SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The 2019 Notes are senior, unsecured obligationsfollowing table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share from operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | | | 2022 | | 2021 | | |
Numerator - Basic: | | | | | | | | | | | |
Net income (loss) from operations | $ | 7,921 | | | $ | (2,420) | | | | | $ | 4,884 | | | $ | (14,786) | | | |
Net (loss) income attributable to redeemable noncontrolling interests | (75) | | | (50) | | | | | (190) | | | 286 | | | |
Preferred stock dividend | (2,519) | | | (21,476) | | | | | (4,957) | | | (32,006) | | | |
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| | | | | | | | | | | |
| | | | | | | | | | | |
Net income (loss) attributable to Synchronoss | $ | 5,327 | | | $ | (23,946) | | | | | $ | (263) | | | $ | (46,506) | | | |
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Numerator - Diluted: | | | | | | | | | | | |
Net income (loss) from operations attributable to Synchronoss | $ | 5,327 | | | $ | (23,946) | | | | | $ | (263) | | | $ | (46,506) | | | |
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| | | | | | | | | | | |
Net income (loss) attributable to Synchronoss | $ | 5,327 | | | $ | (23,946) | | | | | $ | (263) | | | $ | (46,506) | | | |
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Denominator: | | | | | | | | | | | |
Weighted average common shares outstanding — basic | 87,124 | | | 44,131 | | | | | 86,031 | | | 43,438 | | | |
Dilutive effect of: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Shares from assumed conversion of Performance Based Cash Units | 1,832 | | | — | | | | | — | | | — | | | |
Options and unvested restricted shares | 293 | | | — | | | | | — | | | — | | | |
Weighted average common shares outstanding — diluted | 89,249 | | | 44,131 | | | | | 86,031 | | | 43,438 | | | |
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Earnings (loss) per share: | | | | | | | | | | | |
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| | | | | | | | | | | |
Basic | $ | 0.06 | | | $ | (0.54) | | | | | $ | — | | | $ | (1.07) | | | |
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Diluted | $ | 0.06 | | | $ | (0.54) | | | | | $ | — | | | $ | (1.07) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Anti-dilutive stock options excluded | — | | | — | | | | | — | | | — | | | |
Unvested shares of restricted stock awards | 2,662 | | | 2,586 | | | | | 2,662 | | | 2,586 | | | |
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
Non-cancelable agreements
The Company has various non-cancelable arrangements such as services for hosting, support, and software that expire at various dates, with the latest expiration in 2025.
Aggregate annual future minimum payments under non-cancelable agreements as of June 30, 2022 are convertible into sharesas follows:
| | | | | | | | | | | | |
Year | | Non-cancelable agreements | | | | |
2022 | | $ | 10,022 | | | | | |
2023 | | 16,315 | | | | | |
2024 | | 13,425 | | | | | |
2025 | | 9,740 | | | | | |
Total | | $ | 49,502 | | | | | |
Legal Matters
In the ordinary course of business, the Company is regularly subject to various claims, suits, regulatory inquiries and investigations. The Company records a liability for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable, and the loss can be reasonably estimated. Management has also identified certain other legal matters where they believe an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that resolving claims against the Company, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the Company’s business, financial position, results of operations, or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. The Company also evaluates other contingent matters, including income and non-income tax contingencies, to assess the likelihood of an unfavorable outcome and estimated extent of potential loss. It is possible that an unfavorable outcome of one or more of these lawsuits or other contingencies could have a material impact on the liquidity, results of operations, or financial condition of the Company.
In the third quarter of 2017, the SEC and Department of Justice initiated investigations in connection with the June 2017 Announcement and certain transactions that the Company restated in the third quarter of 2018. The Company has received subpoenas, produced documents, and provided additional information to the government in connection with those investigations. On June 22, 2021, the Securities and Exchange Commission (“SEC”) staff verbally notified the Company that the staff has made a preliminary determination to recommend that the SEC initiate an enforcement action against the Company. This is in connection with certain financial transactions that the Company effected in 2015 and 2016 and its disclosure of and accounting for such transactions, which the Company restated in the third quarter of 2018 in its restated annual and quarterly financial statements for 2015 and 2016. That restatement followed the Company’s announcement, on June 13, 2017 (the “June 2017 Announcement”), that certain of its common stock based on a conversion rate of 18.8072 shares per $1,000 principal amount of 2019 Notes which is equivalentprior financial statements would need to an initial conversion price of approximately $53.17 per share. The Company will satisfy any conversion of the 2019 Notes with sharesbe restated. Certain individuals, including certain former members of the Company’s common stock. The 2019 Notes are convertible atmanagement team, received similar notifications. On June 7, 2022 the note holders’ option priorSEC approved the Offer of Settlement and filed an Order Instituting Cease-And-Desist Proceedings pursuant to their maturity and if specified corporate transactions occur. The issue priceSection 21C of the 2019 Notes was equalSecurities Exchange Act of 1934, Making Findings, and Imposing a Cease-And-Desist Order (the “SEC Order”). Pursuant to their face amount.
Holdersthe terms of the 2019 Notes who convert their notesSEC Order, the Company consented to pay a civil penalty in the amount of $12.5 million in equal quarterly installments over two years and to cease and desist from committing or causing any violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and the associated rules thereunder. The expense associated with this settlement of the SEC Order has previously been accrued in the Company’s financial statements. The SEC filed similar orders as to the SEC Order with respect to certain former members of the Company’s management team contemporaneously. Also on June 7, 2022, the SEC filed a civil action against two former members of the Company’s management team, alleging misconduct arising out of the restated transactions that took place in 2015 and 2016 investigated by the SEC in connection with a qualifying fundamental change, as defined in the related indenture,June 2017 Announcement. The Company may be entitledrequired to a make-whole premium in the form of an increase in the conversion rate. Additionally, following the occurrence of a fundamental change, holders may require that the Company repurchase some or all of the 2019 Notes for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. As of September 30, 2016, 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:
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| | | | | | | | | | | | | | | |
| 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 complaint in the United States District Court for the District of New Jersey (Civ Act. No. 3:14-cv-06220) against F-Secure Corporation and F-Secure, Inc. (collectively, “F-Secure"), claiming that F-Secure has infringed, and continues to infringe, several of the Company’s patents. In February 2015, Synchronoss entered into a patent license and settlement agreement with F-Secure Corporation and F-Secure, Inc. whereby the Company granted each of these companies (but not their subsidiaries or affiliates) a limited license to Synchronoss’ patents. As a result of entering into the patent license and settlement agreement, the parties filed a joint stipulation to dismiss the above complaint.
