SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The 2019 Notes are senior, unsecured obligationsfollowing table provides a reconciliation of the Company,numerator and are convertible intodenominator used in computing basic and diluted net income attributable to common stockholders per common share from continued and discontinued operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | | | 2021 | | 2020 | | |
Numerator - Basic: | | | | | | | | | | | |
Net loss from continuing operations | $ | (2,420) | | | $ | (694) | | | | | $ | (14,786) | | | $ | (4,044) | | | |
Net income (loss) attributable to redeemable noncontrolling interests | (50) | | | (165) | | | | | 286 | | | (182) | | | |
Preferred stock dividend1 | (21,476) | | | (9,289) | | | | | (32,006) | | | (18,197) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net loss attributable to Synchronoss | $ | (23,946) | | | $ | (10,148) | | | | | $ | (46,506) | | | $ | (22,423) | | | |
| | | | | | | | | | | |
Numerator - Diluted: | | | | | | | | | | | |
Net loss from continuing operations attributable to Synchronoss | $ | (23,946) | | | $ | (10,148) | | | | | $ | (46,506) | | | $ | (22,423) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Denominator: | | | | | | | | | | | |
Weighted average common shares outstanding — basic | 44,131 | | | 41,697 | | | | | 43,438 | | | 41,482 | | | |
Dilutive effect of: | | | | | | | | | | | |
| | | | | | | | | | | |
Shares from assumed conversion of preferred stock2 | 0 | | | 0 | | | | | 0 | | | 0 | | | |
Shares from assumed conversion of Performance Based Cash Units3 | 0 | | | 0 | | | | | 0 | | | 0 | | | |
| | | | | | | | | | | |
Weighted average common shares outstanding — diluted | 44,131 | | | 41,697 | | | | | 43,438 | | | 41,482 | | | |
| | | | | | | | | | | |
Basic EPS | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | |
Basic | $ | (0.54) | | | $ | (0.24) | | | | | $ | (1.07) | | | $ | (0.54) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Diluted | $ | (0.54) | | | $ | (0.24) | | | | | $ | (1.07) | | | $ | (0.54) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Anti-dilutive stock options excluded | 0 | | | 0 | | | | | 0 | | | 0 | | | |
Unvested shares of restricted stock awards | 2,586 | | | 2,220 | | | | | 2,586 | | | 2,220 | | | |
1 Includes preferred stock amortization costs accelerated due to Series A Preferred stock redemption.
2 The calculation does not include the effect of assumed conversion of preferred stock of 14,939,846 and 12,956,487 shares of its common stockfor the three months ended June 30, 2021 and 2020, respectively; and 14,679,984 and 12,729,876 shares for the six months ended June 30, 2021 and 2020, respectively; which is based on a conversion rate of 18.807255.5556 shares per $1,000 principal amount of 2019 Notes which is equivalent to an initial conversion pricethe preferred stock, because the effect would have been anti–dilutive.
3 The calculation does not include the effect of approximately $53.17 per share. The Company will satisfy anyassumed conversion of the 2019 Notes withPerformance Based Cash Units of 826,742 and NaN 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 September 30, 2016, none of these conditions existed with respect to the 2019 Notes and as a result, the 2019 Notes are classified as long term.
The 2019 Notes are the Company’s direct senior unsecured obligations and rank equal in right of payment to all of the Company’s existing and future unsecured and unsubordinated indebtedness.
At September 30, 2016, the carrying amount of the liability was $225.9 million and the outstanding principal of the 2019 Notes was $230 million, with an effective interest rate of approximately 1.39%. The fair value of the 2019 Notes was $248.3 million at September 30, 2016. The fair value of the liability of the 2019 Notes was determined using a discounted cash flow model based on current market interest rates available to the Company. These inputs are corroborated by observable market data for similar liabilities and therefore classified within Level 2 of the fair-value hierarchy.
Interest expense for the Company’s 2019 Notes related to the contractual interest coupon was:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Contractual interest expense | $ | 431 |
| | $ | 431 |
| | $ | 1,294 |
| | $ | 1,293 |
|
10. Restructuring
In March 2016, the Company initiated the preliminary phase of a work-force reduction as part of a corporate restructuring, with reductions occurring across all levels and departments within the Company. This measure was intended to reduce costs and to align the Company’s resources with its key strategic priorities. As of September 30, 2016, there were $0.4 million of accrued restructuring charges on the balance sheet.
A summary of the Company’s restructuring accrual at September 30, 2016 and changes during the nine months ended September 30, 2016, is presented below:
|
| | | | | | | | | | | | | | | |
| Balance at December 31, 2015 | | Charges | | Payments | | Balance at September 30, 2016 |
Employment termination costs | $ | — |
| | $ | 5,139 |
| | $ | (4,816 | ) | | $ | 323 |
|
Facilities consolidation | 54 |
| | — |
| | (10 | ) | | 44 |
|
Total | $ | 54 |
| | $ | 5,139 |
| | $ | (4,826 | ) | | $ | 367 |
|
11. Income Taxes
The Company recognized approximately $6.9 million and $14.9 million in related income tax expense during the three and nine months ended September 30, 2016, respectively. The effective tax rate was approximately 59% and 1,143% for the three and nine months ended September 30, 2016, which was higher than the U.S. federal statutory rate primarily due to the unfavorable impact of losses in foreign jurisdictions which have lower tax rates than the U.S. as well as the unfavorable impact of the fair market value adjustment for the Razorsight contingent consideration. Additionally, the effective tax rate for the nine months ended September 30, 2016 was impacted by the recording of a non-cash income tax provision to establish a $2.9 million valuation allowance, which reduced the deferred tax asset related to the current net operating losses of certain foreign subsidiaries. The Company reviews the expected annual effective income tax rate and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and forecasted permanent book-to-tax differences, and changes resulting from the impact of tax law changes. The early adoption of ASU 2016-09 resulted in a decrease in the effective tax rate for the three months ended SeptemberJune 30, 20162021 and 2020, respectively; and 699,023 and NaN shares for the six months ended June 30, 2021 and 2020, respectively; which is based on 1 share per 1 Performance Based Cash Unit, because the effect would have been anti–dilutive.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
13. Commitments, Contingencies and Other
Purchase Obligations
Aggregate annual future minimum payments under non-cancelable agreements are as follows:
| | | | | | | | | | | | |
Year | | Non-cancelable agreements | | | | |
2021 | | $ | 5,529 | | | | | |
2022 | | 16,471 | | | | | |
2023 | | 13,807 | | | | | |
2024 and thereafter | | 21,995 | | | | | |
Total | | $ | 57,802 | | | | | |
Legal Matters
In the ordinary course of business, the Company is regularly subject to various claims, suits, regulatory inquiries and investigations. The Company records a liability for specific legal matters when it determines that the likelihood of an increaseunfavorable 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 effectivefuture. The Company also evaluates other contingent matters, including income and non-income tax rate forcontingencies, to assess the nine months ended September 30, 2016likelihood of 51%.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.
12. Legal Matters
On October 7, 2014,May 1, 2017, May 2, 2017, June 8, 2017 and June 14, 2017, 4 putative class actions were filed against the Company filed an amended complaintand certain of its current and former officers and directors in the United States District Court for the District of New Jersey (Civ Act. No. 3:14-cv-06220) against F-Secure Corporation and F-Secure, Inc. (collectively, “F-Secure"(the “Securities Law Action”), claiming that F-Secure has infringed, and continues to infringe, several. After these cases were consolidated, the court appointed as lead plaintiff Employees’ Retirement System of the State of Hawaii, which filed, on November 20, 2017, a consolidated complaint purportedly on behalf of purchasers of the Company’s patents. Incommon stock between February 2015, Synchronoss entered into a patent license3, 2016 and settlement agreement with F-Secure Corporation and F-Secure, Inc. wherebyJune 13, 2017. On February 2, 2018, the Company granted each of these companies (but not their subsidiaries or affiliates) a limited license to Synchronoss’ patents. As a result of entering into the patent license and settlement agreement, the parties filed a joint stipulationdefendants moved to dismiss the aboveconsolidated complaint in its entirety, with prejudice. Before that motion was decided, on August 24, 2018, lead plaintiff filed a consolidated amended complaint purportedly on behalf of purchasers of the Company’s common stock between October 28, 2014 and June 13, 2017. On June 28, 2019, the Court granted defendants’ motion to dismiss the consolidated amended complaint in its entirety, without prejudice, allowing lead plaintiff to leave to amend its complaint.
On August 14, 2019, lead plaintiff filed a second amended complaint. The second amended complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and it alleges, among other things, that the defendants made false and misleading statements of material information concerning the Company’s 2011 acquisition agreement with Miyowa SA providedfinancial results, business operations, and prospects. The plaintiff seeks unspecified damages, fees, interest, and costs. On October 4, 2019, the defendants moved to dismiss the second amended complaint in its entirety. On May 29, 2020, the court granted in part and denied in part defendants’ motion to dismiss the second amended complaint, without prejudice. Plaintiff filed its motion for class certification on October 30, 2020, which motion remains pending. The Company believes that former shareholdersthe asserted claims lack merit and intends to defend against all of Miyowa SA would be eligible for earn-out payments,the claims vigorously. Due to the extent specified business milestones were achieved following the acquisition. In December 2013, Eurowebfund and Bakamar, two former shareholdersinherent uncertainties of Miyowa SA, filed a complaint against the Company in the Commercial Court of Paris, France claiming that they are entitled to certain earn-out payments under the acquisition agreement. The Company was served with a copy of this complaint in January 2014. On December 3, 2015, the Court dismissed all claims in the complaint against the Company. On December 19, 2015, the former shareholders of Miyowa filed an appeal with the Court of Appeal of Paris, France, appealing the Court’s decision. Althoughlitigation, the Company cannot predict the outcome of the action at this time and can give no assurance that the asserted claims will not have a material adverse effect on its financial position or results of operations.
