SYNCHRONOSS TECHNOLOGIES INC - Quarter Report: 2020 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
Or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-52049
SYNCHRONOSS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 06-1594540 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
200 Crossing Boulevard, 8th Floor Bridgewater, New Jersey | 08807 | ||||
(Address of principal executive offices) | (Zip Code) |
(866) 620-3940
(Registrant’s telephone number, including area code)
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | x | |||||||||||
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | |||||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common Stock, par value $.0001 par value | SNCR | The Nasdaq Stock Market, LLC |
As of August 10, 2020, there were 45,735,138 shares of common stock issued and outstanding.
SYNCHRONOSS TECHNOLOGIES, INC.
FORM 10-Q INDEX
Page No. | ||||||||
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
June 30, 2020 | December 31, 2019 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash, restricted cash and cash equivalents | $ | 42,771 | $ | 39,001 | |||||||
Marketable securities, current | — | 11 | |||||||||
Accounts receivable, net | 57,332 | 65,863 | |||||||||
Prepaid & Other Current Assets | 47,888 | 38,022 | |||||||||
Total current assets | 147,991 | 142,897 | |||||||||
Non-Current Assets: | |||||||||||
Property and equipment, net | 18,659 | 26,525 | |||||||||
Operating lease right-of-use assets | 46,913 | 53,965 | |||||||||
Goodwill | 222,854 | 222,969 | |||||||||
Intangible assets, net | 72,910 | 77,613 | |||||||||
Other Assets, non-current | 12,325 | 8,054 | |||||||||
Total Non-Current Assets | 373,661 | 389,126 | |||||||||
Total assets | $ | 521,652 | $ | 532,023 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 22,948 | $ | 21,551 | |||||||
Accrued expenses | 73,506 | 65,987 | |||||||||
Deferred revenues, current | 46,958 | 65,858 | |||||||||
Debt, current | 10,000 | — | |||||||||
Total current liabilities | 153,412 | 153,396 | |||||||||
Deferred tax liabilities | 2,161 | 1,679 | |||||||||
Deferred revenues, non-current | 16,315 | 21,941 | |||||||||
Leases, non-current | 53,495 | 60,976 | |||||||||
Other non-current liabilities | 3,285 | 4,589 | |||||||||
Redeemable noncontrolling interest | 12,500 | 12,500 | |||||||||
Commitments and contingencies | |||||||||||
Series A Convertible Participating Perpetual Preferred Stock, $0.0001 par value; 10,000 shares authorized; 233 shares issued and outstanding at June 30, 2020 | 218,482 | 200,865 | |||||||||
Stockholders’ equity: | |||||||||||
Common stock, $0.0001 par value; 100,000 shares authorized, 51,619 and 51,704 shares issued; 44,457 and 44,542 outstanding at June 30, 2020 and December 31, 2019, respectively | 5 | 5 | |||||||||
Treasury stock, at cost (7,162 and 7,162 shares at June 30, 2020 and December 31, 2019, respectively) | (82,087) | (82,087) | |||||||||
Additional paid-in capital | 517,794 | 525,739 | |||||||||
Accumulated other comprehensive loss | (34,397) | (33,261) | |||||||||
Accumulated deficit | (339,313) | (334,319) | |||||||||
Total stockholders’ equity | 62,002 | 76,077 | |||||||||
Total liabilities and stockholders’ equity | $ | 521,652 | $ | 532,023 |
See accompanying notes to condensed consolidated financial statements.
3
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Net revenues | $ | 76,535 | $ | 77,846 | $ | 153,657 | $ | 165,951 | ||||||||||||||||||
Costs and expenses: | ||||||||||||||||||||||||||
Cost of revenues* | 29,480 | 33,403 | 64,951 | 72,356 | ||||||||||||||||||||||
Research and development | 19,096 | 19,026 | 38,884 | 38,707 | ||||||||||||||||||||||
Selling, general and administrative | 24,640 | 23,080 | 50,984 | 52,326 | ||||||||||||||||||||||
Restructuring charges | 4,493 | 356 | 5,943 | 777 | ||||||||||||||||||||||
Depreciation and amortization | 10,284 | 20,269 | 21,640 | 40,412 | ||||||||||||||||||||||
Total costs and expenses | 87,993 | 96,134 | 182,402 | 204,578 | ||||||||||||||||||||||
Loss from continuing operations | (11,458) | (18,288) | (28,745) | (38,627) | ||||||||||||||||||||||
Interest income | 1,509 | 299 | 1,568 | 488 | ||||||||||||||||||||||
Interest expense | (84) | (463) | (329) | (1,048) | ||||||||||||||||||||||
Gain (loss) on extinguishment of debt | — | 430 | — | 817 | ||||||||||||||||||||||
Other Income, net | 1,367 | (24) | 3,058 | 439 | ||||||||||||||||||||||
Equity method investment loss | — | (376) | — | (1,619) | ||||||||||||||||||||||
Loss from continuing operations, before taxes | (8,666) | (18,422) | (24,448) | (39,550) | ||||||||||||||||||||||
Benefit for income taxes | 7,972 | 1,844 | 20,404 | 3,235 | ||||||||||||||||||||||
Net loss | (694) | (16,578) | (4,044) | (36,315) | ||||||||||||||||||||||
Net loss attributable to redeemable noncontrolling interests | (165) | (593) | (182) | (906) | ||||||||||||||||||||||
Preferred stock dividend | (9,289) | (7,859) | (18,197) | (15,396) | ||||||||||||||||||||||
Net loss attributable to Synchronoss | $ | (10,148) | $ | (25,030) | $ | (22,423) | $ | (52,617) | ||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||||
Basic | $ | (0.24) | $ | (0.61) | $ | (0.54) | $ | (1.30) | ||||||||||||||||||
Diluted | $ | (0.24) | $ | (0.61) | $ | (0.54) | $ | (1.30) | ||||||||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||||
Basic | 41,697 | 40,810 | 41,482 | 40,566 | ||||||||||||||||||||||
Diluted | 41,697 | 40,810 | 41,482 | 40,566 |
________________________________
* Cost of revenues excludes depreciation and amortization which are shown separately.
See accompanying notes to condensed consolidated financial statements.
4
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited) (In thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Net loss | $ | (694) | $ | (16,578) | $ | (4,044) | $ | (36,315) | ||||||||||||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||||||||
Foreign currency translation adjustments | 1,872 | 802 | (2,069) | 507 | ||||||||||||||||||||||
Unrealized loss on available for sale securities | — | 3 | 751 | (902) | ||||||||||||||||||||||
Net income (loss) on inter-company foreign currency transactions | 554 | 264 | 182 | (119) | ||||||||||||||||||||||
Total other comprehensive income (loss) | 2,426 | 1,069 | (1,136) | (514) | ||||||||||||||||||||||
Comprehensive loss | 1,732 | (15,509) | (5,180) | (36,829) | ||||||||||||||||||||||
Comprehensive loss attributable to redeemable noncontrolling interests | (165) | (593) | (182) | (906) | ||||||||||||||||||||||
Comprehensive loss attributable to Synchronoss | $ | 1,567 | $ | (16,102) | $ | (5,362) | $ | (37,735) |
See accompanying notes to condensed consolidated financial statements.
