UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Form 10‑K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 20162022
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to
Commission file number 000‑52049001-40574
SYNCHRONOSS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 06-1594540 |
(State or other jurisdiction of incorporation)
incorporation or organization) | 06‑1594540
(IRSI.R.S. Employer
Identification No.) |
200 Crossing Boulevard, 3rd Floor Bridgewater, New Jersey | 08807 |
| (Address of principal executive offices) | (Zip Code) |
200 Crossing Boulevard, 8th Floor, Bridgewater, New Jersey 08807
(Address of principal executive offices, including ZIP code)
(866) 620‑3940620-3940
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $.0001 par value | SNCR | The NASDAQNasdaq Stock Market, LLC |
| 8.375% Senior Notes due 2026 | SNCRL | The Nasdaq Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whetherif the registrant is a well‑knownwell-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.Act. Yes x¨ No ¨☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”).Act. Yes ¨ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑TS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑acceleratednon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company, ”and "emerging growth company" in Rule 12b‑212b-2 of the Exchange Act. (Check one):
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Large accelerated filer x☐
| Accelerated filer¨☒ | Non‑accelerated filer ¨ (Do not check if a
smaller reporting company)
☐ | Smaller reporting company ¨ ☐ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑212b-2 of the Exchange Act). Yes ¨☐ No x☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
The aggregate market value of the common stock held by non‑affiliatesnon-affiliates of the Registrant as of June 30, 2016,2022, the last business day of the Registrant’s last completed second quarter, based upon the closing price of the common stock as reported by The NASDAQNasdaq Stock Market on such date was approximately $1.3 billion.$85.2 million. Shares of common stock held by each executive officer, director and stockholders known by the Registrant to own 10% or more of the outstanding stock based on public filings and other information known to the Registrant have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 16, 2017,March 14, 2023, a total of 45,998,579 shares90,811,698 shares of the Registrant’s common stock were outstanding.
The exhibit index as required by Item 601(a) of Regulation S‑KS-K is included in Item 15 of Part IV of this report on Form 10‑K.10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to portions of the Registrant’s definitive Proxy Statement for its 20172023 Annual Meeting of Stockholders (the “Proxy Statement”), which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year ended December 31, 2016.2022. Except as expressly incorporated by reference, the Proxy Statement shall not be deemed to be a part of this report on Form 10‑K.
SYNCHRONOSS TECHNOLOGIES, INC.
FORM 10‑K10-K INDEX
TABLE OF CONTENTS
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| 16. | Form 10-K Summary | 114 |
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PART I
FORWARD-LOOKINGFORWARD LOOKING STATEMENTS
The words "Synchronoss", "we", "our", "ours", "us"“Synchronoss,” “we,” “our,” “ours,” “us” and the "Company"“Company,” refer to Synchronoss Technologies, Inc. and its consolidated subsidiaries. We were incorporated in Delaware in 2000. All statements in this Annual Report on Form 10-K for the fiscal year ended December 31, 2022 that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding Synchronoss' "expectations," "beliefs," "hopes," "intentions," "anticipates," "seeks," "strategies," "plans," "targets," "estimations," "outlook"Synchronoss’ “expectations,” “beliefs,” “hopes,” “intentions,” “anticipates,” “seeks,” “strategies,” “plans,” “targets,” “estimations,” “outlook” or the like. Such statements are based on management'smanagement’s current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Past performance is not necessarily indicative of future results. Synchronoss cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors including, but not limitedfactors. We encourage you to read Management’s Discussion and Analysis of our Financial Condition and Results of Operations and our consolidated financial statements contained in this Form 10-K. We also encourage you to read Item 1A of Part I of this Form 10-K, entitled Risk Factors, which contains a more complete discussion of the risks and uncertainties associated with our business. In addition to the riskrisks described in Item 1A of this Form 10-K, other unknown or unpredictable factors discussedalso could affect our results. Therefore, the information in this Annual ReportForm 10-K should be read together with other reports and documents that we file with the Securities and Exchange Commission from time to time, including on Form 10-K.10-Q and Form 8-K, which may supplement, modify, supersede or update those risk factors. Synchronoss expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in Synchronoss'Synchronoss’ expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based.
This Annual Report on Form 10-K includes industry and market data that we obtained from periodic industry publications, third-party studies and surveys, filings of public companies in our industry and internal company surveys. These sources include government and industry sources. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe the industry and market data incorporated into this Annual Report on Form 10-K to be reliable, this information could prove to be inaccurate. Industry and market data could be wrong because of the method by which sources obtained their data and because information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. In addition, we do not know all of the assumptions regarding general economic conditions or growth that were used in preparing the forecasts from the sources relied upon or cited herein.
ITEM 1.BUSINESS
IntroductionOverview
Synchronoss is a leading provider of white label cloud, messaging, digital and network management solutions that enable our customers to keep subscribers, systems, networks and content in sync. We have recently made a number of major announcements, includinghelp our acquisition of Intralinks Holdings, Inc. or Intralinkscustomers to connect, engage and monetize subscribers in more meaningful ways by providing trusted platforms through which end users can sync and store content and connect with one another and the divestiture of our carrier activation business, which willbrands they love. Our mission is to help define the future strategy at Synchronoss. These transactions signify a pivot in our strategy to focus on our cloud, analytics and enterprise businesses moving forward. We believe that our “Synchronoss 3.0” strategy is laying the groundwork for our new growth vision. Our acquisition of Intralinks gives us an immediate enterprise pedigree, experience upon which to leverage our product portfolio, and go-to-market strategy providing a diversified customer footprint which allows for substantial cross-selling opportunities through Synchronoss. We believe that as one combined company, we can deploy enhanced enterprise and mobile solutions to our customers while opening upcreate new enterprise distribution channels acrossrevenue streams, reduce the world.cost of innovation, and captivate their subscribers.
With the Intralinks acquisition, we believe that enterprise will represent a significant portion ofOur core product sets allow our future total revenues, thus helping us further diversify our business model over the coming years. For our carrier business, key customer wins in our cloud and messaging businesses in the North America and Asia-Pacific regions are some of the strategic highlights of our business performance over the past year. We believe that we will be able to build on these customer winscustomers to create a major opportunity for growth in our carrier business aspositive experience throughout their subscribers’ lifecycle by engaging, onboarding and managing the network to ensure reliable service.
•EngageX:
▪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.
•OnboardingX:
▪Backup and Restore: Backup, view and restore subscriber content across operating systems and devices.
▪Out of Box Experience: Streamline the activation of new services and devices.
▪Content Transfer: Effortlessly move content between mobile devices.
•NetworkX:
▪NetworkX: integrated application suite that designs, procures, manages and optimizes telecom network infrastructure.
Who We Serve
At Synchronoss we head into 2017 and beyond. On the enterprise front we are progressing with our strategic partnerships with Verizon and Goldman Sachs, as we have successfully built a strong pipeline of customer enterprise pilots across various verticals with a core focus on financialdelivering carrier-grade solutions to three markets globally: communications service providers/multi-service operators (such as cable and healthcare markets.mobile network operators), mobile insurance providers and retailers. We help our customers accelerate and monetize value-add services to drive growth, facilitate retention and enable differentiated experiences. In 2022, we continued to strengthen our focus through the asset sale of our Digital Experience Platform (the “DXP Business”) to iQmetrix.
DuringCommunications service providers, multi-service operators and mobile insurance providers market white label implementations of our Synchronoss Personal CloudTM, Advanced Messaging and email products and solutions to their subscribers around the fourth quarter, we had a number of successful conversions fromworld. Our customers market and re-sell the services powered by our pipeline into signed deals, where our solutions replaced existing competitive deployments. During 2016, our sales force and strategic partnerships enjoyed some early enterprise customer validation, which is leadingtechnology to additional subscription booking opportunities in our enterprise business. These partnerships, will now betheir subscribers as part of our broader enterprise strategy that centers on the combined Intralinks-Synchronoss team driving our success forward.
We believe this foundation will serve us well as we build a comprehensive product roadmapstand-alone subscriptions, value-added bundles, or use Personal Cloud to enhance their service offerings to subscribers who purchase and a go-to-market strategylease mobile devices and network connectivity by providing an easy solution for the enterprise market around identity, secure mobility, secure collaboration,storing and secure workflow platforms.
Intralinks Acquisition
On January 19, 2017, we completed the previously announced acquisition of Intralinks. Following the acquisition, Intralinks became our wholly-owned subsidiary. Intralinks is a global technology provider of software as a service or SaaS solutions for secure enterprisesyncing user generated content collaboration within(e.g., videos, photos, documents, contacts, music etc.). Additionally, they license Synchronoss Advanced Messaging and among organizations. Intralinks’ cloud-based solutionsEmail to enable organizationswhite label multichannel messaging services including advanced person-to-person (“P2P”) and application-to-person (“A2P”) transactions and to securely manage, control, track, search, exchange and collaborate on sensitive information inside and outside the firewall. Intralinks provides its customers with cost-effective solutions to manage and control large amounts of electronic information, accelerate information intensive business processes, reduce time to market, optimize critical information workflows, meet regulatory and risk management requirements and collaborate with business counterparties in a secure, auditable and compliant manner. Intralinks helps its customers eliminate many of the inherent risks and inefficiencies of using email, fax, courier services and other existing solutions to collaborate and exchange information. Intralinks serves enterprises and governmental agencies across a variety of industries, including financial services, pharmaceutical, manufacturing, biotechnology, consumer, energy, telecommunications, industrial, legal, professional services, insurance and technology. Intralinks delivers its solutions through a cloud-based model, making them available on-demand over the internet using a multi-tenant SaaS architecture. Intralinks’ solutions are sold directly through a field sales team with industry-specific expertise and an inside sales team, and indirectly through a customer referral network and channel partners. Intralinks’ customer-facing teams provide a range of implementation and end-user support services to ensure that its customers remain productive throughout the duration of their use of our services.
Intralinks has built a highly secure and scalable, cloud-based, multi-tenant, content services platform upon which it develops multiple applications that allow its customers to collaborate, manage and exchange critical information securely across organizational and geographic boundaries. Intralinks integrates content management, enterprise collaboration and social, data analytics, file sync and sharing, and document security software into one platform that supports business collaboration and content exchange. The Intralinks platform scales from the needs of small groups and individuals within one organization to large teams of people across multiple enterprises, financial institutions and governmental agencies. The Intralinks platform also helps transform a wide range of slow, expensive and people- and information-intensive tasks into streamlined and efficient business processes.
For more information about Intralinks and its business, please see the Annual Report on Form 10-K filed by Intralinks for the fiscal year ended December 31, 2015 and its subsequent filings with the SEC. The remainder of the discussion in this Annual Report on Form 10-K relates to the period prior to our acquisition of Intralinks, and, except otherwise noted, generally does not give effect to the Intralinks acquisition.
For additional information about our Intralinks acquisition, see Note 19, "Subsequent Event Review" to our consolidated financial statements included in Part II, Item 8 of this report.
General
We are a global software and services company that provides essential technologies and services for the mobile transformation of business. Our portfolio, which is targeted at the Consumer and Enterprise markets, contains offerings such as personal cloud, secure-mobility, identity management and scalable messaging platforms, products and solutions. These essential technologies create a better way of delivering the transformative mobile experiences thatoffer brand/advertiser ecosystems. Communications service providers and enterprises needmulti-service operators use our OnboardX and NetworkX solutions to help them stay ahead of the curve when it comesenhance their subscriber journeys and onboarding and to competition, innovation, productivity, growth and operational efficiency.streamline their internal processes.
Our productscustomers include global service providers such as AT&T, BT, Verizon, Softbank and platforms are designedmulti-service operators like Comcast, Altice, Charter and Mediacom. These customers utilize our solutions to be carrier-grade, flexibleservice both consumer and scalable, enabling multiple converged communication servicesenterprise customers.
How We Go to be managed across a range of distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets. This business model allows us to meet the rapidly changing converged services and connected devices offered by our customers. Our products, platforms and solutions enable our enterprise and service provider customers to acquire, retain and service subscribers and employees quickly, reliably and cost-effectively with our 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 sharing/collaborating with connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of our platforms enable new revenue streams and retention opportunities for our customers through: new subscriber acquisitions, sale of new devices and accessories and new value-added service offerings in the Cloud, including the services offered by Intralinks. By using our technologies, our customers can optimize their cost of operations while enhancing their customer experience.Market
We currently operate in and market our solutions and services directly through our sales organizations in North America,the Americas, Europe, the Middle East and Africa or EMEA, Latin America(“EMEA”) and the Asia Pacific region. Asia-Pacific (“APAC”).
Sales
We deliver essential technologies for mobile trans
formation to two primary types of customers: service provider and enterprise customers in regulated verticals and use cases.
Service Providers, Retailers, OEMs, Re-sellers and Service Integrators
Oursell our solutions, products, and platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services or devicesthrough a direct sales force, with strategic partners 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. Our portfolio includes: cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging and identity/access management that enable communications service providers, or CSPs, cable operators/multi-services operators, or MSOs, and original equipment manufacturers, or OEMs,in collaboration with embedded connectivity (e.g. smartphones, laptops, tablets and mobile Internet devices, or MIDs, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices.
Divestiture of Call Center Operations
During the course of 2016, we strategically began the process of selling our traditional activation business. As part of this effort in late 2016, we divested a large portion of our Activation business to Sequential Technology International or STI, a newly formed company, to leverage the assets sold as part of this transaction to STI's existing global customer care operations. STI is 70% owned by Sequential Technology International Holdings, an unrelated third party that was formerly named Omniglobe International. Omniglobe has been serving many leading carriers and legal entities around the globe, including customers like AT&T for over 10 years. We retained an approximate 30% ownership in STI. Our remaining traditional activation software assets and application programming interfaces orAPI's will help facilitate new innovative platforms, aimed at accelerating the adoption of cloud and digital services for carriers and other customers. The divestiture of the service portion of the Activation business created a better overall solution for our customers as STI is positioned to capitalize on the combined experience of both teams and is expected to become a strong, global player, building on over a decade of call center operations.
Synchronoss Platforms, Products and Solutions
We provide platforms and solutions to help service provider and enterprise customers realize their own visions of mobile transformation in a variety of different areas within their respective businesses. We represent categorical points of entry for our customers to transformresell services to their relationships with subscribersend customers and employees.
As mobile technology continues to transform the service provider and enterprise markets the value ofsubscribers. Our sales professionals are well versed in our platforms, products and solutionsservices with an understanding of market trends, demands and conditions that our current and potential customers are facing.
Marketing
The Synchronoss marketing team’s mission is transforming alongto deliver the right strategy, tools, and customer acquisition initiatives to accelerate our growth. The team uses a combination of product-specific and company-wide marketing messages and initiatives that leverage digital marketing campaigns, sales support materials, social media, and PR to generate top of the funnel business-to-business (“B2B”) sales leads for the sales team. As a result, they play a vital role in promoting our products, discovering new markets, and driving brand awareness in the North America, EMEA, and APAC regions.
The Marketing team also supports our customers’ direct-to-consumer (D2C) marketing efforts for all global cloud deployments. In partnership with it and enabling our customers, to thinkour go-to-market and stay one step aheadawareness campaigns consist of their competition. One common evolutionary shift liesa digitally-led omnichannel approach at critical moments in the valuesubscriber’s purchase lifecycle; including online checkout, retail transactions, customer care interactions, out-of-box setup experiences, and in-app notifications for devices that have our cloud app preloaded.
What We Deliver - Our Platforms
The Synchronoss Experience (syncX) is a premium is placed on data security. We are able to use our platforms in powerful combinations to not only make more effective use of data such as messaging, user generated content, secure applications and sharing, but also to analyze that data to create new opportunities for our customers.
Our cloud, messaging, security, collaboration, work flow management, predictive analytics and activation platforms are designed to be highly stable, secure, scalable and automated, managing transactions relating to a wide range of existing communications and digital content services across our customers. For example, we enable wireless providers to conduct business-to-consumer, or B2C, business-to-business, or B2B, enterprise and indirect channel (i.e., reseller/dealer) transactions. The capabilities of our platforms are designed to provide our customers with the opportunity to improve operational performance and efficiencies, dynamically identify new revenue opportunities and rapidly deploy new services. Our platforms are also designed to provide customers the opportunity to improve performance and efficiencies for activation, content migration and connectivity management for connected devices.
Our platforms power integrated setscollection of products that create repeatable, tailored deployments for Consumer and Enterprise customers. Many of these products are customized byhelp our customers into specific solutions that play instrumental rolescreate a positive brand experience throughout the subscriber lifecycle. SyncX keeps people, systems, networks, and content in helpingsync to enable a better, more engaging experience.
EngageX products keep subscribers engaged with brands, content and people they love. When loyalty and revenue is won and lost through every experience, it is critical to offer value-added services subscribers love. Our Cloud and Messaging experiences grow, inspire, and build loyalty with our customers transform their relationship with their subscribers, partnerscustomers’ subscriber base.
Synchronoss Personal CloudTM Platform
The Synchronoss Personal CloudTM solution is designed to create an engaging and employees. This approach gives ustrusted customer experience through ongoing content management and engagement.The Synchronoss Personal CloudTM platform is a common technical foundation from which we can match productssecure and solutions to flexibly solve the challenges of mobile transformation based on the needs of a variety of customer types, market dynamics and strategies.
Enterprise Solutions
Our Synchronoss Enterprise solutions support an advanced digital mobility experience for businesses and consumers enabling the accessing and protecting of 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 regarding individuals' behaviors by capturing who they are, what they are doing and how, where and when they are doing it. By doing this, our platforms help reduce fraud, improve cybersecurity detection/prevention and overall productivity. Our identity and access solution supports consumers by allowing them to self-register and verify their identities, while providing non-intrusive multi-factor authentication. At the same time, our identity and access solution enables businesses to be sure that the person at the other end of the transaction is the correct person. Our secure mobility solution combines the identity platform with a “bring your own device,” or BYOD,highly scalable, white label platform that is based on a secure container for accessing data, applications,allows our customers’ subscribers to backup and protect, engage with, and manage their personal content and personal information management tools like email, calendar, messaginggives our operator customers the ability to increase average revenue per user (“ARPU”) and notes.reduce churn.
Our Synchronoss Enterprise solutions offer a best-in-class technology platform with purpose-built industry solutions that drive business outcomes for Enterprise customers including: improved employee productivity in a secure environment, greater agility and responsiveness to consumers, higher consumer loyalty and enhanced revenue opportunities, as well as proactively anticipating regulatory data/retention and privacy requirements. There are currently three primary components to this platform, which drive a secure digital online experience in select Enterprise vertical markets:
Secure Mobility Management: A BYOD implementation that provides the rich integration and orchestration of secure mobile productivity software featuring fine grain activity capture and dynamic policy execution through best in class mobility management, security and policy management tools and intelligent productivity through behavioral analytics.
Data and Analytics: A solution that supports fraud and cybersecurity detection/prevention, dynamic policy administration/execution and predictive productivity.
Identity and Access Management: A solution that allows customers to self-register and verify their respective identities while providing non-intrusive multi-factor authentication, which provides businesses with the assurance that the consumer with whom they are interacting is the person authorized to conduct the transaction.
Our Synchronoss Enterprise solutions are targeted, initially at the following markets:
•Financial Services: Capital markets, banking and insurance
•Telecommunications: CSPs
•Healthcare: Providers and payers
•Life Sciences: Pharmaceuticals, device manufacturers and clinical research organizations
•Government: Federal and State governments and government agencies
Synchronoss Personal Cloud
Our Synchronoss Personal Cloud platform is designed to deliver an operator-branded experience for subscribers to backup, restore, synchronize and share their personal content across smartphones, tablets, computers and other connected devices from anywhere at any time. A key element of our Synchronoss Personal Cloud platform is that it extends a carrier’s or OEM’s visibility and reaches into all aspects of a subscriber’s use of a connected device. It introduces the notion of Connect-Sync-Activate for all devices. Once connected, most users of mobile devices avail themselves of content synchronization from the Cloud using policies that are appropriate and applicable to each specific device. Our Synchronoss Personal CloudTM platform is specifically designed to support connected devices, such as smartphones, MIDs,tablets, desktops computers, laptops, tablets and wirelessly enabled consumer electronics such as wearables for health and wellness, cameras, e-readers, personal navigation devices and global positioning system, or GPS, enabled devices,TVs, security cameras, routers, as well as connected automobiles.automobiles and homes.
Messaging Platform
Synchronoss’ Messaging platform powers mobile messaging and mailboxes for hundreds of millions of telecommunication subscribers. Our Synchronoss Personal Cloud solution features products that facilitate the transfer of mobile content from one smart device to another and the sync, backup, storage, content management and content engagement features for mobile content.
Our Synchronoss Personal CloudAdvanced Messaging platform is linkeda powerful, secure, intelligent, white label messaging platform that expands capabilities for communications service provider and multi-service providers to offer P2P messaging via Rich Communications Services (“RCS”).Our Mobile Messaging Platform (“MMP”) is poised to provide a family of clients designedsingle standard ecosystem for onboarding and management to enable a persistent relationship between a subscriberbrands, advertisers and his or her content across devices and time. message wholesalers.
•Advanced Messaging: Our Advanced Messaging platform supports clientsrich messaging channel in both RCS and data backupother Real-Time Communication (“RTC”) and enables rich, P2P communications and creates new commerce and revenue opportunities across major operating systems including: IOS, Android, Windowschannels via A2P experiences for our customers and worksother brands. Our messaging platform operates in tandem with mobile smart devices, tablets and PCs/Web. Our platform also supports the backup, sync, upload and download of data classes including photos, videos, music, messages, documents, contacts and call logs. Our clients may also feature interactive features intended to stimulate daily use of our platform such as Groups Spaces, smart push notifications, advanced sharing capabilities, smart album creation with more being added over time. Our Synchronoss Personal Cloud platform and clients may also be integrated with select third party providers to co-opt features that drive third party application and service engagement, a feature that is designed to provide future monetization opportunities to third parties and carriers.
Our Synchronoss Personal Cloud platform also has the ability to intelligently analyze a subscriber’s user generated content through image tagging, object and facial recognition,Messaging-as-a-Platform (“MaaP”) Messaging Marketplace as well as metadata including location, timededicated, third-party clients and date, sharingnative original equipment manufacturer (“OEM”) clients, providing an end-to-end messaging platform and other data profiles. This information drives an enhanced user experience allowingmonetization tools to the operators, Communications-Platform-as-a-Service (“CpaaS”) players and brands.
•E-Mail: Our Email suite provides service providers with a secure, white label, back-end framework for smart features such as flashbacks, smart albums, etc., which also allows subscribersa branded email service that provides the opportunity to effectively search a massive data base of content to find just the right piece of content without browsing. However, we derive the most value from this content through our ability to apply Synchronoss Analytics to analyze the context in which a subscriber collects content. This informationintroduce and promote services that can be used by our customersmonetized.Our carrier branded Email Suite solution offers leading anti-virus and anti-spam and malware technology to create valuable incremental targetingkeep the integrity and security of subscriber interests, creating a context that adds to the future monetization potentialcustomer experience and protection of subscriber data according to ourcarrier standards. Our Email solution is an important repository for critical communications with an intuitive and feature-rich mobile and desktop email experience ensuring stickiness and increasing customer lifetime value.
OnboardXproducts simplify subscriber onboarding and drive service provider customers’ strategiesadoption at scale.The first impression of a new product or service can either make or break your subscriber relationship. A poor onboarding experience leads to revenue losses and policies.customers feeling stranded. Our customizable service activation, content backup, and device setup experiences make onboarding frictionless.
Synchronoss •Mobile Content Transfer
:Our Synchronoss Mobile Content Transfer® solution is an easy to useeasy-to-use product thatwhose client enables a secure, peer-to-peer, wireless transfer of content from one mobile smart device to another in a carrier retail location or at home/work, etc. Our solution supports secure mobile content transfer across major operating systems including IOS, Android and Windows. Our Synchronoss Mobile Content Transfer solution can transfer select data classes that may include photos, videos, music, messages, documents, contacts, and call logs, across operating systems with varying degreesincluding iOS and Android.
•Out of the platform.
Synchronoss Backup & Transfer
Box Experience: Our Synchronoss Backup & TransferOut of Box Experience solution is a variation of our Synchronoss Mobile Content Transferdevice setup solution that offersassists customers in setting up the same peer-to-peer transferfeatures of select data classes across smart mobile devicestheir new device, including Wi-Fi, email, social network accounts and major operating systemsvoicemail, as well as prompting restoration of content and enrollment in a cloud service. It also offers the ability to send supported data classes that may include photos, videos, music, messages, documents, contactshighlight programs and call logs uprevenue generating initiatives during the setup process, such as loyalty programs, third-party partnerships and value-added services.
NetworkXproducts streamline networks to be more efficient and profitable. In a world where subscribers expect seamless connectivity and zero network interruptions, delivering superior network quality can be complex and costly. Our physical network asset management, off-network procurement, and expense control solutions reduce the cloud for temporary storagecomplexity and then the ability to restore that content back onto that same device or to a new devicecost of network management.
The Synchronoss NetworkX products provide operators with the same subscriber. This capability supports care channel use cases of securing content during a device wipetools and also creates a value-added solution insoftware to design their physical network, streamline their infrastructure purchases, and manage and optimize comprehensive network expenses for leading top tier carriers around the case of lost devices, cracked screensglobe.
•spatialNX: Our spatialSUITE provides enterprise-wide access to timely, accurate and comprehensive network information – including physical location, specifications, attributes, connectivity and capacity – for every inside-plant and outside-plant asset. It delivers data across the enterprise to support provisioning, planning and design, construction, fault and event management, work order management, customer service, marketing and other edge use cases. Furthermore,critical business functions.The automation and ease of integration of our Synchronoss Backup & Transfer solution enables the subscriber to establish a cloud account at the point of transfer and an auto sync capability to keep content backed up to the cloud account going forward. This unified experienceplatform is designed to drive cloud enrollment atenable our customers to lower the pointcost of transfer (often duringnew subscriber acquisitions and enhance the accuracy and reliability of customer transactions.
•ConnectNX (iNOW): Our iNOW provisioning system eliminates manual handling of service orders and manages the full order lifecycle between customer and supplier via automation and rules-based validation. iNOW includes an interface that powers bulk provisioning needs and an open API to seamlessly integrate to other carrier systems.iNOW also provides an electronically bonded gateway platform enabling rapid electronic order confirmations and status updates between bonded carriers.Finally, completed order information flows to Financial Analytics providing integrated and automated order to billing reconciliation functionality.
•ExpenseNX: Our Financial Analytics Platform is a new line or upgrade)comprehensive application suite that helps operators reduce costs, mitigate risks, enforce financial compliance and provide an opportunity to get content intocontrols, and increase operational efficiencies.Financial Analytics ingests any supplier invoice (in any format) through a unique software-driven process – with 100% of the Cloud to reduce the time of transfer for the next upgrade.detail.Invoices are managed via automated audit and payment workflow tightly coupled with a software driven dispute management lifecycle, providing a true procurement-to-payment process on network expenses and disputes across a carrier’s organization.
What We Deliver - Our Services
Synchronoss Messagingoffers professional services including consulting, installation and deployment, configuration, customization, systems integration and support to ensure our customers’ successful deployment and utilization of our products and solutions.
OurProduct Development
At Synchronoss Secure Messaging platform was designed for demanding large-scale environments, with optional advanced email features.we have focused our product development efforts on expanding the functionality, scalability and security of our products and solutions. We cover expect our research and development investments to increase as we intend to continue on an aggressive path to develop new features and functionality, upgrade and extend our product offerings and develop new technology.
Intellectual Property
We rely principally on a combination of trademark, copyright and patent laws in the spectrum when it comes to multichannel messaging, security, identity management,United States and customization solutions, enabling service providers to transform emailother jurisdictions in which we do business, as well as confidentiality procedures and messaging from cost centers to revenue generators. With an approximate 35% market sharecontractual provisions, which protect our proprietary
information, technologies and more than 400 million mailboxes installed worldwide, we believe that we are the premier partner for service providers around the globe.strategies. We also partnercultivate a culture which encourages creativity and innovation amongst our employees by maintaining a patent award program, hosting events such as an annual Innovation Jam and periodic “hackathons.” We believe this facilitates the development of new features, functionality and products, which are essential to establishing our solutions as the leading solutions in the industry. We enter into proprietary information and invention agreements with various companies for best-in-class traffic management, anti-virus, anti-spam, and anti-malware technology.
Our Universal Messaging Suite is an email platform for expanding service provider subscriber bases and adding new revenue streams. It is an easy-to-use, end-to-end solution to make sense of different data and communications from a service provider. Our Universal Messaging Suite is a feature-rich, reliable and secure messaging solution that is available on any device and provides integrated email, chat, voice and video messaging. The useall of our Universal Messaging Suite drives fewer customer service calls due to increased reliability. Our Universal Messaging Suite is a single messaging platform rather than separate infrastructures for back-end, front-endemployees and security.consultants during the onboarding process and non-disclosure agreements with all third parties.
Our UX Suite 2.1 is an intuitiveIn the United States, as of December 31, 2022 we had 71 patents issued and easy-to-use email interface that is accessible on all smartphones, tablets7 patents pending. Internationally, as of December 31, 2022 we had 75 patents issued and desktop devices. The user interface, 6 pending. We hold and/or UI, applies to emails, contacts, calendars, and tasks. Our UX Suite 2.1 delivers highly intuitive and feature-rich mobile and desktop email experiences that match what any over-the-top, or OTT, providers offer and can be fully customized to provide a more engaging mobile and desktop email experience for service providers. Additionally, we also provide professional services program support in writing new feature functionality requirements, omni-channel strategy documents or use-case sequence diagrams. Our UX Suite 2.1 features include:
full productivity information management suite, including mail, contacts, calendar, tasks, alerts, and invites
multiple mail views, including top and right reading panes and contextual toolbars with drop-downs
inline media preview for Microsoft Office documents, PDFs, images and videos within mail
multiple address book support with quick action icons, contact search and alphabetical quick view
aggregated email management from external accounts (e.g., Gmail, Hotmail, Yahoo or any other POP/IMAP)
adaptive touch screen navigation (scroll, swipe, refresh) for fast mobile experiences
access to native mobile device APIs, such as camera and photo albums
advertising ready for integrating third-party applications and value-added services
optimization for large mailbox load/search/sort from any device
Synchronoss Analytics
Our Synchronoss Analytics platform is a cloud-based SaaS, platform that improves customer experience, retention, acquisition, monetization and financial performance. Our Synchronoss Analytics platform analyzes substantial volumes of data from internal and external sources to deliver daily business insights to our customers’ executives and leverages data science, machine learning, artificial intelligence, or AI, and workflow automation while integrating with internal systems to deliver insights around customer behavior, sentiment and operational performance. Our Synchronoss Analytics platform drives significant financial benefits to our service providers and enterprise customers and plays a key role in their efforts to monetize content and customer data in this era of digital transformation.
Our Synchronoss Analytics platform provides the following categories of functionality:
Automated Data Generation - A data generation system that processes tens of thousands of variables to produce advanced insights for use in monetizing Internet of Things, or IoT, initiatives by ingesting data from network devices, their usage, health, connectivity, alarms, behavior and more.
Self-Learning Capabilities - Automated monitoring and feedback software that adapts and learns from generated data in order to create the most valuable and up-to-date insights on an ongoing basis. This functionality precludes the need to update analytics systems, which would require the completion of expensive, labor-intensive and time-consuming projects.
Repeatable Insight Delivery - As opposed to standard analytics applications that require constant reassessments and rebuilds, our Synchronoss Analytics platform provides repeatable insight delivery with an easy-to-operate user interface.
Data Processing Engine - Our Synchronoss Analytics platform creates a robust, highly repeatable, scalable analytic data set upon which insights are continually generated.
Measuring and Monitoring - By measuring and monitoring progress, our Synchronoss Analytics platform automatically learns and applies what it learns to improve the functionality of the analytics software.
Predictive Analytics Engine - Our Synchronoss Analytics engine employs the most advanced and mature algorithms to create predictive and prescriptive insights to use for IoT business and operational purposes.
Our Synchronoss Analytics platform helps marketers at our service provider customers target prospective customers more effectively and efficiently, while also proactively:
improving customer retention
identifying cross-sell and upsell opportunities
improving the performance of marketing campaigns
identifying the Next Best Action for each customer
growing customer lifetime value
delivering prescriptive insights to drive customer-centric business strategies such as acquisition, cross-sell and retention
identifying customer profiles dynamically to increase each marketing campaign’s success
simplifying the ability to take marketing actions by integrating with downstream systems such as campaign management and customer care
driving results and constantly measuring return on investment customer-centric metrics and scorecards to support campaign execution
Our Synchronoss Analytics platform is accessible from the Synchronoss Cloud and can be integrated directly into a service provider’s business and operational support systems, or BSS/OSS. Unlike internal solutions that can take up to 24 months to build, Synchronoss solutions can be operationalized in a short time period - approximately 90 days. Our Synchronoss Analytics platform automatically provides a service provider's customer care representatives with distinct prescriptive actions to takepursuing patents in the customer’s specific set of circumstances.
United States, Germany, the United Kingdom, France and Spain and we may seek additional jurisdictions to the extent we determine such coverage is appropriate and cost efficient. Our Synchronoss Analytics platform integrates easily with back-end systems through the use of web services APIs and batch processing. This is instrumental for faster integration with additional applications, systems and processes including:
ordering new products,
queuing applications to enhance the customer retail experience,
call center enhancements/optimization for calls to customer service/care,
social network care teams,
Cloud customer service apps,
service-on-demand mobile apps for customer callbacks,
timely technician appointments (truck rolls),
mobile apps to track technicians,
product returns
partnerships with logistics firms.
Synchronoss Financial Assurance
Our Synchronoss Financial Assurance platform is offered as either a secure cloud or license-based application suite. Key features of this platform include:
management of network partners and transactions,
data loading and normalization,
consolidated and central database forissued patents cover all network infrastructure expense,
automated and user-configurable audits and alerts that quantify billing errors and let customers proactively manage their vendors and reduce expense,
approval workflow that mirrors the financial checks and balances that customers use throughout their organizations,
automated general ledger coding/accounting for accurate cost allocation,
seamlessly integration into enterprise resource planning and accounts payable systems.
Synchronoss Activation Services
Our Synchronoss Activation Services platform is a scalable and flexible platform that decouples the order processing customer experience from varied and legacy information technology, or IT, back office order management systems. Our platform enables sale, delivery and assuranceaspects of our customers’ new “complex product” bundles quicklybusiness including cloud, messaging,e-commerce, and inexpensively, creating a uniform product portfolio and pricing schema across all of their sales channels and reducing their costs while improving the customer experience through reduced error rates and throughput time in processing orders, alarms, etc. Our platform is fully scalable, agile and adaptable to future products, services and channel changes, serving as a future-proof activation platform with end-to-end channel visibility and analytics and featuring a flexible commercial model. We sell this platform either on a SaaS basis or as a product license sale with accompanying professional services.security.
Demand Drivers for Our Business
Our productsWith faster/higher speeds, lower latency, more capacity, enhanced security and better reliability, 5G capabilities will enable new use cases, applications and business models that were not possible before. Consumer demand for these features alone will shape how Operators offer 5G services and Operators in turn have the opportunity to monetize and earn differentiated revenue streams. According to Market Research Future, Mobile Value-Added-Services (“VAS”) are capable of managing a wide variety of transactions across multiple customer delivery channels and services, which we believe enables usset to benefit from increased growth, complexity and technological changehit $309.1 billion by 2025. The transition to 5G provides an opportunity to strengthen their position in the communications technology industryconsumer market and function as a service enabler by bundling VAS into premium offers. Service providers should also become service creators by developing new, immersive products under their own brand. In either case (branded and partner services) powering digital bundles and simplifying onboarding, consumption, billing, and authentication of VAS will drive higher adoption of premium 5G service plans and ARPU.
Beyond being a buzz word or strategy, 5G is the next wave in severalCommunication Service Providers’ technological future.In 2023, we expect to see continued adoption of 5G use cases and Operators starting to reap returns on their investment in 5G technology. According to Ericsson1, 5G subscriptions grew by 70 million during the first quarter of 2022 to around 620 million and are expected to surpass 1 billion by the end of 2022. In 2027, it is projected that North America will have the highest 5G penetration at 90 percent. 5G adoption among mid-tier smart phones also continues to abound with new devices and capabilities as evidenced by the numerous device demonstrations we saw at Mobile World Congress 2022.
5G will also usher in many more connected device types. In fact, according to the “Deloitte 2021 Connectivity and Mobile Trends Survey”, the average US household has 25 connected devices across 14 categories, up from 11 categories when last measured in 2019. In addition, the number of connected devices globally is estimated to reach 38.6 billion in 2025, up from 22 billion in 2018. More devices will lead to more vulnerabilities around privacy, data, and hardware protection. Consumers have made it clear; they want to understand and feel confident about how their data is being used. Service providers have proven themselves true stewards of consumer data protection and privacy, and therefore differentiated as the market continues to develop. As the provider of both the mobile network and fixed wireless connectivity, service providers are uniquely positioned to become the trusted end-to-end solution of total protection services for subscribers both at home and on the go. The consumer demand around personal cloud data protection, hardware insurance, home and network security will allow service providers to capitalize on their trusted relationship with consumers.
As 5G becomes more saturated in the marketplace, it will drive a need to address the growing cyber-risks that ubiquitous, always-on high-speed access present to organizations. Operators have taken steps to secure the technology's transmission or network segments; however, the threats posed by the endpoints connecting to those networks and the data resident upon them provide a unique opportunity to develop technologies to address this gap. The addressable market for device protection and cloud data storage for these connected devices will continue to increase and presents a hole in coverage that the average consumer still needs to recognize. Organizations that provide services and software for 5G networks, providers, and consumers are in an enviable position to offer security services to ensure the integrity and availability of the enterprise markets we are targeting. As the communications technology industry evolves, new access networks,data generated by those connected devices and applications with multiplesecurity services to protect those devices. Consequently, as we enter the next 12-18 months, operators and modes are emerging. More significantly, the accumulation of multiple connected devices per subscriber is creating new opportunities for network and cloud-driven service continuity. This proliferation of services and advancement of technologies is accelerating subscriber revenue growth, significantly expanding the types and volume of rich content accessed and stored by consumers and increasing the number of transactions between our customers and their subscribers. The technology advances are also continuing the demand for our productsproviders will look to this whitespace to boost functionality and services infor their customers to position themselves as the enterprise market segment, especially in the financial and life science sectors. Key elementssecurity provider of choice for consumers for 5G-connected devices.
We believe our demand drivers include:
New and Richer Operating Systems and the move to 4G-LTE Networks
Device operating systems like iOS for the iPhone/iTouch/iPad portfolio, Android produced by Google, Windows mobile devices, and BlackBerry OS for the BlackBerry portfolio have accelerated the adoption and usage of smartphones. Other growing markets are in smart wearables and connected vehicles. Apple has watchOS and CarPlay, while Google has Android Wear and Android Auto, respectively. According to IDC, the smartwatch market has a compounded annual growth rate or CAGR of about 43% from 2015-2019. For connected vehicles, BI Intelligence forecasts that 82% of all cars shipped in 2021 will be connected, representing a CAGR of 35% from 2016. In addition, the continued growth of 4G-LTE networks is expected to improve the customer experience with connected devices given the network’s higher data speeds and reduced latency. In addition, devices such as mobile routers and tablets can generate mobile hotspots. With fixed mobile broadband, mobile carriers and MSOs can also offer bundled services. At the same time, these networks are also focused on enhancing machine to machine communications.
Increasing Mobile Adoption Worldwide
According to estimates by the International Telecommunication Union in 2016 there were 3.6 billion active mobile-broadband subscriptions in the world, representing 49.4% of the global population, and this number is expected to reach approximately 12% fixed-broadband penetration globally by 2017.
The massive penetration of smart devices in developing countries is causing a modernization of networks and IT capabilities in markets previously dominated by feature phones and standard telephony services. The nature of smart devices is to drive a massive increase in data utilization of high bandwidth networks, an increase in messaging and the creation of user generated content, or UGC, all of which lead to the need for Synchronoss products, solutions and platforms on a new scale to markets that are rapidly catching up to mobile transformation.
The Rise of User Generated Content
As smart phone data use grows, so does the creation of UGC such as pictures, videos and memes. The accumulation of UGC on mobile devices (where 1 trillion photos were taken in 2015) is on pace to outstrip UGC in computer hard drives. This creates a dilemma for users in terms of stranding content that is often perceived as being more valuable than their own device. At the same time, this proliferation of UGC also presents a formidable challenge when it comes to transferring content from device to device in retail. Our Synchronosswhite label Personal Cloud platform solves both of these problems while improving customer loyalty, customer satisfaction and retail efficiency.
Big Data and Monetization
Along with the accumulation of UGC and messages,helps service providers are accumulatingaccelerate the adoption of 5G service and total protection plans. The next generation Personal Cloud gives operators a new way to create, deliver, engage, and monetize more personalized experiences and more data from all areas ofoffers for their network. The collection of this data adds breadth to already deep customer data they maintain that is aimed at supporting their ability to deliver relevant offers to specific customers. Together, this data creates rich context creating a robust profile around millions andsubscribers. When operators have millions of subscribers. Service providers are starting to develop new ways to use “Big Data” to fuel valuable targetingactive users leveraging cloud, it
becomes a channel for mobile ads and add new revenue streams to their existing service revenue lines. Our Synchronoss Analytics platform is used to create new insights on carrier data and add to the value of ad targeting. Our white label cloud and messagingcross selling security services, create additional rich context to add to our carrier customers’ already robust data. According to ABI Research, mobile operators will devote more than $50 billion to Big Data and machine learning analytics through 2021.
Messaging and the Consolidation of Email and Over The Top Players
Messaging such as e-mail is a standard offering provided by service providers to their subscribers. Recent consolidation of email providers in the global market is prompting a reconciliation of this offering across the globe. Messaging as a medium is moving beyond standard email and is fast becoming an interface for commerce. Service providers are seeing usage and monetization declining as a result of the rise in"over the top" or OTT messaging players such as Facebook, Line, What’s App, We Chat and others who are using advanced messaging to create commerce opportunities to give subscribers visibility to smart transactions within a sticky, high frequency environment. Chat bots, operating on artificial intelligence 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. According to Gartner, by 2020, the average person will have more conversations with bots than with his or her spouse.
Our track record of providing scalable, secure, white label email solutions to service providers provides a viable alternative to smaller providers or OTT partners. Service providers are not adopting new messaging clients to compete with highly competitive and viral OTT players; instead they are adopting the monetization techniques used by those players to extend subscriber information into third party applications and chat interfaces, creating stickier commerce opportunities. Our customers are using our Synchronoss Messaging platform, especially in the Asia Pacific market, to evolve service provider messaging into a cloud-centric commerce offering utilizing personal cloud, identity managementinsurance, merchandise like prints & gifts, and other advanced messaging protocols that will open up new revenue streams and allow service operatorscarrier services, leading to compete with OTT providersa significant increase in new ways.
Pressure on Customers to Improve Efficiency while Delivering a Superior Subscriber Experience
Increased competition, recessionary markets and the cost of network capacity have placed significant pressure on our customers to reduce costs and increase revenues. At the same time, due to deregulation, the emergence of new network technologies and the proliferation of services, the complexity of back-office operations has increased significantly. Customers with multiple back-end systems are looking for ways to help their systems interoperate for a better customer experience. In addition, customers are moving to automated provisioning systems that enable them to more easily purchase, upgrade or add new features, applications and content.
ARPU. As a result, we believe our customers are looking for waysfostering new partnerships, building exciting new capabilities, and now enabling subscribers to offer new communications services more rapidly and efficientlyprotect the home. Giving subscribers the ability to protect hardware investments with insurance plans, protect their existing and new customers. Increased competition and the demand for a superior subscriber experience have placed significant pressure on our customers to improve customer-centric processes. CSPs are increasingly turning to transaction-based, cost effective, scalable and automated third-party solutions that can offer guaranteed levels of service delivery.
Digital Transformation and Mobile
Today nearly all businesses are involved in some form of digital transformation to drive profitability, growth, innovation and customer and employee satisfaction. According to Forrester, digital transformation budgets will edge up into the billions of dollars.We provide essential, white label technologies to help service providers realize the digital transformation that we believe drives a 2x output in immediate gratification, omni-channel personalized service and customer ease and convenience of dealingfamilies from cyber threats with carriernetwork-based security services, and networks. Our enterprise customers realize similartheir personal content - with cloud, will differentiate the value in meeting the expectationsproposition of their employees by offering them solutions that address productivity, enable BYOD5G service plans and facilitate these employees doing business from anywhere.deliver significant brand value for our customers.
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Security Fraud and Cyber Threat Detection and Prevention1Ericsson June 2022 Mobility Report
Every year, there is an increase in the prevalence of threats against consumers and companies from a variety of sources. The main point of attack are the user credentials that are used to access applications and commerce sites. As a result, it has become critically important to assure complete confidence in the identification and authentication of users. We believeCompetition
Competition across our focus on security with respect to our products, especially our products focused on the Enterprise markets is leading to a strong demand for our products worldwide.
Consumer Identity Verificationincredibly diverse, dynamic and Authentication
Consumers today are burdened with having too many username and passwords to manage across their personal and professional lives. They are looking for simple safe and secure identity and authentication methods. Through our joint venture with Goldman Sachs, our identity and access solution supports consumers by allowing them to self-register and verify their identities, while providing non-intrusive multi-factor authentication.
Growth Strategy
Our growth objective is to establish our platforms as the de-factonuanced in an increasingly interconnected landscape of rapidly changing technologies, evolving industry standards, for enabling mobile transformation with service provider (CSPs, MSOs, OEMs, multi-channel retailers)new product introductions and enterprise customers (secure vertical markets including Financial, Telecommunications, Healthcare, Life Sciences, Government, etc.). Our strategy is to expand our customer base by vertical market using our existing platforms to enable large scale product deployments while investing in organic and/or inorganic logical extensions of our productconverging spaces and services portfolios. We will continue to focus our technology and development efforts around improving functionality, helping customers drive higher average revenue per customer and subscriber retention, embracing alternative channels and allowing more capabilities for ordering bundled applications and content offerings across these same complex and advanced networks.
Key elements of this strategy are:
Expand our Product Portfolio to Service Providers. Given the explosive growth of connected mobile broadband devices and the increasing need to backup, restore and share content across those devices, our objective is to play a vital role in monetizing those devices with our Connect-Sync-Activate strategy. Methods of monetization may include licenses per device, maintenance fees, professional service fees, active user fees as well as data storage fees. Our prior acquisitions of cloud, analytics and messaging platform providers have enabled us to expand the functionality of our Synchronoss Personal Cloud, Synchronoss Messaging and Synchronoss Analytics platforms. We have also improved the scalability of these acquired platforms to offer a more robust solution to our customers. Once one of our deployments reaches critical mass, we believe we will be able to integrate other solutions to generate additional revenue creating new solutions and generating offers from service providers and other customers.
Expanding into the Enterprise Cloud. Following up on the success of our Synchronoss Personal Cloud offering, we have also leveraged this platform to support the increased need for cloud-based document sharing and collaboration needs in the Small and Medium Business, or SMB, area. SMBs rely heavily on CSPs for support of new trends, such as BYOD. Our Synchronoss WorkSpace offering, combined with our newly-acquired Intralinks offering and our Orbit platform, which we acquired through our Goldman Sachs joint venture are ideally suited for these types of situations, as they are designed to assure an IT manager that the organization’s employees can enhance productivity by using their own mobile devices, while still complying with the organization’s internal security and other IT policies. In addition, our Intralinks business has traditionally sold products directly into both SMB and large-scale enterprise organizations and we plan to leverage these relationships to sell our enterprise solutions.
Expand Presence of Consumer Products Into New Geographic Markets. Although the majority of our revenue has traditionally been generated in North America, we continue to expand globally, especially with our recent acquisitions of Intralinks and Openwave Messaging, which have helped expand our operations and customer engagements globally in EMEA, Latin America and the Asia Pacific region. We believe that the growth of connected devices will further drive opportunities to penetrate new geographic markets within the coming years. The Asia Pacific and Latin America regions are of particular interest, as these markets experience similar trends to those that have driven growth in North America and EMEA.
Broaden Customer Base and Expand Offering to Existing Customers. As our existing consumer customers continue to expand into new distribution channels, such as the rapidly growing e-commerce channels, we expect that they will likely need to support new types of transactions that are well suited to being managed by our platforms. In addition, we believe our customers will require new transaction management solutions as they expand their subscriber customer bases, which will provide us with opportunities to drive increasing amounts of transaction volume over our platforms. Many of our customers purchase multiple services from us and we believe that, with our recent acquisition of Intralinks and Openwave Messaging, we are well positioned to cross-sell additional services to customers who do not currently purchase our full services portfolio.
Expand into Emerging Devices and Internet of Things Space. Various forecasts from industry leading sources have cited explosive growth in the non-traditional connected devices space. These devices include connected cars, connected homes, health and wellness devices and the health care domain. We plan on expanding our cloud platforms (focused on storing data from the varying devices to be stored securely in the cloud), in an effort to capitalize on the growth emerging from these new opportunities.
Maintain Technology Leadership. We strive to continue to build upon our technology leadership by continuing to invest in research and development to increase the automation of processes and workflows and develop complementary product modules that leverage our platforms and competitive strengths. By doing this, we can drive increased interest by making it more economical for customers to use us as a third-party solutions provider. In addition, we believe our close relationships with our customers will continue to provide us with valuable insights into the dynamics that are creating demand for next-generation solutions.
Leverage and Enforce our Intellectual Property. We have a significant repository of granted and filed intellectual property, including over 100 issued patents. We expect to use these assets as a differentiator of our products and services in the marketplace. We rely on a combination of our patents, trademarks, copyrights and trade secrets in the United States and throughout the world, as well as confidentiality procedures and contractual provisions, to protect our proprietary technology and our brand. We will continue to assess appropriate occasions for seeking patent and other intellectual property protections for those aspects of our technology and service that we believe constitute innovations providing significant competitive advantages.
Customers
We maintain strong and collaborative relationships with our customers, which we believe to be one of our core competencies and something that is critical to our success. For our cloud and activation businesses, we are generally the only provider of the services we offer to our customers. Contracts for our cloud and activation business extend up to 60 months from execution and include minimum transaction or revenue commitments from our customers. All of our significant cloud and activation customers may terminate their contracts for convenience upon written notice and in many cases payment of contractual penalties. The contractual penalties we received for the years ended December 31, 2016, 2015, and 2014 were immaterial to our statements of income.
Each of AT&T and Verizon accounted for more than 10% of our revenues for the years ended December 31, 2016, 2015, and 2014, with AT&T and Verizon, in the aggregate, representing 62%, 71% and 67% of net revenues for the years ended December 31, 2016, 2015, and 2014, respectively. Although in December 2016, we divested our activation call center business, which included a portion of the services that we historically provided to AT&T, we will continue to generate revenue from AT&T from our activation software and professional services. We have Statements of Work for each of the Verizon and AT&T businesses that we support which typically run for 12 to 36 months. Although Intralinks has a diverse customer base and we expect that revenue from our Intralinks business will comprise a significant portion of our going forward revenue, the loss of either AT&T or Verizon as a customer would have a material negative impact on our company. We believe that if either AT&T or Verizon were to terminate their relationship with us, that they would encounter substantial costs in replacing Synchronoss' solutions.
Sales and Marketing
We continue to develop a sales and marketing capability aimed at accelerating the adoption of our solutions by expanding penetration of existing industries, capitalizing on new opportunities in underpenetrated or emerging markets and by selectively increasing our geographic coverage.
We sell our services through a mix of field representatives, a direct sales force, a referral network and a select group of strategic and channel partners. Our sales representatives have extensive experience selling technology solutions into a wide variety of industries including communications, financial services, healthcare, insurance, legal and life sciences. Our sales teams are well trained in our platforms, products and service offerings and are instrumental in working with our customers to shape the solutions that are material to the growth of our current and prospective customers’ businesses based on the market trends and conditions that they are facing. This enables our team to easily identify and qualify opportunities where deploying one or more of our platforms would be appropriate and beneficial to prospective customers.
Following each sale, we assign account managers to provide ongoing support and to identify additional sales opportunities. Typically our sales process for our solutions involves an initial consultative process that allows our customers to better assess the operating and capital expenditure benefits associated with an optimal activation, provisioning and cloud-based content management architecture. We generate leads from contacts made through trade-shows, seminars, conferences, events, market research, our Web site, customers, strategic partners and our ongoing public relations program. In addition to our direct sales force, we have established relationships with channel partners, primarily for our recently acquired Intralinks products that promote, sell and support our services in specific geographies. The channel partners for our recently acquired Intralinks business include, among others, systems integrators, resellers, referral partners, service partners and consultants that resell our Intralinks services directly or through a referral network. Our key channel partners for our Intralinks business are located in a variety of countries, including Brazil, Chile, China, India, Japan, Mexico, South Africa and a number of European countries.
We focus our marketing efforts on generating awareness of Synchronoss and its offerings by attaching brand recognition to key trends pertinent to our customers’ transformations. We do this through the creation of thematic and strategic content that is usually based on commissioned third party as well as original research for each of our market segments. We then market this research to industry editors in influential trade publications, media, thought leaders and press around the world. In addition, through our industry, product, and marketing communications functions, we also have an active public relations program to capitalize on recent news stories in key areas and industries. We also promote the launch of new capabilities such as the new European enterprise datacenter and reinforce key capabilities including the Trust Perimeter. Coverage has appeared in wide-reaching business outlets such as Bloomberg TV, Reuters, Fortune, Business Insider and Forbes.
We support these themes via direct marketing, digital marketing and conference presence throughout the year. We are active in numerous technology and industry forums and our employees regularly get invited to speak at tradeshows in which we also demonstrate our solutions. Key shows for our Communications & Media business include the Consumer Electronics Show (CES), Cellular Telecommunications Industry Association (CTIA), GSM Association (Mobile World Congress), and Mobile Future Forward Series, Additional shows for our Enterprise business include Industry and Financial Markets Association (SIFMA), RSA, Gartner enterprise forums, M&A regional associations and industry forums, and additional enterprise mobility events.
In addition, through our product marketing and marketing communications functions, we also have an active public relations program and maintain relationships with recognized trade media and industry analysts such as ABI Research, International Data Corporation (IDC), Gartner Inc., Forrester Research, Inc., Ovum, Frost & Sullivan and Yankee Group. We also manage and maintain our website, blog, social media profiles on LinkedIn, Twitter Facebook, instagram, YouTube and other channels, utilize search engine optimization and marketing, publish product related content and educational white papers, post videos and conduct seminars and user group meetings. Finally, we also actively sponsor technology-related and industry-related conferences and demonstrate our solutions at trade-shows targeted at providers of communications services.
In our enterprise business, where there are millions of potential users across many industries, we have adopted a vertical markets approach aligned to key persons to focus on use cases with new capabilities to serve the needs of the Enterprise market. We have a deep expertise in understanding how organizations in regulated industries such as financial services or life sciences can collaborate and share sensitive documents safely and compliantly.
Operations and Technology
We leverage common proprietary IT platforms to deliver carrier-grade services to our customers across communication and digital convergence market segments. Constructed using a combination of internally developed and licensed technologies, our platforms integrate our order management, gateway, workflow, cloud-based content management, and reporting into a unified system. Our platforms are secure foundations on which to build and offer additional services and maximize performance, scalability and reliability.
Competition
We face different typesthe following categories of competitors in the markets we target that range in market share, focus and maturity.competitors:
Competition in our markets is intense and includes rapidly-changing technologies and customer requirements, as well as evolving industry standards and frequent product introductions. We compete primarily on the basis of the breadth of our domain expertise, as well as on the basis of price, time-to-market, functionality, quality and breadth of product and service offerings. We believe the most important factors making us a strong competitor include:Personal Cloud
breadth and depth of our transaction and content management solutions, including our exception handling technology,
carrier grade nature and scalability of our solutions,
quality and performance of our products,
high-quality customer service,
ability to implement and integrate solutions,
overall value of our platforms
references of our customers.
We are aware of other software developers and smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services that will compete with our platforms. We anticipate continued growth in the communications industry and the entrance of new competitors in the order processing and transaction management solutions market and expect that the market for our products and services will remain intensely competitive.
The competition in our Cloud and Messaging markets are generally divided among three types of companies:
Over The Top•Over-the-top (“OTT”) Service & Platform Providers
Companies such as - Apple, Google, Dropbox, Apple, Facebook, Yahoo, What’s App,Box, Microsoft and others are active and successful in marketing theirAmazon all provide personal cloud and messaging solutions directly to customers using a B2C model on a massive, global scale. Depending on the proclivities of a region, some service providers have entered into strategic partnerships with OTT providers, with these relationships showing varying degrees of financial success. Service providers generally have a strategic interest in protecting the relationship they have with their subscribers, providing value-add relevanceservices closely integrated to their networksrespective technology or service platforms. However, Synchronoss differentiates from these OTT Service and driving additionalPlatform Providers by offering operator-grade white label solutions.
•White Label Platform Providers - The field of platform-independent, white label personal cloud providers has consolidated in recent years with Funambol and others competing for Operator distribution deals. However, these providers target second and third tier regional operators with low-risk, revenue streams. However, OTT partnershipsshare business models and do not always allow for this. Instead, they may offer the service providergenerally pose a service with little to no capital investment required. The tradeoff between cost and business upside is under constant examination and varies from company to company. Recent privacy issues with Yahoo as well as the proposed acquisition of Yahoo by Verizon, a service provider competitive to other North American providers, has given many operators a reason to re-assess their messaging strategy.
Small Service Providers
There remain a handful of smaller solutions providers in the white label cloud and messaging space such as Funambol and Open-Xchange. These providers compete with us for smaller accounts in different regions of the world. In most cases, these providers offer low cost entry and revenue sharing as a business model but they do not provide the scalability, security or stability that appealreal threat to Tier 1 serviceworld-wide Operators.
Messaging
•The emerging RCS marketplace is intensely competitive across the globe. Leading OTT device and OS platform providers which is our major strategic focus.
Analogous Service Providers
White label technologyGoogle and Samsung, along with prominent online platform providers such as Amdocs, Ericsson, HP MomentumFacebook, WhatsApp, Instagram, WeChat and othersLINE have created a well-established strategic presence with large, Tier 1radically new market for communication and monetization that is turning “messaging” into a new, virtual OS.
•Our Email suite provides service providers with a secure, white-label, back-end framework for a branded email service that provides the opportunity to introduce and promote services that can be monetized. Our carrier branded Email Suite solution offers leading anti-virus and anti-spam and malware technology to keep the integrity and security of the customer experience and protection of subscriber data to carrier standards. Our Email solution is an important repository for critical communications with an intuitive and feature-rich mobile and desktop email experience ensuring stickiness and increasing customer lifetime value.
Digital Products
•Telecom Expense Management (TEM) Providers –
▪TEOCO and Tangoe are active in influencing their technology path as well as leading large-scale IT implementations. While thesetwo major providers do not focus their businesses in the area of consumer offerings, they do have relationships with IT departmentsthat offer wholesale and retail TEM software and services. Each of these vendors have large customers/contracts to better account, reconcile and pay out on vendor contracts, network circuits, roaming agreements and other complex expense areas.
•Telecom Service Order Management Providers –
▪Neustar supports major providers with software that handles the full order lifecycle of telecommunications service orders.
▪Order management applications and processes developed/utilized by Operators also present competition.
•Geospatial Network Planning Providers –
▪Major providers of software that manage the planning and they often attempt to combine their offerings in other partsdesign of their businesses. Therefore,physical communication networks include Bentley, GE Smallworld, and 3-GIS.
To compete against global platform providers, we consider them asoffer a factor in competitive initiatives, if not competitive offerings.
With respect to our recently acquired Intralinks business and our Enterprise offerings, the market for these solutions is highly competitive, fragmented and dynamic. We compete with a multitudecollection of providers, including both virtual data room providers and enterprise software providers. The markets for online collaborative content workspaces and solutions for managing, distributing and protecting enterprise content are also rapidly changing, with relatively low barriers to entry. We expect competition to increase from existing competitors as well as new and emerging market entrants. In addition, as we expand our service offerings, we may face competition from new and existing competitors. We compete primarily on product functionality, service levels, security and compliance characteristics, price and reputation. Our competitors include companies that provide online products that serve as document
repositories, virtual data rooms or file sharinghelp to keep subscribers, systems, networks, and collaboration solutions, togethercontent in sync to enable a better, more engaging experience. Our white label products enable subscribers to connect with other products orone another, the networks they rely on, the brands they love and the services that may result in those companies effectively selling these services at lower prices and creating downward pricing pressure for us.
We believe that the principal differentiating factors for our Intralinks business and our Enterprise offerings are primarily the ability to collaborate inside and outside firewalls while maintaining security, control, auditability and compliance standards.they need. We believe we compete effectively based on broadfavorably through our differentiated product capabilities, vast reach across allglobal markets, and our 20+ years of these factors. In particular, our Intralinksexperience building carrier grade solutions that are specifically designed for inter-enterprise collaboration for contentproven to scale.
Compliance and information sharing beyond the firewall. Our Intralinks platform offers enterprise class scalability and reliability, while enabling secure, auditable and compliant information exchange via a SaaS delivery model that lowers total cost of ownership. Additionally, our industry-specific expertise, global customer support, scalability and reliability to ensure uninterrupted performance, as well as price and functionality, have earned us a reputation of trust with our Intralinks customers.Certifications
Employees
We obtain third-party reviews of our controls relating to security. Our Synchronoss white label Personal Cloud has been certified to be compliant with the Service Organization Controls (SOC) 2 type II audit that tests the design and operating effectiveness of controls over time. An independent auditor tests these controls annually and addresses, among other areas, the environmental and physical safeguards for production data centers, legal controls, change management and logical security. In addition, our Financial Analytics hosted solution is certified to be compliant with a SOC 1 type II audit that tests the design and effectiveness of controls related to our customers’ use of this service in financial reporting. Finally, our operations in Bangalore are certified under ISO27000, ensuring best practices for information security management, and ISO9000, ensuring quality management.
Human Capital
At Synchronoss, we believe that our recent growth and success isare attributable in large part to our employeesdiverse employee base and an experienced management team, many members of which have years of industry experiencewith a mission to make Synchronoss a great place to work. We continue to invest in building, implementing, marketing and selling transaction management solutions critical to business operations. We intend to continue training our employees, as well as developing and promoting our team-oriented culture, and believe that these efforts provide us with a sustainable competitive advantage. We offer a work environment that enables employees to make meaningful contributions, as well as incentive programs that are designed to continue to motivate, retain and reward our employees.
As of December 31, 2016,2022 we had 1,765 full‑time employees. None1,391 full-time employees located in India, North America, Europe, and Asia Pacific regions.
We have a purpose-driven culture, with a focus on employee input and well-being, which we believe enables us to attract and retain exceptional talent. We have moved to a flexible work policy, providing the majority of our employees the flexibility to work remotely from off-site locations at their election. We offer learning and development programs for all employees. Employees are covered by any collective bargaining agreements.able to actively voice their questions and thoughts through many internal channels, including our company town hall meetings and employee engagement surveys.
GeographicWith a continued focus on employee engagement, we formed a global Diversity, Equity, and Inclusion (DE&I) committee, laying the groundwork to embed DE&I as part of our corporate culture and pave the way for a more comprehensive program. We took initial steps in this space through formal trainings, employee communications, and updating our corporate language to be more inclusive, aligned with industry’s best practices, and compatible with our DE&I philosophy. More recently, we launched a series of employee initiatives designed to strengthen employee morale, with more to come in this area. We also launched the Sync Cares program in 2022 to bring employees and leadership together to lend their time and talent to support causes and communities around the globe. In our initial year hundreds of our employees volunteered and contributed a total of over 450 hours to 15 organizations in the global communities in which we do business.
From a total rewards perspective, Synchronoss offers a competitive compensation and benefits package, which we review and update each year. Our annual compensation planning coincides with our feedback cycle where employees and managers have performance conversations to facilitate learning and career development. As part of our compensation review program, we conduct pay equity analyses annually.
Corporate Information
Information regarding financial data by geographic locationWe were incorporated in Delaware in 2000. Our principal offices are located at 200 Crossing Boulevard, Bridgewater, New Jersey. We completed our initial public offering in 2006, and our common stock is set forth in Note 2 - “Summary of Significant Accounting Policies - Segmentlisted on the NASDAQ Global Select Market under the symbol “SNCR” and Geographic Information” to our consolidated financial statements included in Part II, Item of this Annual ReportSenior Notes as listed on Form 10-K.the NASDAQ Global Select Market under the symbol “SNCRL.”
Available Information
Our Web addresswebsite is located at www.synchronoss.com and our investor relations website is located at https://synchronosstechnologiesinc.gcs-web.com/. On this Web site, we post the We have used, and intend to continue to use, our investor relations website as a
means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The following filings are available through our investor relations website after they are electronically filedwe file them with or furnished to the U.S. Securities and Exchange Commission (SEC)("SEC"): our annual reportsAnnual Report on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, our current reports on Form 8-K, and our proxy statement on Form 14A related toProxy Statement for our annual stockholders' meeting and any amendment to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All suchstockholders. These filings are also available on the Investor Relations portion of our Web sitefor download free of charge.charge on our investor relations website. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website iswww.sec.gov. The contents of our Web sitethese websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be incorporated by reference into this Form 10-K or in any other report or document we file.inactive textual references only.
The reports filed with the SEC by usSynchronoss and by our officers, directors and significant shareholders are available for review on the SEC’s website at www.sec.gov. You may also read and copy materials that we filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Synchronoss, Synchronoss Personal Cloud Synchronoss Messaging and IntralinksTM and other trademarks of Synchronoss appearing in this Annual ReportForm 10-K are the property of Synchronoss. Other trademarks or service marks that may appear in this Annual Report are the property of their respective holders. Solely for convenience, the trademarks and trade names in this Annual Report are sometimes referred to without the ®, ®, ™ and SM symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
ITEM 1A. RISK FACTORS
An investment in our common stocksecurities involves a high degree of risk. The following are certain risk factors that could affect our business, financial results and results of operations. You should carefully consider the following risk factors in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause the actual results and conditions to differ materially from those projected in forward-looking statements. The risks that we have highlighted here are not the only ones that we face. If any of the risks actually occur, our business, financial condition or results of operation could be negatively affected. In that case, the trading price of our stocksecurities could decline, and our stockholdersinvestors may lose part or all of their investment.
Risks RelatedRisk Factors Summary
Our business operations are subject to Our Businessnumerous risks and Industry
We recently consummated a number of significant transactions with respect to the strategic directionuncertainties, including those outside of our business. There cancontrol, that could cause our actual results to be no guarantee that this strategy willharmed, including risks regarding the following:
Operation Risks
•Our business may not generate sufficient cash flows from operations or future borrowings may not be successfulavailable in amounts sufficient to enable us to fund liquidity needs or that we will experience consistentcapital expenditures.
•Our revenue, earnings and sustainable profitability inare affected by the future as a resultlength of our new strategy.
We have recently madesales cycle, and a number of major announcements, includinglonger sales cycle could adversely affect our acquisition of Intralinks Holdings, Inc. which closed on January 19, 2017, and our divestiture of our main carrier activation business to Sequential Technology International, which closed in December 2016. These transactions signify a pivot in our strategy to focus on our cloud, analytics and enterprise businesses moving forward. In connection with the closing of our acquisition of Intralinks, we also appointed Ronald W. Hovsepian, the former President and Chief Executive Officer of Intralinks as our Chief Executive Officer.
We cannot guarantee that our strategy is the right one or that we will be effective in executing our strategy. Our strategy may not succeed for a number of reasons, including, but not limited to: general economic risks; execution risks with acquisitions; risks associated with sales not materializing based on a change in circumstances; disruption to sales; increasing competitiveness in the enterprise and mobile solutions markets; our ability to retain key personnel following acquisitions; the dynamic nature of the markets in which we operate; specific economic risks in different geographies and among different customer segments; changes in foreign currency exchange rates; uncertainty regarding increased business and renewals from existing customers; uncertainties around continued success in sales growth and market share gains; failure to convert sales pipeline into final sales; risks associated with successful implementation of multiple integrated software products and other product functionality risks; execution risks around new product development and introductions and innovation; product defects; unexpected costs, assumption of unknown liabilities and increased costs for any reason; potential litigation and disputes and the potential costs related thereto; distraction and damage to sales and reputation caused thereby; market acceptance of new products and services; the ability to attract and retain personnel; risks associated with management of growth; lengthy sales and implementation cycles, particularly in larger organizations; technological changes that make our products and services less competitive; risks associated with the adoption of, and demand for, our model in general and by specific customer segments; competition and pricing pressure.
If one or more of the foregoing risks were to materialize, our business, results of operations and ability to achieve sustained profitability could be adversely affected.financial condition.
Our outstanding indebtedness and related obligations could adversely affect•If we do not meet our financial condition and restrict our operating flexibility.
We have substantial debt and related obligations. In August 2014, we issued $230.0 million aggregate principal amount of our 0.75% Convertible Senior Notes due in 2019, or the 2019 Notes. On January 19, 2017, we entered into a Senior Secured Credit Agreement with the lending institutions from time to time parties thereto and Goldman Sachs Bank USA, as administrative agent, collateral agent, swingline lender and a letter of credit issuer, or the 2017 Credit Agreement. Our obligations under the 2017 Credit Agreement are guaranteed by certain of our subsidiaries, including Intralinks, and secured by substantially all of our assets. The term loan lenders under the 2017 Credit Agreement have advanced to us senior secured term loans in an aggregate principal amount of $900 million with a maturity date of January 19, 2024. We refer to this facility as the 2017 Term Facility. The revolving lenders under the 2017 Credit Agreement have provided us with a revolving credit facility of up to $200 million with a maturity date of January 19, 2022. We refer to this facility as the Revolving Facility. We have not drawn down on any of the funds under the Revolving Facility. The term loans under the 2017 Term Facility will amortize at 1% per annum in equal quarterly installments with the balance payable on the final maturity date and contains certain mandatory prepayments. The 2017 Credit Agreement contains a number of customary affirmative and negative covenants and events of default, which, among other things, restrict our ability, and our subsidiaries’ ability, to incur debt, allow liens on assets, make investments, pay dividends or prepay certain other debt. The 2017 Credit Agreement also requires that we comply with certain financial maintenance covenants, including a total gross leverage ratio and an interest charge coverage ratio.
Our substantial level of debt and related obligations, including interest payments, covenants and restrictions, could have important consequences, including by:
impairing our ability to invest in and successfully grow our business and make acquisitions;
making it more difficult for us to satisfy our obligations with respect to our indebtedness, which could result in an event of default under the agreement governing the 2019 Notes or the 2017 Credit Facility;
limiting our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, debt obligations and other general corporate requirements;
hindering our ability to raise equity capital, because, in the event of a liquidation of our business, debt holders have priority over equity holders;
increasing our vulnerability to general economic downturns, competition and industry conditions, which could place us at a competitive disadvantage compared to competitors that are less leveraged and are thereforerevenue forecasts, we may be unable to take advantagereduce our expenses in a timely fashion to avoid or minimize harm to our results of opportunitiesoperations.
•We traditionally have had substantial customer concentration, with a limited number of customers accounting for a substantial portion of our revenue.
•We are subject to credit risk and other risks associated with our accounts receivable securitization facility.
