| Restatement of Previously Issued Consolidated Financial Statements | Restatement of Previously Issued Consolidated Financial Statements The Company has restated its audited consolidated financial statements for the years ended December 31, 2016 and 2015 for the matters described below. The effects of these restatement adjustments on (i) the Company’s Consolidated Balance Sheet at December 31, 2016, (ii) the Company’s Consolidated Statement of Operations for the years ended December 31, 2016 and 2015, (iii) the Company’s Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015, (iv) the Company’s Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016 and 2015 and (v) the Company’s Consolidated Statement of Cash Flows for the years ended December 31, 2016 and 2015 are presented in the Company’s 2017 Form 10-K. The effects of the restatement adjustments on the Company’s unaudited Condensed Consolidated financial statements as of September 30, 2016 and for the three and nine month periods ended are reflected in the tables below. The individual restatement matters that underlie the restatement adjustments are described below. Revenue Recognition Adjustments Related to Hosting Services The Company typically sells hosting services to its subscription services customers, as well as to certain software license customers. As part of the Company’s review of its historical accounting, it has determined that adjustments are required related to certain transactions in each of these two categories of customers that purchase hosting services. It was observed that in certain instances, the Company has historically entered into hosting arrangements that included various components to the fee structure with certain fees accelerated during the initial years of the arrangement. Historically, the Company recognized the accelerated fees as billed and maintenance and support fees were recognized on a straight-line basis through the term of the arrangement. However, the Company has determined to revise its accounting treatment for certain hosting services to reflect revenue recognition on a straight-line basis for such fees over the appropriate period of time during which (i) the benefits of hosting services were provided to the customer or (ii) the customer benefited from the set-up fees. The revised accounting treatment for the revenue recognition is reflected in the restated consolidated financial statements, whereby there has been a deferral of a portion of the accelerated fees out of the initial period of the arrangement, and recognition of those deferred amounts in the later periods of the hosting services arrangement. In the case of certain perpetual software license customers, the Company historically recognized the perpetual software license fee revenue on an upfront basis. The Company has determined to revise its accounting treatment of that software license fee revenue to recognize it ratably over a period of time due to the inclusion of hosting services, as part of the same multiple element arrangement. In certain of these cases, the Company had entered into a separate hosting services contract with the customer that the Company has now determined should have been combined with the software license agreement and treated as part of a larger multiple element arrangement. In accordance with the software revenue recognition rules, since the Company cannot establish vendor specific objective evidence of fair value of the hosting services, the software license element cannot be separated from the hosting services. The revised accounting treatment for the revenue recognition is reflected in the restated consolidated financial statements, whereby the bundled arrangement fees have been recognized ratably over the economic life of the hosting services. Revenue Recognition Adjustments Related to Establishing Persuasive Evidence of an Arrangement and Other Revenue Adjustments The Company historically has had, and continues to have, contractual arrangements with certain customers whereby there is an established master services agreement that includes general terms and conditions. Such master services agreements contemplate the delivery by the customer of purchasing documentation for purposes of completing orders, indicating the nature, price and quantity of products and services ordered. In certain cases, the Company historically formed a view that persuasive evidence of an arrangement existed relating to such orders based upon its receipt from a customer of written confirmation of