|
| | | |
Balance at December 31, 2015 | $ | 61,452 |
|
Fair value adjustment | — |
|
Net loss attributable to redeemable noncontrolling interests | (8,836 | ) |
Balance at September 30, 2016 | $ | 52,616 |
|
5. Acquisition
Openwave Messaging, Inc. (“Openwave”)
On March 1, 2016, the Company acquired all outstanding shares of Openwave for $124.5 million, net of working capital adjustments and liabilities assumed, comprised of $102.5 million paid in cash and $22.0 million paid in shares of the Company’s 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 Synchronoss’ current global footprint, Synchronoss will have increased direct access to subscribers around the world for the Synchronoss Personal Cloud™ platform and bolster the Company’s go-to-market efforts internationally.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
noncontrolling interests could significantly increase or decrease the fair value estimates recorded in the Condensed Consolidated Balance Sheets.
The changes in fair value of the Company’s Level 3 redeemable noncontrolling interests during the six months ended June 30, 2020 were as follows:
| | | | | |
Balance at December 31, 2019 | $ | 12,500 | |
Fair value adjustment | (182) | |
Net income attributable to redeemable noncontrolling interests | 182 | |
Balance at June 30, 2020 | $ | 12,500 | |
5. Leases
The Company has entered into contracts with third parties to lease a variety of assets, including certain real estate, equipment, automobiles and other assets. The Company’s leases frequently allow for lease payments that could vary based on factors such as inflation or the degree of utilization of the underlying asset. For example, certain of the Company’s real estate leases could require us to make payments that vary based on common area maintenance charges, insurance and other charges. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company is party to certain sublease arrangements, primarily related to the Company’s real estate leases, where it acts as the lessee and intermediate lessor.
The Company reflects finance leases as a component of Leases, non-current on the Condensed Consolidated Balance Sheet. The finance leases were not material for the period ended June 30, 2020.
The following table presents information about the Company's Right of Use (ROU) assets and lease liabilities at June 30, 2020 (in thousands):
| | | | | | |
| | |
ROU assets: | | |
Non-current operating lease ROU assets | | $ | 46,913 | |
| | |
| | |
| | |
Operating lease liabilities: | | |
Current operating lease liabilities* | | $ | 9,527 | |
Non-current operating lease liabilities | | 53,452 | |
Total operating lease liabilities | | $ | 62,979 | |
| | |
| | |
| | |
| | |
| | |
* Amounts are included in Accrued Expenses on the Condensed Consolidated Balance Sheet.
The following table presents information about lease expense and sublease income for the three and six months ended June 30, 2020 (in thousands):
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2020 | | June 30, 2020 |
Operating lease cost* | $ | 3,170 | | | $ | 6,220 | |
Other lease costs and income: | | | |
Variable lease costs* | 1,402 | | | 1,727 | |
Sublease income* | (978) | | | (1,944) | |
| | | |
Total net lease cost | $ | 3,594 | | | $ | 6,003 | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
* Amounts are included in Cost of revenues, Selling, general and administrative and/or Research and development based on the function that the underlying leased asset supports which are reflected in the Condensed Consolidated Statements of Operations.
The following table provides the undiscounted amount of future cash flows included in our lease liabilities at June 30, 2020 for each of the five years subsequent to December 31, 2019 and thereafter, as well as a reconciliation of such undiscounted cash flows to our lease liabilities at June 30, 2020 (in thousands):
| | | | | |
| Operating Leases |
Remaining 2020 | $ | 6,743 | |
2021 | 12,754 | |
2022 | 12,105 | |
2023 | 9,667 | |
2024 | 9,470 | |
Thereafter | 32,305 | |
Total future lease payments | 83,044 | |
Less: amount representing interest | (20,065) | |
Present value of future lease payments (lease liability) | $ | 62,979 | |
The following table provides the weighted-average remaining lease term and weighted-average discount rates for our leases as of June 30, 2020:
| | | | | |
Operating Leases: | |
Weighted-average remaining lease term (years), weighted based on lease liability balances | 7.19 |
Weighted-average discount rate (percentages), weighted based on the remaining balance of lease payments | 8.0 | % |
The following table provides certain cash flow and supplemental noncash information related to our lease liabilities for the six months ended June 30, 2020 (in thousands):
| | | | | |
| |
Operating Leases: | |
Cash paid for amounts included in the measurement of lease liabilities | $ | 6,638 | |
Lease liabilities arising from obtaining right-of-use assets | 1,266 | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
6. Investments in Affiliates and Related Transactions
Sequential Technology International, LLC
In connection with the divestiture of the exception handling business of the Company in 2017, Synchronoss entered into a three-year Cloud Telephony and Support services agreement (“CTS Agreement”) to grant Sequential Technology International, LLC (“STIN”) access to certain Synchronoss software and private branch exchange systems to facilitate exception handling operations required to support STIN customers.
The CTS agreement expired in the first quarter of 2020. At the time of the expiration, the Company entered into an Asset Purchase Agreement with STIN. As part of the agreement, the Company received $1.6 million in exchange for certain hardware and system assets for the cloud telephony and remaining support service business.
During the second quarter of 2020, the Company entered into an agreement with STIN and AP Capital Holdings II, LLC (“APC”) to divest its remaining equity interest in STIN as well as settle its paid-in-kind purchase money note (“PIK note”) and certain amounts due as of December 31, 2019 in consideration for a $9.0 million secured promissory note (the “Note”), which includes contingent consideration of up to $16.0 million. The Note has an 8% interest rate and a 3-year stated term. As part of the arrangement, APC acquired a majority stake of STIN. Additionally, in the event of a Sale of STIN by APC and STIN at a future date, the Company shall receive 5% of such sale proceeds, after reducing the sale proceeds by any outstanding amounts of the above Note, including any earned contingent consideration. The Company determined the preliminary fair value of the netNote as of the transaction date to be approximately $4.8 million. The Company determined the fair value of the Note using a discounted cash flow analysis, which discounts the expected future cash flows of the asset to determine its fair value. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The Note has been reflected in Other assets acquiredon the Condensed Consolidated balance sheet. No gain or loss was recognized as a result of the transaction.
Additionally, the Company has renewed its commercial agreement with STIN to continue to provide software and managed support services.
7. Debt
2019 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%. In addition, on a quarterly basis, the Company is required to pay each lender under the Revolving Credit Facility a 0.2% commitment fee in respect of commitments under the Revolving Credit Facility, which may be subject to adjustment based on the Company’s total leverage ratio. The outstanding balance under the Revolving Credit Facility as of June 30, 2020 is $10.0 million.
Interest expense
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table summarizes the Company’s interest expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | |
Convertible Senior Notes | | | | | | | | | | | | |
Amortization of debt issuance costs | | $ | — | | | $ | 82 | | | | | $ | — | | | $ | 237 | | | |
Interest on borrowings | | — | | | 106 | | | | | — | | | 297 | | | |
| | | | | | | | | | | | |
2019 Revolving Credit Facility | | | | | | | | — | | | — | | | |
Amortization of debt issuance costs | | 12 | | | — | | | | | 28 | | | — | | | |
Commitment fee | | — | | | — | | | | | 4 | | | — | | | |
Interest on borrowings | | 68 | | | — | | | | | 82 | | | — | | | |
| | | | | | | | | | | | |
Other | | 4 | | | 275 | | | | | 215 | | | 514 | | | |
Total | | $ | 84 | | | $ | 463 | | | | | $ | 329 | | | $ | 1,048 | | | |
| | | | | | | | | | | | |
8. Accumulated Other Comprehensive (Loss) / Income
The changes in accumulated other comprehensive (loss) income during the six months ended June 30, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2019 | | Other comprehensive loss | | Tax effect | | Balance at June 30, 2020 |
Foreign currency | $ | (28,204) | | | $ | (2,069) | | | | | $ | (30,273) | |
Unrealized loss on intra-entity foreign currency transactions | (4,306) | | | 253 | | | (71) | | | (4,124) | |
Unrealized holding gains (losses) on marketable debt securities | (751) | | | 751 | | | — | | | — | |
Total | $ | (33,261) | | | $ | (1,065) | | | $ | (71) | | | $ | (34,397) | |
|
| | | | | |
| Purchase Price Allocation | | |
Cash | $ | 4,110 |
| | |
Prepaid expenses and other assets | 3,473 |
| | |
Property, Plant & Equipment | 2,882 | | |
Long term assets | 2,396 |
| | |
Intangible assets: | | | Wtd. Avg. |
Tradename | 1,000 |
| | 1 year |
Technology | 32,100 |
| | 7 years |
Customer relationships | 29,000 |
| | 10 years |
Goodwill | 93,930 |
| | |
Total assets acquired | 168,891 |
| | |
Accounts payable and accrued liabilities | 17,722 |
| | |
Deferred revenues | 7,854 |
| | |
Long term liabilities | 18,777 |
| | |
Net assets acquired | $ | 124,538 |
| | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
9. Stockholders’ Equity
There were no significant changes to Company’s authorized capital stock and preferred stock during the six months ended June 30, 2020.
