|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2016 | | 2015 | | 2016 | | 2015 |
| Commitment fees | $ | 154 |
| | $ | 89 |
| | $ | 272 |
| | $ | 241 |
|
| Interest expense | 230 |
| | — |
| | 753 |
| | — |
|
| |
(1) | Unamortized debt issuance cost is related to Convertible Senior Notes. |
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 maturewere paid at maturity on August 15, 2019.
The 2019 and bearNotes bore an 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 arewere senior, unsecured obligations of the Company, and arewere 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 arewere 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. As of the maturity date, none of the 2019 Notes were converted to common stock.
Holders of the 2019 Notes who convertconverted 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,the maturity date of the 2019 Notes, none of these conditions existed with respect to the 2019 Notes and as a result, the 2019 Notes are classified as long term.existed.
The 2019 Notes arewere 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.
At September 30, 2016, the carrying amount of the liability was $225.9 million and the outstanding principal of the 2019 Notes was $230 million, with an effective interest rate of approximately 1.39%. The fair value of the 2019 Notes was $248.3 million at September 30, 2016. 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.
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 September 30, | | Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Convertible Senior Notes | | | | | | | | |
| Amortization of debt issuance costs | | $ | 36 |
| | $ | 354 |
| | $ | 273 |
| | $ | 1,060 |
|
| Interest on borrowings | | 66 |
| | 430 |
| | 363 |
| | 1,292 |
|
| Additional interest on default | | — |
| | — |
| | — |
| | 192 |
|
| Capital leases | | — |
| | 241 |
| | — |
| | 724 |
|
| Other | | 101 |
| | 345 |
| | 615 |
| | 667 |
|
| Total | | $ | 203 |
| | $ | 1,370 |
| | $ | 1,251 |
| | $ | 3,935 |
|
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. Accumulated Other Comprehensive (Loss) / Income
The changes in accumulated other comprehensive (loss) income during the nine months ended September 30, 2019 were as follows:
|
| | | | | | | | | | | | | | | |
| | Balance at December 31, 2018 | | Other comprehensive loss | | Tax effect | | Balance at September 30, 2019 |
| Foreign currency | $ | (26,436 | ) | | $ | (1,928 | ) | | $ | — |
| | $ | (28,364 | ) |
| Unrealized loss on intra-entity foreign currency transactions | (3,906 | ) | | (1,207 | ) | | 348 |
| | (4,765 | ) |
| Unrealized holding losses on marketable debt securities | (41 | ) | | (710 | ) | | — |
| | (751 | ) |
| Total | $ | (30,383 | ) | | $ | (3,845 | ) | | $ | 348 |
| | $ | (33,880 | ) |
10. Restructuring
9. Stockholders’ Equity
There were no significant changes to Company’s authorized capital stock and preferred stock during the nine months ended September 30, 2019.
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.
Preferred Stock
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.
In accordance with the terms of the Share Purchase Agreement dated as of October 17, 2017 (the “PIPE Purchase Agreement”), with Silver Private Holdings I, LLC, an affiliate of Siris (“Silver”), on February 15, 2018, the Company issued to Silver 185,000 shares of its newly issued Series A Convertible Participating Perpetual Preferred Stock (the “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 the Company of the 5,994,667 shares of the Company’s common stock held by Silver (the “Preferred Transaction”).
As of September 30, 2019, there were 210,000 shares of Series A Preferred Stock outstanding, including the initial issuance of 185,000 shares of Series A Preferred Stock and the issuance of 25,000 shares of Series A Preferred Stock as dividends.
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
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
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 (“Liquidation Value”). 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 (known as “Redemption Value”) 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. As of September 30, 2019, the Liquidation Value and Redemption Value of the Preferred Shares was $243.1 million.
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 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 the Company; (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
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
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.
Investor Rights Agreement
In March 2016,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 initiatedotherwise paid as dividends or as an increase of the preliminary phaseLiquidation 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 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.
A summary of the Company’s Series A Convertible Participating Perpetual Preferred Stock balance at September 30, 2019 and changes during the nine months ended September 30, 2019, are presented below:
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 |
| | Shares | | Amount |
| Balance at December 31, 2018 | 195 |
| | $ | 176,603 |
|
| Issuance of preferred stock | 15 |
| | — |
|
| Initial discount and issuance costs related to preferred stock | — |
| | — |
|
| Amortization of preferred stock issuance costs | — |
| | 1,586 |
|
| Issuance of preferred PIK dividend | — |
| | 14,407 |
|
| Balance at September 30, 2019 | 210 |
| | $ | 192,596 |
|
Subsequent to September 30, 2019, the Company paid the accrued Preferred Dividends in-kind of $7.6 million.
Registration Rights
There were no significant changes to the Company’s registration rights during the three and nine months ended September 30, 2019.
Stock Plans
There were no significant changes to the Company’s Stock Plans during the three and nine months ended September 30, 2019. As of September 30, 2019, there were 2.0 million shares available for the grant or award under the Company’s 2015 Plan and 0.3 million shares available for the grant or award under the Company’s 2017 New hire equity incentive Plan.
The Company’s performance cash awards granted to executives under the Long Term Incentive (“LTI”) Plans have been accounted for as liability awards, due to the Company’s intent and the ability to settle such awards in cash upon vesting and has reflected such awards in accrued expenses. As of September 30, 2019, the liability for such awards is approximately $0.7 million.