5
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands)
Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-In Capital | Comprehensive Income (Loss) | Accumulated deficit | Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 51,758 | $ | 5 | (7,162) | $ | (82,087) | $ | 522,164 | $ | (36,823) | $ | (338,454) | $ | 64,805 | ||||||||||||||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 4,754 | — | — | 4,754 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | (138) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends declared | — | — | — | — | (8,454) | — | — | (8,454) | ||||||||||||||||||||||||||||||||||||||||||
Amortization of preferred stock issuance costs | — | — | — | — | (835) | — | — | (835) | ||||||||||||||||||||||||||||||||||||||||||
Shares withheld for taxes in connection with issuance of restricted stock | (1) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Net loss attributable to Synchronoss | — | — | — | — | — | — | (694) | (694) | ||||||||||||||||||||||||||||||||||||||||||
Non-controlling interest | — | — | — | — | 165 | — | (165) | — | ||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | — | — | — | — | — | 2,426 | — | 2,426 | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 51,619 | $ | 5 | (7,162) | $ | (82,087) | $ | 517,794 | $ | (34,397) | $ | (339,313) | $ | 62,002 |
Three Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-In Capital | Comprehensive Income (Loss) | Accumulated deficit | Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | 49,908 | $ | 5 | (7,162) | $ | (82,087) | $ | 533,224 | $ | (31,966) | $ | (249,776) | $ | 169,400 | ||||||||||||||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 5,329 | — | — | 5,329 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | 1,670 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends declared | — | — | — | — | (7,331) | — | — | (7,331) | ||||||||||||||||||||||||||||||||||||||||||
Amortization of preferred stock issuance costs | — | — | — | — | (528) | — | — | (528) | ||||||||||||||||||||||||||||||||||||||||||
Shares withheld for taxes in connection with issuance of restricted stock | — | — | — | — | (5) | — | — | (5) | ||||||||||||||||||||||||||||||||||||||||||
Net income attributable to Synchronoss | — | — | — | — | — | — | (17,171) | (17,171) | ||||||||||||||||||||||||||||||||||||||||||
Non-controlling interest | — | — | — | — | 593 | — | — | 593 | ||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | — | — | — | — | — | 1,069 | — | 1,069 | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 51,578 | $ | 5 | (7,162) | $ | (82,087) | $ | 531,282 | $ | (30,897) | $ | (266,947) | $ | 151,356 |
6
Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-In Capital | Comprehensive Income (Loss) | Accumulated deficit | Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 51,704 | $ | 5 | (7,162) | $ | (82,087) | $ | 525,739 | $ | (33,261) | $ | (334,319) | $ | 76,077 | ||||||||||||||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 10,070 | — | — | 10,070 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | (83) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends declared | — | — | — | — | (16,612) | — | — | (16,612) | ||||||||||||||||||||||||||||||||||||||||||
Amortization of preferred stock issuance costs | — | — | — | — | (1,585) | — | — | (1,585) | ||||||||||||||||||||||||||||||||||||||||||
Shares withheld for taxes in connection with issuance of restricted stock | (2) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Net loss attributable to Synchronoss | — | — | — | — | — | — | (4,044) | (4,044) | ||||||||||||||||||||||||||||||||||||||||||
Non-controlling interest | — | — | — | — | 182 | — | (182) | — | ||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | — | — | — | — | — | (1,136) | — | (1,136) | ||||||||||||||||||||||||||||||||||||||||||
Adoption of new credit loss accounting standard | — | — | — | — | — | — | (768) | (768) | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 51,619 | $ | 5 | (7,162) | $ | (82,087) | $ | 517,794 | $ | (34,397) | $ | (339,313) | $ | 62,002 |
Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-In Capital | Comprehensive Income (Loss) | Accumulated deficit | Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 49,836 | $ | 5 | (7,162) | $ | (82,087) | $ | 534,673 | $ | (30,383) | $ | (233,299) | $ | 188,909 | ||||||||||||||||||||||||||||||||||||
Stock based compensation | — | — | — | — | 11,108 | — | — | 11,108 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | 1,743 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends declared | — | — | — | — | (14,406) | — | — | (14,406) | ||||||||||||||||||||||||||||||||||||||||||
Amortization of preferred stock issuance costs | — | — | — | (990) | (990) | |||||||||||||||||||||||||||||||||||||||||||||
Shares withheld for taxes in connection with issuance of restricted stock | (1) | — | — | — | (9) | — | — | (9) | ||||||||||||||||||||||||||||||||||||||||||
ASC 842 Lease implementation Adjustments | — | — | — | — | — | — | 3,573 | 3,573 | ||||||||||||||||||||||||||||||||||||||||||
Net income attributable to Synchronoss | — | — | — | — | — | — | (37,221) | (37,221) | ||||||||||||||||||||||||||||||||||||||||||
Non-controlling interest | — | — | — | — | 906 | — | — | 906 | ||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | — | — | — | — | — | (514) | — | (514) | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 51,578 | $ | 5 | (7,162) | $ | (82,087) | $ | 531,282 | $ | (30,897) | $ | (266,947) | $ | 151,356 |
See accompanying notes to condensed consolidated financial statements.
7
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
Six Months Ended June 30, | |||||||||||
2020 | 2019 | ||||||||||
Operating activities: | |||||||||||
Net loss | $ | (4,044) | $ | (36,315) | |||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 21,640 | 40,412 | |||||||||
Amortization of debt issuance costs | — | 237 | |||||||||
(Gain) loss on extinguishment of debt | — | (817) | |||||||||
Loss (earnings) from Equity method investments | — | 1,619 | |||||||||
(Gain) loss on Disposals of fixed assets | 12 | — | |||||||||
(Gain) loss on Disposals of intangible assets | (2,164) | — | |||||||||
Amortization of bond premium | — | (34) | |||||||||
Deferred income taxes | 478 | (702) | |||||||||
Stock-based compensation | 10,156 | 11,028 | |||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable, net | 904 | 2,870 | |||||||||
Prepaid expenses and other current assets | (10,031) | 17,635 | |||||||||
Other assets | 502 | 2,042 | |||||||||
Accounts payable | 3,514 | 5,151 | |||||||||
Accrued expenses | 7,002 | (9,569) | |||||||||
Other liabilities | (1,748) | (1,826) | |||||||||
Deferred revenues | (24,613) | (13,167) | |||||||||
Net cash provided by (used in) operating activities | 1,608 | 18,564 | |||||||||
Investing activities: | |||||||||||
Purchases of fixed assets | (424) | (4,940) | |||||||||
Purchases of intangible assets and capitalized software | (8,685) | (5,959) | |||||||||
Proceeds from the sale of intangibles | 2,164 | — | |||||||||
Purchases of marketable securities available for sale | — | (37,542) | |||||||||
Maturity of marketable securities available for sale | 11 | 28,191 | |||||||||
Net cash provided by (used in) investing activities | (6,934) | (20,250) | |||||||||
Financing activities: | |||||||||||
Taxes paid on withholding shares | (9) | — | |||||||||
Retirement of Convertible Senior Notes & related costs | — | (65,887) | |||||||||
Borrowings on revolving line of credit | 10,000 | — | |||||||||
Preferred dividend payment | — | (7,075) | |||||||||
Payments on capital obligations | — | (612) | |||||||||
Net cash provided by (used in) financing activities | 9,991 | (73,574) | |||||||||
Effect of exchange rate changes on cash | (895) | 10 | |||||||||
Net increase in cash and cash equivalents | 3,770 | (75,250) | |||||||||
Cash and cash equivalents, beginning of period | 39,001 | 109,860 | |||||||||
Cash and cash equivalents, end of period | $ | 42,771 | $ | 34,610 | |||||||
Supplemental disclosures of non-cash investing and financing activities: | |||||||||||
Paid in kind dividends on Series A Convertible Participating Perpetual Preferred Stock | $ | 17,616 | $ | 7,332 | |||||||
See accompanying notes to condensed consolidated financial statements.
8
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
1. Description of Business
General
Synchronoss Technologies, Inc. (“Synchronoss” or the “Company”) Digital, Cloud, Messaging and IoT platforms help the world’s leading companies, including operators, original equipment manufacturers (“OEMs”), and Technology, Media and Telecom (“TMT”) providers to deliver continuously transformative customer experiences that create high value engagement and new monetization opportunities.
The Company currently operates in and markets solutions and services directly through the Company’s sales organizations in North America, Europe and Asia-Pacific. The Company’s platforms give customers new opportunities in the TMT space, taking advantage of the rapidly converging services, connected devices, networks and applications.
The Company delivers platforms, products and solutions including:
•Cloud sync, backup, storage, device set up, content transfer and content engagement for user generated content
•Advanced, multi-channel messaging peer-to-peer (“P2P”) communications and application-to-person (“A2P”) commerce solutions
•Digital experience management (Platform as a Service) - including digital journey creation, and journey design products that use analytics that power digital advisor products for IT and Business Channel Owners
•IoT management technology for Smart Cities, Smart Buildings and more
The Synchronoss Personal Cloud Platform™ is a secure and highly scalable white label platform designed to store and sync subscriber’s personally created content seamlessly to and from current and new devices. This allows an Operator’s customers to protect, engage with and manage their personal content and gives the Company’s Operator customers the ability to increase average revenue per user (“ARPU”) through a new monthly recurring charge (“MRC”) and opportunities to mine valuable data that will give subscribers access to new, beneficial services. Additionally, the Synchronoss Personal Cloud Platform performs an expanding set of value-add services including facilitating an Operator’s initial device setup and enhancing visibility and control across disparate devices within subscribers’ smart homes.
The Synchronoss Messaging Platform powers hundreds of millions of subscribers’ mail boxes worldwide. The Company’s Advanced Messaging Product is a powerful, secure and intelligent white label messaging platform that expands capabilities for Operators and TMT companies to offer P2P messaging via Rich Communications Services (“RCS”). Additionally, the Company’s Advanced Messaging Product powers commerce and a robust ecosystem for Operators, brands and advertisers to execute Application to Person (“A2P”) commerce and data-rich dialogue with subscribers.
The Synchronoss Digital Experience Platform (“DXP”) is a purpose-built experience management toolset that sits between the Company’s customers end-user facing applications and their existing back end systems, enabling the authoring and management of customer journeys in a cloud-native no/low-code environment. This platform uses products such as Journey Creator, Journey Advisor, CX Baseline and Digital Coach to create a wide variety of insight-driven customer experiences across existing channels (digital and analogue) including creating the ability to pause and resume continuous, intelligent experiences in an omni-channel environment. DXP can be operated by IT professionals and “citizen” developers (business analysts, etc.) enabling the Company’s customers to bring more compelling and complex experiences to market in less time with fewer and more diverse resources in a real-time, collaborative environment.