•Fluctuations in foreign currency exchange rates could result in foreign currency transaction losses, which could harm our operating results and financial condition.
•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.
•Many of our products are complex and may contain defects that are detected only after deployment.
•Failure to maintain the confidentiality, integrity and availability of our leverage prevents us from exploiting;
imposing additional restrictions on the manner in which we conductsystems, software and solutions could seriously damage our business, including restrictions onreputation and affect our ability to pay dividends, incur additional debtretain customers and sell assets;attract new business.
•The quality of our support and
placing us at a possible disadvantage relative services offerings is important to less leveraged competitorsour customers and competitors that have better accessif we fail to capital resources.
The occurrence of any one of these events could have an adverse effect on our business, financial condition, operating results or cash flows and ability to satisfy ourmeet out service level obligations under our indebtedness. Our failureservice level agreements or otherwise fail to comply with the covenants under the agreements governing the 2019 Notes or the 2017 Credit Facility could result in an event of defaultoffer quality support and the acceleration of any debt then outstanding under the 2019 Notes or the 2017 Credit Facility, as the case may be. Any declaration of an event of default could significantly harm our business and prospectsservices, we would be subject to penalties and could lose customers.
•Our reliance on third-party providers for communications software, services, hardware and infrastructure exposes us to a variety of risks we cannot control.
•Downgrades in our credit ratings may increase our future borrowing costs, limit our ability to raise capital, cause our stock price to decline. Insufficient fundsdecline, any of which could have a material adverse impact on our business.
•Our insurance policies, including general liability, errors and omissions and cyber insurance, may requirenot totally protect us.
Risks Related to our Business and Industry
•The financial and operating difficulties in the telecommunications sector may negatively affect our customers and our business.
•The success of our business depends on the continued growth in demand for connected devices and the continued availability of high-speed access to the Internet.
•The SaaS pricing model is evolving and our failure to manage its evolution and demand could lead to lower than expected revenue and profit.
•Our business depends substantially on customers renewing and expanding their subscriptions for our services. Any decline in our customer renewal and expansions would harm our operating results.
•The markets in which we market and sell our products and services are highly competitive, and if we do not adapt to rapid technological change, we could lose customers or market share, which could adversely affect our ability to sustain or grow revenue.
•Consolidation in the telecommunications, media, technology industry and other industries that we serve can reduce the number of actual and potential customers and adversely affect our business.
•If we do not maintain the compatibility of our services with third-party applications that our customers use in their business processes or if we fail to adapt our services to changes in technology or the marketplace, demand for our services could decline.
Legal, Regulatory and Compliance Risks
•Government regulation of the Internet and e-commerce and of the international exchange of certain information is subject to possible unfavorable changes, and our failure to comply with applicable regulations could harm our business and operating results.
•Changes in laws, regulations or governmental policy applicable to our customers or potential customers may decrease the demand for our solutions or increase our costs.
•We collect, process, store, disclose and use personal information and other data, and our perceived failure to protect this information and data could damage our reputation and harm our business and operating results.
•If we are required to collect sales and use taxes on the services we sell in additional jurisdictions, we may be subject to liability for past sales and out future sales could decrease.
Risks Related to our Series B Preferred Stock, Senior Notes and Common Stock
•Our stock price may continue to experience significant fluctuations and could subject us to delay, scale backlitigation.
•We have, and in the future may be, the target of stockholder derivative complaints or eliminate some or allother securities related legal actions that could adversely affect our result of operations and our business.
•Other than payment of dividends on our previous Series A Preferred Stock and our current Series B Preferred Stock, we have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our activities.common stock increases.
In addition, certain•Delaware law and provisions in our restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, therefore depressing the trading price of our loan agreementscommon stock.
•We have a changeincurred (and expect to continue to incur) significant costs in control provision that provides that, uponconnection with the occurrencerestatement of a change in control, all credit facility commitments shall terminate and all loans shall become due and payable. Furthermore, certainpreviously issued consolidated financial statements.
•Our current or future debt securities or preferred equity securities, which would be senior to our common stock, may adversely affect the market price of our loan agreements requirecommon stock.
•B. Riley Financial, Inc. and its affiliates have significant influence over us and may have conflicts of interest that arise out of future contractual relationships it or its affiliates may have with us.
•The Senior Notes are unsecured and therefore are effectively subordinated to meet specified minimum financial measurements. The operating and financial restrictions and covenants in our loan agreements, as well as any future financing agreementssecured indebtedness that we currently have or that we may enter into, may restrictincur in the future.
•The Senior Notes are structurally subordinated to the indebtedness and other liabilities of our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control and we may not be able to meet those covenants. A breach of anysubsidiaries.
•The indenture under which the Senior Notes were issued contains limited protection for holders of the covenants under one of our loan agreementsSenior Notes.
•An increase in market interest rates could result in a default under some or alldecrease in the value of the Senior Notes.
•A new 1% U.S. federal excise tax may be imposed upon us in connection with the redemptions by us of our loan agreements,Series B Non-Convertible Perpetual Preferred Stock or other redemptions or repurchases of our equity.
•Our common stock could be delisted from Nasdaq, which could cause allwould seriously harm the liquidity of the outstanding indebtedness under our loan agreements to become immediately due and payable and terminate all commitments to extend further credit, if any.common stock.
Operation Risks
Our business may not generate sufficient cash flows from operations, or future borrowings under our credit facilities or from other sourceswhich may not be available to us, in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs includingand capital expenditure requirements necessary to expand our operations and share repurchase programs announced from timeinvest in new products which could reduce our ability to time.compete and could harm our business.
We cannot guarantee that we will be able to generate sufficient revenue or obtain enough capital to fund our capital expenditures, service our debt fund our planned capital expenditures, and execute on our new business strategy. We may be more vulnerable to adverse economic conditions than less leveragedour competitors and thus less able to withstand competitive pressures. AnyWe intend to continue to make substantial investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new products and enhancements to our platforms or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional capital, our stockholders may experience significant dilution of these eventstheir ownership interests, and the per share value of our common stock could reducedecline. In addition, the terms of any future issued equity securities could entitle the holders of those equity securities to rights, preferences and privileges superior to those of holders of our securities. Furthermore, if we engage in additional debt financings, the holders of debt might have priority over the holders of our securities, and we may be required to accept terms that restrict our ability to generate cash availableincur additional indebtedness, including restrictive covenants relating to our capital raising activities and other financial and operational matters, including restricting our ability to pay dividends or make certain other restricted payment, sell assets, make certain investments and grant liens, which may make it more difficult for investment or debt repayment orus to make improvements or respondobtain additional capital and to eventspursue business opportunities. We may also be required to take other actions that would enhance profitability.otherwise be in the interests of the debt holders and force us to maintain specified liquidity or other ratios, including limitations to our total leverage ratio, any of which could harm our business, results of operations, and financial condition. If we are unable to service or repay our debt whenneed additional capital and cannot raise it becomes due, our lenders could seek to accelerate payment of all unpaid principal and foreclose on our assets, and we may have to take actions such as selling assets, seeking additional equity investments or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. Additionally,acceptable terms, we may not be able to, among other things:
•develop or enhance our products and platforms,
•acquire complementary technologies, products or businesses,
•expand operations in the United States or internationally, or
•respond to competitive pressures or unanticipated working capital requirements.
If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited which may also require us to delay, scale back or eliminate some or all of our activities, which could have a material adverse effect on our business, results of operations and financial condition.
Our revenue, earnings and profitability are affected by the length of our sales cycle, and a longer sales cycle could adversely affect our results of operations and financial condition.
Our business is directly affected by the length of our sales cycles. Our customers’ businesses are relatively complex and their purchase of the types of products and services that we offer generally involve a significant financial commitment, with attendant delays, frequently associated with large financial commitments and procurement procedures within an organization. In addition, as we continue to further penetrate the enterprise, and the size and complexity of our sales opportunities continue to expand, we have seen an increase in the average length of time in our sales cycles. The purchase of the types of products and services that we offer typically requires coordination and agreement across many departments within a potential customer’s
organization. Delays associated with such timing factors could have a material adverse effect on our results of operations and financial condition. In periods of economic slowdown our typical sales cycle lengthens, which means that the average time between our initial contact with a prospective customer and the signing of a sales contract increases. The lengthening of our sales cycle could reduce growth in our revenue. In addition, the lengthening of our sales cycle contributes to an increased cost of sales, thereby reducing our profitability.
We may experience quarterly fluctuations in our operating results due to a number of factors which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.
As a result of a variety of factors discussed in this report, many of which are out of our control, our operating results for a particular quarter is difficult to predict, especially in light of a challenging and inconsistent global macroeconomic environment and related market uncertainty. Our revenue may grow at a slower rate than in past periods or decline, as it has in the past, on a year-over-year basis. Our ability to meet financial expectations could also be adversely affected if the nonlinear sales pattern seen in some of our past quarters recurs in future periods.The timing of large orders can also have a significant effect on our business and operating results from quarter to quarter. From time to time, we receive large orders that have a significant effect on our operating results in the period in which the order is recognized as revenue. The timing of such orders is difficult to predict, and the timing of revenue recognition from such orders may affect period to period changes in revenue. As a result, our operating results could vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue.We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.As a result, comparing our operating results on a period-to-period basis may not be meaningful. Our past results should not be relied on as an indication of our future performance.Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.In addition, non-GAAP metrics we may disclose, such as Adjusted EBITDA, Invoiced Cloud Revenue, and any corresponding trends in such metrics should not be relied on as an indication that our GAAP results, such as net income (loss), will be similar or will follow the same trends.If our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, the price of our common stock could decline substantially. Any of the above factors could have a material adverse impact on our operations and financial results.
We are subject to revenue recognitions standards and because we recognize revenue for certain products and services ratably over the term of customer agreements upturns or downturns in the value of signed contracts will not be fully and immediately reflected in our operating results and any changes in the standards could impact our business.
We offer certain of our products and services primarily through fixed or variable commitment contracts and recognize revenue ratably over the related service period, which typically ranges from twelve to twenty-four months. As a result, some portion of the revenue we report in each quarter is revenue from contracts entered into during prior periods. Consequently, a decline in signed contracts in any quarter will not be fully and immediately reflected in revenue for that quarter but may instead negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost structure to offset this reduced revenue. Similarly, revenue attributable to an increase in contracts signed in a particular quarter will not be fully and immediately recognized, as revenue from new or renewed contracts is recognized ratably over the applicable service period. Because we incur certain sales costs at the time of sale, we may not recognize revenues from some customers despite incurring considerable expense related to our sales processes. Timing differences of this nature could cause our margins and profitability to fluctuate significantly from quarter to quarter.As we introduce new services or products, revenue recognition could become increasingly complex and require additional analysis and judgment. Additionally, for new contracts with existing customers, we may negotiate and revise previously used terms and conditions of our contracts with these customers and channel partners, which may also cause us to revise our revenue recognition policies. As our arrangements with customers change, we may be required to defer a greater portion of revenue into future periods, which could materially and adversely affect our financial results.
If we do not meet our revenue forecasts, we may be unable to reduce our expenses in a timely fashion to avoid or minimize harm to our results of operations.
Our revenues are difficult to forecast and are likely to fluctuate significantly from period to period, particularly as we continue to implement our business strategy. We base our operating expense and capital investment budgets on expected sales and revenue trends, and many of our expenses, such as office and equipment leases and personnel costs, will be relatively fixed in the short term and will increase over time as we make investments in our business. Our estimates of sales trends may not
correlate with actual revenues in a particular quarter or over a longer period of time. Variations in the rate and timing of conversion of our sales prospects into sales and actual revenues could cause us to plan or budget inaccurately and those variations could adversely affect our financial results. In particular, delays, reductions in amount or cancellation of customers’ contracts would adversely affect the overall level and timing of our revenues, and our business, results of operations and financial condition could be harmed. Due to the relatively fixed nature of many of our expenses, we may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall.In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. In the event we are unable to collect on our accounts receivable, it could negatively affect our cash flows, operating results and business.
We traditionally have had substantial customer concentration, with a limited number of customers accounting for a substantial portion of our revenues.
The Company’s top five customers accounted for 73.4%, 68.2% and 68.0% of net revenues for the years ended December 31, 2022, 2021 and 2020, respectively. Of these customers, Verizon accounted for more than 10% of our revenues in 2022, 2021, and 2020. There are inherent risks whenever a large percentage of total revenues are concentrated with a limited number of customers. It is not possible for us to predict the future level of demand for our products and services that will be generated by these customers or the future demand for the products and services of these customers in the end-user marketplace. In addition, revenues from these larger customers may fluctuate from time to time based on the commencement and completion of projects, the timing of which may be affected by market conditions or other factors, some of which may be outside of our control. Further, some of our contracts with these larger customers permit them to terminate our services at any time (subject to notice and certain other provisions). If any of our major customers experience declining or delayed sales due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our services or we could lose the customer. Any such development could have an adverse effect on our margins and financial position and would negatively affect our revenues and results of operations and/or trading price of our common stock.
We are exposed to our customers’ credit risk.
We are subject to the credit risk of our customers, and customers with liquidity issues may lead to credit losses for us. Most of our sales are on an open credit basis, with typical payment terms between 45 and 60 days in the United States and, because of local customs or conditions, longer payment terms in some markets outside the United States. We use various methods to screen potential customers and establish appropriate credit limits, but these methods cannot eliminate all potential bad credit risks and may not prevent us from approving applications that are fraudulently completed. Moreover, businesses that are good credit risks at the time of application may become bad credit risks over time and we may fail to detect this change. We maintain reserves we believe are adequate to cover exposure for doubtful accounts. If we fail to adequately assess and monitor our credit risks, we could experience longer payment cycles, increased collection costs and higher bad debt expense. A decrease in accounts receivable resulting from an increase in bad debt expense could adversely affect our liquidity. Our exposure to credit risks may increase if our customers are adversely affected by a difficult macroeconomic environment, or if there is a continuation or worsening of the economic environment. Although we have programs in place that are designed to monitor and mitigate the associated risk, including monitoring of particular risks in certain geographic areas, there can be no assurance, especially during the COVID-19 pandemic, that these programs will be effective in reducing our credit risks or preventing us from incurring additional losses. Future losses, if incurred, could harm our business and have a material adverse effect on our business operating results and financial condition. Additionally, to the degree that the current or future credit markets make it more difficult for some customers to obtain financing, those customers’ ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.
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 December 31, 2022, there were no outstanding obligations under the A/R Facility.
The amounts available under the A/R Facility depend on 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. 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;
•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, including effects of the ongoing conflict between Russia and Ukraine, and the possibility of a wider European or global conflict, and global sanctions imposed in response thereto, 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 continue to lead to disruption, instability and volatility in global markets and industries. The U.S. government and governments in other 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.
Fluctuations in foreign currency exchange rates could result in foreign currency transaction losses, which could harm our operating results and financial condition.
We consider the U.S. dollar to be our functional currency. However, given our international operations we currently have, and expect to have in the future, revenue and expenses and related assets and liabilities denominated in foreign currencies. Foreign currency transaction exposure results primarily from transactions with customers or vendors denominated in currencies other than the functional currency of the entity in which we record the transaction. Any fluctuation in the exchange rate of these
foreign currencies may positively or negatively affect our business and operating results.We face exposure to movements in foreign currency exchange rates due to the fact that we have non-U.S. dollar denominated revenue worldwide. Furthermore, volatile market conditions arising from impacts from the COVID-19 pandemic, the conflict in Ukraine and other macroeconomic conditions may result in significant fluctuations in exchange rates. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of our foreign currency denominated revenue and positively affects the U.S. dollar value of our foreign currency denominated expenses. For example, in 2022, as the U.S. dollar strengthened against several currencies, including the British pound, these foreign exchange impacts reduced our reported revenue in U.S. dollars on a constant currency basis. If foreign currencies were to weaken or strengthen relative to the U.S. dollar, we might elect to raise or lower our international pricing, which could potentially impact demand for our services. Alternatively, we might opt not to adjust our international pricing as a result of fluctuations in foreign currency exchange rates, which could potentially have a positive or negative impact on our results of operations and financial condition.Similarly, our financial performance may be impacted by fluctuations in currency exchange rates when it comes to our non-U.S. dollar denominated expenses. The third-party vendors and suppliers to whom we owe payments for non-U.S. dollar denominated expenses may or may not decide to adjust their pricing to reflect fluctuations in foreign currency exchange rates.If there continues to be volatility in foreign currency exchange rates, we will continue to experience fluctuations in our operating results due to revaluing our assets and liabilities that are not denominated in the functional currency of the entity that recorded the asset or liability, and the translation of our non-U.S. denominated revenue and expenses into U.S. dollars may affect the year-over-year comparability of our operating results.
We may be able to incur substantially more debt, which could have important consequences to investors.
We may be able to incur substantial additional indebtedness in the future. The terms of the indenture governing the Senior Notes does not prohibit us from doing so. If we incur any additional indebtedness that ranks equally with the Senior Notes, the holders of that debt will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization or dissolution. This may have the effect of reducing the amount of proceeds paid to investors. Incurrence of additional debt would also further reduce the cash available to invest in operations, as a result of increased debt service obligations. If new debt is added to our current debt levels, the related risks that we now face could intensify.
Our level of indebtedness could have important consequences to investors, because:
•it could affect our ability to satisfy our financial obligations, including those relating to the Senior Notes;
•a substantial portion of our cash flows from operations would have to be dedicated to interest and principal payments and may not be available for operations, capital expenditures, expansion, acquisitions or general corporate or other purposes;
•it may impair our ability to obtain additional debt or equity financing in the future;
•it may limit our ability to refinance all or a portion of our indebtedness on or before maturity;
•it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and
•it may make us more vulnerable to downturns in our business, our industry or the economy in general.
Our operations may not generate sufficient cash to enable us to service our debt. If we fail to make a payment on the Senior Notes, we could be in default on the Senior Notes, and this default could cause us to be in default on other indebtedness, to the extent outstanding. Conversely, a default under any other indebtedness, if not waived, could result in acceleration of the debt outstanding under the related agreement and entitle the holders thereof to bring suit for the enforcement thereof or exercise other remedies provided thereunder. In addition, such default or acceleration may result in an event of default and acceleration of other indebtedness of the Company, entitling the holders thereof to bring suit for the enforcement thereof or exercise other remedies provided thereunder. If a judgment is obtained by any such holders, such holders could seek to collect on such judgment from the assets of the Company. If that should occur, we may not be able to pay all such debt or to borrow sufficient funds to refinance it. Even if new financing were then available, it may not be on terms that are acceptable to us.
However, no event of default under the Senior Notes would result from a default or acceleration of, or suit, other exercise of remedies or collection proceeding by holders of, our other outstanding debt, if any. As a result, all or substantially all of our assets may be used to satisfy claims of holders of our other outstanding debt, if any, without the holders of the Senior Notes having any rights to such assets.
We may make investments in new products and services that may not be profitable.
We intend to continue to make investments to support our business growth, including expenditures to develop new services or enhance our existing services, enhance our operating infrastructure, market and sell our product offerings and acquire complementary businesses and technologies. These endeavors may involve significant risks and uncertainties and could lead to
a misapplication of our resources. These new investments are inherently risky and may involve distracting management from current operations, create greater than expected liabilities and expenses, provide us with an inadequate return on capital, include other unidentified risks and, ultimately, may generally not be successful. Further, our ability to effectively integrate new services and investments into our business may affect our profitability. Significant delays in new releases or significant problems in creating new products or services could adversely affect our revenue and financial performance.
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.
Our performance and growth depend on our ability to generate customer referrals and to develop referenceable customer relationships that will enhance our sales and marketing efforts. A failure to accomplish these objectives could materially harm our business.
In our business, we depend on end-users of our solutions to generate customer referrals for our services. We also depend on members of the communications industry, financial institutions, legal service providers and other third parties who use our services to recommend them to a larger customer base than we can reach through our direct sales and internal marketing efforts. These referrals are an important source of new customers for our services and generally are made without expectation of compensation. We intend to continue to focus our marketing efforts on these referral partners in order to expand our reach and improve the efficiency of our sales efforts.We also recognize that having respected, well known, market-leading customers who have committed to deploy our solutions within their organizations will support our marketing and sales efforts, as these customers can act as references for us and our product offerings. Our ability to establish and maintain these customer relationships is important to our future profitability. The willingness of these types of customers to provide referrals or serve as anchor or reference customers depends on a number of factors, including the performance, ease of use, reliability, reputation and cost-effectiveness of our services as compared to those offered by our competitors, as well as the internal policies of these customers. We may not be able to cultivate or maintain the relationships with customers that are necessary to develop those customer relationships into referenceable accounts.
The loss of any of our significant referral sources, including our anchor customers, or a decline in the number of referrals we receive or anchor customers that we generate could require us to devote substantially more resources to the sales and marketing of our services, which would increase our costs, potentially lead to a decline in our revenue, slow our growth and generally have a material adverse effect on our business, results of operations and financial condition. In addition, the revenue we generate from our referral and anchor relationships may vary from period to period.
Many of our current and planned products are highly complex and may contain defects or errors that are detected only after deployment in telecommunications networks. If that occurs, our reputation or market acceptance of our products and services may be harmed.
Our products are highly complex, and we cannot assure customers that our extensive product development, production and integration testing is, or will be, adequate to detect all defects, errors, failures and quality issues that could affect customer
satisfaction or result in claims against us. Our products and services may contain undetected errors or scalability limitations at any point in their lives, but particularly when first introduced or as new versions are released. As a result, we might have to replace certain components and/or provide remediation in response to the discovery of defects in products that have been supplied to customers.The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by customers or customers’ end users and other losses to us or to our customers or end users. These occurrences could also result in the loss of or delay in market acceptance of our products, in the loss of sales, or in the need to create provisions, which would harm our business and adversely affect our revenues and profitability.
Failure to maintain the confidentiality, integrity and availability of our systems, software and solutions could seriously damage our reputation and affect our ability to retain customers and attract new business.
Maintaining the confidentiality, integrity and availability of our systems, software and solutions is an issue of critical importance for us and for our customers and users who rely on our systems to store and exchange large volumes of information, much of which is proprietary and confidential. There appears to be an increasing number of individuals, governments, groups and computer “hackers” developing and deploying a variety of destructive software programs (such as viruses, worms and other malicious software) that could attack our computer systems or solutions or attempt to infiltrate our systems. We make significant efforts to maintain the confidentiality, integrity and availability of our systems, solutions and source code. Despite significant efforts to create security barriers, it is virtually impossible for us to mitigate this risk entirely because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not recognized until launched against a target. Like all software solutions, our software is vulnerable to these types of attacks. An attack of this type could disrupt the proper functioning of our software solutions, cause errors in the output of our customers’ work, allow unauthorized access to sensitive, proprietary or confidential information of ours or our customers, and other destructive outcomes. If an actual or perceived breach of our security were to occur, our reputation could suffer, customers could stop buying our solutions and we could face lawsuits and potential liability, any of which could cause our financial performance to be negatively impacted. Though we maintain professional liability insurance that may be available to provide coverage if a cybersecurity incident were to occur, there can be no assurance that insurance coverage will be available or that available coverage will be sufficient to cover losses and claims related to any cybersecurity incidents we may experience.
There is also a danger of industrial espionage, cyber-attacks, misuse or theft of information or assets (including source code), or damage to assets by people who have gained unauthorized access to our facilities, systems or information, which could lead to the disclosure of portions of our source code or other confidential information, improper usage and distribution of our solutions without compensation, illegal or inappropriate usage of our systems and solutions, jeopardizing of the security of information stored in and transmitted through our computer systems, manipulation and destruction of data, defects in our software and downtime issues. More generally, the COVID-19 pandemic has increased attack opportunities available to criminals, as they attempt to profit from disruptions and the resulting shift in companies and individuals working remotely and online, as well as the increase in electronic payments, e-commerce, and other online activity. While the Company does not currently have operations in areas experiencing rising political conflict and uncertainty, there is an increased likelihood that escalation of tensions could result in cyber-attacks or cybersecurity incidents that could either directly or indirectly impact our operations. As such, the risk of cybersecurity incidents is increasing, and we cannot provide assurances that our preventative efforts will be successful. Although we actively employ measures to combat unlicensed copying, access and use of our facilities, systems, software and intellectual property through a variety of techniques, preventing unauthorized use or infringement of our rights is inherently difficult. The occurrence of an event of this nature could adversely affect our financial results or could result in significant claims against us for damages. Further, participating in either a lawsuit to protect against unauthorized access to, usage of or disclosure of any of our solutions or any portion of our source code or the prosecution of an individual in connection with a cybersecurity breach could be costly and time-consuming and could divert management’s attention and adversely affect the market’s perception of us and our solutions.A number of core processes, such as software development, sales and marketing, customer service and financial transactions, rely on our IT, infrastructure and applications. Defects or malfunctions in our IT infrastructure and applications could cause our service offerings not to perform as our customers expect, which could harm our reputation and business. In addition, malicious software, sabotage and other cybersecurity breaches of the types described above could cause an outage of our infrastructure, which could lead to a substantial denial of service and ultimately downtimes, recovery costs and customer claims, any of which could have a significant negative impact on our business, financial position, profitability and cash flows.
The confidentiality, integrity and availability of our systems could also be jeopardized by a breach of our internal controls and policies by our employees, consultants or subcontractors having access to our systems. If our systems fail or are breached as a result of a third-party attack or an error, violation of internal controls or policies or a breach of contract by an employee, consultant or subcontractor that results in the unauthorized use or disclosure of proprietary or confidential information or customer data (including information about the existence and nature of the projects and transactions our customers are engaged
in), we could lose business, suffer irreparable damage to our reputation and incur significant costs and expenses relating to the investigation and possible litigation of claims relating to such event. We could be liable for damages, penalties for violation of applicable laws or regulations and costs for remediation and efforts to prevent future occurrences, any of which liabilities could be significant. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from liabilities or damages with respect to any particular claim. Furthermore, litigation, regardless of its outcome, could result in a substantial cost to us and divert management’s attention from our operations. Any significant claim against us or litigation involving us could have a material adverse effect on our business, financial condition and results of operations.
We have implemented a number of security measures designed to ensure the security of our information, IT resources and other assets. Nonetheless, unauthorized users could gain access to our systems through cyber-attacks and steal, use without authorization and sabotage our intellectual property and confidential data. Any security breach, misuse of our IT systems or theft of our or our customers’ intellectual property or data could lead to customer losses, non-renewal of customer agreements, loss of production, recovery costs or litigation brought by customers or business partners, any of which could adversely impact our cash flows and reputation and could have an adverse impact on our disclosure controls and procedures.
Despite our efforts to protect our intellectual property, unauthorized third parties may attempt to copy our technology or to develop products or solutions with the same or similar functions, which infringe upon our rights. Pursuing these potential violations of Synchronoss’ intellectual property rights is difficult and costly. Our competition may also independently develop technology equivalent to ours and our intellectual property rights may not be sufficient to prevent them from marketing and selling those products which incorporate such technology, which could have a material adverse effect on our ability to compete in the marketplace.
Failures or interruptions of our systems and services could materially harm our revenues, impair our ability to conduct our operations and damage relationships with our customers.
Our success depends on our ability to provide reliable services to our customers and process a high volume of transactions in a timely and effective manner. Although we operate disaster recovery solutions and maintain backup systems, our network operations are susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks, war or other military conflict, including escalation of ongoing political conflicts and similar events. A catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our business, operating results and financial condition could be adversely affected. We could also experience failures or interruptions of our systems and services, or other problems in connection with our operations, as a result of, among other things:
•damage to, or failure of, our computer software or hardware or our connections and outsourced service arrangements with third parties;
•errors in the processing of data by our systems;
•computer viruses or software defects;
•physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events;
•fire, cybersecurity attack, terrorist attack or other catastrophic event;
•increased capacity demands or changes in systems requirements of our customers; or
•errors by our employees or third-party service providers.
We rely on various systems and applications to support our internal operations, including our billing, financial reporting and customer contracting functions. The availability of these systems and applications is essential to us and delays, disruptions or performance problems may adversely impact our ability to accurately bill our customers, report financial information and conduct our business, or cause us to suffer reputational harm, delays in product development, lack of products provided to our customers, breaches of data security and loss of critical data. Any failure or interruption of our systems and services could also prevent us from fulfilling customer orders or maintaining certain service level requirements, particularly in respect of our software as a service (“SaaS”) and hosted offerings.
Additionally, we may choose to replace or implement changes to these systems, including substituting traditional systems with cloud-based solutions, which could be time-consuming and expensive, and which could result in delays in the ongoing operational processes these software solutions support. Further, our cloud-based solutions may experience disruptions and outages that are beyond our control as we rely on third-party vendors to support these solutions and assure their continued availability. We have also acquired a number of companies, products, services and technologies over the last several years. While we make significant efforts to address any IT security issues with respect to our acquisitions, we may still inherit certain risks when we integrate these acquisitions. In addition, our business interruption insurance may be insufficient to compensate us
for losses or liabilities that may occur. Any interruptions in our systems or services could damage our reputation and substantially harm our business and results of operations.
The quality of our support and services offerings is important to our customers and if we fail to meet our service level obligations under our service level agreements or otherwise fail to offer quality support and services, we would be subject to penalties and could lose customers.
Our customers generally depend on our service organization to resolve issues relating to the use of our solutions. A high level of support is critical for the successful marketing and sale of our solutions. If we are unable to provide a level of support and service to meet or exceed the expectations of our customers, we could experience:
•loss of customers and market share;
•difficulty attracting or the inability to attract new customers, including in new geographic regions; and
•increased service and support costs, and a diversion of resources.
Any of the above results would likely have a material adverse impact on our business, revenue, results of operations, financial condition and reputation.In addition, we have service level agreements with many of our customers under which we guarantee specified levels of service availability. These arrangements involve the risk that we may not have adequately estimated the level of service we will in fact be able to provide. The importance of high-quality customer support will increase as we expand our business and pursue new enterprise customers. If we fail to meet our service level obligations under these agreements, we would be subject to penalties, which could result in higher than expected costs, decreased revenues and decreased operating margins. We could also lose customers.
Our reliance on third-party providers for communications software, services, hardware and infrastructure exposes us to a variety of risks we cannot control.
Our success depends on software, equipment, network connectivity and infrastructure hosting services supplied by, or leased from, our vendors and customers. In addition, we rely on third-party vendors to perform a substantial portion of our exception handling services. We may not be able to continue to purchase the necessary software, equipment and services from vendors on commercially reasonableacceptable terms or at all. TheIf we are unable to maintain current purchasing terms or ensure service availability with these vendors and customers, we may lose customers and experience an increase in costs in seeking alternative supplier services. Further, any changes in our third-party vendors could detract from management’s ability to focus on the ongoing operations of our business or could cause delays in the operations of our business.Our business also depends upon the capacity, reliability and security of the infrastructure owned and managed by third parties, including our vendors and customers that are used by our technology interoperability services, network services, number portability services, call processed services and enterprise solutions. We have no control over the operation, quality or maintenance of a significant portion of that infrastructure and whether those third parties will upgrade or improve their software, equipment and services to meet our and our customers’ evolving requirements. We depend on these companies to maintain the operational integrity of our services. If one or more of these companies is unable or unwilling to supply or expand its levels of services to us in the future, our operations could be severely interrupted. In addition, rapid changes in the communications industry have led to industry consolidation. This consolidation may cause the availability, pricing and quality of the services we use to vary and could lengthen the amount of time it takes to deliver the services that we use.
Any damage to, or failure or capacity limitations of, our systems and our related network could result in interruptions in our service that could cause us to lose revenue, issue credits or refunds or could cause our customers to terminate their subscriptions for our services, in each case adversely affecting our renewal rates. Since our customers use our service for important aspects of their businesses, any errors, defects, disruptions in service or other performance problems could hurt our reputation and may damage our customers’ businesses. As a result, we may lose revenue, issue credits or refunds, or customers could elect not to renew our services or delay or withhold payments to us. We could also lose future sales or customers may make claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense or risk of litigation.Additionally, third-party software underlying our services can contain undetected errors or bugs. We may be forced to delay commercial release of our services until any discovered problems are corrected and, in some cases, may need to implement enhancements or modifications to correct errors that we do not detect until after deployment of our services. In addition, problems with the third-party software underlying our services could result in:
•damage to our reputation;
•loss of or customers or delayed revenue;
•warranty claims or litigation;
•loss of or delayed market acceptance of our services, or
•unexpected expenses and diversion of resources to remedy errors.
Interruptions or delays in our service due to problems with our third-party web hosting facilities or other third-party service providers could adversely affect our business.
We rely on third parties for the maintenance of certain of the equipment running our solutions and software at geographically dispersed hosting facilities with third parties. If we are unable to renew, extend or replace our agreements with any of our third-party hosting facilities, we may be unable to arrange for replacement services at a similar cost and in a timely manner, which could cause an interruption in our service. We do not control the operation of these third-party facilities, each of which may be subject to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures or similar events. These facilities may also be subject to break-ins, sabotage, intentional acts of vandalism or similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster, cessation of operations by our third-party web hosting provider or a third party’s decision to close a facility without adequate notice or other unanticipated problems at any facility could result in lengthy interruptions in our service. In addition, the failure by these facilities to provide our required data communications capacity could result in interruptions in our service.
We may seek to acquire companies or technologies, form joint ventures or make investments in other companies or technologies, which could disrupt our ongoing business, disrupt our management and employees, dilute our stockholders’ ownership, increase our debt, and adversely affect our results of operations.
We have made, and in the future intend to form joint ventures, make acquisitions of and investments in companies, technologies or products in existing, related or new markets for us that we believe may enhance our market position or strategic strengths. However, we cannot be sure that any acquisition or investment will ultimately enhance our products or strengthen our competitive position. Acquisitions involve numerous risks, including but not limited to:
•diversion of management’s attention from other operational matters;
•inability to identify acquisition candidates on terms acceptable to us or at all, or inability to complete acquisitions as anticipated or at all;
•inability to realize anticipated benefits or commercialize purchased technologies;
•exposure to operational risks, rules and regulations to the extent such activities are located in countries where we have not historically done business;
•unknown, underestimated and/or undisclosed commitments or liabilities;
•incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill;
•dilution of ownership of our current stockholders if we issue shares of our common stock;
•higher than expected transaction costs; and
•ineffective integration of operations, technologies, products or employees of the acquired companies.
In addition, acquisitions may disrupt our ongoing operations, increase our expenses and/or harm our results of operations or financial condition. Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt (which may reduce our cash available for operations and other uses), an increase in contingent liabilities or an increase in amortization expense related to identifiable assets acquired, each of which could materially harm our business, financial condition and results of operations.
Our employee retention and hiring may be adversely impacted by immigration restrictions and related factors.
Competition for skilled personnel is intense in our industry and any failure on our part to hire and retain appropriately skilled employees could harm our business. Our ability to hire and retain skilled employees is impacted, at least in part, by the fact that a portion of our professional workforce in the United States is comprised of foreign nationals who are not United States citizens. In order to be legally allowed to work for us, these individuals generally hold immigrant visas (which may or may not be tied to their employment with us) or green cards, the latter of which makes them permanent residents in the United States.The ability of these foreign nationals to remain and work in the United States is impacted by a variety of laws and regulations, as well as the processing procedures of various government agencies. Changes in applicable laws, regulations or procedures could adversely affect our ability to hire or retain these skilled employees and could affect our costs of doing business and our ability to deliver services to our customers. In addition, if the laws, rules or procedures governing the ability of foreign nationals to work in the United States were to change or if the number of visas available for foreign nationals permitted to work in the United States were to be reduced, our business could be adversely affected, if, for example, we were unable to hire or no longer able to retain a skilled worker who is a foreign national.Employing foreign nationals may require significant time and expense and our foreign national employees may choose to leave after we have made this investment. While a foreign
national who is working under an immigrant visa tied to his or her employment by us may be less likely to choose to leave our Company than a similarly situated employee who is a United States national or a green card holder (as leaving our employ could mean also having to leave the United States), this may not always be the case. Additionally, many of our foreign national employees hold green cards, which means that they have greater flexibility to leave our Company without facing the risk of also having to leave the United States.
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 ongoing 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.
Downgrades in our credit ratings may increase our future borrowing costs, limit our ability to raise capital, cause our stock price to decline or reduce analyst coverage, any of which could have a material adverse impact on our business.
Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each of the rating agencies may be subject to revision at any time. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, our financial position, conditions in and periods of disruption in any of our principal markets and changes in our business strategy. If weak financial market conditions or competitive dynamics cause any of these factors to deteriorate, we could see a reduction in our corporate credit rating. Since investors, analysts and financial institutions often rely on credit ratings to assess a company’s creditworthiness and risk profile, make investment decisions and establish threshold requirements for investment guidelines, our ability to raise capital, our access to external financing, our stock price and analyst coverage of our stock could be negatively impacted by a downgrade to our credit rating.
Our insurance policies, including general liability, errors and omissions, directors’ and officers’ insurance and cyber insurance may not totally protect us.
We cannot assure that our existing general liability insurance coverage, coverage for errors and omissions, directors’ and officers’ insurance and cyber liability insurance will continue to be available on acceptable terms in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or the occurrence of changes in our insurance
policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Business and Industry
The financial and operating difficulties in the telecommunications sector may negatively affect our customers and our company.
The telecommunications sector has at times faced significant challenges resulting from significant changes in technology and consumer behavior, excess capacity, poor operating results and financing difficulties. The sector’s financial status has also at times been uncertain and access to debt and equity capital has been seriously limited. The impact of these events on us could include slower collection on accounts receivable, higher bad debt expense, uncertainties due to possible customer bankruptcies, lower pricing on new customer contracts, lower revenues due to lower usage by the end customer and possible consolidation among our customers, which will put our customers and operating performance at risk. In addition, because we operate in the communications sector, we may also be negatively impacted by limited access to debt and equity capital.
The ongoing COVID-19 pandemic and measures intended to prevent its spread may have a material and adverse effect on our business and results of operations.
Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the pandemic has significantly increased economic uncertainty and reduced economic activity. The pandemic has resulted in government authorities and businesses implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders, school closures, and business limitations and shutdowns. As a result, our supply chain, financial condition, revenues, profitability and cash flows could be adversely affected.
The pandemic has caused us to modify our business practices to help minimize the risk of the virus to our employees, our customers, and the communities in which we participate, which could negatively impact our business. These measures include temporarily requiring employees to work remotely, suspending all non-essential business travel for our employees, limiting external guests visiting our offices, and canceling, postponing, or holding meetings and events virtually. Given the continually evolving situation, there is no certainty that the measures we have taken will be sufficient to mitigate the risks posed by the virus.
The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition will depend on developments that continue to be highly uncertain and difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, the availability, distribution and efficacy of vaccines, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may experience material and adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, bankruptcies or insolvencies of customers, and recession or economic downturn.
There are no comparable recent events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations, or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of the known risks described throughout this Risk Factors section.
If we do not continue to improve our operational, financial and other internal controls and systems to manage our growth and size, our business, results of operations and financial condition could be adversely affected.
Our historic and anticipated growth will continue to place significant demands on our management and other resources and will require us to continue to develop and improve our operational, financial and other internal controls. In particular, our growth will increase the challenges involved in:
•recruiting, training and retaining technical, finance, marketing and management personnel with the knowledge, skills and experience that our business model requires;
•maintaining high levels of customer satisfaction;
•developing and improving our internal administrative infrastructure, particularly our financial, operational, communications and other internal systems;
•preserving our culture, values and entrepreneurial environment; and
•effectively managing our personnel and operations and effectively communicating to our personnel worldwide our core values, strategies and goals.
In addition, the increasing size and scope of our operations increase the possibility that a member of our personnel will engage in unlawful or fraudulent activity, breach our contractual obligations, or otherwise expose us to unacceptable business risks, despite our efforts to train our people and maintain internal controls to prevent such instances. If we do not continue to develop and implement the right processes and tools to manage our enterprise, our business, results of operations and financial condition could be adversely affected.
The success of our business depends on the continued growth in demand for connected devices and the continued availability of high-speed access to the Internet.
The future success of our business depends upon the continued growth in demand for connected devices and business transactions on the Internet, and on our customers having high-speed access to the Internet, as well as the continued maintenance and development of the Internet infrastructure. While we believe the market for connected devices will continue to grow for the foreseeable future, we cannot accurately predict the extent to which demand for connected devices will increase, if at all. In particular, the ongoing COVID-19 pandemic has caused disruptions in various supply chains. If the demand for connected devices were to slow down or decline or the supply of connected devices to our customers is impacted for any reason, such as COVID-19 or other public health epidemics or concerns, our business and results of operations may be adversely affected. If for any reason the Internet does not remain a widespread communications medium and commercial platform, the demand for our services would be significantly reduced, which would harm our business, results of operations and financial condition.To the extent the Internet continues to experience increased numbers of users, frequency of use or bandwidth requirements, the Internet may become congested and be unable to support the demands placed on it, and its performance or reliability may decline. Any future Internet outages or delays could adversely affect our business, results of operation and financial condition.
Our business growth would be impeded if the performance or perception of the Internet was harmed by security problems such as “viruses,” “worms” or other malicious programs, reliability issues arising from outages and damage to Internet infrastructure, delays in development or adoption of new standards and protocols to handle increased demands of Internet activity, increased costs, decreased accessibility and quality of service, or increased government regulation and taxation of Internet activity. The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If Internet activity grows faster than Internet infrastructure or if the Internet infrastructure is otherwise unable to support the demands placed on it, or if hosting capacity becomes scarce, the growth of our business and operating results may be adversely affected.
The SaaS pricing model is evolving and our failure to manage its evolution and demand could lead to lower than expected revenue and profit.
We derive a portion of our revenue growth from subscription offerings and specifically SaaS offerings. This business model depends heavily on achieving economics of scale due to the initial upfront investment, and the associated revenue is recognized on a ratable basis. Our customers typically have no contractual obligation to renew their subscriptions after completion of their then-current subscription term. We may be unable to predict future customer renewal rates accurately. Our renewal rates may decline or fluctuate as a result of a number of actors, including our customers’ level of satisfaction with our offerings, our offerings’ inability to integrate with new or changing technologies, the prices of our offerings, competing products, reductions in our customers’ spending levels or general, industry-specific or local economic conditions. If we fail to achieve appropriate economics of scale or if we fail to manage or anticipate the evolution and demand of the SaaS pricing model, then our business and operating results could be adversely affected.
Because subscription revenue related to our SaaS offerings is typically recognized ratably over time, we expect to experience near-term revenue growth as more customers move to our SaaS subscriptions. If the Company does not achieve near term growth, we may not be able to adjust our cost structure in response to changes in subscription agreements in a period. Also, since revenue from SaaS subscriptions is recognized over the term of their subscriptions, it is difficult for us to rapidly increase revenue through additional sales in any period. We forecast our future revenue and operating results and provide financial projections based on a number of assumptions, including a forecasted rate of subscription bookings. In addition, our subscription based offerings may be invoiced over multiple reporting periods, which could subject us to additional collection and credit risks, particularly if a customer does not plan to renew these subscriptions. If any of our assumptions about our business model or the estimated subscriptions are incorrect, our revenue and operating results may be impacted and could vary materially from those we provide as guidance or from those anticipated by investors and analysts. If we are unable to manage
our SaaS pricing model in light of the foregoing risks and uncertainties, our business, results of operations and financial condition would be negatively impacted.
Our business depends substantially on customers renewing and expanding their subscriptions for our services. Any decline in our customer renewals and expansions would harm our future operating results.
We enter into subscription agreements with certain of our customers that are generally one to two years. As a result, maintaining the renewal rate of those subscription agreements is critical to our future success. We cannot provide assurance that any of our customer agreements will be renewed, as our customers have no obligation to renew their subscriptions for our services after the expiration of the initial term of their agreements. The loss of any customers that individually or collectively account for a significant amount of our revenues would have a material adverse effect on our results of operations or financial condition. Additionally, our customer’s consumers may become dissatisfied with their current service provider and may switch to another provider. In the event that there is substantial subscriber migration from our existing customers to service providers with which we do not have relationships, the fees that we receive on a per-subscriber basis, and the related revenue, including search and digital advertising revenue, could decline. If our renewal rates are lower than anticipated or decline for any reason, if customers renew on terms less favorable to us, or if there’s a substantial subscriber migration from our customers, our revenue may decrease, and our profitability and gross margin may be harmed, which would have a material adverse effect on our business, results of operations and financial condition.
If we fail to compete successfully with existing or new competitors, our business could be harmed.
If we fail to compete successfully with established or new competitors, it could have a material adverse effect on our results of operations and financial condition. The communications and enterprise industries in which we operate are highly competitive and fragmented, and we expect competition to increase. We compete with independent providers of information systems and services and with the in-house departments of our OEMs and communications services companies'companies’ customers. Rapid technological changes, such as advancements in software integration across multiple and incompatible systems, and economies of scale may make it more economical for CSPs, MSOs or OEMs to develop their own in-house processes and systems, which may render some of our products and services less valuable or, eventually, obsolete. Our competitors include firms that provide comprehensive information systems and managed services solutions, BYOD providers, systems integrators, clearinghouses and service bureaus. Many of our
competitors have long operating histories, large customer bases, substantial financial, technical, sales, marketing and other resources and strong name recognition.
Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves or with third parties to increase their ability to address the needs of our current or prospective customers. In addition, our competitors have acquired, and may continue to acquire in the future, companies that may enhance their market offerings. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. As a result, our competitors may be able to adapt more quickly than us to new or emerging technologies and changes in customer requirements and may be able to devote greater resources to the promotion and sale of their products. These relationships and alliances may also result in transaction pricing pressure, which could result in large reductions in the selling prices of our products and services. Our competitors or our customers'customers’ in-house solutions may also provide services at a lower cost, significantly increasing pricing pressure on us. We may not be able to offset the effects of this potential pricing pressure. Our failure to adapt to changing market conditions and to compete successfully with established or new competitors may have a material adverse effect on our results of operations and financial condition. In particular, a failure to offset competitive pressures brought about by competitors or in-house solutions developed by our customers could result in a substantial reduction in or the outright termination of our contracts with some of our customers, which would have a significant, negative and material impact on our business.business, results of operations and financial condition.
The markets in which we market and sell our products and services are highly competitive, and if we do not adapt to rapid technological change, we could lose customers or market share.share, which could adversely affect our ability to sustain or grow revenue.
The industries we serve are characterized by rapid technological change and frequent new service offerings and are highly competitive with respect to the need for innovation. The industries also demand frequent and, at times, significant technology upgrades and changes. Significant technological upgrades and changes could make our technology and services obsolete, less marketable or less competitive. We must adapt to these rapidly changing markets by continually improving the features, functionality, reliability and responsiveness of our products and services, and by developing new features, services and applications to meet changing customer needs and further address the markets we serve. Our ability to take advantage of opportunities in the markets we serve may require us to invest in development and incur other expenses well in advance of our ability to generate revenues from these offerings or services. We may not be able to timely adapt to these challenges or respond
successfully or in a cost-effective way.way and we will not have the resources to invest in all existing and potential technologies. As a result, we expect to concentrate our resources on those technologies that we believe have or will achieve substantial customer acceptance and in which we will have appropriate technical expertise. However, existing products often have short product life cycles characterized by declining prices over their lives. In addition, our choices for developing technologies may prove incorrect if customers do not adopt the products that we develop or if those technologies ultimately prove to be unviable. Our failure to do sosuccessfully adapt would adversely affect our ability to compete and retain customers and/or market share.share and could adversely affect our ability to sustain or grow revenue. Our revenues and operating results will depend, to a significant extent, on our ability to maintain a product portfolio and service capability that is attractive to our current and future customers; to enhance our existing products; to continue to introduce new products successfully and on a timely basis; and to develop new or enhance existing tools for our services offerings.The development of new technologies remains a significant risk to us, due to the efforts that we still need to make to achieve technological feasibility, due to rapidly changing customer markets; and due to significant competitive threats. In addition, as we expand our service offerings, we may face competition from new and existing competitors. It is also possible that our customers could decide to create, invest in or collaborate in the creation of competitive products that might limit or reduce their need for our products, services and solutions. Further, we may experience delays in the development of one or more features of our offerings, which could materially reduce the potential benefits to us providing these services. In addition, our present or future service offerings may not satisfy the evolving needs of the industry in which we operate. If we are unable to anticipate or respond adequately to these evolving market needs, due to resource, technological or other constraints, our business and results of operations could be harmed. In addition, the arrival of new market entrants could reduce the demand for our services or cause us to reduce our pricing, resulting in a loss of revenue and adversely affecting our business, results of operations and financial condition. Also, the use of internal technologies, developed by our customers or their advisers, could reduce the demand for our services, result in pricing pressures or cause a reduction in our revenue. If we fail to manage these challenges adequately, our business, results of operations and financial condition could be adversely affected.
Consolidation in the telecommunications, media and technology industry or the other industries that we serve can reduce the number of actual and potential customers and adversely affect our business.
There has been, and there continues to be, merger, acquisition and consolidation activity among our customers. Mergers, acquisitions or consolidations of companies in the communications industry or other industries that we serve, have reduced and may continue to reduce the number of our customers and potential customers for our solutions, resulting in a smaller market for our services, which could have a material adverse impact on our business and results of operations. In addition, it is possible that the larger institutions that result from mergers or consolidations could themselves perform some or all of the services that we currently provide or could provide in the future. Should one or more of our significant customers acquire, consolidate or enter into an alliance with an entity or decide to either use a different service provider or to manage its transactions internally, this could have a negative material impact on our business. Any such consolidations, alliances or decisions to manage transactions internally may cause us to lose customers or require us to reduce prices as a result of enhanced customer leverage, which would have a material adverse effect on our business. We may not be able to offset the effects of any price reductions. We may not be able to expand our customer base to make up any revenue declines if we lose customers or if our transaction volumes decline.
The success of our business depends on our ability to achieve or sustain market acceptance of our services and solutions at desired pricing levels.
Our competitors and customers may cause us to reduce the prices we charge for our services and solutions. Our current or future competitors may offer our customers services at reduced prices or bundling and pricing services in a manner that may make it difficult for us to compete. Customers with a significant volume of transactions may attempt to use this leverage in pricing negotiations with us. Also, if our prices are too high, current or potential customers may find it economically advantageous to handle certain functions internally instead of using our services. We may not be able to offset the effects of any price reductions by increasing the number of transactions we handle or the number of customers we serve, by generating higher revenue from enhanced services or by reducing our costs. If these or other sources of pricing pressure cause us to reduce the pricing of our service or solutions below desirable levels, our business and results of operations may be adversely affected.
The success of our business depends on the continued growth of consumer and business transactions related to communications services on the Internet.
The future success of our business depends upon the continued growth of consumer and business transactions on the Internet, including attracting consumers who have historically purchased wireless services and devices through traditional retail stores and attracting new enterprise customers. Specific factors that could deter consumers from purchasing wireless services and devices on the Internet include concerns about buying wireless devices without a face-to-face interaction with sales personnel and the
ability to physically handle and examine the devices.
Our business growth would be impeded if the performance or perception of the Internet was harmed by security problems such as "viruses," "worms" or other malicious programs, reliability issues arising from outages and damage to Internet infrastructure, delays in development or adoption of new standards and protocols to handle increased demands of Internet activity, increased costs, decreased accessibility and quality of service, or increased government regulation and taxation of Internet activity. The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If Internet activity grows faster than Internet infrastructure or if the Internet infrastructure is otherwise unable to support the demands placed on it, or if hosting capacity becomes scarce, the growth of our business may be adversely affected.
The success of our business depends on the continued growth in demand for connected devices and the continued availability of high-speed access to the Internet.
The future success of our business depends upon the continued growth in demand for connected devices and on our customers having high-speed access to the Internet, as well as the continued maintenance and development of the Internet infrastructure. While we believe the market for connected devices will continue to grow for the foreseeable future, we cannot accurately predict the extent to which demand for connected devices will increase, if at all. If the demand for connected devices were to slow down or decline, our business and results of operations may be adversely affected. If for any reason the Internet does not remain a widespread communications medium and commercial platform, the demand for our services would be significantly reduced, which would harm our business, results of operations and financial condition.
To the extent the Internet continues to experience increased numbers of users, frequency of use or bandwidth requirements, the Internet may become congested and be unable to support the demands placed on it, and its performance or reliability may decline. Any future Internet outages or delays could adversely affect our business, results of operation and financial condition.
Though acceptance of cloud-based software has advanced in recent years, some businesses may still be hesitant to adopt these types of solutions.
Our cloud-based service strategy may not be successful. We enable our customers to offer their subscribers the ability to backup, restore and share content across multiple devices through a cloud-based environment. Some businesses may still be uncertain as to whether a cloud-based service like ours is appropriate for their business needs. The success of our offerings is dependent upon continued acceptance by and growth in subscribers of cloud-based services in general and there can be no
guarantee of the adoption rate by these subscribers. Many organizations have invested substantial personnel and financial resources to integrate traditional enterprise software into their organizations and, therefore, may be reluctant or unwilling to migrate to a cloud-based model for storing, accessing, sharing and managing their content. Because we derive, and expect to continue to derive, a substantial portion of our revenue and cash flows from sales of our cloud-based solutions, our success will depend to a substantial extent on the widespread adoption of cloud computing for companies in general. Our cloud strategy will continue to evolve, and we may not be able to compete effectively, generate significant revenues or maintain profitability. While we believe our expertise, investments in infrastructure, and the breadth of our cloud-based services provides us with a strong foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue required to be successful. In addition to software development costs, we incur costs to build and maintain infrastructure to support cloud-based services. It is difficult to predict customer adoption rates and demand for our services, the future growth rate and size of the cloud computing market or the entry of competitive services. The expansion of a cloud-based enterprise software market depends on a number of factors, including the cost, performance and perceived value associated with cloud computing, as well as the ability of companies that provide cloud-based services to address security and privacy concerns. If we or other providers of cloud-based services experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud-based services as a whole, including our services, may be negatively affected. If there is a reduction in demand for cloud-based services caused by a lack of customer acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, we could experience decreased revenue, which could harm our growth rates and adversely affect our business and operating results.
Government regulation of the Internet and e-commerce and of the international exchange of certain information is subject to possible unfavorable changes, and our failure to comply with applicable regulations could harm our business and operating results.
As Internet commerce continues to evolve, increasing regulation by federal, state, local and foreign governments becomes more likely. For example, we believe increased regulation is likely in the area of data privacy. Further, laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers' ability to use and
share data, potentially reducing demand for our products and services. In addition, taxation of products and services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting the exchange of information over the Internet could result in reduced growth or a decline in the use of the Internet and could diminish the viability of our Internet-based services, which could harm our business and operating results.
Our business depends substantially on customers renewing and expanding their subscriptions for our services. Any decline in our customer renewals and expansions would harm our future operating results.
We enter into subscription agreements with certain of our customers that are generally one to two years in length. As a result, maintaining the renewal rate of those subscription agreements is critical to our future success. We cannot provide assurance that any of our customer agreements will be renewed, as our customers have no obligation to renew their subscriptions for our services after the expiration of the initial term of their agreements. The loss of any customers that individually or collectively account for a significant amount of our revenues would have a material adverse effect on our results of operations or financial condition. If our renewal rates are lower than anticipated or decline for any reason, or if customers renew on terms less favorable to us, our revenue may decrease and our profitability and gross margin may be harmed, which would have a material adverse effect on our business, results of operations and financial condition.
If we do not maintain the compatibility of our services with third-party applications that our customers use in their business processes or if we fail to adapt our services to changes in technology or the marketplace, demand for our services could decline.
Our solutions can be used alongside a wide range of other systems such as email and enterprise software systems used by our customers in their businesses. If we do not support the continued integration of our products and services with third-party applications, including through the provision of application programming interfaces that enable data to be transferred readily between our services and third-party applications, demand for our services could decline and we could lose sales or experience declining renewal rates. We will also be required to make our products and services compatible with new or additional third-party applications that are introduced to the markets that we serve and, if we are not successful, we could experience reduced demand for our services. In addition, prospective customers, especially large enterprise customers, may require heavily customized features and functions unique to their business processes. If prospective customers require customized features or functions that we do not offer and that would be difficult for them to develop and integrate within our services, then the market for our products and services may be adversely affected.
We may not currently or in the future appropriately leverage advances in technology to achieve or sustain a competitive advantage in products, services, information and processes. Our customers and users regularly adopt new technologies and industry standards continue to evolve. The introduction of products or services and the emergence of new industry standards can render our existing services obsolete and unmarketable in short periods of time. We expect others to continue to develop, introduce new and enhance existing products and services that will compete with our services. Our future success will depend, in part, on our ability to enhance our current services and to develop and introduce new services that keep pace with technological developments, emerging industry standards and the needs of our customers. We cannot assure that we will be successful in cost-effectively developing, marketing and selling new services or service enhancements that meet these changing demands on a timely basis, that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these services, or that our new service and service enhancements will adequately meet the demands of the marketplace and achieve market acceptance. We also cannot assure that the features that we believe will drive purchasing decisions will in fact be the features that our potential customers consider most significant.
Our revenue, earnings and profitability are affected by the length of our sales cycle, and a longer sales cycle could adversely affect our results of operations and financial condition.
Our business is directly affected by the length of our sales cycles. Our customers' businesses are relatively complex and their purchase of the types of services that we offer generally involve a significant financial commitment, with attendant delays frequently associated with large financial commitments and procurement procedures within an organization. In addition, as we continue to further penetrate the enterprise and the size and complexity of our sales opportunities continue to expand, we have seen an increase in the average length of time in our sales cycles. The purchase of the types of services that we offer typically also requires coordination and agreement across many departments within a potential customer's organization. Delays associated with such timing factors could have a material adverse effect on our results of operations and financial condition. In periods of economic slowdown our typical sales cycle lengthens, which means that the average time between our initial contact with a prospective customer and the signing of a sales contract increases. The lengthening of our sales cycle could reduce growth in our revenue. In addition, the lengthening of our sales cycle contributes to an increased cost of sales, thereby reducing our profitability.
We traditionally have had substantial customer concentration, with a limited number of customers accounting for a substantial portion of our revenues.
Each of AT&T and Verizon accounted for more than 10% of our revenues for the years ended December 31, 2016 and 2015. AT&T and Verizon in the aggregate accounted for 62% and 71% of our revenues for the years ended December 31, 2016 and 2015, respectively. Although, as described above, in December 2016, we divested a portion of our AT&T Activation business related to our exception handling business, which will reduce our customer concentration with one of our top revenue-generating customers, there are inherent risks whenever a large percentage of total revenues are concentrated with a limited number of customers. It is not possible for us to predict the future level of demand for our services that will be generated by these customers or the future demand for the products and services of these customers in the end-user marketplace. In addition, revenues from these larger customers may fluctuate from time to time based on the commencement and completion of projects, the timing of which may be affected by market conditions or other factors, some of which may be outside of our control. Further, some of our contracts with these larger customers permit them to terminate our services at any time (subject to notice and certain other provisions). If any of our major customers experience declining or delayed sales due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our services or we could lose the customer. Any such development could have an adverse effect on our margins and financial position, and would negatively affect our revenues and results of operations and/or trading price of our common stock. Although the recently acquired Intralinks business has a diverse customer base and we expect that revenue from our Intralinks business will comprise a significant portion of our going forward revenue, there can be no assurance that our revenues will not continue to be sufficiently concentrated among a limited number of customers.
As we continue to pursue new enterprise customers, our sales cycle, forecasting processes and deployment processes may be less predictable and require greater time and expense.
As an increasing portion of our business is focused on the enterprise market, our sales cycles may lengthen. Enterprise customers may undertake a significant evaluation process in regard to enterprise software, which can last from several months to a year or longer. Our enterprise sales efforts often require us to educate our customers about the use and benefit of our services, including the technical capabilities and potential cost savings to an organization. In this market segment, in order to make sales, we may need to provide greater levels of customer education regarding the uses and benefits of our services, as well as regarding security, privacy, and data protection laws and regulations, especially for those customers in more heavily regulated industries or those with significant international operations. If our sales cycles were to lengthen, events may occur during the sales cycle that could affect the size or timing of a purchase or even cause cancellations, and this may lead to more unpredictability in our business and operating results. Additionally, sales cycles for sales of certain of our products and services tend to be longer, ranging from three to 12 months or more, which may make forecasting more complex and uncertain. We may spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any sales. In addition, product purchases by large enterprises are frequently subject to budget constraints, multiple approvals, and unplanned administrative processing and other delays. Finally, large enterprises may have longer implementation cycles, require greater product functionality and scalability and a broader range of services, demand that vendors take on a larger share of risks, require acceptance provisions that can lead to a delay in revenue recognition and expect greater payment flexibility from vendors. All of these factors can add further risk to business conducted with these customers. If we fail to realize an expected sale from a large end-customer in a particular quarter or at all, our business, operating results, and financial condition could be materially and adversely affected. Further, where we make sales to enterprise customers on a subscription basis, there may be a delay between when we make the sale and when we start to recognize revenue from that customer. In addition, where we provide professional services, we are required to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met.
We may also face unexpected deployment challenges with enterprise customers or more complicated installations of our products. It may be difficult to deploy our software products if the customer has unexpected database, hardware or software technology issues. Additional deployment complexities may occur if a customer hires a third party to deploy our products and services. Any difficulties or delays in the initial implementation could cause customers to reject our software or lead to the delay or non-receipt of future orders, in which case our business, operating results and financial condition would be harmed.
If we do not meet our revenue forecasts, we may be unable to reduce our expenses in a timely fashion to avoid or minimize harm to our results of operations.
Our revenues are difficult to forecast and are likely to fluctuate significantly from period to period, particularly as we continue to implement our business strategy. We base our operating expense and capital investment budgets on expected sales and revenue trends, and many of our expenses, such as office and equipment leases and personnel costs, will be relatively fixed in the short term and will increase over time as we make investments in our business. Our estimates of sales trends may not correlate with actual revenues in a particular quarter or over a longer period of time. Variations in the rate and timing of conversion of our sales prospects into sales and actual revenues could cause us to plan or budget inaccurately and those variations could adversely affect
our financial results. In particular, delays, reductions in amount or cancellation of customers' contracts would adversely affect the overall level and timing of our revenues, and our business, results of operations and financial condition could be harmed. Due to the relatively fixed nature of many of our expenses, we may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. In the event we are unable to collect on our accounts receivable, it could negatively affect our cash flows, operating results and business.
Because we recognize revenue for certain of our products and services ratably over the term of our customer agreements, downturns or upturns in the value of signed contracts will not be fully and immediately reflected in our operating results.
We offer certain of our products and services primarily through fixed commitment contracts and recognize revenue ratably over the related service period, which typically ranges from twelve to twenty-four months. As a result, some portion of the revenue we report in each quarter is revenue from contracts entered into during prior periods. Consequently, a decline in signed contracts in any quarter will not be fully and immediately reflected in revenue for that quarter, but will instead negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost structure to offset this reduced revenue. Similarly, revenue attributable to an increase in contracts signed in a particular quarter will not be fully and immediately recognized, as revenue from new or renewed contracts is recognized ratably over the applicable service period. Because we incur sales commissions at the time of sale, we may not recognize revenues from some customers despite incurring considerable expense related to our sales processes. Timing differences of this nature could cause our margins and profitability to fluctuate significantly from quarter to quarter.
Our offerings of new services or products may be subject to complex revenue recognition standards, which could materially affect our financial results.
As we introduce new services or products, revenue recognition could become increasingly complex and require additional analysis and judgment. Additionally, we may negotiate and revise terms and conditions of our contracts with customers and channel partners, which may also cause us to revise our revenue recognition policies. As our arrangements with customers evolve, we may be required to defer a greater portion of revenue into future periods, which could materially and adversely affect our financial results.
Failure to maintain the confidentiality, integrity and availability of our systems, software and solutions could seriously damage our reputation and affect our ability to retain customers and attract new business.
Maintaining the confidentiality, integrity and availability of our systems, software and solutions is an issue of critical importance for us and for our customers and users who rely on our systems to store and exchange large volumes of information, much of which is proprietary and confidential. There appears to be an increasing number of individuals, governments, groups and computer "hackers" developing and deploying a variety of destructive software programs (such as viruses, worms and other malicious software) that could attack our computer systems or solutions or attempt to infiltrate our systems. We make significant efforts to maintain the confidentiality, integrity and availability of our systems, solutions and source code. Despite significant efforts to create security barriers, it is virtually impossible for us to mitigate this risk entirely because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not recognized until launched against a target. Like all software solutions, our software is vulnerable to these types of attacks. An attack of this type could disrupt the proper functioning of our software solutions, cause errors in the output of our customers' work, allow unauthorized access to sensitive, proprietary or confidential information of ours or our customers and other destructive outcomes. If an actual or perceived breach of our security were to occur, our reputation could suffer, customers could stop buying our solutions and we could face lawsuits and potential liability, any of which could cause our financial performance to be negatively impacted. Though we maintain professional liability insurance that may be available to provide coverage if a cybersecurity incident were to occur, there can be no assurance that insurance coverage will be available or that available coverage will be sufficient to cover losses and claims related to any cybersecurity incidents we may experience.
There is also a danger of industrial espionage, cyber attacks, misuse or theft of information or assets (including source code), or damage to assets by people who have gained unauthorized access to our facilities, systems or information, which could lead to the disclosure of portions of our source code or other confidential information, improper usage and distribution of our solutions without compensation, illegal or inappropriate usage of our systems and solutions, jeopardizing of the security of information stored in and transmitted through our computer systems, manipulation and destruction of data, defects in our software and downtime issues. Although we actively employ measures to combat unlicensed copying, access and use of our facilities, systems, software and intellectual property through a variety of techniques, preventing unauthorized use or infringement of our rights is inherently difficult. The occurrence of an event of this nature could adversely affect our financial results or could result in significant claims against us for damages. Further, participating in either a lawsuit to protect against unauthorized access to, usage of or disclosure
of any of our solutions or any portion of our source code or the prosecution of an individual in connection with a cybersecurity breach could be costly and time-consuming and could divert management's attention and adversely affect the market's perception of us and our solutions.
A number of core processes, such as software development, sales and marketing, customer service and financial transactions, rely on our IT, infrastructure and applications. Defects or malfunctions in our IT infrastructure and applications could cause our service offerings not to perform as our customers expect, which could harm our reputation and business. In addition, malicious software, sabotage and other cybersecurity breaches of the types described above could cause an outage of our infrastructure, which could lead to a substantial denial of service and ultimately downtimes, recovery costs and customer claims, any of which could have a significant negative impact on our business, financial position, profit and cash flows.
We rely upon our customers and users of our solutions to perform important activities relating to the security of the data maintained on our platforms, particularly the Intralinks platform in the case of our recently acquired Intralinks business, such as assignment of user access rights and administration of document access controls. Because we do not control the access provided by our customers to third parties with respect to all the data on our systems, we cannot ensure the complete integrity or security of this data. Errors or wrongdoing by users resulting in security breaches could be attributed to us. Because many of the engagements in our business, particularly our Intralinks business, involve business-critical projects for financial institutions and their customers and for other types of customers where confidentiality is of paramount importance, a failure or inability to meet our customers' expectations with respect to security and confidentiality could seriously damage our reputation and affect our ability to retain customers and attract new business.
The confidentiality, integrity and availability of our systems could also be jeopardized by a breach of our internal controls and policies by our employees, consultants or subcontractors having access to our systems. If our systems fail or are breached as a result of a third-party attack or an error, violation of internal controls or policies or a breach of contract by an employee, consultant or subcontractor that results in the unauthorized use or disclosure of proprietary or confidential information or customer data (including information about the existence and nature of the projects and transactions our customers are engaged in), we could lose business, suffer irreparable damage to our reputation and incur significant costs and expenses relating to the investigation and possible litigation of claims relating to such event. We could be liable for damages, penalties for violation of applicable laws or regulations and costs for remediation and efforts to prevent future occurrences, any of which liabilities could be significant. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from liabilities or damages with respect to any particular claim. We also cannot assure that our existing general liability insurance coverage, coverage for errors and omissions and cyber liability insurance will continue to be available on acceptable terms in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations. Furthermore, litigation, regardless of its outcome, could result in a substantial cost to us and divert management's attention from our operations. Any significant claim against us or litigation involving us could have a material adverse effect on our business, financial condition and results of operations.
We have implemented a number of security measures designed to ensure the security of our information, IT resources and other assets. Nonetheless, unauthorized users could gain access to our systems through cyber attacks and steal, use without authorization and sabotage our intellectual property and confidential data. Any security breach, misuse of our IT systems or theft of our or our customers' intellectual property or data could lead to customer losses, non-renewal of customer agreements, loss of production, recovery costs or litigation brought by customers or business partners, any of which could adversely impact our cash flows and reputation and could have an adverse impact on our disclosure controls and procedures.
Undetected errors or failures found in our products and services may result in loss of or delay in market acceptance of our products and services that could seriously harm our business.
Our products and services may contain undetected errors or scalability limitations at any point in their lives, but particularly when first introduced or as new versions are released. We frequently release new versions of our products and different aspects of our platforms are in various stages of development. Despite testing by us and by current and potential customers, errors may not be found in new products and services until after commencement of commercial availability or use, resulting in a loss of or a delay in market acceptance, damage to our reputation, customer dissatisfaction and reductions in revenues and margins, any of which could seriously harm our business. Additionally, our agreements with customers that attempt to limit our exposure to liability claims may not be enforceable in jurisdictions where we operate, particularly in certain markets outside the United States.
Compliance with changing European privacy laws could require us to incur significant costs or experience significant business disruption and failure to so comply could result in an adverse impact on our business.
Our solutions provide our customers, for example, with access to websites to conduct e-commerce transactions or access important data and central locations where they can post information and make it accessible to any parties they authorize to access that information. In connection with offering our solutions to customers and their invited guests, we collect user information related to the individuals who access our software solutions.
Europe Directive 95/46/EC, which covers the protection of individuals with regard to the processing of personal data and on the free movement of such data, or the Directive, has required European Union member states to implement data protection laws to meet the strict privacy requirements of the Directive. Among other requirements, the Directive regulates transfers of personally identifiable data that is subject to the Directive, or Personal Data, to third countries, outside the European Economic Area, or the EEA, such as the United States, that have not been found to provide adequate protection to such Personal Data. We have in the past relied upon adherence to the U.S. Department of Commerce’s Safe Harbor Privacy Principles and compliance with the U.S.-EU Framework as agreed to and set forth by the U.S. Department of Commerce and the European Union, which established a means for legitimating the transfer of Personal Data by data controllers in the EEA to the United States. As a result of the October 6, 2015 European Union Court of Justice, or ECJ, opinion in Case C-362/14 (Schrems v. Data Protection Commissioner) regarding the adequacy of the U.S.-EU Safe Harbor Framework, the U.S.-EU Safe Harbor Framework is no longer deemed to be a valid method of compliance with requirements set forth in the Directive (and member states’ implementations thereof) regarding the transfer of Personal Data outside of the EEA.
The successor to the Safe Harbor framework, the EU-US Privacy Shield, was adopted in July 2016. We certified to adhere to this framework in October 2016. The adequacy of this framework, however, is currently being challenged in European courts. We cannot rely on the fact that the framework will not follow the path of the Safe Harbor framework and as such we will continue to face uncertainty as to whether our efforts to comply with our obligations under European privacy laws will be sufficient. If we are investigated by a European data protection authority, we may face fines and other penalties. Any such investigation or charges by European data protection authorities could have a negative effect on our existing business and on our ability to attract and retain new customers.