On September 15, 2017, October 24, 2017, October 27, 2017 and October 30, 2017, Company shareholders filed derivative lawsuits against certain of the Company’s current and former officers and directors and the Company (as nominal defendant) in the United States District Court for the District of New Jersey (the “Derivative Suits”). On May 24, 2018, the Court consolidated the Derivative Suits and appointed Lisa LeBoeuf as lead plaintiff. The lead plaintiff designated as the Operative Complaint the complaint she previously had filed on October 27, 2017. On March 11, 2019, the defendants filed a motion to dismiss the Operative Complaint, which the Court granted in substantial part on November 26, 2019. On December 10, 2019,
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
the defendants filed a motion for reconsideration respecting the only claim to survive the motion to dismiss. On June 12, 2020, the Court granted the defendants’ motion for reconsideration and dismissed the remaining claim without prejudice, allowing lead plaintiff leave to amend her complaint. On July 13, 2020, lead plaintiff filed an amended complaint. The amended complaint alleges claims related to breaches of fiduciary duties and unjust enrichment. The amended complaint’s allegations relate to substantially the same facts as those underlying the Securities Law Action described above. On April 30, 2021, the Court dismissed Plaintiff’s amended complaint in its entirety. Plaintiff filed a notice of appeal or estimate anyon May 28, 2021.Due to the inherent uncertainties of litigation, including a potential loss ifappeal, the Company cannot predict the outcome isof the action at this time and can give no assurance that the asserted claims will not have a material adverse dueeffect on our financial position or results of operations.
On March 7, 2019, Synchronoss shareholders, Beth Daniel and Juan Solis, filed a separate derivative lawsuit against certain of the Company’s current and former officers and directors and the Company (as nominal defendant) in the Court of Chancery of the State of Delaware, asserting substantially the same allegations as those underlying the Derivative Suits and the Securities Law Action described above. Plaintiffs seek unspecified damages and for the Company to take steps to improve its corporate governance and internal procedures. On May 20, 2019, the parties stipulated to a stay of the action pending a ruling on the pending motion to dismiss in the Derivative Suits. The Company believes that the asserted claims lack merit and intends to defend against all of the claims vigorously. Due to the inherent uncertainties of litigation, the Company believescannot predict the positionsoutcome of Eurowebfundthe action at this time and Bakamar are without merit,can give no assurance that the asserted claims will not have a material adverse effect on our financial position or results of operations.
On June 11, 2020 and June 12, 2020, Company shareholders filed derivative lawsuits against certain of the Company’s current and former officers and directors and the Company intends(as nominal defendant) in the United States District Court for the District of New Jersey (the “Demand Refused Derivative Complaints”). The Demand Refused Derivative Complaints allege claims related to vigorously defendbreaches of fiduciary duty, unjust enrichment, and alleged violations of securities laws. The complaints’ allegations relate substantially to the same facts as those underlying the Securities Law Action described above. The Demand Refused Derivative Complaints further allege that each plaintiff made a demand upon the Company’s Board of Directors to investigate the alleged misconduct and that such demand was wrongfully refused. Plaintiffs seek unspecified damages and for the Company to take steps to improve its corporate governance and internal procedures. On October 20, 2020, the Court consolidated the actions and appointed co-lead plaintiffs. On December 4, 2020, co-lead plaintiffs filed a consolidated amended complaint. On February 3, 2021, the defendants filed motions to dismiss the amended complaint, which remain pending before the Court. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the action at this time and can give no assurance that the asserted claims will not have a material adverse effect on its financial position or results of operations.
On May 7, 2021, a mediation took place concerning the Securities Law Action and all of the derivative actions. The Company and the parties to those actions are in the process of seeking to finalize a settlement of all claims.
On June 22, 2021, the Securities and Exchange Commission (“SEC”) staff notified the Company that the staff has made a preliminary determination to recommend that the SEC initiate an enforcement action against the Company in connection with certain financial transactions that the Company effected in 2015 and 2016 and its disclosure of and accounting for such transactions, which the Company restated in the third quarter of 2018 in its restated annual and quarterly financial statements for 2015 and 2016. That restatement followed the Company’s announcement, on June 13, 2017 (the “June 2017 Announcement”), that certain of its prior financial statements would need to be restated. Certain individuals, including certain current and former members of Synchronoss' management team, received similar notifications. The Company is in discussions with the SEC staff regarding the prospect of resolving this matter through settlement. If the Company is unable to resolve this matter through settlement then it would expect to receive a “Wells notice” from the SEC staff in connection with this matter. Although a Wells notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law, it is a formal notice that the SEC has made a preliminary determination to bring an enforcement action against the recipient. Upon receipt of a Wells notice, the recipient has the opportunity to respond to the SEC staff’s position before any formal enforcement action is taken.
In the third quarter of 2017, the SEC and Department of Justice initiated investigations in connection with the June 2017 Announcement and certain transactions that the Company restated in the third quarter of 2018. The Company has received subpoenas, produced documents, and provided additional information to the government in connection with those investigations.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Due to the inherent uncertainties of government investigations, the Company cannot predict the outcome of these government investigations or the SEC staff’s preliminary determination at this time and can give no assurance that the asserted claims brought by them.will not have a material adverse effect on its financial position, prospects or results of operations. It is possible that the ultimate amount of the Company’s liability could be higher than its current reserve.
TheExcept as set forth above, the Company is not currently subject to any legal proceedings that could have a material adverse effect on its operations; however, it may from time to time become a party to various legal proceedings arising in the ordinary course of its business. The Company is currently the plaintiff in several patent infringement cases. The defendants in several of these cases have filed counterclaims. Although the Company cannot predict the outcome of the cases at this time due to the inherent uncertainties of litigation, the Company continues to pursue its claims and believes that the counterclaims are without merit, and the Company intends to defend against all of such counterclaims.
13. Subsequent Events Review14. Additional Financial Information
Other Income, net
The Company has evaluated all subsequent events through November 8, 2016.following table sets forth the components of included in the Other Income, net included in the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | |
FX gains (losses)1 | | $ | 969 | | | $ | 315 | | | $ | (2,304) | | | $ | 101 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Government refunds | | 5 | | | 552 | | | 5 | | | 552 | | | |
Income from sale of intangible assets2 | | 550 | | | 321 | | | 550 | | | 2,164 | | | |
Other3 | | 52 | | | 179 | | | (71) | | | 241 | | | |
Total | | $ | 1,576 | | | $ | 1,367 | | | $ | (1,820) | | | $ | 3,058 | | | |
1 Fair value of foreign exchange gains and losses
2 Represents gain on sale of certain of the Company’s IP addresses and Patents
3 Represents an aggregate of individually immaterial transactions
ITEM 2.MANAGEMENT'SMANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OFOPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with the information set forth in our consolidated financial statementsCondensed Consolidated Financial Statements and the related notes included elsewhere in Item 1 “Financial Information” of this quarterly report on Form 10-Q10-Q.
The words “Synchronoss,” “we,” “our,” “ours,” “us,” and in our annual report Form 10-K for the year ended December 31, 2015.“Company” refer to Synchronoss Technologies, Inc. and its consolidated subsidiaries. This quarterly report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “hopes,” “should,” “continues,” “seeks,” “likely” or similar expressions, indicate a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions.assumptions, including, but not limited to, risks, uncertainties and assumptions relating to the duration and severity of the COVID-19 pandemic and its impact on our business and financial performance. Actual results may differ materially from the forward-looking statements we make. We caution investors not to place substantial reliance on the forward-looking statements included in this quarterly report. These statements speak only as of the date of this quarterly report, (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments. All numbers are expressed in thousands unless otherwise stated.
Overview
We areSynchronoss Technologies, Inc. (“Synchronoss” or the “Company”) is a leading innovatorglobal software and services company that provides essential technologies for the mobile transformation of business. The Company’s portfolio contains offerings such as personal cloud, solutions, software-based activation, secure mobility,secure-mobility, identity management and securescalable messaging for mobile carriers, enterprises, retailers and OEMs across the globe. Our software provides innovative service provider and enterprise solutions that drive billions of transactions on a wide range of connected devices across the world’s leading networks. Our solutions include: activation and provisioning software for devices and services, cloud-based sync, backup, storage and content management capabilities, broadband connectivity solutions, analytics, white label messaging, identity/access management and secure mobility management that enable communications service providers (CSPs), cable operators/multi-services operators (MSOs) and original equipment manufacturers (OEMs) with embedded connectivity (e.g. smartphones, laptops, tablets and MIDs, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers, medium and large enterprises and their consumers as well as other customers to accelerate and monetize value-added services for secure and broadband networks and connected devices.
Our Activation Software, Synchronoss Personal Cloud™ and Enterpriseplatforms, products and platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and “back-office” infrastructure-related systems and processes. Oursolutions. These essential technologies create a better way of delivering the transformative mobile experiences that the Company’s customers rely on our solutions and technology to automate the process of activation and content and settings management for their subscribers’ devices while delivering additional communication services.
Our Synchronoss Activation solution navigates the variety of complex back-end systems of CSPs to provide a best-in-class ordering system by orchestrating the workflow and consolidated automated customer care services. This allows CSPs using our platforms to realize the full benefits of their offerings. The platforms also support, among other automated transaction areas, credit card billing, inventory management, and trouble ticketing. In addition to this, the platform supports customer activation related transactions and other and other services which include managing access service requests, local service requests, local number portability, and directory listings.
Our Synchronoss Personal Cloud™ solution seamlessly transfers content from an old device to a new device, and syncs, backs up and connects consumer’s content from multiple smart devices to our cloud platform. This allows carrier customers to protect and manage their growing cache of personally generated, mobile content over long periods of time.