Common Stock
Each holder of common stock is entitled to vote on all matters and is entitled to 1 vote for each share held. Dividends on common stock will be paid when, and if, declared by the Company’s Board of Directors. NaN dividends have ever been declared or paid by the Company.
Preferred Stock
The goodwill recordedBoard 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 connection with this acquisition was basedexchange 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 June 30, 2020, there were 233,217 shares of Series A Preferred Stock outstanding, including the initial issuance of 185,000 shares of Series A Preferred Stock and the issuance of 48,217 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 operating synergieseach share of Series A Preferred Stock on a quarterly basis, an amount equal to the dividend rate of 14.5% divided by four and multiplied by the then-applicable Liquidation Preference (as defined in the Series A Certificate) per share of Series A Preferred Stock (collectively, the “Preferred Dividends”). The Preferred Dividends are due on January 1, April 1, July 1 and October 1 of each year (each, a “Series A Dividend Payment Date”). The Company may choose to pay the Preferred Dividends in cash or in additional shares of Series A Preferred Stock. In the event the Company does not declare and pay a dividend in-kind or in cash on any Series A Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. In addition, the Series A Preferred Stock participates in dividends declared and paid on shares of the Company’s common stock.
Each share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal to the “Conversion Price” (as that term is defined in the Series A Certificate) multiplied by the then applicable “Conversion Rate” (as that term is defined in the Series A Certificate). Each share of Series A Preferred Stock is initially convertible into 55.5556 shares of common stock, representing an initial “conversion price” of approximately $18.00 per share of common stock. The Conversion Rate is subject to equitable proportionate adjustment in the event of stock splits, recapitalizations and other benefits expectedevents set forth in the Series A Certificate.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
On and after February 15, 2023, holders of shares of Series A Preferred Stock have the right to result fromcause the combined operationsCompany 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 assembled workforce acquired. accrued but unpaid dividends. As of June 30, 2020, the Liquidation Value and Redemption Value of the Preferred Shares was $243.1 million.
The goodwill acquiredholders 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 2 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 1 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 1 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 deductibleless 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 tax purposes.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.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Under the Series A Certificate, if Silver and certain of its affiliates have elected to effect a conversion of some or all of their shares of Series A Preferred Stock and if the sum, without duplication, of (i) the aggregate number of shares of the Company’s common stock issued to such holders upon such conversion and any shares of the Company’s common stock previously issued to such holders upon conversion of Series A Preferred Stock and then held by such holders, plus (ii) the number of shares of the Company’s common stock underlying shares of Series A Preferred Stock that would be held at such time by such holders (after giving effect to such conversion), would exceed the 19.9% of the issued and outstanding shares of the Company’s voting stock on an as converted basis (the “Conversion Cap”), then such holders would only be entitled to convert such number of shares as would result in the sum of clauses (i) and (ii) (after giving effect to such conversion) being equal to the Conversion Cap (after giving effect to any such limitation on conversion). Any shares of Series A Preferred Stock which a holder has elected to convert but which, by reason of the previous sentence, are not so converted, will be treated as if the holder had not made such election to convert and such shares of Series A Preferred Stock will remain outstanding. Also, under the Series A Certificate, if the sum, without duplication, of (i) the aggregate voting power of the shares previously issued to Silver and certain of its affiliates held by such holders at the record date, plus (ii) the aggregate voting power of the shares of Series A Preferred Stock held by such holders as of such record date, would exceed 19.99% of the total voting power of the Company’s outstanding voting stock at such record date, then, with respect to such shares, Silver and certain of its affiliates are only entitled to cast a number of votes equal to 19.99% of such total voting power. The limitation on conversion and voting ceases to apply upon receipt of the requisite approval of holders of the Company’s common stock under the applicable listing standards.
Investor Rights Agreement
Acquisition-related costs recognizedConcurrently 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 10 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) 2 directors nominated and elected by the holders of shares of Series A Preferred Stock; (ii) 4 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) 4 other directors, 2 of whom shall satisfy the independence criteria of the applicable listing standards and, as of the closing of the Preferred Transaction, 1 of whom shall be the individual then serving as chief executive officer of Synchronoss and 1 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 1 director to the Board of Directors of Synchronoss pursuant to the Series A Certificate, Silver will have the right to designate 2 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 to maintain its ownership percentage.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Under the terms of the Investor Rights Agreement, Silver will be entitled to (i) 3 demand registrations, with no more than 2 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 June 30, 2020 and changes during the ninesix months ended SeptemberJune 30, 20162020, are presented below:
| | | | | | | | | | | |
| Preferred Stock | | |
| Shares | | Amount |
Balance at December 31, 2019 | 217 | | | $ | 200,865 | |
Issuance of preferred stock | 16 | | | — | |
| | | |
Amortization of preferred stock issuance costs | — | | | 1,585 | |
Issuance of preferred PIK dividend | — | | | 16,031 | |
| | | |
| | | |
| | | |
| | | |
Balance at June 30, 2020 | 233 | | | $ | 218,481 | |
Registration Rights
There were no significant changes to the Company’s registration rights during the three and six months ended June 30, 2020.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Stock Plans
There were no significant changes to the Company’s Stock Plans during the three and six months ended June 30, 2020. As of June 30, 2020, there were 0.5 million shares available for the grant or award under the Company’s 2015 including transaction costsPlan 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 as legal, accounting, valuationawards in cash upon vesting and other professional services, were $2.9 million and $1.0 million, respectively and are includedthe Company has reflected such awards in accrued expenses. As of June 30, 2020, the selling, general and administrative expenses on the condensed consolidated statements of income.liability for such awards is approximately $0.7 million.
6. Stockholders’ Equity
Stock-Based Compensation
The following table summarizes information about stock-based compensation:compensation expense related to all of the Company’s stock awards included by operating expense categories, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | | | 2020 | | 2019 | | |
Cost of revenues | $ | 642 | | | $ | 657 | | | | | $ | 1,394 | | | $ | 1,343 | | | |
Research and development | 1,071 | | | 889 | | | | | 2,502 | | | 2,114 | | | |
Selling, general and administrative | 3,274 | | | 3,927 | | | | | 6,260 | | | 7,571 | | | |
Total stock-based compensation expense | $ | 4,987 | | | $ | 5,473 | | | | | $ | 10,156 | | | $ | 11,028 | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Stock options | $ | 1,989 |
| | $ | 2,221 |
| | $ | 5,957 |
| | $ | 6,361 |
|
Restricted stock awards | 6,786 |
| | 5,776 |
| | 18,794 |
| | 14,398 |
|
ESPP Plan | 206 |
| | 150 |
| | 656 |
| | 475 |
|
Total stock-based compensation before taxes | $ | 8,981 |
| | $ | 8,147 |
| | $ | 25,407 |
| | $ | 21,234 |
|
Tax benefit | $ | 2,949 |
| | $ | 2,570 |
| | $ | 8,311 |
| | $ | 6,701 |
|
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by award type, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | | | 2020 | | 2019 | | |
Stock options | $ | 1,805 | | | $ | 1,796 | | | | | $ | 3,588 | | | $ | 3,493 | | | |
Restricted stock awards | 2,962 | | | 3,526 | | | | | 6,296 | | | 7,324 | | | |
Performance Based Cash Units | 220 | | | 151 | | | | | 272 | | | 211 | | | |
| | | | | | | | | | | |
Total stock-based compensation before taxes | $ | 4,987 | | | $ | 5,473 | | | | | 10,156 | | | 11,028 | | | |
Tax benefit | $ | 664 | | | $ | 1,056 | | | | | $ | 1,588 | | | $ | 2,114 | | | |
The total stock-based compensation cost related to unvested equity awards as of SeptemberJune 30, 20162020 was approximately $73.4$24.2 million. The expense is expected to be recognized over a weighted-average period of approximately 2.651.54 years.