Stock-Based Compensation
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by operating expense categories, as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Cost of revenues | $ | 804 |
| | $ | 1,035 |
| | $ | 2,147 |
| | $ | 3,447 |
|
| Research and development | 1,117 |
| | 1,340 |
| | 3,231 |
| | 4,682 |
|
| Selling, general and administrative | 4,079 |
| | 4,841 |
| | 11,650 |
| | 13,911 |
|
| Total stock-based compensation expense | $ | 6,000 |
| | $ | 7,216 |
| | $ | 17,028 |
| | $ | 22,040 |
|
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by award types, as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Stock options | $ | 2,147 |
| | $ | 1,940 |
| | $ | 5,640 |
| | $ | 5,680 |
|
| Restricted stock awards | 3,840 |
| | 5,276 |
| | 11,164 |
| | 16,340 |
|
| Employee Stock Purchase Plan | — |
| | — |
| | — |
| | — |
|
| Performance Based Cash Units | 13 |
| | — |
| | 224 |
| | 20 |
|
| Total stock-based compensation before taxes | $ | 6,000 |
| | $ | 7,216 |
| | 17,028 |
| | 22,040 |
|
| Tax benefit | $ | 862 |
| | $ | 1,402 |
| | $ | 2,700 |
| | $ | 4,356 |
|
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 total stock-based compensation cost related to unvested equity awards as of September 30, 2019 was approximately $41.7 million. The expense is expected to be recognized over a weighted-average period of approximately 2.2 years.
The total stock-based compensation cost related to unvested performance based cash units as of September 30, 2019 was approximately $1.0 million. The expense is expected to be recognized over a weighted-average period of approximately 2.1 years.
Stock Options
There were no significant changes to the Company’s Stock Option Plans during the three and nine months ended September 30, 2019.
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, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Expected stock price volatility | | 69.8 | % | | 66.0 | % | | 69.6 | % | | 65.2 | % |
| Risk-free interest rate | | 1.6 | % | | 2.7 | % | | 1.9 | % | | 2.6 | % |
| Expected life of options (in years) | | 4.36 |
| | 4.29 |
| | 4.34 |
| | 4.11 |
|
| Expected dividend yield | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
| Weighted-average fair value (grant date) of the options | | $ | 4.42 |
| | $ | 3.33 |
| | $ | 3.84 |
| | $ | 5.04 |
|
The following table summarizes information about stock options outstanding as of September 30, 2019:
|
| | | | | | | | | | | | | |
| Options | | Number of Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| Outstanding at December 31, 2018 | | 4,254 |
| | $ | 17.93 |
| | | | |
| Options Granted | | 1,229 |
| | 7.08 |
| | | | |
| Options Exercised | | (7 | ) | | 5.48 |
| | | | |
| Options Cancelled | | (549 | ) | | 23.96 |
| | | | |
| Outstanding at September 30, 2019 | | 4,927 |
| | $ | 14.57 |
| | 5.03 | | $ | 8 |
|
| Vested at September 30, 2019 | | 1,667 |
| | $ | 24.24 |
| | 3.73 | | $ | 2 |
|
| Exercisable at September 30, 2019 | | 1,667 |
| | $ | 24.24 |
| | 3.73 | | $ | 2 |
|
The total intrinsic value for stock options exercisable at September 30, 2019 and 2018 was $21 and nil, respectively. The total intrinsic value of stock options exercised for the nine months ended September 30, 2019 and 2018 was $21 and nil, respectively.
Awards of Restricted Stock and Performance Stock
There were no significant changes to the Company’s restricted stock award (“Restricted Stock”) and performance stock plan during the three and nine months ended September 30, 2019.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
A summary of the Company’s unvested restricted stock at September 30, 2019, and changes during the nine months ended September 30, 2019, is presented below:
|
| | | | | | | |
| Unvested Restricted Stock | | Number of
Awards | | Weighted- Average
Grant Date
Fair Value |
| Unvested at December 31, 2018 | | 2,630 |
| | $ | 12.71 |
|
| Granted | | 2,004 |
| | 6.94 |
|
| Vested | | (999 | ) | | 18.63 |
|
| Forfeited | | (168 | ) | | 10.53 |
|
| Unvested at September 30, 2019 | | 3,467 |
| | $ | 8.96 |
|
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.
Performance Based Cash Units
Performance based cash units granted under the Company’s 2015 Plan vest at the end of a three-year period based on
service and achievement of certain performance objectives determined by the Company’s Board of Directors.
A summary of the Company’s unvested performance-based cash units at September 30, 2019 and changes during the nine months ended September 30, 2019, is presented below:
|
| | | | | | | |
| Unvested Cash Units | | Number of
Awards | | Weighted- Average
Grant Date
Fair Value |
| Unvested at December 31, 2018 | | 70 |
| | $ | 6.14 |
|
| Granted | | 236 |
| | — |
|
| Vested | | — |
| | — |
|
| Forfeited | | (66 | ) | | — |
|
| Unvested at September 30, 2019 | | 240 |
| | $ | 5.40 |
|
Performance based cash units are measured at the closing stock price at the reporting period end date and are recognized straight line over the requisite service period. The expense for the period will increase or decrease based on updated fair values of these awards at each reporting date.
10. Income Taxes
The Company recognized approximately $6.6 million in related income tax provision and $1.6 million in related tax benefit during the nine months ended September 30, 2019 and 2018, respectively. The effective tax rate was approximately (7.3)% for the nine months ended September 30, 2019, which was lower than the U.S. federal statutory rate primarily due to pre-tax losses in jurisdictions where full valuation allowances have been recorded and in zero tax rate jurisdictions, offset by certain foreign jurisdictions projecting current income tax expense. In addition, during the period the company recorded discrete current income tax expense associated with U.S. Base Erosion and Anti-Abuse Tax. 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, no change was recorded by the Company to the valuation allowance during the nine months ended September 30, 2019.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
11. Restructuring
Throughout 2017 and in 2018, the Company initiated a work-force reduction as part of a corporate restructuring, with reductions occurring across all levels and departments within the Company. This measure was intendedCompany, primarily to reduce costs andsubsequent to an acquisition or divestiture. As part of these efforts, the Company continues to identify workforce optimization opportunities to better align the Company’s resources with its key strategic priorities. As of September 30, 2016, there were $0.4 million of accrued restructuring charges on the balance sheet.