The Synchronoss IoT Platform creates an easy to use environment and extensible ecosystem making the management of disparate devices, sensors, data pools and networks easier to manage by IoT administrators and drives the propagation of new IoT applications and monetization models for TMT companies. The Company’s IoT platform utilizes Synchronoss platforms (DXP, Cloud, Messaging), products and solutions to make IoT more accessible and actionable for Smart Building facility managers, Smart City planners, Automotive OEMs and TMT ecosystem players.
9
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
2. Basis of Presentation and Consolidation
Basis of Presentation and Consolidation
The accompanying interim unaudited condensed consolidated financial statements have been prepared by Synchronoss and in the opinion of management, include all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. They do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.
The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities (“VIE”) in which the Company is the primary beneficiary and entities in which the Company has a controlling interest. Investments in less than majority-owned companies in which the Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. Investments in less than majority-owned companies in which the Company does not have the ability to exert significant influence over the operating and financial policies of the investee are accounted for using the cost method. All material intercompany transactions and accounts are eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year's presentation.
For further information about the Company’s basis of presentation and consolidation or its significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Risks and Uncertainties
There are many uncertainties regarding the current coronavirus ("COVID-19") pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, business partners and distribution channels. While the pandemic did not materially affect the Company’s financial results and business operations for the three and six months ended June 30, 2020, the Company is unable to predict the impact that COVID-19 will have on its financial position and operating results due to numerous uncertainties. The Company will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to its operations as necessary.
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SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Recently Issued Accounting Standards
Recent accounting pronouncements adopted
Standard | Description | Effect on the financial statements | ||||||||||||
ASU 2016-13, ASU 2019-4 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | In June 2016, the FASB issued ASU 2016-13 which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The ASU is effective for public companies in annual periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted beginning after December 15, 2018 and interim periods within those years. | We adopted Topic 326 beginning on January 1, 2020 using the modified retrospective approach with a cumulative effect adjustment to opening retained earnings recorded at the beginning of the period of adoption. Upon adoption, we changed our impairment model to utilize a forward-looking current expected credit losses (CECL) model in place of the incurred loss methodology for financial instruments measured at amortized cost, including our accounts receivable. CECL estimates on accounts receivable are recorded as general and administrative expenses on our condensed consolidated statements of income. The cumulative effect adjustment from adoption was immaterial to our condensed consolidated financial statements. | ||||||||||||
Date of adoption: January 1, 2020. |
Standards issued not yet adopted
Standard | Description | Effect on the financial statements | ||||||||||||
Update 2019-12 - Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes | The ASU removes the exception to the general principles in ASC 740, Income Taxes, associated with the incremental approach for intra-period tax allocation, accounting for basis differences when there are ownership changes in foreign investments and interim-period income tax accounting for year-to-date losses that exceed anticipated losses. In addition, the ASU improves the application of income tax related guidance and simplifies U.S. GAAP when accounting for franchise taxes that are partially based on income, transactions with government resulting in a step-up in tax basis goodwill, separate financial statements of legal entities not subject to tax, and enacted changes in tax laws in interim periods. Different transition approaches, retrospective, modified retrospective, or prospective, will apply to each income tax simplification provision. | The Company is still evaluating these changes and does not anticipate any material impact on the Company’s consolidated financial position or results of operations upon adoption. | ||||||||||||
Date of adoption: January 1, 2021. | ||||||||||||||
3. Revenue
Disaggregation of revenue
The Company disaggregates revenue from contracts with customers into the nature of the products and services and geographical regions. The Company’s geographic regions are the Americas, Europe, the Middle East and Africa (“EMEA”), and Asia Pacific (“APAC”). The majority of the Company’s revenue is from the Technology, Media and Telecom (collectively, “TMT”) sector.
11
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
Cloud | Digital | Messaging | Total | Cloud | Digital | Messaging | Total | ||||||||||||||||||||||||||||||||||||||||
Geography | |||||||||||||||||||||||||||||||||||||||||||||||
Americas | $ | 40,761 | $ | 12,637 | $ | 8,500 | $ | 61,898 | $ | 38,582 | $ | 20,508 | $ | 2,281 | $ | 61,371 | |||||||||||||||||||||||||||||||
APAC | — | 1,019 | 6,708 | 7,727 | — | 1,157 | 8,785 | 9,942 | |||||||||||||||||||||||||||||||||||||||
EMEA | 1,686 | 1,347 | 3,877 | 6,910 | 1,849 | 561 | 4,123 | 6,533 | |||||||||||||||||||||||||||||||||||||||
Total | $ | 42,447 | $ | 15,003 | $ | 19,085 | $ | 76,535 | $ | 40,431 | $ | 22,226 | $ | 15,189 | $ | 77,846 | |||||||||||||||||||||||||||||||
Service Line | |||||||||||||||||||||||||||||||||||||||||||||||
Professional Services | $ | 4,984 | $ | 2,736 | $ | 5,972 | $ | 13,692 | $ | 3,641 | $ | 3,989 | $ | 4,881 | $ | 12,511 | |||||||||||||||||||||||||||||||
Transaction Services | 1,474 | 2,215 | — | 3,689 | 1,521 | 1,144 | — | 2,665 | |||||||||||||||||||||||||||||||||||||||
Subscription Services | 35,989 | 9,251 | 11,112 | 56,352 | 35,199 | 16,137 | 8,557 | 59,893 | |||||||||||||||||||||||||||||||||||||||
License | — | 801 | 2,001 | 2,802 | 70 | 956 | 1,751 | 2,777 | |||||||||||||||||||||||||||||||||||||||
Total | $ | 42,447 | $ | 15,003 | $ | 19,085 | $ | 76,535 | $ | 40,431 | $ | 22,226 | $ | 15,189 | $ | 77,846 |
Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
Cloud | Digital | Messaging | Total | Cloud | Digital | Messaging | Total | ||||||||||||||||||||||||||||||||||||||||
Geography | |||||||||||||||||||||||||||||||||||||||||||||||
Americas | $ | 80,083 | $ | 23,574 | $ | 19,403 | $ | 123,060 | $ | 77,496 | $ | 41,272 | $ | 4,350 | $ | 123,118 | |||||||||||||||||||||||||||||||
APAC | — | 1,577 | 15,883 | 17,460 | — | 2,155 | 26,940 | 29,095 | |||||||||||||||||||||||||||||||||||||||
EMEA | 3,408 | 2,604 | 7,125 | 13,137 | 3,645 | 1,650 | 8,443 | 13,738 | |||||||||||||||||||||||||||||||||||||||
Total | $ | 83,491 | $ | 27,755 | $ | 42,411 | $ | 153,657 | $ | 81,141 | $ | 45,077 | $ | 39,733 | $ | 165,951 | |||||||||||||||||||||||||||||||
Service Line | |||||||||||||||||||||||||||||||||||||||||||||||
Professional Services | $ | 9,145 | $ | 7,272 | $ | 11,202 | $ | 27,619 | $ | 7,359 | $ | 8,292 | $ | 17,368 | $ | 33,019 | |||||||||||||||||||||||||||||||
Transaction Services | 2,781 | 3,289 | — | 6,070 | 2,883 | 3,160 | — | 6,043 | |||||||||||||||||||||||||||||||||||||||
Subscription Services | 71,565 | 16,253 | 21,729 | 109,547 | 70,793 | 32,539 | 17,722 | 121,054 | |||||||||||||||||||||||||||||||||||||||
License | — | 941 | 9,480 | 10,421 | 106 | 1,086 | 4,643 | 5,835 | |||||||||||||||||||||||||||||||||||||||
Total | $ | 83,491 | $ | 27,755 | $ | 42,411 | $ | 153,657 | $ | 81,141 | $ | 45,077 | $ | 39,733 | $ | 165,951 |
Trade Accounts Receivable and Contract balances
The Company classifies its right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). For example, the Company recognizes a receivable for revenues related to its time and materials and transaction or volume-based contracts. The Company presents such receivables in Trade accounts receivable, net in its condensed consolidated statements of financial position at their net estimated realizable value. The Company maintains an allowance for credit losses to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other economic indicators.
A contract asset is a right to consideration that is conditional upon factors other than the passage of time. For example, the Company would record a contract asset if it records revenue on a professional services engagement but are not entitled to bill until the Company achieves specified milestones. Contract assets balance at June 30, 2020 is $12.8 million.
12
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Amounts collected in advance of services being provided are accounted for as contract liabilities, which are presented as deferred revenue on the accompanying Condensed Consolidated Balance Sheets and are realized with the associated revenue recognized under the contract. Nearly all of the Company's contract liabilities balance is related to services revenue, primarily subscription services contracts.
The Company’s contract assets and liabilities are reported in a net position on a customer basis at the end of each reporting period.