The total stock-based compensation cost related to unvested performance based cash units as of June 30, 2020 was approximately $1.2 million. The expense is expected to be recognized over a weighted-average period of approximately 1.97 years.
Stock Options
There were no significant changes to the Company’s Stock Option Plans during the three and six months ended June 30, 2020.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Stock Options
The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock options. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2016 | | 2015 | | 2016 | | 2015 | | 2020 | | 2019 | | | 2020 | | 2019 | |
Expected stock price volatility | 46 | % | | 46 | % | | 45 | % | | 48 | % | Expected stock price volatility | | 76.1 | % | | 69.6 | % | | | 72.0 | % | | 69.6 | % | |
Risk-free interest rate | 1.27 | % | | 1.27 | % | | 1.16 | % | | 1.26 | % | Risk-free interest rate | | 0.4 | % | | 1.9 | % | | | 1.4 | % | | 1.9 | % | |
Expected life of options (in years) | 3.98 |
| | 3.98 |
| | 4.00 |
| | 4.00 |
| Expected life of options (in years) | | 4.45 | | 4.34 | | | 4.42 | | 4.33 | |
Expected dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % | Expected dividend yield | | 0.0 | % | | 0.0 | % | | | 0.0 | % | | 0.0 | % | |
Weighted-average fair value (grant date) of the options | $ | 15.53 |
| | $ | 15.53 |
| | $ | 11.08 |
| | $ | 16.54 |
| |
Weighted-average fair value (PSV) of the options | | Weighted-average fair value (PSV) of the options | | $ | 1.73 | | | $ | 3.77 | | | | $ | 3.08 | | | $ | 3.78 | | |
The following table summarizes information about stock options outstanding as of SeptemberJune 30, 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Options | | Number of Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding at December 31, 2019 | | 4,922 | | | $ | 14.54 | | | | | |
Options Granted | | 1,534 | | | 5.41 | | | | | |
Options Exercised | | — | | | — | | | | | |
Options Cancelled | | (312) | | | 17.09 | | | | | |
Outstanding at June 30, 2020 | | 6,144 | | | $ | 12.13 | | | 5.17 | | $ | — | |
Vested at June 30, 2020 | | 2,244 | | | $ | 19.72 | | | 3.61 | | $ | — | |
Exercisable at June 30, 2020 | | 2,244 | | | $ | 19.72 | | | 3.61 | | $ | — | |
|
| | | | | | | | | | | | | |
Options | | Number of Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding at December 31, 2015 | | 2,348 |
| | $ | 31.04 |
| | | | |
Options Granted | | 862 |
| | 30.85 |
| | | | |
Options Exercised | | (432 | ) | | 21.74 |
| | | | |
Options Cancelled | | (169 | ) | | 36.38 |
| | | | |
Outstanding at September 30, 2016 | | 2,609 |
| | $ | 32.17 |
| | 4.76 | | $ | 24,664 |
|
Vested at September 30, 2016 | | 2,445 |
| | $ | 32.08 |
| | 4.68 | | $ | 23,261 |
|
Exercisable at September 30, 2016 | | 1,129 |
| | $ | 29.97 |
| | 3.08 | | $ | 13,049 |
|
The below table summarizes additional information related tototal intrinsic value of stock options: options exercisable at June 30, 2020 and 2019 was NaN and NaN, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2020 and 2019 was NaN and NaN, respectively.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Total intrinsic value for stock options exercised | $ | 2,157 |
| | $ | 3,597 |
| | $ | 5,796 |
| | $ | 15,141 |
|
Fair value of vested options | 3,571 |
| | 2,064 |
| | 27,241 |
| | 18,741 |
|
Awards of Restricted Stock and Performance Stock
There were no significant changes to the Company’s restricted stock award (“Restricted Stock”) and performance stock plan during the three and six months ended June 30, 2020.
A summary of the Company’s unvested restricted stock at SeptemberJune 30, 2016,2020, and changes during the ninesix months ended SeptemberJune 30, 2016,2020, is presented below:
| | | | | | | | | | | | | | |
Unvested Restricted Stock | | Number of Awards | | Weighted- Average Grant Date Fair Value |
Unvested at December 31, 2019 | | 3,375 | | | $ | 8.68 | |
Granted | | 260 | | | 5.14 | |
Vested | | (1,072) | | | 9.07 | |
Forfeited | | (343) | | | 7.76 | |
Unvested at June 30, 2020 | | 2,220 | | | $ | 7.50 | |
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.
|
| | | | | | | |
Non-Vested Restricted Stock | | Number of Awards | | Weighted- Average Grant Date Fair Value |
Non-vested at December 31, 2015 | | 1,412 |
| | $ | 36.80 |
|
Granted | | 907 |
| | 33.90 |
|
Vested | | (569 | ) | | 35.68 |
|
Forfeited | | (134 | ) | | 38.85 |
|
Non-vested at September 30, 2016 | | 1,616 |
| | $ | 35.40 |
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Employee Stock PurchasePerformance Based Cash Units
Performance based cash units granted under the Company’s 2015 Plan
On February 1, 2012, vest at the Company establishedend of a ten year Employee Stock Purchase Plan (“ESPP” or “the Plan”) forthree-year period based on service and achievement of certain eligible employees. The Plan is to be administeredperformance objectives determined by the Company’s Board of Directors. The total number of shares available for purchase under the Plan is 500 thousand shares
A summary of the Company’s Common Stock. Employees participate over aunvested performance-based cash units at June 30, 2020 and changes during the six month period through payroll withholdings and may purchase,months ended June 30, 2020, is presented below:
| | | | | | | | | | | | | | |
Unvested Cash Units | | Number of Units | | Period End Fair Value |
Unvested at December 31, 2019 | | 1,046 | | | $ | 4.75 | |
Granted | | 1,391 | | | — | |
Vested | | — | | | — | |
Forfeited | | (180) | | | — | |
Unvested at June 30, 2020 | | 2,257 | | | $ | 3.53 | |
Performance based cash units are measured at the end of the six month period, the Company’s Common Stockclosing stock price at the lowerreporting 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 85% of the fair market value on the first day of the offering period or the fair market value on the purchasethese awards at each reporting date. No participant will be granted a right to purchase Common Stock under the Plan if such participant would own more than 5% of the total combined voting power of the Company. In addition, no participant may purchase more than a thousand shares of Common Stock within any purchase period or with a value greater than $25 thousand in any calendar year.
Treasury Stock
On February 4, 2016, the Company's Board of Directors authorized a stock repurchase program to purchase up to $100 million of the Company's outstanding Common Stock. Under the program, the Company may purchase shares of its Common Stock in the open market, through block trades or otherwise at prices deemed appropriate by the Company. The timing and amount of repurchase transactions under the program will depend on available working capital and other factors as determined by the Board of Directors and management.
As of September 30, 2016, a total of 1.3 million shares have been purchased under the program for an aggregate purchase price of $40 million. The Company classifies Common Stock repurchased as Treasury Stock on its balance sheet.
7. Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) attributable to Synchronoss | $ | 7,676 |
| | $ | 9,645 |
| | $ | (4,717 | ) | | $ | 35,360 |
|
Translation adjustments | 2,645 |
| | (971 | ) | | 6,089 |
| | (11,681 | ) |
Unrealized gain on securities, (net of tax) | 147 |
| | 255 |
| | 145 |
| | 389 |
|
Net income (loss) on intra-entity foreign currency transactions, (net of tax) | 300 |
| | 65 |
| | 662 |
| | (2,047 | ) |
Total comprehensive income attributable to Synchronoss | $ | 10,768 |
| | $ | 8,994 |
| | $ | 2,179 |
| | $ | 22,021 |
|
The changes in accumulated other comprehensive income (loss) during the nine months ended September 30, 2016, are as follows:
|
| | | | | | | | | | | | | | | |
| Foreign Currency | | Unrealized (Loss) Income on Intra-Entity Foreign Currency Transactions | | Unrealized Holding Gains (Losses) on Available-for-Sale Securities | | Total |
Balance at December 31, 2015 | $ | (34,092 | ) | | $ | (4,292 | ) | | $ | (300 | ) | | $ | (38,684 | ) |
Other comprehensive income | 6,089 |
| | 809 |
| | 305 |
| | 7,203 |
|
Tax effect | — |
| | (147 | ) | | (160 | ) | | (307 | ) |
Total comprehensive income | 6,089 |
|
| 662 |
|
| 145 |
|
| 6,896 |
|
Balance at September 30, 2016 | $ | (28,003 | ) |
| $ | (3,630 | ) |
| $ | (155 | ) |
| $ | (31,788 | ) |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
10. Income Taxes
8. Goodwill
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief and IntangiblesEconomic Security Act (“CARES Act”) was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses. The CARES Act amends the Net Operating Loss (“NOL”) provisions of the Tax Cuts and Jobs Act, allowing for the carryback of losses arising in tax years 2018, 2019 and 2020, to each of the five taxable years preceding the taxable year of loss. The Company filed a carryback claim in the second quarter of 2020 for the NOL generated in tax year 2018, which will result in a refund of previously paid taxes. The carryback of the 2018 NOL will result in an increase in the Company’s 2019 tax liability, so the Company has also recorded an estimate of the additional 2019 current tax expense in the first quarter income tax provision. The estimated net income tax benefit associated with the 2018 NOL carryback is approximately $9 million, and this was recorded discretely in the first quarter income tax provision.