We have undertaken efforts to conform transfers of Personal Data from the EEA based on current regulatory obligations, the guidance of data protection authorities and evolving best practices. Despite these efforts, we may be unsuccessful in establishing conforming means of transferring such data from the EEA, including due to ongoing legislative activity, which may vary the current data protection landscape.
We may also experience hesitancy, reluctance or refusal by European or multi-national customers to continue to use our services due to the potential risk exposure that these customers might face as a result the current data protection obligations imposed on them by certain data protection authorities. These customers may also view any alternative approaches to compliance as being too costly, too burdensome, too legally uncertain or otherwise objectionable and therefore decide not to do business with us.
We and our customers are at risk of enforcement actions taken by certain EU data protection authorities until such time as we may be able to ensure that all transfers of Personal Data to us from the EEA are conducted in compliance with all applicable regulatory obligations, the guidance of data protection authorities and evolving best practices. We may find it necessary to establish systems to maintain Personal Data originating from the EU in the EEA, which may involve substantial expense and may cause us to need to divert resources from other aspects of our business, all of which may adversely affect our business.
The Directive will be replaced in time with the pending European General Data Protection Regulation, which will impose additional obligations and risk upon our business and which may increase substantially the penalties to which we could be subject in the event of any non-compliance. We may incur substantial expense in complying with the new obligations to be imposed by the European General Data Protection Regulation and we may be required to make significant changes in our business operations, all of which may adversely affect our revenues and our business overall.
Compromises to our privacy safeguards or disclosure of confidential information could impact our reputation.
Names, addresses, telephone numbers, credit card data and other personal identification information, or PII, are collected, processed and stored in our systems. Our treatment of this kind of information is subject to contractual restrictions and federal, state and foreign data privacy laws and regulations. We have implemented steps designed to protect against unauthorized access to such information, and comply with these laws and regulations. Because of the inherent risks and complexities involved in protecting this information, the steps we have taken to protect PII may not be sufficient to prevent the misappropriation or improper disclosure of such PII. If misappropriation or disclosure of PII were to occur, our business could be harmed through reputational
injury, litigation and possible damages claimed by the affected end customers, including in some cases costs related to customer notification and fraud monitoring, or potential fines from regulatory authorities. We may need to incur significant costs or modify our business practices and/or our services in order to comply with these data privacy and protection laws and regulations in the future. Even the mere perception of a security breach or inadvertent disclosure of PII could adversely affect our business and results of operations. In addition, third party vendors that we engage to perform services for us may unintentionally release PII or otherwise fail to comply with applicable laws and regulations. Our insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. Concerns about the security of online transactions and the privacy of PII could deter consumers from transacting business with us on the Internet. The occurrence of any of these events could have an adverse effect on our business, financial position, and results of operations.
We intend to reserve from time to time a certain amount of cash in order to satisfy the obligations relating to our debt, which could adversely affect the amount or timing of investments to grow our business.
The 2019 Notes are unsecured debt and are not redeemable by us prior to the maturity date. Holders of the 2019 Notes may require us to purchase all or any portion of their 2019 Notes at 100% of their principal amount, plus any unpaid interest, upon a fundamental change, which is generally defined to include a merger involving us, an acquisition of a majority of our outstanding common stock and the change of a majority of our board without the approval of the board. In addition, to the extent we pursue and complete a monetization transaction, the structure of that transaction may qualify as a fundamental change under the 2019 Notes, which could trigger the put rights of the holders of the 2019 Notes, in which case we would be required to use a portion of the net proceeds from that transaction to repurchase any 2019 Notes put to us, which could adversely affect the amount or timing of any distributions to our stockholders.
We intend to reserve from time to time a certain amount of cash in order to satisfy these obligations relating to the 2019 Notes, which could materially affect the amount or timing of any investments to grow our business. If any or all of the 2019 Notes are not converted into shares of our common stock before the maturity date, we will have to pay the holders the full aggregate principal amount of the 2019 Notes then outstanding. Any of the above payments could have a material adverse effect on our cash position. If we fail to satisfy these obligations, it may result in a default under the indenture, which could result in a default under certain of our other debt instruments, if any. Any such default would harm our business and the price of our securities could fall.
Downgrades in our credit ratings may increase our future borrowing costs, limit our ability to raise capital, cause our stock price to decline or reduce analyst coverage, any of which could have a material adverse impact on our business.
Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each of the rating agencies may be subject to revision at any time. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, our financial position, conditions in and periods of disruption in any of our principal markets and changes in our business strategy. If weak financial market conditions or competitive dynamics cause any of these factors to deteriorate, we could see a reduction in our corporate credit rating. Since investors, analysts and financial institutions often rely on credit ratings to assess a company's creditworthiness and risk profile, make investment decisions and establish threshold requirements for investment guidelines, our ability to raise capital, our access to external financing, our ability to refinance our indebtedness, our stock price and analyst coverage of our stock could be negatively impacted by a downgrade to our credit rating.
Changes in laws, regulations or governmental policy applicable to our customers or potential customers may decrease the demand for our solutions or increase our costs.
The level of our customers' and potential customers' activity in the business processes our services are used to support is sensitive to many factors beyond our control, including governmental regulation and regulatory policies. Many of our customers and potential customers in the telecommunications, life sciences, energy, utilities, insurance, financial and other industries are subject to substantial regulation and may be the subject of further regulation in the future. Accordingly, significant new laws or regulations or changes in, or repeals of, existing laws, regulations or governmental policy may change the way these customers do business and could cause the demand for and sales of our solutions to decrease. For example, many products developed by our customers in the life sciences industry require approval of the United States Food and Drug Administration, or FDA, and other similar foreign regulatory agencies before they can market their products. The processes for filing and obtaining FDA approval to market these products are guided by specific protocols that our services help support, such as United States 21 CFR Part 11, which provides the criteria for acceptance by the FDA of electronic records. If new government regulations from future legislation or administrative action or from changes in FDA or foreign regulatory policies occur in the future, the services we currently provide may no longer support these life science processes and protocols, and we may lose customers in the life sciences industry. Any change in the scope of applicable regulations that either decreases the volume of transactions that our customers or potential
customers enter into or otherwise negatively impacts their use of our solutions would have a material adverse effect on our revenues or gross margins, or both. Moreover, complying with increased or changed regulations could cause our operating expenses to increase as we may have to reconfigure our existing services or develop new services to adapt to new regulatory rules and policies, either of which would require additional expense and time. Additionally, the information provided by, or residing in, the software or services we provide to our customers could be deemed relevant to a regulatory investigation or other governmental or private legal proceeding involving our customers, which could result in requests for information from us that could be expensive and time consuming for us to address or harm our reputation since our customers rely on us to protect the confidentiality of their information. These types of changes could adversely affect our business, results of operations and financial condition.
Fraudulent Internet transactions could negatively impact our business.
Our business may be exposed to risks associated with Internet credit card fraud and identity theft that could cause us to incur unexpected expenditures and loss of revenues. Under current credit card practices, a merchant is liable for fraudulent credit card transactions when, as is the case with the transactions we process, that merchant does not obtain a cardholder's signature. Although our customers currently bear the risk for a fraudulent credit card transaction, in the future we may be forced to share some of that risk and the associated costs with our customers. To the extent that technology upgrades or other expenditures are required to prevent credit card fraud and identity theft, we may be required to bear the costs associated with such expenditures. In addition, to the extent that credit card fraud and/or identity theft cause a decline in business transactions over the Internet generally, both the business of our customers and our business could be adversely affected.
Consolidation in the communications industry, the commercial or investment banking industries or the other industries that we serve can reduce the number of actual and potential customers and adversely affect our business.
There has been, and there continues to be, merger, acquisition, alliance and consolidation activity among our customers. Mergers, acquisitions, alliances or consolidations of companies in the communications industry or banks and financial institutions, in particular, have reduced and may continue to reduce the number of our customers and potential customers for our solutions, resulting in a smaller market for our services, which could have a material adverse impact on our business and results of operations. In addition, it is possible that the larger institutions that result from mergers or consolidations could themselves perform some or all of the services that we currently provide or could provide in the future. Should one or more of our significant customers acquire, consolidate or enter into an alliance with an entity or decide to either use a different service provider or to manage its transactions internally, this could have a negative material impact on our business. Any such consolidations, alliances or decisions to manage transactions internally may cause us to lose customers or require us to reduce prices as a result of enhanced customer leverage, which would have a material adverse effect on our business. We may not be able to offset the effects of any price reductions. We may not be able to expand our customer base to make up any revenue declines if we lose customers or if our transaction volumes decline.
Failures or interruptions of our systems and services could materially harm our revenues, impair our ability to conduct our operations and damage relationships with our customers.
Our success depends on our ability to provide reliable services to our customers and process a high volume of transactions in a timely and effective manner. Although we operate disaster recovery solutions our network operations are susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks and similar events. We could also experience failures or interruptions of our systems and services, or other problems in connection with our operations, as a result of, among other things:
damage to or failure of our computer software or hardware or our connections and outsourced service arrangements with third parties;
errors in the processing of data by our systems;
computer viruses or software defects;
physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events;
fire, cybersecurity attack, terrorist attack or other catastrophic event;
increased capacity demands or changes in systems requirements of our customers; or
errors by our employees or third-party service providers. We rely on various systems and applications to support our internal operations, including our billing, financial reporting and customer contracting functions. The availability of these systems and applications is essential to us and delays, disruptions or performance problems may adversely impact our ability to accurately bill our customers, report financial information and conduct our business. Additionally, we may choose to replace or implement changes to these systems, including substituting traditional systems with cloud-based solutions, which could be time-consuming and expensive and which could result in delays in the ongoing operational processes these software solutions support. Further, our cloud-based solutions may experience disruptions and outages
that are beyond our control as we rely on third party vendors to support these solutions and assure their continued availability. We have also acquired a number of companies, products, services and technologies over the last several years. While we make significant efforts to address any IT security issues with respect to our acquisitions, we may still inherit certain risks when we integrate these acquisitions. In addition, our business interruption insurance may be insufficient to compensate us for losses or liabilities that may occur. Any interruptions in our systems or services could damage our reputation and substantially harm our business and results of operations.
The quality of our support and services offerings is important to our customers and if we fail to meet our service level obligations under our service level agreements or otherwise fail to offer quality support and services, we would be subject to penalties and could lose customers.
Our customers generally depend on our service organization to resolve issues relating to the use of our solutions. A high level of support is critical for the successful marketing and sale of our solutions. If we are unable to provide a level of support and service to meet or exceed the expectations of our customers, we could experience:
loss of customers and market share;
difficulty attracting or the inability to attract new customers, including in new geographic regions; and
increased service and support costs and a diversion of resources.
Any of the above results would likely have a material adverse impact on our business, revenue, results of operations, financial condition and reputation.
In addition, we have service level agreements with many of our customers under which we guarantee specified levels of service availability. These arrangements involve the risk that we may not have adequately estimated the level of service we will in fact be able to provide. The importance of high quality customer support will increase as we expand our business and pursue new enterprise customers. If we fail to meet our service level obligations under these agreements, we would be subject to penalties, which could result in higher than expected costs, decreased revenues and decreased operating margins. We could also lose customers.
The financial and operating difficulties in the telecommunications sector may negatively affect our customers and our company.
The telecommunications sector has at times faced significant challenges resulting from significant changes in technology and consumer behavior, excess capacity, poor operating results and financing difficulties. The sector's financial status has also at times been uncertain and access to debt and equity capital has been seriously limited. The impact of these events on us could include slower collection on accounts receivable, higher bad debt expense, uncertainties due to possible customer bankruptcies, lower pricing on new customer contracts, lower revenues due to lower usage by the end customer and possible consolidation among our customers, which will put our customers and operating performance at risk. In addition, because we operate in the communications sector, we may also be negatively impacted by limited access to debt and equity capital.
Our performance and growth depend on our ability to generate customer referrals and to develop referenceable customer relationships that will enhance our sales and marketing efforts. A failure to accomplish these objectives could materially harm our business.
In our business, we depend on end-users of our solutions to generate customer referrals for our services. We depend in part on members of the communications industry, financial institutions, legal service providers and other third parties who use our services to recommend them to a larger customer base than we can reach through our direct sales and internal marketing efforts. For instance, a significant portion of our revenue from our recently acquired Intralinks mergers and acquisitions, or M&A, solutions is derived from referrals by investment banks, financial advisors and law firms that have utilized these services in connection with prior transactions. These referrals are an important source of new customers for our services and generally are made without expectation of compensation. We intend to continue to focus our marketing efforts on these referral partners in order to expand our reach and improve the efficiency of our sales efforts.
We also recognize that having respected, well known, market-leading customers who have committed to deploy our solutions within their organizations will support our marketing and sales efforts, as these customers can act as references for us and our product offerings. Our ability to establish and maintain these customer relationships is important to our future profitability. The willingness of these types of customers to provide referrals or serve as anchor or reference customers depends on a number of factors, including the performance, ease of use, reliability, reputation and cost-effectiveness of our services as compared to those offered by our competitors, as well as the internal policies of these customers. We may not be able to cultivate or maintain the strong relationships with customers that are necessary to develop those customer relationships into referenceable accounts.
The loss of any of our significant referral sources, including our anchor customers, or a decline in the number of referrals we receive or anchor customers that we generate could require us to devote substantially more resources to the sales and marketing of our services, which would increase our costs, potentially lead to a decline in our revenue, slow our growth and generally have a material adverse effect on our business, results of operations and financial condition. In addition, the revenue we generate from our referral and anchor relationships may vary from period to period.
We rely in part on strategic relationships with third parties to sell and deliver our solutions. If we are unable to successfully develop and maintain these relationships, our business may be harmed.
In addition to generating customer referrals through third-party users of our solutions, we intend to pursue relationships with other third parties such as technology and content providers and implementation and distribution partners. Our future growth will depend, at least in part, on our ability to enter into and maintain successful strategic relationships with these third parties. Identifying partners and negotiating and documenting relationships with them requires significant time and resources, as does integrating third-party content and technology. Some of our contracts with third parties may require us to meet certain minimum spend commitment obligations. These commitments could have an adverse effect on our operating results if we are not able to generate sufficient sales to satisfy the minimum commitments. Some of the third parties with whom we have strategic relationships have entered and may continue to enter into strategic relationships with our competitors. Further, these third parties may have multiple strategic relationships and may not regard us as significant for their businesses. As a result, they may choose to offer their services on terms that are unfavorable to us, terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire services or solutions that compete with ours. Our relationships with strategic partners could also interfere with our ability to enter into desirable strategic relationships with other potential partners in the future. If we are unsuccessful in establishing or maintaining relationships with strategic partners on favorable economic terms, our ability to compete in the marketplace or to grow our revenue could be impaired, and our business, results of operations and financial condition would suffer. Even if we are successful, we cannot provide assurance that these relationships will result in increased revenue or customer usage of our solutions or that the economic terms of these relationships will not adversely affect our margins.
If we do not maintain the compatibility of our services with third-party applications that our customers use in their business processes or if we fail to adapt our services to changes in technology or the marketplace, demand for our services could decline.
Our solutions can be used alongside a wide range of other systems such as email and enterprise software systems used by our customers in their businesses. If we do not support the continued integration of our products and services with third-party applications, including through the provision of application programming interfaces that enable data to be transferred readily between our services and third-party applications, demand for our services could decline and we could lose sales or experience declining renewal rates. We will also be required to make our products and services compatible with new or additional third-party applications that are introduced to the markets that we serve and, if we are not successful, we could experience reduced demand for our services. In addition, prospective customers, especially large enterprise customers, may require heavily customized features and functions unique to their business processes. If prospective customers require customized features or functions that we do not offer and that would be difficult for them to develop and integrate within our services, then the market for our products and services may be adversely affected.
We are exposedmay not currently or in the future appropriately leverage advances in technology to achieve or sustain a competitive advantage in products, services, information and processes. Our customers and users regularly adopt new technologies and industry standards continue to evolve. The introduction of products or services and the emergence of new industry standards can render our customers' credit risk.existing services obsolete and unmarketable in short periods of time. We expect others to continue to develop
and introduce new and enhance existing products and services that will compete with our services. Our future success will depend, in part, on our ability to enhance our current services and to develop and introduce new services that keep pace with technological developments, emerging industry standards and the needs of our customers. We cannot assure that we will be successful in cost-effectively developing, marketing and selling new services or service enhancements that meet these changing demands on a timely basis, that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these services, or that our new service and service enhancements will adequately meet the demands of the marketplace and achieve market acceptance. We also cannot assure that the features that we believe will drive purchasing decisions will in fact be the features that our current or potential customers consider most significant.
Legal, Regulatory and Compliance Risks
Government regulation of the Internet and e-commerce and of the international exchange of certain information is subject to possible unfavorable changes, and our failure to comply with applicable regulations could harm our business and operating results.
As Internet commerce continues to evolve, increasing regulation by federal, state, local and foreign governments become more likely. For example, in recent years, numerous federal, state, local and foreign laws regarding privacy and the collection, processing, storage, sharing, disclosure, use or protection of personal information and other data have been enacted. The scope of these laws is expanding, they are subject to differing interpretations and may be costly to comply with and may be inconsistent between countries and jurisdictions or conflict with other rules.Further, laws and regulations applying to the credit risksolicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for our products and services. In addition, taxation of products and services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting the exchange of information over the Internet could result in reduced growth or a decline in the use of the Internet and could diminish the viability of our Internet-based services, which could harm our business and operating results.
Failure to comply with laws and regulations applicable to our business could subject us to fines and penalties and could also cause us to lose customers or negatively impact our ability to contract with customers.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, antitrust laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages and civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, reputation, operating results and financial condition could be adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in third-party professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.
These laws and regulations impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, could lead to claims for damages from our channel partners, penalties or termination of contracts. Any such damages, penalties, disruptions or limitations in our ability to do business could have an adverse effect on our business and operating results.
Changes in laws, regulations or governmental policy applicable to our customers or potential customers may decrease the demand for our solutions or increase our costs.
The level of our customers’ and potential customers’ activity in the business processes our services are used to support is sensitive to many factors beyond our control, including governmental regulation and regulatory policies. Many of our customers and potential customers with liquidity issuesin the telecommunications and other industries are subject to substantial regulation and may lead to bad debt expensebe the subject of further regulation in the future. Accordingly, significant new laws or regulations or changes in, or repeals of, existing laws, regulations or governmental policy may change the way these customers do business and could cause the demand for us. Mostand sales of our sales are on an open credit basis, with typical payment terms between 45 and 60 dayssolutions to decrease. Any change in the United States and, becausescope of local customsapplicable regulations that either decreases the volume of transactions that our customers or conditions, longer payment terms in some markets outside the United States. We use various methods to screen potential customers and establish appropriate credit limits, but these methods cannot eliminate all potential bad credit risks and may not prevent us from approving applications that are fraudulently completed. Moreover, businesses that are good credit risks at the timeenter into or otherwise negatively impacts their use of application may become bad credit risks over time and we may fail to detect this change. We maintain reserves we believe are adequate to cover exposure for doubtful accounts. If we fail to adequately assess and monitor our credit risks, we could experience longer payment cycles, increased collection costs and higher bad debt expense. A decrease in accounts receivable resulting from an increase in bad debt expense could adversely affect our liquidity. Our exposure to credit risks may increase if our customers are adversely affected by a difficult macroeconomic environment, or if there is a continuation or worsening of the economic environment. Although we have programs in place that are designed to monitor and mitigate the associated risk, including monitoring of particular risks in certain geographic areas, there can be no assurance that these programs will be effective in reducing our credit risks or preventing us from incurring additional losses. Future and additional losses, if incurred, could harm our business andsolutions would have a material adverse effect on our revenues or gross margins, or both. Moreover, complying with increased or changed regulations could cause our operating expenses to increase as we may have to reconfigure our existing services or develop new services to adapt to new regulatory rules and policies, either of which would require additional expense and time. Additionally, the information provided by, or residing in, the software or services we provide to our customers could be deemed
relevant to a regulatory investigation or other governmental or private legal proceeding involving our customers, which could result in requests for information from us that could be expensive and time consuming for us to address or harm our reputation since our customers rely on us to protect the confidentiality of their information. These types of changes could adversely affect our business, results of operations and financial condition.
Our expansion into additional international markets may be subject to uncertainties that could increase our costs to comply with regulatory requirements in foreign jurisdictions, disrupt our operations and require increased focus from our management.
Our growth strategy includes the growth of our operations in foreign jurisdictions. International operations are subject to numerous additional risks, including economic and political risks in foreign jurisdictions in which we operate or seek to operate, potential additional costs due to localization and other geographic specific costs, difficulty in enforcing contracts and collecting receivables through some foreign legal and financial systems, unexpected changes in legal and regulatory requirements, differing technology standards and pace of adoption, fluctuations in currency exchange rates, varying regional and geopolitical business conditions and demands. The difficulties associated with managing a large organization spread throughout various countries and potential tax issues, including restrictions on repatriating earnings and multiple changing and complex tax laws and regulations, and the differences in foreign laws and regulations, including foreign tax, data privacy requirements, anti-competition, intellectual property, labor, trade and other laws. Additionally, compliance with international and U.S. laws and regulations that apply to our international operations may increase our cost of doing business in foreign jurisdictions. Violation of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, or prohibitions on the conduct of our business. Sanctions imposed by the United States and other countries with respect to countries involved in conflict may impact our ability to offer services in the region, and additional sanctions or retaliatory measures could be imposed in the future. Further instability or tension in the geopolitical climate could also cause us to adjust our operating model, which would increase our costs of operations. As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could adversely affect our international operations and, consequently, our operating results.
Failure to comply with anticorruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended ("FCPA"), and similar laws associated with our activities outside of the United States could subject us to penalties and other adverse consequences.
We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act of 2010 ("U.K. Bribery Act") and other anti-bribery and anti-money laundering laws in countries in which we conduct activities. We face significant risks if we fail to comply with the FCPA and other anticorruption laws that prohibit companies and their employees and third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person or securing any advantage. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. In addition, we use various third parties to sell our solutions and conduct our business abroad. We or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities. We continue to update and implement our FCPA/anti-corruption compliance program and no assurance can be given that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
Any violation of the FCPA, other applicable anticorruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, which could have a material and adverse effect on our reputation, brand, business, operating results and financial condition. Additionally, to the degree that the current or future credit markets makes it more difficult for some customers to obtain financing, those customers' ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.
Our reliance on third-party providers for communications software, services, hardware and infrastructure exposes us to a variety of risks we cannot control.
Our success depends on software, equipment, network connectivity and infrastructure hosting services supplied by, or leased from, our vendors and customers.prospects. In addition, we rely on third-party vendorsresponding to perform a substantial portion of our exception handling services. Weany enforcement action may not be able to continue to purchase the necessary software, equipment and services from vendors on acceptable terms or at all. If we are unable to maintain current purchasing terms or ensure service availability with these vendors and customers, we may lose customers and experience an increase in costs in seeking alternative supplier services. Further, any changes in our third-party vendors could detract from management’s ability to focus on the ongoing operations of our business or could cause delays in the operations of our business.
Our business also depends upon the capacity, reliability and security of the infrastructure owned and managed by third parties, including our vendors and customers that are used by our technology interoperability services, network services, number portability services, call processed services and enterprise solutions. We have no control over the operation, quality or maintenance of a significant portion of that infrastructure and whether those third parties will upgrade or improve their software, equipment and
services to meet our and our customers' evolving requirements. We depend on these companies to maintain the operational integrity of our services. If one or more of these companies is unable or unwilling to supply or expand its levels of services to us in the future, our operations could be severely interrupted. In addition, rapid changes in the communications industry have led to industry consolidation. This consolidation may cause the availability, pricing and quality of the services we use to vary and could lengthen the amount of time it takes to deliver the services that we use.
Any damage to, or failure or capacity limitations of, our systems and our related network could result in interruptions in our service that could cause us to lose revenue, issue credits or refunds or could cause our customers to terminate their subscriptions for our services, in each case adversely affecting our renewal rates. Since our customers use our service for important aspects of their businesses, any errors, defects, disruptions in service or other performance problems could hurt our reputation and may damage our customers' businesses. As a result, we may lose revenue, issue credits or refunds or customers could elect not to renew our services or delay or withhold payments to us. We could also lose future sales or customers may make claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense or risk of litigation.
Additionally, third-party software underlying our services can contain undetected errors or bugs. We may be forced to delay commercial release of our services until any discovered problems are corrected and, in some cases, may need to implement enhancements or modifications to correct errors that we do not detect until after deployment of our services. In addition, problems with the third party software underlying our services could result in:
damage to our reputation;
loss of or delayed revenue;
loss of customers;
warranty claims or litigation;
loss of or delayed market acceptance of our services; or
unexpected expenses andmaterially significant diversion of management’s attention and resources to remedy errors.and significant defense costs and other third-party professional fees.
We are participants in two joint ventures, which may subject us to certain risks relating to our ability to perform our obligations under the joint ventures, including funding future joint venture capital requirements.
Entering into joint ventures and alliances entails risks, including difficulties in developing and expanding the business of a newly formed joint venture, funding capital calls for the joint venture, exercising influence over the management and activities of joint venture, quality control concerns regarding joint venture products and services and potential conflicts of interest with the joint venture and our joint venture partner. We cannot guarantee that the joint venture operations will be successful. Any inability to meet our obligations as a joint venture partner under the joint ventures could result in penalties and reduced percentage interest in the joint venture for our company. Also, we could be disadvantaged in the event of disputes and controversies with a joint venture partner, since one of our joint venture partner is a relatively significant customer of our products and services and future product and services of the joint venture.
If we are unable to protect our intellectual property rights, our competitive position could be harmed, or we could be required to incur significant expenses to enforce our rights.
Our success depends to a significant degree upon the protection of our software and other proprietary technology rights. We rely on trade secret, copyright and trademark laws and confidentiality agreements with employees and third parties, all of
which offer only limited protection. We also regularly file patent applications to protect inventions arising from our research and development and have obtained a number of patents in the United States and other countries. There can be no assurance that our patent applications will be approved, that any issued patents will adequately protect our intellectual property, or that our patents will not be challenged by third parties. Also, much of our business and many of our solutions rely on key technologies developed or licensed by third or other parties and we may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms. The steps we have taken to protect our intellectual property may not prevent misappropriation of our proprietary rights or the reverse engineering of our solutions. Legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in other countries are uncertain and may afford little or no effective protection of our proprietary technology. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could require costly efforts to protect our technology. Policing the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This type of litigation could result in substantial costs and diversion of management resources, either of which could materially harm our business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
ClaimsWe collect, process, store, disclose and use personal information and other data, and our actual or perceived failure to protect this information and data could damage our reputation and harm our business and operating results.
In the ordinary course of our business, we and our current or future third-party collaborators, service providers, contractors and consultants collect, process, store, disclose and use personal information (also referred to as “personal data” or “personally identifiable information” under certain data privacy laws) and other data provided by othersour customers and their end users. We rely on encryption and authentication technology licensed from third parties to effectively secure transmission of this information.
We are, or may become subject to various federal, state, local and foreign laws, related regulations, and industry standards regarding privacy and the collection, processing, storage, sharing, disclosure, use or protection of personal information and other data. The scope of these laws is changing, they are subject to differing interpretations from one jurisdiction to another, and they may be costly to comply with and may be inconsistent between countries and jurisdictions or conflict with other rules or our practices. As a result, our practices may not have complied in the past or may not comply now or in the future with all such laws, regulations, requirements or obligations.
In the United States, our collection, processing, storage, disclosure and use of personal information is subject to a variety of laws and regulations, including federal and state data privacy laws, data breach notification laws, and consumer protection laws. Many state legislatures have adopted legislation that regulates how businesses operate online, including measures relating to privacy, data security, and data breaches. For example,the California Consumer Privacy Act of 2018, as amended by the California Privacy Rights Act of 2020 (“CPRA”) created new individual privacy rights for consumers (as that term is broadly defined),places increased privacy and security obligations on entities handling personal data of consumers or households, and creates a new state agency that will be vested with authority to implement and enforce the CPRA. The CPRA took effect on January 1, 2023, and it may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation. Virginia, Colorado, Connecticut, and Utah have passed similar laws, all of which come into force in 2023, reflecting a trend toward more stringent privacy legislation in the United States. Other states, including California and Massachusetts, have also passed specific laws mandating reasonable security measures for the handling of personal information.
In Europe, we are subject to the European Union General Data Protection Regulations (Regulation (EU) 2016/679) (the “EU GDPR”) and to the United Kingdom General Data Protection Regulation and Data Protection Act 2018 (the “UK GDPR”) (the EU GDPR and UK GDPR referred to collectively as the “GDPR”). The GDPR imposes comprehensive compliance obligations regarding our processing of personal data, including a principle of accountability and the obligation to demonstrate compliance through policies, procedures, training, and audits. Further, the GDPR regulates cross-border transfers of personal data out of the European Economic Area (“EEA”) and the United Kingdom (“UK”). On July 16, 2020, the Court of Justice of the European Union (the “CJEU”) ruled in its decision in the case of Data Protection Commissioner v. Facebook Ireland Limited, Maximillian Schrems (Case C-311/18) (“Schrems II”) that the EU-US Privacy Shield Framework (“Privacy Shield”) was invalid and could no longer be relied upon as a basis for international transfers of personal data out of the EEA to relevant self-certified U.S. entities. The CJEU further noted that reliance on the European Commission Standard Contractual Clauses (“SCCs”) (a potential alternative transfer mechanism to the Privacy Shield) alone may not necessarily be sufficient in all circumstances and that transfers must be assessed on a case-by-case basis. Synchronoss and our customers continue to use alternative transfer strategies, including the SCCs. As the enforcement landscape further develops, supervisory authorities issue further guidance on international data transfers, and governments work to reach agreements on additional transfer mechanisms,
we may experience additional costs, complaints and/or regulatory investigations or fines; we may have to stop using certain tools and vendors and make other operational changes; we have had to and will have to implement revised SCCs for existing customer and vendor arrangements within required time frames; and/or it could otherwise affect the manner in which we provide our services, and could adversely affect our business, operations and financial condition. Failure to comply with the EU GDPR and the UK GDPR could result in penalties under each of these regimes independently in the respect of the same violation. Penalties for certain violations are up to the greater of EUR 20 million / GBP 17.5 million or 4% of our global annual turnover. In addition to fines, a violation of the GDPR may result in regulatory investigations, reputational damage, orders to cease/change our data processing activities, enforcement notices, assessment notices (for compulsory audits) and/or civil claims (including class action lawsuits).
We are also subject to evolving EU and UK privacy laws on cookies, tracking technologies and e-marketing. If regulators continue their trend of increasing enforcement of the strict approach to opt-in consent for all but essential use cases and given the complex and evolving nature of EU and UK privacy laws, this may lead to substantial costs, require significant systems changes, limit the effectiveness of our marketing activities, require that we infringedivert the attention of our technology personnel, adversely affect our margins, subject us to additional liabilities and there can be no assurances that we will be successful in our compliance efforts.
In addition to the EU and UK, a growing number of other global jurisdictions are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our offerings. Some of these laws, such as the General Data Protection Law in Brazil, or the Act on the Protection of Personal Information in Japan, impose similar obligations as those under the GDPR. Others, such as those in Russia, India, and China, could potentially impose more stringent obligations, including data localization requirements. If we are unable to develop and offer features that meet legal requirements or help our customers meet their proprietary technology couldobligations under the laws or regulations relating to privacy, data protection, or information security, or if we violate or are perceived to violate any laws, regulations, or other obligations relating to privacy, data protection, or information security, we may experience reduced demand for our offerings, harm to our reputation, and become subject to investigations, claims, and other remedies, which would expose us to significant fines, penalties, and other damages, all of which would harm our business.
Third partiesCompromises to our privacy safeguards or disclosure of confidential information could claim thatimpact our current or future products or technology infringe their proprietary rights. We expect that software developers will increasingly bereputation.
Names, addresses, telephone numbers, credit card data and other personal identification information are collected, processed and stored in our systems. Our treatment of this kind of information is subject to infringement claims ascontractual restrictions and federal, state and foreign data privacy laws and regulations. Advances in technology, the numberexpertise of products and competitors providing software and services tocriminals, new discoveries in the communications industry increases and overlaps occur. Any claimfield of infringementcryptography, acts or omissions by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from our business. Furthermore, a party making a claim of this nature, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunctionemployees, contractors or service providers or other court order thatevents or developments could prevent us from offering our productsresult in a compromise or services. Anybreach in the security of these events could seriously harm our business.
We are generally obligated to indemnify our customers if our services infringe the proprietary rights of third partiesconfidential or sensitive information. Our security measures and certainthose of our agreements with customersservice providers may be breached or compromised by individuals or groups of hackers, including sophisticated organizations and partners include indemnification provisions under which we have agreednation states, or compromised by personnel error or malfeasance. Techniques used to indemnify the counter-party for losses sufferedcompromise or incurred assabotage systems change frequently and generally are not recognized until launched against a target. As a result, of claims of intellectual property infringement and, in some cases, for financial and other damages caused by us to property or persons. Third parties may assert infringement claims against our customers or partners. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers or partners, regardless of the merits of these claims. If any of these claims succeed, we may be forcedunable to pay damages on behalf of our customers or partners.
If anyone asserts a claim against us relating to proprietary technology or information, while we might seek to license their intellectual property, we might not be able to obtain a license on commercially reasonable terms or on any terms. In addition, any efforts to develop non-infringing technology could be unsuccessful. Our failure to obtain the necessary licenses or other rightsanticipate these techniques or to develop non-infringing technology could prevent us from offeringimplement adequate preventative measures. We and our services and couldservice providers, therefore, seriously harm our business.
We may seek to acquire companies or technologies, form joint ventures or make investments in other companies or technologies, which could disrupt our ongoing business, disrupt our management and employees, dilute our stockholders’ ownership, increase our debt, and adversely affect our results of operations.
We have made, and in the future intend to form joint ventures, make acquisitions of and investments in companies, technologies or products in existing, related or new markets for us that we believe may enhance our market position or strategic strengths. However, we cannot be sure that any acquisition or investment will ultimately enhance our products or strengthen our competitive position. Acquisitions involve numerous risks, including but not limited to:
diversion of management's attention from other operational matters;
inability to identify acquisition candidates on terms acceptable to us or at all, or inability to complete acquisitions as anticipated or at all;
inability to realize anticipated benefits or commercialize purchased technologies;
exposure to operational risks, rules and regulations to the extent such activities are located in countries where we have not historically done business;
unknown, underestimated and/or undisclosed commitments or liabilities;
incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill;
dilution of ownership of our current stockholders if we issue shares of our common stock;
higher than expected transaction costs; and
ineffective integration of operations, technologies, products or employees of the acquired companies.
In addition, acquisitions may disrupt our ongoing operations, increase our expenses and/or harm our results of operations or financial condition. Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt (which may reduce our cash available for operations and other uses), an increase in contingent liabilities or an increase in amortization expense related to identifiable assets acquired, each of which could materially harm our business, financial condition and results of operations.
Specifically, in regards to our recent acquisition of Intralinks, in addition to the risks described above, we may not be able to effectivelyprevent third parties, including criminals, competitors or others, from breaking into or altering our systems, conducting denial-of-service attacks, attempting to gain access to our systems, information or monetary funds through phishing or social engineering campaigns, installing viruses or malicious software on our website or devices used by our employees or contractors, or carrying out other activity intended to disrupt our systems or gain access to confidential or sensitive information in our or our service providers’ systems. Furthermore, such third parties may further engage in various other illegal activities using such information, including credit card fraud, which may cause additional harm to us, our users and efficiently integrate Intralinks into our company. For example, manybrand. Third parties may attempt to fraudulently induce our or our service providers’ employees to misdirect funds or to disclose information in order to gain access to personal data we maintain about our users or website users.
Any accidental unauthorized access to or disclosure, loss, disablement or encryption of, Intralinks’ contracts with its customers are entered intoacquisition, use or misuse of or modification of confidential or sensitive information, processing or destruction of this information, or unavailability of information that we or our partners could experience or the perception that one has occurred or may occur, could expose us to regulatory actions, litigation, investigations, remediation obligations, damage to our reputation and brand, supplemental disclosure obligations, loss of customer, consumer and partner confidence in connection with discrete one-time financialthe security of our applications, destruction of information, indemnity obligations, impairment to our business and strategic business transactionsresulting fees, costs, expenses, loss of revenues and projects,other potential liabilities. Moreover, there could be public announcements regarding any such as M&A transactions. These transactional agreements typically have initial termsincidents and any steps we take to respond to or remediate such incidents. Security incidents could disrupt operation of sixour products or result in unauthorized access to, twelve months depending on the type of transaction and related purposeunauthorized use or disclosure of, the Intralinks exchange. Oninaccessibility of or loss of our or our partners’ and users’ sensitive and confidential information (including intellectual property and personal information). Consequences of these incidents can
include damage to our reputation, early termination of our contracts, loss of business, litigation, regulatory investigations and other liabilities. Even a perceived security incident could damage the other hand, the relationships with our customers are generally longer term, usually ranging from twelve to sixty months. This difference inmarket perception of our business modelsand adversely impact our results of operations and financial condition. Our efforts to detect, prevent and remediate known or potential security vulnerabilities may create issuesresult in additional direct and indirect costs. Finally, if a high profile security breach occurs with respect to other similarly situated services, our integrationusers and potential users may lose trust in the security of the Intralinks business.
We make significant investments in new products andsuch services that may not be profitable or align with our established company vision.
We intend to continue to make investments to support our business growth, including expenditures to develop new services or enhance our existing services, enhance our operating infrastructure, market and sell our product offerings and acquire complementary businesses and technologies. These endeavors may involve significant risks and uncertainties, including failures to align new initiatives with our established corporate vision and direction,generally, which could lead to a misapplication of our resources. These new investments are inherently risky and may involve distracting management from current operations, create greater than expected liabilities and expenses, provide us with an inadequate return on capital, include other unidentified risks and, ultimately, may generally not be successful. Further,adversely impact our ability to effectively integrateretain existing users or attract new servicesones.
We devote financial and investments intopersonnel resources to implement and maintain security measures. While we have security measures in place that are designed to protect against these risks, preserve the integrity of customer and personal information and prevent information loss, misappropriation and other security breaches, our security measures may be compromised as a result of intentional misconduct, including by computer hackers, employees, contractors or service providers, as well as software bugs, human error, technical malfunctions or other malfeasance.
If any breach of information security were to occur, our reputation and brand could be damaged, our business may affectsuffer, we could be required to expend significant capital and other resources to alleviate problems caused by such breaches, and we could be exposed to a risk of loss, litigation or regulatory action and possible liability. For example, any such event that leads to unauthorized access, use, or disclosure of personal information, including personal information regarding our profitability. Significant delayscustomers or employees, could compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, including private lawsuits or class actions under the California Consumer Privacy Act, which could result in new releases or significant problems in creating new products or services could adversely affect our revenuelegal and financial performance.
Interruptionsexposure and reputational damages that could potentially have an adverse effect on our business. Actual or delays inanticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. Any compromise or breach of our service due to problems withsecurity measures, or those of our third-party web hosting facilities or other third-party service providers, could adversely affect our business.
We rely on third parties for the maintenancemay violate applicable privacy, data security and other laws, and cause significant legal and financial exposure, adverse publicity and a loss of certain of the equipment running our solutions and software at geographically dispersed hosting facilities with third parties. If we are unable to renew, extend or replace our agreements with any of our third party hosting facilities, we may be unable to arrange for replacement services at a similar cost and in a timely manner, which could cause an interruptionconfidence in our service. We do not control the operation of these third party facilities, each of which may be subject to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures or similar events. These facilities may also be subject to break-ins, sabotage, intentional acts of vandalism or similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster, cessation of operations by our third-party web hosting provider or a third party's decision to close a facility without adequate notice or other unanticipated problems at any facility could result in lengthy interruptions in our service. In addition, the failure by these facilities to provide our required data communications capacity could result in interruptions in our service.
Our growth may strain our management, information systems and resources.
Our growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to expand our overall business, customer base, headcount and operations both domestically and internationally. Growing a global organization and managing a geographically dispersed workforce will require substantial management effort and significant additional investment in our infrastructure. We will be required to continue to improve our IT infrastructure, reporting systems and procedures, and operational and financial controls, as well as manage expanded operations in geographically distributed locations. Our expected additional growth will increase our costs, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to manage our growth successfully we will be unable to execute our business plan successfully,security measures, which could have a negative impactmaterial adverse effect on our business, financial condition and results of operations. In addition,We may need to devote significant resources to protect against security breaches or to address problems caused by breaches, diverting resources from the growth and expansion of our business.
Finally, the impacts of the COVID-19 pandemic and the shift to a remote workforce may exacerbate these risks. With our employees primarily working from their homes or other locations outside of the office, there is increased potential that unauthorized third parties may have access to sensitive company or customer information. For instance, if weour employees were to use a non-secure internet network, conduct their work in a non-secure environment or even fail to develop and implementtake appropriate operating practices,precautions within their own home, there is a greater likelihood that an unauthorized person or entity could obtain access to ours or our performance may suffer in terms of quality, cost and cycle time.clients’ sensitive information.
Our expansion into international markets may be subject to uncertainties that could increase our costs to comply with regulatory requirements in foreign jurisdictions, disrupt our operations and require increased focus from our management.
Our growth strategy includes the growth of our operations in foreign jurisdictions. International operations and business expansion plans are subject to numerous additional risks, including economic and political risks in foreign jurisdictions in which we operateAny or seek to operate, potential additional costs due to localization and other geographic specific costs, difficulty in enforcing contracts and collecting receivables through some foreign legal systems, unexpected changes in legal and regulatory requirements, differing technology standards and pace of adoption, fluctuations in currency exchange rates, varying regional and geopolitical business conditions and demands. The difficulties associated with managing a large organization spread throughout various countries and potential tax issues, including restrictions on repatriating earnings and multiple conflicting, changing and complex tax laws and regulations, and the differences in foreign laws and regulations, including foreign tax, data privacy requirements, anti-competition, intellectual property, labor, contract, trade and other laws. Additionally, compliance with international and U.S. laws and regulations that apply to our international operations may increase our cost of doing business in foreign jurisdictions. Violationall of these laws and regulationsissues could result in fines, criminal sanctions against us, our officers or our employees, or prohibitions on the conduct of our business. As we continue to expand our business globally, our success will depend, in large part, onnegatively affect our ability to anticipate and effectively manage these andattract new customers, cause existing customers to elect to terminate or not renew their subscriptions, result in reputational damage, cause us to pay remediation costs, or require us to compensate our customers or other risks associated with our international operations. However, any of these factorsusers for certain losses or result in lawsuits, regulatory fines or other action or liabilities, which could adversely affect our international operationsbusiness and consequently,operating results. These risks may increase as we continue to grow and collect, process, store and transmit increasingly large amounts of data.
Fraudulent Internet transactions could negatively impact our operating results.business.
Fluctuations in foreign currency exchange ratesOur business may be exposed to risks associated with Internet credit card fraud and identity theft that could result in foreign currencycause us to incur unexpected expenditures and loss of revenues. Under current credit card practices, a merchant is liable for fraudulent credit card transactions when, as is the case with the transactions we process, that merchant does not obtain a cardholder’s signature. Although our customers currently bear the risk for a fraudulent credit card transaction, losses, which could harm our operating results and financial condition.
We consider the U.S. dollar to be our functional currency. However, given our international operations, which we expect to expand following our recent acquisition of Intralinks, we currently have, and expect to have in the future revenuewe may be forced to share some of that risk and expensesthe associated costs with our customers. To the extent that technology upgrades or other expenditures are required to prevent credit card fraud and related assets and liabilities denominated in foreign currencies. Foreign currency transaction exposure results primarily from transactionsidentity theft, we may be required to bear the costs associated with customers or vendors denominated in currencies other than the functional currency of the entity in which we record the transaction. Any fluctuation in the exchange rate of these foreign currencies may positively or negatively affect our business, financial condition and operating results.
We face exposure to movements in foreign currency exchange rates duesuch expenditures. In addition, to the factextent that we have non-U.S. dollar denominated revenue worldwide. Weakening of foreign currencies relative tocredit card fraud and/or identity theft cause a decline in business transactions over the U.S. dollar adversely affectsInternet generally, both the U.S. dollar valuebusiness of our foreign currency denominated revenue and positively affects the U.S. dollar value of our foreign currency denominated expenses. If foreign currencies were to weaken or strengthen relative to the U.S. dollar, we might elect to raise or lower our international pricing, which could potentially impact demand for our services. Alternatively, we might opt not to adjust our international pricing as a result of fluctuations in foreign currency exchange rates, which could potentially have a positive or negative impact on our results of operations and financial condition.
Similarly, our financial performance may be impacted by fluctuations in currency exchange rates when it comes to our non-U.S. dollar denominated expenses. The third party vendors and suppliers to whom we owe payments for non-U.S. dollar denominated expenses may, or may not, decide to increase or decrease their pricing to reflect fluctuations in foreign currency exchange rates.
If there continues to be volatility in foreign currency exchange rates, we will continue to experience fluctuations in our operating results due to revaluing our assets and liabilities that are not denominated in the functional currency of the entity that recorded the asset or liability. Further, as foreign currency exchange rates change, the translation of our non-U.S. denominated revenue and expenses into U.S. dollars affects the year-over-year comparability of our operating results.
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. 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.
Our employee retention and hiring may be adversely impacted by immigration restrictions and related factors.
Competition for skilled personnel is intense in our industry and any failure on our part to hire and retain appropriately skilled employees could harm our business. Our ability to hire and retain skilled employees is impacted, at least in part, by the fact that a portion of our professional workforce in the United States is comprised of foreign nationals who are not United States citizens. In order to be legally allowed to work for us, these individuals generally hold immigrant visas (which may or may not be tied to their employment with us) or green cards, the latter of which makes them permanent residents in the United States.
The ability of these foreign nationals to remain and work in the United States is impacted by a variety of laws and regulations, as well as the processing procedures of various government agencies. Changes in applicable laws, regulations or procedures could adversely affect our ability to hire or retain these skilled employees and could affect our costs of doing business and our ability to deliver services to our customers. In addition, if the laws, rules or procedures governing the ability of foreign nationals to work in the United States were to change or if the number of visas available for foreign nationals permitted to work in the United States were to be reduced, our business could be adversely affected, if, for example, we were unable to hire or no longer able to retain a skilled worker who is a foreign national.affected.
Employing foreign nationals may require significant time and expense and our foreign national employees may choose to leave after we have made this investment. While a foreign national who is working under an immigrant visa tied to his or her employment by us may be less likely to choose to leave our Company than a similarly situated employee who is a United States national or a green card holder (as leaving our employ could mean also having to leave the United States), this may not always be the case. Additionally, many of our foreign national employees hold green cards, which means that they have greater flexibility to leave our Company without facing the risk of also having to leave the United States.
Our use of “open source” software could negatively affect our ability to sell our services and subject us to possible litigation.
A portion of the technologies licensed by us incorporates "open source"“open source” software, and we may incorporate open source software in the future. Open source software is generally licensed by its authors or other third parties under open source licenses. If we fail to comply with these licenses, we may be subject to certain conditions, including requirements that we offer any of our services that incorporate the open source software at no cost. Additionally, we may be required to make publicly
available any source code for modifications or derivative works we create based upon, incorporating or using the open source software and/or license those modifications or alterations on terms that are unfavorable to us. If an author or other third party that distributes open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from selling those of our services that contained the open source software and required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our services.
In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide technology support, maintenance, warranties or assurance of title or controls on the origin of the software.
Our inability to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and could harm our business.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new products and enhancements to our platforms or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. In addition, the terms of any future issued equity securities could entitle the holders of those equity securities to rights, preferences and privileges superior to those of holders of our common stock. Furthermore, if we engage in debt financing, the holders of debt might have priority over the holders of common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness, including restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may also be required to take other actions that would otherwise be in the interests of the debt holders and force us to maintain specified liquidity or other ratios, any of which could harm our business, results of operations, and financial condition. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:
develop or enhance our products and platforms;
acquire complementary technologies, products or businesses;
expand operations, in the United States or internationally; or
respond to competitive pressures or unanticipated working capital requirements.
If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.
We continue to incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new and ongoing compliance initiatives.
We operate as a public company, and will continue to incur significant legal, accounting and other expenses as we comply with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act” or the Sarbanes-Oxley Act,“SOX”), the Dodd-Frank Wall Street Reform and Consumer Protection Act and other public company disclosure and corporate governance requirements, as well as any new rules that may subsequently be implemented by the Securities and Exchange Commission and/or the NASDAQ Stock Market, or Nasdaq, the exchange on which our common stock is listed (Nasdaq: SNCR). These rules impose various requirements on public companies, including requirements related to disclosures, corporate governance and internal controls. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly and place significant strain on our personnel, systems and resources.
Our management and other personnel will continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.costlier. For example, we expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to refine our disclosure controls and other procedures that are designed to ensure that the information that we are required to disclose in the reports that we will file with the Securities and Exchange Commission is properly recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. We are also continuing to improve our internal control over financial reporting. We have expended, and anticipate that we will continue to expend, significant resources in order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting. Further, Section 404 of Sarbanes-Oxley requires that we include in our annual report our assessment ofassess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, Section 404 of the Sarbanes-Oxley Act, or Section 404, requires us to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on, and our auditedindependent registered public accounting firm potentially to attest to, the effectiveness of our internal controls over financial statements as of the end of each fiscal year. We successfully completed ourreporting. Our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting as of December 31, 2016.reporting. Our continued compliance with applicable provisions of Section 404 will requirerequires that we continue to incur substantial accounting expense and expend significant management time on compliance related issues.
Our current controlscompliance-related issues as we implement additional corporate governance practices and any new controls thatcomply with reporting requirements. Moreover, if we develop inare not able to comply with the future may become inadequate becauserequirements of changes in conditions in our business. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failureSection 404 applicable to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement oftimely manner, or if we or our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports and independent registered public accounting firm audits ofidentifies deficiencies in our internal control over financial reporting that we willare deemed to be required to include in our periodic reports that will be filed with the SEC. If we were to have ineffective disclosure controls and procedures or internal control over financial reporting, our investors could lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our common stock. As a result, we may face a loss of public confidence,material weaknesses, the market price of our stock could decline and we could be subject to regulatory sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management resources. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations.
Changes in, or interpretations of, accounting principles could result in unfavorable accounting charges.
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles, or their interpretation, could have a significant effect on our reported results and may even retroactively affect previously reported results. Our accounting principles that recently have been or may be affected by changes in accounting principles are: (i) accounting for stock-based compensation; (ii) accounting for income taxes; (iii) accounting for business combinations and goodwill; (iv) revenue recognition guidance; and (v) accounting for foreign currency translation.
Changes in, or interpretations of, tax rules and regulations, results of tax audits and other factors, including timing of tax refund receipt, could cause fluctuations in or adversely affect our effective tax rates.rates and operating results.
Global tax developments applicable to multinational businesses may have a material impact to our business, cash flow from operating activities, or financial results. International organizations such as the Organization for Economic Cooperation and Development, have published Base Erosion and Profit Shifting action plans that, if adopted by countries where we do business, could increase our tax obligations in these countries. In addition, several countries have proposed or enacted Digital Services Taxes ("DST"), many of which would apply to revenues derived from digital services. We will continue to assess the ongoing impact of these current and pending changes to global tax legislation and the impact on the Company's future financial statements upon the finalization of laws, regulations and additional guidance. In addition, as we continue to evaluate our corporate structure, any changes to the taxation of undistributed foreign earnings could also change our plans regarding reinvestment of such earnings. Due to the large scale of our U.S. and international business activities, many of these enacted and proposed changes to the taxation of our activities could increase our worldwide effective tax rate and have an adverse effect on our operating results, cash flow or financial condition.
Certain EU and other jurisdictions have introduced anti-hybrid provisions, which came into force in EU member states on January 1, 2020 (subject to relevant derogations). The scope of these rules is wide-reaching and can apply to disallow certain deductions for corporate tax purposes where hybrid entities exist within a company structure. These provisions may place additional burden on our management to assess the impact of the rules and potentially create additional tax costs. EU countries
and other jurisdictions will continue to interpret or issue additional guidance on how provisions of the anti-hybrid will be applied, which, if applicable, may materially impact our financial statements and cash flow. Separately, as a result of the complexity of, and lack of clear precedent or authority with respect to, the application of various income tax laws to our corporate structure, tax authorities may challenge how we report our transactions, which may increase our costs and impact our operations.
We are subject to income taxes as well as non-income-based taxes, in both the U.S. and various foreign jurisdictions. Many judgments are required in determining our worldwide provision for income taxes and other tax liabilities, and we are under audit by various tax authorities, which often do not agree with positions taken by us on our income and non-income-based tax returns. We currently have significant income tax refunds that are receivable from the U.S. government based in part on provisions in the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Any changes in, or interpretations of, tax rules and regulations or legislative changes to the CARES Act or significant delays in receiving our tax refund could adversely impact our financial position and results. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our consolidated financial statements and may materially affect our financial results in the period or periods for which such determination is made. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be
unfavorably affected by changes in tax laws or the interpretation of tax laws or by changes in the valuation of our deferred tax assets and liabilities. In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law. This law, among other things, provides for a corporate alternative minimum tax on adjusted financial statement income (effective for us beginning in fiscal 2024), and an excise tax on corporate stock repurchases (effective for our share repurchases after December 31, 2022), and we are continuing to evaluate the impact it may have on our financial position and results of operations. There are several proposed changes to U.S. and non-U.S. tax legislation and the ultimate enactment of any of them could have a negative impact on our effective tax rate. It is possible that future requirements, including the recently proposed implementation of International Financial Reporting Standards or IFRS,(“IFRS”) could change our current application of U.S. GAAP, resulting in a material adverse impact on our financial position or results of operations. In addition, we are subject to the continued examination of our income tax returns by the Internal Revenue Service or IRS,(“IRS”), and other tax authorities. These examinations may challenge certain of our tax positions, such as the timing and amount of deductions and allocations of taxable income to various jurisdictions. We regularly assess the likelihood of outcomes resulting from these examinations, if any, to determine the adequacy of our provision for income taxes. We believe our estimates to be reasonable, but there can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.
If we are required to collect sales and use taxes on the services we sell in additional jurisdictions, we may be subject to liability for past sales and our future sales could decrease.
We currently collect sales or use tax on our services in most states. Historically, with a few exceptions, we have not charged or collected value added tax on our services anywhere in the world. We may lose sales or incur significant expenses should tax authorities in other jurisdictions where we do business be successful in imposing sales and use taxes, value added taxes or similar taxes on the services we provide. A successful assertion by one or more tax authorities that we should collect sales or other taxes on the sale of our services could result in substantial tax liabilities for past sales, including interest and penalty charges, and could discourage customers from purchasing our services and otherwise harm our business. Further, we may conclude based on our own review that our services may be subject to sales and use taxes in other areas where we do business. Under these circumstances, we may voluntarily disclose our estimated liability to the respective tax authorities and initiate activities to collect taxes going forward.
It is not clear that our services are subject to sales and use tax in certain jurisdictions. States and certain municipalities in the United States, as well as countries outside the United States, have different rules and regulations governing sales and use taxes. These rules and regulations are subject to varying interpretations that may change over time and, in the future, our services may be subject to such taxes. Although our customer contracts typically provide that our customers are responsible for the payment of all taxes associated with the provision and use of our services, customers may decline to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes. In certain cases, we may elect not to request customers to pay back taxes. If we are required to collect and pay back taxes and associated interest and penalties, and if our customers fail or refuse to reimburse us for all or a portion of these amounts, or if we elect not to seek payment of these amounts, we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on our services going forward will effectively increase the cost of our services to our customers and may adversely affect our ability to retain existing customers or gain new customers in jurisdictions in which such taxes are imposed. Any of the foregoing could have a material adverse effect on our business, results of operation or financial condition.
Economic, political and market conditions can adversely affectChanges in accounting principles, or the interpretation thereof, could have a significant impact on our business, results of operations and financial condition.
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 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 their 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 conditionsposition and results of operations. In addition, these factors could resultoperation.
We prepare our Consolidated Financial Statements in quarterly fluctuations in our business performance. Finally, changesaccordance with GAAP. A change in these conditions may result inprinciples can have a more competitive environment, resulting in possible pricing pressures.
Catastrophic events may disruptsignificant impact on our business.
A natural disaster, telecommunications failure, power outage, cybersecurity attack, war, terrorist attack, or other catastrophic event could cause us to suffer system interruptions, reputational harm, delays in product development, breaches of data security and loss of critical data. An event of this nature could also prevent us from fulfilling customer orders or maintaining certain service level requirements, particularly in respect of our SaaS and hosted offerings. While we have developed certain disaster recovery plans and maintain backup systems to reduce the potentially adverse effect of these types of events, a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our business, operatingreported results and may even retroactively affect previously reported transactions. The adoption of
new or revised accounting principles may require that we make significant changes to our systems, processes and controls and could have a significant impact on our financial condition could be adversely affected.position and results of operations.
Risks Related to Our Recently Acquired Intralinks Business
A substantial portion of our Intralinks business revenue is derived from contracts that provide for the use of Intralinks solutions for a fixed duration. Our inability to enter into new contracts as existing ones expire could negatively impactSeries B Preferred Stock, Senior Notes and our overall financial performance.
Many of our contracts with Intralinks customers are entered into in connection with discrete one-time financial and strategic business transactions and projects such as mergers and acquisitions, or M&A, transactions. During the fiscal years ended December 31, 2014, 2015 and 2016, revenue generated from transactional contracts constituted a substantial portion of Intralinks’ total revenue. These transactional agreements typically have initial terms of six to twelve months depending on the type of transaction and related purpose of the Intralinks exchange. Accordingly, our business depends on our ability to replace these transactional agreements as they expire. Our inability to enter into new contracts with existing customers or find new customers to replace these contracts could have a material adverse effect on our business, results of operations and financial condition.
We may not successfully develop, introduce or integrate new services or enhancements to our Intralinks Platform or our application solutions and this could harm our reputation, revenues and operating income.
Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability to enhance and improve our existing Intralinks platform, including our application solutions, and to introduce new functionality either by acquisition or internal development. Our operating results would suffer if our innovations are not responsive to the needs of our customers, are not appropriately timed with market opportunities or are not brought to market effectively. In addition, it is possible that our assumptions about the features that we believe will drive purchasing decisions for our potential customers or renewal decisions for our existing customers could be incorrect. In the past, we have experienced delays in the planned release dates of new features and upgrades and have discovered defects in new services after their introduction. There can be no assurance that new services or upgrades will be released on schedule or that, when released, they will not contain defects as a result of poor planning, execution or other factors during the product development lifecycle. In addition, we could experience challenges, delays or quality issues in our product development efforts due to the demands of the Agile development methodology our Intralinks’ business relies upon. If any of these situations were to arise, we could suffer adverse publicity, damage to our reputation, loss of revenue, delay in market acceptance or claims by customers brought against us, all of which could have a material adverse effect on our business, results of operations and financial condition. Moreover, upgrades and enhancements to our Intralinks platform may require substantial investment and there can be no assurance that our investments will prove to help us achieve or sustain a durable competitive advantage in products, services and processes. If customers do not widely adopt our solutions or new innovations to our solutions, we may not be able to justify the investments we have made. If we are unable to develop, license or acquire new solutions or enhancements to existing services on a timely and cost-effective basis, or if our new or enhanced solutions do not achieve market acceptance, our business, results of operations and financial condition will be materially adversely affected.
If we are unable to increase our penetration in the existing principal markets for our business, develop, market and sell new solutions or expand into additional markets, we will be unable to grow our business and increase our revenue.
We currently market our Intralinks solutions for a wide range of business processes. These include:
due diligence for M&A, public offerings and other strategic transactions;
loan syndication and other debt capital markets transactions;
board of directors reporting;
secure mobile access to content;
safety information exchange and drug development and licensing for the life sciences industry;
private equity fundraising, hedge fund marketing and investor reporting;
energy exploration and production ventures for the oil and gas industry;
contract and vendor management; and
collaboration and sharing within and outside of organizations.
We intend to continue to focus our sales and marketing efforts in these markets to grow our business. In addition, we believe our future growth depends not only on increasing our penetration into the principal markets in which our services are currently used, but also on identifying and expanding the number of industries, communities and markets that use or could use our services and expanding the solutions we offer to customers in those markets. Efforts to expand our service offerings beyond the markets that we currently serve or to develop, market and sell new service offerings, however, may divert management resources from existing operations, expose us to increased competition from new and existing competitors and require us to commit significant financial resources to an unproven business, any of which could significantly impair our operating results. Moreover, efforts to expand beyond our existing markets and solutions may never result in new services that achieve market acceptance, create additional
revenue or become profitable, particularly if a new target market turns out to be substantially less attractive than we envision due to overestimates in the number of potential customers, the speed at which the market will evolve or grow, the price potential customers are willing to pay for our solutions or the rate at which they are ready to adopt new products or approaches. Our inability to further penetrate our existing markets, successfully launch new solutions or identify additional markets and achieve acceptance of our services in these additional markets could adversely affect our business, results of operations and financial condition.
A significant part of our Intralinks business is derived from the use of Intralinks application solutions in connection with financial and strategic business transactions. Economic trends that affect the volume of these transactions may negatively impact the demand for our services.
A significant portion of our revenue from the Intralinks business depends on the purchase of our services by parties involved in financial and strategic business transactions such as M&A transactions, loan syndications and other debt capital markets, or DCM, transactions. The volume of these types of transactions drives demand for our services. Downturns in the global economy or in the economies of the geographies in which we do business, rising unemployment and reduced equity valuations all create risks that could harm our business. We are not able to predict the impact any potential worsening of macroeconomic conditions could also have on our results of operations. The level of activity in the financial services industry, including the financial transactions our services are used to support, is sensitive to many factors beyond our control, including interest rates, regulatory policies, general economic conditions, our customers' competitive environments, business trends, terrorism and political change. Unfavorable conditions or changes in any of these factors could adversely affect our business, operating results and financial condition.
Risks Related to 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 decreases in our earnings, speculation in the investment community about our 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 decline 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 affect the liquidity of our common stock. Causes of volatility in the market price of our stock could subject us to securities class action litigation. We are currently,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 management.
If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently have research coverage by securities and industry analysts, though we do not control these analysts and have no ability to ensure that they will continue to cover our common stock. If one or more of the analysts who covers us downgrades our stock or states a view that our business prospects are reduced, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to regularly publish reports on us, interest in the purchase of our stock could decrease, which could cause our stock price or trading volume, or both, to decline.
We may face shareholder lawsuitshave, and other potential liabilities that could materially adversely impact our business, financial condition and results of operations.
We may in the future may be, the subjecttarget of various lawsuits, proceedingsstockholder derivative complaints or other securities related legal actions that could adversely affect our results of operations and investigations.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 or regulatory actions or requests 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 our management team, alleging misconduct arising out of the restated transactions that took place in 2015 and 2016 investigated by the Securities and Exchange Commission (“SEC”). We may be required to indemnify these individuals in connection with such action. The Company may be required to indemnify the former members of the Company’s management team for a loss. 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. Large indemnity payments, individually or in the aggregate, could have a material impact on our financial position. In addition, these matters or future lawsuits or investigationslegal 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 regulatory actions and investigations and negative developments in pendingany such legal proceedings could decrease customer demand for our services. As a result, the pending lawsuits and any future lawsuits or investigations involving us, or our officers or directors, could have a material adverse effect on our business, reputation, financial condition, results of operations, liquidity and the trading price of our common stock.
WeOther than payment of dividends on our previous Series A Preferred Stockand our current Series B Preferred Stock, we have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases.
WeOther than the payment of dividends, either in-kind or in cash, on our previous Series A Preferred Stock and our current Series B Preferred Stock in accordance with the Series B Certificate, we have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In
addition, the terms of our outstanding indebtedness restrict our ability to pay dividends,current credit agreement and any future indebtedness that we may incur could preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be a shareholders'sshareholder’s sole source of gain for the foreseeable future. Consequently, in the foreseeable future, a shareholder will likely only experience a gain from youran investment in our common stock if the price of our common stock increases.
Delaware law and provisions in our restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, therefore depressing the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and bylaws and credit agreements may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and bylaws:
•authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;
•prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of the stock to elect some directors;
•establish a classified board of directors as a result of which the successorssuccessor to the directorsa director whose terms haveterm has expired will be elected to serve from the time of election and qualification until the third annual meeting following election;
•require that directors only be removed from office for cause;
•provide that vacancies on the board of directors, including newly-creatednewly created directorships, may be filled only by a majority vote of directors then in office;
•limit who may call special meetings of stockholders;
•prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders;stockholder meeting; and
•establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
The affirmative vote of the holders of at least two-thirds of the voting power of all of the then outstanding shares of our capital stock is generally necessary to amend or repeal the above provisions that are contained in our amended and restated certificate of incorporation. Also, absent approval of our board of directors, our amended and restated by-laws may only be amended or repealed by the affirmative vote of the holders of a majority of our shares of capital stock entitled to vote.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation.us. These provisions may apply even if some stockholders may consider the transaction beneficial to them.
As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.
We have incurred (and expect to continue to incur) significant costs in connection with the restatement of previously issued consolidated financial statements.
We have incurred significant expenses, including audit, legal, consulting and other professional fees, and lender and noteholder consent fees, in connection with certain financial transactions that we effected in 2015 and 2016 and our disclosure of and accounting for such transactions, which we restated in the third quarter of 2018 in our restated annual and quarterly financial statements for 2015 and 2016. That restatement followed our announcement on June 13, 2017 (the “June 2017 Announcement”), that certain of our prior financial statements would need to be restated.On June 7, 2022, the SEC approved the Offer of Settlement and filed an Order Instituting Cease-And-Desist Proceedings pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-And-Desist Order (the “SEC Order”). Pursuant to the terms of the SEC Order, we 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. These quarterly settlement payments will divert cash resources and could adversely impact our business, results of operations and financial condition. 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 as set forth above. We may be required to indemnify the former members of management in that action. Due to the inherent uncertainty of litigation, we cannot predict the outcome of the litigation and can give no assurance that the asserted claims will not have a material adverse effect on its financial position,
prospects, or results of operations. In addition, failure to comply with the provisions of the SEC Order could result in further actions by one or both governmental agencies which could have a material adverse effect on our results of operations.
Our current or future debt securities or preferred equity securities, which are and would be senior to our common stock, may adversely affect the market price of our common stock.
Our Senior Notes and Series B Preferred Stock are senior to our common stock. In addition, in the future, we may attempt to increase our capital resources by offering debt or preferred equity securities, including medium term notes, senior or subordinated notes and classes of preferred stock. Debt securities or shares of preferred stock will generally be entitled to receive interest payments or distributions, both current and in connection with any liquidation or sale, prior to the holders of our common stock. We are not required to offer any such additional debt or preferred equity securities to existing common stockholders on a preemptive basis, and we may generally issue any such debt or preferred equity securities in the future without obtaining the consent of our common stockholders. As a result, any such future offerings of debt securities or preferred equity securities may adversely affect the market price of the common stock.
B. Riley Financial, Inc. and its affiliates (“BRF”) have significant influence over us and may have conflicts of interest that arise out of future contractual relationships it or its affiliates may have with us.
As of December 31, 2022 BRF owned 13.3% of our outstanding common stock and all of our Series B Preferred Stock. As a result, BRF holds significant influence over us as a significant shareholder and may have conflicts of interest that arise out of current or future contractual relationships it or its affiliates may have with us.In addition, for so long as BRF and its affiliates beneficially own at least 10% of our outstanding common stock, BRF will have the right to nominate one member of our board of directors pursuant to an investor rights agreement.
As a result of the foregoing arrangements, BRF has significant influence over our management and policies and over all matters requiring shareholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. Further, if BRF and other significant shareholders of the Company were to act together on any matter presented for shareholder approval, they could have the ability to control the outcome of that matter. BRF can take actions that have the effect of delaying or preventing a change of control of us or discouraging others from making tender offers for our shares, which could prevent shareholders from receiving a premium for their shares. These actions may be taken even if other shareholders oppose them.
The Senior Notes are unsecured and therefore are effectively subordinated to any secured indebtedness that we currently have or that we may incur in the future.
The Senior Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the Senior Notes are effectively subordinated to any secured indebtedness that we or our subsidiaries have currently outstanding or may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. The indenture governing the Senior Notes does not prohibit us or our subsidiaries from incurring additional secured (or unsecured) indebtedness in the future. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness and may consequently receive payment from these assets before they may be used to pay other creditors, including the holders of the Senior Notes.
The Senior Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
The Senior Notes are obligations exclusively of Synchronoss Technologies, Inc. and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Senior Notes, and the Senior Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. Therefore, in any bankruptcy, liquidation or similar proceeding, all claims of creditors (including trade creditors) of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the Senior Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the Senior Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise. The indenture governing the Senior Notes does not prohibit us or our subsidiaries from incurring additional indebtedness in the future. In addition, future debt and security agreements entered into by our subsidiaries may contain various
restrictions, including restrictions on payments by our subsidiaries to us and the transfer by our subsidiaries of assets pledged as collateral.
The indenture under which the Senior Notes were issued contains limited protection for holders of the Senior Notes.
The indenture under which the Senior Notes were issued offers limited protection to holders of the Senior Notes. The terms of the indenture and the Senior Notes does not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on our investment in the Senior Notes. In particular, the terms of the indenture and the Senior Notes do not place any restrictions on our or our subsidiaries’ ability to:
•issue debt securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Senior Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Senior Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Senior Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Senior Notes with respect to the assets of our subsidiaries;
•pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities subordinated in right of payment to the Senior Notes;
•sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);
•enter into transactions with affiliates;
•create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;
•make investments; or
•create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
In addition, the indenture does not include any protection against certain events, such as a change of control, a leveraged recapitalization or “going private” transaction (which may result in a significant increase of our indebtedness levels), restructuring or similar transactions. Furthermore, the terms of the indenture and the Senior Notes will not protect holders of the Senior Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity. Also, an event of default or acceleration under our other indebtedness would not necessarily result in an Event of Default under the Senior Notes.
Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the Senior Notes may have important consequences for you as a holder of the Senior Notes, including making it more difficult for us to satisfy our obligations with respect to the Senior Notes or negatively affecting the trading value of the Senior Notes.
Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Senior Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Senior Notes.
An increase in market interest rates could result in a decrease in the value of the Senior Notes.
In general, as market interest rates rise, notes bearing interest at a fixed rate decline in value. We cannot predict the future level of market interest rates.
An active trading market for the Senior Notes may not develop, which could limit the market price of the Senior Notes or your ability to sell them.
The Senior Notes are listed on Nasdaq under the symbol “SNCRL”. We cannot provide any assurances that an active trading market will develop for the Senior Notes or that holders of our Senior Notes will be able to sell their Notes. If the Senior Notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, general economic conditions, our financial condition,
performance and prospects and other factors. The underwriters of our Senior Note offering have advised us that they may make a market in the Senior Notes, but they are not obligated to do so. The underwriters may discontinue any market-making in the Senior Notes at any time at their sole discretion. Accordingly, we cannot assure you that a liquid trading market will develop for the Senior Notes, that holders of our Senior Notes will be able to sell their Senior Notes at a particular time or that the price the holders receive when they sell will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for the Senior Notes may be harmed. Accordingly, holders of our Senior Notes may be required to bear the financial risk of an investment in the Senior Notes for an indefinite period of time.
In addition, there may be a limited number of buyers when a holder decides to sell their Senior Notes. This may affect the price, if any, offered for such notes or the holders’ ability to sell them when desired or at all.