Significant changes in the contract liabilities balance (current and noncurrent) during the period are as follows (in thousands):
Contract Liabilities* | |||||
Balance - January 1, 2020 | $ | 87,799 | |||
Revenue recognized in the period | (149,666) | ||||
Amounts billed but not recognized as revenue | 125,140 | ||||
Balance - June 30, 2020 | $ | 63,273 |
________________________________
* Comprised of Deferred Revenue
Transaction price allocated to the remaining performance obligations
Topic 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2020. The Company has elected not to disclose transaction price allocated to remaining performance obligations for:
1.Contracts with an original duration of one year or less, including contracts that can be terminated for convenience without a substantive penalty;
2.Contracts for which the Company recognizes revenues based on the right to invoice for services performed;
3.Variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with Topic 606 Section 10-25-14(b), for which the criteria in Topic 606 Section 10-32-40 have been met. This applies to a limited number of situations where the Company is dependent upon data from a third party or where fees are highly variable.
Many of the Company’s performance obligations meet one or more of these exemptions. Specifically, the Company has excluded the following from the Company’s remaining performance obligations, all of which will be resolved in the period in which amounts are known:
•consideration for future transactions, above any contractual minimums
•consideration for success-based transactions contingent on third party data
•credits for failure to meet future service level requirements
As of June 30, 2020, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $140.6 million, of which approximately 85.2 percent is expected to be recognized as revenues within 2 years, and the remainder thereafter.
Estimates of revenue expected to be recognized in future periods also exclude unexercised customer options to purchase services that do not represent material rights to the customer. Customer options that do not represent a material right are only accounted for in accordance with Topic 606 when the customer exercises its option to purchase additional goods or services.
13
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
4. Fair Value Measurements
In accordance with accounting principles generally accepted in the United States, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy prioritizes the inputs used to measure fair value as follows:
•Level 1 - Observable inputs - quoted prices in active markets for identical assets and liabilities;
•Level 2 - Observable inputs other than the quoted prices in active markets for identical assets and liabilities includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and
•Level 3 - Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.
The following is a summary of assets, liabilities and redeemable noncontrolling interests and their related classifications under the fair value hierarchy:
June 30, 2020 | |||||||||||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||
Assets | |||||||||||||||||||||||
Cash, cash equivalents and restricted cash (1) | $ | 42,771 | $ | 42,771 | $ | — | $ | — | |||||||||||||||
Total assets | $ | 42,771 | $ | 42,771 | $ | — | $ | — | |||||||||||||||
Temporary equity | |||||||||||||||||||||||
Redeemable noncontrolling interests (3) | $ | 12,500 | $ | — | $ | — | $ | 12,500 | |||||||||||||||
Total temporary equity | $ | 12,500 | $ | — | $ | — | $ | 12,500 |
December 31, 2019 | |||||||||||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||
Assets | |||||||||||||||||||||||
Cash, cash equivalents and restricted cash (1) | $ | 39,001 | $ | 39,001 | $ | — | $ | — | |||||||||||||||
Marketable securities-short term (2) | 11 | — | 11 | — | |||||||||||||||||||
Total assets | $ | 39,012 | $ | 39,001 | $ | 11 | $ | — | |||||||||||||||
Temporary Equity | |||||||||||||||||||||||
Redeemable noncontrolling interests (3) | $ | 12,500 | $ | — | $ | — | $ | 12,500 | |||||||||||||||
Total temporary equity | $ | 12,500 | $ | — | $ | — | $ | 12,500 |
________________________________
(1)Cash equivalents primarily included money market funds.
(2)Marketable securities are comprised of municipal bonds, certificates of deposit. corporate bonds, treasury bonds, and mutual funds.
(3)Put arrangements held by the noncontrolling interests in certain of the Company’s joint ventures.
Redeemable Noncontrolling Interests
The redeemable noncontrolling interests recorded at fair value are put arrangements held by the noncontrolling interests in certain of the Company’s joint ventures. The Company recognizes changes in the redemption value immediately as they occur and adjusts the carrying value of the noncontrolling interest to the greater of the estimated redemption value, which approximates fair value, at the end of each reporting period or the initial carrying amount.
The fair value of the redeemable noncontrolling interests was estimated by applying an income approach using a discounted cash flow analysis. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value the redeemable
14
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
noncontrolling interests could significantly increase or decrease the fair value estimates recorded in the Condensed Consolidated Balance Sheets.
The changes in fair value of the Company’s Level 3 redeemable noncontrolling interests during the six months ended June 30, 2020 were as follows:
Balance at December 31, 2019 | $ | 12,500 | |||
Fair value adjustment | (182) | ||||
Net income attributable to redeemable noncontrolling interests | 182 | ||||
Balance at June 30, 2020 | $ | 12,500 |
5. Leases
The Company has entered into contracts with third parties to lease a variety of assets, including certain real estate, equipment, automobiles and other assets. The Company’s leases frequently allow for lease payments that could vary based on factors such as inflation or the degree of utilization of the underlying asset. For example, certain of the Company’s real estate leases could require us to make payments that vary based on common area maintenance charges, insurance and other charges. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company is party to certain sublease arrangements, primarily related to the Company’s real estate leases, where it acts as the lessee and intermediate lessor.
The Company reflects finance leases as a component of Leases, non-current on the Condensed Consolidated Balance Sheet. The finance leases were not material for the period ended June 30, 2020.
The following table presents information about the Company's Right of Use (ROU) assets and lease liabilities at June 30, 2020 (in thousands):
ROU assets: | |||||
Non-current operating lease ROU assets | $ | 46,913 | |||
Operating lease liabilities: | |||||
Current operating lease liabilities* | $ | 9,527 | |||
Non-current operating lease liabilities | 53,452 | ||||
Total operating lease liabilities | $ | 62,979 | |||
________________________________
* Amounts are included in Accrued Expenses on the Condensed Consolidated Balance Sheet.
The following table presents information about lease expense and sublease income for the three and six months ended June 30, 2020 (in thousands):
Three Months Ended | Six Months Ended | ||||||||||
June 30, 2020 | June 30, 2020 | ||||||||||
Operating lease cost* | $ | 3,170 | $ | 6,220 | |||||||
Other lease costs and income: | |||||||||||
Variable lease costs* | 1,402 | 1,727 | |||||||||
Sublease income* | (978) | (1,944) | |||||||||
Total net lease cost | $ | 3,594 | $ | 6,003 |
________________________________
15
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
* Amounts are included in Cost of revenues, Selling, general and administrative and/or Research and development based on the function that the underlying leased asset supports which are reflected in the Condensed Consolidated Statements of Operations.
The following table provides the undiscounted amount of future cash flows included in our lease liabilities at June 30, 2020 for each of the five years subsequent to December 31, 2019 and thereafter, as well as a reconciliation of such undiscounted cash flows to our lease liabilities at June 30, 2020 (in thousands):
Operating Leases | |||||
Remaining 2020 | $ | 6,743 | |||
2021 | 12,754 | ||||
2022 | 12,105 | ||||
2023 | 9,667 | ||||
2024 | 9,470 | ||||
Thereafter | 32,305 | ||||
Total future lease payments | 83,044 | ||||
Less: amount representing interest | (20,065) | ||||
Present value of future lease payments (lease liability) | $ | 62,979 |
The following table provides the weighted-average remaining lease term and weighted-average discount rates for our leases as of June 30, 2020:
Operating Leases: | |||||
Weighted-average remaining lease term (years), weighted based on lease liability balances | 7.19 | ||||
Weighted-average discount rate (percentages), weighted based on the remaining balance of lease payments | 8.0 | % |
The following table provides certain cash flow and supplemental noncash information related to our lease liabilities for the six months ended June 30, 2020 (in thousands):
Operating Leases: | |||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 6,638 | |||
Lease liabilities arising from obtaining right-of-use assets | 1,266 |
16
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
6. Investments in Affiliates and Related Transactions
Sequential Technology International, LLC
In connection with the divestiture of the exception handling business of the Company in 2017, Synchronoss entered into a three-year Cloud Telephony and Support services agreement (“CTS Agreement”) to grant Sequential Technology International, LLC (“STIN”) access to certain Synchronoss software and private branch exchange systems to facilitate exception handling operations required to support STIN customers.
The CTS agreement expired in the first quarter of 2020. At the time of the expiration, the Company entered into an Asset Purchase Agreement with STIN. As part of the agreement, the Company received $1.6 million in exchange for certain hardware and system assets for the cloud telephony and remaining support service business.
During the second quarter of 2020, the Company entered into an agreement with STIN and AP Capital Holdings II, LLC (“APC”) to divest its remaining equity interest in STIN as well as settle its paid-in-kind purchase money note (“PIK note”) and certain amounts due as of December 31, 2019 in consideration for a $9.0 million secured promissory note (the “Note”), which includes contingent consideration of up to $16.0 million. The Note has an 8% interest rate and a 3-year stated term. As part of the arrangement, APC acquired a majority stake of STIN. Additionally, in the event of a Sale of STIN by APC and STIN at a future date, the Company shall receive 5% of such sale proceeds, after reducing the sale proceeds by any outstanding amounts of the above Note, including any earned contingent consideration. The Company determined the fair value of the Note as of the transaction date to be approximately $4.8 million. The Company determined the fair value of the Note using a discounted cash flow analysis, which discounts the expected future cash flows of the asset to determine its fair value. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The Note has been reflected in Other assets on the Condensed Consolidated balance sheet. No gain or loss was recognized as a result of the transaction.