A summary of the Company’s restructuring accrual at September 30, 20162019 and changes during the nine months ended September 30, 2016, is2019, are presented below:
|
| | | | | | | | | | | | | | | |
| | Balance at December 31, 2015 | | Charges | | Payments | | Balance at September 30, 2016 |
| Employment termination costs | $ | — |
| | $ | 5,139 |
| | $ | (4,816 | ) | | $ | 323 |
|
| Facilities consolidation | 54 |
| | — |
| | (10 | ) | | 44 |
|
| Total | $ | 54 |
| | $ | 5,139 |
| | $ | (4,826 | ) | | $ | 367 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at December 31, 2018 | | Charges | | Payments | | Other Adjustments1 | | Balance at September 30, 2019 |
| Employment termination costs | $ | 1,276 |
| | $ | 738 |
| | $ | (2,078 | ) | | $ | 139 |
| | $ | 75 |
|
| |
(1) | Includes non-cash adjustments and reclassifications. |
11. Income Taxes12. Earnings per Common Share (“EPS”)
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 the Company’s common stock for the year. The Company recognized approximately $6.9 million and $14.9 millionincludes participating securities (Redeemable Convertible Preferred Stock - Participation with Dividends on Common Stock that contain preferred dividend) in related income tax expense during the three and nine months ended September 30, 2016, respectively. The effective tax rate was approximately 59% and 1,143% for the three and nine months ended September 30, 2016, which was higher than the U.S. federal statutory rate primarily duecomputation of EPS pursuant to the unfavorable impacttwo-class method. The two-class method of lossescomputing 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 foreign jurisdictions which have lower tax rates than the U.S. as well as the unfavorable impactlosses of the fair market value adjustmentCompany.
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 Razorsight contingent consideration. Additionally, the effective tax rate for the nine months ended September 30, 2016 was impacted by the recording of a non-cashnumerator and denominator used in computing basic and diluted net income tax provisionattributable to establish a $2.9 million 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 ratecommon stockholders per common share from continued and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actualdiscontinued operations.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Numerator - Basic: | | | | | | | |
| Net loss from continuing operations | $ | (61,213 | ) | | $ | (46,644 | ) | | $ | (97,528 | ) | | $ | (125,885 | ) |
| Net loss attributable to redeemable noncontrolling interests | (25 | ) | | (422 | ) | | (931 | ) | | 2,122 |
|
| Preferred stock dividend | (8,194 | ) | | (7,463 | ) | | (23,590 | ) | | (18,076 | ) |
| Net (loss) income attributable to Synchronoss | $ | (69,432 | ) | | $ | (54,529 | ) | | $ | (122,049 | ) | | $ | (141,839 | ) |
| | | | | | | | |
| Numerator - Diluted: | | | | | | | |
| Net (loss) income from continuing operations attributable to Synchronoss | $ | (69,432 | ) | | $ | (54,529 | ) | | $ | (122,049 | ) | | $ | (141,839 | ) |
| Income effect for interest on convertible debt, net of tax | — |
| | — |
| | — |
| | — |
|
| Net loss attributable to Synchronoss | $ | (69,432 | ) | | $ | (54,529 | ) | | $ | (122,049 | ) | | $ | (141,839 | ) |
| | | | | | | | |
| Denominator: | | | | | | | |
| Weighted average common shares outstanding — basic | 40,910 |
| | 39,612 |
| | 40,564 |
| | 40,405 |
|
| 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 | 40,910 |
| | 39,612 |
| | 40,564 |
| | 40,405 |
|
| | | | | | | | |
| Earnings per share: | | | | | | | |
| Basic | $ | (1.70 | ) | | $ | (1.38 | ) | | $ | (3.01 | ) | | $ | (3.51 | ) |
| Diluted | $ | (1.70 | ) | | $ | (1.38 | ) | | $ | (3.01 | ) | | $ | (3.51 | ) |
| | | | | | | | |
| Anti-dilutive stock options excluded | — |
| | 4,647 |
| | — |
| | 4,412 |
|
| Unvested shares of restricted stock awards | 3,467 |
| | 2,916 |
| | 3,467 |
| | 2,916 |
|
| |
(1) | The calculation does not include the effect of assumed conversion of convertible debt of 513 and 4,326 shares for the three months ended September 30, 2019 and 2018, respectively, and 1,688 and 4,326 shares for the nine months ended September 30, 2019 and 2018, respectively; which is based on 18.8072 shares per $1,000 principal amount of the Senior Convertible Notes. |
| |
(2) | The calculation does not include the effect of assumed conversion of preferred stock of 11,511 and 10,843 shares, for the three months ended September 30, 2019 and 2018, respectively, and 11,199 and 10,843 shares for the nine months ended September 30, 2019 and 2018, respectively; which is based on 55.5556 shares per $1,000 principal amount of the preferred stock, because the effect would have been anti–dilutive. |
13. Commitments, Contingencies 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 for 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%.Other
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Purchase Obligations
Aggregate annual future minimum payments under non-cancelable agreements are as follows:
|
| | | | |
| Period ending September 30, 2019 | | Non-cancelable agreements |
| Remainder of 2019 | | $ | 7,894 |
|
| 2020 | | 25,257 |
|
| 2021 | | 3,154 |
|
| 2022 | | 2,933 |
|
| 2023 and thereafter | | — |
|
| | | $ | 39,238 |
|
12.
Legal Matters
On October 7, 2014,May 1, 2017, May 2, 2017, June 8, 2017 and June 14, 2017, four putative class actions were filed against the Company filed an amended complaintand certain of its current and former officers and directors 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"(the “Securities Law Action”), claiming that F-Secure has infringed, and continues to infringe, several. After these cases were consolidated, the court appointed as lead plaintiff Employees’ Retirement System of the Company’s patents. InState of Hawaii, which filed, on November 20, 2017, a consolidated complaint purportedly on behalf of purchasers of our common stock between February 2015, Synchronoss entered into a patent license3, 2016 and settlement agreement with F-Secure Corporation and F-Secure, Inc. wherebyJune 13, 2017. On February 2, 2018, the Company granted each of these companies (but not their subsidiaries or affiliates) a limited license to Synchronoss’ patents. As a result of entering into the patent license and settlement agreement, the parties filed a joint stipulationdefendants moved to dismiss the aboveconsolidated complaint in its entirety, with prejudice. Before that motion was decided, on August 24, 2018, lead plaintiff filed a consolidated amended complaint purportedly on behalf of purchasers of our common stock between October 28, 2014 and June 13, 2017. On June 28, 2019, the Court granted defendants’ motion to dismiss the consolidated amended complaint in its entirety, without prejudice, allowing lead plaintiff leave to amend its complaint.