Our Synchronoss Enterprise solutions support an advanced mobility digital experience for businesses and consumers for accessing and protecting their information. Our identity and access management platform helps consumers and business users to securely authenticate access to online websites to conduct e-commerce transactions or access important data. Our secure mobility platforms help users safely and securely store and share important data. Our solutions are based on understanding assumptions on the behaviors of individuals through the capture of who they are, what they are doing and how, where and when they are doing it. This allows our platformsneed to help reduce fraud, improve cybersecurity detection/preventionthem stay ahead of the curve in competition, innovation, productivity, growth and overall productivity. Our identity and access solution supports both consumers by allowing them to self-register and verify their identity, while providing non-intrusive multi-factor authentication and businesses the ability to be sure the correct person is doing the transaction. The secure mobility solution combines the identity platform with a “bring your own device” (BYOD) platform that is based on a secure container for accessing data, applications, content and personal information management tools like email, calendar, messaging and notes.operational efficiency.
Our Synchronoss Messaging is a white label messaging platform for service providers and offers a full range of deployment options including full integration with on premise systems, hybrid deployment support for optimal mix of technologies and protecting existing investments, and full cloud deployment for both SaaS and hosted models. Synchronoss Messaging features a distributed systems management console (messaging security, administration console for user and domain provisioning and management, integration with Nagios for monitoring and alerts) with support for smartphones, tablets and connected devices (support for leading protocols including iCal, CalDAV, CardDAV, EAS, IMAP/IDLE), Native Mobile App for iOS and Android for mail, contacts, calendar and task management.
OurSynchronoss’ products and platforms are designed to be carrier-grade, highly available, flexible and scalable, to enableenabling multiple converged communication services to be managed across multiplea range of distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets allowing usoutlets. This business model allows the Company to meet the rapidly changing and convergingconverged services and connected devices offered by ourtheir customers. OurSynchronoss’ products, platforms and solutions enable our Enterpriseits customers to acquire, retain and service subscribers and employees quickly, reliably and cost-effectively with white label and custom-branded solutions. OurSynchronoss’ customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and enterprise-wide sharing/collaboration with connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of ourthe Company’s platforms enable new revenue streams and retention opportunities for ourtheir customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud, while optimizingCloud. By using the Company’s technologies, Synchronoss’ customers can optimize their cost of operations andwhile enhancing their customer experience. We
The Company currently operateoperates in and market ourmarkets its solutions and services directly through ourits sales organizations in North America, Europe and Asia-Pacific.
Impacts of COVID-19
Although COVID-19 has not significantly affected our business to date, this disclosure discusses the actions the Company has taken in response to the COVID-19 crisis and the impacts that the situation has had on our business, as well as related known or expected trends.
The continued impact of COVID-19 on the macroeconomy and our business will depend significantly on the effectiveness and distribution of the vaccine, the potential cyclicality of the health crisis and the related public policy actions, market or regulatory needs or demands, the length and severity of the global economic slowdown, and whether and how our customers change their behaviors over the longer term. As a result, the demand for our products and services, as well as our overall results
of operations, may be materially and adversely impacted by the pandemic for the duration of 2021 or longer, and we are unable to predict the duration or degree of such impact with any certainty.
In response to the ongoing COVID-19 pandemic, we continue to execute our business continuity plans and evolve our operations to protect the safety of our employees while continuing to provide critical products and services to our customers. Some of the key initiatives the Company continues to execute include:
•Working safely and effectively with new and existing customers to continue to provide our products and services through the pandemic
•Continuing to enhance and modify our safety protocols for our employees
•Adjusting business operations to address circumstances created by COVID-19
•Maintaining effective governance and internal controls in a remote work environment
As the pandemic continues, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees, customers and the Company and to continue to provide our products and services.
Revenues
We generate a substantial portionmost of our revenues on a per-transactionper transaction or subscription basis, which is derived from contracts that extend up to 60 months from execution. For the three months ended September 30, 2016 and 2015, we derived approximately 66% and 73%, respectively, of our revenues from transactions processed and subscription arrangements.
Historically, our revenues have been directly impacted by the number of transactions processed. The future success of our business depends on the continued growth of consumerBusiness-to-Business and businessBusiness-to-Business-to-Consumer driving customer transactions, and ascontinued expansion of our platforms into the TMT Market globally through Cloud, Messaging and Digital markets. As such, the volume of transactions that we process could fluctuateand our ability to expand our footprint in TMT and globally may result in revenue fluctuations on a quarterly basis. See “Current Trends Affecting Our Results of Operations” for certain matters regarding future results of operations.
Most of our revenues are recorded in U.S. dollars but as we continue to expand our footprint with international carriers, and increase the extent of recording our international activities in local currencies, we will become subject to currency translation risk that could affect our future net sales as reported in U.S. dollars.
EachOur top five customers accounted for 70.2% and 69.6% of AT&Tnet revenues for the six months ended June 30, 2021 and June 30, 2020, respectively. Contracts with these customers typically run for three to five years. Of these customers, Verizon accounted for more than 10% of our revenues for the three months ended September 30, 2016in 2021 and 2015. AT&T and2020. The loss of Verizon in the aggregate accounted for 71% and 75% of our revenues for the three months ended September 30, 2016 and 2015, respectively. Our agreements with AT&T typically run three to five years and cover bothas a technology fee and exception handling services. Wecustomer would have a Master Services Agreement, with Statements of Work for each of the AT&T businesses which we support. Each of our agreements with Verizon typically have a similar duration, subject to a Master Services Agreement, with Statements of Work. See “Risk Factors” for certain matters bearing risksmaterial negative impact on our future results of operations.company. However, we believe that the costs incurred and subscriber disruption by Verizon to replace Synchronoss’ solutions would be substantial.
Current Trends Affecting Our Results of Operations
GrowthAs the COVID-19 pandemic continues to evolve, we are actively monitoring the global situation. The extent of the continuing impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our business operations, impact on our customer, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. The extent to which the COVID-19 pandemic may continue to impact our business, financial condition or results of operations is uncertain, but may include, without limitation, impacts to our paying user growth as well as disruptions to our business operations as a result of travel restrictions, shutdown of workplaces and potential impacts to our vendors. Additionally, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our service providerreporting currency, as well as changes in interest rates. Volatile market conditions arising from the COVID-19 pandemic have and enterprise solutions are beingmay continue to negatively impact our results of operations and cash flows, due to a weakening of foreign currencies relative to the U.S. dollar, which may cause our revenues to decline relative to our costs.
Business from our Synchronoss Personal Cloud™ solution has been driven by the massive penetration and use of smart devices on a global basis. The following major trends drive our investment decisionsgrowth in acquisitions and development of product and solutions:
Activation. Service Provider consolidation continues in the US and Internationally. As CSP’s merge with MSOs and TV Providers there is an urgency provisioning new subscribers with devices and new value-add service bundles, while driving cost out of the business. Synchronoss Activation is poised to create new efficiencies in often underserved digital channels as a way to quickly provision combined subscriber bases and utilize traditionally underperforming and lower cost digital sales channels.
PersonalCloud. Shorter carrier customer contracts and lease programs have resulted in faster device upgrade cycles by customers resulting in increased device order transactions and activations. With mobile devices globally that are becoming content rich and acting as a replacement forrich. As these devices replace other traditional devices like PC’s,PCs, the ability to securely back up content from mobile devices, sync it with other devices and share it with others in their community of family, friends and business associates hashave become an essential need. The major Tier 1 carriers are also publicly discussing achieving 500% penetration (multiple connected devices per user) by enabling connectivity to non-traditional devices.needs and subscriber expectations. Such devices include smartphones, connected cars, personal health and wellness devices and
connected home.home devices. The need for these devices to be activated and managed and the contents from themof these devices to be stored in a common cloud are also expected to be drivers of our businessesbusiness in the longlonger term.
Business from our traditional Synchronoss Cloud products such as Personal Cloud, Mobile Content Transfer, Backup & Transfer and Out of Box Experience (OOBE) are poised to respond to this trend withMessaging business (Email) has been driven by a resurgence in the need for white label secure messaging platforms that favor the Mobile Network Operator’s (“MNO”) business objectives and scalable products for mobile devices.
Secure Mobility. As Enterprise looksare not beholden to increase productivity, it turnsthe objectives of a sponsoring over-the-top (“OTT”) platform. We believe that messaging drives higher subscriber engagement than any other application in the market today and holds the potential to mobile. Yet it finds itself confrontedstimulate new revenue from traditional services and third-party brands. OTT global success has driven MNOs to look at opportunities to preempt and compete with the serious logistical challengesOTTs which has potential opportunity for Synchronoss’ future growth to be driven by the need of not only managing stringent security requirements, but also accommodating the personal devices of its employeesTMT companies including (and especially) MNOs to embrace Messaging as a lower costPlatform (“MaaP”). MaaP will allow TMT and more employee-friendly option. This trendMNO’s to converse with subscribers in an efficient, automated way by streamlining the costs and increasing the effectiveness of Bring Your Own Device (BYOD) is now prevalent enough that regulated industries are investigating new ways to merge Wall Street level regulated security and privacy with main stream usability standardsself-care, as well as yielding cross-sell upselling of Facebook, Twitter, Slacker and other third party mobile services. Inherent in this challenge is managing multi-factor authentication, policy driven credential management and fraud protection as employees move in and outservice plans, devices, bundles, etc. The Synchronoss Advanced Messaging Platform provides state of “work” selves and “Home” selves – or even in, out or between companies. In addition to being able to manage different personas,the art RCS-driven features including the ability to create more productive work flows employing predictive analytics is taking on a higher value as a desirable function of a secure mobility platform. Our Secure Mobility platform enables Enterprisesupport advanced Peer to pivot quickly into the regulated BYOD work environmentPeer communications and realize cost savings as well as productivity gains.