the order and commitment to pay the agreed price, such as a quote approval sent by the customer in response to a quote issued by the Company, but prior to that customer’s subsequent delivery to the Company an executed statement of work or, in some instances, a purchase order, pursuant to a master services agreement. The Company has determined, in certain situations, to revise the timing of revenue recognition to when it received final formal contract documentation, which occurred in a future period. In those cases where the adjustment to defer revenue has been recorded prior to when cash payment was received from the customer, the balance sheet impact has been to reduce the related accounts receivable balance, whereas the balance sheet impact of these adjustments after the receipt of cash payment from the customer has been to increase accrued liabilities. The Company also adjusted revenue recognition in connection with certain other transactions, including (i) where the payment obligation on the date of sale was found not to have been fixed and determinable; (ii) where collectability was not reasonably assured; (iii) where the software delivered to the customer was ultimately deemed not to have met acceptance criteria; or (iv) where formal acceptance was not obtained. In certain situations, these adjustments represent issues related to the timing of revenue recognition, while in other cases, these adjustments represent amounts that had subsequently been written-off to bad debt expense (whereby now both the revenue and the related bad debt expense has been reversed). Adjustments Related to Accounting for Acquisitions and Divestiture The Company has identified and corrected errors related to fees received under license agreements entered into with parties of certain historical acquisitions and a divestiture. In each case, the Company had originally treated the license agreement as a separate transaction and recorded the license fees on a gross basis as revenue. The Company has determined to revise its accounting treatment of the license arrangements, to record the license fees as part of the accounting for the acquisition or divestiture, as follows: • In certain cases, the Company entered into a license agreement as part of settling prior intellectual property infringement claims against an acquired entity and/or its selling parent company and affiliates. Historically, the Company had recognized these license fees separately as revenue. However, the Company has determined to net these license fees against the consideration paid as part of the acquisitions, resulting in a reduction of the goodwill and/or intangible assets recorded in purchase accounting. • The Company’s consolidated joint venture Zentry LLC (“Zentry”) and the Company’s partner in that joint venture entered into a license agreement in December 2015 at the same time as the formation of the joint venture. Historically, the Company recorded the license fees as revenue separately from the Zentry formation. The Company has determined to net these license fees against the cash contributions paid as part of the joint venture formation, resulting in a reduction of the goodwill and intangible assets recorded in purchase accounting. • The Company entered into a licensing agreement in December 2016 with Sequential Technology International, LLC (“STIN”) shortly after closing the divestiture of its activation business to Sequential Technology International Holdings, LLC (“STIH”). Historically, the Company recorded the license fees as revenue separately from the accounting for the divestiture. The Company has determined to classify these license fees as additional gain on sale of the activation exception handling business. • The Company made adjustments to reduce the contingent consideration payable to shareholders of Razorsight Corporation (“Razorsight”), which was acquired by the Company in August 2015, and the related losses previously recorded to adjust that liability to fair value, as a result of the determination that many of the sales of Razorsight software that had originally been included in the earn-out calculation have now been adjusted as part of the restatement. • The Company made adjustments to record the fair value of the Company’s guarantee of certain of STIN’s debt as part of the divestiture of its activation exception handling business to STIH in December 2016, to record the sellers note extended in the transaction at fair value, and to adjust certain receivables and other assets sold in the