Additionally, the Company has renewed its commercial agreement with STIN to continue to provide software and managed support services.
7. Debt
2019 Revolving Credit Facility
On October 4, 2019, the Company entered into a Credit Agreement with Citizens Bank, N.A., for a $10.0 million Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest at a rate equal to, at the Company’s option, either (1) the arithmetic average of the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period (one, three or six months (or 12 months if agreed to by all applicable Lenders)) as selected by the Company relevant to such borrowing plus the applicable margin, or (2) a base rate determined by reference to the greatest of the federal funds rate plus 0.50%, the prime commercial lending rate as determined by the Agent, and the daily LIBOR rate plus 1.00%, in each case plus an applicable margin and subject to a floor of 0%. In addition, on a quarterly basis, the Company is required to pay each lender under the Revolving Credit Facility a 0.2% commitment fee in respect of commitments under the Revolving Credit Facility, which may be subject to adjustment based on the Company’s total leverage ratio. The outstanding balance under the Revolving Credit Facility as of June 30, 2020 is $10.0 million.
Interest expense
17
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table summarizes the Company’s interest expense:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Convertible Senior Notes | ||||||||||||||||||||||||||
Amortization of debt issuance costs | $ | — | $ | 82 | $ | — | $ | 237 | ||||||||||||||||||
Interest on borrowings | — | 106 | — | 297 | ||||||||||||||||||||||
2019 Revolving Credit Facility | — | — | ||||||||||||||||||||||||
Amortization of debt issuance costs | 12 | — | 28 | — | ||||||||||||||||||||||
Commitment fee | — | — | 4 | — | ||||||||||||||||||||||
Interest on borrowings | 68 | — | 82 | — | ||||||||||||||||||||||
Other | 4 | 275 | 215 | 514 | ||||||||||||||||||||||
Total | $ | 84 | $ | 463 | $ | 329 | $ | 1,048 | ||||||||||||||||||
8. Accumulated Other Comprehensive (Loss) / Income
The changes in accumulated other comprehensive (loss) income during the six months ended June 30, 2020 were as follows:
Balance at December 31, 2019 | Other comprehensive loss | Tax effect | Balance at June 30, 2020 | ||||||||||||||||||||
Foreign currency | $ | (28,204) | $ | (2,069) | $ | (30,273) | |||||||||||||||||
Unrealized loss on intra-entity foreign currency transactions | (4,306) | 253 | (71) | (4,124) | |||||||||||||||||||
Unrealized holding gains (losses) on marketable debt securities | (751) | 751 | — | — | |||||||||||||||||||
Total | $ | (33,261) | $ | (1,065) | $ | (71) | $ | (34,397) |
18
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
9. Stockholders’ Equity
There were no significant changes to Company’s authorized capital stock and preferred stock during the six months ended June 30, 2020.
Common Stock
Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held. Dividends on common stock will be paid when, and if, declared by the Company’s Board of Directors. No dividends have ever been declared or paid by the Company.
Preferred Stock
The Board of Directors is authorized to issue preferred shares and has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of preferred stock.
In accordance with the terms of the Share Purchase Agreement dated as of October 17, 2017 (the “PIPE Purchase Agreement”), with Silver Private Holdings I, LLC, an affiliate of Siris (“Silver”), on February 15, 2018, the Company issued to Silver 185,000 shares of its newly issued Series A Convertible Participating Perpetual Preferred Stock (the “Series A Preferred Stock”), par value $0.0001 per share, with an initial liquidation preference of $1,000 per share, in exchange for $97.7 million in cash and the transfer from Silver to the Company of the 5,994,667 shares of the Company’s common stock held by Silver (the “Preferred Transaction”).
As of June 30, 2020, there were 233,217 shares of Series A Preferred Stock outstanding, including the initial issuance of 185,000 shares of Series A Preferred Stock and the issuance of 48,217 shares of Series A Preferred Stock as dividends.
Certificate of Designation of the Series A Preferred Stock
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series A Preferred Stock are set forth in the Series A Certificate. Under the Series A Certificate, the holders of the Series A Preferred Stock are entitled to receive, on each share of Series A Preferred Stock on a quarterly basis, an amount equal to the dividend rate of 14.5% divided by four and multiplied by the then-applicable Liquidation Preference (as defined in the Series A Certificate) per share of Series A Preferred Stock (collectively, the “Preferred Dividends”). The Preferred Dividends are due on January 1, April 1, July 1 and October 1 of each year (each, a “Series A Dividend Payment Date”). The Company may choose to pay the Preferred Dividends in cash or in additional shares of Series A Preferred Stock. In the event the Company does not declare and pay a dividend in-kind or in cash on any Series A Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. In addition, the Series A Preferred Stock participates in dividends declared and paid on shares of the Company’s common stock.
Each share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal to the “Conversion Price” (as that term is defined in the Series A Certificate) multiplied by the then applicable “Conversion Rate” (as that term is defined in the Series A Certificate). Each share of Series A Preferred Stock is initially convertible into 55.5556 shares of common stock, representing an initial “conversion price” of approximately $18.00 per share of common stock. The Conversion Rate is subject to equitable proportionate adjustment in the event of stock splits, recapitalizations and other events set forth in the Series A Certificate.
19
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
On and after February 15, 2023, holders of shares of Series A Preferred Stock have the right to cause the Company to redeem each share of Series A Preferred Stock for cash in an amount equal to the sum of the current liquidation preference and any accrued dividends. Each share of Series A Preferred Stock is also redeemable at the option of the holder upon the occurrence of a “Fundamental Change” (as that term is defined in the Series A Certificate) at a specified premium (“Liquidation Value”). In addition, the Company is also permitted to redeem all outstanding shares of the Series A Preferred Stock at any time (i) within the first 30 months of the date of issuance for the sum of the then-applicable Liquidation Preference, accrued but unpaid dividends and a make whole amount (known as “Redemption Value”) and (ii) following the 30-month anniversary of the date of issuance for the sum of the then-applicable Liquidation Preference and the accrued but unpaid dividends. As of June 30, 2020, the Liquidation Value and Redemption Value of the Preferred Shares was $243.1 million.
The holders of a majority of the Series A Preferred Stock, voting separately as a class, are entitled at each of the Company’s annual meetings of stockholders or at any special meeting called for the purpose of electing directors (or by written consent signed by the holders of a majority of the then-outstanding shares of Series A Preferred Stock in lieu of such a meeting): (i) to nominate and elect two members of the Company’s Board of Directors for so long as the Preferred Percentage (as defined in the Series A Certificate) is equal to or greater than 10%; and (ii) to nominate and elect one member of the Company’s Board of Directors for so long as the Preferred Percentage is equal to or greater than 5% but less than 10%.
For so long as the holders of shares of Series A Preferred Stock have the right to nominate at least one director, the Company is required to obtain the prior approval of Silver prior to taking certain actions, including: (i) certain dividends, repayments and redemptions; (ii) any amendment to the Company’s certificate of incorporation that adversely effects the rights, preferences, privileges or voting powers of the Series A Preferred Stock; (iii) issuances of stock ranking senior or equivalent to shares of Series A Preferred Stock (including additional shares of Series A Preferred Stock) in the priority of payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company; (iv) changes in the size of the Company’s Board of Directors; (v) any amendment, alteration, modification or repeal of the charter of the Company’s Nominating and Corporate Governance Committee of the Board of Directors and related documents; and (vi) any change in the Company’s principal business or the entry into any line of business outside of the Company’s existing lines of businesses. In addition, in the event that the Company is in EBITDA Non-Compliance (as defined in the Series A Certificate) or the undertaking of certain actions would result in the Company exceeding a specified pro forma leverage ratio, then the prior approval of Silver would be required to incur indebtedness (or alter any debt document) in excess of $10.0 million, enter or consummate any transaction where the fair market value exceeds $5.0 million individually or $10.0 million in the aggregate in a fiscal year or authorize or commit to capital expenditures in excess of $25.0 million in a fiscal year.
Each holder of Series A Preferred Stock has one vote per share on any matter on which holders of Series A Preferred Stock are entitled to vote separately as a class, whether at a meeting or by written consent. The holders of Series A Preferred Stock are permitted to take any action or consent to any action with respect to such rights without a meeting by delivering a consent in writing or electronic transmission of the holders of the Series A Preferred Stock entitled to cast not less than the minimum number of votes that would be necessary to authorize, take or consent to such action at a meeting of stockholders. In addition to any vote (or action taken by written consent) of the holders of the shares of Series A Preferred Stock as a separate class provided for in the Series A Certificate or by the General Corporation Law of the State of Delaware, the holders of shares of the Series A Preferred Stock are entitled to vote with the holders of shares of common stock (and any other class or series that may similarly be entitled to vote on an as-converted basis with the holders of common stock) on all matters submitted to a vote or to the consent of the stockholders of the Company (including the election of directors) as one class.