Messaging. Messaging as a medium is moving beyond standard email. Messaging is fast becoming an interface for commerce. With the emergence of messaging giants such as What’s App, Line, Facebook and others, companies are using advanced messaging to create commerce opportunities to give subscribers visibility to smart transactions within a very sticky, high frequency environment. Chat bots, operating on AI fueled from semantic analysis of messaging content are the latest entrants to create a “messaging user interface” that is linking subscribers and third parties together across multiple channels. Service providers are not adopting new messaging clients to compete with highly competitive and viral Over the Top (OTT) players. Instead they are adopting monetization techniques used by those players to extend subscriber information into third party applications and chat interfaces creating stickier commerce opportunities. We are working closely with customers, especially in the Asia Pacific market, to evolve Service Provider messaging into a cloud-centric commerce offering utilizing personal cloud, identity management and other advanced messaging protocols that will open upintroduce new revenue streams driven by commerce and allow Operatorsadvertising via Application-to-Person capabilities.
Companies in the TMT market all face the dilemma of attempting to compete with OTT providerspivot their businesses to digital execution in order to create experiences that meet the expectations of their subscribers, generate new ways.revenues and streamline costs creating healthier margins at a faster time to market than they have ever operated before. Their challenges feature the lack of skill sets to conceptualize and run day to day digital operations and the lack of resources to integrate their legacy back end systems to enact digital experiences that achieve their business objectives. The growth of Synchronoss Digital Platforms will be driven by the ability to provide TMT companies’ desire to obtain digital transformation solutions as quickly as possible while educating them on the ability to operate a digital business efficiently. Our Platform as a Service (“PaaS”) model provides a desirable alternative to heavy capital expenditure spending options often tried internally. The ability for our platforms to create low/no code, new customer digital journeys, virtually on the fly, gives TMT Companies the ability to operate new experiences and businesses without heavily investing in development resources.
To support our expected growth, which we expect to be driven by thethese favorable industry trends mentioned above, we continue to look for opportunities to improve our operating efficiencies, such as the utilization of offshore technical and non-technical resources for our exception handling center management as well as routine software maintenance activities. We alsowill leverage modular components from our existing software platforms to build new products. We believe that these opportunities will continue to provide future benefits and position us to supportfor future revenue growth. In addition, we anticipate further automation of the transactions generated by our more mature customers and additional transaction types. Our cost of services can fluctuate from period to period based upon the level of automation and the on-boarding of new transaction and service types. We are also making investments in new research and development of new products designed to enable us to grow rapidly in the mobile wireless market. Our purchase of capital assets and equipment may also increase based on aggressive deployment, subscriber growth and promotional offers for free or bundled storage by our major Tier 1 carrier customers.
We continue to advanceexpand our plans forplatforms into the expansion of our platforms' footprint with broadband carriersconverging TMT, MNO, and international mobile carriersDigital spaces to supportenable connected devices andto do more things across multiple networks, through our focus on transaction managementbrands and cloud-based services for back up, synchronization and sharing of content.communities. Our initiatives with AT&T, Verizon Wireless and other CSPsour customers continue to grow both with regard to our current businessesbusiness as well as our new products.product offerings. We are also exploring additional opportunities through merger and acquisition activities to support our customer, product and geographic diversification strategies.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements in accordance with GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies asDiscussion of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during a fiscal period. Although we believe that our judgments and estimates are appropriate, correct and reasonable under the circumstances, actual results may differ from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See “Risk Factors” for certain matters bearing risks on our future results of operations.
We believe that of our significant accounting policies, which are described in Note 2 in our Annual Report on Form 10-K for the year ended December 31, 2015, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies which we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations:
Revenue Recognition and Deferred Revenue
Allowance for Doubtful Accounts
Income Taxes
Goodwill
Noncontrolling interest
Investments in Affiliates and Other Entities
Business Combinations
Stock-Based Compensation
There were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K during the nine months ended September 30, 2016. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for a more complete discussion of our critical accounting policies and estimates.
Key Developments
On March 1, 2016, we acquired all outstanding shares of Openwave Messaging, Inc. for $124.5 million, net of working capital adjustments and liabilities assumed, comprised of $102.5 million paid in cash and $22 million paid in shares of our common stock, based upon the average market value of the common stock for the ten trading days prior to the acquisition date.
Openwave’s product portfolio includes its core complete messaging platform optimized for today’s most complex messaging requirements worldwide with a particular geographic strength in Asia Pacific. With this acquisition and combined with our current global footprint, we will have increased direct access to subscribers around the world for the Synchronoss Personal Cloud platform and bolster our go-to-market efforts internationally.
ResultsCondensed Consolidated Statements of Operations
Three months ended SeptemberJune 30, 20162021 compared to the three months ended SeptemberJune 30, 20152020
The following table presents an overview of our results of operations for the three months ended SeptemberJune 30, 20162021 and 2015:2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | 2021 vs 2020 | | |
| 2021 | | 2020 | | | | $ Change | | |
Net revenues | $ | 71,532 | | | $ | 76,535 | | | | | $ | (5,003) | | | |
Cost of revenues1 | 27,142 | | | 29,480 | | | | | (2,338) | | | |
Research and development | 17,197 | | | 19,096 | | | | | (1,899) | | | |
Selling, general and administrative | 21,909 | | | 24,640 | | | | | (2,731) | | | |
Restructuring charges | 877 | | | 4,493 | | | | | (3,616) | | | |
Depreciation and amortization | 8,485 | | | 10,284 | | | | | (1,799) | | | |
Total costs and expenses | 75,610 | | | 87,993 | | | | | (12,383) | | | |
Loss from continuing operations | $ | (4,078) | | | $ | (11,458) | | | | | $ | 7,380 | | | |
| | | | | | | | | |
1 Cost of revenues excludes depreciation and amortization which are shown separately.
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2016 | | 2015 | | 2016 vs 2015 |
| $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change |
| (in thousands) |
Net revenues | $ | 176,421 |
| | 100 | % | | $ | 150,874 |
| | 100 | % | | $ | 25,547 |
| | 17 | % |
Cost of services* | 77,230 |
| | 44 | % | | 63,438 |
| | 42 | % | | 13,792 |
| | 22 | % |
Research and development | 28,141 |
| | 16 | % | | 23,986 |
| | 16 | % | | 4,155 |
| | 17 | % |
Selling, general and administrative | 31,600 |
| | 18 | % | | 21,003 |
| | 14 | % | | 10,597 |
| | 50 | % |
Net change in contingent consideration obligation | 572 |
| | — | % | | — |
| | — | % | | 572 |
| | 100 | % |
Restructuring charges | 977 |
| | 1 | % | | 399 |
| | — | % | | 578 |
| | 145 | % |
Depreciation and amortization | 24,692 |
| | 14 | % | | 19,754 |
| | 13 | % | | 4,938 |
| | 25 | % |
Total costs and expenses | 163,212 |
| | 93 | % | | 128,580 |
| | 85 | % | | 34,632 |
| | 27 | % |
Income from operations | $ | 13,209 |
| | 7 | % | | $ | 22,294 |
| | 15 | % | | $ | (9,085 | ) | | (41 | )% |
|
| |
* | Cost of services excludes depreciation and amortization which is shown separately. |
Net revenues. Net revenues increased $25.5 decreased $5.0 million to $176.4$71.5 million for the three months ended SeptemberJune 30, 2016,2021, compared to the same period in 2015. Transaction2020. The decrease in revenue is primarily attributable to non-recurring license sales and one-time professional services in the prior period and the accounting treatment of deferred revenue due to a customer renewal as per ASC 606, which was signed in in the third quarter of fiscal 2020. These changes were partially offset by growth in cloud subscribers and the acceleration of subscription revenues asrevenue from the dissolution of a percentageprevious customer.
Cost of sales were 66% or $117.1revenues decreased $2.3 million to $27.1 million for the three months ended SeptemberJune 30, 2016,2021, compared to 73% or $109.4 million for the same period in 2015. 2020. The $7.72021 decrease was primarily attributable to the year over year reduction in revenue and the cost savings from strategic initiatives implemented in the year driven mainly by data center consolidation and operating expense savings.
Research and development expense decreased $1.9 million increase in transaction and subscription revenue is primarily driven by new subscription arrangements as a result of our expansion with new customers. Professional service and license revenues as a percentage of sales were 34% or $59.3to $17.2 million for the three months ended SeptemberJune 30, 2016,2021, compared to 27% or $41.5 million for the same period in 2015. The increase in professional services2020. The research and license revenue is primarily duedevelopment costs decreased year over year mainly as a result of executed cost savings initiatives to new license agreementsstreamline our workforce and expansion of services with our customers.reduce vendor spend.
Net revenues related to Activation SolutionsSelling, general and administrative expense decreased $0.3$2.7 million to $74.5$21.9 million for the three months ended SeptemberJune 30, 2016,2021, compared to the same period in 2015. Net revenues related2020. The 2021 decrease was primarily attributable to Activation Solutions represented 42%significant cost cutting initiatives executed in year which included headcount reductions, reduced vendor spending and lower facility costs.
Restructuring charges were $0.9 million and $4.5 million for the three months ended SeptemberJune 30, 2016, compared to 50% for the same period in 2015. Net revenues related to our Cloud Solutions increased by $25.8 million to $101.9 million for the three months ended September 30, 2016, compared to the same period in 2015. This increase in our Cloud Solutions performance was a result of new cloud offerings with existing customers as well as increased international sales. Net revenues related to our Cloud Solutions represented 58% for the three months ended September 30, 2016, compared to 50% for the same period in 2015.
Expenses
Cost of services. Cost of services increased $13.8 million to $77.2 million for the three months ended September 30, 2016, compared to the same period in 2015, due2021 and 2020, respectively, which primarily to increases in personnel and related costs, migration and integration of our acquired businesses. Personnel and related costs increased $5.0 million due to increased headcount from the Openwave acquisition and the launch of our Enterprise solution. Outside consulting expenses increased $5.7 million as a result of increased usage of third party exception handling vendors. Facility costs increased by $2.3 million which was primarily driven by increased costs for service contracts due to the expansion of our operational footprint.