On August 14, 2019, lead plaintiff filed a second amended complaint. The Company’s 2011 acquisition agreementsecond amended complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and it alleges, among other things, that the defendants made false and misleading statements of material information concerning our financial results, business operations, and prospects. On October 4, 2019, the defendants moved to dismiss the second amended complaint in its entirety, with Miyowa SA providedprejudice. The Company believes that former shareholdersthe asserted claims lack merit and intends to defend against all of Miyowa SA would be eligible for earn-out payments,the claims vigorously. The plaintiff seeks unspecified damages, fees, interest, and costs. Due to the extent specified business milestones were achieved following the acquisition. In December 2013, Eurowebfund and Bakamar, two former shareholdersinherent uncertainties 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. Althoughlitigation, the Company cannot predict the outcome of the appeal,actions at this time and can give no assurance that the asserted claims will not have a material adverse effect on its financial position or estimate any potential loss ifresults of operations.
On September 15, 2017, October 24, 2017, October 27, 2017 and October 30, 2017, the outcomeCompany’s shareholders filed derivative lawsuits against certain of its officers and directors and the Company (as nominal defendant) in the United States District Court for the District of New Jersey (the “Derivative Suits”). On May 24, 2018, the Court consolidated the Derivative Suits and appointed Lisa LeBoeuf as lead plaintiff. The lead plaintiff designated as the Operative Complaint the complaint she previously had filed on October 27, 2017, which alleges claims related to breaches of fiduciary duties and unjust enrichment. The Operative Complaint’s allegations relate to substantially the same facts as those underlying the Securities Law Action described above. Plaintiff seeks unspecified damages and for the Company to take steps to improve its corporate governance and internal procedures. Defendants’ motion to dismiss the Operative Complaint is adverse, duepending before the Court.
On March 7, 2019, Synchronoss shareholders, Beth Daniel and Juan Solis, filed a separate derivative lawsuit against certain of the Company’s current and former officers and directors and the Company (as nominal defendant) in the Court of Chancery of the State of Delaware, asserting substantially the same allegations as those underlying the Derivative Suits and the Securities Law Action described above. Plaintiffs seek unspecified damages and for the Company to take steps to improve its corporate governance and internal procedures. On May 20, 2019, the parties stipulated to a stay of the action pending a ruling on the pending motion to dismiss in the Derivative Suits. The Company believes that the asserted claims lack merit and intends to defend against all of the claims vigorously. Due to the inherent uncertainties of litigation, the Company believescannot predict the positionsoutcome of Eurowebfundthe Derivative Suits at this time and Bakamar are without merit, andcan give no assurance that the Company intends to vigorously defend allasserted claims brought by them.
The Company iswill 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 arisingour financial position or results of operations.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
14. Additional Financial Information
Other (expense) income, net
The following table sets forth the components of Other (expense) income, net included in the ordinary courseCondensed Consolidated Statements of its business. TheOperations:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
FX gains (losses) (1) | $ | (1,314 | ) | | $ | 38 |
| | $ | (1,619 | ) | | $ | (241 | ) |
PIK Note impairment (2) | — |
| | (18,225 | ) | | — |
| | (18,225 | ) |
Litigation settlement (3) | — |
| | 4,495 |
| | — |
| | 4,495 |
|
Remeasurement gain (loss) on financial instrument (4) | — |
| | — |
| | — |
| | 3,849 |
|
Income from Investment (5) | — |
| | 519 |
| | — |
| | 519 |
|
Royalty income (6) | — |
| | — |
| | — |
| | 92 |
|
Others (7) | 892 |
| | (266 | ) | | 1,636 |
| | 331 |
|
| Total | $ | (422 | ) | | $ | (13,439 | ) | | $ | 17 |
| | $ | (9,180 | ) |
| |
(1) | Fair value of foreign exchange gains and losses |
| |
(2) | PIK Note impairment on the troubled debt restructuring |
| |
(3) | Represents Legal settlement of $4.2M and $0.3M IP settlement from third parties |
| |
(4) | Remeasurement of gain/loss on Mandatorily Redeemable Put option for common shares held by Siris. |
| |
(5) | Represents gain on sale on the Company’s cost investment in Clarity, Money Inc. |
| |
(6) | Includes royalty income in connection with Mirapoint sale |
| |
(7) | Represents an aggregate of individually immaterial transactions |
15. Subsequent Events Review
Revolving Credit Facility
On October 4, 2019, the Company entered into a Credit Agreement with Citizens Bank, N.A., for a $10.0 million Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest at a rate equal to, at the Company’s option, either (1) the arithmetic average of the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period (one, three or six months (or 12 months if agreed to by all applicable Lenders)) as selected by the Company relevant to such borrowing plus the applicable margin, or (2) a base rate determined by reference to the greatest of the federal funds rate plus 0.50%, the prime commercial lending rate as determined by the Agent, and the daily LIBOR rate plus 1.00%, in each case plus an applicable margin and subject to a floor of 0.00%. In addition, on a quarterly basis, the Company is currentlyrequired to pay each lender under the plaintiffRevolving Credit Facility a 0.2% commitment fee in several patent infringement cases. The defendants in severalrespect of these cases have filed counterclaims. Althoughcommitments under the Company cannot predictRevolving Credit Facility, which may be subject to adjustment based on 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.
13. Subsequent Events Review
Company’s total leverage ratio. The Company has evaluated all subsequent events through November 8, 2016.not borrowed under the Revolving Credit Facility.
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 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 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. Oursolutions. These essential technologies create a better way of delivering the transformative mobile experiences that the Company’s customers rely on our solutions and technology to automate 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, 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 platformsneed to help reduce fraud, improve cybersecurity detection/preventionthem stay ahead of the curve in competition, innovation, productivity, growth 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) platform that is based on a secure container for accessing data, applications, content and personal information management tools like email, calendar, messaging and notes.
operational efficiency.