We may issue additional Senior Notes.
Under the terms of the indenture governing the Senior Notes, we may from time to time without notice to, or the consent of, the holders of the Senior Notes, create and issue additional notes which will be equal in rank to the Senior Notes. On October 25, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) between us and BRF, which provides that we may from time to time issue and sell, by means of “at the market” offerings, up to $18 million of our Senior Notes. We will not issue any such additional Notes unless such issuance would constitute a “qualified reopening” for U.S. federal income tax purposes.
The rating for the Senior Notes could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency.
We have obtained a rating for the Senior Notes. Ratings only reflect the views of the issuing rating agency or agencies and such ratings could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency. A rating is not a recommendation to purchase, sell or hold the Senior Notes. Ratings do not reflect market prices or suitability of a security for a particular investor and the rating of the Senior Notes may not reflect all risks related to us and our business, or the structure or market value of the Senior Notes. We may elect to issue other securities for which we may seek to obtain a rating in the future. If we issue other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, could adversely affect the market for or the market value of the Senior Notes.
A new 1% U.S. federal excise tax may be imposed upon us in connection with the redemptions by us of our Series B Non-Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) or other redemptions or repurchases of our equity.
On August 16, 2022, President Biden signed into law the IRA, which, among other things, imposes a new U.S. federal 1% excise tax on certain repurchases (including redemptions) of stock by publicly traded domestic corporations and certain domestic subsidiaries of publicly traded foreign corporations. This excise tax is imposed on the repurchasing corporation itself, not its stockholders from which shares are repurchased. Generally, the amount of the excise tax is 1% of the fair market value of the shares repurchased at the time of the repurchase. For the purposes of calculating the excise tax, the repurchasing corporation is permitted to net the fair market value of certain new stock issuances against the fair market value of the stock repurchases that occur in the same taxable year. On December 27, 2022, the U.S. Treasury Department issued a notice that provides interim guidance regarding the application of the 1% excise tax pending forthcoming proposed regulations. The IRA excise tax applies to repurchases and redemptions that occur after December 31, 2022.
Pursuant to the Certificate of Designation setting forth the rights, preferences, privileges, qualifications, restrictions and limitations on the Series B Preferred Stock (the “Series B Certificate”), each share of Series B Preferred Stock will be redeemable at the option of the holder upon the occurrence of a “Fundamental Change” (i) for cash at a price per share equal to the Liquidation Preference (as defined in the Series B Certificate) and the accrued but unpaid dividends or (ii) for 1.5 times par in the case of payment in shares of common stock, subject to certain limitations on the amount of stock that could be issued to the holders of Series B Preferred Stock. In addition, we are permitted to redeem outstanding shares of the Series B Preferred Stock at any time for the sum of the then-applicable Liquidation Preference and the accrued but unpaid dividends. Pursuant to the Series B Certificate, we will be required to use (i) the first $50.0 million of proceeds from certain transactions (i.e., disposition, sale of assets, tax refunds) received by the Company to redeem for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of Series B Preferred Stock and (ii) the next $25.0 million of proceeds from certain transactions received by us may be used by us to buy back shares of common stock and to the extent, not used for such purpose, to redeem, for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of the Series B Preferred Stock.
We expect that each redemption of Series B Preferred Stock after December 31, 2022 will be subject to the 1% excise tax. Whether and to what extent we would be subject to the excise tax would depend on a number of factors, including (i) the fair market value of the redemptions and repurchase, (ii) the nature and amount of any equity issuances within the same taxable year and (iii) the regulations and other guidance issued by the U.S. Treasury Department and the IRS. The 1% excise tax may increase our costs and impact our operations. This could have an adverse effect on our margins and financial position and would negatively affect our revenues and results of operations and/or trading price of our common stock.
Our common stock could be delisted from Nasdaq, which would seriously harm the liquidity of our common stock.
Nasdaq requires listing issuers to comply with certain standards in order to remain listed on its exchange. If, for any reason, Nasdaq should delist our common stock from trading on its exchange and we are unable to obtain listing on another reputable national securities exchange, a reduction in some or all of the following may occur, each of which could materially adversely affect our stockholders:
• the liquidity and marketability of our common stock;
• the market price of our common stock;
• our ability to obtain financing for the continuation of our operations;
• the number of institutional and general investors that will consider investing in our common stock;
• the number of market makers in our common stock;
• the availability of information concerning the trading prices and volume of our common stock; and
• the number of broker-dealers willing to execute trades in shares of our common stock.
On December 27, 2022, we received notice from Nasdaq indicating that we are no longer in compliance with the Nasdaq Listing Rules minimum bid requirement (the “Minimum Bid Requirement”). If we fail to regain compliance within the allotted compliance periods, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that our common stock will be subject to delisting. We would then be entitled to appeal Nasdaq’s determination, but there can be no assurance that Nasdaq would grant our request for continued listing. We intend to monitor the closing bid price of our common stock and consider options to comply with the Minimum Bid Requirement.
In addition, if we fail to regain compliance to be eligible to trade on Nasdaq, we may have to pursue trading on a less recognized or accepted market, such as the over the counter markets, our common stock may be traded as a “penny stock” which would make transactions in our common stock more difficult and cumbersome, and we may be unable to access capital on favorable terms or at all, as companies trading on alternative markets may be viewed as less attractive investments with higher associated risks, such that existing or prospective institutional investors may be less interested in, or prohibited from, investing in our common stock. This may also cause the market price of our common stock to further decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease approximately 132,000120,000 square feet of office space for our corporate headquarters in Bridgewater, New Jersey. We also lease a 100,000 square foot facilityhave other leases in Bangalore, India. In addition to the above office space, we also lease officescertain countries including Australia, India, Japan, Ireland, Italy and in various states in the United States including California, Colorado, Maryland, Massachusetts, New York, Texas, VirginiaArizona and Washington and in certain countries including Australia, China, Finland, France, Ireland, Italy, Japan, Malta and the Philippines. LeasePennsylvania. The lease terms for our locations expire in the years between 20172023 and 2029.2028. We believe that the facilities we now lease are sufficient to meet our needs through at least the next 12twelve months. However, we may require additional office space after that time or if our current business plans change, and we are currently evaluating expansion possibilities.
ITEM 3. 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 20. Legal Mattersincluded in Part II, Item 8. “Notes to Consolidated Financial Statements” of this Annual 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-K.
ITEM4. MINE SAFETY DISCLOSURES
Not applicable.Applicable.
PART II
ITEM 5. MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
OurAs of December 31, 2022, our common stock iswas traded and listed on the NASDAQThe Nasdaq Global Select Market under the symbol “SNCR.” The following table sets forth, for each period during the past two years, the high and low sale prices as reported by NASDAQ.
|
| | | | | | | | | | | | | | | |
| | Common Stock |
| | 2016 | | 2015 |
| | High | | Low | | High | | Low |
| First Quarter | $ | 35.42 |
| | $ | 20.33 |
| | $ | 51.39 |
| | $ | 37.76 |
|
| Second Quarter | $ | 37.98 |
| | $ | 28.73 |
| | $ | 52.45 |
| | $ | 42.01 |
|
| Third Quarter | $ | 43.65 |
| | $ | 31.45 |
| | $ | 49.53 |
| | $ | 27.86 |
|
| Fourth Quarter | $ | 49.94 |
| | $ | 36.00 |
| | $ | 40.39 |
| | $ | 29.77 |
|
As of February 16, 2017,December 31, 2022, there were approximately 5352 named holders of record of our common stock.stock as according to our transfer agent. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by banks, brokers and other nominees. On February 16, 2017,December 31, 2022, the last reported sale price of our common stock as reported on the NASDAQThe Nasdaq Global Select Market was $33.67$0.62 per share.
Dividend Policy
Common Stock
We have never declared or paid cash dividends on our common or preferred equity. We do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors subject to the covenants under our 2017 Credit Facility and Term Loan Facility, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our Board of Directors may deem relevant.
Preferred Stock
Series B Non-Convertible Preferred Stock
On June 30, 2021, the Company closed a private placement of 75,000 shares of its Series B Perpetual Non-Convertible Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share (the “Series B Preferred Stock”), for net proceeds of $72.8 million (the “Series B Transaction”). The sale of the Series B Preferred Stock was pursuant to the Series B Preferred Stock Purchase Agreement, dated as of June 24, 2021 (the “Series B Purchase Agreement”), between the Company and B. Riley Principal Investments, LLC (“BRPI”).
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series B Preferred Stock are set forth in the Series B Certificate. Under the Series B Certificate, the holders of the Series B Preferred Stock are entitled to receive, on each share of Series B Preferred Stock on a quarterly basis, an amount equal to the dividend rate, as described in the following sentence, divided by four and multiplied by the then-applicable Liquidation Preference per share of Series B Preferred Stock (collectively, the “Preferred Dividends”). The dividend rate is (1) 9.5% per annum for the period commencing on June 30, 2021 and ending on and including December 31, 2021, (2) 13% per annum for the year commencing on January 1, 2022 and ending on and including December 31, 2022; and (3) 14% per annum for the year commencing on January 1, 2023 and thereafter. The Preferred Dividends will be due in cash on January 1, April 1, July 1 and October 1 of each year (each, a “Series B Dividend Payment Date”). The Company may choose to pay the Series B preferred dividends in cash or in additional shares of Series B Preferred Stock. In the event the Company does not declare and pay a dividend in cash on any Series B Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. As of December 31, 2022, the Liquidation Value and Redemption Value of the Series B Preferred Shares was $73.0 million.
The Company paid the following Series B preferred dividends and principal during the year ended December 31, 2022 and accrued the following preferred dividends as of December 31, 2022:
•First quarter: paid $1.8 million preferred dividends in the form of cash.
•Second quarter:
•paid $2.4 million preferred dividends in the form of Series B preferred shares (paid-in-kind);
•made a $2.5 million principal and interest payment to redeem 2,438 shares of Series B Preferred stock;
•made a $4.4 million principal and interest payment to redeem 4,300 shares of Series B Preferred stock.
•Third quarter: paid $2.3 million preferred dividends in the form of cash.
•Fourth quarter:
•paid $2.3 million preferred dividends in the form of cash;
•accrued $2.3 million preferred dividends which was paid in the form of cash on January 3, 2023.
Series A Convertible Preferred Stock
On February 15, 2018, the Company issued to Silver Private Holdings I, LLC (“Silver”), an affiliate of Siris Capital Group, LLC (“Siris”) 185,000 shares of our newly issued Series A Preferred Stock, par value $0.0001 per share. Under the Series A Certificate, the holders of the Series A Preferred Stock were entitled to receive, on each share of Series A Preferred Stock on a quarterly basis, an amount equal to the dividend rate of 14.5% divided by four and multiplied by the then-applicable Liquidation Preference (as defined in the Series A Certificate) per share of Series A Preferred Stock (collectively, the “Preferred Dividends”). The Preferred Dividends were due on January 1, April 1, July 1 and October 1 of each year (each, a “Series A Dividend Payment Date”). The Company may choose to pay the Preferred Dividends in cash or in additional shares of Series A Preferred Stock.
Redemption of Series A Preferred Stock
The Company redeemed in full all of the 268,917 outstanding shares of the Series A Preferred Stock for an aggregate redemption price of $278.7 million and all rights under the Investor Rights Agreement relating to the Series A Preferred Stock were terminated effective with the Redemption. No Series A Preferred Stock remains outstanding or authorized as of December 31, 2022.
For a discussion of our stockholder’s equity refer to Note 13. Capital Structureincluded in Part II, Item 8. “Notes to Consolidated Financial Statements” of this Annual Report on Form 10-K.
Information concerning securities authorized for issuance under equity compensation plans is set forth under the heading “Securities Authorized for Issuance Under Equity Compensation Plans” in the Synchronoss Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock between December 31, 20112017 and December 31, 2016,2022, with the cumulative total return of (i) the NASDAQNasdaq Computer Index and (ii) the NASDAQNasdaq Composite Index, over the same period. This graph assumes the investment of $100 on December 31, 20112017 in our common stock, the NASDAQNasdaq Computer Index and the NASDAQNasdaq Composite Index, and assumes the reinvestment of dividends, if any. The graph assumes the initial value of our common stock on December 31, 20112017 was the closing sales price of $30.21$8.94 per share.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
Information used in the graph was obtained from NASDAQ,Nasdaq, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | December 31, 2018 | | December 31, 2019 | | December 31, 2020 | | December 31, 2021 | | December 31, 2022 |
| Synchronoss Technologies, Inc. | $100 | | $69 | | $53 | | $53 | | $27 | | $7 |
| Nasdaq Composite Index | $100 | | $96 | | $130 | | $187 | | $227 | | $152 |
| Nasdaq Computer Index | $100 | | $96 | | $145 | | $217 | | $299 | | $192 |
|
| | | | | | | | | | | | | | | | | |
| | 12/31/11 | | 12/31/12 | | 12/31/13 | | 12/31/14 | | 12/31/15 | | 12/31/16 |
| Synchronoss Technologies, Inc. | 100 |
| | 70 |
| | 103 |
| | 139 |
| | 117 |
| | 127 |
|
| Nasdaq Composite Index | 100 |
| | 116 |
| | 160 |
| | 182 |
| | 192 |
| | 207 |
|
| Nasdaq Computer Index | 100 |
| | 112 |
| | 148 |
| | 178 |
| | 189 |
| | 212 |
|
The following table provides information relating to our repurchase of common stock during the year ended December 31, 2016:
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program |
| | | | | | | | | |
| 3/1/2016- 3/31/2016 | | 552,500 |
| | $ | 30.00 |
| | 552,500 |
| | $ | 83,419,170 |
|
| 4/1/2016- 4/30/2016 | | 372,462 |
| | 32.20 |
| | 372,462 |
| | 71,425,709 |
|
| 5/1/2016- 5/31/2016 | | 297,174 |
| | 33.75 |
| | 297,174 |
| | 61,394,736 |
|
| 6/1/2016- 6/30/2016 | | 39,835 |
| | 35.64 |
| | 39,835 |
| | 59,974,843 |
|
| Total | | 1,261,971 |
| | $ | 31.72 |
| | 1,261,971 |
| | $ | 59,974,843 |
|
The repurchases were made under the stock repurchase program approved by our Board of Directors and announced on February 4, 2016 and through which we were authorized to purchase up to $100 million of our common stock. The program does not have an expiration date.
Repurchases under the program may take place in the open market or in privately negotiated transactions and may be made pursuant to a Rule 10b5-1 plan.
ITEM 6. SELECTED FINANCIAL DATA[Reserved]
The following selected financial data should be read in conjunction with our consolidated financial statements and related notes and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial data included elsewhere in this Form 10‑K. The selected statements of operations and the selected balance sheet data are derived from our consolidated audited financial statements.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015† | | 2014† | | 2013† | | 2012 |
| | (In thousands, except per share data) |
| Statements of Operations Data: | | | | | | | | | |
| Net revenues | $ | 476,750 |
| | $ | 428,117 |
| | $ | 307,301 |
| | $ | 225,368 |
| | $ | 273,692 |
|
| (Loss) income from continuing operations | (71,809 | ) | | 15,131 |
| | (3,541 | ) | | (19,305 | ) | | 41,458 |
|
| Net (loss) income from continuing operations | (66,541 | ) | | 6,415 |
| | (2,023 | ) | | (9,711 | ) | | 27,083 |
|
| Net (loss) income attributable to noncontrolling interests | (11,596 | ) | | 6,052 |
| | — |
| | — |
| | — |
|
| Net (loss) income from continuing operations attributable to Synchronoss | (54,945 | ) | | 363 |
| | (2,023 | ) | | (9,711 | ) | | 27,083 |
|
| Net (loss) income applicable to shares of common stock for diluted earnings per share | $ | (54,945 | ) | | $ | 2,063 |
| | $ | (2,023 | ) | | $ | (9,711 | ) | | $ | 27,083 |
|
| Basic: | | | | | | | | | |
| Continuing operations | $ | (1.26 | ) | | $ | 0.01 |
| | $ | (0.05 | ) | | $ | (0.25 | ) | | $ | 0.71 |
|
| Diluted: | | | | | | | | | |
| Continuing operations | $ | (1.26 | ) | | $ | 0.01 |
| | $ | (0.05 | ) | | $ | (0.25 | ) | | $ | 0.69 |
|
| Weighted-average common shares outstanding: | | | | | | | | | |
| Basic | 43,571 |
| | 42,284 |
| | 40,418 |
| | 38,891 |
| | 38,195 |
|
| Diluted | 43,571 |
| | 42,284 |
| | 40,418 |
| | 38,891 |
| | 39,126 |
|
| |
† | These amounts have been adjusted to exclude discontinued operations for the divestiture of the Company's BPO business in the fourth quarter of 2016. (See Note 3, Acquisitions and Divestitures in our Consolidated Financial Statements for additional information.) |
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012† |
| | (In thousands) |
| Balance Sheet Data: | | | | | | | | | |
| Cash, cash equivalents, restricted cash and marketable securities | $ | 226,498 |
| | $ | 233,626 |
| | $ | 290,377 |
| | $ | 77,605 |
| | $ | 56,869 |
|
| Working capital | 210,846 |
| | 326,765 |
| | 354,298 |
| | 98,786 |
| | 84,451 |
|
| Total assets | 1,164,729 |
| | 1,010,228 |
| | 862,822 |
| | 527,019 |
| | 466,662 |
|
| Lease financing obligation - long-term | 12,121 |
| | 13,343 |
| | 9,204 |
| | 9,252 |
| | 9,540 |
|
| Contingent consideration obligation - long-term | — |
| | 930 |
| | — |
| | 4,468 |
| | 5,100 |
|
| Convertible debt | 226,291 |
| | 224,878 |
| | 230,000 |
| | — |
| | — |
|
| Redeemable noncontrolling interest | 49,856 |
| | 61,452 |
| | — |
| | — |
| | — |
|
| Total stockholders’ equity | 657,115 |
| | 609,814 |
| | 529,107 |
| | 447,639 |
| | 374,657 |
|
| |
† | Certain prior period amounts have been recast in connection with Accounting Standards Codification 805, Business Combinations. |
ITEM 7.MANAGEMENT’SDISCUSSION AND ANALYSISOF FINANCIALCONDITION AND RESULTS OF OPERATIONS.OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations or (“MD&A,&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 analysisMD&A should be read in conjunction with our Consolidatedthe Financial Statements and Notes to the related notes included in Item 8 - "Financial Statements and Supplementary Data"consolidated financial statements. This section of this Form 10-K.10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Revenues
We generate a substantial portionmost of our revenues on a per‑transactionsubscription or subscriptionper transaction basis, which is derived from contracts that extend up to 60 months from execution.
Historically, our revenues have been directly impacted by the number of transactions that we process for our customers. 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 businessfootprint with international customers and increase the extent of recording our international activities in local currencies,carriers, we will become subject to currency translation risk that could affect our future net sales as reported in U.S. dollars.
The Company’s top five customers accounted for 73.4%, 68.2% and 68.0% of net sales.
Each of AT&Trevenues for the years ended December 31, 2022, 2021 and 2020, respectively. Contracts with these customers typically run for three to five years. Of these customers, Verizon accounted for more than 10% of ourthe Company’s revenues for the years ended December 31, 2016in 2022, 2021, and 2015. AT&T and Verizon in the aggregate accounted for 62% and 71% of our revenues for the years ended December 31, 2016 and 2015, respectively. Although in December 2016, we divested our activation call center business, which included a portion of the services that we historically provided to AT&T, we will continue to generate revenue from AT&T from our activation software and professional services. We have Statements of Work for each of the Verizon and AT&T businesses that we support which typically run for 12 to 36 months. Although Intralinks has a diverse customer base and we expect that revenue from our Intralinks business will comprise a significant portion of our going forward revenue, the2020. The loss of either AT&T or Verizon as a customer would have a material negative impact on our company. WeHowever, we believe that if either AT&T or Verizon were to terminate their relationship with us, that they would encounter substantial costs in replacing Synchronoss' solutions.
Costs and Expenses
Our costs and expenses consist of cost of services, research and development, selling, general and administrative, depreciation and amortization, change in contingent consideration, restructuring, interest and other expense.
Cost of services includes all direct materials, direct labor, cost of facilities and those indirect costs related to revenues such as indirect labor, materials and supplies. Our primary cost of services is related to our information technology and systems department, including colocation fees, network costs, data center maintenance, database management and data processing costs, as well as personnel costs associated with service implementation, customer deployment and customer care.
Research and development costs are expensed as incurred unless they meet the criteria for deferral and amortization under U.S. Generally Accepted Accounting Principles (“GAAP”). Software development costs incurred priorand subscriber disruption by Verizon to the establishment of technological feasibility do not meet these criteria, and are therefore expensed as incurred. Research and development expense consists primarily of costs related to personnel, including salaries and other personnel-related expenses, consulting fees and the cost of facilities, computer and support services used in service technology development. We also expense costs relating to developing modifications and minor enhancements of our existing technology and services.replace Synchronoss’ solutions would be substantial.
Selling, general and administrative expense consists of personnel costs including salaries, sales commissions, sales operations and other personnel-related expenses, travel and related expenses, trade shows, costs of communications equipment and support services, facilities costs, consulting fees, costs of marketing programs, such as internet and print and other overhead and administrative costs.
Net change in contingent consideration obligation consists of the changes to the fair value estimate of the obligation to the former equity holders which resulted from our acquisitions. The estimate is based on the weighted probability of achieving certain financial targets and other milestones. The contingent consideration obligation earn-out periods have been no longer than 12
months in duration. As such, we recognize the changes in fair value over that period. Final determination of the earn-out payment is done up to 90 days after the applicable earn-out period ends.
Restructuring charges consist of the costs associated with work-force reduction plans to reduce costs and align our resources with our key strategic priorities. Restructuring charges include employee termination costs and facilities consolidation costs related to minimum lease payments of a leased location that was closed.
Depreciation relates to our property and equipment and includes our network infrastructure and facilities. Amortization primarily relates to trademarks, customer lists, technology acquired and internally developed software.
Interest expense consists primarily of interest on our lease financing obligations, our outstanding balance on our Credit Facility and our convertible senior notes.
Current Trends Affecting Our Results of Operations
Business from our Synchronoss Personal CloudCloud™ solution has been driven by the unprecedented growth in mobile devices globally. With mobile devicesglobally 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 family, friends and business associates have become an essential needs. 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 and health care devices. The need for the contents ofcontent from these devices to be stored in a common cloud areis also expected to be drivers ofdrive our businessesbusiness in the long-term.longer term.
Bring Your Own Technology (BYOT/BYOD) is impactingBusiness from our traditional Synchronoss Messaging business (email) has been driven by a resurgence in the work environmentneed for enterpriseswhite label secure messaging platforms that favor the Mobile Network Operator’s (“MNO”) business objectives and organizationsare not beholden to the 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 stimulate new revenue from traditional services and third-party brands. OTT global success has driven MNOs to look at opportunities to preempt and compete with the OTTs which often find themselvesprovides a potential opportunity for Synchronoss’ future growth to be driven by the need of TMT companies including (and especially) MNOs to embrace Messaging as a Platform (“MaaP”). MaaP will allow TMT and MNOs to converse with subscribers in a position where they needan efficient, automated way by streamlining the costs and increasing the effectiveness of self-care, as well as yielding cross-sell upselling of service plans, devices, bundles, etc. The Synchronoss Advanced Messaging Platform provides state of the art RCS-driven features including the ability to offer their employees a safe environmentsupport advanced Peer to sharePeer communications and collaborate on their work documentsintroduce new revenue streams driven by commerce and filesadvertising via mobile devices. We expect that by leveraging our Synchronoss Personal Cloud solution infrastructure and technology to build Synchronoss WorkSpace solutions for this purpose will enable us to serve a completely new market, which we believe will also contribute to our growth.Application-to-Person capabilities.
To support our growth, which we willexpect to be driven by these favorable industry trends mentioned above, we plan to 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 for future revenue growth. 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 expand our platforms' footprint with broadband carriersplatforms into the converging TMT, MNO, and international mobile carriersDigital spaces to supportenable connected devices andto do more things across multiple networks, through our focus on cloud-based services for back up, synchronizationbrands and sharing of content.communities. Our initiatives with AT&T, Verizon Wireless, Vodafone, Goldman Sachs, Softbank and other CSPsour customers continue to grow both with regard to our current businessesbusiness as well as our new product offerings. We are also exploring additional opportunities through merger and acquisition activities to support our customer, product and geographic diversification strategies.
Further,
Discussion of the Consolidated Statements of Operations
The following table presents an overview of our results of operations for the years ended December 31, 2022 and 2021 (in thousands).
| | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | 2022 vs 2021 | | |
| 2022 | | 2021 | | | | $ Change | | |
| Net revenues | $ | 252,628 | | | $ | 280,615 | | | | | $ | (27,987) | | | |
Cost of revenues1 | 91,702 | | | 109,050 | | | | | (17,348) | | | |
| Research and development | 55,620 | | | 64,337 | | | | | (8,717) | | | |
| Selling, general and administrative | 70,326 | | | 84,991 | | | | | (14,665) | | | |
| Restructuring charges | 1,905 | | | 5,189 | | | | | (3,284) | | | |
| Depreciation and amortization | 31,753 | | | 36,065 | | | | | (4,312) | | | |
| Total costs and expenses | 251,306 | | | 299,632 | | | | | (48,326) | | | |
| Income (loss) from operations | $ | 1,322 | | | $ | (19,017) | | | | | $ | 20,339 | | | |
1 Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues decreased $28.0 million to $252.6 million for the year ended December 31, 2022, compared to the same period in 2021. The overall change in revenue was a result of the dissolution of CCMI in the prior year, expected impact from the sale and product sunsetting of the non-strategic DXP and Activation assets earlier in 2022, the expected deferred revenue run-off in the current quarter, unfavorable foreign exchange impact related to current macroeconomic conditions and temporary slowdowns in purchasing activity. The change in revenue was partially offset by Cloud subscriber growth.
Cost of revenues decreased $17.3 million to $91.7 million for the year ended December 31, 2022, compared to the same period in 2021. The decrease in 2022 is primarily attributable to the year over year change in revenue and favorable shift to higher margin products.
Research and development expense decreased $8.7 million to $55.6 million for the year ended December 31, 2022, compared to the same period in 2021. Consistent with prior year, the decrease in 2022 is primarily attributable our continued efforts to reduce spend and cost savings from the DXP Business unit divestiture.
Selling, general and administrative expense decreased $14.7 million to $70.3 million for the year ended December 31, 2022, compared to the same period in 2021. The decrease is primarily driven by executed cost savings initiatives which included headcount reductions, reduced vendor spending and lower facility costs.
Restructuring charges were $1.9 million for the year ended December 31, 2022. The restructuring charges were primarily driven by our strategic cost savings initiatives to streamline our business operations, reduce headcount and align our resources with our acquisitionkey strategic priorities.
Depreciation and amortization expense decreased $4.3 million for the year ended December 31, 2022. The decrease was primarily attributable to the expiration of Intralinks,amortizable acquired assets in combination with reduced capital expenditures mainly as a result of the data center consolidation project and efforts to streamline business operations, partially offset by the increased amortization of capitalized software.
Income tax. The Company recognized approximately $1.9 million in related income tax expense and $7.2 million in related income tax benefit during the years ended December 31, 2022 and 2021, respectively. The effective tax rate was approximately (31.7)% for the year ended December 31, 2022, which was lower than the U.S. federal statutory rate primarily
due to the impact of Global Intangible Low-Taxed Income, attributable to income in foreign jurisdictions and the impact of the U.S. capitalization of research expenses effective January 1, 2022, and the divestiture of the DXP and Activation assets during the second quarter. This decrease was partially offset by loss jurisdictions where full valuation allowances have been recorded and foreign income tax credits generated in the period. The Company’s effective tax rate was approximately 23.7% for the year ended December 31, 2021, which higher than the U.S. statutory rate primarily due to the benefit of the CARES Act provision allowing for a 5 year carryback of Net Operating Losses arising in 2018, 2019 and 2020, offset by certain unfavorable permanent book-tax differences.
Liquidity and Capital Resources
As of December 31, 2022, our principal sources of liquidity have been cash provided by operations. Our cash and cash equivalents balance was $21.9 million at December 31, 2022. We anticipate that our principal uses of cash and cash equivalents will be to fund our business, including technology expansion and working capital.
At December 31, 2022, our non-U.S. subsidiaries held approximately $9.4 million of cash and cash equivalents that are available for use by all of our operations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to U.S. tax for the incremental amount in excess of the foreign tax paid. Due to the timing and circumstances of repatriation of these earnings, if any, it is not practical to determine the unrecognized deferred tax liability related to the amount.
We believe that our cash, cash equivalents, financing sources, and our ability to manage working capital and expected positive cash flows generated from operations in combination with continued expense reductions will be sufficient to fund our operations for the next twelve months from the date of filing of this Annual Report on Form 10-K. However, as 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 enhancedtaken actions to improve our current liquidity position, including, reducing working capital, reducing operating costs and substantially reducing discretionary spending. Even with these actions however, an extended period of economic disruption as a result of COVID-19 could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the Enterprise market. Enterprise customers"Forward-Looking Statements" section of this MD&A and Part I, Item 1A. “Risk Factors”, some of which are lookingoutside of our control.
Offering of 2021 Senior Notes due 2026
On June 30, 2021, the Company closed its underwritten public offering of $120.0 million aggregate principal amount of 8.375% senior notes due 2026 at a par value of $25.00 per senior note (the “Senior Notes”). The offering was conducted pursuant to dataan underwriting agreement (the “Notes Underwriting Agreement”) dated June 25, 2021, by and among the Company and B. Riley Securities, Inc., as representative of the several underwriters (the “Notes Underwriters”). At the closing, the Company issued $125.0 million aggregate principal amount of Senior Notes, inclusive of $5.0 million aggregate principal amount of Senior Notes issued pursuant to createthe full exercise of the Notes Underwriters’ option to purchase additional Senior Notes.
The Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. The Senior Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The Senior Notes bear interest at the rate of 8.375% per annum. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The Senior Notes will mature on June 30, 2026, unless redeemed prior to maturity.
The Company may, at its option, at any time and from time to time, redeem the Senior Notes for cash in whole or in part (i) on or after June 30, 2022 and prior to June 30, 2023, at a price equal to $25.75 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after June 30, 2023 and prior to June 30, 2024, at a price equal to $25.50 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (iii) on or after June 30, 2024 and prior to June 30, 2025, at a price equal to $25.25 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iv) on or after June 30, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Senior Notes.
On October 25, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) between the Company and B. Riley Securities, Inc. (the “Agent”), a related party, pursuant to which the Company may offer and sell, from time to time, up to $18.0 million of the Company’s 8.375% Senior Notes due 2026. Sales of the additional Senior Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). Under the Sales Agreement, the Agent will be entitled to compensation of 2.0% of the gross proceeds of all notes sold through it as the Company’s agent.
During the fourth quarter of 2021, the Company sold $16.1 million aggregate principal amount of Senior Notes under the Sales Agreement. The additional Senior Notes sold have terms identical to the initial Senior Notes and are be fungible and vote together with the initial Senior Notes immediately upon issuance. The Senior Notes and initial Senior Notes are listed and trade on The Nasdaq Global Market under the symbol “SNCRL.”
The total fair value of the outstanding Senior Notes was $101.3 million as of December 31, 2022. The Company is in compliance with its debt covenants as of December 31, 2022.
For further details, see Note 11. Debt of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
2019 Revolving Credit Facility
On October 4, 2019, the Company entered into a Credit Agreement with Citizens Bank, N.A., for a $10.0 million Revolving Credit Facility. Borrowings under the Revolving Credit Facility bore interest at a rate equal to, at the Company’s option, either (1) the arithmetic average of the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period (one, three or six months (or 12 months if agreed to by all applicable Lenders)) as selected by the Company relevant to such borrowing plus the applicable margin, or (2) a base rate determined by reference to the greatest of the federal funds rate plus 0.5%, the prime commercial lending rate as determined by the Agent, and the daily LIBOR rate plus 1.0%, in each case plus an applicable margin and subject to a floor of 0.0%.
On June 30, 2021, the Company paid off the outstanding balance and closed the Revolving Credit Facility.
Series B Non-Convertible Preferred Stock
On June 30, 2021, the Company closed a private placement of 75,000 shares of its Series B Perpetual Non-Convertible Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share (the “Series B Preferred Stock”), for net proceeds of $72.8 million (the “Series B Transaction”). The sale of the Series B Preferred Stock was pursuant to the Series B Preferred Stock Purchase Agreement, dated as of June 24, 2021 (the “Series B Purchase Agreement”), between the Company and B. Riley Principal Investments, LLC (“BRPI”).
In connection with the closing of the Series B Transaction, the Company (i) filed a Certificate of Designation with the State of Delaware setting forth the rights, preferences, privileges, qualifications, restrictions and limitations on the Series B Preferred Stock (the “Series B Certificate”) and (ii) entered into an Investor Rights Agreement with B. Riley Financial, Inc. (“B. Riley Financial”) and BRPI setting forth certain governance and registration rights of B. Riley Financial with respect to the Company.
Certificate of Designation of the Series B Preferred Stock
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series B Preferred Stock are set forth in the Series B Certificate. Under the Series B Certificate, the holders of the Series B Preferred Stock are entitled to receive, on each share of Series B Preferred Stock on a quarterly basis, an amount equal to the dividend rate, as described in the following sentence, divided by four and multiplied by the then-applicable Liquidation Preference per share of Series B Preferred Stock (collectively, the “Preferred Dividends”). The dividend rate is (1) 9.5% per annum for the period commencing on June 30, 2021 and ending on and including December 31, 2021, (2) 13% per annum for the year commencing on January 1, 2022 and ending on and including December 31, 2022; and (3) 14% per annum for the year commencing on January 1, 2023 and thereafter. The Preferred Dividends will be due in cash on January 1, April 1, July 1 and October 1 of each year (each, a “Series B Dividend Payment Date”). The Company may choose to pay the Series B Preferred Dividends in cash or in additional shares of Series B Preferred Stock. In the event the Company does not declare and pay a dividend in cash on any Series B Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. As of December 31, 2022, the Liquidation Value and Redemption Value of the Series B Preferred Shares was $73.0 million.
On and after the fifth anniversary of the date of issuance, holders of shares of Series B Preferred Stock will have the right to cause the Company to redeem each share of Series B Preferred Stock for cash in an amount equal to the sum of the current
liquidation preference and any accrued dividends. Each share of Series B Preferred Stock will also be redeemable at the option of the holder upon the occurrence of a “Fundamental Change” at (i) par in the case of a payment in cash or (ii) 1.5 times par in the case of payment in shares of Common Stock (such shares being, “Registrable Securities”), subject to certain limitations on the amount of stock that could be issued to the holders of Series B Stock. In addition, the Company will be permitted to redeem outstanding shares of the Series B Preferred Stock at any time for the sum of the then-applicable Liquidation Preference and the accrued but unpaid dividends. Pursuant to the Series B Certificate, the Company will be required to use (i) the first $50.0 million of proceeds from certain transactions (i.e., disposition, sale of assets, tax refunds) received by the Company to redeem for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of Series B Preferred Stock and (ii) the next $25.0 million of proceeds from certain transactions received by the Company may be used by the Company to buy back shares of Common Stock and to the extent, not used for such purpose by the Company, to redeem, for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of the Series B Preferred Stock.
The Company shall be required to obtain the prior written consent of the holders holding at least a majority of the outstanding shares of the Series B Preferred Stock before taking certain actions, including: (i) certain dividends, repayments and redemptions; (ii) any amendment to the Company’s certificate of incorporation that adversely affects the rights, preferences, privileges or voting powers of the Series B Preferred Stock; and (iii) issuances of stock ranking senior or equivalent to shares of the Series B Preferred Stock (including additional shares of the Series B Preferred Stock) in the priority of payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. Other than with respect to the foregoing consent rights, the Series B Preferred Stock is non-voting stock.
Investor Rights Agreement
On June 30, 2021, the Company, B. Riley Financial and BRPI entered into an Investor Rights Agreement (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, for so long as affiliates of B. Riley Financial beneficially own at least 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to nominate one Class II director (the “B. Riley Nominee”) to the Company’s board of directors (the “Board”), who shall be an employee of B. Riley Financial or its affiliates and is approved by the Board, such approval not to be unreasonably withheld. For so long as affiliates of B. Riley Financial beneficially own 5% or more but less than 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to certain board observer rights.
Series A Convertible Preferred Stock
In accordance with the terms of the Share Purchase Agreement dated as of October 17, 2017 (the “PIPE Purchase Agreement”), with Silver Private Holdings I, LLC, an affiliate of Siris (“Silver”), on February 15, 2018, the Company issued to Silver 185,000 shares of its newly issued Series A Convertible Participating Perpetual Preferred Stock (the “Series A Preferred Stock”), par value $0.0001 per share, with an initial liquidation preference of $1,000 per share, in exchange for $97.7 million in cash and the transfer from Silver to the Company of the 5,994,667 shares of the Company’s common stock held by Silver (the “Preferred Transaction”). In connection with the issuance of the Series A Preferred Stock, we (i) filed the Series A Certificate and (ii) entered into an Investor Rights Agreement with Silver setting forth certain registration, governance and preemptive rights of Silver with respect to us (the “Investor Rights Agreement”). Pursuant to the PIPE Purchase Agreement, at the closing, we paid to Siris $5.0 million as a reimbursement of Silver’s costs and expenses incurred in connection with the Preferred Transaction.
Redemption of Series A Preferred Stock
The net proceeds from the common stock public offering, Senior Note offering and the Series B Transaction were used in part to fully redeem all outstanding shares of the Company’s Series A Preferred Stock on June 30, 2021 (the “Redemption”). The Company redeemed in full all of the 268,917 outstanding shares of the Series A Preferred Stock for an aggregate Redemption Price of $278.7 million and all rights under the Investor Rights Agreement relating to the Series A Preferred Stock were terminated effective context for improvingwith the employee work experience - particularly in ultra-secure environments.Redemption. No Series A Preferred Stock remains outstanding or authorized as of December 31, 2022.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Change | | |
| 2022 | | 2021 | | | | 2022 vs 2021 | | |
| Net cash provided by (used in): | | | | | | | | | |
| Operating activities | $ | 17,359 | | | $ | 4,945 | | | | | $ | 12,414 | | | |
| Investing activities | $ | (13,166) | | | $ | (23,943) | | | | | $ | 10,777 | | | |
| Financing activities | $ | (13,276) | | | $ | 16,188 | | | | | $ | (29,464) | | | |
Our primary source of cash is receipts from revenue. The acquisitionprimary uses of Intralinks is an important step forward in our enterprise strategy that enhances our enterprise knowledgecash are personnel and experience upon which to leverage the Synchronoss product portfolio, go-to-market strategyrelated costs, telecommunications and diversified customer footprint. We believe this sets the stage for large cross-selling opportunities by accelerating our enterprise playbook. Together with Synchronoss and Intralinks as one company, we believe we can deploy enhanced enterprise and mobile solutionsfacility costs related primarily to our customers, while opening up new enterprise distribution channels acrosscost of revenue and general operating expenses including professional service fees, consulting fees, building and equipment maintenance and marketing expense.
Cash flows from operating activities for the world.year ended December 31, 2022 was $17.4 million of cash provided by operating activities, as compared to $4.9 million of cash provided by operating activities for the same period in 2021. The increase of cash provided by operating activities of $12.4 million was mainly driven by continued growth in cloud subscribers, reduced operating costs, and $4.3 million federal tax refunds received in the second quarter of 2022.
Cash flows from investing activitiesfor the year ended December 31, 2022 was$13.2 million of cash used by investing activities, as compared to $23.9 million in cash used by 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. This investment was offset in the current period by the $8 million of cash received as part of the DXP Business sale.
Cash flows from financing activities for the year ended December 31, 2022 was $13.3 million of cash used by financing activities, as compared to $16.2 million of cash provided for the same period in 2021, primarily due to principal and interest payments associated with the redemption of Series B Preferred Stock in 2022.
Effect of Inflation
Inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have impacted our business. Management does not believe these impacts have had a material impact on our results of operations during the 2022, 2021 and 2020. We believe this foundationcannot assure you, however, that we will serve Synchronossnot be affected by general inflation in the future.
Contractual Obligations
Our contractual obligations consist of office and laptop leases, notes payable and related interest as well as contractual commitments under third-party hosting, software licenses and maintenance agreements. The following table summarizes our long‑term contractual obligations as of December 31, 2022 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | 2023 | | 2024-2026 | | 2027-2028 | | Thereafter |
| Finance lease obligations | | $ | 940 | | | $ | 483 | | | $ | 457 | | | $ | — | | | $ | — | |
| Interest | | 44,307 | | | 11,815 | | | 32,492 | | | —�� | | | — | |
| Operating lease obligations | | 42,516 | | | 8,007 | | | 24,045 | | | 10,464 | | | — | |
Purchase obligations1 | | 48,599 | | | 20,343 | | | 28,256 | | | — | | | — | |
| Senior Note Payable | | 141,077 | | | — | | | 141,077 | | | — | | | — | |
| Total | | $ | 277,439 | | | $ | 40,648 | | | $ | 226,327 | | | $ | 10,464 | | | $ | — | |
| | | | | | | | | | |
_____________________________
1Amounts represent obligations associated with colocation agreements and other customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax positions are $4.4 million at December 31, 2022. We are not able to reasonably estimate when we build a comprehensive product roadmap and a go-to-market strategy forwould make any cash payments required to settle these liabilities, but we do not believe that the enterprise market around identity, secure mobility, collaboration, and secure workflow platforms.
With the Intralinks acquisition, enterprise will now represent a significant portionultimate settlement of our total revenues, thus helping us further diversifyobligations will materially affect our business model.liquidity. We do not expect that the balance of unrecognized tax benefits will significantly increase or decrease over the next twelve months.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these 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 Securities and Exchange Commission (“SEC”) considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the audit committee of our Board of Directors,Audit Committee, and the audit committeeAudit Committee has reviewed our related disclosures in this Form 10‑K.10-K. Although we believe that our judgments and estimates are appropriate, correct and reasonable under the circumstances, actual results may differ from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See “RiskPart I, “Item 1A. Risk Factors” in this Form 10-K for certain matters bearing risks on our future results of operations.
We believe the following to be our critical accounting policies because they are important to the portrayal of our consolidated financial condition and results of operations and they require critical management judgments and estimates about matters that are uncertain.
Significant accounting policies that we employ are presented in the Notes to our Consolidated Financial Statements in Item 8 Note 2. Summary of Significant Accounting Policies. There were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K during the year ended December 31, 2022.
Revenue Recognition and Deferred Revenue
The Company generates revenue from the delivery of a range of products, solutions and services for operators, enterprises, OEMs and technology providers. We provideoffer services principally on a transactionalTransactional or subscriptionSubscription basis (SaaS) or at times, on a fixed fee basis and recognizein the revenues asform of Professional Services or Software Licenses. Revenues are recognized when control of the promised goods or services are performedtransferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or delivered as discussed below:services. The Company generates all of its revenue from contracts with customers.
Transactional
Subscription and Subscription Service Arrangements:Transaction and subscription revenues consist of revenues derived from the processing of transactions through ourthe Company’s service platforms, providing enterprise portal management services on a subscription basis and maintenance agreements on software licenses. Transaction service arrangements include services such as processing equipment orders, new account set‑up and activation, number port requests, credit checks and inventory management.The Company generates revenue from Subscription services includefrom monthly active user fees, software as a service (“SaaS”) fees, hosting and storage fees, and fees for the related maintenance support for those services. In most cases, the subscription or transaction arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage, under Topic 606 Section 10-25-14(b). When the Company does not allocate variable consideration to distinct periods of service, the total estimated transaction price is recognized ratably over the term of the contract, where the level of service provided to the customer does not vary significantly from one period to another.
Transaction service arrangements include services such as processing equipment orders, new account setup and activation, number port requests, credit checks and inventory management. Transaction revenues are principally based on a contractual price per transaction and are recognized based on the number of transactions processed during each reporting period. Revenues are recorded based on the total number of transactions processed at the applicable price established in the relevant contract. The total amount of revenue recognized is based primarily on the volume of transactions. Subscription revenues are recorded one of two ways: on a straight‑line basis over the life of the contract or on a fixed monthly fee based on a set contracted amount.
Many of ourthe Company’s contracts guarantee minimum volume transactions from the customer. In these instances, if the customer’s total estimated transaction volume for the period is expected to be less than the contractual amount, we recordthe Company records revenues at the minimum guaranteed amount. At times, transaction revenues may also include billings to customers that reimburse usamount on a straight line based onover the number of individuals dedicated to processing transactions. Set‑upperiod covered by the minimum. Setup fees for transactional service arrangements are deferred until set up activities are completed and recognized on a straight‑line
basis over the life of the contract since these amounts would not have been paid by theremaining expected customer without the related transactional service arrangement.relationship period. Revenues are presented net of discounts, which are volume level driven, ordriven.
In accordance with Topic 606 Section 10-50-20, any credits due to customers, which are generally performance driven and based upon system availability or response times to incidents, are determined and accounted for in the period in which the volume thresholds are met or the services are provided. The Company recognizes revenues from support and maintenance performance obligations over the service delivery period.
Professional Service and
The Company’s software licenses typically provide for a perpetual or term right to use the Company’s software. The Company has concluded that in most cases its software license is distinct as the customer can benefit from the software on its own. Software License Arrangements: Professionalrevenue is typically recognized when the software is delivered to the customer. Contracts that include software customization or specified upgrades may result in the combination of the customization services with the software license as one performance obligation. The Company does not have a history of returns, or refunds of its software licenses, however, in limited instances, the Company may constrain consideration to high-risk customers, until collection is resolved.
The Company’s professional services include processsoftware development and workflow consultingcustomization. The contracts generally include project deliverables specified by each customer. The performance obligations in the agreements are generally combined into one deliverable and generally result in the transfer of control over time. The underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to us. The Company recognizes revenue on fixed fee contracts on the proportion of labor hours expended to the total hours expected to complete the contract performance obligation.
Most of the Company’s contracts with customers contain multiple performance obligations which generally include either 1) a perpetual software license with support and maintenance and sometimes a hosting agreement or 2) a term SaaS agreement, frequently sold along with professional services. For these contracts, the Company accounts for individual goods and services separately if they are distinct performance obligations. This often requires significant judgment based upon knowledge of the products, the solution provided and development services. Professional services when sold with transactional or subscriptionthe structure of the sales contract. In SaaS agreements, the Company provides a service arrangements are accounted for separatelyto the customer which combines the software functionality, maintenance and hosting into a single performance obligation when the professionalcustomer doesn’t have the ability to take possession of the underlying software license. The Company may also sell the same three goods and services have valuein a contract, but there may be three performance obligations, where the customer has the right to take possession of the software license without significant penalty.
The transaction price is allocated to the customerseparate performance obligations on a relative standalone selling price basis. The Company estimates standalone selling prices of software based on observable inputs of past transactions to similarly situated customers. When such observable data is not available for certain software licenses because there is a limited number of transactions or prices are highly variable, the Company will estimate the standalone selling price using the residual approach. Standalone selling prices of services are typically determined based on observable transactions when these services are sold on a standalone basis to similarly situated customers or estimated using a cost-plus margin approach.
Estimating the transaction price of variable consideration including the variable quantity subscription or transaction contracts in a multiple performance obligation arrangement requires significant judgment. The Company generally estimates this variable consideration at the most likely amount to which the Company expects to be entitled and therein certain cases based on the expected value. The Company includes estimated amounts in the transaction price to the extent it is objectiveprobable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and reliable evidencedetermination of fair valuewhether to include estimated amounts in the transaction price are based largely on an assessment of the professional services. When accounted for separately, professional service revenues are recognized as services are performedCompany’s anticipated performance and all other elements of revenue recognition have been satisfied.
In determining whether professional service revenues can be accounted for separately from transaction or subscription service revenues, we consider the following factors for each professional services agreement: availability of the professional services from other vendors, whether objectiveinformation (historical, current and reliable evidence of fair value exists of the undelivered elements, the nature of the professional services, the timing of when the professional services contract was signed in comparisonforecasted) that is reasonably available to the transaction or subscription service start dateus. The Company reviews and the contractual independence of the transactional or subscription service from the professional services.
If a professional service arrangement were not to qualify for separate accounting, we would recognize the professional service revenues ratably over the remaining term of the transaction or subscription agreement.
Revenue from software license arrangements is recognized when the license is delivered to our customers and all of the software revenue recognition criteria are met. When software arrangements include multiple elements, the arrangement consideration is allocated at the inception to all deliverables using the residual method providing we have vendor specific objective evidence (VSOE) on all undelivered elements. We determine VSOE for each element based on historical stand‑alone sales to third‑parties.
When transaction or subscription service arrangements, include multiple elements, the arrangement consideration is allocated at the inception of an arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. The selling price used for each deliverable will be based on VSOE if available, third‑party evidence (TPE) if vendor‑ specific objective evidence is not available, or estimated selling price (ESP) if neither vendor‑specific objective evidence nor third‑party evidence is available. The objective of ESP is to determine the price at which we would transact a sale if the product or service were soldupdates these estimates on a stand‑alonequarterly basis. We determine ESP by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices. ESP is generally used for offerings that are not typically sold on a stand‑alone basis or for new or highly customized offerings.
While we follow specific and detailed rules and guidelines related to revenue recognition, we make and use management judgments and estimates in connection with the revenue recognized in any reporting period, particularly in the areas described above, as well as collectability. If management made different estimates or judgments, differences in the timing of the recognition of revenue could occur.
Deferred Revenue: Deferred revenues primarily represent billings to customers for services in advance of the performance of services, with revenues recognized as the services are rendered, and also include the fair value of deferred revenues recorded as a result of acquisitions.
Service Level Standards
Pursuant to certain contracts, we are subject to service level standards and to corresponding penalties for failure to meet those standards. All performance‑related penalties are reflected as a corresponding reduction of our revenues. These penalties, if applicable, are recorded in the month incurred and were insignificant for the years ended December 31, 2016, 2015 and 2014.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated bad debts resulting from the inability of our customers to make required payments. The amount of the allowance account is based on historical experience and our analysis of the accounts receivable balance outstanding. While credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit losses that we have in the past or that our reserves will be adequate. If the financial condition of one of our customers were to deteriorate, resulting in its inability to make payments, additional allowances may be required which would result in an additional expense in the period that this determination was made.
Income TaxesLiquidity and Capital Resources
Since we conduct operations on a global basis,
As of December 31, 2022, our effective tax rate hasprincipal sources of liquidity have been cash provided by operations. Our cash and cash equivalents balance was $21.9 million at December 31, 2022. We anticipate that our principal uses of cash and cash equivalents will depend upon the geographic distributionbe to fund our business, including technology expansion and working capital.
At December 31, 2022, our non-U.S. subsidiaries held approximately $9.4 million of cash and cash equivalents that are available for use by all of our pre-tax earnings among locations with varyingoperations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to U.S. tax rates. We account for the effects of income taxes that result from our activities during the current and preceding years. Under this method, deferred income tax liabilities and assets are based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax ratesincremental amount in effect in the years in which the differences are expected to reverse or be utilized. The realization of deferred tax assets is contingent upon the generation of future taxable income. A valuation allowance is recorded if it is "more likely than not" that a portion or all of a deferred tax asset will not be realized.
In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
We recognize a tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical meritsexcess of the position. The amount of the accrual for which an exposure exists is measured by determining the amount that has a greater than 50 percent likelihood of being realized upon the settlement of the position. Components of the
reserve are classified as current or a long term liability in the consolidated balance sheets based on when we expect each of the items to be settled. We record interest and penalties accrued in relation to uncertainforeign tax benefits as a component of interest expense. We expect that the amount of unrecognized tax benefits will change during 2017; however, we do not expect the change to have a significant impact on our results of operations or financial position.
While we believe we have identified all reasonably identifiable exposures and that the reserve we have established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved. It is also possible that changes in facts and circumstances could cause us to either materially increase or reduce the carrying amount of our tax reserves. In general, tax returns for the year 2012 and thereafter are subject to future examination by tax authorities.
Our policy has been to leave our cumulative unremitted foreign earnings invested indefinitely outside the United States, and we intend to continue this policy. As such, taxes have not been provided on any of the remaining accumulated foreign unremitted earnings.paid. Due to the timing and circumstances of repatriation of suchthese earnings, if any, it is not practicablepractical to determine the unrecognized deferred tax liability relatingrelated to the amount.
We believe that our cash, cash equivalents, financing sources, and our ability to manage working capital and expected positive cash flows generated from operations in combination with continued expense reductions will be sufficient to fund our operations for the next twelve months from the date of filing of this Annual Report on Form 10-K. However, as 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 as a result of COVID-19 could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the "Forward-Looking Statements" section of this MD&A and Part I, Item 1A. “Risk Factors”, some of which are outside of our control.
Offering of 2021 Senior Notes due 2026
On June 30, 2021, the Company closed its underwritten public offering of $120.0 million aggregate principal amount of 8.375% senior notes due 2026 at a par value of $25.00 per senior note (the “Senior Notes”). The offering was conducted pursuant to an underwriting agreement (the “Notes Underwriting Agreement”) dated June 25, 2021, by and among the Company and B. Riley Securities, Inc., as representative of the several underwriters (the “Notes Underwriters”). At the closing, the Company issued $125.0 million aggregate principal amount of Senior Notes, inclusive of $5.0 million aggregate principal amount of Senior Notes issued pursuant to the full exercise of the Notes Underwriters’ option to purchase additional Senior Notes.
The Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. The Senior Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The Senior Notes bear interest at the rate of 8.375% per annum. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The Senior Notes will mature on June 30, 2026, unless redeemed prior to maturity.
The Company may, at its option, at any time and from time to time, redeem the Senior Notes for cash in whole or in part (i) on or after June 30, 2022 and prior to June 30, 2023, at a price equal to $25.75 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after June 30, 2023 and prior to June 30, 2024, at a price equal to $25.50 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (iii) on or after June 30, 2024 and prior to June 30, 2025, at a price equal to $25.25 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iv) on or after June 30, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Senior Notes.
On October 25, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) between the Company and B. Riley Securities, Inc. (the “Agent”), a related party, pursuant to which the Company may offer and sell, from time to time, up to $18.0 million of the Company’s 8.375% Senior Notes due 2026. Sales of the additional Senior Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). Under the Sales Agreement, the Agent will be entitled to compensation of 2.0% of the gross proceeds of all notes sold through it as the Company’s agent.
During the fourth quarter of 2021, the Company sold $16.1 million aggregate principal amount of Senior Notes under the Sales Agreement. The additional Senior Notes sold have terms identical to the initial Senior Notes and are be fungible and vote together with the initial Senior Notes immediately upon issuance. The Senior Notes and initial Senior Notes are listed and trade on The Nasdaq Global Market under the symbol “SNCRL.”
The total fair value of the outstanding Senior Notes was $101.3 million as of December 31, 2022. The Company is in compliance with its debt covenants as of December 31, 2022.
For further details, see Note 11. Debt of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
2019 Revolving Credit Facility
On October 4, 2019, the Company entered into a Credit Agreement with Citizens Bank, N.A., for a $10.0 million Revolving Credit Facility. Borrowings under the Revolving Credit Facility bore interest at a rate equal to, at the Company’s option, either (1) the arithmetic average of the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period (one, three or six months (or 12 months if agreed to by all applicable Lenders)) as selected by the Company relevant to such amounts. Ifborrowing plus the cumulative unremitted foreign earnings exceedapplicable margin, or (2) a base rate determined by reference to the amount we intendgreatest of the federal funds rate plus 0.5%, the prime commercial lending rate as determined by the Agent, and the daily LIBOR rate plus 1.0%, in each case plus an applicable margin and subject to reinvest in foreign countriesa floor of 0.0%.
On June 30, 2021, the Company paid off the outstanding balance and closed the Revolving Credit Facility.
Series B Non-Convertible Preferred Stock
On June 30, 2021, the Company closed a private placement of 75,000 shares of its Series B Perpetual Non-Convertible Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share (the “Series B Preferred Stock”), for net proceeds of $72.8 million (the “Series B Transaction”). The sale of the Series B Preferred Stock was pursuant to the Series B Preferred Stock Purchase Agreement, dated as of June 24, 2021 (the “Series B Purchase Agreement”), between the Company and B. Riley Principal Investments, LLC (“BRPI”).
In connection with the closing of the Series B Transaction, the Company (i) filed a Certificate of Designation with the State of Delaware setting forth the rights, preferences, privileges, qualifications, restrictions and limitations on the Series B Preferred Stock (the “Series B Certificate”) and (ii) entered into an Investor Rights Agreement with B. Riley Financial, Inc. (“B. Riley Financial”) and BRPI setting forth certain governance and registration rights of B. Riley Financial with respect to the Company.
Certificate of Designation of the Series B Preferred Stock
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series B Preferred Stock are set forth in the future, we would provideSeries B Certificate. Under the Series B Certificate, the holders of the Series B Preferred Stock are entitled to receive, on each share of Series B Preferred Stock on a quarterly basis, an amount equal to the dividend rate, as described in the following sentence, divided by four and multiplied by the then-applicable Liquidation Preference per share of Series B Preferred Stock (collectively, the “Preferred Dividends”). The dividend rate is (1) 9.5% per annum for taxesthe period commencing on such excess amount.
Stock‑Based Compensation
June 30, 2021 and ending on and including December 31, 2021, (2) 13% per annum for the year commencing on January 1, 2022 and ending on and including December 31, 2022; and (3) 14% per annum for the year commencing on January 1, 2023 and thereafter. The Preferred Dividends will be due in cash on January 1, April 1, July 1 and October 1 of each year (each, a “Series B Dividend Payment Date”). The Company may choose to pay the Series B Preferred Dividends in cash or in additional shares of Series B Preferred Stock. In the event the Company does not declare and pay a dividend in cash on any Series B Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. As of December 31, 2016, we maintain four stock‑based compensation plans. We utilize2022, the Black‑Scholes pricing model to determine the fair value of stock options on the dates of grant. Restricted stock awards are measured based on the fair market valuesLiquidation Value and Redemption Value of the underlying stock onSeries B Preferred Shares was $73.0 million.
On and after the datesfifth anniversary of grant. We recognize stock‑based compensation over the requisite service period with an offsetting credit to additional paid‑in capital.
For our performance restricted stock awards we estimate the numberdate of issuance, holders of shares of Series B Preferred Stock will have the recipient isright to receive by applying a probabilitycause the Company to redeem each share of achieving the performance goals. The actual number of shares the recipient receives is determined at the end of the performance period based on the results achieved versus goals based on our performance targets, such as revenue and EBITDA. Once the number of awards is determined, the compensation cost is fixed and continues to be recognized using straight line recognition over the requisite service periodSeries B Preferred Stock for each vesting tranche.
Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on our historical information of our stock. The average expected life was determined using historical stock option exercise activity. The risk‑free interest rate is based on U.S. Treasury zero‑coupon issues with a remaining termcash in an amount equal to the expected life assumedsum of the current
liquidation preference and any accrued dividends. Each share of Series B Preferred Stock will also be redeemable at the dateoption of grant. We have never declared or paid cash dividends on our common or preferred equity and do not anticipate paying any cash dividendsthe holder upon the occurrence of a “Fundamental Change” at (i) par in the foreseeable future. Forfeitures are accounted for as they occur.
Business Combinations
We account for business combinations in accordance with the acquisition method. The acquisition method of accounting requires that assets acquired and liabilities assumed be recorded at their fair values on the datecase of a business acquisition. Our consolidated financial statements and results of operations reflect an acquired business from the completion date of an acquisition.
The judgments that we makepayment in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income in periods following a business combination. We generally use either the income, costcash or market approach to aid in our conclusions of such fair values and asset lives. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its replacement or reproduction cost. The market approach estimates value based on what other participants(ii) 1.5 times par in the market have paid for reasonably similar assets. Although each valuation approach is consideredcase of payment in valuing the assets acquired, the approach ultimately selected is based on the characteristicsshares of the asset and the availability of information.
We record contingent consideration resulting from a business combination at its fair value on the acquisition date. Each reporting period thereafter, we revalue these obligations and record increases or decreases in their fair value as an adjustmentCommon Stock (such shares being, “Registrable Securities”), subject to net change in contingent consideration obligation within the consolidated statement of income. Changes in the fair value of the contingent consideration obligation can result from updates in the achievement of financial or other operational targets and changes to the weighted probability of achieving those future targets. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, any change in the assumptions described above, could have a material impactcertain limitations on the amount of stock that could be issued to the net change in contingent consideration obligation that we record inholders of Series B Stock. In addition, the Company will be permitted to redeem outstanding shares of the Series B Preferred Stock at any given period.
Recent Acquisitions
On January 19, 2017, we completedtime for the acquisitionsum of Intralinks at a pricethe then-applicable Liquidation Preference and the accrued but unpaid dividends. Pursuant to the Series B Certificate, the Company will be required to use (i) the first $50.0 million of $13.00 per share, or $850.0 million, netproceeds from certain transactions (i.e., disposition, sale of working capital adjustments. For further details see the subsequent events footnote (Note 19).
The acquisition will allowassets, tax refunds) received by the Company to leverageredeem for cash, shares of the Synchronoss' product portfolio, go-to-market strategySeries B Preferred Stock, on a pro rata basis among each holder of Series B Preferred Stock and diversified customer footprint(ii) the next $25.0 million of proceeds from certain transactions received by the Company may be used by the Company to buy back shares of Common Stock and deployto the extent, not used for such purpose by the Company, to redeem, for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of the Series B Preferred Stock.
The Company shall be required to obtain the prior written consent of the holders holding at least a majority of the outstanding shares of the Series B Preferred Stock before taking certain actions, including: (i) certain dividends, repayments and redemptions; (ii) any amendment to the Company’s certificate of incorporation that adversely affects the rights, preferences, privileges or voting powers of the Series B Preferred Stock; and (iii) issuances of stock ranking senior or equivalent to shares of the Series B Preferred Stock (including additional shares of the Series B Preferred Stock) in the priority of payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. Other than with respect to the foregoing consent rights, the Series B Preferred Stock is non-voting stock.
Investor Rights Agreement
On June 30, 2021, the Company, B. Riley Financial and BRPI entered into an enhanced enterpriseInvestor Rights Agreement (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, for so long as affiliates of B. Riley Financial beneficially own at least 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to nominate one Class II director (the “B. Riley Nominee”) to the Company’s board of directors (the “Board”), who shall be an employee of B. Riley Financial or its affiliates and mobile solutionis approved by the Board, such approval not to customers while opening up new enterprise distribution channels acrossbe unreasonably withheld. For so long as affiliates of B. Riley Financial beneficially own 5% or more but less than 10% of the world.outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to certain board observer rights.
On March 1, 2016,Series A Convertible Preferred Stock
In accordance with the terms of the Share Purchase Agreement dated as of October 17, 2017 (the “PIPE Purchase Agreement”), with Silver Private Holdings I, LLC, an affiliate of Siris (“Silver”), on February 15, 2018, the Company issued to Silver 185,000 shares of its newly issued Series A Convertible Participating Perpetual Preferred Stock (the “Series A Preferred Stock”), par value $0.0001 per share, with an initial liquidation preference of $1,000 per share, in exchange for $97.7 million in cash and the transfer from Silver to the Company of the 5,994,667 shares of the Company’s common stock held by Silver (the “Preferred Transaction”). In connection with the issuance of the Series A Preferred Stock, we acquired(i) filed the Series A Certificate and (ii) entered into an Investor Rights Agreement with Silver setting forth certain registration, governance and preemptive rights of Silver with respect to us (the “Investor Rights Agreement”). Pursuant to the PIPE Purchase Agreement, at the closing, we paid to Siris $5.0 million as a reimbursement of Silver’s costs and expenses incurred in connection with the Preferred Transaction.
Redemption of Series A Preferred Stock
The net proceeds from the common stock public offering, Senior Note offering and the Series B Transaction were used in part to fully redeem all outstanding shares of Openwave Messaging, Inc. for $124.5 million, net of working capital adjustments and liabilities assumed, comprised of $102.5 million paidthe Company’s Series A Preferred Stock on June 30, 2021 (the “Redemption”). The Company redeemed in cash and $22 million paid in shares of our common stock, based upon the average market valuefull all 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.
On August 4, 2015, we acquired all268,917 outstanding shares of Razorsightthe Series A Preferred Stock for $25.3an aggregate Redemption Price of $278.7 million net of liabilities assumed. Razorsight offers cloud-based analytics solutions for communications service providers. Their cloud-based products embed advanced statistical analysis and predictive analyticsall rights under the Investor Rights Agreement relating to proactively pinpoint customer attrition risk, revenue opportunities, and better customer experiences. We believe that this acquisition will strategically enhance our product portfolio allowing us to reach a broader client base by expanding our value proposition and more deeply embedding our platforms.
On February 23, 2015, we acquired certain cloud assets from F-Secure, an online security and privacy company headquartered in Finland, for cash consideration of $59.5 million, net of liabilities assumed. This acquisition expands our cloud services customer base.
Discontinued Operations
Management classifies a disposal transaction as discontinued operation in the consolidated financial statements when it qualifies as a component of the Company, meets the held for sale criteria, is disposed of by sale, or is disposed of other than by sale and it represents a strategic shift that has a major effect on our operations and financial results.
Recent Divestitures
On December 16, 2016, we completed the divestiture of a portion of our carrier activation business (“BPO”) to a newly formed entity named Sequential Technology International, LLC (“STI”), to leverage the assets sold as part of this transaction to STI's existing global customer care operations, for a total purchase price of $146 million. As part of the sales arrangement, we will retain a 30% investment in STI, which can be reduced during the cour ents. Sequential Technology International Holdings, LLC, an unrelated third party that was formerly named Omniglobe International LLC, owns the remaining 70% of STI. The divestiture of the service portion of the Activation business created a better overall solution for our customers as STI is positioned to capitalize on the combined experience of both teams and is expected to become a strong, global player, building on over a decade of call center operations.
On December 29, 2016, we completed the divestiture of our Mirapoint activation business to an unrelated third party and recorded a gain of $1.4 million on the sale.
On February 1, 2017, we completed the divestiture of our SpeechCycle business, to an unrelated third party, for consideration of $13.5 million. As part of the divestiture we entered into a 1 year transition services agreementSeries A Preferred Stock were terminated effective with the acquirerRedemption. No Series A Preferred Stock remains outstanding or authorized as of December 31, 2022.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Change | | |
| 2022 | | 2021 | | | | 2022 vs 2021 | | |
| Net cash provided by (used in): | | | | | | | | | |
| Operating activities | $ | 17,359 | | | $ | 4,945 | | | | | $ | 12,414 | | | |
| Investing activities | $ | (13,166) | | | $ | (23,943) | | | | | $ | 10,777 | | | |
| Financing activities | $ | (13,276) | | | $ | 16,188 | | | | | $ | (29,464) | | | |
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 support various indirect activities such as customer software support, technical support services,our cost of revenue and general operating expenses including professional service fees, consulting fees, building and equipment maintenance and general & administrative support services.marketing expense.
Investments in Affiliates and Other Entities
In the normal course of business, we enter into various types of investment arrangements, each having unique terms and conditions. These investments may include equity interests held by us in business entities, including general or limited partnerships, contractual ventures, or other forms of equity participation. Management determines whether such investments involve a variable interest entity (“VIE”) based on the characteristics of the subject entity. If the entity is determined to be a VIE, then management
determines if we are the primary beneficiary of the entity and whether or not consolidation of the VIE is required. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct theCash flows from operating activities of a VIE that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE, in either case that could potentially be significant to the VIE. When we are deemed to be the primary beneficiary, the VIE is consolidated and the other party’s equity interest in the VIE is accounted for as a noncontrolling interest.
We generally account for investments that we makes in VIEs in which we have determined that we do not have a controlling financial interest but have significant influence over and hold at least a 20% ownership interest using the equity method. Any such investment not meeting the parameters to be accounted under the equity method would be accounted for using the cost method unless the investment had a readily determinable fair value, at which it would then be reported. We utilize a 1 month reporting lag in recording equity income from equity method investments.
If an entity fails to meet the characteristics of a VIE, management then evaluates such entity under the voting model. Under the voting model, we would consolidate the entity if it is determined that we, directly or indirectly, have greater than 50% of the voting shares, and determine that other equity holders do not have substantive participating rights.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of assets acquired, including other definite‑lived intangible assets. Goodwill is not amortized, but reviewed annually for impairment or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We performed our annual impairment test as of October 1, 2016, and determined that there was no impairment. We do not believe we are at significant risk for impairment.
Results of Operations
Year ended December 31, 2016 compared to the year ended December 31, 2015
The following table presents an overview of our results of operations for the year ended December 31, 20162022 was $17.4 million of cash provided by operating activities, as compared to $4.9 million of cash provided by operating activities for the same period in 2021. The increase of cash provided by operating activities of $12.4 million was mainly driven by continued growth in cloud subscribers, reduced operating costs, and 2015:$4.3 million federal tax refunds received in the second quarter of 2022.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | |
| | 2016 | | 2015 | | 2016 vs 2015 |
| | $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change |
| | (in thousands) |
| Net revenues | $ | 476,750 |
| | 100 | % | | $ | 428,117 |
| | 100 | % | | $ | 48,633 |
| | 11 | % |
| Cost of services* | 194,198 |
| | 41 | % | | 155,287 |
| | 36 | % | | 38,911 |
| | 25 | % |
| Research and development | 106,681 |
| | 22 | % | | 91,430 |
| | 21 | % | | 15,251 |
| | 17 | % |
| Selling, general and administrative | 131,106 |
| | 27 | % | | 88,411 |
| | 21 | % | | 42,695 |
| | 48 | % |
| Net change in contingent consideration obligation | 10,930 |
| | 2 | % | | 760 |
| | — | % | | 10,170 |
| | 1,338 | % |
| Restructuring charges | 6,333 |
| | 1 | % | | 4,946 |
| | 1 | % | | 1,387 |
| | 28 | % |
| Depreciation and amortization | 99,311 |
| | 21 | % | | 72,152 |
| | 17 | % | | 27,159 |
| | 38 | % |
| Total costs and expenses | 548,559 |
| | 115 | % | | 412,986 |
| | 96 | % | | 135,573 |
| | 33 | % |
| (Loss) income from continuing operations | $ | (71,809 | ) | | (15 | )% | | $ | 15,131 |
| | 4 | % | | $ | (86,940 | ) | | (575 | )% |
| |
* | Cost of services excludes depreciation and amortization which is shown separately. |
Revenues
Net revenues. Net revenues increased $48.6 million to $476.8 million Cash flows from investing activitiesfor the year ended December 31, 2016,2022 was$13.2 million of cash used by investing activities, as compared to $23.9 million in cash used by investing activities during the same period in 2015. Transaction2021. The cash used for investing activities in the current year and subscription revenuesprior year was primarily related to increased investment in product development for our Cloud offering and capitalization of associated labor costs. This investment was offset in the current period by the $8 million of cash received as a percentagepart of sales were 64% or $306.8 millionthe DXP Business sale.
Cash flows from financing activities for the year ended December 31, 20162022 was $13.3 million of cash used by financing activities, as compared to 64% or $275.9$16.2 million of cash provided 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 36% or $170.0 million for the year ended December 31, 2016, compared to 36% or $152.2 million for the same period in 2015. The increase in professional services and license revenue is2021, primarily due to new license agreementsprincipal and expansioninterest payments associated with the redemption of services withSeries B Preferred Stock in 2022.