Research and development. Research and development expense increased $4.2 million to $28.1 million for the three months ended September 30, 2016, compared to the same period in 2015 primarily due to an increase of $2.9 million in outside consultant expense which was driven by the launch of our Enterprise solution.
Selling, general and administrative. Selling, general and administrative expense increased $10.6 million to $31.6 million for the three months ended September 30, 2016, compared to the same period in 2015. The increase was driven by a $3.7 million increase in personnel and related costs which were impacted by increased headcount due to the launch of our Enterprise solution and our Openwave acquisition. There was an increase in professional services of $1.9 million related to accounting and legal costs resulting from our acquisitions and tax planning efforts. The remaining increase related to a $2.5 million increase in bad debt expense.
Net change in contingent consideration obligation. The net change in contingent consideration obligation was an increase of $0.6 million for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. This was due to an increase in the probability of achieving the contractual milestones associated with the Razorsight earn-out. There was no contingent consideration balance for the three months ended September 30, 2015 due to the completion of all prior earn-out periods.
Restructuring charges. Restructuring charges were $1.0 million for the three months ended September 30, 2016, related to employment termination costs as a result of the work‑force reduction plan startedwork-force reductions initiated in March 2016the current year to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization. Depreciation and amortization expense increased $4.9decreased $1.8 million to $24.7$8.5 million for the three months ended SeptemberJune 30, 2016,2021, compared to the same period in 2015. This2020. The 2021 decrease was primarily relatedattributable to the increaseexpiration of amortizable acquired assets in depreciable assets necessary forcombination with reduced capital expenditures mainly as a result of the continued expansion of our platformsdata center consolidation project and efforts to streamline business operations, partially offset by the increased amortization of our newly acquired intangible assetscapitalized software.
Income tax. The Company recognized approximately $0.2 million and $8.0 million in related to our recent acquisitions.
Interest income. Interest income decreased $0.3 million to $0.3 milliontax benefit during the three months ended June 30, 2021 and 2020, respectively. The effective tax rate was approximately 7.7% for the three months ended SeptemberJune 30, 2016, compared to2021, which was lower than the same period in 2015U.S. federal statutory rate primarily due to a changepre-tax losses in our portfolio allocations.
Interest expense. Interest expense increased $0.1 million to $1.6 millionjurisdictions where full valuation allowances have been recorded, and in zero rate jurisdictions, and discrete tax benefits associated with the release of certain uncertain tax benefit reserves, partially offset by certain foreign jurisdictions projecting current income tax expense. The Company’s effective tax rate was approximately 92.0% for the three months ended SeptemberJune 30, 2016, compared to the same period in 2015.
Other income (expense), net. Other income (expense) increased $0.9 million to $0.2 million for the three months ended September 30, 2016, compared to the same period in 2015. Other income (expense) increased primarily due to a one-time $0.5 million benefit from the restructuring of specific facility leases.
Income tax. We recognized approximately $6.9 million and $10.7 million in related income tax expenses during the three months ended September 30, 2016 and 2015, respectively. Our effective tax rate was approximately 59% for the three months ended September 30, 2016,2020, which was
higher than ourthe U.S. federal statutory rate primarily due to the unfavorable impactCompany’s ability to recognize certain loss carrybacks as a result of lossesthe enactment of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) in foreign jurisdictions, which have lower tax rates than the U.S. andfirst quarter of 2020, the unfavorable impact of the fair market value adjustment forredemption of the contingent consideration obligation related toCompany’s interest in STIN and valuation allowances recorded in domestic and foreign jurisdictions, partially offset by the Razorsight earn-out. Our effective tax rate was approximately 53% forimpact of permanent book-tax differences.
Discussion of the threeCondensed Consolidated Statements of Operations
Six months ended SeptemberJune 30, 2015, which was higher than our U.S. federal statutory rate due to the unfavorable impact of losses in foreign jurisdictions, which have lower tax rates than the U.S. and the unfavorable impact of transaction costs related to the purchase of Razorsight, which are required to be capitalized for income tax purposes.
Nine months ended September 30, 20162021 compared to the ninesix months ended SeptemberJune 30, 20152020
The following table presents an overview of our results of operations for the ninesix months ended SeptemberJune 30, 20162021 and 2015:2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | $ Change | | |
| 2021 | | 2020 | | | | $ Change | | |
Net revenues | $ | 137,031 | | | $ | 153,657 | | | | | $ | (16,626) | | | |
Cost of revenues1 | 55,779 | | | 64,951 | | | | | (9,172) | | | |
Research and development | 34,594 | | | 38,884 | | | | | (4,290) | | | |
Selling, general and administrative | 39,837 | | | 50,984 | | | | | (11,147) | | | |
Restructuring charges | 1,590 | | | 5,943 | | | | | (4,353) | | | |
Depreciation and amortization | 18,352 | | | 21,640 | | | | | (3,288) | | | |
Total costs and expenses | 150,152 | | | 182,402 | | | | | (32,250) | | | |
Loss from continuing operations | $ | (13,121) | | | $ | (28,745) | | | | | $ | 15,624 | | | |
| | | | | | | | | |
| | | | | | | | | |
1 Cost of revenues excludes depreciation and amortization which are shown separately.
|
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2016 | | 2015 | | 2016 vs 2015 |
| $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change |
| (in thousands) |
Net revenues | $ | 476,658 |
| | 100 | % | | $ | 421,620 |
| | 100 | % | | $ | 55,038 |
| | 13 | % |
Cost of services* | 217,004 |
| | 46 | % | | 172,013 |
| | 41 | % | | 44,991 |
| | 26 | % |
Research and development | 78,408 |
| | 16 | % | | 68,472 |
| | 16 | % | | 9,936 |
| | 15 | % |
Selling, general and administrative | 89,799 |
| | 19 | % | | 60,603 |
| | 14 | % | | 29,196 |
| | 48 | % |
Net change in contingent consideration obligation | 7,299 |
| | 2 | % | | — |
| | — | % | | 7,299 |
| | 100 | % |
Restructuring charges | 5,139 |
| | 1 | % | | 5,090 |
| | 1 | % | | 49 |
| | 1 | % |
Depreciation and amortization | 74,009 |
| | 16 | % | | 51,221 |
| | 12 | % | | 22,788 |
| | 44 | % |
Total costs and expenses | 471,658 |
| | 99 | % | | 357,399 |
| | 85 | % | | 114,259 |
| | 32 | % |
Income from operations | $ | 5,000 |
| | 1 | % | | $ | 64,221 |
| | 15 | % | | $ | (59,221 | ) | | (92 | )% |
|
| |
* | Cost of services excludes depreciation and amortization which is shown separately. |
Net revenues.Net revenues increased $55.0 decreased $16.6 million to $476.7$137.0 million for the ninesix months ended SeptemberJune 30, 2016,2021, compared to the same period in 2015. Transaction2020. The decrease in revenue is primarily attributable to non-recurring license sales and one-time professional services in the prior period and the accounting treatment of deferred revenue due to a customer renewal as per ASC 606, which was signed in in the third quarter of fiscal 2020. These changes were partially offset by growth in cloud subscribers and the acceleration of subscription revenues asrevenue from the dissolution of a percentageprevious customer.
Cost of sales were 69% or $330.9revenues decreased $9.2 million to $55.8 million for the ninesix months ended SeptemberJune 30, 2016 compared to 73% or $306.0 million for the same period in 2015. The increase in transaction and subscription revenue is primarily driven by new subscription arrangements as a result of our expansion with new customers. Professional service and license revenues as a percentage of sales were 31% or $145.7 million for the nine months ended September 30, 2016, compared to 27% or $115.6 million for the same period in 2015. The increase in professional services and license revenue is primarily due to new license agreements and expansion of services with our customers.
Net revenues related to Activation Solutions decreased $0.6 million to $202.0 million for the nine months ended September 30, 2016, compared tothe same period in 2015. Net revenues related to Activation Solutions represented 42% for the nine months ended September 30, 2016, compared to 48% for the same period in 2015. Net revenues related to our Cloud Solutions increased by $55.6 million to $274.7 million of our revenues for the nine months ended September 30, 20162021, compared to the same period in 2015. 2020. The increase2021 decrease was primarily due to cost savings initiatives implemented by the Company. These initiatives resulted in our Cloud Solution performance was a resultsignificant decrease in cost of new cloud offerings with newrevenues driven mainly by data center consolidation and existing customers. Net revenues related to our Cloud Solutions represented 58% for the nine months ended September 30, 2016, compared to 52% for the same period in 2015.operating expense savings.
Expenses
Cost of services. Cost of services increased $45.0Research and development expense decreased $4.3 million to $217.0$34.6 million for the ninesix months ended SeptemberJune 30, 2016,2021, compared to the same period in 2015, due primarily to increases in personnel and related costs, migration and integration of our acquired businesses. Personnel and related costs increased $11.0 million due to increased headcount from the Openwave acquisition and the launch of our Enterprise solution. Outside consulting expenses increased $15.3 million, of which $5.7 million of costs related to the launch of our Enterprise solution and increased usage of our third-party exception handling vendors. Facility costs increased by $16.3 million this was primarily driven by increased costs for service contracts due to the expansion of our operational footprint.
Research and development. Research2020. The research and development costs decreased year over year mainly as a result of executed cost savings initiatives to streamline our workforce and reduce vendor spend.
Selling, general and administrativeexpense increased $9.9decreased $11.1 million to $78.4$39.8 million for the ninesix months ended SeptemberJune 30, 2016,2021, compared to the same period in 20152020. The 2021 decrease was primarily due to an increase of $11.1 million in outside consultant expense which was mostly driven by the launch of our Enterprise solution offset bycost savings initiatives that resulted in a $1.1 million decrease in personnelemployee costs, facilities, and external costs related costs due to the capitalization of qualified software costs.outside consultants and legal fees.