Our Synchronoss Messaging is a white label messaging platform for service providers and offers a full range of deployment options including full integration with on premise systems, hybrid deployment support for optimal mix of technologies 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.
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 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 its solutions and services directly through ourits sales organizations in North America, Europe and Asia-Pacific.
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 the three months ended September 30, 2016 and 2015, we derived approximately 66% and 73%, respectively, of our revenues from transactions processed and subscription arrangements.
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 Internet of Things (“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.
EachOur top five customers accounted for 70.8% and 70.8% of AT&Tnet revenues for the nine months ended September 30, 2019 and September 30, 2018, respectively. Contracts with these customers typically run for three to five years. Of these customers, Verizon
accounted for more than 10% of our revenues for the three months ended September 30, 2016in 2019 and 2015. AT&T and2018. The loss of Verizon in the aggregate accounted for 71% and 75% of our revenues for the three months ended September 30, 2016 and 2015, respectively. Our agreements with AT&T typically run three to five years and cover bothas a technology fee and exception handling services. Wecustomer would have a Master Services Agreement, with Statements of Work for each of the AT&T businesses which we support. Each of our agreements with Verizon typically have a similar duration, subject to a Master Services Agreement, with Statements of Work. See “Risk Factors” for certain matters bearing risksmaterial negative impact on our future results of operations.company. However, we believe that the costs incurred and subscriber disruption by Verizon to replace Synchronoss’ solutions would be substantial.
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,PCs, 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 Mobile Network Operator’s (“MNO”) business objectives and are not beholden to the objectives of a sponsoring over-the-top (“OTT”) platform. We believe that 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 MNOs to look at opportunities to preempt and compete with the OTTs which has potential opportunity for Synchronoss’ future growth to be driven by the need of TMT companies including (and especially) MNOs to embrace Messaging as a Platform (“MaaP”). MaaP will allow TMT and MNO’s to converse with subscribers in an efficient, automated way by streamlining the costs and increasing the effectiveness of self-care, as well as yielding 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 sets 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 capital expenditure spending options often tried internally. The ability for our platforms to create low/no code, new customer digital journeys, virtually on the fly, gives 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 IoT 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.product offerings. We are also exploring additional opportunities through merger and acquisition activities to support our customer, product and geographic diversification strategies.
Three months ended September 30, 2019 compared to the three months ended September 30, 2018
The following table presents an overview of our results of operations for the three months ended September 30, 2019 and 2018 (in thousands): |
| | | | | | | | | | | |
| | Three months ended September 30, | | 2019 vs 2018 |
| | 2019 | | 2018 | | $ Change |
| Net revenues* | $ | 52,210 |
| | $ | 83,286 |
| | $ | (31,076 | ) |
| Cost of revenues** | 35,602 |
| | 43,714 |
| | (8,112 | ) |
| Research and development | 18,575 |
| | 18,684 |
| | (109 | ) |
| Selling, general and administrative | 30,536 |
| | 27,320 |
| | 3,216 |
|
| Restructuring charges | (39 | ) | | 4,539 |
| | (4,578 | ) |
| Depreciation and amortization | 18,508 |
| | 23,658 |
| | (5,150 | ) |
| Total costs and expenses | 103,182 |
| | 117,915 |
| | (14,733 | ) |
| Loss from continuing operations | $ | (50,972 | ) | | $ | (34,629 | ) | | $ | (16,343 | ) |
| |
| * | The 2019 and 2018 net revenues includes STIN revenue of $(19.6) million and $7.3 million respectively. |
| |
| ** | Cost of revenues excludes depreciation and amortization which are shown separately. |
Net revenues decreased $31.1 million to $52.2 million for the three months ended September 30, 2019, compared to the same period in 2018. The decrease in revenue is primarily driven by changes to the STIN business that led the Company to conclude that its collection of certain STIN receivables is no longer probable. In accordance with ASC 842, the portion of revenue that is no longer deemed collectible is reversed in the current period against revenue. Accordingly, the Company determined a contingency reserve is required, which is included as a reduction of revenue in the amount $26.0 million.
Cost of revenues decreased $8.1 million to $35.6 million for the three months ended September 30, 2019, compared to the same period in 2018. The 2019 decrease was primarily due to cost savings initiatives implemented in 2018 and continuing into 2019. These initiatives resulted in a significant decrease in cost of revenues driven mainly by data center consolidation and operating expense savings.
Research and development expense decreased $0.1 million to $18.6 million for the three months ended September 30, 2019, compared to the same period in 2018. The decrease in 2019 is primarily due to the realization of our strategic efforts to reduce costs and refocus our resources on key strategic priorities. These efforts resulted in decreased personnel related costs including stock-based compensation expense.
Selling, general and administrative expense increased $3.2 million to $30.5 million for the three months ended September 30, 2019, compared to the same period in 2018. The 2019 increase was primarily related to the right of use asset impairment of $6.1 million in the period offset by lower personnel and consulting costs from the prior period.
Restructuring charges were $0.0 million and $4.5 million for the three months ended September 30, 2019 and 2018, respectively, which primarily related to employment termination costs as a result of the work-force reduction and facility consolidation plans initiated in connection with acquisition and divestiture activities. In the prior year, we commenced separate plans designed to reduce operating costs and align our resources with our key strategic priorities. Material cash outlays for restructuring typically occur in the quarter in which the plan is initiated or in the subsequent quarter.
Depreciation and amortization expense decreased $5.2 million to $18.5 million for the three months ended September 30, 2019, compared to the same period in 2018. The 2019 decrease was primarily attributable to the expiration of amortizable acquired assets, partially offset by the increased amortization of capitalized software.
Interest expense decreased $1.2 million to $0.2 million for the three months ended September 30, 2019, compared to the same period in 2018. The 2019 decrease was primarily due to a decrease in our borrowings outstanding in 2019 after repayments of 2019 Notes.