GoodwillIn April 2020, there was a redemption of the Company’s partnership interest in STIN. The total discrete benefit related to the exit from STI was $12.1 million which included the settlement of certain trade receivables.
The Company records goodwill which representsrecognized approximately $20.4 million and $3.2 million in related income tax benefit during the excesssix months ended June 30, 2020 and 2019, respectively. The effective tax rate was approximately 83.5% for the six months ended June 30, 2020. The effective tax rate was primarily driven by the impact of the purchase price over the fair value of assets acquired, including other definite-lived intangible assets. Goodwill is reviewed annually for impairment or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair valueredemption of the reporting unit below its carrying amount.Company’s interest in STIN, the new NOL carryback provisions discussed above and valuation allowances recorded in domestic and foreign jurisdictions, partially offset by the impact of permanent book-tax differences. The Company continues to consider 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 six months ended June 30, 2020.
11. Restructuring
The Company continues to execute certain restructurings to identify workforce optimization opportunities to better align the Company’s resources with its key strategic priorities. A summary of the Company’s restructuring accrual at June 30, 2020 and changes in goodwill during the ninesix months ended SeptemberJune 30, 20162020, are as follows: presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2019 | | Charges | | Payments | | Other Adjustments | | Balance at June 30, 2020 |
Employment termination costs | $ | 90 | | | $ | 5,943 | | | $ | (1,975) | | | $ | (5) | | | $ | 4,053 | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | |
Balance at December 31, 2015 | $ | 221,271 |
|
Acquisition | 93,930 |
|
Reclassifications, adjustments and other | (3,033 | ) |
Translation adjustments | 3,017 |
|
Balance at September 30, 2016 | $ | 315,185 |
|
The reclassification adjustment of $3.0 million is primarily related to a change in the Company’s deferred tax asset in connection with a pre-acquisition tax loss.
Other Intangible Assets
Intangible assets consist primarily of trade names, technology, and customer lists and relationships. These intangible assets are amortized on the straight‑line method over the estimated useful life. Amortization expense for the nine months ended September 30, 2016 and the year ended December 31, 2015 was $35.0 million and $28.6 million, respectively.
The Company’s intangible assets consist of the following:
|
| | | | | | | | | | | |
| September 30, 2016 |
| Cost | | Accumulated Amortization | | Net |
Trade name | $ | 2,541 |
| | $ | (2,012 | ) | | $ | 529 |
|
Technology | 162,744 |
| | (55,546 | ) | | 107,198 |
|
Customer lists and relationships | 137,645 |
| | (47,901 | ) | | 89,744 |
|
Capitalized software and patents | 23,874 |
| | (5,679 | ) | | 18,195 |
|
| $ | 326,804 |
|
| $ | (111,138 | ) |
| $ | 215,666 |
|
|
| | | | | | | | | | | |
| December 31, 2015 |
| Cost | | Accumulated Amortization | | Net |
Trade name | $ | 1,531 |
| | $ | (1,372 | ) | | $ | 159 |
|
Technology | 130,200 |
| | (35,336 | ) | | 94,864 |
|
Customer lists and relationships | 105,864 |
| | (33,969 | ) | | 71,895 |
|
Capitalized software and patents | 11,406 |
| | (4,002 | ) | | 7,404 |
|
| $ | 249,001 |
| | $ | (74,679 | ) | | $ | 174,322 |
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
12. Earnings per Common Share (“EPS”)
Estimated future amortization expense
Basic EPS is computed based upon the weighted average number of its intangible assetscommon shares outstanding for the next five yearsyear. Diluted EPS is as follows:
|
| | | |
Year ending December 31, | |
|
2016 | $ | 12,079 |
|
2017 | 49,338 |
|
2018 | 46,218 |
|
2019 | 38,984 |
|
2020 | 25,302 |
|
2021 | 13,161 |
|
9. Debt
Credit Facility
In September 2013,computed based upon the Company entered into a Credit Agreement (the “Credit Facility”) with JP Morgan Chase Bank, N.A., asweighted average number of common shares outstanding for the administrative agent, Wells Fargo Bank, National Association, asyear plus the syndication agentdilutive effect of common stock equivalents using the treasury stock method and Capital One, National Association and KeyBank National Association, as co-documentation agents. The Credit Facility, which was usedthe average market price of the Company’s common stock for general corporate purposes, was a $100 million unsecured revolving line of credit that matures on September 27, 2018.the year. The Company paid a commitment feeincludes participating securities (Redeemable Convertible Preferred Stock - Participation with Dividends on Common Stock that contain preferred dividend) in the rangecomputation of 25EPS pursuant to 35 basis points on the unused balancetwo-class method. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the revolving credit facility underCompany.
The following table provides a reconciliation of the Credit Agreement. Synchronoss hadnumerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share from continued and discontinued operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | | | 2020 | | 2019 | | |
Numerator - Basic: | | | | | | | | | | | |
Net loss from continuing operations | $ | (694) | | | $ | (16,578) | | | | | $ | (4,044) | | | $ | (36,315) | | | |
Net loss attributable to redeemable noncontrolling interests | (165) | | | (593) | | | | | (182) | | | (906) | | | |
Preferred stock dividend | (9,289) | | | (7,859) | | | | | (18,197) | | | (15,396) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net loss attributable to Synchronoss | $ | (10,148) | | | $ | (25,030) | | | | | $ | (22,423) | | | $ | (52,617) | | | |
| | | | | | | | | | | |
Numerator - Diluted: | | | | | | | | | | | |
Net loss from continuing operations attributable to Synchronoss | $ | (10,148) | | | $ | (25,030) | | | | | $ | (22,423) | | | $ | (52,617) | | | |
Income effect for interest on convertible debt, net of tax | — | | | — | | | | | — | | | — | | | |
Net loss from continuing operations adjusted for the convertible debt | (10,148) | | | (25,030) | | | | | (22,423) | | | (52,617) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Denominator: | | | | | | | | | | | |
Weighted average common shares outstanding — basic | 41,697 | | | 40,810 | | | | | 41,482 | | | 40,566 | | | |
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 | 41,697 | | | 40,810 | | | | | 41,482 | | | 40,566 | | | |
| | | | | | | | | | | |
Basic EPS | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | |
Basic | $ | (0.24) | | | $ | (0.61) | | | | | $ | (0.54) | | | $ | (1.30) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Diluted | $ | (0.24) | | | $ | (0.61) | | | | | $ | (0.54) | | | $ | (1.30) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Anti-dilutive stock options excluded | — | | | — | | | | | — | | | — | | | |
Unvested shares of restricted stock awards | 2,220 | | | 3,691 | | | | | 2,220 | | | 3,691 | | | |
(1) The calculation does not include the right to request an increase ineffect of assumed conversion of convertible debt of 1,451,173 shares for the aggregatethree months ended June 30, 2019, which is based on 18.8072 shares per $1,000 principal amount of the Credit Facility to $150 million. Senior Convertible Notes.
Interest(2) The calculation does not include the effect of assumed conversion of preferred stock of 12,956,487 and 11,041,017 shares, for the three months ended June 30, 2020 and 2019, respectively, which is based on the borrowings were based upon LIBOR plus a 2.25 basis point margin. All outstanding balances under the Credit Facility were repaid on July 7, 2016 and the Credit Facility was terminated and replaced with the Amended Credit Facility.