transaction. • The Company made certain adjustments to the opening balances of Openwave Messaging, Inc. (“Openwave”) and SNCR, LLC (“SNCR, LLC”); impacting deferred revenue, goodwill and intangibles. Adjustments in deferred revenue and intangibles resulted were reported post-acquisition as revenues and costs were realized. Other Adjustments and Capitalized Software The Company also identified and corrected certain errors in the amounts reported as capitalized software development. These adjustments were primarily around (i) the recognition of impairment or immediate expensing of certain previously capitalized software development costs and (ii) revisions of amounts capitalized and the timing of when such capitalized costs are amortized. Adjustments pertaining to capitalized software development were driven primarily due to misalignment on the unit of account being measured in tracking project progress and ultimately general release as well as the appropriateness of the capitalization of certain administrative costs. The Company also identified and corrected certain other errors, primarily due to timing of recognition of (i) stock-based compensation arrangements, (ii) accruals and reserves, (iii) noncontrolling interests and (iv) impairment charges. Impairment charges were primarily due to long-lived asset impairments realized on SNCR, LLC assets, due to continued delays in product development and sales. Additionally, the Company identified certain prior year balance sheet classification adjustments requiring, the most significant of which, a reclassification between cash and restricted cash due to certain contractual restrictions on cash balances, and reclassifications between treasury stock and additional paid-in-capital due to share issuances from the Company’s common stock pool, rather than its treasury stock. Income Taxes The Company recorded adjustments to income taxes to reflect the impact of the restatement adjustments, as well as a discrete tax adjustment to record a valuation allowance at a specific foreign jurisdiction in an earlier year than originally recorded. See Note 11 - Income Taxes for discussion of the related impact to the Company’s effective tax rate. The following table presents the Condensed Consolidated Balance Sheet as previously reported, restatement adjustments and the Condensed Consolidated Balance Sheet as restated at December 31, 2016: Adjustments (Unaudited) As Previously Reported ** Revenue - Hosting Revenue - Evidence of Arrangement and Other Revenue Acquisitions & Divestiture Capitalized Software and Other Income Taxes As Restated ASSETS Current assets: Cash and cash equivalents $ 181,018 $ — $ — $ — $ (11,217 ) $ — $ 169,801 Restricted cash — — — — 41,632 — 41,632 Marketable securities 12,506 — — — — — 12,506 Accounts receivable, net 137,233 (344 ) (36,509 ) 7,896 (802 ) — 107,474 Prepaid expenses and other assets 33,696 — — 1,408 (1,166 ) 4,339 38,277 Total current assets 364,453 (344 ) (36,509 ) 9,304 28,447 4,339 369,690 Restricted cash 30,000 — — — (30,000 ) — — Marketable securities 2,974 — — — — — 2,974 Property and equipment, net 155,599 — — (823 ) 3,429 — 158,205 Goodwill 269,905 — — (41,358 ) — (3,896 ) 224,651 Intangible assets, net 203,864 — — (19,830 ) (21,066 ) — 162,968 Deferred tax assets 1,503 — — — — 11,783 13,286 Other assets 7,541 — — (70 ) 1,187 — 8,658 Note receivable from related party 83,000 — — (12,731 ) — — 70,269 Equity method investment 45,890 — — (2,240 ) — — 43,650 Total Assets $ 1,164,729 $ (344 ) $ (36,509 ) $ (67,748 ) $ (18,003 ) $ 12,226 $ 1,054,351 ** Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations. Adjustments (Unaudited) As Previously Reported ** Revenue - Hosting Revenue - Evidence of Arrangement and Other Revenue Acquisitions & Divestiture Capitalized Software and Other Income Taxes As Restated LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 15,770 $ — $ — $ — $ 1,287 $ — $ 17,057 Accrued expenses 69,435 — 5,274 971 246 956 76,882 Deferred revenues 27,542 33,398 (151 ) (3,360 ) 1 — 57,430 Contingent consideration obligation 11,860 — — (9,027 ) — — 2,833 Short-term debt 29,000 — — — — — 29,000 Total current liabilities 153,607 33,398 5,123 (11,416 ) 1,534 956 183,202 Lease financing obligation - long term 12,121 — — 41 288 — 12,450 Long-term debt 226,291 — — — — — 226,291 Deferred tax liability 49,822 — — — — (46,314 ) 3,508 Deferred revenues 12,134 52,965 531 — — — 65,630 Other liabilities 3,783 — — — 1,679 2,731 8,193 Redeemable noncontrolling interests 49,856 — — (28,813 ) 4,237 — 25,280 Commitments and contingencies Stockholder's equity Common stock 5 — — — — — 5 Treasury stock (95,183 ) — — — (11,448 ) — (106,631 ) Additional paid-in capital 575,093 — — (7,667 ) 3,727 — 571,153 Accumulated other comprehensive loss (43,253 ) — 658 — 138 107 (42,350 ) Retained earnings 220,453 (86,707 ) (42,821 ) (19,893 ) (18,158 ) 54,746 107,620 Total stockholders' equity 657,115 (86,707 ) (42,163 ) (27,560 ) (25,741 ) 54,853 529,797 Total liabilities & stockholders' equity $ 1,164,729 $ (344 ) $ (36,509 ) $ (67,748 ) $ (18,003 ) $ 12,226 $ 1,054,351 ** Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations. The following table presents the Condensed Consolidated Statement of Operations as previously reported, restatement adjustments and the Condensed Consolidated Statement of Operations as restated for the three months ended September 30, 2016 . Adjustments As Previously Reported** Revenue - Hosting Revenue - Evidence of Arrangement and Other Revenue Acquisitions & Divestiture Capitalized Software and Other Income Taxes As Restated Net revenues $ 132,480 $ (6,440 ) $ (7,648 ) $ 1,544 $ — $ — $ 119,936 Costs and expenses: Cost of revenues* 49,073 — — 65 — — 49,138 Research and development 28,141 — — — 2,889 — 31,030 Selling, general and administrative 30,934 2 (2,246 ) 156 (19 ) — 28,827 Net change in contingent consideration obligation 572 — — (1,921 ) — — (1,349 ) Restructuring charges 924 — — — — — 924 Depreciation and amortization 24,692 — — (1,111 ) 11 — 23,592 Total costs and expenses 134,336 2 (2,246 ) (2,811 ) 2,881 — 132,162 Loss from continuing operations (1,856 ) (6,442 ) (5,402 ) 4,355 (2,881 ) — (12,226 ) Interest income 271 — — — — — 271 Interest expense (1,596 ) — — — — — (1,596 ) Other expense, net (167 ) — 16 — — — (151 ) Loss from continuing operations, before taxes (3,348 ) (6,442 ) (5,386 ) 4,355 (2,881 ) — (13,702 ) Benefit for income taxes (1,621 ) — — — — 5,231 3,610 Net loss from continuing operations (4,969 ) (6,442 ) (5,386 ) 4,355 (2,881 ) 5,231 (10,092 ) Net income from discontinued operations, net of tax 9,802 — (2,427 ) (272 ) (1 ) 2,205 9,307 Net loss 4,833 (6,442 ) (7,813 ) 4,083 (2,882 ) 7,436 (785 ) Net loss attributable to redeemable noncontrolling interests (2,843 ) — — — (504 ) — (3,347 ) Net loss attributable to Synchronoss $ 7,676 $ (6,442 ) $ (7,813 ) $ 4,083 $ (2,378 ) $ 7,436 $ 2,562 Basic: Continuing operations $ (0.05 ) $ (0.15 ) Discontinued operations 0.23 0.21 $ 0.18 $ 0.06 Diluted: Continuing operations $ (0.05 ) $ (0.15 ) Discontinued operations 0.23 0.21 $ 0.18 $ 0.06 Weighted-average common shares outstanding: Basic 43,560 43,560 Diluted 43,560 43,560 * Cost of services excludes depreciation and amortization which is shown separately. ** Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations. The following table presents the Condensed Consolidated Statement of Operations as previously reported, restatement adjustments and the Condensed Consolidated Statement of Operations as restated for the nine months ended September 30, 2016 : Adjustments As Previously Reported** Revenue - Hosting Revenue - Evidence of Arrangement and Other Revenue Acquisitions & Divestiture Capitalized Software and Other Income Taxes As Restated Net revenues $ 354,954 $ (17,161 ) $ (9,523 ) $ (8,987 ) $ — $ — $ 319,283 Costs and expenses: Cost of revenues* 143,988 — — (107 ) (412 ) — 143,469 Research and development 78,408 — — — 6,496 — 84,904 Selling, general and administrative 87,809 155 (2,718 ) 536 (1,161 ) — 84,621 Net change in contingent consideration obligation 7,299 — — (5,533 ) — — 1,766 Restructuring charges 4,973 — — — — — 4,973 Depreciation and amortization 74,009 — — (3,333 ) (209 ) — 70,467 Total costs and expenses 396,486 155 (2,718 ) (8,437 ) 4,714 — 390,200 Loss from continuing operations (41,532 ) (17,316 ) (6,805 ) (550 ) (4,714 ) — (70,917 ) Interest income 1,492 — — — — — 1,492 Interest expense (5,006 ) — — — — — (5,006 ) Other expense, net (186 ) — 322 — — — 136 Loss from continuing operations, before taxes (45,232 ) (17,316 ) (6,483 ) (550 ) (4,714 ) — (74,295 ) Benefit for income taxes 814 — — — — 17,946 18,760 Net loss from continuing operations (44,418 ) (17,316 ) (6,483 ) (550 ) (4,714 ) 17,946 (55,535 ) Net income from discontinued operations, net of tax 30,865 — (5,726 ) (272 ) — 2,239 27,106 Net loss (13,553 ) (17,316 ) (12,209 ) (822 ) (4,714 ) 20,185 (28,429 ) Net loss attributable to redeemable noncontrolling interests (8,836 ) — — — (658 ) — (9,494 ) Net loss attributable