Income tax. The Company recognized approximately $9.8 million income tax provision and $2.3 million in related income tax benefit during the three months ended September 30, 2019 and 2018, respectively. The effective tax rate was approximately (19.2)% for the three months ended September 30, 2019, which was lower than the U.S. federal statutory rate primarily due to pre-tax losses in jurisdictions where full valuation allowances have been recorded and in zero tax rate jurisdictions, offset by certain foreign jurisdictions projecting current income tax expense. In addition, during the period the company recorded discrete
current income tax expense associated with U.S. Base Erosion and Anti-Abuse Tax. The Company’s effective tax rate was approximately 4.7% for the three months ended September 30, 2018, which was lower than the U.S. federal statutory rate primarily due to the to the valuation allowance recorded in the fourth quarter of 2017 and the tax benefits recorded discretely in the third quarter of 2018 from the expiration of the statute of limitations for uncertain tax positions.
Discussion of the Condensed Consolidated Statements of Operations
Nine months ended September 30, 2019 compared to the nine months ended September 30, 2018
The following table presents an overview of our results of operations for the nine months ended September 30, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | 2019 vs 2018 |
| | 2019 | | 2018 | | $ Change |
| Net revenues* | $ | 218,161 |
| | $ | 243,737 |
| | $ | (25,576 | ) |
| Cost of revenues** | 107,958 |
| | 127,788 |
| | (19,830 | ) |
| Research and development | 57,282 |
| | 59,789 |
| | (2,507 | ) |
| Selling, general and administrative | 82,862 |
| | 99,368 |
| | (16,506 | ) |
| Restructuring charges | 738 |
| | 8,425 |
| | (7,687 | ) |
| Depreciation and amortization | 58,920 |
| | 70,330 |
| | (11,410 | ) |
| Total costs and expenses | 307,760 |
| | 365,700 |
| | (57,940 | ) |
| Loss from continuing operations | $ | (89,599 | ) | | $ | (121,963 | ) | | $ | 32,364 |
|
| |
| * | The 2019 and 2018 net revenues includes STIN revenue of $(6.9) million and $21.0 million respectively. |
| |
| ** | Cost of revenues excludes depreciation and amortization which are shown separately. |
Net revenues decreased $25.6 million to $218.2 million for the nine months ended September 30, 2019, compared to the same period in 2018. The decrease in revenue is primarily driven by changes to the STIN business that led the Company to conclude that its collection of certain STIN receivables is no longer probable. In accordance with ASC 842, the portion of revenue that is no longer deemed collectible is reversed in the current period against revenue. Accordingly, the Company determined a contingency reserve is required, which is included as a reduction of revenue in the amount $26.0 million.
Cost of revenues decreased $19.8 million to $108.0 million for the nine months ended September 30, 2019, compared to the same period in 2018. The 2019 decrease was primarily due to cost savings initiatives implemented in 2018 and continuing into 2019. These initiatives resulted in a significant decrease in cost of revenues driven mainly by data center consolidation and operating expense savings.
Research and development expense decreased $2.5 million to $57.3 million for the nine months ended September 30, 2019, compared to the same period in 2018. The decrease in 2019 is primarily due to the realization of our strategic efforts to reduce costs and refocus our resources on key strategic priorities. These efforts resulted in decreased personnel related costs including stock-based compensation expense.
Selling, general and administrative expense decreased $16.5 million to $82.9 million for the nine months ended September 30, 2019, compared to the same period in 2018. The 2019 decrease was primarily due to a net reduction in professional services and outside consulting fees incurred in the prior year period and lower telecommunication and facility costs offset by the right of use asset impairment of $6.1 million in the current period.
Restructuring charges were $0.7 million and $8.4 million for the nine months ended September 30, 2019 and 2018, respectively, which primarily related to employment termination costs as a result of the work-force reduction and facility consolidation plans initiated in connection with acquisition and divestiture activities. In the prior year, we commenced separate plans designed to reduce operating costs and align our resources with our key strategic priorities. Material cash outlays for restructuring typically occur in the quarter in which the plan is initiated or in the subsequent quarter.
Depreciation and amortization expense decreased $11.4 million to $58.9 million for the nine months ended September 30, 2019, compared to the same period in 2018. The 2019 decrease was primarily attributable to the expiration of amortizable acquired assets, partially offset by the increased amortization of capitalized software.
Interest income decreased $6.8 million to $0.7 million for the nine months ended September 30, 2019, compared to the same period in 2018. The 2019 decrease was primarily due to 2018 interest earned on a paid-in-kind purchase money note (the “PIK Note”), which the Company began deferring effective July 1, 2018 related to PIK Note.
Interest expense decreased $2.7 million to $1.3 million for the nine months ended September 30, 2019, compared to the same period in 2018. The 2019 decrease was primarily due to a decrease in our borrowings outstanding in 2019 after repayments of 2019 Notes and new lease standard (Topic 842) implementation for interest expense presentation which is now reflected in operating expense effective first quarter of 2019.
Other expense decreased $9.2 million to $0.0 million for the nine months ended September 30, 2019, compared to the same period in 2018. There was no significant activity in current period in other expense. The prior period other net expense consisted of a $18.2 million write down of the PIK note, partially offset by other net income of $4.2 million in legal settlements and $3.8 million from the remeasurement of a mandatorily redeemable financial instrument.
Equity method investment loss changed $1.7 million to a loss of $1.6 million for the nine months ended September 30, 2019, compared to a loss of $0.1 million for the same period in 2018. All equity method investment income (loss) are the result of our 30% equity interest in STIN and vary based on the financial results of the investment company during the respective reporting period.
Income tax. The Company recognized approximately $6.6 million in related income tax provision and $1.6 million in related income tax benefit during the nine months ended September 30, 2019 and 2018, respectively. The effective tax rate was approximately (7.3)% for the nine months ended September 30, 2019, which was lower than the U.S. federal statutory rate primarily due to pre-tax losses in jurisdictions where full valuation allowances have been recorded and in zero tax rate jurisdictions, offset by certain foreign jurisdictions projecting current income tax expense. In addition, during the period the company recorded discrete current income tax expense associated with U.S. Base Erosion and Anti-Abuse Tax. The Company’s effective tax rate was approximately 1.3% for the nine months ended September 30, 2018, which was lower than the U.S. federal statutory rate primarily due to the valuation allowance recorded in the fourth quarter of 2017 and the tax benefits recorded discretely in the third quarter of 2018 from the expiration of the statute of limitations for uncertain tax positions.