Effect of Inflation
Inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have impacted our customers.
We derive our revenue from Cloud and Activation services and software licenses. Our Cloud service revenues include, among other things, revenue from our Personal Cloud, Messaging Cloud and Enterprise Cloud platforms. Our Activation services revenues include, among other things, revenue from our Activation services, our Activation API software and Cloud Analytics.
During the course of 2016, we divestedbusiness. Management does not believe these impacts have had a portion of our BPO business to STI. Subsequent to December 31, 2016, we completed the sale of our SpeechCycle business. As part of this strategic divestiture process we are maintaining our software activation API which is integral to the Razorsight Cloud Analytics platform. Since our acquisition of Razorsight, our Cloud Analytics technology has been used in both our Activation and Cloud business to provide augmented subscriber information to our mobile operator customers. Cloud Analytics has become a key component to our Personal Cloud offerings and, in late 2016, we began to offer the combined technology as our Cloud Analytics solution.
As a result of our activation divestitures, on an on-going basis, our business operationsmaterial impact on our remaining activation assets are focused on driving cloud analyticsresults of operations during the 2022, 2021 and 2020. We cannot assure you, however, that we will not be affected by general inflation in the future.
Contractual Obligations
Our contractual obligations consist of office and laptop leases, notes payable and related cloud deals with carriers given a strategic focus around our existing API’sinterest as well as contractual commitments under third-party hosting, software licenses and gateways which are integral to the Razorsight Cloud Analytics platform. Activation assets remaining in the business are key to our core cloud business going forward. We believe this combination of assets from both our Activation API's and Personal Cloud subscribers creates a new differentiating offering, providing us with a competitive advantage in our Cloud Analytics offering. As a result of this new offering we reclassified revenue historically derived from Cloud Analytics offering to the Cloud category.
maintenance agreements. The following table outlinessummarizes our long‑term contractual obligations as of December 31, 2022 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | 2023 | | 2024-2026 | | 2027-2028 | | Thereafter |
| Finance lease obligations | | $ | 940 | | | $ | 483 | | | $ | 457 | | | $ | — | | | $ | — | |
| Interest | | 44,307 | | | 11,815 | | | 32,492 | | | —�� | | | — | |
| Operating lease obligations | | 42,516 | | | 8,007 | | | 24,045 | | | 10,464 | | | — | |
Purchase obligations1 | | 48,599 | | | 20,343 | | | 28,256 | | | — | | | — | |
| Senior Note Payable | | 141,077 | | | — | | | 141,077 | | | — | | | — | |
| Total | | $ | 277,439 | | | $ | 40,648 | | | $ | 226,327 | | | $ | 10,464 | | | $ | — | |
| | | | | | | | | | |
_____________________________
1Amounts represent obligations associated with colocation agreements and other customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax positions are $4.4 million at December 31, 2022. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the reclassification:ultimate settlement of our obligations will materially affect our liquidity. We do not expect that the balance of unrecognized tax benefits will significantly increase or decrease over the next twelve months.
Critical Accounting Policies and Estimates
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| | Revenue from Continuing Operations | | Revenue from Continuing operations |
| | Prior to | | Cloud | | After | | Prior to | | Cloud | | After |
| | Reclassification | | Analytics | | Reclassification | | Reclassification | | Analytics | | Reclassification |
| | | | | | | | | | | | |
| Activation | $ | 112,652 |
| | $ | (25,827 | ) | | $ | 86,825 |
| | $ | 118,133 |
| | $ | (5,848 | ) | | $ | 112,285 |
|
| Cloud | 364,098 |
| | 25,827 |
| | 389,925 |
| | 309,984 |
| | 5,848 |
| | 315,832 |
|
| Net Revenues | $ | 476,750 |
| | $ | — |
| | $ | 476,750 |
| | $ | 428,117 |
| | $ | — |
| | $ | 428,117 |
|
Of the $86.8 million referenced above as 2016 Activation revenue after reclassification, roughly $50 millionThe 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 U.S. GAAP. The preparation of these 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. We have discussed the selection and development of the critical accounting policies with the Audit Committee, and the Audit Committee has reviewed our related disclosures in this Form 10-K. 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 Part I, “Item 1A. Risk Factors” in this Form 10-K for certain matters bearing risks on our future results of operations.
We believe the following to activation assets which we have either sold or sunsetted, or do not plan to actively market or pursue in 2017.
Net revenues related to Activation Solutions decreased $25.5 million to $86.8 million for the year ended December 31, 2016, compared tothe same period in 2015 duebe our critical accounting policies because they are important to the completionportrayal of nonrecurring migration related workour consolidated financial condition and professional service projectsresults of operations and they require critical management judgments and estimates about matters that are uncertain.
Significant accounting policies that we employ are presented in 2015. Net revenues related to Activation Solutions represented 18% for the year ended December 31, 2016, compared to 26% for the same period in 2015.
Net revenues relatedNotes to our Cloud Solutions increased by $74.1 million to $389.9 millionConsolidated Financial Statements in Item 8 Note 2. Summary of our revenues for the year ended December 31, 2016 compared to the same period in 2015. The increaseSignificant Accounting Policies. There were no significant changes in our Cloud Solution performance was a result of new cloud offerings with newcritical accounting policies and existing customers and the launch ofestimates discussed in our Enterprise solutions. Net revenues related to our Cloud Solutions represented 82% for the year ended December 31, 2016, compared to 74% for the same period in 2015.
Expenses
Cost of services. Cost of services increased $38.9 million to $194.2 million for the year ended December 31, 2016, compared to the same period in 2015, due primarily to increases in personnel and related costs, migration and integration of our acquired businesses. Personnel and related costs increased $14.6 million due to increased headcount from the Openwave acquisition and the launch of our Enterprise solution. Outside consulting expenses increased $6.2 million, of which $6 million of costs related to the launch of our Enterprise solution. Facility costs increased by $15.5 million, primarily driven by increased costs for service contracts due to the expansion of our operational footprint. Royalty fees increased $1.9 million associated with our Openwave product offerings.
Research and development. Research and development expense increased $15.3 million to $106.7 million for the year ended December 31, 2016, compared to the same period in 2015 primarily due to increases of $12.2 million in outside consultant expense and $2.9 million in personnel and related costs which were driven by the launch of our Enterprise solution and the Openwave acquisition.
Selling, general and administrative. Selling, general and administrative expense increased $42.7 million to $131.1 million for the year ended December 31, 2016, compared to the same period in 2015. The increase was driven in part by a $17.0 million increase in personnel and related costs which were driven by additional headcount due to the launch of our Enterprise solution and the Openwave acquisition. Included in this expense is mergers and acquisitions ("M&A") expenses, which increased $10.5 million as a result of our acquisition and divestiture activities. Professional services increased by $4.2 million as a result of accounting and legal costs related to our acquisitions, divestitures and tax planning. Outside consulting expenses increased by$4.9 million due primarily to costs incurred for the launch of our Enterprise solution. The remaining increases included $3.0 million related to facilities and $3.2 million related to increases in bad debt expense.
Net change in contingent consideration obligation. The net change in contingent consideration obligation was a $10.2 million increase for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This was due to an achievement of the contractual milestones associated with the potential earn-out payments to the Razorsight shareholders.
Restructuring charges. Restructuring charges were $6.3 million for the year ended December 31, 2016, which related to employment termination costs as a result of the work‑force reduction plans that we commenced in March 2016 and in December 2016 that was designed to reduce costs and align our resources with our key strategic priorities.
Depreciation and amortization. Depreciation and amortization expense increased $27.2 million to $99.3 million for the year ended December 31, 2016, compared to the same period in 2015, primarily related to the increase in depreciable assets necessary
for the continued expansion of our platforms and amortization of our newly acquired intangible assets related to our recent acquisitions.
Interest expense. Interest expense increased $1.3 million to $7.0 million for the year ended December 31, 2016, compared to the same period in 2015 due to an increase of approximately $0.9 million in contractual interest related to the drawdown from the Amended Credit Facility and $0.2 million related to increased financing costs and commitment fees for the Amended Credit Facility.
Other income (expense), net. Other income (expense) increased $1.5 million to $1.9 million for the year ended December 31, 2016, compared to the same period in 2015 driven by the $1.4 million gain on the sale of our Mirapoint activation business.
Income tax. We recognized approximately $8.0 million and $5.4 million in income tax benefit and expenseForm 10-K during the year ended December 31, 20162022.
Revenue Recognition and 2015, respectively. Our effective tax rate was approximately 11%Deferred Revenue
The Company generates revenue from the delivery of a range of products, solutions and services for operators, enterprises, OEMs and technology providers. We offer services principally on a Transactional or Subscription basis (SaaS) or in the form of Professional Services or Software Licenses. Revenues are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company generates all of its revenue from contracts with customers.
Subscription and Transaction revenues consist of revenues derived from the processing of transactions through the Company’s service platforms, providing enterprise portal management services on a subscription basis and maintenance agreements on software licenses. The Company generates revenue from Subscription services from monthly active user fees, software as a service (“SaaS”) fees, hosting and storage fees, and fees for the year ended December 31, 2016,related maintenance support for those services. In most cases, the subscription or transaction arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage, under Topic 606 Section 10-25-14(b). When the Company does not allocate variable consideration to distinct periods of service, the total estimated transaction price is recognized ratably over the term of the contract, where the level of service provided to the customer does not vary significantly from one period to another.
Transaction service arrangements include services such as processing equipment orders, new account setup and activation, number port requests, credit checks and inventory management. Transaction revenues are principally based on a contractual price per transaction and are recognized based on the number of transactions processed during each reporting period. Revenues are recorded based on the total number of transactions processed at the applicable price established in the relevant contract.
Many of the Company’s contracts guarantee minimum volume transactions from the customer. In these instances, if the customer’s total estimated transaction volume for the period is expected to be less than the contractual amount, the Company records revenues at the minimum guaranteed amount on a straight line based over the period covered by the minimum. Setup fees for transactional service arrangements are deferred until set up activities are completed and recognized on a straight‑line
basis over remaining expected customer relationship period. Revenues are presented net of discounts, which was lower than our U.S. federal statutory rateare volume level driven.
In accordance with Topic 606 Section 10-50-20, any credits due to customers, which are generally performance driven and based upon system availability or response times to incidents, are determined and accounted for in the unfavorable impact of lossesperiod in foreign jurisdictions, which have lower tax rates than the U.S,services are provided. The Company recognizes revenues from support and maintenance performance obligations over the unfavorable impactservice delivery period.
The Company’s software licenses typically provide for a perpetual or term right to use the Company’s software. The Company has concluded that in most cases its software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered to the customer. Contracts that include software customization or specified upgrades may result in the combination of the fair market value adjustmentcustomization services with the software license as one performance obligation. The Company does not have a history of returns, or refunds of its software licenses, however, in limited instances, the Company may constrain consideration to high-risk customers, until collection is resolved.
The Company’s professional services include software development and customization. The contracts generally include project deliverables specified by each customer. The performance obligations in the agreements are generally combined into one deliverable and generally result in the transfer of control over time. The underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to us. The Company recognizes revenue on fixed fee contracts on the proportion of labor hours expended to the total hours expected to complete the contract performance obligation.
Most of the Company’s contracts with customers contain multiple performance obligations which generally include either 1) a perpetual software license with support and maintenance and sometimes a hosting agreement or 2) a term SaaS agreement, frequently sold along with professional services. For these contracts, the Company accounts for individual goods and services separately if they are distinct performance obligations. This often requires significant judgment based upon knowledge of the Razorsight contingent consideration obligationproducts, the solution provided and the recording of a non-cash income tax provision to establish a valuation allowance. We considered all available evidence, including our historical profitability and projections of future taxable income together with new evidence, both positive and negative, that could affect the viewstructure of the future realization of deferred tax assets. Assales contract. In SaaS agreements, the Company provides a result of our assessment, we recorded a $9.3 million valuation allowance which reduced the deferred tax asset related to our current net operating losses of certain domestic and foreign subsidiaries. Our effective tax rate was approximately 46% for the year ended December 31, 2015, which was higher than our U.S. federal statutory rate dueservice to the unfavorable impact of losses in foreign jurisdictions,customer which combines the software functionality, maintenance and hosting into a single performance obligation when the customer doesn’t have lower tax rates than the U.S, the unfavorable impactability to take possession of the fair market value adjustmentunderlying software license. The Company may also sell the same three goods and services in a contract, but there may be three performance obligations, where the customer has the right to take possession of the software license without significant penalty.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company estimates standalone selling prices of software based on observable inputs of past transactions to similarly situated customers. When such observable data is not available for certain software licenses because there is a limited number of transactions or prices are highly variable, the Razorsight contingentCompany will estimate the standalone selling price using the residual approach. Standalone selling prices of services are typically determined based on observable transactions when these services are sold on a standalone basis to similarly situated customers or estimated using a cost-plus margin approach.
Estimating the transaction price of variable consideration including the variable quantity subscription or transaction contracts in a multiple performance obligation arrangement requires significant judgment. The Company generally estimates this variable consideration at the most likely amount to which the Company expects to be entitled and the recording of a non-cash income tax provision to establish a valuation allowance. We reviewin certain cases based on the expected annual effective income tax ratevalue. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and make changesdetermination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. The Company reviews and updates these estimates 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.basis.
Year ended December 31, 2015, compared to the year ended December 31, 2014
The following table presents an overview of our results of operations for the years ended December 31, 2015 and 2014:
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | |
| | 2015 | | 2014 | | 2015 vs 2014 |
| | $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change |
| | (in thousands) |
| Net revenues | $ | 428,117 |
| | 100 | % | | $ | 307,301 |
| | 100 | % | | $ | 120,816 |
| | 39 | % |
| Cost of services* | 155,287 |
| | 36 | % | | 102,386 |
| | 33 | % | | 52,901 |
| | 52 | % |
| Research and development | 91,430 |
| | 21 | % | | 73,620 |
| | 24 | % | | 17,810 |
| | 24 | % |
| Selling, general and administrative | 88,411 |
| | 21 | % | | 77,081 |
| | 25 | % | | 11,330 |
| | 15 | % |
| Net change in contingent consideration obligation | 760 |
| | — | % | | 1,799 |
| | 1 | % | | (1,039 | ) | | (58 | )% |
| Restructuring charges | 4,946 |
| | 1 | % | | — |
| | — | % | | 4,946 |
| | 100 | % |
| Depreciation and amortization | 72,152 |
| | 17 | % | | 55,956 |
| | 18 | % | | 16,196 |
| | 29 | % |
| Total costs and expenses | 412,986 |
| | 96 | % | | 310,842 |
| | 101 | % | | 102,144 |
| | 33 | % |
| Income (loss) from continuing operations | $ | 15,131 |
| | 4 | % | | $ | (3,541 | ) | | (1 | )% | | $ | 18,672 |
| | (527 | )% |
| |
* | Cost of services excludes depreciation and amortization which is shown separately. |
Revenues
Net Revenues. Net revenues increased $120.8 million to $428.1 million in 2015, compared to 2014. Transaction and subscription revenues as a percentage of sales were 64% or $275.9 million in 2015 compared to 66% or $203.4 million in 2014. The $72.4 million increase in transaction and subscription revenue is primarily due to our expanded offerings and an increase in subscriptions with our existing customers. Professional service and software license revenues as a percentage of sales were 36% or $152.2 million in 2015 compared to 34% or $103.9 million in 2014. The increase in professional services and license revenue is due to new license agreements of approximately $38 million with existing and new customers of which $20.3 million related to our new ventures with Verizon and Goldman Sachs. New releases in our personal cloud offering accounted for an additional $18 million of this increase.
We derive our revenue from Cloud and Activation services and software licenses. Our Cloud service revenues include, among other things, revenue from our Personal Cloud, Messaging Cloud and Enterprise Cloud platforms. Our Activation services revenues include, among other things, revenue from our Activation services, our Activation API software and Cloud Analytics.
During the course of 2016, we divested a portion of our BPO business to STI. Subsequent to December 31, 2016, we completed the sale of our SpeechCycle business. As part of this strategic divestiture process we are maintaining our software activation API which is integral to the Razorsight Cloud Analytics platform. Since our acquisition of Razorsight, our Cloud Analytics technology has been used in both our Activation and Cloud business to provide augmented subscriber information to our mobile operator customers. Cloud Analytics has become a key component to our Personal Cloud offerings and, in late 2016, we began to offer the combined technology as our Cloud Analytics solution.
As a result of our activation divestitures, on an on-going basis, our business operations on our remaining activation assets are focused on driving cloud analytics and related cloud deals with carriers given a strategic focus around our existing API’s and gateways which are integral to the Razorsight Cloud Analytics platform. Activation assets remaining in the business are key to our core cloud business going forward. We believe this combination of assets from both our Activation API's and Personal Cloud subscribers creates a new differentiating offering, providing us with a competitive advantage in our Cloud Analytics offering. As a result of this new offering we reclassified revenue historically derived from Cloud Analytics offering to the Cloud category.
The following table outlines the reclassification:
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 | | Year Ended December 31, 2014 |
| | Revenue from Continuing Operations | | Revenue from Continuing Operations |
| | Prior to | | Cloud | | After | | Prior to | | Cloud | | After |
| | Reclassification | | Analytics | | Reclassification | | Reclassification | | Analytics | | Reclassification |
| | | | | | | | | | | | |
| Activation | 118,133 |
| | (5,848 | ) | | 112,285 |
| | 95,836 |
| | — |
| | 95,836 |
|
| Cloud | 309,984 |
| | 5,848 |
| | 315,832 |
| | 211,465 |
| | — |
| | 211,465 |
|
| Net Revenues | 428,117 |
| | — |
| | 428,117 |
| | 307,301 |
| | — |
| | 307,301 |
|
Net revenues related to Activation Services increased $16.4 million to $112.3 million in 2015, compared to $95.8 million in 2014. Net revenues related to Activation Services represented 26% of our revenue for the year ended December 31, 2015, compared to 31% for 2014. The increase was driven by the expansion of our customer base.
Net revenues related to our Cloud Services increased by $104.4 million to $315.8 million of our revenues for the year ended December 31, 2015 compared to 2014. Net revenues related to our Cloud Services represented 74% of our revenue for the year ended December 31, 2015, compared to 69% in 2014. The increase in our Cloud Service performance was a result of strong adoption of our cloud offerings across our customer base and our expanded offerings.
Expense
Cost of Services. Cost of services increased $52.9 million to $155.3 million in 2015, compared to 2014, due primarily to an increase of $36.9 million in colocation costs related to the expansion and virtualization of our hosting and storage offerings. There was also an increase of $7.9 million in outside consulting expense due to our ongoing migration and integration projects. Additionally, our personnel and related costs increased $6.8 million as a result of our continued growth.
Research and Development.Research and development expense increased approximately $17.8 million to $91.4 million in 2015, compared to 2014, primarily due to an increase of $12.9 million in personnel and related costs and an increase of $1.5 million in stock-based compensation, due to an increase in headcount as a result of our acquisitions and our investments in our product group. An increase in facility costs of $1.9 million was driven by increased maintenance contracts related to our development and testing environments.
Selling, General and Administrative. Selling, general and administrative expenses increased $11.3 million to $88.4 million in 2015, compared to 2014.The most significant drivers of the increase are a $4.3 million increase in professional fees, a $3.4 million increase in outside consultants and a $3.5 million increase in our bad debt expense, offset by a $1.1 million decrease in M&A expense. The increase in professional fees relates to accounting and legal costs as a result of our acquisitions, tax planning activities and our patent licensing program. The most significant increases in outside consultants related to costs incurred for the launch of our Enterprise business, including our strategic ventures with Goldman Sachs and Verizon.
Net Change in Contingent Consideration Obligation. The net change in contingent consideration obligation decreased by $1.0 million for the year ended December 31, 2015. This was due to a $0.8 million increase in the contingent consideration for the year ended December 31, 2015 related to an increase in our potential earn-out payment to the Razorsight shareholders due to the achievement of certain milestones compared to a $1.8 million increase in 2014 in the fair value of contingent consideration associated with our potential earn-out payment to the Strumsoft shareholders.
Restructuring charges.Restructuring charges were $4.9 million related to employment termination costs and facility consolidation costs, as a result of the workforce reduction plan started in January 2015, which was designed to reduce costs and align our resources with our key strategic priorities.
Depreciation and Amortization. Depreciation and amortization expense increased $16.2 million to $72.2 million in 2015, compared to 2014, primarily related to the increase in depreciable fixed assets necessary for the continued expansion of our platforms and amortization of our newly acquired intangible assets related to our recent acquisitions and ventures.
Interest Income. Interest income increased $0.8 million to $2.0 million in 2015, compared to 2014. Interest income increased primarily due to an increase in our cash, cash equivalents and investment balances during the year.
Interest Expense. Interest expense increased $2.3 million to $5.7 million in 2015, compared to 2014 due to an increase of approximately $2 million related to the convertible debt contractual interest together with amortization of deferred financing costs and an increase of $0.3 million related to interest paid on capital leases.
Other Income. Other income decreased by less than $0.1 million to $0.4 million in 2015, compared to 2014. Other income decreased primarily due to the unavailability of a New York state refundable research and development tax credit in 2015 that had been available in 2014, as well as foreign currency exchange rate fluctuations.
Income Tax. During 2015 and 2014, we recognized approximately $5.4 million and $3.2 million in income tax expense and benefit, respectively. Our effective tax rate was approximately 45.8% and 61.6% during 2015 and 2014, respectively. In 2015, our effective tax rate was higher than our U.S. federal statutory rate primarily due to the tax effect of non-deductible expenses and the unfavorable tax impact of losses in foreign jurisdictions which have lower tax rates than the U.S. offset by the favorable impact of the minority interest in the ventures and the tax credit for research and experimentation expenses.
We expect to be exposed to fluctuations in our effective tax rate during the earn-out period for our contingent consideration liabilities. Due to the nature of these transactions we may experience significant adjustments to fair value of the contingent consideration obligation depending on the outcome of the target achievements.
Unaudited Quarterly Results of Operations
The following tables includes unaudited financial data for the fiscal year quarters in 2016 and 2015, which have been adjusted for discontinued operations.
|
| | | | | | | | | | | | | | | | |
| | | Quarter Ended |
| | | March 31, | | June 30, | | September 30, | | December 31, |
| | | (In thousands, except per share data) |
| 2016 | | | | | | | | |
Net revenues (4) | | $ | 104,219 |
| | $ | 118,255 |
| | $ | 132,480 |
| | $ | 121,796 |
|
Gross profit(2) | | 57,771 |
| | 69,788 |
| | 83,407 |
| | 71,586 |
|
| Income (loss) from continuing operations | | (20,555 | ) | | (19,121 | ) | | (1,856 | ) | | (30,277 | ) |
| Net income (loss) | | (11,083 | ) | | (7,303 | ) | | 4,833 |
| | 21,545 |
|
Net income (loss) attributable to Synchronoss (3) | | (7,954 | ) | | (4,439 | ) | | 7,676 |
| | 24,305 |
|
| | | | | | | | | |
| Basic: | | | | | | | | |
Continuing operations (1) | | $ | (0.44 | ) | | $ | (0.34 | ) | | $ | (0.05 | ) | | $ | (0.44 | ) |
Discontinued operations (1) | | 0.26 |
| | 0.24 |
| | 0.23 |
| | 0.99 |
|
| | | $ | (0.18 | ) | | $ | (0.10 | ) | | $ | 0.18 |
| | $ | 0.55 |
|
| Diluted: | | | | | | | | |
Continuing operations (1) | | $ | (0.44 | ) | | $ | (0.34 | ) | | $ | (0.05 | ) | | $ | (0.44 | ) |
Discontinued operations (1) | | 0.26 |
| | 0.24 |
| | 0.23 |
| | 0.99 |
|
| | | $ | (0.18 | ) | | $ | (0.10 | ) | | $ | 0.18 |
| | $ | 0.55 |
|
|
| | | | | | | | | | | | | | | | |
| | | Quarter Ended |
| | | March 31, | | June 30, | | September 30, | | December 31, |
| | | (In thousands, except per share data) |
| 2015 | | | | | | | | |
Net revenues (4) | | $ | 95,431 |
| | $ | 102,176 |
| | $ | 109,297 |
| | $ | 121,213 |
|
Gross profit(2) | | 61,824 |
| | 66,231 |
| | 69,074 |
| | 75,701 |
|
| Income (loss) from continuing operations | | 1,445 |
| | 7,574 |
| | 4,565 |
| | 1,547 |
|
| Net income | | 10,561 |
| | 15,154 |
| | 9,645 |
| | 11,322 |
|
| Net income (loss) attributable to Synchronoss | | 10,561 |
| | 15,154 |
| | 9,645 |
| | 5,270 |
|
| | | | | | | | | |
| Basic: | | | | | | | | |
Continuing operations (1) | | $ | (0.01 | ) | | $ | 0.11 |
| | $ | (0.04 | ) | | $ | (0.05 | ) |
Discontinued operations (1) | | 0.26 |
| | 0.25 |
| | 0.27 |
| | 0.17 |
|
| | | $ | 0.25 |
| | $ | 0.36 |
| | $ | 0.23 |
| | $ | 0.12 |
|
| Diluted: | | | | | | | | |
Continuing operations (1) | | $ | (0.01 | ) | | $ | 0.11 |
| | $ | (0.04 | ) | | $ | (0.05 | ) |
Discontinued operations (1) | | 0.26 |
| | 0.25 |
| | 0.27 |
| | 0.17 |
|
| | | $ | 0.25 |
| | $ | 0.36 |
| | $ | 0.23 |
| | $ | 0.12 |
|
| |
(1) | Per common share amounts for the quarters and full year have been calculated separately. Accordingly, quarterly amounts do not add to the annual amount because of differences in the number of weighted‑average common shares outstanding during each period which results principally from the effect of issuing shares of our common stock and options throughout the year. |
| |
(2) | Gross profit is defined as net revenues less cost of services and excludes depreciation and amortization expense. |
| |
(3) | Net income for the quarter ended March 31, 2016 included a $0.6 million income tax expense adjustment related to the elimination of the additional paid-in-capital or APIC Pool as a result of the adoption of ASU 2016-09. |
| |
(4) | In the Pro Forma Financial Information which we filed as part of our Form 8-K on December 22, 2016 in connection with the divestiture of our BPO business referenced above, net revenues for our Activation API software; which were not included in the divestiture, for the nine month period ended September 30, 2016 were originally classified as revenue from discontinued operations instead of continuing operations. Specifically, net revenues for each of the quarters of March 31, June 30 and September 30 reflect revenues of $1.3 million, $1.2 million and $2.4 million, respectively, that were originally classified as revenue from discontinued operations instead of continuing operations. This was adjusted in the quarter ended December 31, 2016 by adding these amounts to the above revenue for that quarter, and these amounts were further offset by reducing revenues from continuing operations in the quarter of approximately $5.0 million as a result of the timing of the divesture of the BPO business in the quarter. |
Liquidity and Capital Resources
As of December 31, 2016,2022, our principal sourcesources of liquidity hashave been cash provided by operations and borrowings on our Amended Credit Facility.operations. Our cash and cash equivalents marketable securities and restricted cash balance was $226.5$21.9 million at December 31, 2016.2022. 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 and acquisition activities and the expansion of our customer base. Uses of cash will also include facility andincluding technology expansion significant integration and restructuring activities, capital expenditures, and working capital.
At December 31, 2016,2022, our non-U.S. subsidiaries held approximately $25.5$9.4 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 these earnings, if any, it is not practical to determine the unrecognized deferred tax liability related to the amount.
Credit Rating
Our credit ratingsWe believe that our cash, cash equivalents, financing sources, and our ability to manage working capital and expected positive cash flows generated from operations in combination with continued expense reductions will be sufficient to fund our operations for the next twelve months from the date of filing of this Annual Report on Form 10-K. However, as 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 as a result of COVID-19 could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the debt capital markets"Forward-Looking Statements" section of this MD&A and costPart I, Item 1A. “Risk Factors”, some of capital. Our long-term credit ratingswhich are outside of our control.
Offering of 2021 Senior Notes due 2026
On June 30, 2021, the Company closed its underwritten public offering of $120.0 million aggregate principal amount of 8.375% senior notes due 2026 at a par value of $25.00 per senior note (the “Senior Notes”). The offering was conducted pursuant to an underwriting agreement (the “Notes Underwriting Agreement”) dated June 25, 2021, by and among the Company and B. Riley Securities, Inc., as representative of the several underwriters (the “Notes Underwriters”). At the closing, the Company issued $125.0 million aggregate principal amount of Senior Notes, inclusive of $5.0 million aggregate principal amount of Senior Notes issued pursuant to the full exercise of the Notes Underwriters’ option to purchase additional Senior Notes.
The Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. The Senior Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The Senior Notes bear interest at the rate of 8.375% per annum. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The Senior Notes will mature on June 30, 2026, unless redeemed prior to maturity.
The Company may, at its option, at any time and from time to time, redeem the Senior Notes for cash in whole or in part (i) on or after June 30, 2022 and prior to June 30, 2023, at a price equal to $25.75 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after June 30, 2023 and prior to June 30, 2024, at a price equal to $25.50 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (iii) on or after June 30, 2024 and prior to June 30, 2025, at a price equal to $25.25 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iv) on or after June 30, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Senior Notes.
On October 25, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) between the Company and B. Riley Securities, Inc. (the “Agent”), a related party, pursuant to which the Company may offer and sell, from time to time, up to $18.0 million of the Company’s 8.375% Senior Notes due 2026. Sales of the additional Senior Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). Under the Sales Agreement, the Agent will be entitled to compensation of 2.0% of the gross proceeds of all notes sold through it as the Company’s agent.
During the fourth quarter of 2021, the Company sold $16.1 million aggregate principal amount of Senior Notes under the Sales Agreement. The additional Senior Notes sold have terms identical to the initial Senior Notes and are be fungible and vote together with the initial Senior Notes immediately upon issuance. The Senior Notes and initial Senior Notes are listed and trade on The Nasdaq Global Market under the symbol “SNCRL.”
The total fair value of the outstanding Senior Notes was $101.3 million as of January 6, 2017 areDecember 31, 2022. The Company is in compliance with its debt covenants as follows:of December 31, 2022.
|
| | | |
| Long-term | | Outlook |
Moody's Investors Service | B1 | | Positive |
S&P Global Ratings | BB- | | Stable |
For further details, see Note 11. Debt of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
20132019 Revolving Credit Facility
In September 2013, weOn October 4, 2019, the Company entered into a Credit Agreement (the “Credit Facility”) with JP Morgan ChaseCitizens Bank, N.A., asfor a $10.0 million Revolving Credit Facility. Borrowings under 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. TheRevolving Credit Facility which was used for general corporate purposes, was a $100 million unsecured revolving line of credit that was set to mature 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 this credit agreement. We had the right to request an increase in the aggregate principal amount of the Credit Facility up to $150 million.
Interest on the borrowing was 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 2013 Credit Facility was terminated and replaced with the Amended Credit Facility.
Amended Credit Facility
On July 7, 2016, we entered into an Amended Credit Agreement (the “Amended Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Administrative Agent”) and the several lenders party thereto. The Amended Credit Facility, which will be used for general corporate purposes, was a $250 million unsecured revolving line of credit that was set to mature on July 7, 2021, subject to terms and conditions set forth therein. We paid a commitment fee in the range of 15 to 30 basis points on the unused balance of the revolving credit facility under the Amended Credit Agreement. We have the right to request an increase in the aggregate principal amount of the Amended Credit Facility up to $350 million.
Interest on the borrowing were based upon LIBOR plus a 1.99 basis point margin. As of December 31, 2016, we had an outstanding balance of $29 million on our Amended Credit Facility.
The Amended Credit Facility was subject to certain financial covenants. As of December 31, 2016, we were in compliance with all required covenants.
On January 19, 2017, the Company repaid all outstanding obligations under the Amended Credit Agreement with Wells Fargo Bank and the several lenders party thereto. The aggregate payoff amount was $29 million and included all accrued interest and associated prepayment penalties. For further details see the subsequent events footnote (Note 19).
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 $230.0 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance. At December 31, 2016, the carrying amount of the liability was $226.3 million and the outstanding principal of the 2019 Notes was $230.0 million, with an effective interest rate of approximately 1.39%.
2017 Term Facility
On January 19, 2017, we completed the acquisition of Intralinks at a price of $13.00 per share. In connection with the acquisition, we entered in to the 2017 Credit Agreement. We paid a total of approximately $904.1 million, in connection with the acquisition, including repayment of existing indebtedness for both Synchronoss, including the Amended Credit Facility and Intralinks, fees and costs associated with the Term Facility (as defined below) and other transaction related expenses as well as funded payments required to complete the acquisition with cash on hand and proceeds from the Credit Agreement. Our obligations under the 2017 Credit Agreement are guaranteed by certain of our subsidiaries, including Intralinks, and secured by substantially all of our assets and the guarantors.
The term loan lenders under the 2017 Credit Agreement have advanced to senior secured term loans in an aggregate principal amount of $900 million with a maturity date of January 19, 2024 (the “ 2017 Term Facility”). The revolving lenders under the Credit Agreement have provided us with a revolving credit facility of up to $200 million with a maturity date of January 19, 2022 (the “Revolving Facility”). The term loans under the Term Facility will amortize at 1% per annum in equal quarterly installments with the balance payable on the final maturity date. The proceeds of the Term Facility are being used to finance a portion of the cash consideration in the Offer and the Merger, to refinance certain of our existing indebtedness, including the Amended Credit Facility and indebtedness of Intralinks (or our subsidiaries) and to pay related fees and expenses. The Revolving Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice under swingline loans, and borrowing thereunder may be used for working capital and other general corporate purposes.
Loans under the 2017 Term Facility bearbore interest at a rate equal to, at ourthe Company’s option, either (1) the adjustedarithmetic average of the LIBOR rate determined by reference to the costs of funds for an applicableU.S. dollar deposits for the interest period (one, three or an alternatesix months (or 12 months if agreed to by all applicable Lenders)) as selected by the Company relevant to such borrowing plus the applicable margin, or (2) a base rate determined by reference to the greatest of the federal funds rate plus 0.5%, the prime commercial lending rate as determined by the Agent, and the daily LIBOR rate plus 1.0%, in each case plus an applicable margin and subject to a floor of 2.75% or 1.75%, respectively. The revolving loans under 0.0%.
On June 30, 2021, the Company paid off the outstanding balance and closed the Revolving Facility initially bear interest atCredit Facility.
Series B Non-Convertible Preferred Stock
On June 30, 2021, the Company closed a rateprivate placement of 75,000 shares of its Series B Perpetual Non-Convertible Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share (the “Series B Preferred Stock”), for net proceeds of $72.8 million (the “Series B Transaction”). The sale of the Series B Preferred Stock was pursuant to the Series B Preferred Stock Purchase Agreement, dated as of June 24, 2021 (the “Series B Purchase Agreement”), between the Company and B. Riley Principal Investments, LLC (“BRPI”).
In connection with the closing of the Series B Transaction, the Company (i) filed a Certificate of Designation with the State of Delaware setting forth the rights, preferences, privileges, qualifications, restrictions and limitations on the Series B Preferred Stock (the “Series B Certificate”) and (ii) entered into an Investor Rights Agreement with B. Riley Financial, Inc. (“B. Riley Financial”) and BRPI setting forth certain governance and registration rights of B. Riley Financial with respect to the Company.
Certificate of Designation of the Series B Preferred Stock
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series B Preferred Stock are set forth in the Series B Certificate. Under the Series B Certificate, the holders of the Series B Preferred Stock are entitled to receive, on each share of Series B Preferred Stock on a quarterly basis, an amount equal to at our option, the adjusted LIBORdividend rate, as described in the following sentence, divided by four and multiplied by the then-applicable Liquidation Preference per share of Series B Preferred Stock (collectively, the “Preferred Dividends”). The dividend rate is (1) 9.5% per annum for the period commencing on June 30, 2021 and ending on and including December 31, 2021, (2) 13% per annum for the year commencing on January 1, 2022 and ending on and including December 31, 2022; and (3) 14% per annum for the year commencing on January 1, 2023 and thereafter. The Preferred Dividends will be due in cash on January 1, April 1, July 1 and October 1 of each year (each, a “Series B Dividend Payment Date”). The Company may choose to pay the Series B Preferred Dividends in cash or an alternate base rate, in each case, plus an applicable marginadditional shares of 2.50% or 1.50%, respectively, subject to step-downs basedSeries B Preferred Stock. In the event the Company does not declare and pay a dividend in cash on our ratio of first lien secured debt to adjusted EBITDA.
Subject to certain customary exceptions, loans underany Series B Dividend Payment Date, the 2017 Term Facility are subject to mandatory prepayments in amounts equal to: (1) 100%unpaid amount of the net cash proceeds from any non-ordinary course sale or other disposition of assets (including as a result of casualty or condemnation) by Synchronoss or its restricted subsidiaries subjectPreferred Dividend will be added to customary reinvestment provisions and certain other exceptions; (2) 100% of the net cash proceeds from incurrences of debt (other than permitted debt); and (3) a customary annual excess cash flow sweep at levels based on Parent’s then applicable ratio of first lien secured debt to adjusted EBITDA.
The 2017 Credit Agreement contains a number of customary affirmative and negative covenants and events of default, which, among other things, restrict our ability to incur debt, allow liens on assets, make investments, pay dividends or prepay certain other debt. The 2017 Credit Agreement also requires us to comply with certain financial maintenance covenants, including a total gross leverage ratio and an interest charge coverage ratio.
Certain of the lenders under the 2017 Credit Agreement, or their affiliates, have provided, and may in the future from time to time provide, certain commercial and investment banking, financial advisory and other services in the ordinary course of business for the registrant and its affiliates, for which they have in the past and may in the future receive customary fees and commissions.
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 for 12 to 18 months following the announcement.
Liquidation Preference. As of December 31, 2016, we repurchased approximately 1.3 million2022, the Liquidation Value and Redemption Value of the Series B Preferred Shares was $73.0 million.
On and after the fifth anniversary of the date of issuance, holders of shares of ourSeries B Preferred Stock will have the right to cause the Company to redeem each share of Series B Preferred Stock for cash in an amount equal to the sum of the current
liquidation preference and any accrued dividends. Each share of Series B Preferred Stock will also be redeemable at the option of the holder upon the occurrence of a “Fundamental Change” at (i) par in the case of a payment in cash or (ii) 1.5 times par in the case of payment in shares of Common Stock (such shares being, “Registrable Securities”), subject to certain limitations on the amount of stock that could be issued to the holders of Series B Stock. In addition, the Company will be permitted to redeem outstanding shares of the Series B Preferred Stock at any time for the sum of the then-applicable Liquidation Preference and the accrued but unpaid dividends. Pursuant to the Series B Certificate, the Company will be required to use (i) the first $50.0 million of proceeds from certain transactions (i.e., disposition, sale of assets, tax refunds) received by the Company to redeem for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of Series B Preferred Stock and (ii) the next $25.0 million of proceeds from certain transactions received by the Company may be used by the Company to buy back shares of Common Stock and to the extent, not used for such purpose by the Company, to redeem, for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of the Series B Preferred Stock.
The Company shall be required to obtain the prior written consent of the holders holding at least a majority of the outstanding shares of the Series B Preferred Stock before taking certain actions, including: (i) certain dividends, repayments and redemptions; (ii) any amendment to the Company’s certificate of incorporation that adversely affects the rights, preferences, privileges or voting powers of the Series B Preferred Stock; and (iii) issuances of stock ranking senior or equivalent to shares of the Series B Preferred Stock (including additional shares of the Series B Preferred Stock) in the priority of payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. Other than with respect to the foregoing consent rights, the Series B Preferred Stock is non-voting stock.
Investor Rights Agreement
On June 30, 2021, the Company, B. Riley Financial and BRPI entered into an Investor Rights Agreement (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, for so long as affiliates of B. Riley Financial beneficially own at least 10% of the outstanding shares of common stock under this program(unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to nominate one Class II director (the “B. Riley Nominee”) to the Company’s board of directors (the “Board”), who shall be an employee of B. Riley Financial or its affiliates and is approved by the Board, such approval not to be unreasonably withheld. For so long as affiliates of B. Riley Financial beneficially own 5% or more but less than 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to certain board observer rights.
Series A Convertible Preferred Stock
In accordance with the terms of the Share Purchase Agreement dated as of October 17, 2017 (the “PIPE Purchase Agreement”), with Silver Private Holdings I, LLC, an affiliate of Siris (“Silver”), on February 15, 2018, the Company issued to Silver 185,000 shares of its newly issued Series A Convertible Participating Perpetual Preferred Stock (the “Series A Preferred Stock”), par value $0.0001 per share, with an initial liquidation preference of $1,000 per share, in exchange for $97.7 million in cash and the transfer from Silver to the Company of the 5,994,667 shares of the Company’s common stock held by Silver (the “Preferred Transaction”). In connection with the issuance of the Series A Preferred Stock, we (i) filed the Series A Certificate and (ii) entered into an Investor Rights Agreement with Silver setting forth certain registration, governance and preemptive rights of Silver with respect to us (the “Investor Rights Agreement”). Pursuant to the PIPE Purchase Agreement, at the closing, we paid to Siris $5.0 million as a reimbursement of Silver’s costs and expenses incurred in connection with the Preferred Transaction.
Redemption of Series A Preferred Stock
The net proceeds from the common stock public offering, Senior Note offering and the Series B Transaction were used in part to fully redeem all outstanding shares of the Company’s Series A Preferred Stock on June 30, 2021 (the “Redemption”). The Company redeemed in full all of the 268,917 outstanding shares of the Series A Preferred Stock for an aggregate repurchase priceRedemption Price of $40.0 million.$278.7 million and all rights under the Investor Rights Agreement relating to the Series A Preferred Stock were terminated effective with the Redemption. No Series A Preferred Stock remains outstanding or authorized as of December 31, 2022.
Discussion of Cash Flows
Year ended December 31, 2016, compared to the year ended December 31, 2015
A summary of net cash flows follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, | | Change | | |
| 2022 | | 2021 | | | | 2022 vs 2021 | | |
| Net cash provided by (used in): | | | | | | | | | |
| Operating activities | $ | 17,359 | | | $ | 4,945 | | | | | $ | 12,414 | | | |
| Investing activities | $ | (13,166) | | | $ | (23,943) | | | | | $ | 10,777 | | | |
| Financing activities | $ | (13,276) | | | $ | 16,188 | | | | | $ | (29,464) | | | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | Change |
| Net cash provided by (used in): | | | (As adjusted) | | |
| Operating activities | $ | 142,589 |
| | $ | 139,822 |
| | $ | 2,767 |
|
| Investing activities | (99,376 | ) | | (226,111 | ) | | 126,735 |
|
| Financing activities | (8,976 | ) | | (1,694 | ) | | (7,282 | ) |
Our primary source of cash is receipts from revenue. The primary uses of cash are personnel and related costs, telecommunications and facility costs related primarily to our cost of revenue and general operating expenses including professional service fees, consulting fees, building and equipment maintenance and marketing expense.
Cash flows from operations
Cash provided by operations increased by approximately $2.8 million operating activities for the year ended December 31, 20162022 was $17.4 million of cash provided by operating activities, as compared to $4.9 million of cash provided by operating activities for the same period in 2021. The increase of cash provided by operating activities of $12.4 million was mainly driven by continued growth in cloud subscribers, reduced operating costs, and was primarily impacted by:$4.3 million federal tax refunds received in the second quarter of 2022.
Increase of $63.9 million in net working capital, specifically, the favorable timing of collections.
Offset by $69.3 million decrease in non-cash items of which the net gain related to our divestiture was the most notable item.
Cash flows from investing
Cash used in financing activities decreased by $126.7 million for the year ended December 31, 20162022 was$13.2 million of cash used by investing activities, as compared to $23.9 million in cash used by investing activities during the same period in 2021. The cash used for investing activities in the current year and prior year was primarily impacted by:related to increased investment in product development for our Cloud offering and capitalization of associated labor costs. This investment was offset in the current period by the $8 million of cash received as part of the DXP Business sale.
Decreased purchases of marketable securities and acquisitions.
Cash flows from financing
Cash used in financing activities decreased by $7.3 million for the year ended December 31, 2016 and2022 was primarily impacted by:
Higher net borrowings$13.3 million of $29 million.
Share repurchases of $40 million.
Year ended December 31, 2015,cash used by financing activities, as compared to the year ended December 31, 2014
A summary$16.2 million of net cash flows follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2015 | | 2014 | | Change |
| Net cash provided by (used in): | (As adjusted) | | (As adjusted) | | |
| Operating activities | $ | 139,822 |
| | $ | 87,321 |
| | $ | 52,501 |
|
| Investing activities | (226,111 | ) | | (152,980 | ) | | (73,131 | ) |
| Financing activities | (1,694 | ) | | 237,961 |
| | (239,655 | ) |
Cash Flows from Operations
Cash provided by operations increased by approximately $52.5 million for the year ended December 31, 2015same period in 2021, primarily due to principal and was primarily impacted by:interest payments associated with the redemption of Series B Preferred Stock in 2022.
An increase in net income and non-cash items of $29.7 million.
An increase in net working capital of $31.4 million.
Cash flows from investing
Cash used in financing activities increased by $73.1 million for the year ended December 31, 2015 and was primarily impacted by:
Approximately $93.5 million related to 2015 acquisitions.
Purchases of property and equipment related to our continued investments in our global information technology and business systems infrastructure.
Cash flows from financing
Cash used in financing activities decreased by $239.7 million for the year ended December 31, 2015 and was primarily impacted by:
The issuance of the 2019 Notes for $230 million.
Decreased proceeds from stock option exercises of approximately $10.1 million.
We believe that our existing cash and cash equivalents, cash generated from our existing operations, our available credit facilities and other available sources of financing will be sufficient to fund our operations for the next twelve months based on our current business plans.
Effect of Inflation
Although inflation generally affects us by increasing our cost of
Inflationary increases in certain input costs, such as occupancy, labor and equipment, we dobenefits, and general administrative costs, have impacted our business. Management does not believe that inflation hasthese impacts have had anya material effectimpact on our results of operations during 2016, 2015the 2022, 2021 and 2014.2020. We docannot assure you, however, that we will not expectbe affected by general inflation in the current rate of inflation to have a material impact on our business.future.
Contractual Obligations
Our contractual commitmentsobligations consist of obligationsoffice and laptop leases, notes payable and related interest as well as contractual commitments under leases for office space, automobiles, convertible debtthird-party hosting, software licenses and its associated interest expense, colocation agreements, computer equipment and furniture and fixtures.maintenance agreements. The following table summarizes our long‑term contractual obligations as of December 31, 20162022 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | 2023 | | 2024-2026 | | 2027-2028 | | Thereafter |
| Finance lease obligations | | $ | 940 | | | $ | 483 | | | $ | 457 | | | $ | — | | | $ | — | |
| Interest | | 44,307 | | | 11,815 | | | 32,492 | | | —�� | | | — | |
| Operating lease obligations | | 42,516 | | | 8,007 | | | 24,045 | | | 10,464 | | | — | |
Purchase obligations1 | | 48,599 | | | 20,343 | | | 28,256 | | | — | | | — | |
| Senior Note Payable | | 141,077 | | | — | | | 141,077 | | | — | | | — | |
| Total | | $ | 277,439 | | | $ | 40,648 | | | $ | 226,327 | | | $ | 10,464 | | | $ | — | |
| | | | | | | | | | |
_____________________________
1Amounts represent obligations associated with colocation agreements and other customer delivery related purchase obligations.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| | | | | Less Than | | | | | | More Than |
| | | Total | | 1 Year | | 1—3 Years | | 4—5 Years | | 5 Years |
Capital lease obligations (1) | | $ | 16,836 |
| | $ | 2,464 |
| | $ | 4,642 |
| | $ | 2,574 |
| | $ | 7,156 |
|
| Convertible Senior Notes | | 230,000 |
| | — |
| | 230,000 |
| | — |
| | — |
|
Interest (2) | | 4,528 |
| | 1,725 |
| | 2,803 |
| | — |
| | — |
|
Contingent consideration obligation (3) | | 11,860 |
| | 11,860 |
| | — |
| | — |
| | — |
|
| Operating lease obligations | | 70,741 |
| | 9,564 |
| | 14,291 |
| | 12,402 |
| | 34,484 |
|
Purchase obligations (4) | | 27,762 |
| | 14,327 |
| | 9,969 |
| | 3,466 |
| | — |
|
Other long-term liabilities (5) | | 1,742 |
| | 170 |
| | 1,572 |
| | — |
| | — |
|
| Total | | $ | 363,469 |
| | $ | 40,110 |
| | $ | 263,277 |
| | $ | 18,442 |
| | $ | 41,640 |
|
| |
(1) | Amount includes the Pennsylvania facility lease and the VCHS data center. |
| |
(2) | Represents the interest on the Convertible Senior Notes. |
| |
(3) | Amount represents the fair value of the contingent consideration obligation of our Razorsight acquisition and is based on actual achievements of financial targets and milestones as of December 31, 2016.
|
| |
(4) | Amount represents obligations associated with colocation agreements. |
| |
(5) | Amount represents unrecognized tax positions recorded in our balance sheet. Although the timing of the settlement is uncertain, we believe this amount will be settled within 3 years. |
Recently IssuedUncertain Tax Positions
Unrecognized tax positions are $4.4 million at December 31, 2022. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. We do not expect that the balance of unrecognized tax benefits will significantly increase or decrease over the next twelve months.
Critical Accounting StandardsPolicies and Estimates
In January 2017,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 U.S. GAAP. The preparation of these 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. We have discussed the selection and development of the critical accounting policies with the Audit Committee, and the Audit Committee has reviewed our related disclosures in this Form 10-K. 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 Part I, “Item 1A. Risk Factors” in this Form 10-K for certain matters bearing risks on our future results of operations.
We believe the following to be our critical accounting policies because they are important to the portrayal of our consolidated financial condition and results of operations and they require critical management judgments and estimates about matters that are uncertain.
Significant accounting policies that we employ are presented in the Notes to our Consolidated Financial Statements in Item 8 Note 2. Summary of Significant Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles-GoodwillPolicies. There were no significant changes in our critical accounting policies and Other, Simplifyingestimates discussed in our Form 10-K during the Test for Goodwill Impairment, which eliminates Step 2year ended December 31, 2022.
Revenue Recognition and Deferred Revenue
The Company generates revenue from the delivery of a range of products, solutions and services for operators, enterprises, OEMs and technology providers. We offer services principally on a Transactional or Subscription basis (SaaS) or in the form of Professional Services or Software Licenses. Revenues are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company generates all of its revenue from contracts with customers.
Subscription and Transaction revenues consist of revenues derived from the processing of transactions through the Company’s service platforms, providing enterprise portal management services on a subscription basis and maintenance agreements on software licenses. The Company generates revenue from Subscription services from monthly active user fees, software as a service (“SaaS”) fees, hosting and storage fees, and fees for the related maintenance support for those services. In most cases, the subscription or transaction arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage, under Topic 606 Section 10-25-14(b). When the Company does not allocate variable consideration to distinct periods of service, the total estimated transaction price is recognized ratably over the term of the contract, where the level of service provided to the customer does not vary significantly from one period to another.
Transaction service arrangements include services such as processing equipment orders, new account setup and activation, number port requests, credit checks and inventory management. Transaction revenues are principally based on a contractual price per transaction and are recognized based on the number of transactions processed during each reporting period. Revenues are recorded based on the total number of transactions processed at the applicable price established in the relevant contract.
Many of the Company’s contracts guarantee minimum volume transactions from the customer. In these instances, if the customer’s total estimated transaction volume for the period is expected to be less than the contractual amount, the Company records revenues at the minimum guaranteed amount on a straight line based over the period covered by the minimum. Setup fees for transactional service arrangements are deferred until set up activities are completed and recognized on a straight‑line
basis over remaining expected customer relationship period. Revenues are presented net of discounts, which are volume level driven.
In accordance with Topic 606 Section 10-50-20, any credits due to customers, which are generally performance driven and based upon system availability or response times to incidents, are determined and accounted for in the period in which the services are provided. The Company recognizes revenues from support and maintenance performance obligations over the service delivery period.
The Company’s software licenses typically provide for a perpetual or term right to use the Company’s software. The Company has concluded that in most cases its software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered to the customer. Contracts that include software customization or specified upgrades may result in the combination of the customization services with the software license as one performance obligation. The Company does not have a history of returns, or refunds of its software licenses, however, in limited instances, the Company may constrain consideration to high-risk customers, until collection is resolved.
The Company’s professional services include software development and customization. The contracts generally include project deliverables specified by each customer. The performance obligations in the agreements are generally combined into one deliverable and generally result in the transfer of control over time. The underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to us. The Company recognizes revenue on fixed fee contracts on the proportion of labor hours expended to the total hours expected to complete the contract performance obligation.
Most of the Company’s contracts with customers contain multiple performance obligations which generally include either 1) a perpetual software license with support and maintenance and sometimes a hosting agreement or 2) a term SaaS agreement, frequently sold along with professional services. For these contracts, the Company accounts for individual goods and services separately if they are distinct performance obligations. This often requires significant judgment based upon knowledge of the products, the solution provided and the structure of the sales contract. In SaaS agreements, the Company provides a service to the customer which combines the software functionality, maintenance and hosting into a single performance obligation when the customer doesn’t have the ability to take possession of the underlying software license. The Company may also sell the same three goods and services in a contract, but there may be three performance obligations, where the customer has the right to take possession of the software license without significant penalty.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company estimates standalone selling prices of software based on observable inputs of past transactions to similarly situated customers. When such observable data is not available for certain software licenses because there is a limited number of transactions or prices are highly variable, the Company will estimate the standalone selling price using the residual approach. Standalone selling prices of services are typically determined based on observable transactions when these services are sold on a standalone basis to similarly situated customers or estimated using a cost-plus margin approach.
Estimating the transaction price of variable consideration including the variable quantity subscription or transaction contracts in a multiple performance obligation arrangement requires significant judgment. The Company generally estimates this variable consideration at the most likely amount to which the Company expects to be entitled and in certain cases based on the expected value. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. The Company reviews and updates these estimates on a quarterly basis.
Income Taxes
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses. The CARES Act amends the Net Operating Loss provisions of the Tax Cuts and Jobs Act, allowing for the carryback of losses arising in tax years 2018, 2019 and 2020, to each of the five taxable years preceding the taxable year of loss.
Since we conduct operations on a global basis, our effective tax rate has and will depend upon the geographic distribution of our pre-tax earnings among locations with varying tax rates. We account for the effects of income taxes that result from our
activities during the current and preceding years. Under this method, deferred income tax liabilities and assets are based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse or be utilized. The realization of deferred tax assets is contingent upon the generation of future taxable income. A valuation allowance is recorded if it is “more likely than not” that a portion or all of a deferred tax asset will not be realized.
In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
We recognize a tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured by determining the amount that has a greater than 50 percent likelihood of being realized upon the settlement of the position. Components of the reserve are classified as current or a long-term liability in the Consolidated Balance Sheets based on when we expect each of the items to be settled. We record interest and penalties accrued in relation to uncertain tax benefits as a component of interest expense.
While we believe we have identified all reasonably identifiable exposures and that the reserve we have established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved. It is also possible that changes in facts and circumstances could cause us to either materially increase or reduce the carrying amount of our tax reserves. In general, tax returns for the year 2018 and thereafter are subject to future examination by tax authorities.
Our policy has been to leave our cumulative unremitted foreign earnings invested indefinitely outside the United States, and we intend to continue this policy. Although the transition tax in the TCJA has removed U.S. federal taxes on distributions to the U.S. on a go forward basis, the Company continues to assert permanent reinvestment of foreign earnings. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts.
Goodwill
Goodwill is our largest intangible asset. At December 31, 2022, our goodwill impairment test. Underbalance was $210.9 million, representing approximately 53% of total assets. Goodwill represents the revised test,excess of the purchase price over the fair value of assets acquired, including other definite-life intangible assets. Our policy is to perform an entity should perform its annual, or interim, goodwill impairment test by comparingof goodwill at least annually, and more frequently if events or circumstances occurred that would indicate a reduced fair value in our reporting units could exist. Typically, we perform a qualitative assessment in the fourth quarter of the fiscal year to determine if it is more likely than not that the fair value of a reporting unit withis less than its carrying amount. An entity shouldvalue. As part of this qualitative assessment, we perform a quantitative assessment where necessary in substantiating our qualitative assessment.
During our qualitative assessment we make significant estimates, assumptions, and judgments, around the financial performance of the Company, changes in our share price, and forecasts of earnings, working capital requirements, and cash flows. We consider the reporting unit's historical results and operating trends as well as any strategic difference from our historical results when determining these assumptions.
If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, we perform a quantitative goodwill impairment test. Fair value estimates used in the quantitative impairment test are calculated using a combination of the income and market approaches. The income approach is based on the present value of future cash flows of each reporting unit, while the market approach is based on certain multiples of selected guideline public companies or selected guideline transactions. The approaches incorporate a number of market participant assumptions including future growth rates, discount rates, income tax rates and market activity in assessing fair value and are reporting unit specific. If the carrying amount exceeds the reporting unit's fair value, we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’sunit's fair value; however,value. We recognize any impairment loss in operating income.
The fair value measurement associated with the loss recognized shouldquantitative goodwill impairment test is based on significant inputs that are not exceedobservable in the total amountmarket and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value goodwill could significantly increase or decrease the fair value estimates used for impairment assessments.
For our 2022 impairment tests, the Company identified one reporting unit, Core. The Company performed a quantitative impairment assessment, as of goodwill allocatedOctober 1, 2022, for the Core reporting unit. The amounts below represent the results of our quantitative assessment.
The table below depicts the methods employed, assumptions used and percentage fair value in excess of carrying value.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 Impairment Test |
| Reporting Unit | | Discount Rate | | Growth Rate Range | | Terminal Growth Rate | | Goodwill | | Fair Value Exceeds Carrying Value by | | Fair Value Method |
| Core | | 12.5% | | 0.0% - 3.0% | | 2.0% | | $203,261 | | 25.3% | | Income Approach, Market Approach |
The 2022 fair value of the reporting unit was estimated using the income and market approach.
For the income approach, we used projections, which require the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions. Factors specific to each reporting unit include revenue and cost growth, profit margins, terminal value growth rates, capital expenditures projections, assumed tax rates, discount rates and other assumptions deemed reasonable by management.
Management also applied the market approach to the analysis. For the market approach, we used judgment in identifying the relevant comparable-company market multiples. These estimates and assumptions may vary between each reporting unit depending on the facts and circumstances specific to that unit. If sufficient comparable data is not present, the market approach will not be employed. The discount rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit. This ASU is effective for any interim or annual impairment tests for fiscal years beginning after December 15, 2019, with early adoption permitted. Management is currently evaluating
Factors influencing the impact of the adoption on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. Management is currently evaluating the impact of the adoption on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which amends the guidance in ASC 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. Management is currently evaluating the impact of the adoption on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, which amends the consolidation guidance in ASU 2015-02 regarding the treatment of indirect interests held through related parties that are under common control. ASU 2016-17 is effective for annual reporting periods beginning after
December 15, 2016, and interim periods within those years, with early adoption permitted. Management is currently evaluating the impact of the adoption on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” which requires entities to recognize at the transaction date the income tax effects for intra-entity transfers of assets other than inventory. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. Management is currently evaluating the impact of the adoption on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement 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 consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The ASU is effective for public companies in annual periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted beginning after December 15, 2018 and interim periods within those years. Management is currently evaluating the impact of the adoption on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Under ASU 2016-02, lessees will be required to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understandrevenue growth rates include the nature of an entity’s leasing activities. This ASU is effectivethe services the reporting unit provides for public reporting companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. We are inits clients, the process of evaluating the effectmaturity of the new guidance onreporting unit and any known concentrated customer contract renewals. We believe that the estimates and assumptions we made are reasonable, but they are susceptible to change from period to period. Actual results of operations, cash flows and other factors will likely differ from the estimates used in our consolidated financial statementsvaluation, and disclosures.it is possible that differences and changes could be material.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amountA deterioration in profitability, adverse market conditions, significant client losses, changes in spending levels of revenue to which it expects to be entitled for the transfer of promised goodsour existing clients 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 non-cash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications. Finally, issued in December 2016, ASU 2016-20 makes minor corrections or minor improvements to the Codification that are not expected todifferent economic outlook than currently estimated by management could have a significant effectimpact on current accounting practicethe estimated fair value of our reporting units and could result in an impairment charge in the future.
Capitalized Software Development Costs
Software development costs are accounted for in accordance with either ASC 985-20, “Software - Costs of Software to be Sold, Leased or create a significant administrative cost to most entities. The new standards are effective for public reporting companies for interim and annual periods beginning after December 15, 2017. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method),Marketed,” or retrospectivelyASC 350-40, “Internal-Use Software.” Costs associated with the cumulative effectplanning and designing phase of initially applying the guidance recognized at the datesoftware development are classified as research and development costs and are expensed as incurred. The amounts capitalized include external direct costs of initial application (the cumulative catch-up transition method). Synchronoss has elected to use the modified retrospective transition method,services used in developing internal-use software and employee compensation and related expenses of personnel directly associated with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).
Management is in the process of completing an initial assessment and expects changes to current accounting policy in the following areas:
For certain software license arrangements, we currently usedevelopment activities. Once technological feasibility has been determined, a ratable, or over time, revenue recognition method for software licensing arrangements where vendor specific objective evidence (VSOE) of the maintenance portion of the arrangement does not exist. Undercosts incurred in development, including coding, testing and quality assurance, are capitalized until available for general release to clients.
Amortization is calculated on a solution-by-solution basis and is recognized over the new standard, we expectestimated economic life of the timingsoftware, typically ranging two to three years. Amortization begins when the software is substantially completed for its intended use. Costs incurred during the preliminary and post-implementation stages are expensed as incurred. The amounts capitalized include external direct costs of revenue recognition to be accelerated because we anticipateservices used in developing internal-use software, employee compensation and related expenses of personnel directly associated with the development activities. Software development costs are evaluated for recoverability whenever events or changes in circumstances indicate that the license revenue portion will be recognized at a point in time upon software license delivery, consistent with our current accounting policy for software arrangements where we can establish VSOE.
Professional services in certain software and in other consulting services arrangements are recognized over time under a proportional performance method. Under the new standard, professional services must meet one of three defined criteria for professional services to be recognized over time. The three criteria are:
| |
◦ | The customer simultaneously receives and consumes the benefits as the Company performs, |
| |
◦ | The customer controls the asset as the Company creates or enhances it, |
| |
◦ | or the Company’s performance does not create an asset for which the entity has an alternative use, and there is a right to payment for performance to date. |
Where contract terms do not qualify for onecarrying value of the over time criteria, we expect that the timing of revenue recognition for professional services in these contracts wouldasset may not be delayed and recognized at a point in time.
Certain implementationrecoverable. Unrecoverable costs and other fulfillment costs, such as direct labor for contract set-up activities, that were previously expensed as incurred will be capitalized and amortized over the contract term and anticipated renewal periods. Capitalizing and amortizing these costs would have these costs recognized over a longer time period.
Our contracts may contain customer options for additional goods and services at stated prices, which may be material rights under the new standards. A material right exists if a contract option provides the customer with a good or service at a discounted price that a similar customer would not otherwise be offered. Under the new standards, material rights are treated as separate performance obligations and are allocated an estimated value. Where contract terms are determined to provide material rights, we expect that some portion the contract price will be allocated to these material rightsreviewed annually and recognized in later periods.
At this time, wethe period they become unrecoverable, as needed, and are not able to reasonably estimate the impact that adoption is expected to have.
In our implementation process, significant activities that are in process are the calculation of the transition adjustment, drafting and approval of new accounting policies, design and implementation of new processes and systems to accommodate the new policies and to compile the information for the enhanced disclosures under the new standards. In addition, internal controls around the new policies, processes and systems need to be designed and implemented.
Impact of New Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (ASU 2014-15). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. Adoption of this guidance, effective December 31, 2016, had no impact on the consolidated financial statements or disclosures.
In March, 2016, the FASB released 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 $5.2 million and $15.1 million for the years ended December 31, 2015 and 2014, respectively.
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 $17.0 million and $1.2 million for the years ended December 31, 2015 and 2014, respectively.
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 increased our effective tax rate for the three monthsConsolidated Statements of Operations as depreciation and year ended December 31, 2016 by 1%. 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 computationamortization expense.
ASU 2016-09 eliminates the requirement that excess tax benefits be realized (i.e., through
Recently Issued Accounting Standards
For 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 earningsdiscussion of $0.5 million.
Adoptionrecently issued accounting standards see Note 2. Summary of Significant Accounting Policies of the new standard impacted our previously reported quarterly results as follows: Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
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| | | | | | | |
| | Three Months Ended March 31, 2016, |
| | As reported | | As adjusted |
| Income statement: | |
| | |
|
| Provision for income taxes | $ | (3,965 | ) | | $ | (4,588 | ) |
| Cash flows statement: | |
| | |
|
| Net cash from operations | $ | 37,731 |
| | $ | 40,489 |
|
| Net cash used in financing | (35,253 | ) | | (32,495 | ) |
| Balance sheet: | |
| | |
|
| Deferred tax liability | $ | 23,096 |
| | $ | 22,864 |
|
| Additional paid-in capital | 535,326 |
| | 536,659 |
|
| Retained earnings | 194,012 |
| | 192,911 |
|
Management adopted ASU 2015-03, “Interest- Imputation of Interest” (subtopic 835-30); “Simplifying the Presentation of Debt Issuance Costs”, and ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associate with Line of Credit Arrangements” during the first quarter of 2016, concurrently. The adoption of these ASUs required us to reclassify the deferred financing costs associated with our Convertible Senior Notes from other assets to long-term debt on a retrospective basis. Our consolidated balance sheets included deferred financing costs of $3.7 million and $5.1 million as of December 31, 2016 and December 31, 2015, respectively, which were reclassified from other assets to long-term debt. The debt issuance costs associated with our 2013 Credit Facility and Amended Credit Facility continue to be presented in other assets on the consolidated balance sheets.
Off‑BalanceOff-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of and during the years ended December 31, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK
Market Risk
The following discussion about market risk disclosures involves forward‑lookingforward-looking statements. Actual results could differ materially from those projected in the forward‑lookingforward-looking statements. We deposit our excess cash in what we believe are high‑qualityhigh-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 risk of interest rate fluctuations on our marketable securities; however, such risk is mitigated by the relatively short‑termshort-term nature of these investments. These investments are denominated in United States dollars.
The primary objective of our investment activities is to preserve our capital for the purpose of funding operations, while at the same time maximizing the income, we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short‑short- and long‑termlong-term investments in a variety of securities, which could include commercial paper, money market funds and corporate and government debt securities. Our cash and cash equivalents and marketable securities at December 31, 20162022 and 2015December 31, 2021 were invested in liquid money market accounts, certificates of deposit and government securities. All market‑riskmarket-risk sensitive instruments were entered into for non‑tradingnon-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 to mitigate foreign currency exchange risk.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.
InterestRate 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 December 31, 20162022 would increase interest income by less thanapproximately $0.2 million on an annual basis.
Borrowings under our credit facility, are at variable rates
Based on our outstanding borrowings at December 31, 2016, a one-percentage point change in interest rates would have affected interest expense on the debt by $0.3 million on an annualized basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The
To the Stockholders and the Board of Directors and Stockholders of
Synchronoss Technologies, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Synchronoss Technologies, Inc. (the Company) as of December 31, 20162022 and 2015, and2021, the related consolidated statements of income andoperations, comprehensive (loss) income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Synchronoss Technologies, Inc.the Company at December 31, 20162022 and 2015,2021, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016,2022, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Synchronoss Technologies, Inc.’sthe Company's internal control over financial reporting as of December 31, 2016,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2017March 15, 2023 expressed an unqualified opinion thereon.
As discussedBasis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in Note 2accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the Company changed its methodcritical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | |
| | New or Modified Revenue Arrangements with Multiple Performance Obligations - Identifying contracts, performance obligations and stand-alone selling price |
| Description of the Matter | | As discussed in Note 3. Revenue of the consolidated financial statements, the Company recognized $252.6 million in revenue across all service lines. The Company’s revenue agreements frequently contain multiple performance obligations, and judgment is required to determine which performance obligations are distinct and accounted for separately. These agreements may also contain variable consideration in the form of tiered pricing, contractual minimums or discounts. Judgment is also required to estimate the total contract consideration and to allocate the consideration to each distinct performance obligation. Additionally, the Company may enter into multiple agreements with the same customer, which may affect the identification of the contract, the performance obligations and the allocation of total contract consideration. Auditing the Company’s new or modified revenue arrangements that included multiple performance obligations was complex and involved a high degree of judgment related to management’s identification of performance obligations and its estimate and allocation of contract consideration.
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| | | | | | | | |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls related to the Company’s process for identifying and assessing new or modified revenue arrangements that included multiple performance obligations as well as recognizing the related revenue, including controls over management’s review of the significant judgments and estimates used in the identification of the contract, distinct performance obligations and the estimation and allocation of amounts to each performance obligation.
Our audit procedures also included, among others, reading a sample of customer contracts and evaluating management’s identification of the contract and the distinct performance obligations based on the terms of the arrangements and the Company’s accounting policies. To test the calculation of the amount of consideration allocated to each distinct performance obligation, we performed procedures to evaluate management’s judgments related to the allocation of consideration to each distinct performance obligation and performed sensitivity analyses to evaluate how these assumptions affect the amount of revenue recognized. We have also evaluated the adequacy of the Company’s disclosures included in Note 3. Revenue. |
| | | | | | | | |
| | Goodwill |
| Description of the Matter | | At December 31, 2022, the Company's goodwill balance was $210.9 million. As discussed in Note 8. Goodwill and Intangibles of the consolidated financial statements, goodwill is tested for impairment at least annually on October 1 at the reporting unit level. Auditing the Company's goodwill impairment test was complex due to the significant judgment required in determining the fair value of the reporting unit. In particular, the fair value estimate was sensitive to significant assumptions that require judgment, including revenue growth rates, free cash flow and operating expenses as a percentage of revenue that affect the amount and timing of future cash flows, long-term growth rates, and the weighted average cost of capital ("discount rate"), which are affected by factors such as general market conditions and recent operating performance. |
| | | | | | | | |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's goodwill impairment review process. For example, we tested controls over management's review of the valuation model and the significant assumptions, discussed above used to develop the prospective financial information. We also tested management's controls to validate the data used in the valuation was complete and accurate.
To test the estimated fair value of the Company's reporting unit, we performed audit procedures that included, among others, assessing the reasonableness of the methodologies used. We also compared the significant assumptions used by management to develop the prospective financial information to current industry and economic trends, analyst expectations, changes to the Company's business model, customer base or product mix and other relevant information. We assessed the historical accuracy of management's projections of future earnings by comparing the actual results to prior forecasts, and we performed analyses of significant assumptions to assess the impact of changes in the assumptions on the calculation of fair value. Further, we evaluated the revenue growth rates, free cash flow, operating expenses as a percentage of revenue and long-term growth rates in comparison to the Company’s peers. We also involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. We have also evaluated the adequacy of the Company’s disclosures included in Note8. Goodwill and Intangibles. |
/s/ Ernst & Young LLP
MetroPark,We have served as the Company’s auditor since 2001.