The Company’s 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 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,indemnify the former shareholdersmembers of Miyowa filed an appeal withmanagement in that action. Due to the Court
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
inherent uncertainty of Paris, France, appealing the Court’s decision. Althoughlitigation, the Company cannot predict the outcome of the appeal,litigation and can give no assurance that the asserted claims will not have a material adverse effect on its financial position, prospects, or estimate any potential loss ifresults of operations.
Except as set forth above, the outcome is adverse, due to the inherent uncertainties of litigation, the Company believes the positions of Eurowebfund and Bakamar are without merit, and the Company intends to vigorously defend all claims brought by them.
The Company is not currently subject to any other legal proceedings that could have a material adverse effect on its operations; however, itthe Company may from time to time become a party to various legal proceedings arising in the ordinary course of itsour business.
14. Additional Financial Information
Other Income (expense), net
The Company is currentlyfollowing table sets forth the plaintiffcomponents of Other Income (expense), net included in several patent infringement cases. The defendants in severalthe Condensed Consolidated Statements of these cases have filed counterclaims. Although the Company cannot predict the outcomeOperations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
FX gains (losses)1 | | $ | 3,896 | | | $ | 969 | | | $ | 5,614 | | | $ | (2,304) | | | |
Government refunds | | 93 | | | 5 | | | 93 | | | 5 | | | |
Income from sale of intangible assets2 | | — | | | 550 | | | — | | | 550 | | | |
Other2 | | 76 | | | 52 | | | 62 | | | (71) | | | |
Total | | $ | 4,065 | | | $ | 1,576 | | | $ | 5,769 | | | $ | (1,820) | | | |
1 Fair value of the cases at this time due to the inherent uncertaintiesforeign exchange gains and losses
2 Represents an aggregate of litigation, the Company continues to pursue its claims and believes that the counterclaims are without merit, and the Company intends to defend all of such counterclaims.individually immaterial transactions
13. Subsequent Events Review
The Company has evaluated all subsequent events through November 8, 2016.
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 is a leading innovatorprovider of white label cloud, solutions, software-based activation, secure mobility, identitymessaging, digital and network management and secure 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, storageenable our customers to keep subscribers, systems, networks 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 otherin sync. We help our customers to accelerateconnect, engage and monetize value-added services for securesubscribers in more meaningful ways by providing trusted platforms through which end users can sync and broadband networks and connected devices.store
Our Activation Software, Synchronoss Personal Cloud™ and Enterprise products and platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and “back-office” infrastructure-related systems and processes. Our customers rely on our solutions and technology to automate the process of activation and content and settings management for their subscribers’ devices while delivering additional communication services.
connect with one another and the brands they love. 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 platformsmission is to help reduce fraud, improve cybersecurity detection/prevention and overall productivity. Our identity and access solution supports both consumers by allowing them to self-register and verify their identity, while providing non-intrusive multi-factor authentication and businesses the ability to be sure the correct person is doing the transaction. The secure mobility solution combines the identity platform with a “bring your own device” (BYOD) platform that is based on a secure container for accessing data, applications, content and personal information management tools like email, calendar, messaging and notes.
Our Synchronoss Messaging is a white label messaging platform for service providers and offers a full 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.
Our products and platforms are designed to be carrier-grade, highly available, flexible and scalable to enable multiple converged communication services to be managed across multiple distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets allowing us to meet the rapidly changing and converging services and connected devices offered by our customers. Our products, platforms and solutions enable our Enterprise customers to acquire, retain and service subscribers quickly, reliably and cost-effectively with white label and custom-branded solutions. Our 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 our platforms enablecreate new revenue streams, reduce the cost of innovation, and retention opportunities forcaptivate their subscribers.
Our core product sets allow our customers through newto create a positive experience throughout their subscribers’ lifecycle by engaging, onboarding and managing the network to ensure reliable service.
•ENGAGE:
◦Personal Cloud: Backup, manage and engage with content.
◦Advanced Messaging: multi-channel messaging, peer-to-peer (“P2P”) communications and application-to-person (“A2P”) commerce solutions.
◦Email Suite: White label consumer email solutions.
•ONBOARD:
◦Backup and Restore: Backup, view and restore subscriber acquisitions, sale of new devices, accessoriescontent across operating systems and new value-added service offerings in the Cloud, while optimizing their cost of operationsdevices.
◦Content Transfer: Effortlessly move content between mobile devices.
•NETWORK:
◦Total Network Management (“TNM”): integrated application suite that designs, procures, manages and enhancing customer experience. Weoptimizes telecom network infrastructure.
The Company currently operateoperates in and market ourmarkets its solutions and services directly through ourits sales organizations in North America, Europe and Asia-Pacific.
Revenues
We generate a substantial portionmost 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 and Digital 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 68.6% and 70.2% of AT&Tnet revenues for the six months ended June 30, 2022 and June 30, 2021, 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 2022 and 2015. AT&T and2021. The loss of Verizon in the aggregate accounted for 71% and 75% of our revenues for the three months ended September 30, 2016 and 2015, respectively. Our agreements with AT&T typically run three to five years and cover bothas a technology fee and exception handling services. Wecustomer would have a Master Services Agreement, with Statements of Work for each of the AT&T businesses which we support. Each of our agreements with Verizon typically have a similar duration, subject to a Master Services Agreement, with Statements of Work. See “Risk Factors” for certain matters bearing risksmaterial negative impact on our future results of operations.company. However, we believe that the costs incurred and subscriber disruption by Verizon to replace Synchronoss’ solutions would be substantial.
Current Trends Affecting Our Results of Operations
Growth inBusiness from our service provider and enterprise solutions are beingSynchronoss Personal Cloud™ solution has been driven by the massive penetration and use of smart devices on a global basis. The following major trends drive our investment decisionsgrowth in acquisitions and development of product and solutions:
Activation. Service Provider consolidation continues in the US and Internationally. As CSP’s merge with MSOs and TV Providers there is an urgency provisioning new subscribers with devices and new value-add service bundles, while driving cost out of the business. Synchronoss Activation is poised to create new efficiencies in often underserved digital channels as a way to quickly provision combined subscriber bases and utilize traditionally underperforming and lower cost digital sales channels.