Amended Credit Facility
On July 7, 2016, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Administrative Agent”) and the several lenders party thereto (the “Amended Credit Facility”). The Amended Credit Facility, which will be used for general corporate purposes, is a $250 million unsecured revolving line of credit that matures on July 7, 2021, subject to terms and conditions set forth therein. The Company pays a commitment fee in the range of 15 to 30 basis points on the unused balance of the revolving credit facility under the Credit Agreement. Synchronoss has the right to request an increase in the aggregate55.5556 shares per $1,000 principal amount of the Amended Credit Facility to $350 million.preferred stock, because the effect would have been anti–dilutive.
Interest on the borrowing was based upon LIBOR plus a 1.99 basis point margin. As of September 30, 2016, the Company had an outstanding balance of $38 million on the Amended Credit Facility.
The Amended Credit Facility is subject to certain financial covenants. As of September 30, 2016, the Company was in compliance with all required covenants.
Interest expense and commitment fees under the Credit Facility and the Amended Credit Facility were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Commitment fees | $ | 154 |
| | $ | 89 |
| | $ | 272 |
| | $ | 241 |
|
Interest expense | 230 |
| | — |
| | 753 |
| | — |
|
Convertible Senior Notes
On August 12, 2014, the Company issued $230.0 million aggregate principal amount of its 0.75% Convertible Senior Notes due in 2019 (the “2019 Notes”). The 2019 Notes mature on August 15, 2019, and bear interest at a rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. The Company accounted for the $230.0 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance which are presented net of the face value of the 2019 Notes on the balance sheet.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
13. Commitments, Contingencies and Other
Purchase Obligations
Aggregate annual future minimum payments under non-cancelable agreements are as follows:
| | | | | | | | | | | | |
As of June 30, 2020 | | Non-cancelable agreements | | | | |
2020 | | $ | 17,541 | | | | | |
2021 | | 3,665 | | | | | |
2022 | | 2,207 | | | | | |
2023 and thereafter | | 1,563 | | | | | |
Total | | $ | 24,976 | | | | | |
Legal Matters
In the ordinary course of business, the Company is regularly subject to various claims, suits, regulatory inquiries and investigations. The 2019 NotesCompany records a liability for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable, and the loss can be reasonably estimated. Management has also identified certain other legal matters where they believe an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that resolving claims against the Company, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the Company’s business, financial position, results of operations, or cash flows, these matters are senior, unsecured obligationssubject to inherent uncertainties and management’s view of these matters may change in the future. The Company also evaluates other contingent matters, including income and non-income tax contingencies, to assess the likelihood of an unfavorable outcome and estimated extent of potential loss. It is possible that an unfavorable outcome of one or more of these lawsuits or other contingencies could have a material impact on the liquidity, results of operations, or financial condition of the Company.
On May 1, 2017, May 2, 2017, June 8, 2017 and June 14, 2017, four putative class actions were filed against the Company and are convertible into sharescertain of its common stock based on a conversion rate of 18.8072 shares per $1,000 principal amount of 2019 Notes which is equivalent to an initial conversion price of approximately $53.17 per share. The Company will satisfy any conversion of the 2019 Notes with shares of the Company’s common stock. The 2019 Notes are convertible at the note holders’ option prior to their maturitycurrent and if specified corporate transactions occur. The issue price of the 2019 Notes was equal to their face amount.
Holders of the 2019 Notes who convert their notes in connection with a qualifying fundamental change, as defined in the related indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, following the occurrence of a fundamental change, holders may require that the Company repurchase some or all of the 2019 Notes for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accruedformer officers and unpaid interest, if any. As of September 30, 2016, none of these conditions existed with respect to the 2019 Notes and as a result, the 2019 Notes are classified as long term.
The 2019 Notes are the Company’s direct senior unsecured obligations and rank equal in right of payment to all of the Company’s existing and future unsecured and unsubordinated indebtedness.
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 Company’s 2019 Notes related to the contractual interest coupon was:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Contractual interest expense | $ | 431 |
| | $ | 431 |
| | $ | 1,294 |
| | $ | 1,293 |
|
10. Restructuring
In March 2016, the Company initiated the preliminary phase of a work-force reduction as part of a corporate restructuring, with reductions occurring across all levels and departments within the Company. This measure was intended to reduce costs and to 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, 2016 and changes during the nine months ended September 30, 2016, is 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 |
|
11. Income Taxes
The Company recognized approximately $6.9 million and $14.9 million 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 due to the unfavorable impact of losses in foreign jurisdictions which have lower tax rates than the U.S. as well as the unfavorable impact of the fair market value adjustment for 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-cash income tax provision 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 rate and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and forecasted permanent book-to-tax differences, and changes resulting from the impact of tax law changes. The early adoption of ASU 2016-09 resulted in a decrease in the effective tax rate 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%.
12. Legal Matters
On October 7, 2014, the Company filed an amended complaintdirectors 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 State of Hawaii, which filed, on November 20, 2017, a consolidated complaint purportedly on behalf of purchasers of the Company’s patents. Incommon 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 the Company’s 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 second 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 the Company’s 2011 acquisition agreementfinancial 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. On May 29, 2020, the court granted in part and denied in part defendants’ motion to dismiss the second amended complaint without prejudice. 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.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
On September 15, 2017, October 24, 2017, October 27, 2017 and October 30, 2017, the outcome is adverse, dueCompany’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. On March 11, 2019, the defendants filed a motion to dismiss the Operative Complaint, which the Court granted in substantial part on November 26, 2019. On December 10, 2019, the defendants filed a motion for reconsideration respecting the only claim to survive the motion to dismiss.. On June 12, 2020, the Court granted the defendants’ motion for reconsideration and dismissed the remaining claim without prejudice, allowing lead plaintiff leave to amend her complaint. On July 13, 2020, lead plaintiff filed an amended complaint. The amended complaint alleges claims related to breaches of fiduciary duty and unjust enrichment. The amended complaint’s allegations relate substantially to 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. 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 actions at this time and Bakamar are without merit,can give no assurance that the asserted claims will not have a material adverse effect on its financial position or results of operations.
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 motion to dismiss in the Derivative Suits. The Company believes that the asserted claims lack merit and intends to vigorously defend against all of the claims brought by them.vigorously. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the Derivative Suits at this time and can give no assurance that the asserted claims will not have a material adverse effect on our financial position or results of operations.
On June 11, 2020 and June 12, 2020, the Company’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 “Demand Refused Derivative Complaints”). The Demand Refused Derivative Complaints allege claims related to breaches of fiduciary duty, unjust enrichment, and alleged violations of securities laws. The complaints’ allegations relate substantially to the same facts as those underlying the Securities Law Action described above. The Demand Refused Derivative Complaints further allege that each plaintiff made a demand upon the Company’s Board of Directors to investigate the alleged misconduct and that such demand was wrongfully refused. Plaintiffs seek unspecified damages and for the Company to take steps to improve its corporate governance and internal procedures. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the 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 results of operations.
Except as set forth above, the Company is not currently subject to any legal proceedings that could have a material adverse effect on its operations; however, it may from time to time become a party to various legal proceedings arising in the ordinary course of its business. The Company is currently the plaintiff in several patent infringement cases. The defendants in several of these cases have filed counterclaims. Although the Company cannot predict the outcome of the cases at this time due to the inherent uncertainties of litigation, the Company continues to pursue its claims and believes that the counterclaims are without merit, and the Company intends to defend against all of such counterclaims.
13.14. Additional Financial Information
Other Income, net
The following table sets forth the components of included in the Other Income, net included in the Condensed Consolidated Statements 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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | |
FX gains (losses) (1) | | $ | 315 | | | $ | (462) | | | $ | 101 | | | $ | (305) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Income from sale of intangible assets (2) | | 321 | | | — | | | 2,164 | | | — | | | |
Government Refunds | | 552 | | | — | | | 552 | | | — | | | |
Other (3) | | 179 | | | 438 | | | 241 | | | 744 | | | |
Total | | $ | 1,367 | | | $ | (24) | | | $ | 3,058 | | | $ | 439 | | | |
(1)Fair value of foreign exchange gains and losses
(2)Represents gain on sale of certain of the Company’s IP addresses
(3)Represents an aggregate of individually immaterial transactions
15. Subsequent Events Review
Verizon
On August 7, 2020, the Company entered into an agreement with Verizon Sourcing LLC (“Verizon”) to amend the terms of Statement of Work No. 1 (“SOW No. 1”) under the existing Application Service Provider Agreement dated April 1, 2013 between Synchronoss and Verizon (the “Original Agreement”). The Amendment, among other things, extends the term of SOW No. 1 through June 30, 2025.