Selling, general and administrative. Selling, general and administrative expense increased $29.2Restructuring charges decreased $4.4 million to $89.8$1.6 million for the ninesix months ended SeptemberJune 30, 2016,2021, compared to the same period in 2015. The increase was driven in part by a $13.3 million increase in personnel and related costs2020, which were driven by additional headcount due to the launch of our Enterprise solution and our Openwave acquisition. There was also a $4.5 million increase in outside consultants, of which the most significant increase related to costs incurred for the launch of our Enterprise solution. The remaining increases included $2.5 million related to facilities and $3.3 million related to increases in bad debt expense.
Net change in contingent consideration obligation. The net change in contingent consideration obligation was a $7.3 million increase for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. This was due to an increase in the probability of achieving the contractual milestones associated with the Razorsight earn-out. There was no contingent consideration for the nine months ended September 30, 2015 due to the completion of all prior earn-out periods.
Restructuring charges. Restructuring charges were $5.1 million for the nine months ended September 30, 2016,primarily related to employment termination costs as a result of the work‑force reduction plan startedwork-force reductions initiated in March 2016the current year to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization. Depreciation and amortization expense increased $22.8decreased $3.3 million to $74.0$18.4 million for the ninesix months ended SeptemberJune 30, 2016,2021, compared to the same period in 2015,2020. The 2021 decrease was primarily relatedattributable to the increaseexpiration of amortizable acquired assets in depreciable assets necessary forcombination with reduced capital expenditures mainly as a result of the continued expansion of our platformsdata center consolidation project and efforts to streamline business operations, partially offset by the increased amortization of our newly acquired intangible assets related to our recent acquisitions.capitalized software.
Interest expense. Interest expense increased $0.8 million to $5.0 million for the nine months ended September 30, 2016, compared to the same period in 2015 due to an increase
Other income (expense), net. Other income (expense) increasedIncome tax. The Company recognized approximately $0.4 million to $0.2 million for the nine months ended September 30, 2016, compared to the same period in 2015. Other income (expense) increased primarily due to a one-time $0.5 million benefit from the restructuring of specific facility leases.
Income tax. We recognized approximately $14.9 million and $25.5$20.4 million in related income tax expensebenefit during the ninesix months ended SeptemberJune 30, 20162021 and 2015,2020, respectively. OurThe effective tax rate was approximately 1,143%2.4% for the ninesix months ended SeptemberJune 30, 2016,2021, which was lower than the U.S. federal statutory rate primarily due to pre-tax losses in jurisdictions where full valuation allowances have been recorded, pre-tax losses in jurisdictions which have a zero tax rate, and certain foreign jurisdictions projecting current income tax expense. During the period, the Company also recognized a discrete income tax benefit associated with the release of certain reserves for uncertain tax benefits. The Company’s effective tax rate was approximately 83.5% for the six months ended June 30, 2020, which was higher than ourthe U.S. federal statutory rate primarily due to the unfavorable impactCompany’s ability to recognize certain loss carrybacks as a result of lossesthe enactment of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) in foreign jurisdictions, which have lower tax rates than the U.S.,first quarter 2020, the unfavorable impact of the fair market value adjustment forredemption of the Razorsight contingent consideration obligationCompany’s interest in STIN and valuation allowances recorded in domestic and foreign jurisdictions, partially offset by the recordingimpact of a non-cash income tax provisionpermanent book-tax differences. The Company continues to establish a valuation allowance. We consideredconsider all available evidence, including our historical profitability and projections of future taxable income together with new evidence, both positive and negative, that could affect the view of the future realization of deferred tax assets. As a result of ourthe assessment, weno change was recorded a $2.9 millionby the Company to the valuation allowance which reducedduring the deferred tax asset related to our current net operating losses of certain foreign subsidiaries. Our effective tax rate was approximately 42% for the ninesix months ended SeptemberJune 30, 2015, which was higher than our U.S. federal statutory rate due to the unfavorable impact of losses in foreign jurisdictions We review the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and forecasted permanent book-to-tax differences, and changes resulting from the impact of tax law changes.2021.
Liquidity and Capital Resources
OurAs of June 30, 2021, our principal sourcesources of liquidity has beenwere cash provided by operations and borrowings on our Credit Facility.the remaining proceeds from the financing transactions. Our cash and cash equivalents and marketable securities balance was $144.3$32.6 million at SeptemberJune 30, 2016, a decrease of $89.4 million as compared to the balance at December 31, 2015. This decrease was primarily due to our acquisition of Openwave, the unfavorable timing of collections, purchases of fixed assets and repurchases of outstanding common stock under the Board approved repurchase program. This was offset by borrowings under the Credit Facility and cash provided by operations.2021. We anticipate that our principal uses of cash in the futureand cash equivalents will be to fund the expansion of our business, through both organic growth as well as possible acquisition activities and the expansion of our customer base. Uses of cash will also include facility andincluding technology expansion capital expenditures, and working capital.
At SeptemberJune 30, 2016,2021, our non-U.S. subsidiaries held approximately $25.0$6.9 million of cash and cash equivalents that are available for use by all of our operations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries except those acquired as part of the Openwave acquisition, will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to U.S. tax for the incremental amount in excess of the foreign tax paid. Due to the timing and circumstances of repatriation of suchthese earnings, if any, it is not practical to determine the unrecognized deferred tax liability related to the amount.
Credit Facility
In September 2013, we entered into a Credit Agreement (the “Credit Facility”) with JP Morgan Chase Bank, N.A., as the administrative agent, Wells Fargo Bank, National Association, as the syndication agent and Capital One, National Association and KeyBank National Association, as co-documentation agents. The Credit Facility, which was used for general corporate purposes, was a $100 million unsecured revolving line of credit that matures on September 27, 2018. We paid a commitment fee in the range of 25 to 35 basis points on the unused balance of the revolving credit facility under the Credit Agreement. We had the right to request an increase in the aggregate principal amount of the Credit Facility to $150 million.
Interest on the borrowing were based upon LIBOR plus a 2.25 basis point margin. All outstanding balances under the Credit Facility were repaid on July 7, 2016 and the Credit Facility was terminated and replaced with the Amended Credit Facility.
Amended Credit Facility
On July 7, 2016, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent (the “Administrative Agent”) and the several lenders party thereto (the “Amended Credit Facility”). The Amended Credit Facility, which will be used for general corporate purposes, is a $250 million unsecured revolving line of credit that matures on July 7, 2021, subject to terms and conditions set forth therein. We pay a commitment fee in the range of 15 to 30 basis points on the unused balance of the revolving credit facility under the Credit Agreement. We have the right to request an increase in the aggregate principal amount of the Amended Credit Facility to $350 million.
Interest on the borrowing was based upon LIBOR plus a 1.99 basis point margin. As of September 30, 2016, we have an outstanding balance of $38 million on our Amended Credit Facility.
The Amended Credit Facility is subject to certain financial covenants. As of September 30, 2016, we were in compliance with all required covenants.
Convertible Senior Notes
On August 12, 2014, we issued $230.0 million aggregate principal amount of 0.75% Convertible Senior Notes due in 2019 (the “2019 Notes”). The 2019 Notes mature on August 15, 2019, and bear interest at a rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. We accounted for the $230 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance. At September 30, 2016, the carrying amount of the liability was $225.9 million and the outstanding principal of the 2019 Notes was $230.0 million, with an effective interest rate of approximately 1.39%.
Share Repurchase Program
On February 4, 2016, we announced that our Board of Directors approved a share repurchase program under which we may repurchase up to $100 million of our outstanding common stock. We plan to make such purchases at prevailing prices over the next 12 to 18 months.
As of September 30, 2016, we repurchased approximately 1.3 million shares of our common stock for $40.0 million in connection with our existing share repurchase program.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands):
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2016 | | 2015 |
Net cash provided by (used in): | | | (As adjusted) |
Operating activities | $ | 56,484 |
| | $ | 76,574 |
|
Investing activities | (80,479 | ) | | (168,700 | ) |
Financing activities | (1,915 | ) | | (3,058 | ) |
Cash flows from operations. Net cash provided by operating activities for the nine months ended September 30, 2016 was $56.5 million, as compared to $76.6 million for the same period in 2015. Cash flows from operations decreased by approximately $20.1 million and was primarily impacted by the increased levels of net working capital, specifically, the unfavorable timing of collections.
Cash flows from investing. Net cash used in investing activities for the nine months ended September 30, 2016 was $80.5 million, as compared to $168.7 million used for the same period in 2015. The decrease of approximately $88.2 million was primarily due to decreased purchases of marketable securities.
Cash flows from financing. Net cash used in financing activities for the nine months ended September 30, 2016 was $1.9 million, as compared to $3.1 million used by financing activities for the same period in 2015. The decrease in net cash used in financing activities for the nine months ended September 30, 2016 of $1.1 million as compared to 2015 was primarily due to higher net borrowings of $38 million offset by share repurchases of $40 million.
We believe that our existing cash, and cash equivalents, and our ability to manage working capital and expected positive cash flows generated from our existing operations our available credit facilities and other available sources of financingin combination with continued expense reductions will be sufficient to fund our operations for the next twelve months from the filing date of this Form 10-Q based on our current business plans. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. Given the economic uncertainty as a result of the pandemic, we have taken actions to improve our current liquidity position, including, reducing working capital, reducing operating costs and substantially reducing discretionary spending. Even with these actions however, an extended period of economic disruption as a result of the continued global impact 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” in our Annual Report on Form 10-K for the year ended December 31, 2020, some of which are outside of our control.
Redemption of Series A Preferred Stock
The net proceeds from our public offering of common stock, Senior Note offering and the Series B Preferred Stock transaction was used in part to fully redeem all outstanding shares of Series A Preferred Stock on June 30, 2021 (the “Redemption”).