PersonalCloud. Shorter carrier customer contracts and lease programs have resulted in faster device upgrade cycles by customers resulting in increased device order transactions and activations. With mobile devices globally that are becoming content rich and acting as a replacement forrich. As these devices replace other traditional devices like PC’s,PCs, the ability to securely back up content from mobile devices, sync it with other devices and share it with others in their community of family, friends and business associates hashave become an essential need. The major Tier 1 carriers are also publicly discussing achieving 500% penetration (multiple connected devices per user) by enabling connectivity to non-traditional devices.need and subscriber expectation. Such devices include smartphones, connected cars, personal health and wellness devices and connected home.home devices. The need for the content from these devices to be activated and managed and the contents from them to be stored in a common cloud areis also expected to be drivers ofdrive our businessesbusiness in the longlonger term.
Business from our traditional Synchronoss Cloud products such as Personal Cloud, Mobile Content Transfer, Backup & Transfer and Out of Box Experience (OOBE) are poised to respond to this trend withMessaging business (Email) has been driven by a resurgence in the need for white label secure messaging platforms that favor the Mobile Network Operator’s (“MNO”) business objectives and scalable products for mobile devices.
Secure Mobility. As Enterprise looksare not beholden to increase productivity, it turnsthe objectives of a sponsoring over-the-top (“OTT”) platform. We believe that advanced messaging drives higher subscriber engagement than any other application in the market today and holds the potential to mobile. Yet it finds itself confrontedstimulate 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 serious logistical challengesOTTs which provides a potential opportunity for Synchronoss’ future growth to be driven by the need of not only managing stringent security requirements, but also accommodating the personal devices of its employeesTMT companies including (and especially) MNOs to embrace Messaging as a lower costPlatform (“MaaP”). MaaP will allow TMT and more employee-friendly option. This trendMNOs to converse with subscribers in an efficient, automated way by streamlining the costs and increasing the effectiveness 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 standardsself-care, as well as yielding cross-sell upselling 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 outservice plans, devices, bundles, etc. The Synchronoss Advanced Messaging Platform provides state of “work” selves and “Home” selves – or even in, out or between companies. In addition to being able to manage different personas,the art RCS-driven features including 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 Enterprisesupport advanced Peer to pivot quickly into the regulated BYOD work environmentPeer communications and realize cost savings as well as productivity gains.
Messaging. Messaging as a medium is moving beyond standard email. Messaging is fast becoming an interface for commerce. With the emergence of messaging giants such as What’s App, Line, Facebook and others, companies are using advanced messaging to create commerce opportunities to give subscribers visibility to smart transactions within a very sticky, high frequency environment. Chat bots, operating on AI fueled from semantic analysis of messaging content are the latest entrants to create a “messaging user interface” that is linking subscribers and third parties together across multiple channels. Service providers are not adopting new messaging clients to compete with highly competitive and viral Over the Top (OTT) players. Instead they are adopting monetization techniques used by those players to extend subscriber information into third party applications and chat interfaces creating stickier commerce opportunities. We are working closely with customers, especially in the Asia Pacific market, to evolve Service Provider messaging into a cloud-centric commerce offering utilizing personal cloud, identity management and other advanced messaging protocols that will open upintroduce new revenue streams driven by commerce and allow Operators to compete with OTT providers in new ways.advertising via Application-to-Person capabilities.
To support our expected growth, which we expect to be driven by thethese favorable industry trends mentioned above, we continueplan 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 also 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, and international mobile carriersDigital 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 Wireless and other CSPsour customers 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 asDiscussion 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.
ResultsCondensed Consolidated Statements of Operations
Three months ended SeptemberJune 30, 20162022 compared to the three months ended SeptemberJune 30, 20152021
The following table presents an overview of our results of operations for the three months ended SeptemberJune 30, 20162022 and 2015:2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | $ Change | | |
| 2022 | | 2021 | | | | 2022 vs 2021 | | |
Net revenues | $ | 65,236 | | | $ | 71,532 | | | | | $ | (6,296) | | | |
Cost of revenues1 | 22,316 | | | 27,142 | | | | | (4,826) | | | |
Research and development | 13,460 | | | 17,197 | | | | | (3,737) | | | |
Selling, general and administrative | 15,288 | | | 21,909 | | | | | (6,621) | | | |
Restructuring charges | 1,019 | | | 877 | | | | | 142 | | | |
Depreciation and amortization | 8,259 | | | 8,485 | | | | | (226) | | | |
Total costs and expenses | 60,342 | | | 75,610 | | | | | (15,268) | | | |
Income (loss) from operations | $ | 4,894 | | | $ | (4,078) | | | | | $ | 8,972 | | | |
| | | | | | | | | |
1 Cost of revenues excludes depreciation and amortization which are shown separately.
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| 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 | )% |
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| |
* | Cost of services excludes depreciation and amortization which is shown separately. |
Net revenues. Net revenues increased $25.5 decreased $6.3 million to $176.4$65.2 million for the three months ended SeptemberJune 30, 2016,2022, compared to the same period in 2015. Transaction2021. The change in revenue is mainly attributable to increased cloud revenue driven by continued subscriber growth which was more than offset by revenue received from a non-recurring advanced messaging contract in the prior year and subscriptionthe divestiture of the DXP and Activation assets in the quarter.
Cost of revenues as a percentage of sales were 66% or $117.1 decreased $4.8 million to $22.3 million for the three months ended SeptemberJune 30, 2016,2022, compared to 73% or $109.4 million for the same period in 2015. 2021. The $7.72022 decrease was primarily attributable to continued efforts to streamline our business operations and reduce costs as well as the continued realization of a more profitable revenue mix.
Research and development expense decreased $3.7 million increase in transaction and subscription revenue is primarily driven by new subscription arrangements as a result of our expansion with new customers. Professional service and license revenues as a percentage of sales were 34% or $59.3to $13.5 million for the three months ended SeptemberJune 30, 2016,2022, compared to 27% or $41.5 million for the same period in 2015. The increase in professional services2021. The research and license revenue is primarily duedevelopment costs decreased year over year mainly as a result of executed cost savings initiatives to new license agreementsstreamline our workforce and expansion of services with our customers.reduce vendor spend and overhead costs.