Iselin, New Jersey
February 27, 2017March 15, 2023
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)thousands, except per share data)
| | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 | |
| | | | |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | $ | 21,921 | | | $ | 31,504 | | |
| | | | |
| | | | |
| Accounts receivable, net | 47,024 | | | 47,586 | | |
| Prepaid & other current assets | 36,342 | | | 42,901 | | |
| | | | |
| | | | |
| Total current assets | 105,287 | | | 121,991 | | |
| Non-current assets: | | | | |
| | | | |
| Property and equipment, net | 4,582 | | | 6,979 | | |
| Operating lease right-of-use assets | 20,863 | | | 26,399 | | |
| Goodwill | 210,889 | | | 224,577 | | |
| Intangible assets, net | 47,536 | | | 60,335 | | |
| Loan receivable | 4,834 | | | 4,834 | | |
| | | | |
| Other assets, non-current | 4,081 | | | 5,619 | | |
| | | | |
| | | | |
| | | | |
| Total non-current assets | 292,785 | | | 328,743 | | |
| Total assets | $ | 398,072 | | | $ | 450,734 | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| Current liabilities: | | | | |
| Accounts payable | $ | 14,209 | | | $ | 11,097 | | |
| Accrued expenses | 52,115 | | | 61,916 | | |
| Deferred revenues, current | 13,859 | | | 22,368 | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total current liabilities | 80,183 | | | 95,381 | | |
| | | | |
| | | | |
| | | | |
| Long-term debt, net of debt issuance costs | 134,584 | | | 133,104 | | |
| Deferred tax liabilities | 466 | | | 560 | | |
| Deferred revenues, non-current | 324 | | | 548 | | |
| | | | |
| Leases, non-current | 29,637 | | | 36,095 | | |
| Other non-current liabilities | 3,933 | | | 9,218 | | |
| | | | |
| Total liabilities | 249,127 | | | 274,906 | | |
| Commitments and contingencies: | | | | |
| | | | |
| Series B Non-Convertible Perpetual Preferred Stock, $0.0001 par value; 150 and 150 shares authorized, 71 and 75 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively | 68,348 | | | 72,505 | | |
| Redeemable noncontrolling interest | 12,500 | | | 12,500 | | |
| Stockholders’ equity: | | | | |
| Common stock, $0.0001 par value; 150,000 and 100,000 shares authorized, 90,853 and 88,305 shares issued; 90,853 and 88,305 outstanding at December 31, 2022 and December 31, 2021, respectively | 9 | | | 9 | | |
| | | | |
| Additional paid-in capital | 488,848 | | | 492,512 | | |
| Accumulated other comprehensive loss | (44,131) | | | (32,985) | | |
| Accumulated deficit | (376,629) | | | (368,713) | | |
| Total stockholders’ equity | 68,097 | | | 90,823 | | |
| Total liabilities and stockholders’ equity | $ | 398,072 | | | $ | 450,734 | | |
| | | | |
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 181,018 |
| | $ | 147,634 |
|
| Marketable securities | 12,506 |
| | 66,357 |
|
| Accounts receivable, net of allowance for doubtful accounts of $1,756 and $3,029 at December 31, 2016 and December 31, 2015, respectively | 137,233 |
| | 136,117 |
|
| Prepaid expenses and other assets | 33,696 |
| | 48,127 |
|
| Assets of discontinued operations, current | — |
| | 8,710 |
|
| Total current assets | 364,453 |
| | 406,945 |
|
| Restricted cash | 30,000 |
| | — |
|
| Marketable securities | 2,974 |
| | 19,635 |
|
| Property and equipment, net | 155,599 |
| | 168,280 |
|
| Goodwill | 269,905 |
| | 182,000 |
|
| Intangible assets, net | 203,864 |
| | 174,322 |
|
| Deferred tax assets | 1,503 |
| | 3,560 |
|
| Other assets | 7,541 |
| | 10,350 |
|
| Note receivable from related party | 83,000 |
| | — |
|
| Equity method investment | 45,890 |
| | — |
|
| Assets of discontinued operations, non-current | — |
| | 45,136 |
|
| Total assets | $ | 1,164,729 |
| | $ | 1,010,228 |
|
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 15,770 |
| | $ | 26,038 |
|
| Accrued expenses | 69,435 |
| | 45,819 |
|
| Deferred revenues | 27,542 |
| | 8,323 |
|
| Contingent consideration obligation | 11,860 |
| | — |
|
| Short term debt | 29,000 |
| | — |
|
| Total current liabilities | 153,607 |
| | 80,180 |
|
| Lease financing obligation - long term | 12,121 |
| | 13,343 |
|
| Contingent consideration obligation - long-term | — |
| | 930 |
|
| Convertible debt | 226,291 |
| | 224,878 |
|
Deferred tax liability 1 | 49,822 |
| | 16,404 |
|
| Deferred revenues | 12,134 |
| | 559 |
|
| Other liabilities | 3,783 |
| | 2,668 |
|
| Redeemable noncontrolling interest | 49,856 |
| | 61,452 |
|
| Stockholders’ equity: | | | |
| Preferred stock, $0.0001 par value; 10,000 shares authorized, 0 shares issued and outstanding at December 31, 2016 and December 31, 2015 | — |
| | — |
|
| Common stock, $0.0001 par value; 100,000 shares authorized, 49,317 and 48,084 shares issued; 45,323 and 44,405 outstanding at December 31, 2016 and December 31, 2015, respectively | 5 |
| | 4 |
|
| Treasury stock, at cost (3,994 and 3,679 shares at December 31, 2016 and December 31, 2015, respectively) | (95,183 | ) | | (65,651 | ) |
Additional paid-in capital 1 | 575,093 |
| | 512,802 |
|
| Accumulated other comprehensive loss | (43,253 | ) | | (38,684 | ) |
Retained earnings 1 | 220,453 |
| | 201,343 |
|
| Total stockholders’ equity | 657,115 |
| | 609,814 |
|
| Total liabilities and stockholders’ equity | $ | 1,164,729 |
| | $ | 1,010,228 |
|
1See Note 2 for discussion of the adoption of ASU 2016-09.
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Twelve Months Ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | |
| Net revenues | | | | | | $ | 252,628 | | | $ | 280,615 | | | $ | 291,670 | |
| Costs and expenses: | | | | | | | | | | |
Cost of revenues1 | | | | | | 91,702 | | | 109,050 | | | 121,817 | |
| Research and development | | | | | | 55,620 | | | 64,337 | | | 77,043 | |
| Selling, general and administrative | | | | | | 70,326 | | | 84,991 | | | 89,292 | |
| Restructuring charges | | | | | | 1,905 | | | 5,189 | | | 7,955 | |
| Depreciation and amortization | | | | | | 31,753 | | | 36,065 | | | 43,685 | |
| Total costs and expenses | | | | | | 251,306 | | | 299,632 | | | 339,792 | |
| Income (loss) from operations | | | | | | 1,322 | | | (19,017) | | | (48,122) | |
| Interest income | | | | | | 465 | | | 39 | | | 1,597 | |
| Interest expense | | | | | | (13,640) | | | (6,420) | | | (476) | |
| Gain on divestiture | | | | | | 2,549 | | | — | | | — | |
| Other income (expense), net | | | | | | 3,447 | | | (4,877) | | | 9,535 | |
| | | | | | | | | | |
| Loss from operations, before taxes | | | | | | (5,857) | | | (30,275) | | | (37,466) | |
| (Provision) benefit for income taxes | | | | | | (1,859) | | | 7,177 | | | 27,108 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net loss | | | | | | (7,716) | | | (23,098) | | | (10,358) | |
| Net (loss) income attributable to redeemable noncontrolling interests | | | | | | (200) | | | 156 | | | (344) | |
| Preferred stock dividend | | | | | | (9,552) | | | (35,509) | | | (37,981) | |
| Net loss attributable to Synchronoss | | | | | | $ | (17,468) | | | $ | (58,451) | | | $ | (48,683) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Basic | | | | | | $ | (0.20) | | | $ | (0.90) | | | $ | (1.16) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Diluted | | | | | | $ | (0.20) | | | $ | (0.90) | | | $ | (1.16) | |
| Weighted-average common shares outstanding: | | | | | | | | | | |
| Basic | | | | | | 86,232 | | | 64,734 | | | 41,950 | |
| Diluted | | | | | | 86,232 | | | 64,734 | | | 41,950 | |
_____________________________ |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| Net revenues | $ | 476,750 |
| | $ | 428,117 |
| | $ | 307,301 |
|
| Costs and expenses: | | | | | |
| Cost of services* | 194,198 |
| | 155,287 |
| | 102,386 |
|
| Research and development | 106,681 |
| | 91,430 |
| | 73,620 |
|
| Selling, general and administrative | 131,106 |
| | 88,411 |
| | 77,081 |
|
| Net change in contingent consideration obligation | 10,930 |
| | 760 |
| | 1,799 |
|
| Restructuring charges | 6,333 |
| | 4,946 |
| | — |
|
| Depreciation and amortization | 99,311 |
| | 72,152 |
| | 55,956 |
|
| Total costs and expenses | 548,559 |
| | 412,986 |
| | 310,842 |
|
| (Loss) income from continuing operations | (71,809 | ) | | 15,131 |
| | (3,541 | ) |
| Interest income | 2,428 |
| | 2,047 |
| | 1,265 |
|
| Interest expense | (7,013 | ) | | (5,711 | ) | | (3,430 | ) |
| Other income (expense), net | 1,863 |
| | 372 |
| | 441 |
|
| (Loss) income from continuing operations, before taxes | (74,531 | ) | | 11,839 |
| | (5,265 | ) |
Provision for income taxes 1 | 7,990 |
| | (5,424 | ) | | 3,242 |
|
| Net (loss) income from continuing operations | (66,541 | ) | | 6,415 |
| | (2,023 | ) |
| Net income from discontinued operations, net of taxes | 74,533 |
| | 40,267 |
| | 40,918 |
|
| Net income | 7,992 |
| | 46,682 |
| | 38,895 |
|
| Net (loss) income attributable to noncontrolling interests | (11,596 | ) | | 6,052 |
| | — |
|
| Net income attributable to Synchronoss | $ | 19,588 |
| | $ | 40,630 |
| | $ | 38,895 |
|
| | | | | | |
| Basic † | | | | | |
| Continuing operations | $ | (1.26 | ) | | $ | 0.01 |
| | $ | (0.05 | ) |
| Discontinued operations | 1.71 |
| | 0.95 |
| | 1.01 |
|
| | $ | 0.45 |
| | $ | 0.96 |
| | $ | 0.96 |
|
| Diluted † | | | | | |
| Continuing operations | $ | (1.26 | ) | | $ | 0.01 |
| | $ | (0.05 | ) |
| Discontinued operations | 1.71 |
| | 0.95 |
| | 1.01 |
|
| | $ | 0.45 |
| | $ | 0.96 |
| | $ | 0.96 |
|
| Weighted-average common shares outstanding: | | | | | |
| Basic † | 43,571 |
| | 42,284 |
| | 40,418 |
|
| Diluted † | 43,571 |
| | 42,284 |
| | 40,418 |
|
| |
* | 1Cost of services excludes depreciation and amortization which is shown separately. |
| |
† | See notes to financial statement footnote 2. |
1 See Note 2 for discussion of the adoption of ASU 2016-09.revenues excludes depreciation and amortization which are shown separately.
See accompanying notes to consolidated financial statementsstatements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Twelve Months Ended December 31, |
| | | | | | | | 2022 | | 2021 | | 2020 |
| Net loss | | | | | | | | $ | (7,716) | | | $ | (23,098) | | | $ | (10,358) | |
| Other comprehensive loss, net of tax: | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | | | | | | (11,261) | | | (3,274) | | | 2,128 | |
| Unrealized loss on available for sale securities | | | | | | | | — | | | — | | | 751 | |
| Net income (loss) on inter-company foreign currency transactions | | | | | | | | 115 | | | (1,498) | | | 2,169 | |
| Total other comprehensive (loss) income | | | | | | | | (11,146) | | | (4,772) | | | 5,048 | |
| Comprehensive loss | | | | | | | | (18,862) | | | (27,870) | | | (5,310) | |
| Comprehensive (loss) income attributable to redeemable noncontrolling interests | | | | | | | | (200) | | | 156 | | | (344) | |
| Comprehensive loss attributable to Synchronoss | | | | | | | | $ | (19,062) | | | $ | (27,714) | | | $ | (5,654) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | | | | | |
| Net income attributable to Synchronoss | $ | 19,588 |
| | $ | 40,630 |
| | $ | 38,895 |
|
| Other comprehensive income (loss), net of tax: | | | | | |
| Foreign currency translation adjustments | (4,042 | ) | | (17,281 | ) | | (12,739 | ) |
| Unrealized gain (loss) on securities | 198 |
| | (54 | ) | | (176 | ) |
| Net loss on intra-entity foreign currency transactions | (725 | ) | | (1,335 | ) | | (6,376 | ) |
| Total other comprehensive loss | (4,569 | ) | | (18,670 | ) | | (19,291 | ) |
| Total comprehensive income attributable to Synchronoss | $ | 15,019 |
| | $ | 21,960 |
| | $ | 19,604 |
|
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders' Equity |
| | Common Stock | | Treasury Stock | | | | |
| | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at December 31, 2013 | 44,456 |
| | $ | 4 |
| | (3,793 | ) | | $ | (67,104 | ) | | $ | 393,644 |
| | $ | (723 | ) | | $ | 121,818 |
| | $ | 447,639 |
|
| Stock based compensation | — |
| | — |
| | — |
| | — |
| | 9,992 |
| | — |
| | — |
| | 9,992 |
|
| Issuance of restricted stock | 765 |
| | — |
| | — |
| | — |
| | 18,353 |
| | — |
| | — |
| | 18,353 |
|
| Issuance of common stock on exercise of options | 1,223 |
| | — |
| | — |
| | — |
| | 30,003 |
| | — |
| | — |
| | 30,003 |
|
| ESPP compensation | — |
| | — |
| | — |
| | — |
| | 642 |
| | — |
| | — |
| | 642 |
|
| Sale of Treasury Stock in connection with an employee stock purchase plan | — |
| | — |
| | 60 |
| | 768 |
| | 909 |
| | — |
| | — |
| | 1,677 |
|
| Net income attributable to Synchronoss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 38,895 |
| | 38,895 |
|
| Total other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (19,291 | ) | | — |
| | (19,291 | ) |
| Tax benefit from stock option exercise | — |
| | — |
| | — |
| | — |
| | 1,197 |
| | — |
| | — |
| | 1,197 |
|
| Balance at December 31, 2014 | 46,444 |
| | $ | 4 |
| | (3,733 | ) | | $ | (66,336 | ) | | $ | 454,740 |
| | $ | (20,014 | ) | | $ | 160,713 |
| | $ | 529,107 |
|
| Stock based compensation | — |
| | — |
| | — |
| | — |
| | 8,495 |
| | — |
| | — |
| | 8,495 |
|
| Issuance of restricted stock | 761 |
| | — |
| | — |
| | — |
| | 22,592 |
| | — |
| | — |
| | 22,592 |
|
| Issuance of common stock on exercise of options | 879 |
| | — |
| | — |
| | — |
| | 19,936 |
| | — |
| | — |
| | 19,936 |
|
| ESPP compensation | — |
| | — |
| | — |
| | — |
| | 624 |
| | — |
| | — |
| | 624 |
|
| Sale of Treasury Stock in connection with an employee stock purchase plan | — |
| | — |
| | 54 |
| | 685 |
| | 1,217 |
| | — |
| | — |
| | 1,902 |
|
| Net income attributable to Synchronoss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 40,630 |
| | 40,630 |
|
| Total other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (18,670 | ) | | — |
| | (18,670 | ) |
| Tax benefit from stock option exercise | — |
| | — |
| | — |
| | — |
| | 5,198 |
| | — |
| | — |
| | 5,198 |
|
| Balance at December 31, 2015 | 48,084 |
| | $ | 4 |
| | (3,679 | ) | | $ | (65,651 | ) | | $ | 512,802 |
| | $ | (38,684 | ) | | $ | 201,343 |
| | $ | 609,814 |
|
| Cumulative effect adjustment to RE's | — |
| | — |
| | — |
| | — |
| | 710 |
| | — |
| | (478 | ) | | 232 |
|
| Balance at Balance at January 1, 2016 | 48,084 |
| | $ | 4 |
| | (3,679 | ) | | $ | (65,651 | ) | | $ | 513,512 |
| | $ | (38,684 | ) | | $ | 200,865 |
| | $ | 610,046 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 7,778 |
| | — |
| | — |
| | 7,778 |
|
| Issuance of restricted stock | 605 |
| | — |
| | — |
| | — |
| | 25,384 |
| | — |
| | — |
| | 25,384 |
|
| Issuance of common stock on exercise of options | 608 |
| | 1 |
| | — |
| | — |
| | 13,912 |
| | — |
| | — |
| | 13,913 |
|
| ESPP compensation | — |
| | — |
| | — |
| | — |
| | 817 |
| | — |
| | — |
| | 817 |
|
| Issuance of common stock related to acquisition | — |
| | — |
| | 840 |
| | 9,244 |
| | 12,756 |
| | — |
| | — |
| | 22,000 |
|
| Issuance of common stock to a subsidiary | 20 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase of treasury shares | — |
| | — |
| | (1,263 | ) | | (40,025 | ) | | — |
| | — |
| | — |
| | (40,025 | ) |
| Sale of Treasury Stock in connection with an employee stock purchase plan | — |
| | — |
| | 108 |
| | 1,249 |
| | 934 |
| | — |
| | — |
| | 2,183 |
|
| Net income attributable to Synchronoss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19,588 |
| | 19,588 |
|
| Total other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (4,569 | ) | | — |
| | (4,569 | ) |
| Balance at Balance at December 31, 2016 | 49,317 |
| | $ | 5 |
| | (3,994 | ) | | $ | (95,183 | ) | | $ | 575,093 |
| | $ | (43,253 | ) | | $ | 220,453 |
| | $ | 657,115 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional | | Accumulative Other | | | | Total |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Comprehensive Income (Loss) | | Accumulated deficit | | Stockholders' Equity |
| Balance at December 31, 2019 | 51,704 | | | $ | 5 | | | (7,162) | | | $ | (82,087) | | | $ | 525,739 | | | $ | (33,261) | | | $ | (334,319) | | | $ | 76,077 | |
| Stock based compensation | — | | | — | | | — | | | — | | | 11,246 | | | — | | | — | | | 11,246 | |
| Issuance of restricted stock | (525) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| Preferred stock dividends accrued | — | | | — | | | — | | | — | | | (34,451) | | | — | | | — | | | (34,451) | |
| Amortization of preferred stock issuance costs | — | | | — | | | — | | | — | | | (3,530) | | | — | | | — | | | (3,530) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Shares withheld for taxes in connection with issuance of restricted stock | (2) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Net loss attributable to Synchronoss | — | | | — | | | — | | | — | | | — | | | — | | | (10,358) | | | (10,358) | |
| Non-controlling interest | — | | | — | | | — | | | — | | | 344 | | | — | | | (344) | | | — | |
| Total other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 5,048 | | | — | | | 5,048 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Adoption of new credit loss accounting standard | — | | | — | | | — | | | — | | | — | | | — | | | (750) | | | (750) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2020 | 51,177 | | | $ | 5 | | | (7,162) | | | $ | (82,087) | | | $ | 499,348 | | | $ | (28,213) | | | $ | (345,771) | | | $ | 43,282 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional | | Accumulative Other | | | | Total |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Comprehensive Income (Loss) | | Accumulated deficit | | Stockholders' Equity |
| Balance at December 31, 2020 | 51,177 | | | $ | 5 | | | (7,162) | | | $ | (82,087) | | | $ | 499,348 | | | $ | (28,213) | | | $ | (345,771) | | | $ | 43,282 | |
| Stock based compensation | — | | | — | | | — | | | — | | | 9,259 | | | — | | | — | | | 9,259 | |
| Issuance of restricted stock | 1,982 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
| | | | | | | | | | | | | | | |
| Preferred stock dividends accrued | — | | | — | | | — | | | — | | | (22,718) | | | — | | | — | | | (22,718) | |
| Amortization of preferred stock issuance costs | — | | | — | | | — | | | | | (12,791) | | | | | | | (12,791) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Issuance of common stock related to acquisition | 42,308 | | | 4 | | | — | | | — | | | 109,996 | | | — | | | — | | | 110,000 | |
| Common Stock - Issuance Costs | — | | | — | | | — | | | — | | | (8,340) | | | — | | | — | | | (8,340) | |
| Retirement of treasury stock | (7,162) | | | — | | | 7,162 | | | 82,087 | | | (82,087) | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Net loss attributable to Synchronoss | — | | | — | | | — | | | — | | | — | | | — | | | (23,098) | | | (23,098) | |
| Non-controlling interest | — | | | — | | | — | | | — | | | (156) | | | — | | | 156 | | | — | |
| Total other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (4,772) | | | — | | | (4,772) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | 88,305 | | | $ | 9 | | | — | | | $ | — | | | $ | 492,512 | | | $ | (32,985) | | | $ | (368,713) | | | $ | 90,823 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional | | Accumulative Other | | | | Total |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Comprehensive Income (Loss) | | Accumulated deficit | | Stockholders' Equity |
| Balance at December 31, 2021 | 88,305 | | | $ | 9 | | | — | | | $ | — | | | $ | 492,512 | | | $ | (32,985) | | | $ | (368,713) | | | $ | 90,823 | |
| Stock based compensation | — | | | — | | | — | | | — | | | 5,771 | | | — | | | — | | | 5,771 | |
| Issuance of restricted stock | 2,616 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| Preferred stock dividend | — | | | — | | | — | | | — | | | (9,409) | | | — | | | — | | | (9,409) | |
| Amortization of preferred stock issuance costs | — | | | — | | | — | | | — | | | (143) | | | — | | | — | | | (143) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Shares withheld for taxes in connection with issuance of restricted stock | (68) | | | — | | | — | | | — | | | (83) | | | — | | | — | | | (83) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Net loss attributable to Synchronoss | — | | | — | | | — | | | — | | | — | | | — | | | (7,716) | | | (7,716) | |
| Non-controlling interest | — | | | — | | | — | | | — | | | 200 | | | — | | | (200) | | | — | |
| Total other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (11,146) | | | — | | | (11,146) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance at December 31, 2022 | 90,853 | | | $ | 9 | | | — | | | $ | — | | | $ | 488,848 | | | $ | (44,131) | | | $ | (376,629) | | | $ | 68,097 | |
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, |
| 2022 | | | | 2021 | | 2020 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Operating activities: | | | | | | | |
| Net loss from continuing operations | $ | (7,716) | | | | | $ | (23,098) | | | $ | (10,358) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | |
| Depreciation and amortization | 31,753 | | | | | 34,760 | | | 42,672 | |
| | | | | | | |
| Impairment of long-lived assets and capitalized software | — | | | | | 1,305 | | | 1,013 | |
| | | | | | | |
| Amortization of debt issuance costs | 1,391 | | | | | 624 | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Loss on disposals of fixed assets | 126 | | | | | 263 | | | 12 | |
| | | | | | | |
| Gain on sale of DXP Business | (2,549) | | | | | — | | | — | |
| Gain on disposals of intangible assets | — | | | | | (550) | | | (3,477) | |
| Amortization of bond discount | 88 | | | | | 9 | | | — | |
| | | | | | | |
| Deferred income taxes | (164) | | | | | 463 | | | (911) | |
| | | | | | | |
| Stock-based compensation | 5,461 | | | | | 9,343 | | | 11,137 | |
| Contingent consideration obligation | 3,638 | | | | | — | | | — | |
| | | | | | | |
| Operating lease impairment, net | 175 | | | | | 1,353 | | | 5,350 | |
| Changes in operating assets and liabilities: | | | | | | | |
| Accounts receivable, net | 14 | | | | | (748) | | | 11,703 | |
| Prepaid expenses and other current assets | 6,954 | | | | | (4,394) | | | (1,641) | |
| Accounts payable | 3,024 | | | | | (2,031) | | | (7,127) | |
| Accrued expenses | (8,430) | | | | | 3,468 | | | 898 | |
| | | | | | | |
| | | | | | | |
| Deferred revenues | (8,312) | | | | | (21,972) | | | (43,200) | |
| Other liabilities | (8,094) | | | | | 6,150 | | | (6,635) | |
| | | | | | | |
| Net cash provided by (used in) operating activities | 17,359 | | | | | 4,945 | | | (564) | |
| | | | | | | |
| Investing activities: | | | | | | | |
| Purchases of fixed assets | (1,408) | | | | | (1,521) | | | (885) | |
| Additions to capitalized software | (19,758) | | | | | (22,972) | | | (16,665) | |
| | | | | | | |
| Acquisition of intangible assets | — | | | | | — | | | (400) | |
| Proceeds from the sale of intangibles | — | | | | | 550 | | | 3,600 | |
| Proceeds from the sale of DXP Business | 8,000 | | | | | — | | | — | |
| | | | | | | |
| Maturity of marketable securities available for sale | — | | | | | — | | | 11 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net cash used in investing activities | (13,166) | | | | | (23,943) | | | (14,339) | |
| | | | | | | |
|
| | | | | | | | | | | |
| | Year Ended Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Operating activities: | | | (As Adjusted) | | (As Adjusted) |
| Net income | $ | 7,992 |
| | $ | 46,682 |
| | $ | 38,895 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization expense | 99,311 |
| | 72,152 |
| | 55,956 |
|
| Amortization of debt issuance costs | 1,607 |
| | 1,501 |
| | 618 |
|
| (Gain) loss on disposals | (952 | ) | | 16 |
| | 33 |
|
| Gain on discontinued operations | (95,311 | ) | | — |
| | — |
|
| Amortization of bond premium | 1,416 |
| | 1,705 |
| | 384 |
|
| Deferred income taxes | 32,826 |
| | 8,319 |
| | 3,207 |
|
| Non-cash interest on leased facility | 1,111 |
| | 924 |
| | 946 |
|
| Stock-based compensation | 33,979 |
| | 31,711 |
| | 28,987 |
|
| Contingent consideration obligation | 10,930 |
| | (772 | ) | | 3,532 |
|
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable, net of allowance for doubtful accounts | (1,662 | ) | | (27,577 | ) | | (50,924 | ) |
Prepaid expenses and other current assets 1 | 12,644 |
| | (8,543 | ) | | (14,660 | ) |
| Other assets | 10,054 |
| | (4,282 | ) | | (1,930 | ) |
| Accounts payable | (11,139 | ) | | 6,185 |
| | 4,169 |
|
Accrued expenses 1 | 22,024 |
| | 16,333 |
| | 16,402 |
|
| Other liabilities | (6,558 | ) | | (402 | ) | | 5,825 |
|
| Deferred revenues | 24,317 |
| | (4,130 | ) | | (4,119 | ) |
| Net cash provided by operating activities | 142,589 |
| | 139,822 |
| | 87,321 |
|
| | | | | | |
| Investing activities: | | | | | |
| Purchases of fixed assets | (58,542 | ) | | (59,960 | ) | | (73,885 | ) |
| Purchases of intangible assets | — |
| | (1,200 | ) | | — |
|
| Purchases of marketable securities available-for-sale | (13,445 | ) | | (139,569 | ) | | (50,275 | ) |
| Maturities of marketable securities available-for-sale | 82,904 |
| | 106,210 |
| | 9,265 |
|
| Change in restricted cash | (30,000 | ) | | — |
| | — |
|
| Proceeds from the sale of discontinued operations | 18,135 |
| | — |
| | — |
|
| Businesses acquired, net of cash | (98,428 | ) | | (131,592 | ) | | (38,085 | ) |
| Net cash used in investing activities | (99,376 | ) | | (226,111 | ) | | (152,980 | ) |
| | | | | | |
| Financing activities: | | | | | |
| Proceeds from the exercise of stock options | 13,912 |
| | 19,936 |
| | 30,003 |
|
Taxes paid on withholding shares 1 | (8,885 | ) | | (17,043 | ) | | (15,139 | ) |
| Payments on contingent consideration obligation | — |
| | (4,468 | ) | | — |
|
| Debt issuance costs | (1,346 | ) | | — |
| | (7,065 | ) |
| Proceeds from issuance of convertible notes | — |
| | — |
| | 230,000 |
|
| Borrowings on revolving line of credit | 144,000 |
| | — |
| | 40,000 |
|
| Repayment of revolving line of credit | (115,000 | ) | | — |
| | (40,000 | ) |
| Repurchases of common stock | (40,025 | ) | | — |
| | — |
|
| Proceeds from the sale of treasury stock in connection with an employee stock purchase plan | 2,183 |
| | 1,902 |
| | 1,677 |
|
| Repayments of capital lease obligations | (3,815 | ) | | (2,021 | ) | | (1,515 | ) |
| Net cash (used in) provided by financing activities | (8,976 | ) | | (1,694 | ) | | 237,961 |
|
| Effect of exchange rate changes on cash | (853 | ) | | (350 | ) | | 153 |
|
| Net increase (decrease) in cash and cash equivalents | 33,384 |
| | (88,333 | ) | | 172,455 |
|
| Cash and cash equivalents at beginning of period | 147,634 |
| | 235,967 |
| | 63,512 |
|
| Cash and cash equivalents at end of period | $ | 181,018 |
| | $ | 147,634 |
| | $ | 235,967 |
|
| | | | | | |
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid for income taxes | $ | 4,661 |
| | $ | 29,868 |
| | $ | 19,342 |
|
| Cash paid for interest | $ | 6,981 |
| | $ | 5,791 |
| | $ | 2,290 |
|
| | | | | | |
| Supplemental disclosures of non-cash investing and financing activities: | | | | | |
| Issuance of common stock in connection with Openwave acquisition | $ | 22,000 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | |
| Financing activities: | | | | | | | |
| Share-based compensation-related proceeds, net of taxes paid on withholding shares | — | | | | | (1) | | | — | |
| Taxes paid on withholding shares | (83) | | | | | (1) | | | (9) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Debt issuance costs related to long term debt | — | | | | | (8,606) | | | — | |
| | | | | | | |
| | | | | | | |
| Proceeds from issuance of long term debt | — | | | | | 141,077 | | | — | |
| | | | | | | |
| | | | | | | |
| Borrowings on revolving line of credit | — | | | | | — | | | 10,000 | |
| Repayment of revolving line of credit | — | | | | | (10,000) | | | — | |
| | | | | | | |
| Proceeds from issuance of common stock | — | | | | | 110,000 | | | — | |
| Common stock issuance costs | — | | | | | (8,340) | | | — | |
| | | | | | | |
| Proceeds from issuance of Series B Preferred stock | — | | | | | 75,000 | | | — | |
| Series B Preferred stock issuance costs | — | | | | | (2,495) | | | — | |
| Series B Preferred dividend paid in the form of cash | (6,455) | | | | | (1,781) | | | — | |
| Redemption of Series B Preferred stock | (6,738) | | | | | — | | | — | |
| Redemption of Series A Preferred stock | — | | | | | (278,665) | | | — | |
| | | | | | | |
| Net cash (used in) provided by financing activities | (13,276) | | | | | 16,188 | | | 9,991 | |
| | | | | | | |
| Effect of exchange rate changes on cash | (500) | | | | | 643 | | | (418) | |
| | | | | | | |
| Net decrease in cash and cash equivalents | $ | (9,583) | | | | | $ | (2,167) | | | $ | (5,330) | |
| Cash and cash equivalents, beginning of period | 31,504 | | | | | 33,671 | | | 39,001 | |
| Cash and cash equivalents, end of period | $ | 21,921 | | | | | $ | 31,504 | | | $ | 33,671 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | |
| Cash paid for income taxes | $ | 4,562 | | | | | $ | 3,449 | | | $ | 6,138 | |
| Cash refund for income taxes | $ | 5,206 | | | | | $ | 420 | | | $ | 15,585 | |
| Cash paid for interest | $ | 11,822 | | | | | $ | 3,657 | | | $ | 212 | |
| | | | | | | |
| Supplemental disclosures of non-cash investing and financing activities: | | | | | | | |
Paid in kind dividends on Series A Preferred stock 1 | $ | — | | | | | $ | 31,277 | | | $ | 36,776 | |
| Paid in kind dividends on Series B Preferred stock | $ | 2,581 | | | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
12021 amounts include amortization of preferred stock issuance costs accelerated due to Series A redemption.
1See Note 2 for discussion of the adoption of ASU 2016-09.
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
| |
1. | Description of Business |
1. Description of Business
General
Synchronoss Technologies, Inc. (“Synchronoss” or the “Company”) is a global softwareleading provider of white label cloud, messaging, digital and services companynetwork management solutions that provides essential technologies for the mobile transformation of business. enable our customers to keep subscribers, systems, networks and content in sync.
The Company's portfolio, whichSynchronoss Personal CloudTM solution is targeted at the Consumerdesigned to create an engaging and Enterprise markets, contains offerings such as personal cloud, secure-mobility, identitytrusted customer experience through ongoing content management and engagement.The Synchronoss Personal CloudTM platform is a secure and highly scalable, messaging platforms, productswhite label platform that allows our customers’ subscribers to backup and solutions. These essential technologies create a better way of deliveringprotect, engage with, and manage their personal content and gives our operator customers the transformative mobile experiences that service providersability to increase average revenue per user (“ARPU”) and enterprises need to help them stay ahead of the curve in competition, innovation, productivity, growth and operational efficiency.reduce churn.
Synchronoss' products and platforms areOur Synchronoss Personal CloudTM platform is specifically designed to be carrier-grade, flexiblesupport smartphones, tablets, desktops computers, laptops, wearables for health and scalable, enabling multiple converged communication services to be managed acrosswellness, cameras, TVs, security cameras, routers, as well as connected automobiles and homes.
Synchronoss’ Messaging platform powers mobile messaging and mailboxes for hundreds of millions of telecommunication subscribers. Our Advanced Messaging platform is a range of distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets. This business model allows the Company to meet the rapidly changing converged services and connected devices offered by their customers. Synchronoss' products, platforms and solutions enable its enterprise and service provider customers to acquire, retain and service subscribers and employees quickly, reliably and cost-effectively withpowerful, secure, intelligent, white label and custom-branded solutions. Synchronoss customers can simplify the processes associated with managing the customer experiencemessaging platform that expands capabilities for procuring, activating, connecting, backing-up, synchronizing and sharing/collaboration with connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of the Company's platforms enable new revenue streams and retention opportunities for their customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud, including the services offered by Intralinks, which the Company acquired in January 2017. By using the Company's technologies, Synchronoss customers can optimize their cost of operations while enhancing their customer experience.
The Company currently operates in and markets their solutions and services directly through their sales organizations in North America, Europe, the Middle East and Africa or EMEA, Latin America and the Asia-Pacific region. Synchronoss delivers essential technologies for mobile transformation to two primary types of customers:communications service provider and enterprise customers in regulated verticalsmulti-service providers to offer P2P messaging via Rich Communications Services (“RCS”).Our Mobile Messaging Platform (“MMP”) is poised to provide a single standard ecosystem for onboarding and use cases.management to brands, advertisers and message wholesalers.
Service Providers, Retailers, OEMs, Re-sellersThe Synchronoss NetworkX products provide operators with the tools and Service Integratorssoftware to design their physical network, streamline their infrastructure purchases, and manage and optimize comprehensive network expenses for leading top tier carriers around the globe.
These 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. Synchronoss' customers rely on their solutions and technology to automate the process of activation and content and settings management for their subscribers’ devices while delivering additional communication services. Synchronoss' portfolio includes: cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, identity/access management that enable communications service providers or CSPs, cable operators/multi-services operators, or MSOs and original equipment manufacturers, or OEMs with embedded connectivity (e.g. smartphones, laptops, tablets and mobile internet devices or MIDs, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
2.2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company, its wholly‑ownedwholly-owned subsidiaries and variable interest entities (VIE)(“VIE”) in which the Company is the primary beneficiary and entities in which the Company has a controlling interest. Investments in less than majority-owned companies in which the Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. Investments in less than majority-owned companies in which the Company does not have the ability to exert significant influence over the operating and financial policies of the investee are accounted for using the cost method. All material intercompany transactions and accounts are eliminated in consolidation. Certain prior
Risks and Uncertainties
There continue to be uncertainties regarding the coronavirus ("COVID-19") pandemic and current geopolitical environment. The Company is closely monitoring the impact of the pandemic and geopolitical environment on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, business partners and distribution channels. While the pandemic or geopolitical environment did not materially affect the Company’s financial results and business operations for the year amountsended December 31, 2022, the Company is unable to predict the impact these factors will have been reclassifiedon its financial position and operating results due to conformnumerous uncertainties. The Company will continue to assess the evolving impact of the COVID-19 pandemic and geopolitical environment and will make adjustments to its operations as necessary.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Recently Issued Accounting Standards
Standards issued not yet adopted
| | | | | | | | | | | | | | |
| Standard | | Description | | Effect on the financial statements |
Update 2022-04 - Liabilities—Supplier Finance Programs
(Subtopic 405-50). Disclosure of Supplier Finance Program Obligations | | The amendments in this Update apply to all entities that use supplier finance programs in connection with the purchase of goods and services (herein described as buyer parties). Supplier finance programs, which also may be referred to as reverse factoring,
payables finance, or structured payables arrangements, allow a buyer to offer its suppliers the option for access to payment in advance of an invoice due date, which is paid by a third-party finance provider or intermediary on the basis of invoices that the buyer has confirmed as valid.
The amendments in this Update require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. To achieve that objective, the buyer should disclose qualitative and quantitative information about its supplier finance programs. | | The Company continues to evaluate these changes and does not anticipate any material impact on the Company’s consolidated financial position or results of operations upon adoption.
|
| Planned date of adoption: January 1, 2023 | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Digital Experience Platform and Activation Solutions Sale
On March 7, 2022, Synchronoss Technologies, Inc. and iQmetrix Global Ltd. (“iQmetrix ”), entered into an Asset Purchase Agreement, pursuant to which Synchronoss has agreed to sell its Digital Experience Platform and activation solutions (the “DXP Business”) to iQmetrix for up to a total purchase price of $14 million. The purchase price is payable as follows: (i) $7.5 million on the closing date of the Transaction, (ii) $0.5 million deposited into an escrow account on the Closing Date, (iii) $1 million paid twelve (12) months from the Closing Date, and (iv) $5 million that may be payable as an earn-out.
This transaction closed on May 11, 2022. The Company received the $7.5 million cash payment on the transaction close date. The Company received the $0.5 million payment in escrow during the third quarter in accordance with the terms of the Asset Purchase Agreement. The remaining $1 million escrow payment was recorded into other current assets. This consideration is not contingent on any further actions.
The Company determined the fair value of the earn-out provision was $3.6 million of which $3.0 million was recorded as an other current asset and the remaining portion was recorded as non-current other asset. In the fourth quarter, iQmetrix and the Company agreed that the required performance conditions were not met. This resulted in a write-off of the asset recorded within the Selling, general and administrative expenses line item on the income statement.
The book value of the divested intangible assets associated with the DXP Business was $2.3 million. For the goodwill allocation, the fair value of the core reporting unit was estimated using a combination of the income approach, which incorporates the use of the discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. Based on the fair value of the core reporting unit and the aggregate consideration received in the transaction, the Company determined the attributable fair value of goodwill to the current year's presentation.DXP Business was $7.6 million. The transaction resulted in a $2.5 million gain for the year ended December 31, 2022.
Accounts Receivable Securitization Facility
On June 23, 2022 (the “Closing Date”), the Company and certain of its subsidiaries (together with the Company, the “Company Group”) entered into a $15 million accounts receivable securitization facility (the “A/R Facility”) with Norddeutsche Landesbank Girozentrale.
The A/R Facility transaction includes (i) Receivables Purchase Agreements (the “Receivables Purchase Agreements”) dated as of the Closing Date, among the Company, as initial servicer, SN Technologies, LLC, a wholly owned special purpose
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
subsidiary of the Company (“SN Technologies”), as seller, Norddeutsche Landesbank Girozentrale, as administrative agent (the “Administrative Agent”), and the purchasers party thereto, the group agents party thereto and the originators party thereto; (ii) Purchase and Sale Agreements (the “Purchase and Sale Agreements”) dated as of the Closing Date, between the Company Group, as originators (the “Originators”), and SN Technologies, as purchaser; (iii) the Administration Agreement (the “Administration Agreement”) dated as of the Closing Date, between the Company, as servicer, and Finacity Corporation, as administrator; and (iv) the Performance Guaranty (the “Performance Guaranty”) dated as of the Closing Date made by the Company in favor of the Administrative Agent.
Pursuant to the Purchase and Sale Agreements, the Originators will sell existing and future accounts receivable (and related assets) (the “Receivables”) to SN Technologies in exchange for cash and/or subordinated notes. The Originators and SN Technologies intend the transactions contemplated by the Purchase and Sale Agreements to be true sales to SN Technologies by the respective Originators. Pursuant to the Receivables Purchase Agreement, SN Technologies will in turn grant an undivided security interest to the Administrative Agent in the Receivables in exchange for a credit facility permitting borrowings of up to $15 million outstanding from time to time. Yield is payable to the Administrative Agent under the Receivables Purchase Agreements at a variable rate based on the Norddeutsche Landesbank Girozentrale’s Hanover funding rate plus a 2.35% margin. The Company’s commitment fee shall equal 0.85% per annum on the average daily unused outstanding capital. Pursuant to the Performance Guaranty, the Company guarantees the performance of the Originators of their obligations under the Purchase and Sale Agreements.
The Company has not agreed to guarantee any obligations of SN Technologies or the collection of any of the receivables and will not be responsible for any obligations to the extent the failure to perform such obligations by the Company or any Originators results from receivables being uncollectible on account of the insolvency, bankruptcy or lack of creditworthiness or other financial inability to pay of the related obligor.
Unless earlier terminated or subsequently extended pursuant to the terms of the Receivables Purchase Agreement, the A/R Facility will expire on June 23, 2025.
The foregoing description of the A/R Facility and the respective transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to the full text of the Receivables Purchase Agreements, Purchase and Sale Agreements, Administration Agreement and Performance Guaranty, copies of which are filed as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, on Form 8-K filed with Securities and Exchange Commission on June 23, 2022.
The Company has not drawn on the A/R Facility as of December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP)(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Revenue Recognition and Deferred Revenue
Revenues are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company provides services principally on a transactional or subscription basis or, at times, on a fixed fee basisgenerates all of its revenue from contracts with customers.
Subscription and recognizes the revenues as the services are performed or delivered as described below:
Transactional and Subscription Service Arrangements:Transaction and subscription revenues consist of revenues derived from the processing of transactions through the Company’s service platforms, providing enterprise portal management services on a subscription basis and maintenance agreements on software licenses. Transaction service arrangements include services such as processing equipment orders, new account set‑up and activation, number port requests, credit checks and inventory management.The Company generates revenue from Subscription services includefrom monthly active user fees, software as a service (“SaaS”) fees, hosting and storage fees, and fees for the related maintenance support for those services. In most cases, the subscription or transaction arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
distinct periods of service based on usage, under Topic 606 Section 10-25-14(b). When the Company does not allocate variable consideration to distinct periods of service, the total estimated transaction price is recognized ratably over the term of the contract, where the level of service provided to the customer does not vary significantly from one period to another.
Transaction service arrangements include services such as processing equipment orders, new account setup and activation, number port requests, credit checks and inventory management.
Transaction revenues are principally based on a contractual price per transaction and are recognized based on the number of transactions processed during each reporting period. Revenues are recorded based on the total number of transactions processed at the applicable price established in the relevant contract. The total amount of revenues recognized is based primarily on the volume of transactions. Subscription revenues are recorded one of two ways: on a straight‑line basis over the life of the contract or on a fixed monthly fee based on a set contracted amount.
Many of the Company’s contracts guarantee minimum volume transactions from the customer. In these instances, if the customer’s total estimated transaction volume for the period is expected to be less than the contractual amount, the Company records revenues at the minimum guaranteed amount. At times, transaction revenues may also include billings to customers that reimburseamount on a straight line based over the Company based onperiod covered by the number of individuals dedicated to processing transactions. Set‑upminimum. Setup fees for transactional service arrangements are deferred until set up activities are completed and recognized on a straight‑line basis over the life of the contract since these amounts would not have been paid by theremaining expected customer without the related transactional service arrangement.relationship period. Revenues are presented net of discounts, which are volume level driven, ordriven.
In accordance with Topic 606 Section 10-50-20, any credits due to customers, which are generally performance driven and based upon system availability or response times to incidents, are determined and accounted for in the period in which the volume thresholds are met or the services are provided. The Company recognizes revenues from support and maintenance performance obligations over the service delivery period.
Professional Service andThe Company’s software licenses typically provide for a perpetual or term right to use the Company’s software. The Company has concluded that in most cases its software license is distinct as the customer can benefit from the software on its own. Software License Arrangements: Professionalrevenue is typically recognized when the software is delivered to the customer. Contracts that include software customization or specified upgrades may result in the combination of the customization services with the software license as one performance obligation. The Company does not have a history of returns, or refunds of is software licenses, however, in limited instances, the Company may constrain consideration to high-risk customers, until collection is resolved.
The Company’s professional services include processsoftware development and workflow consultingcustomization. The contracts generally include project deliverables specified by each customer. The performance obligations in the agreements are generally combined into one deliverable and generally result in the transfer of control over time. The underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to us. The Company recognizes revenue on fixed fee contracts on the proportion of labor hours expended to the total hours expected to complete the contract performance obligation.
Most of the Company’s contracts with customers contain multiple performance obligations which generally include either 1) a perpetual software license with support and maintenance and sometimes a hosting agreement or 2) a term SaaS agreement, frequently sold along with professional services. For these contracts, the Company accounts for individual goods and services separately if they are distinct performance obligations. This often requires significant judgment based upon knowledge of the products, the solution provided and development services. Professional services when sold with transactional or subscriptionthe structure of the sales contract. In SaaS agreements, the Company provides a service arrangements are accounted for separatelyto the customer which combines the software functionality, maintenance and hosting into a single performance obligation when the professionalcustomer doesn’t have the ability to take possession of the underlying software license. The Company may also sell the same three goods and services have valuein a contract, but there may be three performance obligations, where the customer has the right to take possession of the software license without significant penalty.
The transaction price is allocated to the customerseparate performance obligations on a relative standalone selling price basis. The Company estimates standalone selling prices of software based on observable inputs of past transactions to similarly situated customers. When such observable data is not available for certain software licenses because there is a limited number of transactions or prices are highly variable, the Company will estimate the standalone selling price using the residual approach. Standalone selling prices of services are typically determined based on observable transactions when these services are sold on a standalone basis and there is objective and reliable evidence of fair value of the professional services. When accounted for separately, professional service revenues are recognized as services are performed and all other elements of revenue recognition have been satisfied.to similarly situated customers or estimated using a cost-plus margin approach.
In determining whether professional service revenues can be accounted for separately from transaction or subscription service revenues, the Company considers the following factors for each professional services agreement: availability of the professional services from other vendors, whether objective and reliable evidence of fair value exists of the undelivered elements, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the transaction or
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
subscription service start date and the contractual independence of the transactional or subscription service from the professional services.
If a professional service arrangement were not to qualify for separate accounting, the Company would recognize the professional service revenues ratably over the remaining term ofEstimating the transaction price of variable consideration including the variable quantity subscription or subscription agreement.
Revenue from software license arrangements is recognized when the license is delivered to its customers and all of the software revenue recognition criteria are met. When software arrangements includetransaction contracts in a multiple elements, theperformance obligation arrangement requires significant judgment. The Company generally estimates this variable consideration is allocated at the inceptionmost likely amount to all deliverables using the residual method providing the Company has vendor specific objective evidence (VSOE) on all undelivered elements. The Company determines VSOE for each element based on historical stand‑alone sales to third parties.
When transaction or subscription service arrangements, include multiple elements, the arrangement consideration is allocated at the inception of an arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. The selling price used for each deliverable will be based on VSOE if available, third‑party evidence (TPE) if vendor‑specific objective evidence is not available, or estimated selling price (ESP) if neither vendor‑specific objective evidence nor third‑party evidence is available. The objective of ESP is to determine the price at which the Company would transactexpects to be entitled and in certain cases based on the expected value. The Company includes estimated amounts in the transaction price to the extent it is probable that a sale ifsignificant reversal of cumulative revenue recognized will not occur when the product or service were solduncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. The Company reviews and update these estimates on a stand‑alonequarterly basis.
The Company determines ESP by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices. ESP is generally used for offerings that are not typically sold on a stand‑alone basis or for new or highly customized offerings.Company’s typical performance obligations include the following:
| | | | | | | | | | | | | | | | | | | | |
| Performance Obligation | | When Performance Obligation is Typically Satisfied | | When Payment is Typically Due | | How Standalone Selling Price is Typically Estimated |
| Software License | | | | | | |
| Software License | | Upon shipment or made available for download (point in time) | | Within 90 days of delivery | | Observable transactions or residual approach when prices are highly variable or uncertain |
| Software License with significant customization | | Over the performance of the customization and installation of the software (over time) | | Within 90 days of services
being performed | | Residual approach |
| Hosting Services | | As hosting services are provided (over time) | | Within 90 days of services
being provided | | Estimated using a cost-plus margin approach |
| Professional Services | | | | | | |
| Consulting | | As work is performed (over time) | | Within 90 days of services
being performed | | Observable transactions |
| Customization | | SaaS: Over the remaining term of the SaaS agreement
License: Over the performance of the customization and installation of the software (over time) | | Within 90 days of services
being performed | | Observable transactions |
| Transaction Services | | As transaction is processed (over time) | | Within 90 days of transaction | | Observable transactions |
| Subscription Services | | | | | | |
| Customer Support | | Ratably over the course of the support contract
(over time) | | Within 90 days of the start of the contract period | | Observable transactions |
| SaaS | | Over the course of the SaaS service once the system is available for use
(over time) | | Within 90 days of services
being performed | | Estimated using a cost-plus margin approach |
While the Company follows specific and detailed rules and guidelines related to revenue recognition, it makes and uses management judgments and estimates in connection with the revenue recognized in any reporting period, particularly in the areas described above, as well as collectability. If management made different estimates or judgments, differences in the timing of the recognition of revenue could occur.
Deferred Revenue: Revenue
Deferred revenues primarily represent billings to customers for services in advance of the performance of services, with revenues recognized as the services are rendered, and also includesinclude the fair value of deferred revenues recorded as a result of acquisitions.
Service Level Standards
Pursuant to certain contracts, the Company is subject to service level standards and to corresponding penalties for failure to meet those standards. All performance‑relatedperformance-related penalties are reflected as a corresponding reduction of the Company’s revenues. These penalties, if applicable, are recorded in the month incurred and were insignificant for the years ended December 31, 2016, 20152022, 2021 and 2014,2020, respectively.
Cost of ServicesRevenues
Cost of services includes all direct materials, direct labor and those indirect costs related to revenues such as indirect labor, materials and supplies and facilities cost, exclusive of depreciation expense.
Research and Development
Research and development costs are expensed as incurred, unless they meet U.S. GAAP criteria for deferral and amortization. Software development costs incurred prior to the establishment of technological feasibility do not meet these criteria, and are expensed as incurred. The Company includes capitalized software development costs in intangible assets on the consolidated balance sheets. Amortization of software development costs is computed using the straight‑line method over the estimated useful lives of the assets, 3 and 5 years. Research and development expense consists primarily of costs related to personnel, including salaries and other personnel‑related expenses, consulting fees and the cost of facilities, computer and support services used in service technology development. The Company also expenses costs relating to developing modifications and minor enhancements of its existing technology and services.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Research and Development
Software development costs are accounted for in accordance with either ASC 985-20, “Software - Costs of Software to be Sold, Leased or Marketed,” or ASC 350-40, “Internal-Use Software.” Costs associated with the planning and designing phase of software development are classified as research and development costs and are expensed as incurred. The amounts capitalized include external direct costs of services used in developing internal-use software, and employee compensation and related expenses of personnel directly associated with the development activities. Once technological feasibility has been determined, a portion of the costs incurred in development, including coding, testing and quality assurance, are capitalized until available for general release to clients.
Amortization is calculated on a solution-by-solution basis and is recognized over the estimated economic life of the software, typically ranging two to three years. Amortization begins when the software is substantially completed for its intended use. Costs incurred during the preliminary and post-implementation stages are expensed as incurred. The amounts capitalized include external direct costs of services used in developing internal-use software, employee compensation and related expenses of personnel directly associated with the development activities. Software development costs are evaluated for recoverability whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Unrecoverable costs are reviewed annually and recognized in the period they become unrecoverable, as needed, and are recorded in the Consolidated Statements of Operations as depreciation and amortization expense.
The unamortized software development costs and amortization expense were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Unamortized software development costs | | $ | 30,877 | | | $ | 33,152 | | | $ | 28,512 | |
| Software development amortization expense | | $ | 18,211 | | | $ | 15,412 | | | $ | 10,843 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Unamortized software development costs | $ | 19,417 |
| | $ | 6,071 |
| | $ | 6,106 |
|
| Software development amortization expense | $ | 2,235 |
| | $ | 1,951 |
| | $ | 837 |
|
Concentration of Credit Risk
The Company’s financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents marketable securities and accounts receivable. The Company maintains its cash and cash equivalents at several major financial institutions. The Company has not experienced any realized losses in such accounts and believes it is not exposed to any significant credit risk related to cash, cash equivalents and securities. The Company’s cash equivalents and short‑term marketable securities consist primarily of money market funds, certificates of deposit, commercial paper, and municipal and corporate bonds. The Company believes that concentration of credit risk with respect to accounts receivable is limited because of the creditworthiness of the Company’sits major customers.
AT&T and Verizon Wireless in the aggregateThe Company’s top five customers accounted for 62%73.4%, 71%68.2% and 67%68.0% of net revenues for 2016, 2015the years ended December 31, 2022, 2021 and 2014,2020, respectively. AT&T andContracts with these customers typically run for three to five years. Of these customers, Verizon accounted for 64%more than 10% of the Company’s revenues in 2022, 2021, and 57% of accounts receivable at December 31, 2016 and 2015, respectively. The loss of either AT&T or Verizon as a customer would have a material negative impact on the Company. The Company believes that if either AT&T or Verizon terminated their relationships with Synchronoss, they would encounter substantial costs in replacing Synchronoss’ solutions.2020.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with aan original maturity of three months or less at the date of acquisition to be cash equivalents.
Restricted CashAccounts Receivable
Accounts receivable include current notes, amounts billed to customers, claims, and unbilled revenue, which consists of amounts recognized as sales but not yet billed. Substantially all amounts of unbilled receivables are expected to be billed and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
collected in the subsequent year. The Company had unbilled receivable balances of $0.8 million and $4.0 million as of December 31, 2022 and 2021, respectively.
Allowance for Credit Losses
The restricted cash balanceCompany is held in escrowexposed to cover certaincredit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions that existed at the closingand a review of the carrier activation business divestiture.current status of customers' trade accounts receivables. Customers are pooled based on sharing specific risk factors, including geographic location. Due to the short-term nature of such receivables, the estimated accounts receivable that may not be collected is based on aging of the accounts receivable balances.
Customers are assessed for credit worthiness upfront through a credit review, which includes assessment based on our analysis of their financial statements when a credit rating is not available. The escrow funds willCompany evaluates contract terms and conditions, country and political risk, and may require prepayment to mitigate risk of loss. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company monitors changes to the receivables balance on a timely basis, and balances are written off as they are determined to be released uponuncollectible after all collection efforts have been exhausted. Estimates of potential credit losses are used to determine the assigned contracts meeting certain minimum revenue thresholds.allowance; they are based on assessment of anticipated payment and all other historical, current and future information that is reasonably available.
Fair Value of Financial Instruments and Liabilities
The Company includes disclosures of fair value information about financial instruments and liabilities, whether or not recognized on the balance sheet,Consolidated Balance Sheets, for which it is practicable to estimate that value. Due to their short‑termshort-term nature, the carrying amounts reported in the financial statements approximate the fair value for cash and cash equivalents, marketable securities, accounts receivable and accounts payable.
Marketable Securities
Marketable securities consist of fixed income investments with a maturity of greater than three months and enhanced money market funds. These investments are classified as available‑for‑sale and are reported at fair value on the Company’s balance sheet. The Company classifies its securities with maturity dates of 12 months or more as long term. Unrealized holding gains and losses are reported within accumulated other comprehensive loss as a separate component of stockholders’ equity. If a decline in the fair value of a marketable security below the Company’s cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write‑down is included in earnings as an impairment charge. The Company has recorded temporary changes in fair value of the marketable securities but has not recorded other‑than‑temporary charges for the periods presented herein.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due to the Company from normal business activities. The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. The Company estimates uncollectible amounts based upon historical bad debts, current customer receivable balances, the age of customer receivable balances, the customer’s financial condition and current economic trends.
Property and Equipment
Property and equipment and leasehold improvements are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight‑linestraight-line method over the estimated useful lives of the assets, which range from 3 to 5 years, or the lesser of the related initial term of the lease or useful life for leasehold improvements. Amortization of property and equipment recorded under a capital lease is included with depreciation expense. Expenditures for routine maintenance and repairs are charged against operations. Majoroperations, while major replacements, improvements and additions are capitalized.
Noncontrolling InterestInterests and Mandatorily Redeemable Financial Instruments
Noncontrolling interests ("NCI"(“NCI”) are evaluated by the Company and are shown as either a liability, temporary equity (shown between liabilities and equity) or as permanent equity depending on the nature of the redeemable features at amounts based on formulas specific to each entity. Generally, mandatorily redeemable NCI'sNCIs are classified as liabilities and non-mandatorily redeemable NCI'sNCIs are classified outside of stockholders'stockholders’ equity in the consolidated balance sheetsConsolidated Balance Sheets as temporary equity under the caption, redeemable noncontrolling interests, and are measured at their redemption values at the end of each period. If the redemption value is greater than the carrying value, an adjustment is recorded in retained earnings to record the NCI at its redemption value. Redeemable NCI’sNCIs that are mandatorily redeemable are classified as a liability in the consolidated balance sheetsConsolidated Balance Sheets under either other current liabilities or other long-term liabilities, depending on the remaining duration until settlement, and are measured at the amount of cash that would be paid if settlement occurred at the balance sheet date with any change from the prior period recognized as interest expense.
If the noncontrolling interest is not currently redeemable yet probable of becoming redeemable, the Company is required to either (1) accrete changes in the redemption value over the period from the date of issuance to the earliest redemption date of the instrument using an appropriate methodology, usually the interest method, or (2) recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the redemption value at the end of each reporting period. The Company has elected to recognize changes in the redemption value immediately as they occur and adjust
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
the carrying value of the noncontrolling interest to the greater of the estimated redemption value, which approximates fair value, at the end of each reporting period or the initial carrying amount.
Net income attributable to NCI’sNCIs reflects the portion of the net income (loss) of consolidated entities applicable to the NCI stockholders in the accompanying consolidated statementsConsolidated Statements of income.Operations. The net income attributable to NCI is classified in the consolidated statementsConsolidated Statements of incomeOperations as part of consolidated net income and deducted from total consolidated net income to arrive at the net income attributable to the Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Business Combinations
The Company accounts for business combinations in accordance with the acquisition method. The acquisition method of accounting requires that assets acquired, liabilities assumed and any noncontrolling interest in the aquiree (if any) be recorded at their fair values on the date of a business acquisition. The Company’s consolidated financial statements and results of operations reflect an acquired business from the completion date of an acquisition.
The judgments that the Company makes in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income in periods following a business combination. The Company generally uses either the income, cost or market approach to aid in its conclusions of such fair values and asset lives. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its replacement or reproduction cost. The market approach estimates value based on what other participants in the market have paid for reasonably similar assets. Although each valuation approach is considered in valuing the assets acquired, the approach ultimately selected is based on the characteristics of the asset and the availability of information.
The Company records contingent consideration resulting from a business combination at its fair value on the acquisition date. Each reporting period thereafter, the Company revalues these obligations and records increases or decreases in their fair value as an adjustment to net change in contingent consideration obligation within the consolidated statement of income. Changes in the fair value of the contingent consideration obligation can result from updates in the achievement of financial targets and changes to the weighted probability of achieving those future financial targets. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, any change in the assumptions described above, could have a material impact on the amount of the net change in contingent consideration obligation that the Company records in any given period.
Discontinued Operations
The Company generally classifies a disposal transaction as discontinued operation in the consolidated financial statements when it qualifies as a component of the Company, meets the held for sale criteria, is disposed of by sale, or is disposed of other than by sale and it represents a strategic shift that has a major effect on the Company's operations and financial results.
Investments in Affiliates and Other Entities
In the normal course of business, Synchronoss enters into various types of investment arrangements, each having unique terms and conditions. These investments may include equity interests held by Synchronoss in business entities, including general or limited partnerships, contractual joint ventures, or other forms of equity participation. Synchronoss determines whether such investments involve a VIEvariable interest entity (“VIE”) based on the characteristics of the subject entity. If the entity is determined to be a VIE, then management determines if Synchronoss is the primary beneficiary of the entity and whether or not consolidation of the VIE is required. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct the activities of a VIE that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE, in either case that could potentially be significant to the VIE. When Synchronoss is deemed to be the primary beneficiary, the VIE is consolidated and the other party’s equity interest in the VIE is accounted for as a noncontrolling interest.
The Company generally accounts for investments it makes in VIEs in which it has determined that it does not have a controlling financial interest but has significant influence over and holds at least a 20% ownership interest using the equity method. Any such investment not meeting the parameters to be accounted under the equity method would be accounted for using the cost method unless the investment had a readily determinable fair value, at which it would then be reported.The Company utilizes a 1 month reporting lag in recording equity income from equity method investments.reported.
If an entity fails to meet the characteristics of a VIE, the Company then evaluates such entity under the voting model. Under the voting model, the Company consolidates the entity if they determine that they, directly or indirectly, have greater than 50% of the voting shares, and determine that other equity holders do not have substantive participating rights.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of assets acquired, including other definite‑liveddefinite-lived intangible assets. Goodwill is not amortized, but reviewed for impairment annually in the fourth quarter or when an interim triggering event has occurred indicating potential impairment. The Company has concluded that it has one operating segment and one reportable segment because the aggregation criteria and the quantitative threshold test was met. The Company tests for goodwill impairment on each of its reporting units, which is at the operating segment or one level below the operating segment.
During the Company’s qualitative assessment, the Company makes significant estimates, assumptions, and judgments, around the financial performance of the Company, changes in share price, and forecasts of earnings, working capital requirements, and cash flows. The Company considers each reporting unit's historical results and operating trends as well as any strategic difference from the Company’s historical results when determining these assumptions.
The Company can opt to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or upon the occurrenceCompany can directly perform the quantitative impairment test. If the Company determines that the fair value of events or changes in circumstances that woulda reporting unit is more likely than not reduceto be less than its carrying amount, a quantitative impairment test is performed.
Fair value estimates used in the quantitative impairment test are calculated using a combination of the income and market approaches. The income approach is based on the present value of future cash flows of each reporting unit, while the market approach is based on certain multiples of selected guideline public companies or selected guideline transactions. The approaches incorporate a number of market participant assumptions including future growth rates, discount rates, income tax rates and market activity in assessing fair value and are reporting unit specific. If the carrying amount exceeds the reporting unit's fair value, the Company recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The fair value measurement associated with the quantitative goodwill impairment test is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value goodwill could significantly increase or decrease the fair value estimates used for impairment assessments.
In order to assess the reasonableness of the estimated fair value of the Company’s reporting unit, the Company compares the aggregate reporting unit fair value to the Company’s market capitalization on an overall basis and calculates an implied control premium (the excess of the sum of the reporting units’ fair value over the Company’s market capitalization on an overall basis). The Company evaluates the control premium by comparing it to observable control premiums from recent comparable transactions. If the implied control premium is determined to not be reasonable in light of these recent transactions, the Company re-evaluates its reporting unit fair values, which may result in an adjustment to the discount rate and/or other assumptions.
This re-evaluation could result in a change to the estimated fair value of the reporting unit. If the fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired.
If the fair value of the reporting unit belowis less than its carrying amount. There were noamount, goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment charges recognized during the years ended December 31, 2016, 2015 and 2014.loss.
Impairment of Long‑LivedLong-Lived Assets
A review of long‑livedlong-lived assets for impairment is performed when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If an indication of impairment is present, the Company compares the estimated undiscounted future cash flows to be generated by the asset to the asset’s carrying amount. If the undiscounted future cash flows are less than the carrying amount of the asset, the Company records an impairment loss equal to the amount by which the asset’s carrying amount exceeds its fair value. The fair value is determined based on valuation techniques such as a comparison to fair values of similar assets or using a discounted cash flow analysis. There were no
This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value long lived assets could significantly increase or decrease the fair value estimates used for impairment charges recognized during the years ended December 31, 2016, 2015 and 2014.assessments.
Long lived assets that do not have indefinite lives are amortized/depreciated over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company reevaluates the useful life determinations each year to determine whether events and circumstances warrant a revision to the remaining useful lives.
Leases
The Company adopted Accounting Standards Codification Topic 842, Leases (ASC 842) on January 1, 2019. ASC 842 applies to a number of arrangements to which the Company is party whereby the Company acts as a lessee.
Whenever the Company enters into a new arrangement, it must determine, at the inception date, whether the arrangement contains a lease. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified fixed asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset.
If a lease exists, the Company must then determine the separate lease and non-lease components of the arrangement. Each right to use an underlying asset conveyed by a lease arrangement should generally be considered a separate lease component if it both: (i) can benefit the Company without depending on other resources not readily available to the Company and (ii) does not significantly affect and is not significantly affected by other rights of use conveyed by the lease. Aspects of a lease arrangement that transfer other goods or services to the Company but do not meet the definition of lease components are considered non-lease components. The consideration owed by the Company pursuant to a lease arrangement is generally
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
allocated to each lease and non-lease component for accounting purposes. However, the Company has elected to not separate lease and non-lease components. Each lease component is accounted for separately from other lease components, but together with the associated non-lease components.
For each lease, the Company must then determine:
•The lease term - The lease term is the period of the lease not cancellable by the Company, together with periods covered by: (i) renewal options the Company is reasonably certain to exercise or that are controlled by the lessor and (ii) termination options the Company is reasonably certain not to exercise.
•The present value of lease payments is calculated based on:
–Lease payments - Lease payments include certain fixed and variable payments, less lease incentives, together with amounts probable of being owed by the Company under residual value guarantees and, if reasonably certain of being paid, the cost of certain renewal options and early termination penalties set forth in the lease arrangement. Lease payments exclude consideration that is: (i) not related to the transfer of goods and services to the Company and (ii) allocated to the non-lease components in a lease arrangement, except for the classes of assets where the Company has elected to not separate lease and non-lease components.
–Discount rate - The discount rate must be determined based on information available to the Company upon the commencement of a lease. Lessees are required to use the rate implicit in the lease whenever such rate is readily available; however, as the implicit rate in the Company's leases is generally not readily determinable, the Company generally uses the hypothetical incremental borrowing rate it would have to pay to borrow an amount equal to the lease payments, on a collateralized basis, over a timeframe similar to the lease term.
•Lease classification - In making the determination of whether a lease is an operating lease or a finance lease, the Company considers the lease term in relation to the economic life of the leased asset, the present value of lease payments in relation to the fair value of the leased asset and certain other factors, including the lessee's and lessor's rights, obligations and economic incentives over the term of the lease.
Generally, upon the commencement of a lease, the Company will record a lease liability and a right-of-use (ROU) asset. However, the Company has elected, for certain classes of underlying assets with initial lease terms of twelve months or less (known as short-term leases), to not recognize a lease liability or ROU asset. Lease liabilities are initially recorded at lease commencement as the present value of future lease payments. ROU assets are initially recorded at lease commencement as the initial amount of the lease liability, together with the following, if applicable: (i) initial direct costs and (ii) lease payments made, net of lease incentives received, prior to lease commencement.
Over the lease term, the Company generally increases its lease liabilities using the effective interest method and decreases its lease liabilities for lease payments made. The Company generally amortizes its ROU assets over the shorter of the estimated useful life or the lease term and assesses its ROU assets for impairment, similar to other long-lived assets.
For finance leases, amortization expense and interest expense are recognized separately in the Consolidated Statements of Operations, with amortization expense generally recorded on a straight-line basis and interest expense recorded using the effective interest method. For operating leases, a single lease cost is generally recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term. Lease costs for short-term leases not recognized in the Consolidated Balance Sheets are recognized in the Consolidated Statements of Operations and are expensed as incurred. Variable lease costs not initially included in the lease liability and ROU asset impairment charges are expensed as incurred.
Income Taxes
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses. The CARES Act amends the Net Operating
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Loss provisions of the Tax Cuts and Jobs Act, allowing for the carryback of losses arising in tax years 2018, 2019 and 2020, to each of the five taxable years preceding the taxable year of loss.
Since the Company conductswe conduct operations on a global basis, itsour effective tax rate has and will depend upon the geographic distribution of its pre‑taxour pre-tax earnings among locations with varying tax rates. The Company accountsWe account for the effects of income taxes that result from itsour activities during the current and preceding years. Under this method, deferred income tax liabilities and assets are based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse or be utilized. The realization of deferred tax assets is contingent upon the generation of future taxable income. A valuation allowance is recorded if it is “more likely than not” that a portion or all of a deferred tax asset will not be realized.
In evaluating the Company’sour ability to recover theirour deferred tax assets within the jurisdiction from which they arise, the Company considerswe consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company beginswe begin with historical results adjusted for the results of discontinued operations and incorporatesincorporate assumptions aboutincluding the amount of future state, federal and foreign pretax operating income, adjusted for items that do not have tax consequences. Thethe reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income require significant judgment and are consistent with the plans and estimates the Company iswe are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income (loss).
The Company recognizesWe recognize a tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured by determining the amount that has a greater than 50 percent likelihood of being realized upon the settlement of the position. Components of the reserve are classified as a current or a long‑termlong-term liability in the consolidated balance sheetsConsolidated Balance Sheets based on when the Company expectswe expect each of the items to be settled. The Company recordsWe record interest and penalties accrued in relation to uncertain tax benefits as a component of interest expense. The Company expects that the amount of unrecognized tax benefits will change during 2017, however, the Company does not expect the change to
While we believe we have a significant impact on its results of operations or financial position.
While the Company believes it has identified all reasonably identifiable exposures and that the reserve that the Company haswe have established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved. It is also possible that changes in facts and circumstances
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
could cause the Companyus to either materially increase or reduce the carrying amount of itsour tax reserves. In general, tax returns for the year 2012year 2018 and thereafter are subject to future examination by tax authorities. Additionally, to the extent we utilize our NOL carryforwards in the future, the tax years in which the attribute was generated may still be adjusted upon examination by the tax authorities in the future period when the attribute is utilized.
The Company’sOur policy has been to leave itsour cumulative unremitted foreign earnings invested indefinitely outside the United States, and the Company intendswe intend to continue this policy. As such,Although distributions to the U.S. are generally not subject to U.S. federal taxes, have not been provided on anythe Company continues to assert permanent reinvestment of the remaining accumulated foreign unremitted earnings. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts. If the cumulative unremitted foreign earnings exceed the amount the Company intends to reinvest in foreign countries in the future, the Company would provide for taxes on such excess amount.