For further details, see Note7. Debt and Note9. Stockholders’ Equity of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Series B Preferred Stock
On June 30, 2021, we closed a private placement of 75,000 shares of or Series B Preferred Stock, for an aggregate purchase price of $75.0 million. 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 (as defined in the Series B Certificate) 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 Synchronoss 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.
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 Synchronoss 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” (as that term is defined in the Series B Certificate) 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, Synchronoss will be required to use (i) the first proceeds $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 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 Series B Preferred Stock, on a pro rata basis among each holder of Series B Preferred Stock.
Revolving Credit Facility
We repaid in full and closed our Revolving Credit Facility as of June 30, 2021. For further details, see Note7. Debt of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
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 June 30, 2021, 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.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands): | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change | | |
| 2021 | | 2020 | | | | 2021 vs 2020 | | |
Net cash provided by (used in): | | | | | | | | | |
Operating activities | $ | 8,167 | | | $ | 1,608 | | | | | $ | 6,559 | | | |
Investing activities | (11,659) | | | (6,934) | | | | | (4,725) | | | |
Financing activities | 2,687 | | | 9,991 | | | | | (7,304) | | | |
Our primary source of cash is receipts from revenue. The primary uses of cash are personnel and related costs, telecommunications and facility costs related primarily to our cost of revenue and general operating expenses including professional service fees, consulting fees, building and equipment maintenance and marketing expense.
Cash flows from operating activities for the six months ended June 30, 2021 was $8.2 million cash provided by operating activities, as compared to $1.6 million of cash provided by operating activities for the same period in 2020. The increase in cash provided by operations from the prior year is primarily attributable to favorable changes in working capital.
Cash flows from investingfor the six months ended June 30, 2021 was $11.7 million cash used in investing, as compared to $6.9 million in cash used in investing activities during the same period in 2020. The cash used for investing in the current year was primarily related to the purchase of fixed assets and investment in capitalized software. The net decrease in cash used for investing in the prior year was primarily related to the investment in capitalized software offset by the sale of certain IP address assets.
Cash flows from financing for the six months ended June 30, 2021 was $2.7 million of cash provided, as compared to $10.0 million of cash provided by financing activities for the same period in 2020. In 2021, the net proceeds from our public offering of common stock, Senior Note offering and Series B Preferred Stock transaction was primarily used to fully redeem all outstanding shares of the Company’s Series A Preferred Stock and repay and close the Revolving Credit Facility on June 30, 2021. The cash provided from financing activities in the prior year was attributable to the drawdown from our Revolving Credit Facility.
Effect of Inflation
Although inflation generally affects us by increasing our cost of labor and equipment, we do not believe that inflation has had any material effect on our results of operations during the three or six months ended June 30, 2021 and 2020. We do not expect the current rate of inflation to have a material impact on our business.
Contractual Obligations
Our contractual obligations consist of contingent consideration, office equipment and colocation services and contractual commitments under third-party hosting, software licenses and maintenance agreements. The following table summarizes our long-term contractual obligations as of June 30, 2021 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | 2021 | | 2022-2024 | | 2025-2026 | | Thereafter |
Capital lease obligations | | $ | 804 | | | $ | 131 | | | $ | 599 | | | $ | 74 | | | $ | — | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating lease obligations | | 60,868 | | | 6,145 | | | 27,892 | | | 16,268 | | | 10,563 | |
Purchase obligations1 | | 57,802 | | | 5,529 | | | 42,574 | | | 9,699 | | | — | |
8.375% Senior Notes due 2026 | | 125,000 | | | — | | | — | | | 125,000 | | | — | |
Total | | $ | 244,474 | | | $ | 11,805 | | | $ | 71,065 | | | $ | 151,041 | | | $ | 10,563 | |
1 Amount represents obligations associated with colocation agreements and other customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax positions of $2.6 millionat June 30, 2021 are excluded from the table above as we are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. We anticipate that the balance of unrecognized tax benefits will decrease by approximately $0.6 millionover the next twelve months.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements in accordance with U.S. GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during a fiscal period. The SEC considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application.
These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts continuing to arise from COVID-19 and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See Part II, “Item 1A. Risk Factors” in this Form 10-Q for certain matters bearing risks on our future results of operations.
During the six months ended June 30, 2021, there were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K for the nine monthsyear ended September 30, 2016 or 2015. December 31, 2020. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 for a more complete discussion of our critical accounting policies and estimates.
Impact of Recently Issued Accounting Standards
In August 2016, the Financial Account Standards Board (“FASB”)For a discussion of recently issued Accounting Standards Update (“ASU”) 2016-15, “Statementaccounting standards see Note2. Basis of Cash Flows” (“ASU 2016-15). This new guidance will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. ASU 2016-15 will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. Management is currently evaluating the impact of ASU 2016-15 on our condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications. The new standards are effective for public reporting companies for interim and annual periods beginning after December 15, 2017. Management is currently evaluating the effect that these ASUs will have on our consolidated financial statements and related disclosures. Management has not yet selected a transition method nor has it determined the effect of these standards on our ongoing financial reporting.
Impact of New Accounting Pronouncements
In March, 2016, the FASB released Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments may significantly impact net income, earnings per share, and the statement of cash flows. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. Management elected to early adopt this standard in the second quarter ended June 30, 2016.
ASU 2016-09 eliminates the requirement to estimate and apply a forfeiture rate to reduce stock compensation expense during the vesting period and, instead, account for forfeitures as they occur. ASU 2016-09 requires that this change be adopted using the modified retrospective approach. As such, we recorded a cumulative-effect adjustment of $1.0 million to adjust our retained earnings.
Under ASU 2016-09, excess tax benefits related to employee share-based payments are not reclassified from operating activities to financing activities in the statement of cash flows. We applied the effect of ASU 2016-09 to the presentation of excess tax benefits in the statement of cash flows, retrospectively. This change increased the net cash provided by operating activities and decreased net cash provided by financing activities by $4.7 million for the nine months ended September 30, 2015.
Under ASU 2016-09, cash paid when withholding shares for tax withholding purposes are classified as a financing activity in the statement of cash flows. ASU 2016-09 requires that this change be adopted retrospectively. The presentation requirements for cash flows related to employee taxes paid for withheld shares increased the net cash provided by operating activities and decreased net cash provided by financing activities by $15.5 million for the nine months ended September 30, 2015.
ASU 2016-09 eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. This decreased our effective tax rate for the three months ended September 30, 2016 by 2% and increased our effective tax rate by 51% for the nine months ended September 30, 2016. The ASU requires that this change be adopted prospectively. We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in our computation of diluted earnings per share for the three months ended September 30, 2016. This increased our diluted weighted average common shares outstanding by 43,762 shares and decreased the diluted weighted average common shares outstanding by 121,041 for the three and nine months ended September 30, 2016, respectively.
ASU 2016-09 eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before they can be recognized. Previously unrecognized deferred tax assets were recognized on a modified retrospective basis which resulted in a cumulative-effect adjustment to our retained earnings of $0.5 million.
Adoption of the new standard impacted our previously reported quarterly results as follows:
|
| | | | | | | |
| Three Months Ended March 31, 2016, |
| As reported | | As adjusted |
Income statement: | |
| | |
|
Provision for income taxes | $ | (3,965 | ) | | $ | (4,588 | ) |
Cash flows statement: | |
| | |
|
Net cash from operations | $ | 37,731 |
| | $ | 40,489 |
|
Net cash used in financing | (35,253 | ) | | (32,495 | ) |
Balance sheet: | |
| | |
|
Deferred tax liability | $ | 23,096 |
| | $ | 22,864 |
|
Additional paid-in capital | 535,326 |
| | 536,659 |
|
Retained earnings | 194,012 |
| | 192,911 |
|
Management adopted ASU 2015-03, “Interest- Imputation of Interest (subtopic 835-30); Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15, Presentation and Subsequent MeasurementConsolidation included in Part I, Item 1. “Notes to Condensed Consolidated Financial Statements (unaudited)” of Debt Issuance Costs Associate with Line of Credit Arrangements, during the first quarter of 2016, concurrently. The adoption of these ASUs required us to reclassify the deferred financing costs associated with our Convertible Senior Notes from other assets to long-term debtthis Quarterly Report on a retrospective basis. Our consolidated balance sheets included deferred financing costs of $4.1 million and $5.1 million as of September 30, 2016 and December 31, 2015, respectively, which were reclassified from other assets to long-term debt. The debt issuance costs associated with our Credit Facility and Amended Credit Facility continue to be presented in other assets on the condensed consolidated balance sheets.Form 10-Q.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of SeptemberJune 30, 20162021 and December 31, 20152020 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our interests.investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
In additionThe following discussion about market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We deposit our excess cash in what we believe are high-quality financial instruments, primarily money market funds and certificates of deposit and, we may be exposed to market risks related to changes in interest rates. We do not actively manage the other information set forthrisk of interest rate fluctuations on our marketable securities; however, such risk is mitigated by the relatively short-term nature of these investments. These investments are denominated in this report, you should carefully consider the factors discussed in Part II, “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” inUnited States dollars.
The primary objective of our Annual Report on Form 10-Kinvestment activities is to preserve our capital for the year endedpurpose of funding operations, while at the same time maximizing the income, we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short- and long-term investments in a variety of securities, which could include commercial paper, money market funds and corporate and government debt securities. Our cash, cash equivalents and marketable securities at June 30, 2021 and December 31, 2015, which could materially affect our business, financial condition or future results. We believe our exposure associated with these2020 were invested in liquid money market risks has not changed materially since December 31, 2015.accounts, certificates of deposit and government securities. All market-risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Exchange Risk
We are exposed to translation risk because certain of our foreign operations utilize the local currency as their functional currency and those financial results must be translated into U.SU.S. dollars. As currency exchange rates fluctuate, translation of the financial statements of foreign businesses into U.S. dollars affects the comparability of financial results between years.