20
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Under the Series A Certificate, if Silver and certain of its affiliates have elected to effect a conversion of some or all of their shares of Series A Preferred Stock and if the sum, without duplication, of (i) the aggregate number of shares of the Company’s common stock issued to such holders upon such conversion and any shares of the Company’s common stock previously issued to such holders upon conversion of Series A Preferred Stock and then held by such holders, plus (ii) the number of shares of the Company’s common stock underlying shares of Series A Preferred Stock that would be held at such time by such holders (after giving effect to such conversion), would exceed the 19.9% of the issued and outstanding shares of the Company’s voting stock on an as converted basis (the “Conversion Cap”), then such holders would only be entitled to convert such number of shares as would result in the sum of clauses (i) and (ii) (after giving effect to such conversion) being equal to the Conversion Cap (after giving effect to any such limitation on conversion). Any shares of Series A Preferred Stock which a holder has elected to convert but which, by reason of the previous sentence, are not so converted, will be treated as if the holder had not made such election to convert and such shares of Series A Preferred Stock will remain outstanding. Also, under the Series A Certificate, if the sum, without duplication, of (i) the aggregate voting power of the shares previously issued to Silver and certain of its affiliates held by such holders at the record date, plus (ii) the aggregate voting power of the shares of Series A Preferred Stock held by such holders as of such record date, would exceed 19.99% of the total voting power of the Company’s outstanding voting stock at such record date, then, with respect to such shares, Silver and certain of its affiliates are only entitled to cast a number of votes equal to 19.99% of such total voting power. The limitation on conversion and voting ceases to apply upon receipt of the requisite approval of holders of the Company’s common stock under the applicable listing standards.
Investor Rights Agreement
Concurrently with the closing of the Preferred Transaction, Synchronoss and Silver entered into an Investor Rights Agreement. Under the terms of the Investor Rights Agreement, Silver and Synchronoss have agreed that, effective as of the closing of the Preferred Transaction, the Board of Directors of Synchronoss will consist of ten members. From and after the closing of the Preferred Transaction, so long as the holders of Series A Preferred Stock have the right to nominate a member to the Board of Directors pursuant to the Series A Certificate, the Board of Directors of Synchronoss will consist of (i) two directors nominated and elected by the holders of shares of Series A Preferred Stock; (ii) four directors who meet the independence criteria set forth in the applicable listing standards (each of whom will be initially agreed upon by Synchronoss and Silver); and (iii) four other directors, two of whom shall satisfy the independence criteria of the applicable listing standards and, as of the closing of the Preferred Transaction, one of whom shall be the individual then serving as chief executive officer of Synchronoss and one of whom shall be the current chairman of the Board of Directors of Synchronoss as of the date of execution of the Investors Rights Agreement. Following the closing of the Preferred Transaction, so long as the holders of Series A Preferred Stock have the right to nominate at least one director to the Board of Directors of Synchronoss pursuant to the Series A Certificate, Silver will have the right to designate two members of the Nominating and Corporate Governance Committee of the Board of Directors.
Pursuant to the terms of the Investor Rights Agreement, neither Silver nor its affiliates may transfer any shares of Series A Preferred Stock subject to certain exceptions (including transfers to affiliates that agree to be bound by the terms of the Investor Rights Agreement).
For so long as Silver has the right to appoint a director to the Board of Directors of Synchronoss, without the prior approval by a majority of directors voting who are not appointed by the holders of shares of Series A Preferred Stock, neither Silver nor its affiliates will directly or indirectly purchase or acquire any debt or equity securities of Synchronoss (including equity-linked derivative securities) if such purchase or acquisition would result in Silver’s Standstill Percentage (as defined in the Investor Rights Agreement) being in excess of 30%. However, the foregoing standstill restrictions would not prohibit the purchase of shares pursuant to the PIPE Purchase Agreement or the receipt of shares of Series A Preferred Stock issued as Preferred Dividends pursuant to the Series A Certificate, shares of Common Stock received upon conversion of shares of Series A Preferred Stock or receipt of any shares of Series A Preferred Stock, Common Stock or other securities of the Company otherwise paid as dividends or as an increase of the Liquidation Preference (as defined in the Series A Certificate) or distributions thereon. Silver will also have preemptive rights with respect to issuances of securities of Synchronoss to maintain its ownership percentage.
21
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Under the terms of the Investor Rights Agreement, Silver will be entitled to (i) three demand registrations, with no more than two demand registrations in any single calendar year and provided that each demand registration must include at least 10% of the shares of Common Stock held by Silver, including shares of Common Stock issuable upon conversion of shares of Series A Preferred Stock and (ii) unlimited piggyback registration rights with respect to primary issuances and all other issuances.
A summary of the Company’s Series A Convertible Participating Perpetual Preferred Stock balance at June 30, 2020 and changes during the six months ended June 30, 2020, are presented below:
Preferred Stock | |||||||||||
Shares | Amount | ||||||||||
Balance at December 31, 2019 | 217 | $ | 200,865 | ||||||||
Issuance of preferred stock | 16 | — | |||||||||
Amortization of preferred stock issuance costs | — | 1,585 | |||||||||
Issuance of preferred PIK dividend | — | 16,031 | |||||||||
Balance at June 30, 2020 | 233 | $ | 218,481 |
Registration Rights
There were no significant changes to the Company’s registration rights during the three and six months ended June 30, 2020.
22
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Stock Plans
There were no significant changes to the Company’s Stock Plans during the three and six months ended June 30, 2020. As of June 30, 2020, there were 0.5 million shares available for the grant or award under the Company’s 2015 Plan and 0.3 million shares available for the grant or award under the Company’s 2017 New Hire Equity Incentive Plan.
The Company’s performance cash awards granted to executives under the Long Term Incentive (“LTI”) Plans have been accounted for as liability awards, due to the Company’s intent and the ability to settle such awards in cash upon vesting and the Company has reflected such awards in accrued expenses. As of June 30, 2020, the liability for such awards is approximately $0.7 million.
Stock-Based Compensation
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by operating expense categories, as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Cost of revenues | $ | 642 | $ | 657 | $ | 1,394 | $ | 1,343 | |||||||||||||||
Research and development | 1,071 | 889 | 2,502 | 2,114 | |||||||||||||||||||
Selling, general and administrative | 3,274 | 3,927 | 6,260 | 7,571 | |||||||||||||||||||
Total stock-based compensation expense | $ | 4,987 | $ | 5,473 | $ | 10,156 | $ | 11,028 |
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by award type, as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Stock options | $ | 1,805 | $ | 1,796 | $ | 3,588 | $ | 3,493 | |||||||||||||||
Restricted stock awards | 2,962 | 3,526 | 6,296 | 7,324 | |||||||||||||||||||
Performance Based Cash Units | 220 | 151 | 272 | 211 | |||||||||||||||||||
Total stock-based compensation before taxes | $ | 4,987 | $ | 5,473 | 10,156 | 11,028 | |||||||||||||||||
Tax benefit | $ | 664 | $ | 1,056 | $ | 1,588 | $ | 2,114 |
The total stock-based compensation cost related to unvested equity awards as of June 30, 2020 was approximately $24.2 million. The expense is expected to be recognized over a weighted-average period of approximately 1.54 years.
The total stock-based compensation cost related to unvested performance based cash units as of June 30, 2020 was approximately $1.2 million. The expense is expected to be recognized over a weighted-average period of approximately 1.97 years.
Stock Options
There were no significant changes to the Company’s Stock Option Plans during the three and six months ended June 30, 2020.
23
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 Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock options. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Expected stock price volatility | 76.1 | % | 69.6 | % | 72.0 | % | 69.6 | % | ||||||||||||||||||
Risk-free interest rate | 0.4 | % | 1.9 | % | 1.4 | % | 1.9 | % | ||||||||||||||||||
Expected life of options (in years) | 4.45 | 4.34 | 4.42 | 4.33 | ||||||||||||||||||||||
Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||
Weighted-average fair value (PSV) of the options | $ | 1.73 | $ | 3.77 | $ | 3.08 | $ | 3.78 |
The following table summarizes information about stock options outstanding as of June 30, 2020:
Options | Number of Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||||
Outstanding at December 31, 2019 | 4,922 | $ | 14.54 | |||||||||||||||||||||||
Options Granted | 1,534 | 5.41 | ||||||||||||||||||||||||
Options Exercised | — | — | ||||||||||||||||||||||||
Options Cancelled | (312) | 17.09 | ||||||||||||||||||||||||
Outstanding at June 30, 2020 | 6,144 | $ | 12.13 | 5.17 | $ | — | ||||||||||||||||||||
Vested at June 30, 2020 | 2,244 | $ | 19.72 | 3.61 | $ | — | ||||||||||||||||||||
Exercisable at June 30, 2020 | 2,244 | $ | 19.72 | 3.61 | $ | — |
The total intrinsic value of stock options exercisable at June 30, 2020 and 2019 was nil and nil, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2020 and 2019 was nil and nil, respectively.