Liquidity and Capital Resources
As of September 30, 2019, 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 $20.1 million at September 30, 2019. We anticipate that our principal uses of cash, cash equivalents, and marketable securities 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, capital expenditures, and working capital.
At September 30, 2019, our non-U.S. subsidiaries held approximately $8.6 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, and expected positive cash flows generated from operations will be sufficient to fund our operations for the next twelve months from the date of filing 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
The Company paid off the remaining carrying amount of the convertible senior notes on August 15, 2019. 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 2019.
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 Private Holdings I, LLC, an affiliate of Siris (“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 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 (“Liquidation Value”). 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 (known as “Redemption Value”) 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. As of September 30, 2019, the Liquidation Value and Redemption Value of the Preferred Shares was $243.1 million.
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.
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):
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | 2019 vs 2018 |
| | 2019 | | 2018 | | Change |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 11,839 |
| | $ | (60,662 | ) | | $ | 72,501 |
|
| Investing activities | 17,725 |
| | (42,045 | ) | | 59,770 |
|
| Financing activities | (120,993 | ) | | 85,202 |
| | (206,195 | ) |
Our primary source of cash is receipts from revenue. The primary uses of cash are personnel and related costs, telecommunications and facility costs related primarily to our cost of revenue and general operating expenses including professional service fees, consulting fees, building and equipment maintenance and marketing expense.
Cash flows from operating activities for the nine months ended September 30, 2019 was a $11.8 million of cash provided by operating activities, as compared to $60.7 million of cash used for operating activities for the same period in 2018. The increase of cash provided by operating activities of $72.5 million was primarily due to favorable changes in cash earnings of $38.2 million and a favorable change in working capital of $34.3 million.
Cash flows from investingfor the nine months ended September 30, 2019 was $17.7 million, as compared to $42.0 million in cash used for investing activities during the same period in 2018. The increased spend in 2018 was due primarily to purchase marketable securities and fund the honeybee acquisition.
Cash flows from financing for nine months ended September 30, 2019 was $121.0 million use of cash, as compared to $85.2 million of cash provided by financing activities for the same period in 2018. The cash used for financing for 2019 was primarily driven by the $113.0 million partial repayment of the convertible debt and preferred dividend payment of $7.1 million compared to proceeds for the issuance of preferred stock for the same period 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 during 2019 and 2018. We do not expect the current rate of inflation to have a material impact on our business.
Contractual Obligations
Our contractual obligations consist of principal and interest related to our Convertible Senior Notes, 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 September 30, 2019 (in thousands).
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| | | Total | | Remainder of 2019 | | 2020 - 2022 | | 2023 - 2024 | | Thereafter |
| Capital lease obligations | | $ | 313 |
| | $ | 313 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Operating lease obligations | | $ | 95,868 |
| | $ | 3,242 |
| | $ | 38,689 |
| | $ | 20,079 |
| | $ | 33,858 |
|
| Purchase obligations* | | 39,238 |
| | 7,894 |
| | 31,344 |
| | — |
| | — |
|
| Total | | $ | 135,419 |
| | $ | 11,449 |
| | $ | 70,033 |
| | $ | 20,079 |
| | $ | 33,858 |
|
| |
| * | Amount represents obligations associated with colocation agreements and other customer delivery related purchase obligations. |
Uncertain Tax Positions
Unrecognized tax positions of $3.6 million at September 30, 2019 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 nine months ended September 30, 2019, the Company made significant changes in its accounting policies whichover leases, to align with the adoption of Topic 842. These updates are described in detail in Note 2 in our Annual Report on Form 10-K for2. 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
ThereTopic 842, there were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K for the year ended December 31, 2018 during the nine months ended September 30, 2016.2019. 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, 20152018 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, 20162019 and December 31, 20152018 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 endedpurpose 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 September 30, 2019 and December 31, 2015, which could materially affect our business, financial condition or future results. We believe our exposure associated with these2018 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.SU.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, 20162019 would increase interest income by less than $0.5approximately $0.2 million on an annual basis.
Borrowings under our credit facility, are 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.
ITEM 4. CONTROLS AND PROCEDURES
Background
In connection with the preparation of the Company’s Form 10-Q for the first quarter of 2017 and a related internal investigation commenced by the Audit Committee, certain adjustments related to the Company’s accounting treatment for software license revenue were identified. The Company subsequently completed additional accounting review procedures and identified other adjustments.
The accounting adjustments referenced above resulted from certain material weaknesses in our internal control over financial reporting. 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, 2018.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As described in additional detail in the 2018 Form 10-K, the Company did not maintain effective controls within its financial close process. Until these material weaknesses are remediated, they could result in material misstatements of the Company’s financial statements that would not be prevented or detected. As of September 30, 2019, the remedial measures identified below have been implemented and tested by management for design and operating effectiveness in the second quarter. Based on the results of testing, management has developed specific action plans to address the control findings which were incorporated into our third quarter testing that is currently being evaluated.
Evaluation of Disclosure Controls and Procedures.Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of ourWe maintain disclosure controls and procedures (as defined in Rules 13a-15(e) andor 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2016. Based uponamended (the “Exchange Act”)), 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,designed to ensure that the information we are required to be disclosed by usdisclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, areis recorded, processed, summarized and reported within the time periods specified in theSEC rules and forms, of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our ChiefPrincipal Executive Officer and ChiefPrincipal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.disclosure.