to Synchronoss $ (4,717 ) $ (17,316 ) $ (12,209 ) $ (822 ) $ (4,056 ) $ 20,185 $ (18,935 ) Basic: Continuing operations $ (0.82 ) $ (1.06 ) Discontinued operations 0.71 0.62 $ (0.11 ) $ (0.44 ) Diluted: Continuing operations $ (0.82 ) $ (1.06 ) Discontinued operations 0.71 0.62 $ (0.11 ) $ (0.44 ) Weighted-average common shares outstanding: Basic 43,488 43,469 Diluted 43,488 43,469 * Cost of services excludes depreciation and amortization which is shown separately. ** Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations. The following table presents the Condensed Consolidated Statement of Comprehensive (loss) as previously reported, restatement adjustments and the Condensed Consolidated Statement of Comprehensive Income (Loss) as restated for the three months ended September 30, 2016 : Adjustments As Previously Reported** Revenue - Hosting Revenue - Evidence of Arrangement and Other Revenue Acquisitions & Divestiture Capitalized Software and Other Income Taxes As Restated Net (loss) $ 4,833 $ (6,442 ) $ (7,813 ) $ 4,083 $ (2,882 ) $ 7,436 $ (785 ) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 2,645 — (31 ) — — — 2,614 Unrealized loss on available for sale securities 147 — — — — — 147 Net income on intra-entity foreign currency transactions 300 — — — — — 300 Total other comprehensive income, net of tax 3,092 — (31 ) — — — 3,061 Comprehensive loss 7,925 (6,442 ) (7,844 ) 4,083 (2,882 ) 7,436 2,276 Comprehensive loss attributable to redeemable noncontrolling interests (2,843 ) — — — (504 ) — (3,347 ) Comprehensive (loss) income attributable to Synchronoss $ 10,768 $ (6,442 ) $ (7,844 ) $ 4,083 $ (2,378 ) $ 7,436 $ 5,623 ** Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations. The following table presents the Condensed Consolidated Statement of Comprehensive (Loss) as previously reported, restatement adjustments and the Condensed Consolidated Statement of Comprehensive Income (loss) as restated for the nine months ended September 30, 2016 : Adjustments As Previously Reported** Revenue - Hosting Revenue - Evidence of Arrangement and Other Revenue Acquisitions & Divestiture Capitalized Software and Other Income Taxes As Restated Net (loss) gain $ (13,553 ) $ (17,316 ) $ (12,209 ) $ (822 ) $ (4,714 ) $ 20,185 $ (28,429 ) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 6,089 — (146 ) — 19 — 5,962 Unrealized gain (loss) on available for sale securities 145 — — — — — 145 Net income (loss) on intra-entity foreign currency transactions 662 — — — — — 662 Total other comprehensive income (loss), net of tax 6,896 — (146 ) — 19 — 6,769 Comprehensive income (loss) (6,657 ) (17,316 ) (12,355 ) (822 ) (4,695 ) 20,185 (21,660 ) Comprehensive income (loss) attributable to redeemable noncontrolling interests (8,836 ) — — — (658 ) — (9,494 ) Comprehensive income (loss) attributable to Synchronoss $ 2,179 $ (17,316 ) $ (12,355 ) $ (822 ) $ (4,037 ) $ 20,185 $ (12,166 ) ** Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations. The following table presents the Condensed Consolidated Statement of Cash Flows as previously reported, restatement adjustments, and the Condensed Consolidated Statement of Cash Flows as adjusted for the nine months ended September 30, 2016: As Previously Reported Adjustments As Restated Operating activities: Net loss continuing operations $ (44,418 ) $ (11,117 ) $ (55,535 ) Net loss from discontinued operations 30,865 (3,759 ) 27,106 Adjustments to reconcile net loss to net cash provided by operating activities: 115,356 (27,534 ) 87,822 Changes in operating assets and liabilities: (45,319 ) 18,072 (27,247 ) Net cash (used in) provided by operating activities 56,484 (24,338 ) 32,146 Investing activities: Net cash used in investing activities (80,479 ) 19,009 (61,470 ) Financing activities: Net cash provided by financing activities (1,915 ) 7,176 5,261 Effect of exchange rate changes on cash 1,595 (2,085 ) (490 ) Net increase (decrease) in cash and cash equivalents (24,315 ) (238 ) (24,553 ) Cash, restricted cash and cash equivalents at beginning of period 147,634 238 147,872 Cash, restricted cash and cash equivalents at end of period 123,319 — 123,319 Cash and cash equivalents per the Condensed Consolidated Balance Sheet 123,319 (12,975 ) 110,344 Restricted cash per the Condensed Consolidated Balance Sheet — 12,975 12,975 Total cash, cash equivalents and restricted cash $ 123,319 $ — $ 123,319 Supplemental disclosures of cash flow information: Cash paid for income taxes 3,935 — 3,935 Cash paid for interest $ 1,636 $ — $ 1,636 |