Awards of Restricted Stock and Performance Stock
There were no significant changes to the Company’s restricted stock award (“Restricted Stock”) and performance stock plan during the three and six months ended June 30, 2020.
A summary of the Company’s unvested restricted stock at June 30, 2020, and changes during the six months ended June 30, 2020, is presented below:
Unvested Restricted Stock | Number of Awards | Weighted- Average Grant Date Fair Value | ||||||||||||
Unvested at December 31, 2019 | 3,375 | $ | 8.68 | |||||||||||
Granted | 260 | 5.14 | ||||||||||||
Vested | (1,072) | 9.07 | ||||||||||||
Forfeited | (343) | 7.76 | ||||||||||||
Unvested at June 30, 2020 | 2,220 | $ | 7.50 |
Restricted stock awards are granted subject to other service conditions or service and performance conditions (“Performance-Based Awards”). Restricted stock and Performance-Based Awards are measured at the closing stock price at the date of grant and are recognized straight line over the requisite service period.
24
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Performance Based Cash Units
Performance based cash units granted under the Company’s 2015 Plan vest at the end of a three-year period based on service and achievement of certain performance objectives determined by the Company’s Board of Directors.
A summary of the Company’s unvested performance-based cash units at June 30, 2020 and changes during the six months ended June 30, 2020, is presented below:
Unvested Cash Units | Number of Units | Period End Fair Value | ||||||||||||
Unvested at December 31, 2019 | 1,046 | $ | 4.75 | |||||||||||
Granted | 1,391 | — | ||||||||||||
Vested | — | — | ||||||||||||
Forfeited | (180) | — | ||||||||||||
Unvested at June 30, 2020 | 2,257 | $ | 3.53 |
Performance based cash units are measured at the closing stock price at the reporting period end date and are recognized straight line over the requisite service period. The expense for the period will increase or decrease based on updated fair values of these awards at each reporting date.
25
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
10. Income Taxes
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses. The CARES Act amends the Net Operating Loss (“NOL”) provisions of the Tax Cuts and Jobs Act, allowing for the carryback of losses arising in tax years 2018, 2019 and 2020, to each of the five taxable years preceding the taxable year of loss. The Company filed a carryback claim in the second quarter of 2020 for the NOL generated in tax year 2018, which will result in a refund of previously paid taxes. The carryback of the 2018 NOL will result in an increase in the Company’s 2019 tax liability, so the Company has also recorded an estimate of the additional 2019 current tax expense in the first quarter income tax provision. The estimated net income tax benefit associated with the 2018 NOL carryback is approximately $9 million, and this was recorded discretely in the first quarter income tax provision.
In April 2020, there was a redemption of the Company’s partnership interest in STIN. The total discrete benefit related to the exit from STI was $12.1 million which included the settlement of certain trade receivables.
The Company recognized approximately $20.4 million and $3.2 million in related income tax benefit during the six months ended June 30, 2020 and 2019, respectively. The effective tax rate was approximately 83.5% for the six months ended June 30, 2020. The effective tax rate was primarily driven by the impact of the redemption of the Company’s interest in STIN, the new NOL carryback provisions discussed above and valuation allowances recorded in domestic and foreign jurisdictions, partially offset by the impact of permanent book-tax differences. The Company continues to consider all available evidence, including historical profitability and projections of future taxable income together with new evidence, both positive and negative, that could affect the view of the future realization of deferred tax assets. As a result of the assessment, no change was recorded by the Company to the valuation allowance during the six months ended June 30, 2020.
11. Restructuring
The Company continues to execute certain restructurings to identify workforce optimization opportunities to better align the Company’s resources with its key strategic priorities. A summary of the Company’s restructuring accrual at June 30, 2020 and changes during the six months ended June 30, 2020, are presented below:
Balance at December 31, 2019 | Charges | Payments | Other Adjustments | Balance at June 30, 2020 | |||||||||||||||||||||||||
Employment termination costs | $ | 90 | $ | 5,943 | $ | (1,975) | $ | (5) | $ | 4,053 | |||||||||||||||||||
26
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
12. Earnings per Common Share (“EPS”)
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of the Company’s common stock for the year. The Company includes participating securities (Redeemable Convertible Preferred Stock - Participation with Dividends on Common Stock that contain preferred dividend) in the computation of EPS pursuant to the two-class method. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share from continued and discontinued operations.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Numerator - Basic: | |||||||||||||||||||||||
Net loss from continuing operations | $ | (694) | $ | (16,578) | $ | (4,044) | $ | (36,315) | |||||||||||||||
Net loss attributable to redeemable noncontrolling interests | (165) | (593) | (182) | (906) | |||||||||||||||||||
Preferred stock dividend | (9,289) | (7,859) | (18,197) | (15,396) | |||||||||||||||||||
Net loss attributable to Synchronoss | $ | (10,148) | $ | (25,030) | $ | (22,423) | $ | (52,617) | |||||||||||||||
Numerator - Diluted: | |||||||||||||||||||||||
Net loss from continuing operations attributable to Synchronoss | $ | (10,148) | $ | (25,030) | $ | (22,423) | $ | (52,617) | |||||||||||||||
Income effect for interest on convertible debt, net of tax | — | — | — | — | |||||||||||||||||||
Net loss from continuing operations adjusted for the convertible debt | (10,148) | (25,030) | (22,423) | (52,617) | |||||||||||||||||||
Denominator: | |||||||||||||||||||||||
Weighted average common shares outstanding — basic | 41,697 | 40,810 | 41,482 | 40,566 | |||||||||||||||||||
Dilutive effect of: | |||||||||||||||||||||||
Shares from assumed conversion of convertible debt 1 | — | — | — | — | |||||||||||||||||||
Shares from assumed conversion of preferred stock 2 | — | — | — | — | |||||||||||||||||||
Options and unvested restricted shares | — | — | — | — | |||||||||||||||||||
Weighted average common shares outstanding — diluted | 41,697 | 40,810 | 41,482 | 40,566 | |||||||||||||||||||
Basic EPS | |||||||||||||||||||||||
Earnings per share: | |||||||||||||||||||||||
Basic | $ | (0.24) | $ | (0.61) | $ | (0.54) | $ | (1.30) | |||||||||||||||
Diluted | $ | (0.24) | $ | (0.61) | $ | (0.54) | $ | (1.30) | |||||||||||||||
Anti-dilutive stock options excluded | — | — | — | — | |||||||||||||||||||
Unvested shares of restricted stock awards | 2,220 | 3,691 | 2,220 | 3,691 |
________________________________
(1) The calculation does not include the effect of assumed conversion of convertible debt of 1,451,173 shares for the three months ended June 30, 2019, which is based on 18.8072 shares per $1,000 principal amount of the Senior Convertible Notes.
(2) The calculation does not include the effect of assumed conversion of preferred stock of 12,956,487 and 11,041,017 shares, for the three months ended June 30, 2020 and 2019, respectively, which is based on 55.5556 shares per $1,000 principal amount of the preferred stock, because the effect would have been anti–dilutive.
27
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
13. Commitments, Contingencies and Other
Purchase Obligations
Aggregate annual future minimum payments under non-cancelable agreements are as follows:
As of June 30, 2020 | Non-cancelable agreements | |||||||
2020 | $ | 17,541 | ||||||
2021 | 3,665 | |||||||
2022 | 2,207 | |||||||
2023 and thereafter | 1,563 | |||||||
Total | $ | 24,976 |
Legal Matters
In the ordinary course of business, the Company is regularly subject to various claims, suits, regulatory inquiries and investigations. The Company records a liability for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable, and the loss can be reasonably estimated. Management has also identified certain other legal matters where they believe an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that resolving claims against the Company, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the Company’s business, financial position, results of operations, or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. The Company also evaluates other contingent matters, including income and non-income tax contingencies, to assess the likelihood of an unfavorable outcome and estimated extent of potential loss. It is possible that an unfavorable outcome of one or more of these lawsuits or other contingencies could have a material impact on the liquidity, results of operations, or financial condition of the Company.
