding operations, while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short- and long-term investments in a variety of securities, which could include commercial paper, money market funds and corporate and government debt securities. Our cash, cash equivalents and marketable securities at March 31, 2018 and December 31, 2015, which could materially affect our business, financial condition or future results. We believe our exposure associated with these2017 were invested in liquid money market risks has not changed materially since December 31, 2015.accounts, certificates of deposit and government securities. All market-risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Exchange Risk
We are exposed to translation risk because certain of our foreign operations utilize the local currency as their functional currency and those financial results must be translated into U.S dollars. As currency exchange rates fluctuate, translation of the financial statements of foreign businesses into U.S. dollars affects the comparability of financial results between years.
We do not hold any derivative instruments and do not engage in any hedging activities. Although our reporting currency is the U.S. dollar, we may conduct business and incur costs in the local currencies of other countries in which we may operate, make sales and buy materials and services. As a result, we are subject to foreign currency translationtransaction risk. Further, changes in exchange rates between foreign currencies and the U.S. dollar could affect our future net sales, cost of sales and expenses and could result in exchangeforeign currency transaction gains or losses.
We cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on our business, results of operations and financial condition. To the extent that our international activities recorded in local currencies increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase and hedging activities may be considered if appropriate.
Interest Rate Risk
We are exposed to the risk of interest rate fluctuations on the interest income earned on our cash and cash equivalents. A hypothetical 100 basis point movement in interest rates applicable to our cash and cash equivalents outstanding at September 30, 2016March 31, 2018 would increase interest income by less than $0.5$0.3 million on an annual basis.
Borrowings under our credit facility, areAs of March 31, 2018, we held a contingent derivative interest fair valued at variable rates of interest and expose us to interest rate risk. As such, our net income is sensitive to movements in interest rates. If interest rates increase, our debt obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. Such increases in interest rates could have a material adverse effect on our cash flow and financial condition. We do not hold any derivative instruments and do not engage in any hedging activities to mitigate interest rate risk.
Based on our outstanding borrowings at September 30, 2016, a one-percentage point change in interest rates would have affected interest expense on the debt by $0.4 million on an annualized basis.$0.1 million.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.Background
Under the supervision andIn connection with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectivenesspreparation of the designCompany’s Form 10-Q for the first quarter of 2017 and operation of our disclosure controlsa related internal investigation commenced by the Audit Committee, certain errors related to the Company’s accounting treatment for software license revenue were identified. The Company subsequently completed additional accounting review procedures and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2016. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of September 30, 2016, the end of the period covered by this quarterly report, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.identified other errors discussed further below.
Changes in internal controls over financial reporting
On March 1, 2016, we completed our acquisition of Openwave Messaging, Inc. (“Openwave”). SEC guidance permits management to omit an assessment of an acquired business' internal control over financial reportingThe accounting errors referenced above resulted from management's assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. Accordingly, we have not assessed Openwaves’ internal control over financial reporting as of September 30, 2016.
Excluding the Openwave acquisition, there were no changescertain material weaknesses in our internal control over financial reporting duringreporting. These material weaknesses were identified after the Company’s filing of its Form 10-K for the year ended December 31, 2016. Management determined these material weaknesses and other control deficiencies were primarily the result of an ineffective control environment. As a result, the Company lacked effective control activities necessary to prepare accurate financial statements and ensure compliance with regulatory filing requirements applicable to public companies. These material weaknesses are further described in subsection “Evaluation of Disclosure Controls and Procedures” in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2017
In addition to the foregoing, beginning in the second quarter of 2017, the Audit Committee authorized an investigative review by its independent counsel and a third-party forensic consulting firm acting at the direction of independent counsel. The need for this investigation arose from allegations brought to the attention of management and the Audit Committee. The investigation related to potential accounting errors in the areas of revenue recognition and asset impairment. This investigation and the related findings are further described in subsection “Evaluation of Disclosure Controls and Procedures” in Part II, Item 9A of our Annual Report on Form 10-K for the year ended September 30, 2016 that have materially affected, or are reasonably likelyDecember 31, 2017. The errors and misstatements identified as part of these investigations were corrected, as appropriate, in the Company’s prior period financial statements.