Tax Refund
Subsequent to June 30, 2020, the Company has evaluated all subsequent events through November 8, 2016.received a $13.4 million tax refund for the carryback claim filed in the second quarter of 2020.
Preferred Dividends
Subsequent to June 30, 2020, the Company paid in-kind the accrued Preferred Dividends of $8.5 million.
ITEM 2.MANAGEMENT'SMANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OFOPERATIONS
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.assumptions, including, but not limited to, risks, uncertainties and assumptions relating to the duration and severity of the COVID-19 pandemic and its impact on our business and financial performance. 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.
Impacts of the Recent Novel Coronavirus (COVID-19)
This disclosure discusses the actions the Company has taken in response to the COVID-19 crisis and the impacts that the situation has had on our business, as well as related known or expected trends.
COVID-19 was identified in China in late 2019 and has since spread throughout the world, including throughout the United States (U.S.). COVID-19 has resulted in authorities implementing numerous preventative measures to contain or mitigate the outbreak of the virus, such as travel bans and restrictions, limitations on business activity, quarantines, and shelter-in-place orders.
These restrictions and our responses to them are impacting our customers and their use of our products and services. In addition, governments have imposed a wide variety of consumer protection measures that limit how certain businesses, including TMT companies, can operate their businesses and interact with their customers. The crisis and governmental responses to the crisis have also resulted in a slowdown of global economic activity, which has impacted our customers. As a result, prior trends in our business may not be applicable to our operations during the pendency of the crisis.
The impact of COVID-19 for the remainder of the year and beyond will depend significantly on the duration and potential cyclicality of the health crisis and the related public policy actions, additional initiatives we undertake in response to employee, market or regulatory needs or demands, the length and severity of the global economic slowdown, and whether and how our customers change their behaviors over the longer term. As a result, the demand for our products and services, as well as our overall results of operations, may be materially and adversely impacted by the pandemic for the duration of 2020 or longer, and we are unable to predict the duration or degree of such impact with any certainty.
In response to COVID-19, we have been executing our business continuity plans and evolving our operations to protect the safety of our employees while continuing to provide critical products and services to our customers. Some of the initiatives the Company has undertaken include:
•Working with our customers to continue to provide our products and services through the pandemic
•Enhancing our safety protocols including moving the majority of our employees to remote work arrangements
•Adjusting business operations to address circumstances created by COVID-19
•Maintaining effective governance and internal controls in a remote work environment
As the crisis continues, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees, customers and the Company and to continue to provide our products and services.
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 Cloud, Messaging, Digital Transformation 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 69.6% and 67.9% of AT&Tnet revenues for the six months ended June 30, 2020 and June 30, 2019, 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 2020 and 2015. AT&T and2019. 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 resultscompany. 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
GrowthAs the full impact of the COVID-19 pandemic on our business continues to develop, we are actively monitoring the global situation. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our business operations, impact on our customer, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. The extent to which the COVID-19 pandemic may impact our business, financial condition or results of operations is uncertain, but may include, without limitation, impacts to our paying user growth as well as disruptions to our business operations as a result of travel restrictions, shutdown of workplaces and potential impacts to our vendors. Additionally, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our service providerreporting currency, as well as changes in interest rates. Volatile market conditions arising from the COVID-19 pandemic have and enterprise solutions are beingmay continue to negatively impact our results of operations and cash flows, due to a weakening of foreign currencies relative to the U.S. dollar, which may cause our revenues to decline relative to our costs.
Business from our Synchronoss 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 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,carriers like AT&T, has technology to unify and harness data from legacy systems; provide analytic insights that fuel automated communications, via our Advanced Messaging Platform between sensors, devices and people; and create a common storage reservoir with our secure Cloud. There is opportunity in many areas of the IoT ecosystem for Synchronoss to support utilizing our Activation, Cloud 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 personal 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 security 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.Analytics tools.
Messaging. Messaging as a medium is moving beyond standard email. Messaging is fast becoming an interface for commerce. With the emergence
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.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements in accordance with 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. 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 “Risk Factors” for certain matters bearing risks on our future results of operations.
We believe that of our significant accounting policies, which are described in Note 2 in our Annual Report on Form 10-K for the year ended December 31, 2015, the following accounting policies involve a greater degree 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
There were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K during the nine months ended September 30, 2016. 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, 2015 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 SeptemberJune 30, 20162020 compared to the three months ended SeptemberJune 30, 20152019
The following table presents an overview of our results of operations for the three months ended SeptemberJune 30, 20162020 and 2015:2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | | | | | 2020 vs 2019 | | |
| 2020 | | 2019 | | | | $ Change | | |
Net revenues | $ | 76,535 | | | $ | 77,846 | | | | | $ | (1,311) | | | |
Cost of revenues* | 29,480 | | | 33,403 | | | | | (3,923) | | | |
Research and development | 19,096 | | | 19,026 | | | | | 70 | | | |
Selling, general and administrative | 24,640 | | | 23,080 | | | | | 1,560 | | | |
| | | | | | | | | |
Restructuring charges | 4,493 | | | 356 | | | | | 4,137 | | | |
Depreciation and amortization | 10,284 | | | 20,269 | | | | | (9,985) | | | |
Total costs and expenses | 87,993 | | | 96,134 | | | | | (8,141) | | | |
Loss from continuing operations | $ | (11,458) | | | $ | (18,288) | | | | | $ | 6,830 | | | |
* Cost of revenues excludes depreciation and amortization which are shown separately.
|
| | | | | | | | | | | | | | | | | | | | |
| 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 decreased $1.3 million to $176.4$76.5 million for the three months ended SeptemberJune 30, 2016,2020, compared to the same period in 2015. Transaction2019. The decrease in revenue is primarily driven by the expiration of the STIN Cloud Telephony and subscriptionSupport services agreement and the sunset of certain legacy products offset by new commercial cloud and messaging agreements.
Cost of revenues as a percentage of sales were 66% or $117.1 decreased $3.9 million to $29.5 million for the three months ended SeptemberJune 30, 2016,2020, compared to 73% or $109.4 million for the same period in 2015.2019. The $7.72020 decrease was primarily due to cost savings initiatives implemented by the Company. 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 increased $0.1 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 $59.3to $19.1 million for the three months ended SeptemberJune 30, 2016,2020, compared to 27% or $41.5 million for the same period in 2015. The increase in professional services2019. Research and license revenue is primarily due to new license agreementsdevelopment remained relatively flat against the comparable period.
Selling, general and expansion of services with our customers.
Net revenues related to Activation Solutions decreased $0.3administrative expense increased $1.6 million to $74.5$24.6 million for the three months ended SeptemberJune 30, 2016,2020, compared to the same period in 2015. Net revenues2019. The 2020 increase was primarily driven by external costs 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 $25.8outside consultants and legal fees.
Restructuring charges were $4.5 million to $101.9and $0.4 million for the three months ended SeptemberJune 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, due2020 and 2019, respectively, which 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 startedwork-force reductions initiated in March 2016the current year to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization. Depreciation and amortization expense increased $4.9decreased $10.0 million to $24.7$10.3 million for the three months ended SeptemberJune 30, 2016,2020, compared to the same period in 2015. This2019. The 2020 decrease was primarily relatedattributable to the increaseexpiration of amortizable acquired assets in depreciable assets necessary forcombination with reduced capital expenditures mainly as a result of the continued expansion of our platforms anddata center consolidation efforts, partially offset by the increased amortization of our newly acquired intangible assets related to our recent acquisitions. capitalized software.
Interest income. Interest income decreased $0.3 million to $0.3Income was $1.5 million for the three months ended SeptemberJune 30, 2016, compared2020. The interest income was primarily attributable to the same periodsettlement of the PIK note receivable, which resulted in 2015 due to a changereversal of past interest expenses incurred for tax purposes.
Income tax. The Company recognized approximately $8.0 million and $1.8 million in our portfolio allocations.
Interest expense. Interest expense increased $0.1 million to $1.6 millionrelated income tax benefit during the three months ended June 30, 2020 and 2019, respectively. The effective tax rate was approximately 92.0% for the three months ended SeptemberJune 30, 2016, compared to2020. The effective tax rate was primarily driven by the same periodimpact of the redemption of the Company’s interest in 2015.