Net revenues relatedSelling, general and administrative expense decreased $6.6 million to Activation Solutions decreased $0.3 million to $74.5$15.3 million for the three months ended SeptemberJune 30, 2016,2022, compared to the same period in 2015. Net revenues related to Activation Solutions represented 42%2021. We executed significant strategic cost reductions by optimizing our workforce, reducing vendor spend and lowering facility costs. These strategic cost savings have favorably impacted our current and prior period selling, general and administrative costs.
Restructuring charges were $1.0 million and $0.9 million for the three months ended SeptemberJune 30, 2016, compared to 50% for the same period in 2015. Net revenues related to our Cloud Solutions increased by $25.8 million to $101.9 million for the three months ended September 30, 2016, compared to the same period in 2015. This increase in our Cloud Solutions performance was a result of new cloud offerings with existing customers as well as increased international sales. Net revenues related to our Cloud Solutions represented 58% for the three months ended September 30, 2016, compared to 50% for the same period in 2015.
Expenses
Cost of services. Cost of services increased $13.8 million to $77.2 million for the three months ended September 30, 2016, compared to the same period in 2015, due2022 and 2021, 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 started in March 2016work-force reductions initiated to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization. Depreciation and amortization expense increased $4.9decreased $0.2 million to $24.7$8.3 million for the three months ended SeptemberJune 30, 2016,2022, compared to the same period in 2015. This2021. The 2022 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 efforts to streamline business operations, partially offset by the continued expansion of our platforms andincreased amortization of our newly acquired intangible assets related to our recent acquisitions. capitalized software.
InterestIncome tax. The Company recognized an income. Interest tax expense of approximately $0.4 million and an income decreased $0.3tax benefit of approximately $0.2 million to $0.3 millionduring the three months ended June 30, 2022 and 2021, respectively. The effective tax rate was approximately 5.2% for the three months ended SeptemberJune 30, 2016, compared to the same period in 2015 due to a change in our portfolio allocations.
Interest expense. Interest expense increased $0.1 million to $1.6 million for the three months ended September 30, 2016, compared to the same period in 2015.
Other income (expense), net. Other income (expense) increased $0.9 million to $0.2 million for the three months ended September 30, 2016, compared to the same period in 2015. Other income (expense) increased primarily due to a one-time $0.5 million benefit from the restructuring of specific facility leases.
Income tax. We recognized approximately $6.9 million and $10.7 million in related income tax expenses during the three months ended September 30, 2016 and 2015, respectively. Our effective tax rate was approximately 59% for the three months ended September 30, 2016,2022, which was higherlower than ourthe U.S. federal statutory rate primarily due to the unfavorable impact ofpre-tax losses in foreign jurisdictions whichwhere full valuation allowances have lowerbeen recorded. Additionally, the Company recognized a discrete income tax rates thanbenefit in the U.S. andperiod associated with the unfavorable impactrelease of the fair market value adjustmentcertain reserves for the contingent consideration obligation related to the Razorsight earn-out. Ouruncertain tax benefits. The Company’s effective tax rate was approximately 53%7.7% for the three months ended SeptemberJune 30, 2015,2021, which was higherlower than ourthe U.S. federal statutory rate primarily due to the unfavorable impact ofpre-tax losses in foreignjurisdictions where full valuation allowances have been recorded, pre-tax losses in jurisdictions which have lowera zero tax rates than the U.S.rate, and the unfavorable impact of transaction costs related to the purchase of Razorsight, which are required to be capitalized forcertain foreign jurisdictions projecting current income tax purposes.expense. The Company also recognized a discrete tax benefit associated with the release of certain reserves for uncertain tax benefits during the period.
Discussion of the Condensed Consolidated Statements of Operations
NineSix months ended SeptemberJune 30, 20162022 compared to the ninesix months ended SeptemberJune 30, 20152021
The following table presents an overview of our results of operations for the ninesix months ended SeptemberJune 30, 20162022 and 2015:2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | $ Change | | |
| 2022 | | 2021 | | | | 2022 vs 2021 | | |
Net revenues | $ | 131,102 | | | $ | 137,031 | | | | | $ | (5,929) | | | |
Cost of revenues1 | 47,155 | | | 55,779 | | | | | (8,624) | | | |
Research and development | 29,251 | | | 34,594 | | | | | (5,343) | | | |
Selling, general and administrative | 33,185 | | | 39,837 | | | | | (6,652) | | | |
Restructuring charges | 1,704 | | | 1,590 | | | | | 114 | | | |
Depreciation and amortization | 16,293 | | | 18,352 | | | | | (2,059) | | | |
Total costs and expenses | 127,588 | | | 150,152 | | | | | (22,564) | | | |
Income (loss) from operations | $ | 3,514 | | | $ | (13,121) | | | | | $ | 16,635 | | | |
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1 Cost of revenues excludes depreciation and amortization which are shown separately.
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| 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 | )% |
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| |
* | Cost of services excludes depreciation and amortization which is shown separately. |
Net revenues.Net revenues increased $55.0 decreased $5.9 million to $476.7$131.1 million for the ninesix months ended SeptemberJune 30, 2016,2022, compared to the same period in 2015. Transaction2021. The change in revenue is mainly attributable to increased cloud revenue driven by continued subscriber growth which was more than offset by revenue received from a non-recurring advanced messaging contract in the prior year and subscriptionthe divestiture of the DXP and Activation assets and sunsetting certain legacy products in the current period.
Cost of revenues as a percentage of sales were 69% or $330.9 decreased $8.6 million to $47.2 million for the ninesix months ended SeptemberJune 30, 2016 compared to 73% or $306.0 million for the same period in 2015. The increase in transaction and subscription revenue is primarily driven by new subscription arrangements as a result of our expansion with new customers. Professional service and license revenues as a percentage of sales were 31% or $145.7 million for the nine months ended September 30, 2016, compared to 27% or $115.6 million for the same period in 2015. The increase in professional services and license revenue is primarily due to new license agreements and expansion of services with our customers.