Foreign Currency
The functional currency of non-U.S. entities is translated into U.S. dollars for balance sheet accounts using the month end rates in effect as of the balance sheet date and average exchange rate for revenue and expense accounts for each respective period. The translation adjustments are deferred as a separate component of stockholders’ equity within accumulated other comprehensive income.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Gains or losses resulting from transactions denominated in foreign currencies are included in other income or expense, within the consolidated statementsConsolidated Statements of income.Operations and were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Net gain (loss) on foreign currency translations | | $ | 2,702 | | | $ | (5,810) | | | $ | 4,234 | |
Comprehensive Income (Loss)
Reporting on comprehensive income requires components of other comprehensive income, including unrealized gains or losses on available‑for‑saleavailable-for-sale securities, to be included as part of total comprehensive income. Comprehensive income is comprised of net income, translation adjustments and unrealized gains and losses on available‑for‑saleavailable-for-sale securities. The components of comprehensive income are included in the statementsConsolidated Statements of comprehensive income.Comprehensive Income (Loss).
Basic and Diluted Net Income Attributable to Common Stockholders per Common Share
Basic earnings per shareEPS is calculated by usingcomputed based upon the weighted-averageweighted average number of common shares outstanding duringfor the period,year, excluding amounts associated with restricted shares.
The diluted earnings per share calculationDiluted EPS is computed based onupon the weighted-averageweighted average number of common shares outstanding for the year plus the potential dilutive effect of common stock outstanding adjustedequivalents using the treasury stock method and the average market price of the Company’s common stock for the number of additional shares that would have been outstanding had all potentiallyyear. The potential dilutive common shares been issued.
Potentially dilutive shareseffect of common stock includeincludes stock options, convertible debt and unvested restricted stock. The dilutive effects of stock options and restricted stock awards are based on the treasury stock method. The dilutive effect of the assumed conversion of convertible debt is determined using the if-converted method. The after-tax effect of interest expense related to the convertible securities is added back to net income, and the convertible debt is assumed to have been converted into common shares at the beginning of the period.
Stock‑BasedThe Company includes participating securities (Redeemable Convertible Preferred Stock - Participation with Dividends on Common Stock that contain preferred dividend) in the computation of EPS pursuant to the two-class method. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
Stock-Based Compensation
As of December 31, 2022, the Company maintains three stock-based compensation plans.
The Company utilizes the Black‑ScholesBlack-Scholes pricing model to determine the fair value of stock options on the dates of grant. Restricted stock awards are measured based on the fair market values of the underlying stock on the dates of grant. The Company recognizes stock‑basedstock-based compensation over the requisite service period with an offsetting credit to additional paid‑inpaid-in capital.
For the Company’s performance restricted stock awards and units, the Company estimates the number of shares the recipient is to receive by applying a probability of achieving the performance goals. The actual number of shares the recipient receives is determined at the end of the performance period based on the results achieved versus goals based on the performance targets, such as revenues and EBITDA. Once the number of awards is determined, theearnings before interest, tax, depreciation and amortization (“EBITDA”) after certain adjustments, and Total Shareholder Return (TSR). The compensation cost is fixed and continues to be recognized using straight line recognitionmethod over the requisite service period for each vesting tranche. Performance based stock awards are measured at the closing stock price on the grant date and are recognized straight line over the requisite service period. Performance based cash units are measured at the closing stock price at the reporting period end date and are recognized straight line over the requisite service period.
Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on historical information of the Company'sCompany’s stock. The average expected life was determined using historical stock option exercise activity. The risk‑free interest rate is based on U.S. Treasury zero‑coupon issues with a remaining
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
determined using historical stock option exercise activity. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The Company has never declared or paid cash dividends on the common or preferred equity and does not anticipate paying any cash dividends on the common equity in the foreseeable future. Forfeitures are accounted for as they occur.
Recently Issued Accounting Standards
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles-Goodwill and Other, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the revised test, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for any interim or annual impairment tests for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which amends the guidance in ASC 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, which amends the consolidation guidance in ASU 2015-02 regarding the treatment of indirect interests held through related parties that are under common control. ASU 2016-17 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize at the transaction date the income tax effects for intra-entity transfers of assets other than inventory. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement 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 the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The ASU is effective for public companies in annual periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted beginning after December 15, 2018 and interim periods within those years. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under ASU 2016-02, lessees will be required to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting companies for interim and
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its consolidated financial statements and disclosures.
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 non-cash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications. Finally, issued in December 2016, ASU 2016-20 makes minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The new standards are effective for public reporting companies for interim and annual periods beginning after December 15, 2017. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company has elected to use the modified retrospective transition method, with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).
The Company is in the process of completing an initial assessment and expect changes to current accounting policy in the following areas:
For certain software license arrangements, the Company currently uses a ratable, or over time, revenue recognition method for software licensing arrangements where vendor specific objective evidence (VSOE) of the maintenance portion of the arrangement does not exist. Under the new standard, the Company expects the timing of revenue recognition to be accelerated because it anticipates that the license revenue portion will be recognized at a point in time upon software license delivery, consistent with its current accounting policy for software arrangements where the Company can establish VSOE.
Professional services in certain software and in other consulting services arrangements are recognized over time under a proportional performance method. Under the new standard, professional services must meet one of three defined criteria for professional services to be recognized over time. The three criteria are:
| |
◦ | The customer simultaneously receives and consumes the benefits as the Company performs, |
| |
◦ | The customer controls the asset as the Company creates or enhances it, |
| |
◦ | or the Company’s performance does not create an asset for which the entity has an alternative use, and there is a right to payment for performance to date. |
Where contract terms do not qualify for one of the over time criteria, the Company expects that the timing of revenue recognition for professional services in these contracts would be delayed and recognized at a point in time.
Certain implementation costs and other fulfillment costs, such as direct labor for contract set-up activities, that were previously expensed as incurred will be capitalized and amortized over the contract term and anticipated renewal periods. Capitalizing and amortizing these costs would have these costs recognized over a longer time period.
The Company's contracts may contain customer options for additional goods and services at stated prices, which may be material rights under the new standards. A material right exists if a contract option provides the customer with a good or service at a discounted price that a similar customer would not otherwise be offered. Under the new standards, material rights are treated as separate performance obligations and are allocated an estimated value. Where contract terms are determined to provide material rights, the Company expects that some portion of the contract price will be allocated to these material rights and recognized in later periods.
At this time, the Company is not able to reasonably estimate the impact that adoption is expected to have.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
In the Company's implementation process, significant activities that are in process are the calculation of the transition adjustment, drafting and approval of new accounting policies, design and implementation of new processes and systems to accommodate the new policies and to compile the information for the enhanced disclosures under the new standards. In addition, internal controls around the new policies, processes and systems need to be designed and implemented.
Impact of New Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. Adoption of this guidance, effective December 31, 2016, had no impact on the consolidated financial statements or disclosures.
In March, 2016, the FASB released 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. The Company 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, the Company recorded a cumulative-effect adjustment of $1.0 million to adjust 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. The Company 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 $5.2 million and $15.1 million for the years ended December 31, 2015 and 2014, respectively.
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 $17.0 million and $1.2 million for the years ended December 31, 2015 and 2014, respectively.
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 increased the effective tax rate for the three months and year ended December 31, 2016 by less than 1%. The ASU requires that this change be adopted prospectively. The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share for the three months ended December 31, 2016. This increased the diluted weighted average common shares outstanding by 97,800 shares for the three months ended December 31, 2016 and decreased the diluted weighted average common shares outstanding by 66,363 for the year ended December 31, 2016.
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 retained earnings of $0.5 million.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Adoption of the new standard impacted 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 |
|
The Company adopted ASU 2015-03, Interest- Imputation of Interest (subtopic 835-30); Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements, during the first quarter of 2016, concurrently. The adoption of these ASUs required the Company to reclassify its deferred financing costs associated with its Convertible Senior Notes from other assets to long-term debt on a retrospective basis. The Company's consolidated balance sheets included deferred financing costs of $3.7 million and $5.1 million as of December 31, 2016 and December 31, 2015, respectively, which were reclassified from other assets to long-term debt. The debt issuance costs associated with the Company's 2013 Credit Facility and Amended Credit Facility continue to be presented in other assets on the consolidated balance sheets.
Segment and Geographic Information
The Company’s chief operating decision‑maker is the PrincipalChief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources. Accordingly, the Company has determined that it currently operates in one business segment: providing cloud solutions and software‑based activation for connected devices globally.Officer. The Company is not organized by marketoperates and is managed and operated as one business. A single management team reports to the chief operating decision maker who comprehensively manages the entire business. The Company does not operate any separate lines of business or separate business entities with respect to its services. Accordingly, the Company does not accumulate a complete set of discrete financial information with respect to separate service lines and does not have separately reportable segments. Although the Company operatesoffers various products in North America, Europe and Asia‑Pacific awith the majority of the Company’s revenue and long lived assets are in the U.S. The Company assessed its current structure and operations and determined it has one reportable segment as the business is managed and assessed by the chief operating decision-maker based on the consolidated results of the organization.
Revenues by geography are based on the billing addresses of the Company’s customers. The following tables set forth revenues and property and equipment, net by geographic area:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Revenues: | | | | | | |
| Domestic | | $ | 200,086 | | | $ | 225,433 | | | $ | 228,639 | |
| Foreign | | 52,542 | | | 55,182 | | | 63,031 | |
| Total | | $ | 252,628 | | | $ | 280,615 | | | $ | 291,670 | |
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 |
| Property and equipment, net: | | | | |
| Domestic | | $ | 2,997 | | | $ | 4,115 | |
| Foreign | | 1,585 | | | 2,864 | |
| Total PPE, net | | $ | 4,582 | | | $ | 6,979 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Revenues | | | | | |
| Domestic | $ | 411,867 |
| | $ | 375,254 |
| | $ | 255,222 |
|
| Foreign | 64,883 |
| | 52,863 |
| | 52,079 |
|
| Total | $ | 476,750 |
| | $ | 428,117 |
| | $ | 307,301 |
|
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Property and equipment, net: | | | |
| Domestic | $ | 146,772 |
| | $ | 156,961 |
|
| Foreign | 8,827 |
| | 11,319 |
|
| Total | $ | 155,599 |
| | $ | 168,280 |
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
3. AcquisitionRevenue
Disaggregation of revenue
The Company disaggregates revenue from contracts with customers into the nature of the products and Divestiture
Acquisition
Openwave Messaging, Inc.services and geographical regions. The Company’s geographic regions are the Americas, Europe, the Middle East and Africa (“Openwave”EMEA”)
On March 1, 2016, the Company acquired all outstanding shares of Openwave for $124.5 million, net of working capital adjustments, and liabilities assumed, comprised of $102.5 million paid in cash and $22.0 million paid in sharesAsia Pacific (“APAC”). The majority of the Company’s common stock, based uponrevenue is from the average market value of the common stock for the ten trading days prior to the acquisition date.TMT sector.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, 2022 | | Twelve Months Ended December 31, 2021 |
| Cloud | | Digital | | Messaging | | Total | | Cloud | | Digital | | Messaging | | Total |
| Geography: | | | | | | | | | | | | | | | |
| Americas | $ | 155,296 | | | $ | 35,535 | | | $ | 9,255 | | | $ | 200,086 | | | $ | 158,283 | | | $ | 47,108 | | | $ | 20,042 | | | $ | 225,433 | |
| APAC | 1,469 | | | 3,308 | | | 29,549 | | | 34,326 | | | 486 | | | 4,064 | | | 28,022 | | | 32,572 | |
| EMEA | 6,566 | | | 1,495 | | | 10,155 | | | 18,216 | | | 7,213 | | | 3,284 | | | 12,113 | | | 22,610 | |
| Total | $ | 163,331 | | | $ | 40,338 | | | $ | 48,959 | | | $ | 252,628 | | | $ | 165,982 | | | $ | 54,456 | | | $ | 60,177 | | | $ | 280,615 | |
| | | | | | | | | | | | | | | |
| Service Line: | | | | | | | | | | | | | | | |
| Professional Services | $ | 14,278 | | | $ | 4,070 | | | $ | 10,080 | | | $ | 28,428 | | | $ | 15,131 | | | $ | 9,244 | | | $ | 12,477 | | | $ | 36,852 | |
| Transaction Services | 858 | | | 6,018 | | | 56 | | | 6,932 | | | 5,852 | | | 6,721 | | | 12 | | | 12,585 | |
| Subscription Services | 148,195 | | | 25,707 | | | 32,012 | | | 205,914 | | | 142,636 | | | 35,770 | | | 44,765 | | | 223,171 | |
| License | — | | | 4,543 | | | 6,811 | | | 11,354 | | | 2,363 | | | 2,721 | | | 2,923 | | | 8,007 | |
| Total | $ | 163,331 | | | $ | 40,338 | | | $ | 48,959 | | | $ | 252,628 | | | $ | 165,982 | | | $ | 54,456 | | | $ | 60,177 | | | $ | 280,615 | |
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
Trade Accounts Receivable and combined with Synchronoss’ current global footprint, Synchronoss will have increased direct access to subscribers around the world for the Synchronoss Personal Cloud™ platform and bolster the Company’s go-to-market efforts internationally.Contract balances
The Company determinedclassifies its right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the fair valuepassage of time is required before payment is due). For example, the Company recognizes a receivable for revenues related to its time and materials and transaction or volume-based contracts. The Company presents such receivables in Trade accounts receivable, net in its consolidated statements of financial position at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors.
A contract asset is a right to consideration that is conditional upon factors other than the passage of time. For example, the Company would record a contract asset if it records revenue on a professional services engagement but are not entitled to bill until the Company achieves specified milestones. Contract asset balance at December 31, 2022 is $15.5 million.
Amounts collected in advance of services being provided are accounted for as contract liabilities, which are presented as deferred revenue on the accompanying balance sheet and are realized with the associated revenue recognized under the contract. Nearly all of the Company's contract liabilities balance is related to services revenue, primarily subscription services contracts.
The Company’s contract assets and liabilities are reported in a net assets acquired as follows:position on a customer basis at the end of each reporting period.
|
| | | | | |
| | Purchase Price
Allocation | | |
| Cash | $ | 4,110 |
| | |
| Prepaid expenses and other assets | 3,145 |
| | |
| Property, Plant & Equipment | 2,882 | | |
| Long term assets | 1,986 |
| | |
| Intangible assets: | | | Wtd. Avg. |
| Tradename | 1,000 |
| | 1 year |
| Technology | 32,100 |
| | 7 years |
| Customer relationships | 29,000 |
| | 10 years |
| Goodwill | 91,732 |
| | |
| Total assets acquired | 165,955 |
| | |
| Accounts payable and accrued liabilities | 17,722 |
| | |
| Deferred revenues | 8,204 |
| | |
| Long term liabilities | 15,491 |
| | |
| Net assets acquired | $ | 124,538 |
| | |
The goodwill recorded in connection with this acquisition was based on operating synergies and other benefits expected to result from the combined operations and the assembled workforce acquired. The goodwill acquired is not deductible for tax purposes.
Acquisition‑Related Costs
Acquisition related costs recognized during the years ended December 31, 2016, 2015 and 2014 including transaction costs such as employee retention, legal, accounting, valuation and other professional services, were $11.8 million, $1.8 million, and $2.5 million, respectively.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Significant changes in the contract liabilities balance (current and noncurrent) during the period are as follows:
Divestitures | | | | | | |
| | Contract Liabilities1 |
| Balance - January 1, 2022 | | $ | 22,916 | |
| Revenue recognized in the period | | (253,822) | |
| Amounts billed but not recognized as revenue | | 245,089 | |
| | |
| | |
| Balance - December 31, 2022 | | $ | 14,183 | |
_____________________________
Mirapoint1 Comprised of deferred revenue.
OnRevenues recognized during the year ended December 29, 2016, we completed31, 2022 for performance obligations satisfied or partially satisfied in previous periods were immaterial.
Contract acquisition costs
In connection with the divestitureadoption of our Mirapoint activation businessTopic 606 and the related cost accounting guidance under Accounting Standards Codification (“ASC”) 340, the Company is required to an unrelated third partycapitalize certain contract acquisition costs consisting primarily of commissions and recordedbonuses paid when contracts are signed. For contracts that have a gainduration of $1.4 million onless than one year, the sale.
Sequential Technology International, LLC
OnCompany follows a Topic 606 practical expedient and expenses these costs over the estimated customer life, because it does not pay commissions upon renewals that are commensurate with the initial contract. During the year ended December 16, 2016, Synchronoss completed a divestiture of a portion of its carrier activation business (“BPO”) to a newly formed entity named Sequential Technology International, LLC (“STI”) for a total purchase price of $146 million. As part of the sales arrangement, Synchronoss will retain a 30% investment in STI. Sequential Technology International Holdings, LLC ("STIH") an unrelated third party that was formerly named Omniglobe International LLC, will own the remaining 70% of STI. STIH financed the purchase of these assets through cash of $18.1 million, a new term loan, and a related party subordinated seller's note receivable in31, 2022, the amount of $83amortization was immaterial and there was no impairment in relation to costs capitalized.
Contract Fulfillment Costs
Under ASC 340-40, the Company evaluates whether or not it should capitalize the costs of fulfilling a contract. Such costs would be capitalized when they are not within the scope of other standards and: (1) are directly related to a contract; (2) generate or enhance resources that will be used to satisfy performance obligations; and (3) are expected to be recovered. As of December 31, 2022 and 2021, the Company had $1.7 million issued by Synchronoss, whichand $1.5 million of capitalized contract fulfillment costs, respectively.
Transaction price allocated to the remaining performance obligations
Topic 606 requires that the Company disclose the aggregate amount of transaction price that is secured by STIH’s interest in STI. The related party note receivable earns interest at a rateallocated to performance obligations that have not yet been satisfied as of 12% per annum and matures on June 16, 2021.
December 31, 2022. The Company and STIH agreedhas elected not to disclose transaction price allocated to remaining performance obligations for:
1.Contracts with an original duration of one year or less, including contracts that can be terminated for convenience without a put and call option in regards tosubstantive penalty;
2.Contracts for which the Company's equity interest in STI. The Company will haverecognizes revenues based on the right to exerciseinvoice for services performed;
3.Variable consideration allocated entirely to a put option at any timewholly unsatisfied performance obligation or to sell it's interesta wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in STI, ataccordance with Topic 606 Section 10-25-14(b), for which the fair market value determined at the datecriteria in Topic 606 Section 10-32-40 have been met. This applies to a limited number of exercise. Additionally, STIH will have the right to exercise a call option at any time to purchase the interest in STI at the fair market value determined at the date of exercise.
The Company determined that the put and call options are embedded within the host contract and do not require bifurcation and separate accounting treatment. STI has been determined to be a VIE of whichsituations where the Company is not the primary beneficiary (See Note 5).dependent upon data from a third party or where fees are highly variable.
As partMany of the divestiture, Synchronoss entered into a three year transition services agreement (“TSA”) with STI to support various indirect activities such as customer software support, technical support services, maintenance and general & administrative support services and a term license for access to certain platforms, necessary to perform certain tasks, as partCompany’s performance obligations meet one or more of the exception handling process.
On December 22, 2016,these exemptions. Specifically, the Company entered into a non-exclusive perpetual license agreement with STIH,has excluded the following from the Company’s remaining performance obligations, all of which will be resolved in the amount of $9.2 million,period in which is included in net revenues in the statement of income,amounts are known:
•consideration for the use of the Company's Analytics software. The Company calculated the fair value of the license using a cost approach, which calculates the time and effort requiredfuture transactions, above any contractual minimums;
•consideration for success-based transactions contingent on third-party data;
•credits for failure to recreate the technology today. Inputs used to value the license are considered Level 3 inputs.
The following is a summary of the operating results of BPO which have been reflected within income from discontinued operations, net of tax:meet future service level requirements.
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Net revenues | $ | 145,613 |
| | $ | 150,714 |
| | $ | 150,013 |
|
| Costs and expenses: | | | | | |
| Cost of services | 96,737 |
| | 83,931 |
| | 82,028 |
|
| Selling, general and administrative | 2,615 |
| | 2,324 |
| | 2,146 |
|
| Total costs and expenses | 99,352 |
| | 86,255 |
| | 84,174 |
|
| Income from discontinued operations | 46,261 |
| | 64,459 |
| | 65,839 |
|
| Gain on sale of discontinued operations | 95,311 |
| | — |
| | — |
|
| Income from discontinued operations before taxes | 141,572 |
| | 64,459 |
| | 65,839 |
|
| Provision for income taxes | (67,039 | ) | | (24,192 | ) | | (24,921 | ) |
| Discontinued operations, net of taxes | $ | 74,533 |
| | $ | 40,267 |
| | $ | 40,918 |
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
As of December 31, 2022, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $110.9 million, of which approximately 93.28% is expected to be recognized as revenues within 2 years, and the remainder thereafter.
Estimates of revenue expected to be recognized in future periods also exclude unexercised customer options to purchase services that do not represent material rights to the customer. Customer options that do not represent a material right are only accounted for in accordance with Topic 606 when the customer exercises its option to purchase additional goods or services.
4. Allowance for Credit Losses
Effective January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” prospectively. ASU 2016-13 replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. The guidance requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due.
The financial results reflected above may not represent BPO's stand-alone operating results,accounts receivable balance on the Company’s consolidated balance sheet as the results reported within income from discontinued operations,of December 31, 2022 was $47.0 million, net of tax only include certain costs$0.4 million of allowances. Changes in the allowance were not material for the year ended December 31, 2022. The following table provides a roll-forward of the allowance for credit losses that are directly attributableis deducted from the amortized cost basis of accounts receivable to BPO and exclude certain overhead costs that were previously allocatedpresent the net amount expected to BPO for each period.be collected:
| | | | | | | | |
| | Allowance for credit losses |
| Balance at December 31, 2021 | | $ | 478 | |
| Current period change for expected credit losses | | (110) | |
| Balance at December 31, 2022 | | $ | 368 | |
4.
5. Fair Value Measurements
The Company classifies marketable securities as available‑for‑sale. TheIn accordance with accounting principles generally accepted in the United States, fair value hierarchy establishedis defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the guidance adopted by the Companymeasurement date. A three-level hierarchy prioritizes the inputs used in valuation techniques into three levelsto measure fair value as follows:
•Level 1—1 - Observable inputs—inputs - quoted prices in active markets for identical assets and liabilities;
•Level 2—2 - Observable inputs other than the quoted prices in active markets for identical assets and liabilities—liabilities includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and
•Level 3—3 - Unobservable inputs—inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following is a summary of assets, liabilities and redeemable noncontrolling interests and their related classifications under the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Total | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets | | | | | | | |
| Cash and cash equivalents | $ | 21,921 | | | $ | 21,921 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| Total assets | $ | 21,921 | | | $ | 21,921 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Temporary equity | | | | | | | |
Redeemable noncontrolling interests1 | $ | 12,500 | | | $ | — | | | $ | — | | | $ | 12,500 | |
| Total temporary equity | $ | 12,500 | | | $ | — | | | $ | — | | | $ | 12,500 | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Total | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets | | | | | | | |
| Cash and cash equivalents (A) | $ | 181,018 |
| | $ | 181,018 |
| | $ | — |
| | $ | — |
|
| Securities available-for-sale (B) | 15,480 |
| | — |
| | 15,480 |
| | — |
|
| Total assets | $ | 196,498 |
| | $ | 181,018 |
| | $ | 15,480 |
| | $ | — |
|
| Liabilities | |
| | |
| | |
| | |
|
| Contingent consideration obligation | $ | 11,860 |
| | $ | — |
| | $ | — |
| | $ | 11,860 |
|
| Total liabilities | $ | 11,860 |
|
| $ | — |
|
| $ | — |
|
| $ | 11,860 |
|
| Temporary Equity | |
| | |
| | |
| | |
|
| Redeemable noncontrolling interest (C) | $ | 49,856 |
| | $ | — |
| | $ | — |
| | $ | 49,856 |
|
| Total temporary equity | $ | 49,856 |
|
| $ | — |
|
| $ | — |
|
| $ | 49,856 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Total | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets | | | | | | | |
| Cash and cash equivalents | $ | 31,504 | | | $ | 31,504 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| Total assets | $ | 31,504 | | | $ | 31,504 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Temporary Equity | | | | | | | |
Redeemable noncontrolling interests1 | $ | 12,500 | | | $ | — | | | $ | — | | | $ | 12,500 | |
| Total temporary equity | $ | 12,500 | | | $ | — | | | $ | — | | | $ | 12,500 | |
_____________________________
|
| | | | | | | | | | | | | | | |
| | December 31, 2015 |
| | Total | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets | | | | | | | |
|
| Cash and cash equivalents (A) | $ | 147,634 |
| | $ | 147,634 |
| | $ | — |
| | $ | — |
|
| Securities available-for-sale (B) | 85,992 |
| | — |
| | 85,992 |
| | — |
|
| Total assets | $ | 233,626 |
| | $ | 147,634 |
| | $ | 85,992 |
| | $ | — |
|
| Liabilities | |
| | |
| | |
| | |
|
| Contingent consideration obligation | $ | 930 |
| | $ | — |
| | $ | — |
| | $ | 930 |
|
| Total liabilities | $ | 930 |
|
| $ | — |
|
| $ | — |
|
| $ | 930 |
|
| Temporary Equity | |
| | |
| | |
| | |
|
| Redeemable noncontrolling interest | $ | 61,452 |
| | $ | — |
| | $ | — |
| | $ | 61,452 |
|
| Total temporary equity | $ | 61,452 |
|
| $ | — |
|
| $ | — |
|
| $ | 61,452 |
|
| |
(A) | Cash and cash equivalents includes money market funds. |
| |
(B) | Securities available-for-sale include municipal bonds, commercial papers, certificates of deposit, enhanced income money market fund and corporate bonds which are classified as marketable securities. |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts1 Put arrangements held by the noncontrolling interests in tables in thousands, except for per share data or unless otherwise noted)
| |
(C) | As of December��31, 2016, the carrying amount of the redeemable noncontrolling interest was greater than the fair value and accordingly no adjustment to the carrying amount was recorded. |
The Company utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company's marketable securities investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No transfers of assets between Level 1, Level 2 and Level 3 of the fair value measurement hierarchy occurred during the year ended December 31, 2016.
Available-for-Sale Securities
At December 31, 2016 and December 31, 2015, the estimated fair value of investments classified as available for sale, are as follows:
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Available-for-sale securities: | | | | | | | |
| Certificates of deposit | $ | 450 |
| | $ | — |
| | $ | — |
| | $ | 450 |
|
| Municipal bonds | 15,063 |
| | 1 |
| | (34 | ) | | 15,030 |
|
| Total available-for-sale securities | $ | 15,513 |
|
| $ | 1 |
|
| $ | (34 | ) |
| $ | 15,480 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2015 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Available-for-sale securities: | | | | | | | |
| Certificates of deposit | $ | 2,329 |
| | $ | — |
| | $ | (5 | ) | | $ | 2,324 |
|
| Corporate bonds | 39,986 |
| | — |
| | (253 | ) | | 39,733 |
|
| Municipal bonds | 38,564 |
| | 11 |
| | (44 | ) | | 38,531 |
|
| Fixed Income Fund | 5,593 |
| | — |
| | (189 | ) | | 5,404 |
|
| Total available-for-sale securities | $ | 86,472 |
|
| $ | 11 |
|
| $ | (491 | ) |
| $ | 85,992 |
|
Unrealized gains and losses are reported as a component of accumulated other comprehensive loss in stockholders’ equity. There were no sales of marketable securities during the years ended December 31, 2016 and 2015. The cost of securities sold is based on the specific identification method. The Company evaluates investments with unrealized losses to determine if the losses are other than temporary. The Company has determined that the gross unrealized losses at December 31, 2016 and 2015 are temporary. In making this determination, the Company considered the financial condition, credit ratings and near‑term prospects of the issuers, the underlying collateral of the investments, and the magnitude of the losses as compared to the cost and the length of time the investments have been in an unrealized loss position. Additionally, while the Company classifies the securities as available for sale, the Company does not currently intend to sell such investments and it is more likely than not to recover the carrying value prior to being required to sell such investments.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2016, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Securities in unrealized loss position less than 12 months | | Securities in unrealized loss position greater than 12 months | | Total |
| | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value |
| Certificates of deposit | $ | — |
| | $ | 250 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 250 |
|
| Municipal bonds | (32 | ) | | 12,683 |
| | (2 | ) | | 914 |
| | (34 | ) | | 13,597 |
|
| | $ | (32 | ) |
| $ | 12,933 |
|
| $ | (2 | ) |
| $ | 914 |
|
| $ | (34 | ) |
| $ | 13,847 |
|
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2015, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 |
| | Securities in unrealized loss position less than 12 months | | Securities in unrealized loss position greater than 12 months | | Total |
| | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value |
| Certificates of deposit | $ | (5 | ) | | $ | 2,324 |
| | — |
| | $ | — |
| | $ | (5 | ) | | $ | 2,324 |
|
| Corporate bonds | (253 | ) | | 39,808 |
| | — |
| | — |
| | (253 | ) | | 39,808 |
|
| Municipal bonds | (43 | ) | | 20,630 |
| | (1 | ) | | 550 |
| | (44 | ) | | 21,180 |
|
| Fixed Income Fund | — |
| | — |
| | (189 | ) | | 5,404 |
| | (189 | ) | | 5,404 |
|
| | $ | (301 | ) |
| $ | 62,762 |
|
| $ | (190 | ) |
| $ | 5,954 |
|
| $ | (491 | ) | | $ | 68,716 |
|
Expected maturities of available-for-sale securities are as follows:
|
| | | | | | | |
| | December 31, 2016 |
| | Amortized Cost | | Fair Value |
| Due within one year | $ | 12,525 |
| | $ | 12,506 |
|
| Due after 1 year through 5 years | 2,988 |
| | 2,974 |
|
| Total available-for-sale securities | $ | 15,513 |
| | $ | 15,480 |
|
Contingent Consideration
The Company determined the fair value of the contingent consideration related to the acquisition of Razorsight using a real options approach which uses a risk-adjusted expected growth rate based on assessments of expected growth in revenue, adjusted by an appropriate factor. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The significant unobservable inputs used in the fair value measurementcertain of the Company’s contingent consideration obligation are the probabilities of achieving certain financial targets and contractual milestones. Significant changes in any of those probabilities in isolation may result in a higher (lower) fair value measurement. joint ventures.
No changes in valuation techniques occurred during the year ended December 31, 2016. During the year ended December 31, 2016, the Company recognized a $10.9 million increase of the contingent consideration obligation due to an increase in the probability of achieving the contractual milestones associated with the potential earn-out payment to the Razorsight shareholders.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The changes in fair value of the Company’s Level 3 contingent consideration obligation during the year ended December 31, 2016 were as follows:
|
| | | |
| Balance at December 31, 2015 | $ | 930 |
|
| Fair value adjustment to contingent consideration obligation included in net income | 10,930 |
|
| Balance at December 31, 2016 | $ | 11,860 |
|
Redeemable Noncontrolling Interests
The Company accounts for the redeemable noncontrolling interestinterests recorded at its acquisition date fair value as temporary equity, due toare put arrangements held by the redemption option existing outside the controlnoncontrolling interests in certain of the Company. The noncontrolling shareholders have the option, which is embedded in the noncontrolling interest, to require the Company to purchase the remaining noncontrolling share at a formula price designed to approximate fair value based on operating results of the entity.
Company’s joint ventures. The Company recognizes changes in the redemption value immediately as they occur and adjusts the carrying value of the noncontrolling interest to the greater of the estimated redemption value, which approximates fair value, at the end of each reporting period or the initial carrying amount. As of December 31, 2016, the carrying amount of the redeemable noncontrolling interest was greater than the fair value and accordingly no adjustment to the carrying value was recorded.
The fair value of the redeemable noncontrolling interestinterests was estimated by applying an income approach using a discounted cash flow analysis. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value the redeemable noncontrolling interestinterests could significantly increase or decrease the fair value estimates recorded in the consolidated balance sheets.Consolidated Balance Sheets.
The changes in fair value of the Company’s Level 3 redeemable noncontrolling interests during the year ended December 31, 20162022 were as follows:
| | | | | | | | |
| | Redeemable noncontrolling interests |
| Balance at December 31, 2021 | | $ | 12,500 | |
| Fair value adjustment | | (200) | |
| Net loss attributable to redeemable noncontrolling interests | | 200 | |
| Balance at December 31, 2022 | | $ | 12,500 | |
|
| | | |
| Balance at December 31, 2015 | $ | 61,452 |
|
| Fair value adjustment | — |
|
| Net loss attributable to redeemable noncontrolling interests | (11,596 | ) |
| Balance at December 31, 2016 | $ | 49,856 |
|
5. Investments
STI, LLC
The Company includes investments which are accounted for using the equity method, under the caption equity method investments on the Company's consolidated balance sheets. As of December 31, 2016, the Company's investments in equity interests was comprised of $45.9 million related to a 30% equity interest in STI. The Company utilizes a 1 month reporting lag in recording equity income from STI.
Zentry, LLC
During the year ended December 31, 2015, the Company formed a venture with MCI Communications and Verizon Patent and Licensing Inc. (collectively, “Verizon”), referred to as Zentry, LLC (“Zentry”) in which the Company holds a 67% interest.
The Company determined that Zentry was a voting interest entity, because the entity has sufficient equity at risk to enable it to finance its activities independently. As the Company holds a majority ownership in Zentry, the Company consolidates Zentry under the voting model.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
6. Investments in Affiliates and Related Transactions
SNCR,
Sequential Technology International, LLC
In connection with the divestiture of the exception handling business of the Company in 2017, Synchronoss entered into a three-year Cloud Telephony and Support services agreement (“CTS Agreement”) to grant Sequential Technology International, LLC (“STIN”) access to certain Synchronoss software and private branch exchange systems to facilitate exception handling operations required to support STIN customers.
The CTS agreement expired in the first quarter of 2020. At the time of the expiration, the Company entered into an Asset Purchase Agreement with STIN. As part of the agreement, the Company received $1.6 million in exchange for certain hardware and system assets for the cloud telephony and remaining support service business.
During the year endedsecond quarter of 2020, the Company entered into an agreement with STIN and AP Capital Holdings II, LLC (“APC”) to divest its remaining equity interest in STIN as well as settle its paid-in-kind purchase money note (“PIK note”) and certain amounts due as of December 31, 2015,2019 in consideration for a $9.0 million secured promissory note (the “Note”), which includes contingent consideration of up to $16.0 million. The Note has an 8% interest rate and a 3-year stated term. As part of the arrangement, APC acquired a majority stake of STIN. Additionally, in the event of a Sale of STIN by APC and STIN at a future date, the Company formed a venture with Goldman Sachs (“Goldman”), referred toshall receive 5% of such sale proceeds, after reducing the sale proceeds by any outstanding amounts of the above Note, including any earned contingent consideration. The Company determined the fair value of the Note as SNCR, LLC which was determinedof the transaction date to be approximately $4.8 million. The Company determined the fair value of the Note using a VIEdiscounted cash flow analysis, which discounts the expected future cash flows of the asset to determine its fair value. The fair value measurement is based on significant inputs not observable in whichthe market and thus represents a Level 3 measurement. The Note has been reflected in Loan Receivable on the Consolidated balance sheet. No gain or loss was recognized as a result of the transaction. As of December 31, 2022 the Company holds a 67% interest.reassessed the fair value of the note and there were no material changes.
The Company concluded thatIn connection with the entity does not have enough equity to finance its activities without additional subordinated financial support, which was provided byPIK note, the Company viarecorded a $20CECL adjustment of $0.8 million linewhich offset the current year accretion of credit. The Company consolidates the entity under the VIE model. The Company is the primary beneficiary and has the power to direct activities that most significantly impact the ventures’ economic performance. In particular, the Company directs the day to day operations, sales, marketing, distribution and R&D effortsinterest of SNCR, LLC.$0.8 million.
6.7. Property and Equipment
Property and equipment consist of the following:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Computer hardware | | $ | 116,569 | | | $ | 178,619 | |
| Computer software | | 26,173 | | | 52,061 | |
| | | | |
| Furniture and fixtures | | 4,106 | | | 5,613 | |
| Finance lease right-of-use assets | | 1,440 | | | 1,065 | |
| Leasehold improvements | | 14,547 | | | 18,369 | |
| Property and equipment, gross | | 162,835 | | | 255,727 | |
| Less: Accumulated depreciation | | (158,253) | | | (248,748) | |
| Property and equipment, net | | $ | 4,582 | | | $ | 6,979 | |
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Computer hardware | $ | 242,739 |
| | $ | 217,659 |
|
| Computer software | 48,040 |
| | 39,510 |
|
| Construction in-progress | 14,961 |
| | 4,299 |
|
| Furniture and fixtures | 5,981 |
| | 4,040 |
|
| Building | 8,808 |
| | 8,808 |
|
| Leasehold improvements | 15,576 |
| | 11,922 |
|
| | 336,105 |
| | 286,238 |
|
| Less: Accumulated depreciation | (180,506 | ) | | (117,958 | ) |
| | $ | 155,599 |
| | $ | 168,280 |
|
Depreciation expense was approximately $52.3$3.6 million, $43.5$6.5 million and $36.1$15.6 million for 2016, 2015,the year ended December 31, 2022, 2021, and 2014,2020, respectively. Amortization of property and equipment recorded under capital leases are included within depreciation expense.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
8. Goodwill and Intangibles
Goodwill
The Company records goodwill which represents the excess of the purchase price over the fair value of assets acquired, including other definite-lived intangible assets. Goodwill is reviewed annually for impairment or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
The following table shows the adjustments to goodwill during 20162022 and 2015:2021:
| | | | | | | | |
| | Goodwill |
| Balance at December 31, 2020 | | $ | 232,771 | |
| | |
| | |
| | |
| | |
| Translation adjustments | | (8,194) | |
| Balance at December 31, 2021 | | $ | 224,577 | |
| | |
| | |
| Goodwill allocated to the sale of DXP Business | | (7,567) | |
| | |
| Translation adjustments | | (6,121) | |
| Balance at December 31, 2022 | | $ | 210,889 | |
|
| | | |
| Balance at December 31, 2014 | $ | 147,135 |
|
| Acquisitions | 84,636 |
|
| Reclassifications, adjustments and other | (30 | ) |
| Reclassified to assets of discontinued operations, non-current | (39,271 | ) |
| Translation adjustments | (10,470 | ) |
| Balance at December 31, 2015 | $ | 182,000 |
|
| Acquisition | 91,732 |
|
| Adjustment to amount reclassified to assets of discontinued operations, non-current | 2,466 |
|
| Reclassifications, adjustments and other | (3,033 | ) |
| Translation adjustments | (3,260 | ) |
| Balance at December 31, 2016 | $ | 269,905 |
|
When performing its annual impairment test, the Company compares the fair value of each reporting unit to its carrying amount with the fair values derived from the market approach and the income approach. Under the market approach, the Company estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit. The reclassification, adjustmentsCompany weights the fair value derived from the market approach depending on the level of comparability of these publicly-traded companies to the reporting unit. When market comparables are not meaningful or not available, the Company estimates the fair value of a reporting unit using only the income approach. Under the income approach, the Company estimates the fair value of a reporting unit based on the present value of estimated future cash flows. The Company bases cash flow projections on management’s estimates of revenue growth rates and otheroperating margins, taking into consideration industry and market conditions. The Company bases the discount rate on the weighted-average cost of $3.0 million and $30.0 thousandcapital adjusted for the years 2016relevant risk associated with business-specific characteristics and 2015, respectively, are primarilythe uncertainty related to the reporting unit’s ability to execute on the projected cash flows.
In order to assess the reasonableness of the estimated fair value of the Company’s reporting units, the Company compares the aggregate reporting unit fair value to the Company’s market capitalization on an overall basis and calculates an implied control premium (the excess of the sum of the reporting units’ fair value over the Company’s market capitalization on an overall basis). The Company evaluates the control premium by comparing it to observable control premiums from recent comparable transactions. If the implied control premium is determined to not be reasonable in light of these recent transactions, the Company re-evaluates its reporting unit fair values, which may result in an adjustment to the discount rate and/or other assumptions. This re-evaluation could result in a change into the Company’s deferred tax asset in connection withestimated fair value for certain or all reporting units. If the fair value of a pre-acquisition taxreporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired.
If the fair value of the reporting unit is less than its carrying amount, goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment loss.
The Company recognized no impairment charges to its goodwill for the years ended December 31, 2022, 2021, and 2020, respectively.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Other Intangible Assets
The Company’s intangible assets with definite lives consist primarily of technology, capitalized software, trade names, technology, and customer lists and relationships. These intangible assets are being amortized on the straight‑linestraight-line method over the estimated useful lives of the assets. Amortization expense related to intangible assets for the years ended December 31, 2016, 20152022, 2021 and 20142020 was $47.0$28.1 million, $28.6$28.3 million and $19.8$27.0 million, respectively.
The Company recognized impairment charges to its intangible assets of nil, $1.3 million and $0.9 million for the years ended December 31, 2022, 2021 and 2020 respectively. The Company includes these impairments within depreciation and amortization in its Consolidated Statements of Operations.
The Company’s intangible assets consist of the following:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Cost | | Accumulated Amortization | | Net |
| Technology | | $ | 96,209 | | | $ | (95,487) | | | $ | 722 | |
| Customer lists and relationships | | 118,022 | | | (102,271) | | | 15,751 | |
| Capitalized software and patents | | 94,227 | | | (63,164) | | | 31,063 | |
| Trade name | | 2,437 | | | (2,437) | | | — | |
| Total | | $ | 310,895 | | | $ | (263,359) | | | $ | 47,536 | |
|
| | | | | | | | | | | |
| | December 31, 2016 |
| | Cost | | Accumulated Amortization | | Net |
| Trade name | $ | 2,523 |
| | $ | (2,259 | ) | | $ | 264 |
|
| Technology | 160,169 |
| | (60,794 | ) | | 99,375 |
|
| Customer lists and relationships | 134,280 |
| | (50,503 | ) | | 83,777 |
|
| Capitalized software and patents | 26,666 |
| | (6,218 | ) | | 20,448 |
|
| | $ | 323,638 |
|
| $ | (119,774 | ) |
| $ | 203,864 |
|
| | | | | | | | | | December 31, 2021 |
| | December 31, 2015 | | Cost | | Accumulated Amortization | | Net |
| | Cost | | Accumulated Amortization | | Net | |
| Trade name | $ | 1,531 |
| | $ | (1,372 | ) | | $ | 159 |
| |
| Technology | 130,200 |
| | (35,336 | ) | | 94,864 |
| Technology | | $ | 101,938 | | | $ | (96,732) | | | $ | 5,206 | |
| Customer lists and relationships | 105,864 |
| | (33,969 | ) | | 71,895 |
| Customer lists and relationships | | 125,115 | | | (103,385) | | | 21,730 | |
| Capitalized software and patents | 11,406 |
| | (4,002 | ) | | 7,404 |
| Capitalized software and patents | | 82,910 | | | (49,511) | | | 33,399 | |
| | $ | 249,001 |
| | $ | (74,679 | ) | | $ | 174,322 |
| |
| Trade name | | Trade name | | 2,453 | | | (2,453) | | | — | |
| Total | | Total | | $ | 312,416 | | | $ | (252,081) | | | $ | 60,335 | |
Estimated future amortization expense of its intangible assets for the next five years is as follows:
| | | | | | | | |
| Year ending December 31, | | |
| 2023 | | $ | 21,736 | |
| 2024 | | 11,733 | |
| 2025 | | 5,532 | |
| 2026 | | 1,080 | |
| 2027 | | 102 | |
| Thereafter | | — | |
Total 1 | | $ | 40,183 | |
_____________________________1As of December 31, 2022, the Company had $7.4 million of capitalized software costs that are currently in the development stage. Amortization of these costs will begin once the software projects are complete and ready for their intended use.
|
| | | |
| Year ending December 31, | |
|
| 2017 | $ | 49,563 |
|
| 2018 | 46,561 |
|
| 2019 | 39,631 |
|
| 2020 | 24,940 |
|
| 2021 | 12,965 |
|
| Thereafter | 30,225 |
|
8. Accrued Expenses
Accrued expenses consist of the following:
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Accrued compensation and benefits | $ | 31,752 |
| | $ | 24,776 |
|
| Accrued accounting fees | 2,258 |
| | 1,622 |
|
| Accrued consulting fees | 15,140 |
| | 6,075 |
|
| Accrued other | 16,220 |
| | 12,663 |
|
| Accrued income tax payable | 4,065 |
| | 683 |
|
| | $ | 69,435 |
| | $ | 45,819 |
|
9. Commitments and ContingenciesAccrued Expenses
Accrued expenses consist of the following:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Accrued compensation and benefits | | $ | 23,834 | | | $ | 29,773 | |
| Accrued professional service fees | | 3,972 | | | 3,259 | |
| Accrued telecommunications and hosting | | 2,006 | | | 1,736 | |
| Accrued income taxes payable | | 803 | | | 1,844 | |
| Accrued Series B preferred dividend | | 2,298 | | | 1,781 | |
| Accrued operating lease liabilities | | 5,497 | | | 7,491 | |
| Accrued third party tech services | | 1,226 | | | 4,277 | |
| Accrued 2021 8.375% Senior Notes - Interest | | 1,969 | | | 1,969 | |
| | | | |
| Accrued other | | 10,510 | | | 9,786 | |
| Total | | $ | 52,115 | | | $ | 61,916 | |
10. Leases
The Company has entered into contracts with third parties to lease a variety of assets, including certain real estate, equipment, automobiles and other assets. The Company’s leases office space, automobiles, office equipmentfrequently allow for lease payments that could vary based on factors such as inflation or the degree of utilization of the underlying asset. For example, certain of the Company’s real estate leases could require us to make payments that vary based on common area maintenance charges, insurance and colocation services under non‑cancellable capitalother charges. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company is party to certain sublease arrangements, primarily related to the Company’s real estate leases, operating leases or long-term agreements, which expire through December 2029. Aggregate annual future minimum payments under these non‑cancellable agreements arewhere it acts as follows:the lessee and intermediate lessor. The Company does not have material sublease arrangements.
|
| | | | | | | | | | | |
| Year ending December 31: | Colocation | | Operating Leases | | Capital Leases |
| 2017 | $ | 14,327 |
| | $ | 9,564 |
| | $ | 2,464 |
|
| 2018 | 5,055 |
| | 7,502 |
| | 2,357 |
|
| 2019 | 4,914 |
| | 6,790 |
| | 2,285 |
|
| 2020 | 3,466 |
| | 6,528 |
| | 1,293 |
|
| 2021 and thereafter | — |
| | 40,357 |
| | 8,437 |
|
| | $ | 27,762 |
| | $ | 70,741 |
| | $ | 16,836 |
|
Rent expense forThe following table presents information about the years ended Company's ROU assets and lease liabilities at December 31, 2016, 2015 and 2014 was $8.6 million, $7.6 million and $6.5 million respectively.2022:
| | | | | | |
| | |
| ROU assets: | | |
| Non-current operating lease ROU assets | | $ | 20,863 | |
| | |
| | |
| | |
| Operating lease liabilities: | | |
Current operating lease liabilities1 | | $ | 5,497 | |
| Non-current operating lease liabilities | | 29,222 | |
| Total operating lease liabilities | | $ | 34,719 | |
| | |
| | |
| | |
| | |
| | |
10. Debt_____________________________
1Amounts are included in Accrued Expenses on Consolidated Balance Sheets.
2013 Credit Facility
In September 2013, the Company entered into a Credit Agreement (the “Credit Facility”) with JP Morgan Chase Bank, N.A., as the administrative agent, Wells Fargo Bank, National Association, as the syndication agent and Capital One, National Association and KeyBank National Association, as co-documentation agents. The Credit Facility, which was used for general corporate purposes, was a $100 million unsecured revolving line of credit that was set to mature on September 27, 2018. The Company paid a commitment fee in the range of 25 to 35 basis points on the unused balance of the revolving credit facility under this credit agreement. Synchronoss had the right to request an increase in the aggregate principal amount of the Credit Facility to $150 million.
Interest on the borrowings were based upon LIBOR plus a 2.25 basis point margin. All outstanding balances under the Credit Facility were repaid on July 7, 2016 and the 2013 Credit Facility was terminated and replaced with the Amended Credit Facility.
Amended Credit Facility
On July 7, 2016, the Company entered into an Amended Credit Agreement (the “Amended Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Administrative Agent”) and several lenders party thereto (the “Amended Credit Facility”). The Amended Credit Facility, was permitted to be used for general corporate purposes, was a $250 million unsecured revolving line of credit that was set to mature on July 7, 2021, subject to terms and conditions set forth therein. The Company paid a commitment fee in the range of 15 to 30 basis points on the unused balance of the revolving credit facility under the Amended Credit Agreement. Synchronoss had the right to request an increase in the aggregate principal amount of the Amended Credit Facility up to $350 million.
Interest on the borrowings was based upon LIBOR plus a 1.99 basis point margin. As of December 31, 2016, the Company had an outstanding balance of $29 million on the Amended Credit Facility.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The Amended Credit Facility was subject to certain financial covenants. As of December 31, 2016, the Company was in compliance with all required covenants.
Interestfollowing table presents information about lease expense and commitment fees under the Credit Facility and the Amended Credit Facility were as follows:
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2016 | | 2015 | | 2014 |
| Commitment fees | | $ | 415 |
| | $ | 332 |
| | $ | 215 |
|
| Interest expense | | 877 |
| | — |
| | 136 |
|
On January 19, 2017, the Company repaid all outstanding obligations under the Amended Credit Agreement with Wells Fargo Bank and the several lenders party thereto. The aggregate payoff amount was $29 million and included all accrued interest and associated prepayment penalties. For further details see the subsequent events footnote (Note 19).
Convertible Senior Notes
On August 12, 2014, the Company issued $230.0 million aggregate principal amount of its 0.75% Convertible Senior Notes due in 2019 (the “2019 Notes”). The 2019 Notes mature on August 15, 2019, and bear interest at a rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. The Company accountedsublease income for the $230.0 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance which are presented net of the face value of the 2019 Notes on the balance sheet.
The 2019 Notes are senior, unsecured obligations of the Company, and are convertible into shares of its common stock based on a conversion rate of 18.8072 shares per $1,000 principal amount of 2019 Notes which is equivalent to an initial conversion price of approximately $53.17 per share. The Company will satisfy any conversion of the 2019 Notes with shares of the Company’s common stock. The 2019 Notes are convertible at the note holders’ option prior to their maturity and if specified corporate transactions occur. The issue price of the 2019 Notes was equal to their face amount.
Holders of the 2019 Notes who convert their notes in connection with a qualifying fundamental change, as defined in the related indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, following the occurrence of a fundamental change, holders may require that the Company repurchase some or all of the 2019 Notes for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. As of December 31, 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 December 31, 2016, the carrying amount of the liability was $226.3 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 $242.4 million at December 31, 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:
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2016 | | 2015 | | 2014 |
| Contractual interest expense | | $ | 1,725 |
| | $ | 1,725 |
| | $ | 647 |
|
11. Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income (loss) during the year ended December 31, 2016,2022:
| | | | | | | | |
Operating lease cost1 | | $ | 7,320 | |
| Other lease costs and income: | | |
Variable lease costs1,2 | | 1,620 | |
| Operating lease impairments/remeasurements | | 175 | |
Sublease income1 | | (2,766) | |
| Total net lease cost | | $ | 6,349 | |
_____________________________
1 Amounts are included in Cost of revenues, Selling, general and administrative and/or Research and development based on the function that each underlying leased asset supports. This is reflected in the Consolidated Statements of Operations.
2 As part of the Company’s in year cost savings initiatives, the Company closed certain office spaces and terminated various lease agreements. These actions resulted in a $0.7 million ROU asset impairment charge, which was determined by the present value of the forecasted future cash flows for the remaining lease term.
The following table provides the undiscounted amount of future cash flows included in the Company’s lease liabilities at December 31, 2022 for each of the five years subsequent to December 31, 2022 and thereafter, as follows: well as a reconciliation of such undiscounted cash flows to the Company’s lease liabilities at December 31, 2022:
| | | | | |
| Operating Leases |
| 2023 | $ | 8,007 | |
| 2024 | 8,170 | |
| 2025 | 8,018 | |
| 2026 | 7,857 | |
| 2027 | 6,191 | |
| Thereafter | 4,273 | |
| Total future lease payments | 42,516 | |
| Less: amount representing interest | (7,797) | |
| Present value of future lease payments (lease liability) | $ | 34,719 | |
The following table provides the weighted-average remaining lease term and weighted-average discount rates for the Company’s leases as of December 31, 2022:
| | | | | |
| Operating Leases: | |
| Weighted-average remaining lease term (years), weighted based on lease liability balances | 5.31 |
| Weighted-average discount rate (percentages), weighted based on the remaining balance of lease payments | 8.0 | % |
The following table provides certain cash flow and supplemental noncash information related to the Company’s lease liabilities for the year ended December 31, 2022:
| | | | | |
| Operating Leases: | |
| Cash paid for amounts included in the measurement of lease liabilities | $ | 9,903 | |
| Lease liabilities arising from obtaining right-of-use assets | — | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
11. Debt
Offering of 2021 Senior Notes due 2026
On June 30, 2021, the Company closed its underwritten public offering of $120.0 million aggregate principal amount of 8.375% senior notes due 2026 at a par value of $25.00 per senior note (the “Senior Notes”). The offering was conducted pursuant to an underwriting agreement (the “Notes Underwriting Agreement”) dated June 25, 2021, by and among the Company and B. Riley Securities, Inc., as representative of the several underwriters (the “Notes Underwriters”). At the closing, the Company issued $125.0 million aggregate principal amount of Senior Notes, inclusive of $5.0 million aggregate principal amount of Senior Notes issued pursuant to the full exercise of the Notes Underwriters’ option to purchase additional Senior Notes.
The Notes Underwriting Agreement contains customary representations, warranties and covenants of the Company, customary conditions to closing, indemnification obligations of the Company and the Notes Underwriters, including for liabilities under the Securities Act, other obligations of the parties and termination provisions.
On June 30, 2021, the Company entered into an indenture (the “Base Indenture”) and a supplemental indenture (the “First Supplemental Indenture” and, together with the Base Indenture, the “Indenture”) with The Bank of New York Mellon Trust Company National Association, as trustee (the “Trustee”), between the Company and the Trustee. The Indenture establishes the form and provides for the issuance of the Senior Notes.
The Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. The Senior Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The Senior Notes bear interest at the rate of 8.375% per annum. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The Senior Notes will mature on June 30, 2026, unless redeemed prior to maturity.
The Company may, at its option, at any time and from time to time, redeem the Senior Notes for cash in whole or in part (i) on or after June 30, 2022 and prior to June 30, 2023, at a price equal to $25.75 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after June 30, 2023 and prior to June 30, 2024, at a price equal to $25.50 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (iii) on or after June 30, 2024 and prior to June 30, 2025, at a price equal to $25.25 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iv) on or after June 30, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Senior Notes.
The Indenture contains customary events of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of at least 25% of the principal amount of the Senior Notes may declare the entire amount of the Senior Notes, together with accrued and unpaid interest, if any, to be immediately due and payable. In the case of an event of default involving the Company’s bankruptcy, insolvency or reorganization, the principal of, and accrued and unpaid interest on, the principal amount of the Senior Notes, together with accrued and unpaid interest, if any, will automatically, and without any declaration or other action on the part of the Trustee or the holders of the Senior Notes, become due and payable.
On October 25, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) between the Company and B. Riley Securities, Inc. (the “Agent”), a related party, pursuant to which the Company may offer and sell, from time to time, up to $18.0 million of the Company’s 8.375% Senior Notes due 2026. Sales of the additional Senior Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). Under the Sales Agreement, the Agent will be entitled to compensation of 2.0% of the gross proceeds of all notes sold through it as the Company’s agent.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
|
| | | | | | | | | | | | | | | |
| | Foreign Currency | | Unrealized (Loss) Income on Intra-Entity Foreign Currency Transactions | | Unrealized Holding Gains (Losses) on Available-for-Sale Securities | | Total |
| Balance at December 31, 2015 | $ | (34,092 | ) | | $ | (4,292 | ) | | $ | (300 | ) | | $ | (38,684 | ) |
| Other comprehensive income (loss) | (4,042 | ) | | (789 | ) | | 365 |
| | (4,466 | ) |
| Tax effect | — |
| | 64 |
| | (167 | ) | | (103 | ) |
| Total comprehensive income (loss) | (4,042 | ) |
| (725 | ) |
| 198 |
|
| (4,569 | ) |
| Balance at December 31, 2016 | $ | (38,134 | ) |
| $ | (5,017 | ) |
| $ | (102 | ) |
| $ | (43,253 | ) |
The carrying amounts of the Company’s borrowings were as follows:
| | | | | | | | | | | | | | |
| Senior Notes | | December 31, 2022 | | December 31, 2021 |
| 2021 Non-convertible 8.375% Senior Notes due 2026 | | $ | 141,077 | | | $ | 141,077 | |
| Unamortized discount and debt issuance cost | | (6,493) | | | (7,973) | |
| Carrying value of Senior Notes | | $ | 134,584 | | | $ | 133,104 | |
Debt issuance are deferred and amortized into interest expense using the effective interest method.
The total fair value of the outstanding Senior Notes was $101.3 million as of December 31, 2022. The Company is in compliance with its debt covenants as of December 31, 2022.
2019 Revolving Credit Facility
On October 4, 2019, the Company entered into a Credit Agreement with Citizens Bank, N.A., for a $10.0 million Revolving Credit Facility. Borrowings under the Revolving Credit Facility bore interest at a rate equal to, at the Company’s option, either (1) the arithmetic average of the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period (one, three or six months (or 12 months if agreed to by all applicable Lenders)) as selected by the Company relevant to such borrowing plus the applicable margin, or (2) a base rate determined by reference to the greatest of the federal funds rate plus 0.5%, the prime commercial lending rate as determined by the Agent, and the daily LIBOR rate plus 1.0%, in each case plus an applicable margin and subject to a floor of 0.0%.
On June 30, 2021, the Company paid off the outstanding balance and closed the Revolving Credit Facility.
Interest expense
The following table summarizes the Company’s interest expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Twelve Months Ended December 31, |
| | | | | | | | 2022 | | 2021 | | 2020 |
| 2021 Non-Convertible 8.375% Senior Notes due 2026: | | | | | | | | | | | | |
| Amortization of debt issuance costs | | | | | | | | $ | 1,391 | | | $ | 625 | | | $ | — | |
| Interest on borrowings | | | | | | | | 11,815 | | | 5,458 | | | — | |
| Amortization of debt discount | | | | | | | | 88 | | | 9 | | | — | |
| 2019 Revolving Credit Facility: | | | | | | | | | | | | |
| Amortization of debt issuance costs | | | | | | | | — | | | 84 | | | 52 | |
| Commitment fee | | | | | | | | — | | | — | | | 4 | |
| Interest on borrowings | | | | | | | | — | | | 126 | | | 202 | |
| | | | | | | | | | | | |
| Other | | | | | | | | 346 | | | 118 | | | 218 | |
| Total | | | | | | | | $ | 13,640 | | | $ | 6,420 | | | $ | 476 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
12. Accumulated Other Comprehensive (Loss) / Income
The changes in accumulated other comprehensive (loss) income (loss) during the yearyears ended December 31, 2015, arewere as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | | Other comprehensive loss | | Tax effect | | Balance at
December 31, 2022 |
| Foreign currency | $ | (29,350) | | | $ | (11,261) | | | $ | — | | | $ | (40,611) | |
| Unrealized (loss) income on intercompany foreign currency transactions | (3,635) | | | 191 | | | (76) | | | (3,520) | |
| | | | | | | |
| Total | $ | (32,985) | | | $ | (11,070) | | | $ | (76) | | | $ | (44,131) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2020 | | Other comprehensive (loss) income | | Tax effect | | Balance at December 31, 2021 |
| Foreign currency | $ | (26,076) | | | $ | (3,274) | | | $ | — | | | $ | (29,350) | |
| Unrealized (loss) income on intercompany foreign currency transactions | (2,137) | | | (1,984) | | | 486 | | | (3,635) | |
| | | | | | | |
| Total | $ | (28,213) | | | $ | (5,258) | | | $ | 486 | | | $ | (32,985) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2019 | | Other comprehensive (loss) income | | Tax effect | | Balance at December 31, 2020 |
| Foreign currency | $ | (28,204) | | | $ | 2,128 | | | $ | — | | | $ | (26,076) | |
| Unrealized (loss) income on intercompany foreign currency transactions | (4,306) | | | 3,130 | | | (961) | | | (2,137) | |
| Unrealized holding gains (losses) on marketable debt securities | (751) | | | 751 | | | — | | | — | |
| Total | $ | (33,261) | | | $ | 6,009 | | | $ | (961) | | | $ | (28,213) | |
|
| | | | | | | | | | | | | | | |
| | Foreign Currency | | Unrealized (Loss) Income on Intra-Entity Foreign Currency Transactions | | Unrealized Holding Gains (Losses) on Available-for-Sale Securities | | Total |
| Balance at December 31, 2014 | $ | (16,811 | ) | | $ | (2,957 | ) | | $ | (246 | ) | | $ | (20,014 | ) |
| Other comprehensive income (loss) | (17,281 | ) | | (2,722 | ) | | (79 | ) | | (20,082 | ) |
| Tax effect | — |
| | 1,387 |
| | 25 |
| | 1,412 |
|
| Total comprehensive income (loss) | (17,281 | ) | | (1,335 | ) | | (54 | ) | | (18,670 | ) |
| Balance at December 31, 2015 | $ | (34,092 | ) | | $ | (4,292 | ) | | $ | (300 | ) | | $ | (38,684 | ) |
12.13. Capital Structure
As of December 31, 2016,2022, the Company’s authorized capital stock was 110160 million shares of stock with a par value of $0.0001, of which 100150 million shares were designated as common stock and 10 million shares were designated as preferred stock.stock, 150 thousand of which were designated Series B Perpetual Non-Convertible Preferred Stock.
Common Stock
Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held. Dividends on common stock will be paid when, and if, declared by the Company’s Board of Directors. No common stock dividends have ever been declared or paid by the Company.
Common Stock Offering
On June 29, 2021, the Company closed its underwritten public offering of common stock, par value $0.0001 per share. The offering was conducted pursuant to an underwriting agreement (the “Underwriting Agreement”) dated June 24, 2021, by and between the Company and B. Riley Securities, Inc., as representative of the several underwriters (the “Underwriters”) for net proceeds of $102.3 million. At the closing, the Company issued 42,307,692 shares of common stock, inclusive of 3,846,154 shares of common stock issued pursuant to the full exercise of the Underwriters’ option to purchase additional shares of common stock. The Company used the net proceeds for the redemption of the Series A Convertible Preferred Stock.
Treasury Stock
On February 4, 2016, the Company announced that the Board of Directors approved a share repurchase program under which the Company may repurchase up to $100.0 million of its outstanding common stock for 12 to 18 months following the announcement. In 2016, the Company repurchased approximately 1.3 million shares of the Company’s common stock under
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
this program for an aggregate repurchase price of $40.0 million. There were no share repurchases subsequent to 2016. In 2018, in connection with execution of the Share Purchase Agreement, the Company received approximately 6.0 million shares of Synchronoss common stock, which have been recorded as Treasury shares as of December 31, 2020. Additionally, in 2018 the Company retired 3.9 million shares of common stock that were previously repurchased in prior years. Any related additional paid in capital and par values were removed from the common stock numbers. In the second quarter of 2021, the entire balance of Treasury Stock was sold in the underwritten public offering. Treasury Stock balance is nil as of December 31, 2022.
Shelf Registration Statement
On August 19, 2020, the Company filed a universal shelf registration statement with the SEC for the issuance of common stock, preferred stock, debt securities, guarantees of debt securities, warrants and units up to an aggregate amount of $250.0 million (“the 2020 Shelf Registration Statement”). On August 28, 2020, the 2020 Shelf Registration Statement was declared effective by the SEC. As of December 31, 2022, except for the Common Stock offering and the issuance of Senior Notes, the Company has not raised additional capital using the 2020 Shelf Registration Statement.
Preferred Stock
There are no shares of preferred stock outstanding as of December 31, 2016 or 2015. The Board of Directors is authorized to issue preferred shares and has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of preferred stock.
TreasurySeries B Non-Convertible Preferred Stock
On February 4, 2016, the Company's Board of Directors authorized a stock repurchase program to purchase up to $100 million of the Company's outstanding Common Stock. Under the program,June 30, 2021, the Company may purchaseclosed a private placement of 75,000 shares of its Series B Perpetual Non-Convertible Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share (the “Series B Preferred Stock”), for net proceeds of $72.8 million (the “Series B Transaction”). The sale of the Series B Preferred Stock was pursuant to the Series B Preferred Stock Purchase Agreement, dated as of June 24, 2021 (the “Series B Purchase Agreement”), between the Company and B. Riley Principal Investments, LLC (“BRPI”).
In connection with the closing of the Series B Transaction, the Company (i) filed a Certificate of Designation with the State of Delaware setting forth the rights, preferences, privileges, qualifications, restrictions and limitations on the Series B Preferred Stock (the “Series B Certificate”) and (ii) entered into an Investor Rights Agreement with B. Riley Financial, Inc. (“B. Riley Financial”) and BRPI setting forth certain governance and registration rights of B. Riley Financial with respect to the Company.
Certificate of Designation of the Series B Preferred Stock
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series B Preferred Stock are set forth in the Series B Certificate. Under the Series B Certificate, the holders of the Series B Preferred Stock are entitled to receive, on each share of Series B Preferred Stock on a quarterly basis, an amount equal to the dividend rate, as described in the following sentence, divided by four and multiplied by the then-applicable Liquidation Preference per share of Series B Preferred Stock (collectively, the “Preferred Dividends”). The dividend rate is (1) 9.5% per annum for the period commencing on June 30, 2021 and ending on and including December 31, 2021, (2) 13% per annum for the year commencing on January 1, 2022 and ending on and including December 31, 2022; and (3) 14% per annum for the year commencing on January 1, 2023 and thereafter. The Preferred Dividends will be due in cash on January 1, April 1, July 1 and October 1 of each year (each, a “Series B Dividend Payment Date”). The Company may choose to pay the Series B Preferred Dividends in cash or in additional shares of Series B Preferred Stock. In the event the Company does not declare and pay a dividend in cash on any Series B Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. As of December 31, 2022, the Liquidation Value and Redemption Value of the Series B Preferred Shares was $73.0 million.
On and after the fifth anniversary of the date of issuance, holders of shares of Series B Preferred Stock will have the right to cause the Company to redeem each share of Series B Preferred Stock for cash in an amount equal to the sum of the current liquidation preference and any accrued dividends. Each share of Series B Preferred Stock will also be redeemable at the option of the holder upon the occurrence of a “Fundamental Change” at (i) par in the case of a payment in cash or (ii) 1.5 times par in the case of payment in shares of Common Stock in(such shares being, “Registrable Securities”), subject to certain limitations on the open market, through block trades or otherwise at prices deemed appropriate by the Company. The timing and amount of repurchase transactions understock that could be issued to the programholders of Series B Stock. In addition, the Company will depend on available working capitalbe permitted to redeem outstanding shares of the Series B Preferred Stock at any time for the sum of the then-applicable Liquidation Preference and other factors as determined by the Board of Directors and management.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
accrued but unpaid dividends. Pursuant to the Series B Certificate, the Company will be required to use (i) the first $50.0 million of proceeds from certain transactions (i.e., disposition, sale of assets, tax refunds) received by the Company to redeem for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of Series B Preferred Stock and (ii) the next $25.0 million of proceeds from certain transactions received by the Company may be used by the Company to buy back shares of Common Stock and to the extent, not used for such purpose by the Company, to redeem, for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of the Series B Preferred Stock.
As
The Company is required to obtain the prior written consent of December 31, 2016,the holders holding at least a totalmajority of 1.3 millionthe outstanding shares have been purchased underof the programSeries B Preferred Stock before taking certain actions, including: (i) certain dividends, repayments and redemptions; (ii) any amendment to the Company’s certificate of incorporation that adversely affects the rights, preferences, privileges or voting powers of the Series B Preferred Stock; and (iii) issuances of stock ranking senior or equivalent to shares of the Series B Preferred Stock (including additional shares of the Series B Preferred Stock) in the priority of payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. Other than with respect to the foregoing consent rights, the Series B Preferred Stock is non-voting stock.
Investor Rights Agreement
On June 30, 2021, the Company, B. Riley Financial and BRPI entered into an Investor Rights Agreement (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, for an aggregate purchase priceso long as affiliates of $40 million.
Registration Rights
HoldersB. Riley Financial beneficially own at least 10% of the outstanding shares of common stock which(unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to nominate one Class II director (the “B. Riley Nominee”) to the Company’s board of directors (the “Board”), who shall be an employee of B. Riley Financial or its affiliates and is approved by the Board, such approval not to be unreasonably withheld. For so long as affiliates of B. Riley Financial beneficially own 5% or more but less than 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to certain board observer rights.
A summary of the Company’s Series B Preferred Stock balance at December 31, 2022 and changes during the year ended December 31, 2022, are presented below:
| | | | | | | | | | | |
| Series B Preferred Stock |
| Shares | | Amount |
| Balance at December 31, 2021 | 75 | | | $ | 72,505 | |
| | | |
| | | |
| Amortization of preferred stock issuance costs | — | | | 143 | |
| Issuance of preferred PIK dividend | 3 | | | 2,438 | |
| | | |
| | | |
| | | |
| Redemption of Series B preferred shares | (7) | | | (6,738) | |
Balance at December 31, 20221 | 71 | | | $ | 68,348 | |
1 Series B preferred stock net principal balance of $68.3 million is presented as gross principal balance of $70.7 million net of $2.4 million unamortized issuance costs.
Series A Convertible Preferred Stock
In accordance with the terms of the Share Purchase Agreement dated as of October 17, 2017 (the “PIPE Purchase Agreement”), with Silver Private Holdings I, LLC, an affiliate of Siris (“Silver”), on February 15, 2018, the Company issued to Silver 185,000 shares of its newly issued Series A Convertible Participating Perpetual Preferred Stock (the “Series A Preferred Stock”), par value $0.0001 per share, with an initial liquidation preference of $1,000 per share, in exchange for $97.7 million in cash and the transfer from Silver to the Company of the 5,994,667 shares of the Company’s common stock held by Silver (the “Preferred Transaction”).
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Certificate of Designation of the Series A Preferred Stock
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series A Preferred Stock are set forth in the Series A Certificate. Under the Series A Certificate, the holders of the Series A Preferred Stock were issued upon conversionentitled to receive, on each share of Series A Preferred Stock on a quarterly basis, an amount equal to the dividend rate of 14.5% divided by four and multiplied by the then-applicable Liquidation Preference (as defined in the Series A Certificate) per share of Series A Preferred Stock (collectively, the “Series A Preferred Dividends”). The Series A Preferred Dividends were due on January 1, April 1, July 1 and October 1 of each year (each, a “Series A Dividend Payment Date”).
The Company had the option to choose to pay the Series A Preferred Dividends in cash or in additional shares of Series A Preferred Stock. In the event the Company did not declare and pay a dividend in-kind or in cash on any Series A Dividend Payment Date, the unpaid amount of the Series A Preferred Dividend was added to the Liquidation Preference.