ChangesThe Company’s Principal Executive Officer and Principal Financial Officer have evaluated the design and effectiveness of the Company’s disclosure controls and procedures as of September 30, 2019 and, due to the existence of the material weaknesses 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 reporting from management's assessmentdescribed above, the Company’s Principal Executive and Principal Financial Officers have determined that such disclosure controls and procedures were not effective as of internal control over financial reporting for a period not to exceed one year from the datesuch date. In light of the acquisition.material weakness, the Company performed additional analysis and other post-closing procedures to ensure the Company’s condensed consolidated financial statements are prepared in accordance with U.S. GAAP. Accordingly, the Company’s management, including its Principal Executive and Principal Financial Officers, has concluded that the condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
Following the identification of the material weaknesses described above and 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, 2018, and with the oversight of the Audit Committee, management is committed to our remediation efforts to address these material weaknesses. The remediation efforts, summarized below, are intended to both address the identified material weaknesses and strengthen our overall financial control environment. In this regard, the following represents the enhancements the Company has designed, implemented and is in the process testing as of September 30, 2019 to remediate the material weaknesses above:
Control Environment
The Company has increased standardization of contract documentation and revenue analysis for individual transactions, including increased oversight of revenue opportunities and contract review by personnel with the requisite accounting knowledge to identify revenue-impacting terms and consider potential downstream effects.
The Company has developed a more comprehensive review process and monitoring controls over contracts with customers to ensure accurate accounting for multiple-element arrangements.
The Company has implemented and is executing a quarterly non-recurring transaction review meeting with key stakeholders within the Company to identify and discuss potentially significant transactions. Meetings are attended by process owners across various functions or departments, both domestic and international, to promote regular and effective communication between finance and non-finance personnel, and to ensure that information related to significant transactions is communicated timely.
The Company performed a review of key business process controls related to high-risk financial statement accounts, such as revenue, significant transactions, capitalized software, accounts receivable, treasury and financial close, which resulted in the redesign of existing controls and the addition of newly developed / documented control activities, in order to mitigate known risks and strengthen the overall control environment. The redesigned control environment was tested in the second quarter and management action plans were developed and incorporated into our current periods control procedures.
The Company has hired a Director of Revenue Recognition, a Director of Technical Accounting, and other resources to augment our staff to support further enhancement on the controls and procedures surrounding revenue recognition and technical matters.
Control Activities
The Company has performed a review of key IT process controls and enhanced the control design. The IT control environment was tested in the second quarter and management action plans were developed and incorporated into our current periods control procedures.
The Company has engaged external resources to assist management in our control design assessment and execution.
Information and Communication
The Company has established a Disclosure Committee that includes key members of management that include key members of management that have responsibility for disclosure information necessary for periodic filings with the SEC. The committee met formally for purposes of the Fiscal 2019 Form 10-Q filing to discuss all significant events and relevant disclosure matters for the filing.
The Company has established a quarterly significant non-recurring transactions meeting that includes key members of management from each functional business area including sales, marketing, finance, operations, information technology, and legal. The meeting includes a standardized agenda that discusses relevant business matters and updates that may have an accounting implication for the quarter. Each matter is documented, the accounting implications are assessed, and the appropriate actions are taken.
Monitoring Activities and Risk Assessment
The Company formally established an Internal Audit function and our Audit Committee approved their charter in January 2019.
The Company has enhanced and completed our risk assessment processes to identify relevant accounts and assertions and design control procedures that relate to relevant risks.
The Company has reevaluated and completed our control design of our entity level controls. The Company is in the process of executing full control testing for entity level controls as of September 30, 2019.
We have hired external resources to support and improve our Internal Audit function.
We believe the control measures described above have been implemented and will remediate the material weaknesses we have not assessed Openwaves’identified in our internal control over financial reporting, as well as our disclosure controls and procedures once the controls have been operating effectively for a sufficient period of September 30, 2016.time. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, our management may determine to take additional measures.
Changes in Internal Controls Over Financial Reporting
Excluding the Openwave acquisition,changes described above under “Remediation of Material Weaknesses in Internal Control Over Financial Reporting” including the on-going remediation efforts described above, there were no changes in our internal control over financial reporting during the quarterperiod ended September 30, 20162019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 13. Commitments, Contingencies and Other 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, 2015,2018, which could materially affect our business, financial condition or future results. The risks described in our Form 10-K and other reports we file 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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4.2 | Form |
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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 | Form of Indenture for Convertible Senior Notes, incorporated by reference to Registrants Form S-3 (Commission File No. 333-132080). |
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10.8.2 | Third Amendment Lease Agreement between the Registrant and Triple Net Investments XXV, L.P. for the premises located at 1555 Spillman Drive, Bethlehem, Pennsylvania, dated as of May 9, 2016. |
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10.9 | Cingular Master Services Agreement, effective September 1, 2005 by and between the Registrant and Cingular Wireless LLC, incorporated by reference to Registrant’s AnnualCurrent Report on Form 10-K for the year ended December 31, 2008. |
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10.9.1 | Subordinate Material and Services Agreement No. SG021306.S.025 by and between the Registrant and AT&T Services, Inc. dated as of August 1, 2013, including order numbers SG021306.S.025.S.001, SG021306.S.025.S.002, SG021306.S.025.S.003 and SG021306.S.025.S.004, incorporated by reference to Registrant’s Annual Report8-K filed on Form 10-K for the year ended December 31, 2013. |
| February 20, 2018. |
| 31.1 |
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| (filed herewith) |
| 31.2 |
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| (filed herewith) |
| 32.1 |
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| (filed herewith) |
| 32.2 |
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| (filed herewith) |
| 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 |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB |
| | XBRL Labels Linkbase Document |
| 101.PRE |
| | XBRL Presentation Linkbase Document |
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101.LAB | XBRL Taxonomy Extension Label Linkbase |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | Synchronoss Technologies, Inc. | |
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| | | | |
| | | /s/ Glenn Lurie | |
| | | /s/Stephen G. Waldis | |
| | Stephen G. Waldis | |
| | Chairman of the Board of Directors andGlenn Lurie | |
| | | Chief Executive Officer | |
| | | (Principal executive officer) | |
| | | |
| | Executive Officer)
| |
| | | | |
| | | | |
| | | /s/Karen L. Rosenberger David Clark | |
| | | Karen L. RosenbergerDavid Clark | |
| | | Executive Vice President, Chief Financial Officer
and Treasurer
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November 8, 2016
5, 2019