Net revenues related to Activation Solutions decreased $0.6 million to $202.0 million for the nine months ended September 30, 2016, compared tothe same period in 2015. Net revenues related to Activation Solutions represented 42% for the nine months ended September 30, 2016, compared to 48% for the same period in 2015. Net revenues related to our Cloud Solutions increased by $55.6 million to $274.7 million of our revenues for the nine months ended September 30, 20162022, compared to the same period in 2015.2021. The increase in2022 decrease was primarily attributable to continued efforts to streamline our Cloud Solution performance wasbusiness operations and reduce costs as well as the continued realization of a result of new cloud offerings with newmore profitable revenue mix.
Research and existing customers. Net revenues related to our Cloud Solutions represented 58% for the nine months ended September 30, 2016, compared to 52% for the same period in 2015.
Expenses
Cost of services. Cost of services increased $45.0development expense decreased $5.3 million to $217.0$29.3 million for the ninesix months ended SeptemberJune 30, 2016,2022, 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. Research2021. The research and development costs decreased year over year mainly as a result of executed cost savings initiatives to streamline our workforce and reduce vendor spend.
Selling, general and administrativeexpense increased $9.9decreased $6.7 million to $78.4$33.2 million for the ninesix months ended SeptemberJune 30, 2016,2022, compared to the same period in 20152021. The 2022 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 bycost savings initiatives that resulted in a $1.1 million decrease in personnelemployee costs, facilities, and external costs related costs due to the capitalization of qualified software costs.outside consultants and legal fees.
Selling, general and administrative. Selling, general and administrative expenseRestructuring charges increased $29.2$0.1 million to $89.8$1.7 million for the ninesix months ended SeptemberJune 30, 2016,2022, compared to the same period in 2015. The increase was driven in part by a $13.3 million increase in personnel and related costs 2021, 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 started in March 2016work-force reductions initiated to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization. Depreciation and amortization expense increased $22.8decreased $2.1 million to $74.0$16.3 million for the ninesix months ended SeptemberJune 30, 2016,2022, compared to the same period in 2015,2021. The 2022 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 platformsdata center consolidation project and efforts to streamline business operations, partially offset by the increased amortization of our newly acquired intangible assets related to our recent acquisitions.capitalized software.
Interest expense. Interest expense increased $0.8 million to $5.0 million for the nine months ended September 30, 2016, compared to the same period in 2015 due to an increase of approximately $0.8 million related to the drawdown from the Amended Credit Facility.
Other income (expense), net. Other income (expense) increased $0.4 million to $0.2 million for the nine months ended September 30, 2016, compared to the same period in 2015. Other income (expense) increased primarily due to a one-time $0.5 million benefit from the restructuring of specific facility leases.
Income tax. WeThe Company recognized approximately $14.9 million and $25.5 million in relatedan income tax expense of $0.6 million and an income tax benefit of $0.4 million during the ninesix months ended SeptemberJune 30, 20162022 and 2015,2021, respectively. OurThe effective tax rate was approximately 1,143%10.3% for the ninesix months ended SeptemberJune 30, 2016,2022, which was higherlower than ourthe U.S. federal statutory rate primarily due to the unfavorable impact ofpre-tax losses in foreign jurisdictions whichwhere full valuation allowances have lower tax rates thanbeen recorded. Additionally, the U.S., the unfavorable impact of the fair market value adjustment for the Razorsight contingent consideration obligation and the recording ofCompany recognized a non-cashdiscrete income tax provision to establish a valuation allowance. We considered all available evidence, including our historical profitability and projections of future taxable income togetherbenefit in the period associated with new evidence, both positive and negative, that could affect the view of the future realization of deferred tax assets. As a result of our assessment, we recorded a $2.9 million valuation allowance which reduced the deferred tax asset related to our current net operating lossesrelease of certain foreign subsidiaries. Ourreserves for uncertain tax benefits. The Company’s effective tax rate was approximately 42%2.4% for the ninesix months ended SeptemberJune 30, 2015,2021, which was higherlower than ourthe U.S. federal statutory rate primarily due to the unfavorable impact ofpre-tax losses in foreign jurisdictions We review the expected annual effective incomewhere full valuation allowances have been recorded, pre-tax losses in jurisdictions which have a zero tax rate, and make changes oncertain foreign jurisdictions projecting current income tax expense. The Company also recognized a quarterly basis as necessary based ondiscrete tax benefit associated with the release of certain factors such as changes in forecasted annual operating income, changes toreserves for uncertain tax benefits during the actual and forecasted permanent book-to-tax differences, and changes resulting from the impact of tax law changes.period.
Liquidity and Capital Resources
OurAs of June 30, 2022, our principal sourcesources of liquidity has beenwere cash provided by operations and borrowings on our Credit Facility.the remaining proceeds from the financing transactions. Our cash and cash equivalents and marketable securities balance was $144.3$25.5 million at SeptemberJune 30, 2016, a decrease of $89.4 million as compared to the balance at December 31, 2015. This decrease was primarily due to our acquisition of Openwave, the unfavorable timing of collections, purchases of fixed assets and repurchases of outstanding common stock under the Board approved repurchase program. This was offset by borrowings under the Credit Facility and cash provided by operations.2022. We anticipate that our principal uses of cash in the futureand cash equivalents 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 andincluding technology expansion capital expenditures, and working capital.
At SeptemberJune 30, 2016,2022, our non-U.S. subsidiaries held approximately $25.0$4.4 million of cash and cash equivalents that are available for use by all of our operations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries 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, financing sources, 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 filing date of this Form 10-Q based on our current business plans. However, given the impact of the COVID-19 pandemic on the economy and our operations as well as geopolitical developments, 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 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” in our Annual Report on Form 10-K for the year ended December 31, 2021, some of which are outside of our control.
For further details, see Note 7. Debt and Note 9. Capital Structure of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands): | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | |
| 2022 | | 2021 | | | | | | |
Net cash provided by (used in): | | | | | | | | | |
Operating activities | $ | 6,728 | | | $ | 8,167 | | | | | | | |
Investing activities | (3,768) | | | (11,659) | | | | | | | |
Financing activities | $ | (8,517) | | | $ | 2,687 | | | | | | | |
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 provided by operating activities for the six months ended June 30, 2022 was $6.7 million as compared to $8.2 million of cash provided by operating activities for the same period in 2021. In the current period, the Company generated cash from operations mainly driven by continued growth in cloud revenue, certain annual maintenance and support renewals paid in the second quarter and a $4.3 million tax refund received in the second quarter. The prior years cash provided from operations was positively impacted by a non-recurring cash payment for a advanced messaging contract.