Redemption of Series A Preferred Stock
The net proceeds from the common stock public offering, Senior Note offering and the Series B Transaction was used in part to fully redeem all outstanding shares of the Company’s Series A preferred stock are entitled to have theirPreferred Stock on June 30, 2021 (the “Redemption”). The Company redeemed in full all of the 268,917 outstanding shares registeredof the Series A Preferred Stock for an aggregate Redemption Price of $278.7 million and all rights under the Securities ActInvestor Rights Agreement relating to the Series A Preferred Stock were terminated effective with the Redemption. No Series A Preferred Stock remains outstanding or authorized as of 1933, as amended (the “Securities Act”). UnderDecember 31, 2022. In addition, on June 30, 2021, in connection with the termsredemption of an agreementthe Series A Preferred Stock, the Investor Rights Agreement between the Company and the holdersSilver terminated.
The Company and Siris Capital Group, LLC (“Siris”) entered into an Advisory Services Agreement dated as of these securitiesMay 18, 2020 under which include registration rights, ifSiris may provide consulting and advisory services to the Company proposeson operational, business, financial and strategic matters. All obligations related to register anythis Advisory Services Agreement were paid by the Company and the Advisory Services Agreement was terminated as of its securities under the Securities Act, either for its own account or for the account of others, these stockholders are entitled to notice of such registration and are entitled to include their shares in such registration.June 30, 2021.
13.14. Stock Plans
In March 2015, the Company adopted the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan replaces the Company’s prior 2000 Equity Incentive Plan (the “2000 Plan”), and the 2006 Equity Incentive Plan (the “2006 Plan”) and the 2010 New Hire Equity Incentive Plan (the “2010 Plan”), (collectively, the “Plans”). Beginning March 2015, all awards were granted under the 2015 Plan. In addition, any awards that were previously granted under any prior Plans that terminate without issuance of shares, shall be eligible for issuance under the 2015 Plan.
Under the 2015 Plan, the Company may grant to its employees, outside directors and consultants awards in the form of non-qualified stock options, shares of restricted stock, stock units, or stock appreciation rights and performance shares. The Company’s Board of Directors administers the Plan and is responsible for determining the individuals to be granted options or shares, the number of options or shares each individual will receive, the price per share and the exercise period of each option.
At the annual meeting of stockholders the Company held on June 16, 2022, the stockholders of the Company approved and adopted the Certificate of Amendment of the Company’s restated certificate of incorporation to increase the total number of shares of authorized common stock from 100 million shares to 150 million shares. Additionally, the Company’s stockholders approved the amendment and restatement of the Company’s 2015 Equity Incentive Plan to increase the maximum total number of shares of common stock issuable under the Plans by 12.9 million shares from 29,297,175 shares to a new aggregate total of 42,197,175 shares.
On December 15, 2017, the Compensation Committee adopted the 2017 New Hire Equity Incentive Plan (“2017 New Hire Plan”), which is intended to be exempt from the stockholder approval requirements under the “inducement grant exception” provided by the Inducement Rule. The Committee authorized the issuance of up to 1.5 million Common Shares to new hires, with the purpose of promoting the long-term success of the Company and the creation of stockholder value by (a) providing for the attraction and retention of new employees with exceptional qualifications, (b) encouraging new employees to focus on critical long-range objectives, and (c) linking new employees directly to stockholder interests through increased stock ownership. As required by the Inducement Rule, the Company issues a press release promptly upon issuing shares to new employees pursuant to the 2017 New Hire Plan.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
On November 1, 2021 Synchronoss Technologies, Inc. 2017 New Hire Equity Incentive Plan was amended to increase the maximum number of shares of Common Stock authorized for issuance under the 2017 Incentive Plan by 566,711 shares from 1,500,000 shares to a new aggregate total of 2,066,711 shares.
As of December 31, 2016,2022, there were 2.38.0 million shares available for the grant or award under the Company’s 2015 Plan and 1.0 million shares available for the grant or award under the Company’s 2017 New Hire Equity Incentive Plan.
The Company’s performance cash awards granted to executives under the Long Term Incentive (“LTI”) Plans have been accounted for as liability awards, due to the Company’s intent and the ability to settle such awards in cash upon vesting and has reflected such awards in accrued expenses. As of December 31, 2022, the liability for such awards is approximately $0.2 million.
Stock-Based Compensation
The following table summarizes stock-based compensation expense:
|
| | | | | | | | | | | |
| | December 31, |
| | 2016 | | 2015 | | 2014 |
| Stock options | $ | 7,778 |
| | $ | 8,495 |
| | $ | 9,992 |
|
| Restricted stock awards | 25,384 |
| | 22,592 |
| | 18,353 |
|
| ESPP Plan | 817 |
| | 624 |
| | 642 |
|
Total stock-based compensation before taxes1 | $ | 33,979 |
| | $ | 31,711 |
| | $ | 28,987 |
|
| Tax benefit | $ | 11,108 |
| | $ | 10,130 |
| | $ | 9,939 |
|
1 Includes $1.6 million, $1.8 million and $1.7 millionexpense related to discontinued operations forall of the years ended December 31, 2016, 2015 and 2014, respectively.Company’s stock awards included by operating expense categories, as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended December 31, |
| | | | | | | 2022 | | 2021 | | 2020 |
| Cost of revenues | | | | | | | $ | 788 | | | $ | 1,593 | | | $ | 2,409 | |
| Research and development | | | | | | | 1,728 | | | 2,862 | | | 4,380 | |
| Selling, general and administrative | | | | | | | 2,945 | | | 4,850 | | | 4,348 | |
| Total stock-based compensation expense | | | | | | | $ | 5,461 | | | $ | 9,305 | | | $ | 11,137 | |
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by award types, as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended December 31, |
| | | | | | | 2022 | | 2021 | | 2020 |
| Stock options | | | | | | | $ | 2,570 | | | $ | 3,748 | | | $ | 1,308 | |
| Restricted stock awards | | | | | | | 2,899 | | | 5,364 | | | 9,743 | |
| Performance Based Cash Units | | | | | | | (8) | | | 193 | | | 86 | |
| | | | | | | | | | | |
| Total stock-based compensation before taxes | | | | | | | $ | 5,461 | | | $ | 9,305 | | | $ | 11,137 | |
| Tax benefit | | | | | | | $ | 1,062 | | | $ | 1,750 | | | $ | 1,815 | |
The total stock-based compensation cost related to unvested equity awards as of December 31, 20162022 was approximately $58.3$7.6 million. The expense is expected to be recognized over a weighted-average period of approximately 2.481.8 years.
The total stock-based compensation cost related to unvested performance-based cash units as of December 31, 2022 was approximately $0.3 million. The expense is expected to be recognized over a weighted-average period of approximately 1.8 years.
Stock Options
Options that were granted under the Company’s 2000, 2006 and 2015 Plans generally vest 25% on the first year anniversary of the date of grant plus an additional 1/48th for each month of continuous service thereafter.
Options that were granted under the Company’s 2010 Plan generally vest 50% on the second year anniversary and an additional 1/48th for each month of continuous service thereafter.
IncentiveStock options that were granted under the 2000 and 2006 Plans generally vest 25% on the 1st year anniversary on the date of grant and an additional 1/48th for each month of continuous service thereafter.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The weighted‑average assumptions used in the Black‑Scholes option pricing model are as follows:
|
| | | | | | | | | | | |
| | December 31, |
| | 2016 | | 2015 | | 2014 |
| Expected stock price volatility | 45 | % | | 47 | % | | 57 | % |
| Risk-free interest rate | 1.16 | % | | 1.27 | % | | 1.43 | % |
| Expected life of options (in years) | 4.0 |
| | 4.0 |
| | 4.2 |
|
| Expected dividend yield | — | % | | — | % | | — | % |
| Weighted-average fair value (grant date) of the options | $ | 11.13 |
| | $ | 15.88 |
| | $ | 14.67 |
|
The following table summarizes information about stock options outstanding.
|
| | | | | | | | | | | | | |
| Options | | Number of Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| Outstanding at December 31, 2015 | | 2,348 |
| | $ | 31.04 |
| | | | |
| Options Granted | | 878 |
| | 31.04 |
| | | | |
| Options Exercised | | (608 | ) | | 22.88 |
| | | | |
| Options Cancelled | | (289 | ) | | 36.56 |
| | | | |
| Outstanding at December 31, 2016 | | 2,329 |
| | $ | 32.48 |
| | 4.60 | | $ | 15,719 |
|
| Vested at December 31, 2016 | | 2,203 |
| | $ | 32.45 |
| | 4.53 | | $ | 14,865 |
|
| Exercisable at December 31, 2016 | | 1,056 |
| | $ | 31.19 |
| | 3.03 | | $ | 8,397 |
|
The below table summarizes additional information related to stock options:
|
| | | | | | | | | | | |
| | December 31, |
| | 2016 | | 2015 | | 2014 |
| Total intrinsic value for stock options exercised | $ | 8,953 |
| | $ | 18,369 |
| | $ | 18,950 |
|
| Fair value of vested awards | $ | 21,687 |
| | $ | 29,815 |
| | $ | 19,409 |
|
Awards of Restricted Stock and Performance Stock
Restricted stock awards (“restricted stock”) granted under the Company’s Plans generally vest 25% of the applicable shares on the first anniversary of the date of grant and thereafter an additional 1/16th48th for each three monthsmonth of continuous service.
Other than as set forth above, there were no significant changes to the Company’s Stock Option Plans during the year ended December 31, 2022.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock options. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Twelve Months Ended December 31, |
| | | | | | | | 2022 | | 2021 | | 2020 |
| Expected stock price volatility | | | | | | | | 74.1 | % | | 82.3 | % | | 74.5 | % |
| Risk-free interest rate | | | | | | | | 3.1 | % | | 0.7 | % | | 1.0 | % |
| Expected life of options (in years) | | | | | | | | 4.15 | | 4.23 | | 4.47 |
| Expected dividend yield | | | | | | | | 0.0 | % | | 0.0 | % | | 0.0 | % |
| Weighted-average fair value of the options | | | | | | | | $ | 0.71 | | $ | 1.83 | | $ | 2.79 |
The following table summarizes information about stock options outstanding as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Number of
Options | | Weighted-Average
Exercise Price | | Weighted-Average
Remaining
Contractual
Term (Years) | | Aggregate
Intrinsic
Value |
| Outstanding at December 31, 2021 | | 4,715 | | | $ | 6.53 | | | | | |
| Options Granted | | 3,039 | | | 1.22 | | | | | |
| Options Exercised | | — | | | — | | | | | |
| Options Cancelled | | (1,113) | | | 8.33 | | | | | |
| Outstanding at December 31, 2022 | | 6,641 | | | $ | 3.80 | | | 5.28 | | $ | — | |
| Vested and exercisable at December 31, 2022 | | 2,445 | | | $ | 7.08 | | | 3.84 | | $ | — | |
| | | | | | | | |
The total intrinsic value of stock options exercised during the year ended December 31, 2022 and 2021 was nil and nil, respectively. The total intrinsic value of stock options exercisable as of December 31, 2022 and 2021 was nil and nil, respectively.
Awards of Restricted Stock and Performance Stock
Restricted stock awards (“Restricted Stock”) granted under the Company’s 2006 PlanPlans generally vest with respect to one-third of the applicable shares on the first, second, and third anniversary of the date that the performance objectives under the performance stock awards are achieved and thereafter an additional one-third for each year of grant, considering a continuous service. service is provided.
Generally, performance stock awards granted under the Company’s 2015 Plan vest at the end of a three-year period based on service and achievement of certain performance objectives determined by the Company’s Board of Directors.
There were no significant changes to the Company’s restricted stock award (“Restricted Stock”) and performance stock plan during the year ended December 31, 2022.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
A summary of the Company’s unvested restricted stock at December 31, 2016,2022, and changes during the year ended December 31, 2016,2022, is presented below:
| | | | | | | | | | | | | | |
| Unvested Restricted Stock | | Number of
Awards | | Weighted- Average
Grant Date
Fair Value |
| Unvested at December 31, 2021 | | 2,574 | | | $ | 3.57 | |
| Granted | | 3,205 | | | 1.25 | |
Granted adjustment1 | | 63 | | | 1.64 | |
| Vested | | (805) | | | 4.28 | |
| Forfeited | | (652) | | | 2.74 | |
| Unvested at December 31, 2022 | | 4,385 | | | $ | 1.82 | |
|
| | | | | | | |
| Non-Vested Restricted Stock | | Number of Awards | | Weighted- Average Grant Date Fair Value |
| Non-vested at December 31, 2015 | | 1,412 |
| | $ | 36.80 |
|
| Granted | | 939 |
| | 34.06 |
|
| Vested | | (677 | ) | | 35.65 |
|
| Forfeited | | (334 | ) | | 37.55 |
|
| Non-vested at December 31, 2016 | | 1,340 |
| | $ | 35.28 |
|
1 Represents performance based cash units grants that vested and were paid out in form of shares of stock during the period.
Restricted stock awards are granted subject to other service conditions or service and performance conditions (“performance-based awards”Performance-Based Awards”). Restricted stock and performance-based awardsPerformance-Based Awards are measured at the closing stock price at the date of grant and are recognized straight line over the requisite service period. During 2016,
Performance Based Cash Units
Performance based cash units (PBCU) generally vest at the Company issued approximately 41 thousand sharesend of restricted stock related to the 2015a three-year period based on service and achievement of certain performance share objectives.
Employee Stock Purchase Plan
On February 1, 2012, the Company established a ten year Employee Stock Purchase Plan (“ESPP” or “the Plan”) for certain eligible employees. The Plan is to be administeredobjectives determined by the Company’s Board of Directors. The total number of shares available for purchase under the Plan is 500 thousand shares of the Company’s Common Stock. Employees participate over a six month period through payroll withholdings and may purchase, at the end of the six month period, the Company’s Common Stock at the lower of 85% of the fair market value on the first day of the offering periodPBCU can be settled in cash or the fair market value on the purchase date. No participant will be granted a right to purchase Common Stock under the Plan if such participant would own more than 5% of the total combined voting power of the Company. In addition, no participant may purchase more than a thousand shares of Common Stock within any purchase period or with a value greater than $25 thousand in any calendar year.
Treasury Stock
On February 4, 2016, the Company's Board of Directors authorized a stock repurchase program to purchase up to $100 million of the Company's outstanding Common Stock. Under the program, the Company may purchase shares of its Common Stock in the open market, through block trades or otherwise at prices deemed appropriate by the Company. The timing and amount of repurchase transactions under the program will depend on available working capital and other factorsequity as determined by the BoardCompensation Committee.
A summary of Directors and management.
As ofthe Company’s unvested performance-based cash units at December 31, 2016, a total2022 and changes during the year ended December 31, 2022, is presented below:
| | | | | | | | | | | | | | |
| Unvested Cash Units | | Number of
Awards | |
Period end
Fair Value |
| Unvested at December 31, 2021 | | 1,996 | | | $ | 2.44 | |
| Granted | | 4,672 | | | |
Granted adjustment 1 | | (216) | | | |
| Vested | | (63) | | | |
| Forfeited | | (517) | | | |
| Unvested at December 31, 2022 | | 5,872 | | | $ | 0.62 | |
_____________________________1 Includes changes in the unvested units due to performance adjustments.
Performance based cash units are measured at the closing stock price at the reporting period end date and are recognized straight line over the requisite service period. The expense for the period will increase or decrease based on updated fair values of 1.3 million shares have been purchased underthese awards as well as the program for an aggregate purchase pricepercentage achievement of $40 million. The Company classifies Common Stock repurchased as Treasury Stock on its balance sheet.the performance metrics at each reporting date.
14.15. 401(k) Plan
The Company has a 401(k) plan (the “Plan”“401(k) Plan”) covering all eligible employees. The 401(k) Plan allows for a discretionary employer match. The Company incurred and expensed $2.7$1.8 million, $2.1$2.5 million, and $1.8$2.9 million for the years ended December 31, 2016, 20152022, 2021 and 2014,2020, respectively, in 401(k) Plan match contributions.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
16. Restructuring
15. Restructuring Charges
In March 2016 and December 2016, theThe 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. These measures were intendedcontinues to reduce costs andidentify workforce optimization opportunities to better align the Company’s resources with its key strategic priorities.
As of December 31, 2016, there were $1.2 million of accrued restructuring charges on the balance sheet. A summary of the Company’s restructuring accrual at December 31, 20162022 and changes during the year ended December 31, 2016, is2022, are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | | Charges | | Payments | | Other Adjustments | | Balance at December 31, 2022 |
| Employment termination costs | $ | 3,247 | | | $ | 1,905 | | | $ | (4,167) | | | $ | (153) | | | $ | 832 | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Balance at December 31, 2015 | | Charges1 | | Payments | | Balance at December 31, 2016 |
| Employment termination costs | $ | — |
| | $ | 6,639 |
| | $ | (5,458 | ) | | $ | 1,181 |
|
| Facilities consolidation | 54 |
| | — |
| | (14 | ) | | 40 |
|
| Total | $ | 54 |
| | $ | 6,639 |
| | $ | (5,472 | ) | | $ | 1,221 |
|
1 Includes $0.3 million related to discontinued operations.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
16.17. Income Taxes
The components of income or (loss) from continuing operations before income taxes are as follows:
| | | | Year ended December 31, | | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2022 | | 2021 | | 2020 |
| Domestic | $ | (57,846 | ) | | $ | 32,385 |
| | $ | (11,620 | ) | Domestic | $ | (32,138) | | | $ | (49,337) | | | $ | (43,457) | |
| Foreign | (16,685 | ) | | (20,546 | ) | | 6,355 |
| Foreign | 26,281 | | | 19,062 | | | 5,991 | |
| Total | $ | (74,531 | ) | | $ | 11,839 |
| | $ | (5,265 | ) | Total | $ | (5,857) | | | $ | (30,275) | | | $ | (37,466) | |
The components of income tax (expense) benefit from continuing operations are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | (1,611) | | | $ | 6,852 | | | $ | 30,365 | |
| State | (108) | | | (78) | | | 56 | |
| Foreign | (232) | | | (1,257) | | | (3,643) | |
| Deferred: | | | | | |
| Federal | (30) | | | 9 | | | 262 | |
| State | 126 | | | (70) | | | (229) | |
| Foreign | (4) | | | 1,721 | | | 297 | |
| Income tax (provision) benefit | $ | (1,859) | | | $ | 7,177 | | | $ | 27,108 | |
The Company recognized approximately $1.9 million in related income tax expense and $7.2 million in related income tax benefit during the years ended December 31, 2022 and 2021, respectively. The effective tax rate was approximately (31.7)% for the year ended December 31, 2022, which was lower than the U.S. federal statutory rate primarily due to the impact of Global Intangible Low-Taxed Income, attributable to income in foreign jurisdictions and the impact of the U.S. capitalization of research expenses effective January 1, 2022, and the divestiture of the DXP and Activation assets during the second quarter. This decrease was partially offset by loss jurisdictions where full valuation allowances have been recorded and foreign income tax credits generated in the period. The Company’s effective tax rate was approximately 23.7% for the year ended December 31, 2021, which was higher than the U.S. statutory rate primarily due to the benefit of the CARES Act provision allowing for a 5 year carryback of Net Operating Losses arising in 2018, 2019 and 2020, offset by certain unfavorable permanent book-tax differences.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Current: | | | | | |
| Federal | $ | (48 | ) | | $ | 1,993 |
| | $ | 12,873 |
|
| State | 1,580 |
| | 299 |
| | 447 |
|
| Foreign | (3,239 | ) | | 682 |
| | (2,040 | ) |
| Deferred: | | | | | |
| Federal | 10,716 |
| | (10,277 | ) | | (10,437 | ) |
| State | 301 |
| | (480 | ) | | (1,301 | ) |
| Foreign | (1,320 | ) | | 2,359 |
| | 3,700 |
|
| Income tax expense | $ | 7,990 |
| | $ | (5,424 | ) | | $ | 3,242 |
|
Reconciliations of the statutory tax rates and the effective tax rates from continuing operations for the years ended December 31, 2016, 20152022, 2021 and 20142020 are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State taxes, net of federal benefit | 0.7 | % | | (0.4) | % | | (0.5) | % |
| Effect of rates different than statutory | 12.3 | % | | 2.3 | % | | (2.1) | % |
| Minority interest | 0.7 | % | | (0.1) | % | | 0.2 | % |
| Non-deductible bad debt adjustment | — | % | | — | % | | (2.9) | % |
| Stock based compensation | (16.8) | % | | (5.1) | % | | (6.1) | % |
| Foreign basis differences | 18.5 | % | | 6.3 | % | | 9.8 | % |
| Regulatory matters | — | % | | (8.7) | % | | — | % |
| Other permanent adjustments | (5.3) | % | | (2.5) | % | | (0.9) | % |
| Federal and foreign tax credits | 27.7 | % | | 0.9 | % | | 6.5 | % |
| Change in valuation allowance | 73.6 | % | | 7.7 | % | | (3.2) | % |
| Uncertain tax positions | (2.6) | % | | (4.3) | % | | (0.7) | % |
| Other | (0.1) | % | | (0.3) | % | | 1.1 | % |
| Divestiture of assets | (20.4) | % | | — | % | | — | % |
| Global intangible low-taxed income | (153.1) | % | | (8.5) | % | | 3.9 | % |
| Base Erosion Anti-Abuse Tax and related elections | — | % | | — | % | | 0.9 | % |
| NOL carryback and other refund claims | — | % | | 15.4 | % | | 45.4 | % |
| Deferred tax adjustments | 2.5 | % | | — | % | | — | % |
| Return to provision | 9.6 | % | | — | % | | — | % |
| Effective tax rate | (31.7) | % | | 23.7 | % | | 72.4 | % |
|
| | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Statutory rate | 35 | % | | 35 | % | | 35 | % |
| State taxes, net of federal benefit | 2 | % | | 1 | % | | (11 | )% |
| Effect of rates different than statutory | (7 | )% | | 44 | % | | 47 | % |
| Minority interest | (5 | )% | | (18 | )% | | — | % |
| Non-deductible stock based compensation | — | % | | — | % | | (4 | )% |
| Other permanent adjustments | — | % | | 10 | % | | (9 | )% |
| Fair market value adjustment on Earn-out | (5 | )% | | 2 | % | | 3 | % |
| Research and development credit | 3 | % | | (19 | )% | | 25 | % |
| Subpart F income | — | % | | — | % | | (22 | )% |
| Change in valuation allowance | (13 | )% | | 12 | % | | — | % |
| Ireland deferred tax liability - migration | — | % | | (13 | )% | | — | % |
| Customer relationship adjustment - Australia | — | % | | (16 | )% | | — | % |
| Other | 1 | % | | 8 | % | | (2 | )% |
| Net | 11 | % | | 46 | % | | 62 | % |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| Accrued liabilities | $ | 935 | | | $ | 1,290 | |
| Deferred revenue | 824 | | | 3,057 | |
| Bad debts reserve | 2,219 | | | 2,270 | |
| Deferred compensation | 5,714 | | | 6,236 | |
| Federal net operating loss carry forwards | 5,324 | | | 13,419 | |
| State net operating loss carry forwards | 8,777 | | | 9,332 | |
| Foreign net operating loss carry forwards | 8,045 | | | 9,001 | |
| Lease obligations | 6,696 | | | 8,262 | |
| Capital loss carry forwards | 5,449 | | | 6,120 | |
| Intangible assets | 3,527 | | | 6,100 | |
| Basis difference | 6,454 | | | 6,268 | |
| Credits | 8,227 | | | 9,720 | |
| Fixed assets | 797 | | | 1,281 | |
| Interest limitation | 26 | | | 1,232 | |
| Capitalization of research expenses | 12,155 | | | — | |
| Other | 235 | | | 97 | |
| Total deferred tax assets | $ | 75,404 | | | $ | 83,685 | |
| | | |
| Deferred tax liabilities: | | | |
| | | |
| Basis difference | $ | (2,880) | | | $ | (2,621) | |
| Depreciation and amortization | (709) | | | (2,109) | |
| Prepaids | (466) | | | (604) | |
| Lease assets | (3,647) | | | (4,978) | |
| Other | (497) | | | (492) | |
| Total deferred tax liabilities | (8,199) | | | (10,804) | |
| Less: valuation allowance | (67,671) | | | (73,441) | |
| Net deferred income tax (liabilities) assets | $ | (466) | | | $ | (560) | |
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Deferred tax assets: | | | |
| Accrued liabilities | $ | 22 |
| | $ | 14 |
|
| Deferred revenue | 8,715 |
| | 316 |
|
| Bad debts reserve | 307 |
| | 184 |
|
| Deferred compensation | 12,748 |
| | 11,684 |
|
| Federal net operating loss carry forwards | 18,993 |
| | 18,637 |
|
| State net operating loss carry forwards | 1,899 |
| | 1,691 |
|
| Foreign net operating loss carry forwards | 14,433 |
| | 9,992 |
|
| Deferred rent | 747 |
| | 570 |
|
| Capital loss carry forward | 229 |
| | 232 |
|
| Transaction costs | 2,438 |
| | — |
|
| Other | 2,057 |
| | 1,761 |
|
| Total deferred tax assets | $ | 62,588 |
| | $ | 45,081 |
|
| Deferred tax liabilities: | | | |
| Intangible assets | $ | (23,430 | ) | | $ | (24,373 | ) |
| Basis difference | (15,323 | ) | | — |
|
| Installment sale | (28,020 | ) | | — |
|
| Depreciation and amortization | (30,034 | ) | | (28,705 | ) |
| Total deferred tax liabilities | (96,807 | ) | | (53,078 | ) |
| Less: valuation allowance | (14,100 | ) | | (4,847 | ) |
| Net deferred income tax (liabilities) assets | $ | (48,319 | ) | | $ | (12,844 | ) |
As of December 31, 2016,2022, the Company has federal and state income tax net operating loss (NOL)(“NOL”) carryforwards of $54.3$25.4 million and $36.6$148.5 million, respectively, including NOL carryforwards which will expire at various dates from 20172025 through 2036.2041, and NOL carryforwards which do not expire. The Company also has foreign NOL carryforwards in various jurisdictions of $75.5$54.5 million that have various carryforward periods. Such NOL carryforwards expire as follows:
| | | | | |
| Year | NOL carryforward |
| 2023 | $ | — | |
| 2024 | — | |
| 2025 - 2041 | 178,993 | |
| Indefinite | 49,369 | |
| Total | $ | 228,362 | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
|
| | | |
| 2017-2021 | $ | 10,937 |
|
| 2022-2026 | 15,647 |
|
| 2027-2036 | 67,526 |
|
| Indefinite | 72,272 |
|
| | $ | 166,382 |
|
In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results and incorporates assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the underlying businesses.
The foreign NOL carryforwards in the income tax returns filed included unrecognized tax benefits taken in prior years. The NOLs for which a deferred tax asset is recognized for financial statement purposes in accordance with ASC 740 are presented net of these unrecognized tax benefits.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
As of December 31, 2014, a valuation allowance of $2.5 million was recorded to place a full valuation allowance on all deferred tax assets within Spatial U.S. In 2016, a valuation allowance of $41 thousand was released for the utilization of NOL for the current year income. However, the company still believes that there is no positive evidence with regards to the projections for the future income. As such, a valuation allowance of $2.2 million has been recorded to place a full valuation allowance on all the deferred tax assets within Spatial U.S.
The Company continues to evaluate the ability to realize all of its net deferred tax assets at each reporting date and records a benefit for deferred tax assets to the extent it has deferred tax liabilities that provide a source of income to benefit the deferred tax asset. As a result of this analysis, the Company recorded a valuation allowance against the net deferred tax assets of certain foreign jurisdictions as the realization of these assets is not more likely than not, given uncertainty of future earnings in these jurisdictions. The valuation allowance decreased by $5.8 million and by $1.5 million during the years ended December 31, 2022 and December 31, 2021, respectively. The decrease in tax year ended December 31, 2022 is primarily related to a decrease in deferred tax assets including deferred revenue, intangibles and net operating loss, interest expense and tax credit carryforwards, net of capitalization of research expenditures. This decrease was partially offset by a decrease in deferred tax liabilities primarily associated with intangible assets during the period. The decrease in tax year ended December 31, 2021 is primarily related to a decrease in deferred tax assets including deferred revenue, partially offset by a decrease in deferred tax liabilities primarily associated with intangible assets during the period.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2016,2022, the Company’s tax years for 2013, 2014 and 20152018 through 2022 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2016,2022, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before 2012.2017. Additionally, to the extent we utilize our NOL carryforwards in the future, the tax years in which the attribute was generated may still be adjusted upon examination by the tax authorities in the future period when the attribute is utilized.
During 2021 the Internal Revenue Service commenced an audit of certain of the Company’s prior year U.S. federal income tax filings, including the 2013 through 2020 tax years. The audit is currently ongoing and the receipt of the associated refunds would materially improve the Company’s financial position. Due to the ongoing audit, U.S. federal tax returns for years 2013–2020 remain subject to future examination by the tax authorities.
The Company received $4.3 million in federal tax refunds in the second quarter of 2022. There is currently underno change to the Company’s position on the remaining tax refunds.
In 2017, the TCJA included a transition tax based on undistributed, untaxed foreign earnings analyzed in aggregate. The final analysis performed by the Company resulted in an overall untaxed deficit and no transition tax. In addition, no income tax examinations in New York and New Jerseytaxes have been provided for the tax years 2012 through 2014 and currently under Federal tax examination for the tax years 2013 and 2014. The Company doesany remaining undistributed foreign earnings not believe that the results of these audits will have a material effect on its financial position or results of operations.
The Company has provided taxes for $3.3 million of royalty fees paid to its Ireland subsidiary as Subpart F income subject to USthe transition tax, or any additional outside basis difference inherent in 2014. The Company has not provided taxes for the remaining $34.9 million of undistributed earnings of itsthese entities, as these amounts continue to be indefinitely reinvested in foreign subsidiaries which the Company plans to reinvest indefinitely outside of the United States.operations. Should the Company decide to repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings will no longer be indefinitely invested outside the United States. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amountsamounts.
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses. The CARES Act amends the Net Operating
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Loss provisions of the Tax Cuts and Jobs Act, allowing for the carryback of losses arising in tax years 2018, 2019 and 2020, to each of the five taxable years preceding the taxable year of loss.
On March 11, 2021 the American Rescue Plan Act ("ARPA") was signed into law. The legislation was aimed at addressing the continuing economic and health impacts of the COVID-19 pandemic. This legislative relief, along with the previous governmental relief packages provide for numerous changes to current tax law. ARPA does not materially impact the Company’s financial statements.
On August 16, 2022, the Inflation Reduction Act of 2022 ("IRA") was signed into law. This legislation includes significant changes relating to tax, climate change, energy and health care. Among other provisions, the IRA introduces a book minimum tax assessed on financial statement income of certain large corporations and an excise tax on share repurchases. The Company does not anticipate these provisions will have a material impact on our results of operations or financial position, when effective.
A reconciliation of the amounts of unrecognized tax benefits excluding interest, are as follows:
| | | | | |
| Unrecognized tax benefits |
| Balance at December 31, 2019 | $ | 3,269 | |
| |
| |
| Decrease related to lapse of Statute of Limitations | (262) | |
| |
| Increases for tax positions of current period | 276 | |
| Balance at December 31, 2020 | 3,283 | |
| |
| |
| Decrease related to lapse of Statute of Limitations | (827) | |
| |
| Increase for tax positions of current period | 2,058 | |
| Balance at December 31, 2021 | 4,514 | |
| |
| |
| Decrease related to lapse of Statute of Limitations | (1,043) | |
| |
| Increase for tax positions of current period | 966 | |
| Balance at December 31, 2022 | $ | 4,437 | |
|
| | | |
| Unrecognized tax benefit at December 31, 2013 | $ | 708 |
|
| Decreases for tax positions taken during prior year | (218 | ) |
| Reduction due to lapse of applicable statute of limitations | (11 | ) |
| Increases for tax positions of current period | 651 |
|
| Unrecognized tax benefit at December 31, 2014 | 1,130 |
|
| Decreases for tax positions taken during prior year | 38 |
|
| Reduction due to lapse of applicable statute of limitations | (58 | ) |
| Increases for tax positions of current period | 344 |
|
| Unrecognized tax benefit at December 31, 2015 | 1,454 |
|
| Decreases for tax positions taken during prior year | (30 | ) |
| Reduction due to lapse of applicable statute of limitations | (44 | ) |
| Increases for tax positions of current period | 362 |
|
| Unrecognized tax benefit at December 31, 2016 | $ | 1,742 |
|
Included in the balance of unrecognized tax benefits as of the years ended December 31, 2016, 20152022 and 2014,2021, are $1.7$3.9 million $1.5 million and $1.1$3.9 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense. The liability for unrecognized tax benefits excludes accrued interest of $0.4 million, $0.4 million and $0.3 million, for the years ended December 31, 20162022, 20152021 and 2014.2020, respectively. The Company believes that it is reasonably possible that approximately $0.2$0.6 million of its currently unrecognized tax benefits primarily related to research and development creditsand uncertain tax benefits in non-U.S. jurisdictions, which are individually insignificant, may be recognized by the end of 20162023 as a result of a lapse of the statute of limitations.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
17.18. Earnings Perper Common Share (“EPS”)
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of the Company’s common stock for the year. The Company includes participating securities (Redeemable Convertible Preferred Stock - Participation with Dividends on Common Stock that contain preferred dividend) in the computation of EPS pursuant to the two-class method. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share from continued and discontinued operations.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended December 31, |
| | | | | | | 2022 | | 2021 | | 2020 |
| Numerator - Basic: | | | | | | | | | | | |
| Net loss from operations | | | | | | | $ | (7,716) | | | $ | (23,098) | | | $ | (10,358) | |
| Net (loss) income attributable to redeemable noncontrolling interests | | | | | | | (200) | | | 156 | | | (344) | |
| Preferred stock dividend | | | | | | | (9,552) | | | (35,509) | | | (37,981) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net loss attributable to Synchronoss | | | | | | | $ | (17,468) | | | $ | (58,451) | | | $ | (48,683) | |
| | | | | | | | | | | |
| Numerator - Diluted: | | | | | | | | | | | |
| Net loss attributable to Synchronoss | | | | | | | $ | (17,468) | | | $ | (58,451) | | | $ | (48,683) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net loss attributable to Synchronoss | | | | | | | $ | (17,468) | | | $ | (58,451) | | | $ | (48,683) | |
| | | | | | | | | | | |
| Denominator: | | | | | | | | | | | |
| Weighted average common shares outstanding — basic | | | | | | | 86,232 | | | 64,734 | | | 41,950 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Basic | | | | | | | $ | (0.20) | | | $ | (0.90) | | | $ | (1.16) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Diluted | | | | | | | $ | (0.20) | | | $ | (0.90) | | | $ | (1.16) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Anti-dilutive stock options excluded | | | | | | | — | | | — | | | — | |
| | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Numerator - Basic: | | | | | |
| Net (loss) income from continuing operations | $ | (66,541 | ) | | $ | 6,415 |
| | $ | (2,023 | ) |
| Net (loss) income attributable to noncontrolling interests | (11,596 | ) | | 6,052 |
| | — |
|
| Net (loss) income from continuing operations attributable to Synchronoss | (54,945 | ) | | 363 |
| | (2,023 | ) |
| | | | | | |
| Net income from discontinued operations, net of taxes | 74,533 |
| | 40,267 |
| | 40,918 |
|
| Net income attributable to Synchronoss | $ | 19,588 |
| | $ | 40,630 |
| | $ | 38,895 |
|
| | | | | | |
| Numerator - Diluted: | | | | | |
| Net (loss) income from continuing operations attributable to Synchronoss | $ | (54,945 | ) | | $ | 363 |
| | $ | (2,023 | ) |
| Income effect for interest on convertible debt, net of tax | — |
| | 1,700 |
| | — |
|
| Net (loss) income from continuing operations adjusted for the convertible debt | (54,945 | ) | | 2,063 |
| | (2,023 | ) |
| | | | | | |
| Net income from discontinued operations, net of taxes | 74,533 |
| | 40,267 |
| | 40,918 |
|
| Net income attributable to Synchronoss, adjusted for the convertible debt | $ | 19,588 |
| | $ | 42,330 |
| | $ | 38,895 |
|
| | | | | | |
| Denominator: | | | | | |
| Weighted average common shares outstanding — basic | 43,571 |
| | 42,284 |
| | 40,418 |
|
| Dilutive effect of: | | | | | |
| Shares from assumed conversion of convertible debt | — |
| | — |
| | — |
|
| Options and unvested restricted shares | — |
| | — |
| | — |
|
| Weighted average common shares outstanding — diluted | 43,571 |
| | 42,284 |
| | 40,418 |
|
| | | | | | |
| Basic EPS | | | | | |
| Continuing operations | $ | (1.26 | ) | | $ | 0.01 |
| | $ | (0.05 | ) |
| Discontinued operations | 1.71 |
| | 0.95 |
| | 1.01 |
|
| | $ | 0.45 |
| | $ | 0.96 |
| | $ | 0.96 |
|
| Diluted EPS | | | | | |
| Continuing operations | $ | (1.26 | ) | | $ | 0.01 |
| | $ | (0.05 | ) |
| Discontinued operations | 1.71 |
| | 0.95 |
| | 1.01 |
|
| | $ | 0.45 |
| | $ | 0.96 |
| | $ | 0.96 |
|
| | | | | | |
| Anti-dilutive stock options excluded: | 1,089 |
| | 553 |
| | 1,100 |
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
19. Commitments
18.
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 December 31, 2022 are as follows:
| | | | | | | | |
| Year | | Non-cancelable agreements |
| 2023 | | $ | 20,343 | |
| 2024 | | 17,565 | |
| 2025 | | 10,691 | |
| | |
| Total | | $ | 48,599 | |
20. Legal Matters
On October 7, 2014,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 (the “DoJ”) initiated investigations 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. On June 7, 2022 the SEC approved the Offer of Settlement and filed an amended complaintOrder Instituting Cease-And-Desist Proceedings pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-And-Desist Order (the “SEC Order”). Pursuant to the terms of the SEC Order, the Company consented to pay a civil penalty in the United States District Court foramount 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 DistrictExchange Act and the associated rules thereunder. The expense associated with this settlement of New Jersey (Civ Act. No. 3:14-cv-06220)the SEC Order has previously been accrued in the Company’s financial statements. Also on June 7, 2022, the SEC filed a civil action against F-Secure Corporation and F-Secure, Inc. (collectively, “F-Secure"), claiming that F-Secure has infringed, and continues to infringe, severaltwo former members of the Company’s patents. In Februarymanagement team, alleging misconduct arising out of the restated transactions that took place in 2015 Synchronoss entered into a patent license and settlement agreement with F-Secure Corporation and F-Secure, Inc. whereby2016 investigated by the SEC as set forth above. The Company granted eachmay be required to indemnify the former members 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 providedmanagement in that former shareholders of Miyowa SA would be eligible for earn-out payments,action. Due to the extent specified business milestones were achieved following the acquisition. In December 2013, Eurowebfund and Bakamar, two former shareholdersinherent uncertainty of Miyowa SA, filed a complaint against the Company in the Commercial Court of Paris, France claiming that they are entitled to certain earn-out payments under the acquisition agreement. The Company was served with a copy of this complaint in January 2014. On December 3, 2015, the Court dismissed all claims in the complaint against the Company. On December 19, 2015, the former shareholders of Miyowa filed an appeal with the Court of Appeal of Paris, France, appealing the Court’s decision. Althoughlitigation, the Company cannot predict the outcome of the appeal,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. In addition, failure to comply with the outcome isprovisions of the SEC Order could result in further actions by one or both governmental agencies which could have a material adverse due toeffect on the inherent uncertaintiesCompany’s results of litigation,operations.
Except as set forth above, 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. The Company is currently the plaintiff in several patent infringement cases. The defendants in several of these cases have filed counterclaims. Although the Company cannot predict the outcome of the cases at this time due to the inherent uncertainties of litigation, the Company continues to pursue its claims and believes that the counterclaims are without merit, and the Company intends to defend all of such counterclaims.
19. Subsequent Events Review
On January 19, 2017, Synchronoss completed the acquisition of Intralinks at a price of $13.00 per share, or $850.0 million, net of working capital adjustments. In connection with the acquisition, the Company entered into a credit agreement (the "2017 Credit Agreement"). Synchronoss paid a total of approximately $904.1 million, including repayment of existing indebtedness for both Synchronoss, including the Amended Credit Facility and Intralinks, fees and costs associated with the 2017 Term Facility (as defined below) and other transaction related expenses and funded the payments required to complete the acquisition with cash on hand and proceeds from the 2017 Credit Agreement. The Company's obligations under the 2017 Credit Agreement are guaranteed by certain of their subsidiaries, including Intralinks, and secured by substantially all of their assets and the guarantors.
The Company believes that the acquisition will allow the Company to leverage the Synchronoss' product portfolio, go-to-market strategy and diversified customer footprint and deploy an enhanced enterprise and mobile solution to customers while opening up new enterprise distribution channels across the world.
At this time, the required financial information needed to complete the initial purchase price allocation of all of the tangible and identifiable intangible assets and liabilities, as well as the required supplemental pro forma results of the combined entity, is incomplete.
The term loan lenders under the 2017 Credit Agreement have advanced to senior secured term loans in an aggregate principal amount of $900 million with a maturity date of January 19, 2024 (the “ 2017 Term Facility”). The revolving lenders under the Credit Agreement have provided Synchronoss with a revolving credit facility of up to $200 million with a maturity date of January 19, 2022 (the “Revolving Facility”). The term loans under the Term Facility will amortize at 1% per annum in equal quarterly installments with the balance payable on the final maturity date. The proceeds of the Term Facility are being used to finance a portion of the cash consideration in the Offer and the Merger, to refinance certain existing indebtedness of Synchronoss, including the Amended Credit Facility and indebtedness of Intralinks (or its subsidiaries) and to pay related fees and expenses. The Revolving Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice under swingline loans, and borrowing thereunder may be used for working capital and other general corporate purposes.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
21. Additional Financial Information
Loans under
Other income (expense), net
The following table sets forth the 2017 Term Facility bear interest at a rate equal to, at Synchronoss' option,components of Other income (expense), net included in the adjusted LIBOR rate for an applicable interest period or an alternate base rate, in each case, plus an applicable marginConsolidated Statements of 2.75% or 1.75%, respectively. The revolving loans under the Revolving Facility initially bear interest at a rate equal to, at Synchronoss' option, the adjusted LIBOR rate or an alternate base rate, in each case, plus an applicable marginOperations:
| | | | | | | | | | | | | | | | | |
| Twelve Months Ended December 31, |
| 2022 | | 2021 | | 2020 |
FX gains (losses) 1 | $ | 2,702 | | | $ | (5,810) | | | $ | 4,234 | |
Government refunds 2 | 828 | | | 450 | | | 1,597 | |
Income from sale of intangible assets 3 | — | | | 550 | | | 3,477 | |
| | | | | |
Other 4 | (83) | | | (67) | | | 227 | |
| Total | $ | 3,447 | | | $ | (4,877) | | | $ | 9,535 | |
_____________________________
1 Represents fair value of 2.50% or 1.50%, respectively, subject to step-downs basedforeign exchange gains and losses.
2 Represents government and tax refunds.
3 Represents gain on sale on the Company's ratioCompany’s IP addresses and patents.
4 Represents an aggregate of first lien secured debtindividually immaterial transactions.
22. Subsequent Events
On March 10, 2023 the Company received a non-binding proposal from B. Riley Financial, Inc. (“B. Riley”) to adjusted EBITDA.
Subject to certain customary exceptions, loans under the Term Facility are subject to mandatory prepayments in amounts equal to: (1) 100%acquire all outstanding shares of the netCompany’s common stock for a price of $1.15 per share, payable in cash proceeds from any non-ordinary course sale or other disposition of assets (including as a result of casualty or condemnation) by Synchronoss or(the “B. Riley Proposal”).
B. Riley, together with its restricted subsidiaries subject to customary reinvestment provisions and certain other exceptions; (2) 100%affiliates, owns approximately 13.9% of the net cash proceeds from incurrencesCompany’s outstanding common stock as of debt (other than permitted debt);March 10, 2023, and (3) a customary annual excess cash flow sweep at levels based on Parent’s then applicable ratio of first lien secured debt to adjusted EBITDA.
The 2017 Credit Agreement contains a number of customary affirmative and negative covenants and events of default, which, among other things, restrictis the ability of Synchronoss and its subsidiaries to incur debt, allow liens on assets, make investments, pay dividends or prepay certain other debt. The 2017 Credit Agreement also requires Synchronoss to comply with certain financial maintenance covenants, including a total gross leverage ratio and an interest charge coverage ratio.
Certainlargest holder of the lenders under the 2017 Credit Agreement, or their affiliates, have provided, and may in the future from time to time provide, certain commercial and investment banking, financial advisory and other services in the ordinary course of business for the registrant and its affiliates, for which they have in the past and may in the future receive customary fees and commissions.
On February 1, 2017 the Company completed a divestiture of its SpeechCycle business, to an unrelated third party, for consideration of $13.5 million. As partCompany’s common stock. B. Riley also nominated one of the divestiture, Synchronoss entered intoCompany’s directors pursuant to a 1 year transition servicespre-existing agreement with the acquirerCompany.
During 2022, the Company engaged UBS Securities, LLC (“UBS”) as its financial advisor to support various indirect activities such as customer software support, technical support services, maintenanceassist in exploring and general & administrative support services.evaluating potential strategic transactions involving the Company or certain of its lines of business, all with the objective of maximizing value for the Company’s stockholders.
Consistent with its fiduciary duties and in consultation with UBS and its legal advisors, the Company’s Board of Directors will carefully review the B. Riley Proposal and other potential strategic transactions to determine the course of action that it believes will maximize value for the Company’s stockholders. However, there is no guarantee that a strategic transaction involving B. Riley or any other party will be completed.
ITEM 9. CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures.Procedures
We maintain disclosure controls and procedures (as defined in RulesRule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)),Act) that are designed to ensure that information we are required to disclosebe disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SECSEC’s rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officerChief Executive Officer, or CEO, and principal financial officer, as appropriate,our Chief Financial Officer, or CFO, to allow timely decisions regarding required disclosure. In designingManagement, with the participation of our CEO and evaluatingCFO, performed an evaluation of the effectiveness of our disclosure controls and procedures management recognizedas of December 31, 2022. Based on that anyevaluation, our CEO and CFO concluded that our disclosure controls and procedures no matter how well designedwere effective as of December 31, 2022.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and operated, can provide only reasonable assurance of achievingmaintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the desired control objectives.Exchange Act). Under the supervision and with the participation of our management, including our Principal Executive OfficerCEO and our Principal Financial Officer,CFO, we evaluatedconducted an evaluation of the effectiveness of our internal control over financial reporting based on the design and operationframework in Internal Control-Integrated Framework issued by the Committee of our disclosure controls and procedures asSponsoring Organizations of December 31, 2016.the Treadway Commission (2013 Framework). Based uponon that evaluation, our Principal Executive Officer and Principal Financial Officermanagement concluded that our disclosure controls and procedures areinternal control over financial reporting was effective as of December 31, 2016,2022 to provide reasonable assurance regarding the endreliability of financial reporting and the period covered by this yearly report. Management believespreparation of consolidated financial statements for external reporting purposes in accordance with GAAP.
Ernst & Young LLP, the independent registered public accounting firm that the Consolidated Financial Statementsaudited our consolidated financial statements included in this annual report are fairly presented in all material respects in accordance with GAAP, andAnnual Report on Form 10-K, audited the effectiveness of our Principal Executive Officer and Principal Financial Officer have certified that they fairly present in all material respects our financial condition, results of operations and cash flows for each of the periods presented.
Changes in internal controls over financial reporting
On March 1, 2016, we completed our acquisition of Openwave Messaging, Inc. (“Openwave”). SEC guidance permits management to omit an assessment of an acquired business' internal control over financial 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 December 31, 2016.2022. Ernst & Young LLP has issued their report which is included elsewhere herein.
Excluding the Openwave acquisition, thereChanges in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our controls performed during the year ended December 31, 20162022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual ReportLimitations on Internal Control over Financial ReportingControls
Our management is responsible for establishingdisclosure controls and maintaining adequateprocedures and internal control over financial reporting.
Internal control over financial reporting is a processare designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting is defined in Rules 13a‑15(f) or 15d‑15(f) promulgated under the Exchange Actachieving their objectives as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
To assist management, the Company has established procedures to verify and monitor its internal controls. Because of its inherent limitations, however, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
specified above. Management assessed the effectiveness of its internal control over financial reporting as of December 31, 2016. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the "COSO" criteria).
We have excluded from the scope of our assessment of internal control over financial reporting the operations and related assets of Openwave which we acquired in 2016. At December 31, 2016 and for the period from acquisition through December 31, 2016, total assets, net assets, revenues and net income of Openwave represented 6%, 6%, 9% and (20%) of Synchronoss' consolidated total assets, net assets, revenues and net income, respectively, as of and for the year ended December 31, 2016.
Based on our assessment, management concluded that, as of December 31, 2016, its internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by Ernst & Young LLP, its independent registered public accounting firm, as stated in their report which is included in Item 9 of this Annual Report on Form 10‑K.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including its Principal Executive Officer and Principal Financial Officer, does not expect, however, that itsour disclosure controls and procedures or itsour internal control over financial reporting will prevent or detect all errorserror and all fraud. AAny control system, no matter how well conceiveddesigned and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that theits objectives of the control system arewill be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company’s operationsCompany have been detected. These inherent limitations include the realities that judgments in decision‑making can be faulty, and that breakdowns can occur because
Report of Independent Registered Public Accounting Firm
The
To the Stockholders and the Board of Directors and Stockholders of
Synchronoss Technologies, Inc.:
Opinion on Internal Control over Financial Reporting
We have audited Synchronoss Technologies, Inc.’s internal control over financial reporting as of December 31, 2016,2022, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Synchronoss Technologies, Inc.’s (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated March 15, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Openwave Messaging, Inc., which is included in the 2016 consolidated financial statements of Synchronoss Technologies, Inc. since the acquisition date of March 1, 2016 and constituted $55.2 million and $38.0 million of total and net assets, respectively, as of December 31, 2016 and $42.5 million and $3.9 million of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of Synchronoss Technologies, Inc. also did not include an evaluation of the internal control over financial reporting of Openwave Messaging, Inc.
In our opinion, Synchronoss Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Synchronoss Technologies, Inc. as of December 31, 2016 and 2015 and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2016 of Synchronoss Technologies, Inc. and our report dated February 27, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Metropark,Iselin, New Jersey
February 27, 2017March 15, 2023
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANTAND CORPORATE GOVERNANCE
| |
(a) |
a.Identification of Directors. Information concerning the directors of Synchronoss is set forth under the heading “Election of Directors” in the Synchronoss Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
b.Audit Committee Financial Expert. Information concerning Synchronoss’ audit committee financial expert is set forth under the heading “Audit Committee” in the Synchronoss Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
c.Identification of the Audit Committee. Information concerning the audit committee of Synchronoss is set forth under the heading “Audit Committee” in the Synchronoss Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
d.Delinquent Section 16(a) Reports. Information concerning non-compliance, if any, with beneficial ownership reporting requirements is set forth under the caption “Delinquent Section 16(a) Reports” in the Synchronoss Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
e.Information about our Executive Officers. Information concerning the executive officers of Synchronoss is set forth under the heading “Information about our Executive Officers” in the Synchronoss Proxy Statement for the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Identification of Directors. Information concerning the directors of Synchronoss is set forth under the heading “Election of Directors” in the Synchronoss Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
|
| |
(b) | Audit Committee Financial Expert. Information concerning Synchronoss’ audit committee financial expert is set forth under the heading “Audit Committee” in the Synchronoss Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
|
| |
(c) | Identification of the Audit Committee. Information concerning the audit committee of Synchronoss is set forth under the heading “Audit Committee” in the Synchronoss Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
|
| |
(d) | Section 16(a) Beneficial Ownership Reporting Compliance. Information concerning compliance with beneficial ownership reporting requirements is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Synchronoss Proxy Statement for the 2017 Annual Meeting of Stockholders and is incorporated herein by reference.
|
Code of Ethics. Information concerning the Synchronoss Workplace Code of Ethics and Business Conduct is set forth under the caption “Code“Workplace Code of Ethics and Business Conduct” in the Synchronoss Proxy Statement for the 20172022 Annual Meeting of Stockholders and is incorporated herein by reference. The Company intends to disclose on its website any amendments to, or waivers from, its Code of Business Conduct that are required to be disclosed pursuant to the rules of the SEC. Information contained on, or connected to, our website is not incorporated by reference into this annual report and should not be considered part of this report or any other filing that we make with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is set forth under the headings “Compensation of Executive Officers” and “Securities Authorized for Issuance Under Equity Compensation Plans” in the Synchronoss Proxy Statement for the 20172022 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning shares of Synchronoss equity securities beneficially owned by certain beneficial owners and by management is set forth under the heading “Equity Security Ownership of Certain Beneficial Owners and Management” in the Synchronoss Proxy Statement for the 20172022 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions is set forth under the heading “Certain Related Party Transactions” in the Synchronoss Proxy Statement for the 20172022 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES
Information concerning fees and services of the Company’s principal accountants is set forth under the heading “Report of the Audit Committee” and “Independent Registered Public Accounting Firm’s Fees” in the Synchronoss Proxy Statement for the 20172022 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
| | | | | |
| Page No. |
| |
| Consolidated Balance Sheets | |
| Consolidated Statements of Operations | |
| |
| |
| |
| |
| |
| |
(a)(2) Schedule for the years ended December 31, 2016, 2015, 2014:2022, 2021, 2020:
II—Valuation and Qualifying Accounts
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
December 31, 2022, 2021, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Beginning Balance | | Additions | | Reductions | | Ending Balance |
| | (In thousands) |
| Allowance for credit losses: | | | | | | | | |
| 2022 | | $ | 478 | | | $ | 17 | | | $ | (127) | | | $ | 368 | |
| 2021 | | $ | 543 | | | $ | 650 | | | $ | (715) | | | $ | 478 | |
| 2020 | | $ | 1,864 | | | $ | 897 | | | $ | (2,218) | | | $ | 543 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Beginning Balance | | Additions | | Reductions | | Ending Balance |
| | (In thousands) |
| Valuation allowance for deferred tax assets: | | | | | | | | |
| 2022 | | $ | 73,441 | | | $ | 1,464 | | | $ | (7,234) | | | $ | 67,671 | |
| 2021 | | $ | 74,961 | | | $ | 3,306 | | | $ | (4,826) | | | $ | 73,441 | |
| 2020 | | $ | 73,346 | | | $ | 7,402 | | | $ | (5,787) | | | $ | 74,961 | |
All other Schedules have been omitted because they are not applicable, or the required information is shown in the financial statementsConsolidated Financial Statements or notesof the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K thereto.
(a)(3) Exhibits:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
| Exhibit No. | | Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 2.1 | | | | 8-K | | 001-40574 | | 2.1 | | March 8, 2022 | | |
| 2.2 | | | | 10-Q | | 001-40574 | | 2.1 | | May 11, 2022 | | |
| 3.1 | | | | | | | | | | | | X |
| 3.2 | | | | S-1 | | 333-132080 | | 3.4 | | May 9, 2006 | | |
| 3.3 | | | | 8-K | | 000-52049 | | 3.2 | | February 20, 2018 | | |
| 3.4 | | | | 8-K | | 000-52049 | | 3.3 | | June 30, 2021 | | |
| 3.5 | | | | 8-K | | 000-52049 | | 3.1 | | June 30, 2021 | | |
| 3.6 | | | | 8-K | | 001-40574 | | 3.1 | | June 23, 2022 | | |
| 4.1 | | | | S-1 | | 333-132080 | | 3.2 | | May 9, 2006 | | |
| 4.2 | | | | S-1 | | 333-132080 | | 4.2 | | June 12, 2006 | | |
| 4.3 | | | | S-3 | | 333-197871 | | 4.8 | | August 5, 2014 | | |
| 4.4 | | | | 10-K | | 001-40574 | | 4.6 | | March 15, 2022 | | |
| 4.5 | | | | 8-K | | 000-52049 | | 4.1 | | June 30, 2021 | | |
| 4.6 | | | | 8-K | | 000-52049 | | 4.2 | | June 30, 2021 | | |
| 4.7 | | | | 8-K | | 000-52049 | | 4.3 | | June 30, 2021 | | |
| 4.8 | | | | 8-K | | 000-52049 | | 4.3 | | June 30, 2021 | | |
| 10.1 | | | | 8-K | | 000-52049 | | 4.2 | | June 30, 2021 | | |
| 10.2† | | | | S-1 | | 333-132080 | | 10.2 | | February 28, 2006 | | |
| 10.3† | | | | S-1 | | 333-132080 | | 10.3 | | May 9, 2006 | | |
| 10.4† | | | | DEF 14A | | 000-52049 | | - | | April 8, 2010 | | |
| 10.5† | | | | S-8 | | 333-168745 | | 10.4A | | August 11, 2010 | | |
| 10.6† | | | | S-8 | | 333-265780 | | 10.1 | | June 22, 2022 | | |
| 10.7† | | | | 8-K | | 000-52049 | | 10.1 | | December 21, 2017 | | |
| 10.8† | | | | 10-K | | 001-40574 | | 4.6 | | March 15, 2022 | | |
| 10.9† | | | | 10-K | | 000-52049 | | 10.5 | | February 28, 2012 | | |
| 10.10 | | | | 10-K | | 000-52049 | | 10.10 | | February 28, 2012 | | |
| 10.11† | | | | 10-Q | | 000-52049 | | 10.4 | | August 9, 2018 | | |
| 10.12† | | | | 10-Q | | 000-52049 | | 10.5 | | August 9, 2018 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
| Exhibit No. | | Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 10.13 | | | | 10-Q | | 000-52049 | | 10.12 | | August 9, 2018 | | |
| 10.14 | | | | 10-Q | | 000-52049 | | 10.13 | | August 9, 2018 | | |
| 10.15 | | | | 8-K | | 001-40574 | | 1.1 | | October 26, 2021 | | |
| 10.16‡ | | | | 10-Q | | 000-52049 | | 10.2 | | November 9, 2020 | | |
| 10.17† | | | | | | | | | | | | X |
| 10.18† | | | | 10-Q | | 000-52049 | | 10.1 | | May 5, 2021 | | |
| 10.19† | | | | | | | | | | | | X |
| 10.20† | | | | | | | | | | | | X |
| 10.21† | | | | 10-Q | | 001-40574 | | 10.2 | | November 9, 2021 | | |
| 10.22† | | | | | | | | | | | | X |
| 10.23† | | | | 10-Q | | 001-40574 | | 10.1 | | November 9, 2021 | | |
| 10.24 | | | | 8-K | | 001-40574 | | 10.1 | | June 23, 2022 | | |
| 10.25 | | | | 8-K | | 001-40574 | | 10.2 | | June 23, 2022 | | |
| 10.26 | | | | 8-K | | 001-40574 | | 10.3 | | June 23, 2022 | | |
| 10.27 | | | | 8-K | | 001-40574 | | 10.4 | | June 23, 2022 | | |
| 10.28† | | | | 8-K | | 001-40574 | | 10.1 | | August 9, 2022 | | |
| 10.29 | | | | 10-Q | | 001-40574 | | 10.1 | | August 9, 2022 | | |
| 10.30* | | | | 8-K | | 001-40574 | | 10.1 | | November 7, 2022 | | |
| 21.1 | | | | 10-K | | 000-52049 | | 21.1 | | July 2, 2018 | | |
| 23.1 | | | | | | | | | | | | X |
| 31.1 | | | | | | | | | | | | X |
| 31.2 | | | | | | | | | | | | X |
| 32.1** | | | | | | | | | | | | X |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
Exhibit No. | | Description |
2.1 |
| | Agreement and Plan of MergerIncorporated by and among Synchronoss Technologies, Inc., GL Merger Sub, Inc. and Intralinks Holdings, Inc.
dated December 5, 2016, incorporated by reference to Exhibit 2.1 to the Registrant’s Current report on Form 8-K, filed December 6, 2016 (File No. 005-85999). |
3.1 |
| | Restated Certificate of Incorporation of the Registrant, incorporated by reference to Registrant’s Registration Statement on Form S‑1 (Commission File No. 333‑132080). |
3.2 |
| | Amended and Restated Bylaws of the Registrant, incorporated by reference to Registrant’s Registration Statement on Form S‑1 (Commission File No. 333‑132080). |
4.1 |
| | Reference is made to Exhibits 3.1 and 3.2. |
4.2 |
| | Amended and Restated Investors Rights Agreement, dated December 22, 2000, by and among the Registrant, certain stockholders and the investors listed on the signature pages thereto, incorporated by reference to Registrant’s Registration Statement on Form S‑1 (Commission File No. 333‑132080). |
4.3 |
| | Amendment No. 1 to Synchronoss Technologies, Inc. Amended and Restated Investors Rights Agreement, dated April 27, 2001, by and among the Registrant, certain stockholders and the investors listed on the signature pages thereto, incorporated by reference to Registrant’s Registration Statement on Form S‑1 (Commission File No. 333‑132080). |
4.4 |
| | Registration Rights Agreement, dated November 13, 2000, by and among the Registrant and the investors listed on the signature pages thereto, incorporated by reference to Registrant’s Registration Statement on Form S‑1 (Commission File No. 333‑132080). |
4.5 |
| | Amendment No. 1 to Synchronoss Technologies, Inc. Registration Rights Agreement, dated May 21, 2001, by and among the Registrant, certain stockholders listed on the signature pages thereto and Silicon Valley Bank, incorporated by reference to Registrant’s Registration Statement on Form S‑1 (Commission File No. 333‑132080). |
4.6 |
| | Form of Common Stock Certificate, incorporated by reference to Registrant’s Registration Statement on Form S-1 (Commission File No. 333-132080) |
4.7 |
| | Form of Indenture for Convertible Senior Notes, incorporated by reference to Registrant’s Registration Statement on Form S-3 (Commission File No. 333-197871) |
10.1 |
| | Form of Indemnification Agreement between the Registrant and each of its directors and executive officers, incorporated by reference to Registrant’s Registration Statement on Form S‑1 (Commission File No. 333‑132080). |
10.2 |
| | Synchronoss Technologies, Inc. 2000 Stock Plan and forms of agreements thereunder, incorporated by reference to Registrant’s Registration Statement on Form S‑1 (Commission File No. 333‑132080). |
10.3 |
| | Amendment No. 1 to Synchronoss Technologies, Inc. 2000 Stock Plan, incorporated by reference to Registrant’s Registration Statement on Form S‑1 (Commission File No. 333‑132080). |
10.4 |
| | 2006 Equity Incentive Plan, as amended and restated, incorporated by reference to Registrant’s Schedule 14A dated April 8, 2010. |
10.4.1 |
| | 2010 New Hire Equity Incentive Plan, incorporated by reference to Registrant’s Registration Statement on Form S‑8 (Commission File No. 333‑168745). |
10.4.2 |
| | 2015 Equity Incentive Plan, incorporated by reference to Registrant’s Registration Statement on Form S‑8 (Commission File No. 333‑204311). |
10.5 |
| | Employee Stock Purchase Plan, incorporated by reference to Registrant’s Annual Report on Form 10‑K for the year ended December 31, 2011. |
10.6 |
| | Lease Agreement between the Registrant and Wells Reit—Bridgewater NJ, LLC for the premises located at 200 Crossing Boulevard, Bridgewater, New Jersey, dated as of October 27, 2011, incorporated by reference to Registrant’s Annual Report on Form 10‑K for the year ended December 31, 2011. |
|
| | | |
| Exhibit No. | | Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
10.732.2** |
| | Credit Agreement dated as of September 27, 2013 between the Registrant and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Registrant’s Quarterly Report on Form 10‑Q for the quarter ended September 30, 2013. |
10.8‡ |
| | 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 |
| | Sub10ordinate Material and Services Agreement No. SG021306.S.025 by and between the Registrant and AT&T Services, Inc. dated as of August 1, 2013, incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 2013. |
10.10* |
| | Amendment 1 effective as of January 1, 2016 to Subordinate Material and Services Agreement No. SG021306.S.025 by and between the Registrant and AT&T Services, Inc. |
10.11* |
| | Order No.SG021306.S.025.S.007 effective as of January 1, 2016 by and between the Registrant and AT&T Services, Inc. |
10.12* |
| | Amendment No. 1 effective as of January 1, 2016 to Order No. SG021306.S.025.S.001 dated as of August 1, 2013 by and between the Registrant and AT&T Services, Inc. together with Amended and Restated Order No. SG021306.S.025.S.001. |
10.13* |
| | Amendment No. 2 effective as of January 1, 2016 to Order No. SG021306.S.025.S.002 dated as of August 1, 2013 by and between the Registrant and AT&T Services, Inc., together with Amended and Restated Order No. SG021306.S.025.S.002. |
10.14* |
| | Amendment No. 3 effective as of January 1, 2016 to Order No. SG021306.S.025.S.003 dated as of August 1, 2013 by and between the Registrant and AT&T Services, Inc. |
10.15* |
| | Amendment No. 4 effective as of January 1, 2016 to Order No. SG021306.S.025.S.003 dated as of August 1, 2013 by and between the Registrant and AT&T Services, Inc., together with Amended and Restated Order No. SG021306.S.025.S.003 |
10.16* |
| | Amendment No. 5 effective as of January 1, 2016 to Order No. SG021306.S.025.S.004 dated as of August 1, 2013 by and between the Registrant and AT&T Services, Inc. together with Amended and Restated Order No. SG021306.S.025.S.004. |
10.17 |
| | Commitment Letter, dated as of December 5, 2016, by and among Synchronoss Technologies, Inc. and Goldman Sachs Bank USA,
Credit Suisse AG and Credit Suisse Securities (USA) LLC, incorporated by reference to Exhibit 10.1 to the Registrant’s Current report on Form 8-K, filed December 6, 2016 (File No. 005-85999). |
10.18 |
| | Form of Tender and Support Agreement by and between Synchronoss Technologies, Inc., GL Merger Sub, Inc. and certain
stockholders of Intralinks Holdings, Inc. dated December 5, 2016, incorporated by reference to Exhibit 99.1 to the Registrant’s Current report on Form 8-K, filed December 6, 2016 (File No. 005-85999). |
10.19† |
| | Employment Agreement dated as of August 1, 2016 between the Registrant and Stephen G. Waldis, incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 000-5209) |
10.18† |
| | Employment Agreement dated as of August 1, 2016 between the Registrant and Karen Rosenberger, incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 000-5209) |
10.19† |
| | Employment Agreement dated as of August 1, 2016 between the Registrant and Robert Garcia, incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 (File No.000-5209) |
10.20† |
| | Employment Agreement dated as of August 1, 2016 between the Registrant and Daniel Rizer, incorporated by reference to Exhibit10.11 to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (File No. 000-5209).
|
10.21† |
| | Employment Agreement dated as of January 1, 2015 between the Registrant and David Schuette, incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 000-5209). |
10.22 |
| | Share Purchase Agreement dated as of December 24, 2012 by and between Synchronoss Technologies Ireland Ltd. and Research In Motion Ltd, incorporated by reference to Registrant’s Annual report on Form 10‑K for the year ended December 31, 2012. |
21.1 |
| | List of subsidiaries. |
23.1 |
| | Consent of Ernst & Young, LLP, Independent Registered Public Accounting Firm. |
24 |
| | Power of Attorney (see signature page to this Annual Report on Form 10‑K) |
31.1 |
| | Certification of Principal 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 Principal 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 Principal 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 |
32.2 |
| | Certification of Principal 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 20022002. | | | | | | | | | | 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 |
_____________________________
| | | | | |
| † | Compensation Arrangement. |
| |
* | Confidential treatment has been requested for portions of this document. The omitted portions of this document have been filed with the Securities and Exchange Commission. |
| |
| ‡ | Confidential treatment has been granted with respect to certain provisions of this exhibit. |
| ** | |
(b) | Exhibits.This certification is being furnished solely to accompany this Annual Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
(b)Exhibits.
See (a)(3) above.
| |
(c) | Financial Statement Schedule. |
(c)Financial Statement Schedule.
See (a)(2) above.
ITEM 16. FORM 10-K SUMMARY
None.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
December 31, 2016, 2015, and 2014:
|
| | | | | | | | | | | | | | | | |
| | | Beginning | | | | | | Ending |
| | | Balance | | Additions | | Reductions | | Balance |
| | | (In thousands) |
| Allowance for doubtful receivables | | | | | | | | |
| 2016 | | $ | 3,029 |
| | $ | 7,433 |
| | $ | (8,706 | ) | | $ | 1,756 |
|
| 2015 | | $ | 88 |
| | $ | 3,872 |
| | $ | (931 | ) | | $ | 3,029 |
|
| 2014 | | $ | 237 |
| | $ | 418 |
| | $ | (567 | ) | | $ | 88 |
|
|
| | | | | | | | | | | | | | | | |
| | | Beginning | | | | | | Ending |
| | | Balance | | Additions | | Reductions | | Balance |
| | | (In thousands) |
| Valuation allowance for deferred tax assets | | | | | | | | |
| 2016 | | $ | 4,847 |
| | $ | 9,370 |
| | $ | (117 | ) | | $ | 14,100 |
|
| 2015 | | $ | 2,553 |
| | $ | 2,521 |
| | $ | (227 | ) | | $ | 4,847 |
|
| 2014 | | $ | 2,803 |
| | $ | 2,724 |
| | $ | (2,974 | ) | | $ | 2,553 |
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | SYNCHRONOSS TECHNOLOGIES, INC. | |
| | (Registrant) | |
| | |
| SYNCHRONOSS TECHNOLOGIES, INC.
(Registrant)
|
| | | |
| By | /s/ Stephen G. WaldisJeff Miller | |
| | Stephen G. Waldis, Founder andJeff Miller | |
| | Chief Executive ChairmanOfficer | |
| | (Principal Executive Officer)
| |
| | | |
| | | |
| | /s/ Louis Ferraro | |
| | Louis Ferraro | |
| | Chief Financial Officer | |
February 27, 2017March 15, 2023
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ronald J. Prague or Karen L. Rosenberger, or either of them, each with the power of substitution, their attorney‑in‑fact, to sign any amendments to this Form 10‑K (including post‑effective amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys‑in‑fact, or their substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | |
| Signature | Title | Date |
| | |
| /s/ Jeff Miller | Chief Executive Officer | March 15, 2023 |
| Jeff Miller | (Principal Executive Officer) | |
| | |
| Signature | |
| | |
/s/ Stephen G. WaldisLouis Ferraro | Executive Chairman, Principal Executive Officer & Director | February 27, 2017 |
Stephen G. Waldis | (Principal Executive Officer) | |
| | |
/s/ Karen Rosenberger | Chief Financial Officer | February 27, 2017March 15, 2023 |
Karen L. RosenbergerLouis Ferraro | (Principal Financial Officer) | |
| | |
/s/ Ronald W. HovsepianStephen Waldis | Director | February 27, 2017March 15, 2023 |
Ronald W. HovsepianStephen Waldis | Executive Chairman | |
| | |
/s/ William J. CadoganLaurie L. Harris | Director | February 27, 2017March 15, 2023 |
William J. CadoganLaurie L. Harris | | |
| | |
/s/ Thomas J. HopkinsKristin S. Rinne | Director | February 27, 2017March 15, 2023 |
Thomas J. HopkinsKristin S. Rinne | | |
| | |
/s/ James M. McCormickMohan Gyani | Director | February 27, 2017March 15, 2023 |
James M. McCormickMohan Gyani | | |
| | |
/s/ Donnie M. MooreMartin Bernstein | Director | February 27, 2017March 15, 2023 |
Donnie M. MooreMartin Bernstein | | |