Other income (expense), net. Other income (expense) increased $0.9 million to $0.2 millionSTIN, the new NOL carryback provisions discussed above and valuation allowances recorded in domestic and foreign jurisdictions, partially offset by the impact of permanent book-tax differences. The Company’s effective tax rate was approximately 10.0% for the three months ended SeptemberJune 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, 2016,2019, which was higherlower than ourthe U.S. federal statutory rate primarily due to the unfavorable impact of lossesvaluation allowance recorded in domestic and foreign jurisdictions which have loweroffset by certain jurisdictions projecting current tax rates than the U.S. and the unfavorable impactexpense.
Discussion 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 threeCondensed Consolidated Statements of Operations
Six months ended SeptemberJune 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, 20162020 compared to the ninesix months ended SeptemberJune 30, 20152019
The following table presents an overview of our results of operations for the ninesix months ended SeptemberJune 30, 20162020 and 2015:2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | 2020 vs 2019 | | |
| 2020 | | 2019 | | | | $ Change | | |
Net revenues | $ | 153,657 | | | $ | 165,951 | | | | | $ | (12,294) | | | |
Cost of revenues* | 64,951 | | | 72,356 | | | | | (7,405) | | | |
Research and development | 38,884 | | | 38,707 | | | | | 177 | | | |
Selling, general and administrative | 50,984 | | | 52,326 | | | | | (1,342) | | | |
| | | | | | | | | |
Restructuring charges | 5,943 | | | 777 | | | | | 5,166 | | | |
Depreciation and amortization | 21,640 | | | 40,412 | | | | | (18,772) | | | |
Total costs and expenses | 182,402 | | | 204,578 | | | | | (22,176) | | | |
Loss from continuing operations | $ | (28,745) | | | $ | (38,627) | | | | | $ | 9,882 | | | |
* Cost of revenues excludes depreciation and amortization which are shown separately.
|
| | | | | | | | | | | | | | | | | | | | |
| 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 decreased $12.3 million to $476.7$153.7 million for the ninesix months ended SeptemberJune 30, 2016,2020, 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 period2019. The decrease in 2015. The increase in transaction and subscription revenue is primarily driven by the expiration of the STIN Cloud Telephony and Support services agreement and the sunset of certain legacy products offset by new subscription arrangements as a resultcommercial cloud and messaging agreements.
Cost of our expansion with new customers. Professional service and license revenues as a percentage of sales were 31% or $145.7 decreased $7.4 million to $65.0 million for the ninesix months ended SeptemberJune 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, 20162020, compared to the same period in 2015.2019. The increase2020 decrease was primarily due to cost savings initiatives implemented by the Company. These initiatives resulted in our Cloud Solution performance was a resultsignificant decrease in cost of new cloud offerings with newrevenues driven mainly by data center consolidation 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.operating expense savings.
Expenses
Cost of services. Cost of servicesResearch and development expense increased $45.0$0.2 million to $217.0$38.9 million for the ninesix months ended SeptemberJune 30, 2016,2020, 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.2019. Research and development remained relatively flat against the comparable period.
Selling, general and administrativeexpense increased $9.9decreased $1.3 million to $78.4$51.0 million for the ninesix months ended SeptemberJune 30, 2016,2020, compared to the same period in 20152019. The 2020 decrease was 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 $1.1continued effort to streamline external costs related to outside consultants and legal fees.
Restructuring charges were $5.9 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$0.8 million for the ninesix months ended SeptemberJune 30, 2016, compared to the same period in 2015. The increase was driven in part by a $13.3 million increase in personnel2020 and related costs2019, respectively, 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,primarily related to employment termination costs as a result of the work‑force reduction plan startedwork-force reductions initiated in March 2016the current year to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization. Depreciation and amortization expense increased $22.8decreased $18.8 million to $74.0$21.6 million for the ninesix months ended SeptemberJune 30, 2016,2020, compared to the same period in 2015,2019. The 2020 decrease was primarily relatedattributable to the increase in depreciableexpiration of amortizable acquired assets, necessary forpartially offset by the continued expansion of our platforms andincreased amortization of our newly acquired intangible assets related to our recent acquisitions.capitalized software.
Interest expense. Interest expense increased $0.8 million to $5.0Income was $1.6 million for the ninesix months ended SeptemberJune 30, 2016, compared2020. The interest income was primarily attributable to the same periodsettlement of the PIK note receivable, which resulted in 2015 due to an increasea reversal of approximately $0.8 million related to the drawdown from the Amended Credit Facility.past interest expenses incurred for tax purposes.
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. WeThe Company recognized approximately $14.9$20.4 million and $25.5$3.2 million in related income tax expensebenefit during the ninesix months ended SeptemberJune 30, 20162020 and 2015,2019, respectively. OurThe effective tax rate was approximately 1,143%83.5% for the ninesix months ended SeptemberJune 30, 2016,2020, which was higherlower than ourthe 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 second quarter, the Company recorded a $12.1 million U.S. federal current benefit as a discrete item related to the redemption of its partnership interest in STIN and the related settlement of certain trade receivables. The Company’s effective tax rate was approximately 8.2% for the six months ended June 30, 2019, which was lower than the U.S. federal statutory rate primarily due to the unfavorable impact of lossesvaluation allowance recorded in domestic and foreign jurisdictions which have loweroffset by certain jurisdictions projecting current tax rates than the U.S., the unfavorable impactexpense.
Liquidity and Capital Resources
OurAs of June 30, 2020, our principal sourcesources of liquidity hashave been cash provided by operations and borrowings oncapital from our Credit Facility.revolving credit facility. Our cash, cash equivalents, and marketable securities and restricted cash balance was $144.3$42.8 million at SeptemberJune 30, 2016,2020. Subsequent to June 30, 2020, the Company received a decrease$13.4 million tax refund for the carryback claim filed in the second quarter of $89.4 million as compared2020.For further details, see Note15. Subsequent Events of the Notes to the balance at December 31, 2015. This decrease was primarily due to our acquisitionCondensed Consolidated Financial Statements in Item 1 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. this Form 10-Q.
We anticipate that our principal uses of cash, in the futurecash equivalents, and marketable securities 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 SeptemberJune 30, 2016,2020, our non-U.S. subsidiaries held approximately $25.0$6.0 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 suchthese 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, credit facility, and our ability to manage working capital and expected positive cash flows generated from our existing operations our available credit facilities and other available sources of financingin combination with continued expense reductions will be sufficient to fund our operations for the next twelve months from the date of filing based on our current business plans. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. Given the economic uncertainty as a result of the pandemic, we have taken actions to improve our current liquidity position, including, reducing working capital, reducing operating costs and substantially reducing discretionary spending. Even with these actions however, an extended period of economic disruption as a result of COVID-19 could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. 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.
Revolving Credit Facility
In the first quarter of fiscal 2020, the Company drew the $10.0 million from our Revolving Credit Facility. For further details, see Note7. 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 2020.
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 February 15, 2023, 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 June 30, 2020, 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):
| | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | Change | | |
| 2020 | | 2019 | | | | 2020 vs 2019 | | |
Net cash provided by (used in): | | | | | | | | | |
Operating activities | $ | 1,608 | | | $ | 18,564 | | | | | $ | (16,956) | | | |
Investing activities | (6,934) | | | (20,250) | | | | | 13,316 | | | |
Financing activities | 9,991 | | | (73,574) | | | | | 83,565 | | | |
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 six months ended June 30, 2020 was $1.6 million cash provided by operating activities, as compared to $18.6 million of cash used in operating activities for the same period in 2019. The decrease of cash used by operating activities of $17.0 million was primarily due to a significant tax refund received in the prior year.
Cash flows from investingfor the six months ended June 30, 2020 was $6.9 million cash used for investing, as compared to $20.3 million in cash used in investing activities during the same period in 2019. The cash used for investing in the current year was primarily related to the purchase of fixed assets and investment in capitalized software offset by the sale of certain IP address assets. The net decrease in cash from investing activities from the prior year mainly related to the net proceeds from the purchases and sales of marketable securities in the prior year that were not present in the current period.