Cash used in investingactivities for the six months ended June 30, 2022 was $3.8 million as compared to $11.7 million in cash used in investing activities during the same period in 2021. The cash used for investing activities in the current year and prior year was primarily related to increased investment in product development for our Cloud offering and capitalization of associated labor costs, in addition to annual vendor payments made in the current period. This investment was offset in the current period by the $7.5 million of cash received as part of the DXP and Activation sale.
Cash (used in) provided by financing activities for the six months ended June 30, 2022 was $8.5 million of cash used primarily due to principal and interest payments associated with the redemption of Series B Preferred Stock. In 2021, the net proceeds from our public offering of common stock, Senior Note offering and Series B Preferred Stock transaction was primarily used to fully redeem all outstanding shares of the Company’s Series A Preferred Stock and repay and close the Revolving Credit Facility on June 30, 2021.
Effect of Inflation
Although inflation generally affects us by increasing our cost ofInflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have not significantly impacted our results of operations during the six months June 30, 2022 and 2021. We cannot assure you, however, that we will not be affected by general inflation in the future.
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, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | 2022 | | 2023-2025 | | 2026-2027 | | Thereafter |
Finance lease obligations | | $ | 791 | | | $ | 182 | | | $ | 590 | | | $ | 19 | | | $ | — | |
Interest | | 50,215 | | | 5,908 | | | 35,446 | | | 8,861 | | | — | |
Operating lease obligations | | 47,365 | | | 4,829 | | | 24,230 | | | 14,036 | | | 4,270 | |
Purchase obligations1 | | 49,502 | | | 10,022 | | | 39,480 | | | — | | | — | |
Senior Note Payable | | 141,077 | | | — | | | — | | | 141,077 | | | — | |
Total | | $ | 288,950 | | | $ | 20,941 | | | $ | 99,746 | | | $ | 163,993 | | | $ | 4,270 | |
1 Amount represents obligations associated with colocation agreements and other customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax positions of $4.0 million at June 30, 2022 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 inflation has had any material effectthe ultimate settlement of our obligations will materially affect our liquidity. We anticipate that the balance of unrecognized tax benefits will decrease by approximately $0.5 millionover 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 continuing to arise 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 ninesix months ended SeptemberJune 30, 2016 or 2015. 2022, there were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K for the year ended December 31, 2021. 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, 2021 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 Note 2. 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 Linethis Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of SeptemberJune 30, 20162022 and December 31, 20152021 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, 2022 and December 31, 2015, which could materially affect our business, financial condition or future results. We believe our exposure associated with these2021 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, 20162022 would increase interest income by less than $0.5approximately $0.3 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, 2022.
Changes in internal controls over financial reportingInternal Control Over Financial Reporting
On March 1, 2016, we completed our acquisition of Openwave Messaging, Inc. (“Openwave”). SEC guidance permits management to omit an assessment of an acquired business' internal control over financial reporting from management's 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, thereThere were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 30, 2016period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our 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 effectimpact our results of operations, financial condition or cash flows see Note 13. Commitments, Contingencies and Other included in Part I, Item 1. “Notes to Condensed Consolidated Financial Statements (unaudited)” of this Quarterly Report on our operations; however, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business. We are currently the plaintiff in several patent infringement cases. The defendants in several of these cases from time to time may file counterclaims. Although due to the inherent uncertainties of litigation, we cannot predict the outcome of any of these actions at this time, we continue to pursue our claims and believe that any counterclaims are without merit, and we intend to defend against all such counterclaims.Form 10-Q.
ITEM 1A. RISK FACTORS
In addition to the other informationOther than set forth in this report, you should carefully consider thebelow, there have been no material changes to our risk factors discussedas previously disclosed in Part I, “ItemItem 1A. Risk Factors”included in our Annual Report on Form 10-K for the year ended December 31, 2015,2021.
We are subject to credit risk and other risks associated with our accounts receivable securitization facility (the “A/R Facility”).
We entered into the A/R Facility with Norddeutsche Landesbank Girozentrale (“NLG”) in June 2022 that permits borrowings of up to $15.0 million outstanding from time to time through June 2025 against our existing and future account receivables. As of June 30, 2022, there were no outstanding obligations under the A/R Facility.
The amounts available under the A/R Facility depend the size of our accounts receivable. If these amounts are less than we forecast, this could negatively affect our expected borrowing capacity and our ability to satisfy any obligations as they become due.
The willingness of NLG to make advances to us is subject to customary conditions for financings of this nature. If we are unable to satisfy those conditions, NLG could refrain from providing financing to us, and we may experience a material and adverse loss of liquidity. The A/R Facility contains representations and warranties, affirmative and negative covenants, and events of default that are customary for financings of this type. If we breach certain of our debt covenants under the A/R Facility, we will be unable to utilize the full borrowing capacity under the A/R Facility and our lenders could require us to repay the debt immediately and could immediately take possession of the receivables securing such debt. In addition, because our Senior Notes and A/R Facility contain cross-default and cross-acceleration provisions with other debt, if any debtholder were to declare its loan due and payable as a result of a default, the holders of the Senior Notes or NLG, might be able to require us to pay those debts immediately.
If NLG terminates the A/R Facility, we may experience a material and adverse loss of our liquidity, which could have a material adverse effect on financial, results of operations and cash flows.
Due to the global nature of our operations, political or economic changes or other factors in a specific country or region could harm our operating results and financial condition.