We do not hold any derivative instruments and do not engage in any hedging activities. Although our reporting currency is the U.S. dollar, we may conduct business and incur costs in the local currencies of other countries in which we may operate, make sales and buy materials and services. As a result, we are subject to foreign currency translationtransaction risk. Further, changes in exchange rates between foreign currencies and the U.S. dollar could affect our future net sales, cost of sales and expenses and could result in exchangeforeign currency transaction gains or losses.
We cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on our business, results of operations and financial condition. To the extent that our international activities recorded in local currencies increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase and hedging activities may be considered if appropriate.
Interest Rate Risk
We are exposed to the risk of interest rate fluctuations on the interest income earned on our cash and cash equivalents. A hypothetical 100 basis point movement in interest rates applicable to our cash and cash equivalents outstanding at SeptemberJune 30, 20162021 would increase interest income by less than $0.5approximately $0.3 million on an annual basis.
Borrowings under our credit facility, are at variable rates
Based on our outstanding borrowings at September 30, 2016, a one-percentage point change in interest rates would have affected interest expense on the debt by $0.4 million on an annualized basis.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.Procedures
Under the supervision and with the participation of our management, including ourOur Chief Executive Officer and our Chief Financial Officer wehave evaluated the effectiveness of the design and operation of ourregistrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underof the Securities Exchange Act of 1934,1934), as amended) as of September 30, 2016. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of September 30, 2016, the end of the period covered by this quarterly report, tothat ensure that information relating to the informationregistrant which is required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, arethis report is recorded, processed, summarized and reported within therequired time periods specifiedusing the criteria for effective internal control established in Internal Control-Integrated Framework issued by the rules and formsCommittee of Sponsoring Organizations of the Securities and ExchangeTreadway Commission and that such information is accumulated and communicated to our management, includingin 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the registrant’s disclosure controls and procedures were effective as appropriate to allow timely decisions regarding required disclosures.of June 30, 2021.
Changes in internal controls over financial reportingInternal Control Over Financial Reporting
On March 1, 2016, we completed our acquisition of Openwave Messaging, Inc. (“Openwave”). SEC guidance permits management to omit an assessment of an acquired business' internal control over financial reporting from management's assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. Accordingly, we have not assessed Openwaves’ internal control over financial reporting as of September 30, 2016.
Excluding the Openwave acquisition, thereThere were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 30, 2016period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 7, 2014, we filed an amended complaint in the United States District Court for the District of New Jersey (Civ Act. No. 3:14-cv-06220) against F-Secure Corporation and F-Secure, Inc. (collectively, “F-Secure"), claiming that F-Secure has infringed, and continues to infringe, severalFor a discussion of our patents. In February 2015, we entered into a patent license and settlement agreement with F-Secure Corporation and F-Secure, Inc. whereby we granted each of these companies (but not their subsidiaries or affiliates) a limited license to our patents. As a result of entering into the patent license and settlement agreement, the parties filed a joint stipulation to dismiss the above complaint.
Our 2011 acquisition agreement with Miyowa SA provided that former shareholders of Miyowa SA would be eligible for earn-out payments to the extent specified business milestones were achieved following the acquisition. In December 2013, Eurowebfund and Bakamar, two former shareholders of Miyowa SA filed a complaint against us in the Commercial Court of Paris, France claiming that they are entitled to certain earn-out payments under the acquisition agreement. We were served with a copy of this complaint in January 2014. On December 3, 2015, the Court dismissed all claims in the complaint against us. On December 19, 2015, the former shareholders of Miyowa filed an appeal with the Court of Appeal of Paris, France, appealing the Court’s decision. Although we cannot predict the outcome of the appeal, or estimate any potential loss if the outcome is adverse, due to the inherent uncertainties of litigation, we believe the positions of Eurowebfund and Bakamar are without merit, and we intend to vigorously defend all claims brought by them.
We are not currently subject to anymaterial pending legal proceedings that could have a material adverse effectimpact our results of operations, financial condition or cash flows see Note13. Commitments, Contingencies and Other included in Part I, Item 1. “Notes to Condensed Consolidated Financial Statements (unaudited)” of this Quarterly Report on our operations; however, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business. We are currently the plaintiff in several patent infringement cases. The defendants in several of these cases from time to time may file counterclaims. Although due to the inherent uncertainties of litigation, we cannot predict the outcome of any of these actions at this time, we continue to pursue our claims and believe that any counterclaims are without merit, and we intend to defend against all such counterclaims.Form 10-Q.
ITEM 1A. RISK FACTORS
In addition to the other informationOther than set forth in this report, you should carefully consider thebelow, there have been no material changes to our risk factors discussedas previously disclosed in Part I, “ItemItem 1A. Risk Factors”included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Risks Related to our Senior Notes, Series B Preferred Stock and Common Stock
We are subject to investigations relating to certain transactions in 2015 and 2016 that resulted in the restatement of our financial statements in 2018, and the Securities and Exchange Commission staff has preliminarily determined to recommend the initiation of an enforcement action against us in connection with that matter.
On June 22, 2021, the SEC staff notified us that it has made a preliminary determination to recommend that the SEC initiate an enforcement action against us 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. Certain individuals, including certain current and former members of our management team, received similar notifications. We are in discussions with the SEC staff regarding the prospect of resolving this matter through settlement. If we are unable to resolve this matter through settlement then we would expect to receive a “Wells notice” from the SEC staff in connection with this matter. Although a Wells notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law, it is a formal notice that the SEC intends to bring an enforcement action against the recipient. Upon receipt of a Wells notice, the recipient has the opportunity to respond to the SEC staff’s position before any formal enforcement action is taken.
In the third quarter of 2017, the SEC and Department of Justice initiated investigations in connection with the June 2017 Announcement and certain transactions that we restated in the third quarter of 2018. We have received subpoenas, produced documents, and provided additional information to the government in connection with those investigations.
At this time, we cannot predict with certainty what the outcome of these government investigations or the SEC staff’s preliminary determination might be, but they could have a material adverse impact on our financial position, prospects and results of operations.
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 materiallyhave 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 business, financial condition or future results. The risks describedcredit ratings include changes in our Form 10-K are notoperating performance, the only risks we face. Additional riskseconomic environment, our financial position, conditions in and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affectperiods of disruption in any of our principal markets and changes in our business strategy. If weak financial condition and/market conditions or operating results. Ifcompetitive dynamics cause any of the risks actually occur,these factors to deteriorate, we could see a reduction in our business,corporate credit rating. Since investors, analysts and financial condition or results of operations could be negatively affected. In that case, the tradinginstitutions 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 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 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 Securities, Inc. and its affiliates (“BRS”) 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 June 30, 2021, BRS owned 19.2% of our outstanding common stock and all of our Series B Preferred Stock. As a result, BRS 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 BRS and its affiliates beneficially own at least 10% of our outstanding common stock, BRS 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, BRS 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 BRS 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. BRS 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.
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.
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 your 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 you will be able to sell your 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 you will be able to sell your Senior Notes at a particular time or that the price you receive when you 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, you 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 you decide to sell your Senior Notes. This may affect the price, if any, offered for your Notes or your ability to sell your Notes 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. 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 stockholdersbusiness, or the structure or market value of the Senior Notes. We may lose partelect 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 allare subsequently lowered or withdrawn, could adversely affect the market for or the market value of their investment.the Senior Notes.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS
None.On June 30, 2021, we issued and sold 75,000 shares of Series B Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share, for an aggregate purchase price of $75.0 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 Synchronoss and B. Riley Principal Investments, LLC (“BRPI”). The sale was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| | | | | | | | |
Exhibit No. | | Description |
| |
Exhibit No. | Description |
3.1 | |
3.2 | | |
3.2 | |
3.4 | | |
3.3 | |
4.2 | Form | |
3.4 | | | |
10.83.5 | | | |
3.6 | | | |
4.1 | | | |
4.2 | | | |
4.3 | | | |
10.1† | | |
10.2 | |
10.8.1 | Form | |
31.1 | |
10.8.2 | Third Amendment Lease Agreement between the Registrant and Triple Net Investments XXV, L.P. for the premises located at 1555 Spillman Drive, Bethlehem, Pennsylvania, dated as of May 9, 2016. |
| |
10.9 | Cingular Master Services Agreement, effective September 1, 2005 by and between the Registrant and Cingular Wireless LLC, incorporated by reference to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008. |
| |
10.9.1 | Subordinate Material and Services Agreement No. SG021306.S.025 by and between the Registrant and AT&T Services, Inc. dated as of August 1, 2013, including order numbers SG021306.S.025.S.001, SG021306.S.025.S.002, SG021306.S.025.S.003 and SG021306.S.025.S.004, incorporated by reference to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013. |
| |
31.1 | |
31.2 | |
31.2 | | |
32.1 | |
32.1 | | |
32.2 | |
32.2 | | |
101.INS | |
101.INS | XBRL Instance Document |
101.SCH | |
101.SCH | XBRL Schema Document |
101.CAL | |
101.CAL | XBRL Calculation Linkbase Document |
101.DEF | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
101.LAB | | XBRL Labels Linkbase Document |
101.PRE | | XBRL Presentation Linkbase Document |
| | |
101.LAB | XBRL Taxonomy Extension Label Linkbase | |
† Compensation Arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | Synchronoss Technologies, Inc. | |
| | | |
| | | |
| | Synchronoss Technologies, Inc. | |
| | /s/ Jeff Miller | |
| | Jeff Miller | |
| | | |
| | | |
| | /s/Stephen G. Waldis | |
| | Stephen G. Waldis | |
| | Chairman of the Board of Directors and | |
| | Chief Executive Officer | |
| | (Principal executive officer)Executive Officer)
| |
| | | |
| | | |
| | /s/ David Clark | |
| | David Clark | |
| | /s/Karen L. Rosenberger | |
| | Karen L. Rosenberger | |
| | Executive Vice President, Chief Financial Officer
and Treasurer
| |
November 8, 2016
August 9, 2021