Please refer to materially affect,subsection “Evaluation of Disclosure Controls and Procedures” in Part II, Item 9A, as well as, Note 2 - Restatement of Previously Issued Financial Statements of the Notes to Consolidated Financial Statements in Item 8 contained in Part II, Item 7 of our internal control over financial reporting.Annual Report on Form 10-K for the year ended December 31, 2017 for a more complete discussion of the findings.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 7, 2014, we filed an amended complaint in the United States District Court for the District of New Jersey (Civ Act. No. 3:14-cv-06220) against F-Secure Corporation and F-Secure, Inc. (collectively, “F-Secure"), claiming that F-Secure has infringed, and continues to infringe, severalFor a discussion of our patents. In February 2015, we entered into a patent license and settlement agreement with F-Secure Corporation and F-Secure, Inc. whereby we granted each of these companies (but not their subsidiaries or affiliates) a limited license to our patents. As a result of entering into the patent license and settlement agreement, the parties filed a joint stipulation to dismiss the above complaint.
Our 2011 acquisition agreement with Miyowa SA provided that former shareholders of Miyowa SA would be eligible for earn-out payments to the extent specified business milestones were achieved following the acquisition. In December 2013, Eurowebfund and Bakamar, two former shareholders of Miyowa SA filed a complaint against us in the Commercial Court of Paris, France claiming that they are entitled to certain earn-out payments under the acquisition agreement. We were served with a copy of this complaint in January 2014. On December 3, 2015, the Court dismissed all claims in the complaint against us. On December 19, 2015, the former shareholders of Miyowa filed an appeal with the Court of Appeal of Paris, France, appealing the Court’s decision. Although we cannot predict the outcome of the appeal, or estimate any potential loss if the outcome is adverse, due to the inherent uncertainties of litigation, we believe the positions of Eurowebfund and Bakamar are without merit, and we intend to vigorously defend all claims brought by them.
We are not currently subject to anymaterial pending legal proceedings that could have a material adverse effectimpact our results of operations, financial condition or cash flows see Note 12, “Commitments and Contingencies” included in Part I, Item 1. “Notes to Condensed Consolidated Financial Statements (unaudited)” of this Quarterly Report on our operations; however, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business. We are currently the plaintiff in several patent infringement cases. The defendants in several of these cases from time to time may file counterclaims. Although due to the inherent uncertainties of litigation, we cannot predict the outcome of any of these actions at this time, we continue to pursue our claims and believe that any counterclaims are without merit, and we intend to defend against all such counterclaims.Form 10-Q.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015,2017, which could materially affect our business, financial condition or future results. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. If any of the risks actually occur, our business, financial condition or results of operations could be negativelyadversely affected. In that case, the trading price of our stock could decline, and our stockholders may lose part or all of their investment.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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| | | |
Exhibit No. | | Description |
3.1 |
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3.2 | |
3.2 |
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3.4 | |
3.3 |
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4.1 |
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4.2 |
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4.3 |
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10.8 | Amended and Restated Credit Agreement dated as of July 7, 2016 between the Registrant and Wells Fargo Bank, National Association, as Administrative Agent |
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10.8.1 | |
4.4 |
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10.8.210.1 | Third Amendment Lease
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10.2‡ |
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10.9 | |
10.3‡ |
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10.9.1 | |
10.4† |
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10.5† |
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10.6† |
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10.7† |
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10.8† |
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10.9† |
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10.10† |
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10.11† |
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10.12† |
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10.13† |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
| | XBRL Instance Document |
101.SCH |
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101.SCH | XBRL Schema Document |
101.CAL |
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101.CAL | XBRL Calculation Linkbase Document |
101.DEF |
| |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
101.LAB |
| | XBRL Labels Linkbase Document |
101.PRE |
| | XBRL Presentation Linkbase Document |
| |
101.LAB† | XBRL Taxonomy Extension Label LinkbaseCompensation Arrangement. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.