We conduct significant sales and customer support operations in countries around the world. As such, our growth depends in part on our increasing sales into emerging countries. We also depend on, and many of our customers depend on, non-U.S. operations of our contract manufacturers, component suppliers and distribution partners. Emerging countries in the aggregate experienced a decline in orders during fiscal 2021 and certain prior periods. We continue to assess the sustainability of any improvements in these countries and there can be no assurance that our investments in these countries will be successful. Our future results could be materially adversely affected by a variety of political, economic or other factors relating to our operations inside and outside the United States, including impacts from global central bank monetary policy; issues related to the political relationship between the United States and other countries that can affect the willingness of customers in those countries to purchase products from companies headquartered in the United States; business interruptions resulting from regional or larger scale conflicts or geo-political actions; the impact of the COVID-19 or other public health epidemics or concerns on our customer’s component suppliers, and the challenging and inconsistent global macroeconomic environment, any
or all of which could have a material adverse effect on our operating results and financial condition, including, among others things:
•Current or future supply chain interruptions;
•Foreign currency exchange rates;
•Political or social unrest or instability, including effects of the recent conflict between Russia and Ukraine, and the possibility of a wider European or global conflict, and global sanctions imposed in response thereto;
•Economic instability or weakness, including inflation, or natural disasters in a specific country or region, including the current economic or health challenges in China and global economic ramifications of Chinese economic difficulties;
•Environmental and trade protection measures and other legal and regulatory requirements, some of which may affect our ability to import our products, to export our products from, or sell our products in various countries;
•Political considerations that affect service provider and government spending patterns;
•Health or similar issues and the responses thereto, such as a pandemic or epidemic, including the COVID-19 pandemic and responses taken thereto;
•Natural disasters, terrorism, war or other military conflict, telecommunication and electrical failures;
•Difficulties in staffing and managing international operations; or
•Adverse tax consequences, including imposition of withholding or other taxes on our global operations.
Concerns over economic recession, the COVID-19 pandemic, interest rate increases and inflation, supply chain delays and disruptions, policy priorities of the U.S. presidential administration, trade wars, unemployment, or prolonged government shutdown may contribute to increased volatility and diminished expectations for the economy and markets. Additionally, concern over geopolitical issues may also contribute to prolonged market volatility and instability. For example, the conflict between Russia and Ukraine could lead to disruption, instability and volatility in global markets and industries. The U.S. government and other governments in jurisdictions have imposed severe economic sanctions and export controls against Russia and Russian interests, have removed Russia from the Society for Worldwide Interbank Financial Telecommunication system, and have threatened additional sanctions and controls. The impact of these measures, as well as potential responses to them by Russia, is unknown.
We must recruit and retain our key management and other key personnel and our failure to recruit and retain qualified employees could have a negative impact on our business.
We believe that our success depends in part on the continued contributions of our senior management and other key personnel to generate business and execute programs successfully. In addition, the relationships and reputation that these individuals have established and maintain with our customers and within the industries in which we operate contribute to our ability to maintain good relations with our customers and others within those industries. The loss of any members of senior management or other key personnel could materially impair our ability to identify and secure new contracts and otherwise effectively manage our business. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash- and equity-based compensation. If we do not obtain the stockholder approval needed to continue granting equity compensation in a competitive manner, our ability to attract, retain, and motivate executives and key employees could be weakened. Further, in the technology industry, there is substantial and continuous competition for highly skilled business, product development, technical and other personnel. We may be unable to attract or retain qualified personnel because their salaries and other compensation may increase to levels that we are unwilling or unable to provide. Competition for qualified personnel at times can be intense and as a result we may not be successful in attracting and retaining the personnel we require, which could have a material adverse effect on our ability to meet our commitments and new product delivery objectives. If we are unable to maintain or expand our direct sales capabilities, we may not be able to generate anticipated revenues. In addition, if we are unable to maintain or expand our product development capabilities, we may not be able to meet our product development goals.Further, we rely on the expertise and experience of our senior management team. Although we have employment agreements with our executive officers, none of them or any of our other management personnel is obligated to remain employed by us. The loss of services of any key management personnel could lower productive output, interrupt our strategic vision and make it more difficult to pursue our business goals successfully.
Economic, political and market conditions can adversely affect our results of operations, financial condition and business.
Our business is influenced by a range of factors that are beyond our control and that we have no comparative advantage in forecasting. These include but are not limited to general economic and business conditions, the overall demand for cloud-based products and services, general political developments and currency exchange rate fluctuations. Economic uncertainty, including interest rate increases and inflation, may exacerbate negative trends in consumer spending and may negatively impact the businesses of certain of our customers, which may cause a reduction in their use of our platforms or increase the likelihood of defaulting on their payment obligations, and therefore cause a reduction in our revenues. These conditions and uncertainty about future economic conditions may make it challenging for us to forecast our operating results, make business decisions and identify the risks that may affect our business, financial conditions and results of operations and may result in a more competitive environment, resulting in possible pricing pressures.Our business could be affected by acts of war or other military actions, terrorism, natural disasters and the widespread outbreak of infectious diseases. Current world tensions could escalate, and this could have unpredictable consequences on the world economy and on our business.
The COVID-19 pandemic has created significant uncertainty in the global economy. The COVID-19 pandemic and health measures taken by governments and private industry in response to the pandemic, including stay-at-home orders, restrictions on business operations, and travel restrictions, have had significant negative effects on the economy, including disruptions impacting various supply chains. Continued uncertainty about the pandemic, associated economic consequences, and potential relief measures may have a long-term adverse effect on the economy, our sellers, customers, suppliers, and our business. For example, we are currently subletting some of our office space. An economic downturn or our work from home practices may cause us to need less office space than we are contractually committed to leasing and prevent us from finding subtenants for such unused office space, causing us to pay for unused office space. Rising tensions in the geopolitical climate, including effects of the recent conflict between Russia and Ukraine, and the possibility of a wider European or global conflict, and global sanctions imposed in response thereto, have created significant uncertainty in the global economy. These or any further political or governmental developments or health concerns in countries could result in social, economic and labor instability.If, as a result of such events, we experience a reduction in demand for our products, platforms or services, or the supply of products or components to our customers, our business, results of operations and financial condition may be materially and adversely affected.
We have, and in the future may be, the target of stockholder derivative complaints or future results. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us orother securities related legal actions that we currently deem to be immaterial also may materiallycould adversely affect our results of operations and our business.