Cash flows from financing for six months ended June 30, 2020 was $10.0 million of cash provided, as compared to $73.6 million of cash used by financing activities for the same period in 2019. The cash provided from investing activities was attributable to the $10.0 million drawdown from our Revolving Credit Facility in the current quarter. The net change in cash provided from financing activities from the prior year is primarily attributable to the cash provided from the Revolving Credit Facility offset by repayments for our Convertible Senior Notes in 2019.
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 2020 and 2019. We do not expect the current rate of inflation to have a material impact on our business.
Contractual Obligations
Our contractual obligations consist of contingent consideration, 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 June 30, 2020 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period | | | | | | | | |
| | Total | | 2020 | | 2021-2023 | | 2024-2025 | | Thereafter |
Capital lease obligations | | $ | 62 | | | $ | 8 | | | $ | 49 | | | $ | 5 | | | $ | — | |
Revolving Credit Facility | | $ | 10,000 | | | $ | 10,000 | | | $ | — | | | $ | — | | | $ | — | |
Interest | | — | | | — | | | — | | | — | | | — | |
Operating lease obligations | | 83,044 | | | 6,743 | | | 34,526 | | | 18,852 | | | 22,923 | |
Purchase obligations* | | 24,976 | | | 17,541 | | | 7,435 | | | — | | | — | |
| | | | | | | | | | |
Total | | $ | 118,082 | | | $ | 34,292 | | | $ | 42,010 | | | $ | 18,857 | | | $ | 22,923 | |
* Amount represents obligations associated with colocation agreements and other customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax positions of $3.5 million at June 30, 2020 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
Our condensed consolidated financial statements and 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 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.
These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from COVID-19 and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly 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 Part II, “Item 1A. Risk Factors” in this Form 10-Q for certain matters bearing risks on our future results of operations.
During the six months ended June 30, 2020, the Company made changes in its accounting policies over Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. These updates are described in detail in Note2. Basis of Presentation and Consolidation. Aside from the adoption of Topic 326, there were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K for the nineyear ended December 31, 2019 during the six months ended SeptemberJune 30, 2016 or 2015. 2020. 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, 2019 for a more complete discussion of our critical accounting policies and estimates.
Impact of Recently Issued Accounting Standards
In August 2016, the Financial Account Standards Board (“FASB”)For a discussion of recently issued Accounting Standards Update (“ASU”) 2016-15, “Statementaccounting standards see Note2. Basis 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 adoption 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.
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 MeasurementConsolidation included in Part I, Item 1. “Notes to Condensed Consolidated Financial Statements (unaudited)” 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 debtthis Quarterly Report 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.Form 10-Q.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of SeptemberJune 30, 20162020 and December 31, 20152019 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 June 30, 2020 and December 31, 2015, which could materially affect our business, financial condition or future results. We believe our exposure associated with these2019 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 SeptemberJune 30, 20162020 would increase interest income by less than $0.5approximately $0.4 million on an annual basis.
Borrowings under our credit facility, are at variable rates
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
Evaluation of Disclosure Controls and Procedures.Procedures
Under the supervision and with the participation of our management, including ourOur Chief Executive Officer and our Chief Financial Officer wehave evaluated the effectiveness of the design and operation of ourregistrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underof the Securities Exchange Act of 1934,1934), as amended) as of September 30, 2016. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of September 30, 2016, the end of the period covered by this quarterly report, tothat ensure that information relating to the informationregistrant which is required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, arethis report is recorded, processed, summarized and reported within therequired time periods specifiedusing the criteria for effective internal control established in Internal Control-Integrated Framework issued by the rules and formsCommittee of Sponsoring Organizations of the Securities and ExchangeTreadway Commission and that such information is accumulated and communicated to our management, includingin 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the registrant’s disclosure controls and procedures were effective as appropriate to allow timely decisions regarding required disclosures.of June 30, 2020.
Changes in Internal Control Over Financial Reporting
We completed an implementation of a new enterprise resource planning, or ERP, system during the first quarter of 2020. The ERP system replaced or enhanced certain internal controlsfinancial, operating and other systems that are critical to our business operations. The ERP implementation affected the processes that constitute our internal control over financial reportingreporting. Management has taken steps to ensure that appropriate controls were designed and implemented as the new ERP system was implemented.
On March 1, 2016, we completed our acquisitionWith the exception of Openwave Messaging, Inc. (“Openwave”). SEC guidance permits management to omit an assessment of an acquired business'the ERP implementation described above, there were no changes in the Company's internal control over financial reporting from management's assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. Accordingly, we have not assessed Openwaves’ internal control over financial reporting as of September 30, 2016.
Excluding the Openwave acquisition, there were no changes in our internal control over financial reportingthat occurred during the quarterquarterly period ended SeptemberJune 30, 20162020 that have materially affected, or are reasonably likely to materially affect, oureffect, the Company's internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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 effect onimpact our operations; however, we may from time to time become a party to various legal proceedings arising in the ordinary courseresults 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 claimsoperations, financial condition or cash flows see Note13. Commitments, Contingencies and believe that any counterclaims are without merit, and we intend to defend against all such counterclaims.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussedOther included in Part I, “ItemItem 1. “Notes to Condensed Consolidated Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.
ITEM 1A. Risk Factors”RISK FACTORS
Except as stated below, there have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. included in our Annual Report on Form 10-K for the year ended December 31, 2015,2019. In addition, the impacts of COVID-19 and any worsening of the economic environment may exacerbate the risks described below and in our Annual Report on Form 10-K for the year ended December 31, 2019, any of which could materially affect our business, financial condition or future results. The risks described in our Form 10-K are nothave a material impact on us.
Operational Risks
Public health crises, including the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also mayrecent novel coronavirus (COVID-19) outbreak, could materially adversely affect our business, financial condition and/and results of operations. Our business is based on our ability to provide products and services to customers throughout the United States and around the world and the ability of those customers to utilize and pay for those products and services for their businesses. As a result, our business could be materially adversely affected by a crisis, like the COVID-19 outbreak, that significantly impacts our current and potential customers and vendors. In addition, such a crisis could significantly increase the probability or operating results. If anyconsequences of the risks actually occur,our business faces in ordinary circumstances, such as risks associated with our supplier and vendor relationships, risks of an economic slowdown, regulatory risks, and the costs and availability of financing. Because the severity, magnitude and duration of the COVID-19 outbreak and its economic consequences are uncertain and rapidly changing, the impact on our business, financial condition orand results of operations could be negatively affected.remains uncertain and difficult to predict. In addition, the ultimate impact of the COVID-19 outbreak on our business, financial condition and results of operations depends on many factors, including those discussed above, that case, the trading price ofare not within our stock could decline, and our stockholders may lose part or all of their investment.control.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE 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
| | | | | | | | |
Exhibit No. | | Description |
| |
Exhibit No. | Description |
3.1 | |
3.2 | | |
3.2 | |
3.4 | | |
3.3 | |
4.2 | Form | |
10.1 | |
10.8 | Amended and Restated Credit | |
| | |
10.8.131.1 | Form of Indenture for Convertible Senior Notes, incorporated by reference to Registrants Form S-3 (Commission File No. 333-132080). |
| |
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. |
| |
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 Annual Report on Form 10-K for the year ended December 31, 2008. |
| |
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 Report on Form 10-K for the year ended December 31, 2013. |
| |
31.1 | |
31.2 | |
31.2 | | |
32.1 | |
32.1 | | |
32.2 | |
32.2 | | |
101.INS | |
101.INS | XBRL Instance Document |
101.SCH | |
101.SCH | XBRL Schema Document |
101.CAL | |
101.CAL | XBRL Calculation Linkbase Document |
101.DEF | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
101.LAB | | XBRL Labels Linkbase Document |
101.PRE | | XBRL Presentation Linkbase Document |
| |
101.LAB | XBRL Taxonomy Extension Label 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.
| | | | | | | | | | | |
| | Synchronoss Technologies, Inc. | |
| | | |
| | | |
| | Synchronoss Technologies, Inc. | |
| | /s/ Glenn Lurie | |
| | Glenn Lurie | |
| | | |
| | | |
| | /s/Stephen G. Waldis | |
| | Stephen G. Waldis | |
| | Chairman of the Board of Directors and | |
| | Chief Executive Officer | |
| | (Principal executive officer)Executive Officer)
| |
| | | |
| | | |
| | /s/ David Clark | |
| | David Clark | |
| | /s/Karen L. Rosenberger | |
| | Karen L. Rosenberger | |
| | Executive Vice President, Chief Financial Officer
and Treasurer
| |
November 8, 2016
August 12, 2020