We have, and in the future may be, the target of stockholder derivative complaints or other securities related legal actions.The existence of any litigation may have an adverse effect on our reputation with referral sources and our customers themselves, which could have an adverse effect on our results of operations and financial condition.The outcome and amount of resources needed to respond to, defend or resolve lawsuits is unpredictable and may remain unknown for long periods of time. Our exposure under these matters may also include our indemnification obligations, to the extent we have any, to current and former officers and directors and, in some cases former underwriters, against losses incurred in connection with these matters, including reimbursement of legal fees and other expenses. For instance, on June 7, 2022, the SEC filed a civil action against two former members of the Company’s management team, alleging misconduct arising out of the restated transactions that took place in 2015 and 2016 investigated by the SEC in connection with the June 2017 Announcement. We may be required to indemnify these individuals in connection with such action. Although we maintain insurance for claims of this nature, our insurance coverage does not apply in all circumstances and may be denied or insufficient to cover the costs related to the class action and stockholder derivative lawsuits. In addition, future lawsuits or legal claims involving us may increase our insurance premiums, deductibles or co-insurance requirements or otherwise make it more difficult for us to maintain or obtain adequate insurance coverage on acceptable terms, if at all. Moreover, adverse publicity associated with negative developments in any such legal proceedings could decrease customer demand for our services. As a result, future lawsuits involving us, or our officers or directors, could have a material adverse effect on our business, reputation, financial condition, and/results of operations, liquidity and the trading price of our common stock.
Our stock price may continue to experience significant fluctuations and could subject us to litigation.
Our stock price, like that of other technology companies, continues to fluctuate greatly. Our stock price, and demand for our stock, can be affected by many factors, such as unanticipated changes in management, quarterly increases or operating results. If any ofdecreases in our earnings, speculation in the risks actually occur,investment community about our business, financial condition or results of operations and changes in
revenue or earnings estimates, announcement of new services, technological developments, alliances, or acquisitions by us. Additionally, the price of our common stock may continue to fluctuate greatly in the future due to factors that are non-company specific, such as the decline in the United States and/or international economies, acts of terror against the United States or other jurisdictions where we conduct business, war or other military conflict or due to a variety of company specific factors, including quarter to quarter variations in our operating results, shortfalls in revenue, gross margin or earnings from levels projected by securities analysts and the other factors discussed in these risk factors. Concerns over economic recession, the COVID-19 pandemic, interest rate increases and inflation, supply chain delays and disruptions, policy priorities of the U.S. presidential administration, trade wars, unemployment, or prolonged government shutdown may contribute to increased volatility and diminished expectations for the economy and markets. Additionally, concern over geopolitical issues may also contribute to prolonged market volatility and instability. The U.S. government and other governments in jurisdictions have imposed severe economic sanctions and export controls against Russia and Russian interests, have removed Russia from the SWIFT system, and have threatened additional sanctions and controls. The impact of these measures, as well as potential responses to them by Russia, is unknown. In addition, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the market price of our common stock could bedecline for reasons unrelated to our business, operating results or financial condition. Fluctuation in market price and demand for our common stock may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affected. In that case,affect the tradingliquidity of our common stock. Causes of volatility in the market price of our stock could decline,subject us to securities class action litigation. We were previously, and may in the future be, the subject of lawsuits that could require us to incur substantial costs defending against those lawsuits and divert the time and attention of our stockholders may lose part or all of their investment.management.
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
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit No. | | Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| | | | | | | | | | | | |
3.1 | | | | S-1 | | 333-132080 | | 3.2 | | May 9, 2006 | | |
3.2 | | | | 8-K | | 001-40574 | | 3.1 | | June 23, 2022 | | |
3.3 | | | | S-1 | | 333-132080 | | 3.4 | | May 9, 2006 | | |
3.4 | | | | 8-K | | 000-52049 | | 3.2 | | February 20, 2018 | | |
3.5 | | | | 8-K | | 000-52049 | | 3.3 | | June 30, 2021 | | |
10.1 | | | | | | | | | | | | X |
10.2 | | | | 8-K | | 001-40574 | | 10.1 | | June 23, 2022 | | |
10.3 | | | | 8-K | | 001-40574 | | 10.2 | | June 23, 2022 | | |
10.4 | | | | 8-K | | 001-40574 | | 10.3 | | June 23, 2022 | | |
10.5 | | | | 8-K | | 001-40574 | | 10.4 | | June 23, 2022 | | |
31.1 | | | | | | | | | | | | X |
31.2 | | | | | | | | | | | | X |
32.1 | | | | | | | | | | | | X |
32.2 | | | | | | | | | | | | X |
101.INS | | XBRL Instance Document | | | | | | | | | | X |
101.SCH | | XBRL Schema Document | | | | | | | | | | X |
101.CAL | | XBRL Calculation Linkbase Document | | | | | | | | | | X |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase | | | | | | | | | | X |
101.LAB | | XBRL Labels Linkbase Document | | | | | | | | | | X |
101.PRE | | XBRL Presentation Linkbase Document | | | | | | | | | | X |
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| | | | | | | | | | | | |
|
| |
Exhibit No. | Description |
| |
3.2 | Restated Certificate of Incorporation of the Registrant, incorporated by reference to Registrant’s Registration Statement on Form S-1 (Commission File No. 333-132080). |
| |
3.4 | Amended and Restated Bylaws of the Registrant, incorporated by reference to Registrant’s Registration Statement on Form S-1 (Commission File No. 333-132080). |
| |
4.2 | Form of the Registrant’s Common Stock certificate, incorporated by reference to Registrant’s Registration Statement on Form S-1 (Commission File No. 333-132080). |
| |
10.8 | Amended and Restated Credit Agreement dated as of July 7, 2016 between the Registrant and Wells Fargo Bank, National Association, as Administrative Agent |
| |
10.8.1 | 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 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and section 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and section 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
| |
101.INS | XBRL Instance Document |
| |
101.SCH | XBRL Schema Document |
| |
101.CAL | XBRL Calculation Linkbase Document |
| |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| |
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/ Jeff Miller | |
| | Jeff Miller | |
| | | |
| | | |
| | /s/Stephen G. Waldis | |
| | Stephen G. Waldis | |
| | Chairman of the Board of Directors and | |
| | Chief Executive Officer | |
| | (Principal executive officer)Executive Officer)
| |
| | | |
| | | |
| | /s/ Taylor Greenwald | |
| | Taylor Greenwald | |
| | /s/Karen L. Rosenberger | |
| | Karen L. Rosenberger | |
| | Executive Vice President, Chief Financial Officer
and Treasurer
| |
November 8, 2016
August 9, 2022