On May 1, 2017, May 2, 2017, June 8, 2017 and June 14, 2017, four putative class actions were filed against the Company and certain of its current and former officers and directors in the United States District Court for the District of New Jersey (the “Securities Law Action”). 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 common stock between February 3, 2016 and June 13, 2017. On February 2, 2018, the defendants moved to dismiss the consolidated complaint in its entirety, with prejudice. Before that motion was decided, on August 24, 2018, lead plaintiff filed a consolidated amended complaint purportedly on behalf of purchasers of the Company’s common stock between October 28, 2014 and June 13, 2017. On June 28, 2019, the Court granted defendants’ motion to dismiss the consolidated amended complaint in its entirety, without prejudice, allowing lead plaintiff leave to amend its complaint. On August 14, 2019, lead plaintiff filed a second amended complaint. The second amended complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and it alleges, among other things, that the defendants made false and misleading statements of material information concerning the Company’s financial results, business operations, and prospects. On October 4, 2019, the defendants moved to dismiss the second amended complaint in its entirety, with prejudice. On May 29, 2020, the court granted in part and denied in part defendants’ motion to dismiss the second amended complaint without prejudice. The Company believes that the asserted claims lack merit and intends to defend against all of the claims vigorously. The plaintiff seeks unspecified damages, fees, interest, and costs. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the actions at this time and can give no assurance that the asserted claims will not have a material adverse effect on its financial position or results of operations.
28
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
On September 15, 2017, October 24, 2017, October 27, 2017 and October 30, 2017, the Company’s shareholders filed derivative lawsuits against certain of its officers and directors and the Company (as nominal defendant) in the United States District Court for the District of New Jersey (the “Derivative Suits”). On May 24, 2018, the Court consolidated the Derivative Suits and appointed Lisa LeBoeuf as lead plaintiff. The lead plaintiff designated as the Operative Complaint the complaint she previously had filed on October 27, 2017. On March 11, 2019, the defendants filed a motion to dismiss the Operative Complaint, which the Court granted in substantial part on November 26, 2019. On December 10, 2019, the defendants filed a motion for reconsideration respecting the only claim to survive the motion to dismiss.. On June 12, 2020, the Court granted the defendants’ motion for reconsideration and dismissed the remaining claim without prejudice, allowing lead plaintiff leave to amend her complaint. On July 13, 2020, lead plaintiff filed an amended complaint. The amended complaint alleges claims related to breaches of fiduciary duty and unjust enrichment. The amended complaint’s allegations relate substantially to the same facts as those underlying the Securities Law Action described above. Plaintiff seeks unspecified damages and for the Company to take steps to improve its corporate governance and internal procedures. The Company believes that the asserted claims lack merit and intends to defend against all of the claims vigorously. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the actions at this time and can give no assurance that the asserted claims will not have a material adverse effect on its financial position or results of operations.
On March 7, 2019, Synchronoss shareholders, Beth Daniel and Juan Solis, filed a separate derivative lawsuit against certain of the Company’s current and former officers and directors and the Company (as nominal defendant) in the Court of Chancery of the State of Delaware, asserting substantially the same allegations as those underlying the Derivative Suits and the Securities Law Action described above. Plaintiffs seek unspecified damages and for the Company to take steps to improve its corporate governance and internal procedures. On May 20, 2019, the parties stipulated to a stay of the action pending a ruling on the motion to dismiss in the Derivative Suits. The Company believes that the asserted claims lack merit and intends to defend against all of the claims vigorously. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the Derivative Suits at this time and can give no assurance that the asserted claims will not have a material adverse effect on our financial position or results of operations.
On June 11, 2020 and June 12, 2020, the Company’s shareholders filed derivative lawsuits against certain of its officers and directors and the Company (as nominal defendant) in the United States District Court for the District of New Jersey (the “Demand Refused Derivative Complaints”). The Demand Refused Derivative Complaints allege claims related to breaches of fiduciary duty, unjust enrichment, and alleged violations of securities laws. The complaints’ allegations relate substantially to the same facts as those underlying the Securities Law Action described above. The Demand Refused Derivative Complaints further allege that each plaintiff made a demand upon the Company’s Board of Directors to investigate the alleged misconduct and that such demand was wrongfully refused. Plaintiffs seek unspecified damages and for the Company to take steps to improve its corporate governance and internal procedures. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the actions at this time and can give no assurance that the asserted claims will not have a material adverse effect on its financial position or results of operations.
Except as set forth above, the Company is not currently subject to any legal proceedings that could have a material adverse effect on its operations; however, it may from time to time become a party to various legal proceedings arising in the ordinary course of its business. The Company is currently the plaintiff in several patent infringement cases. The defendants in several of these cases have filed counterclaims. Although the Company cannot predict the outcome of the cases at this time due to the inherent uncertainties of litigation, the Company continues to pursue its claims and believes that the counterclaims are without merit, and the Company intends to defend against all of such counterclaims.
14. Additional Financial Information
Other Income, net
The following table sets forth the components of included in the Other Income, net included in the Condensed Consolidated Statements of Operations:
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SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
FX gains (losses) (1) | $ | 315 | $ | (462) | $ | 101 | $ | (305) | ||||||||||||||||||
Income from sale of intangible assets (2) | 321 | — | 2,164 | — | ||||||||||||||||||||||
Government Refunds | 552 | — | 552 | — | ||||||||||||||||||||||
Other (3) | 179 | 438 | 241 | 744 | ||||||||||||||||||||||
Total | $ | 1,367 | $ | (24) | $ | 3,058 | $ | 439 |
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(1)Fair value of foreign exchange gains and losses
(2)Represents gain on sale of certain of the Company’s IP addresses
(3)Represents an aggregate of individually immaterial transactions
15. Subsequent Events
Verizon
On August 7, 2020, the Company entered into an agreement with Verizon Sourcing LLC (“Verizon”) to amend the terms of Statement of Work No. 1 (“SOW No. 1”) under the existing Application Service Provider Agreement dated April 1, 2013 between Synchronoss and Verizon (the “Original Agreement”). The Amendment, among other things, extends the term of SOW No. 1 through June 30, 2025.
Tax Refund
Subsequent to June 30, 2020, the Company received a $13.4 million tax refund for the carryback claim filed in the second quarter of 2020.
Preferred Dividends
Subsequent to June 30, 2020, the Company paid in-kind the accrued Preferred Dividends of $8.5 million.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 our Condensed Consolidated Financial Statements and the related notes included in Item 1 “Financial Information” of this Form 10-Q.
The words “Synchronoss,” “we,” “our,” “ours,” “us,” and the “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 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, 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, 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
Synchronoss Technologies, Inc. (“Synchronoss” or the “Company”) is a global software and services company that provides essential technologies for the mobile transformation of business. The Company’s portfolio contains offerings such as personal cloud, secure-mobility, identity management and scalable messaging platforms, products and solutions. These essential technologies create a better way of delivering the transformative mobile experiences that the Company’s customers need to help them stay ahead of the curve in competition, innovation, productivity, growth and operational efficiency.
Synchronoss’ products and platforms are designed to be carrier-grade, flexible and scalable, enabling multiple converged communication services to be managed across a range of distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets. This business model allows the Company to meet the rapidly changing converged services and connected devices offered by their customers. Synchronoss’ products, platforms and solutions enable its customers to acquire, retain and service subscribers and employees quickly, reliably and cost-effectively with white label and custom-branded solutions. Synchronoss’ customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and sharing/collaboration with connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of the Company’s platforms enable new revenue streams and retention opportunities for their customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud. By using the Company’s technologies, Synchronoss’ customers can optimize their cost of operations while enhancing their customer experience.
The Company currently operates in and markets its solutions and services directly through its sales organizations in North America, Europe and Asia-Pacific.
Impacts of the Recent Novel Coronavirus (COVID-19)
This disclosure discusses the actions the Company has taken in response to the COVID-19 crisis and the impacts that the situation has had on our business, as well as related known or expected trends.
COVID-19 was identified in China in late 2019 and has since spread throughout the world, including throughout the United States (U.S.). COVID-19 has resulted in authorities implementing numerous preventative measures to contain or mitigate the outbreak of the virus, such as travel bans and restrictions, limitations on business activity, quarantines, and shelter-in-place orders.
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These restrictions and our responses to them are impacting our customers and their use of our products and services. In addition, governments have imposed a wide variety of consumer protection measures that limit how certain businesses, including TMT companies, can operate their businesses and interact with their customers. The crisis and governmental responses to the crisis have also resulted in a slowdown of global economic activity, which has impacted our customers. As a result, prior trends in our business may not be applicable to our operations during the pendency of the crisis.
The impact of COVID-19 for the remainder of the year and beyond will depend significantly on the duration and potential cyclicality of the health crisis and the related public policy actions, additional initiatives we undertake in response to employee, market or regulatory needs or demands, the length and severity of the global economic slowdown, and whether and how our customers change their behaviors over the longer term. As a result, the demand for our products and services, as well as our overall results of operations, may be materially and adversely impacted by the pandemic for the duration of 2020 or longer, and we are unable to predict the duration or degree of such impact with any certainty.
In response to COVID-19, we have been executing our business continuity plans and evolving our operations to protect the safety of our employees while continuing to provide critical products and services to our customers. Some of the initiatives the Company has undertaken include:
•Working with our customers to continue to provide our products and services through the pandemic
•Enhancing our safety protocols including moving the majority of our employees to remote work arrangements
•Adjusting business operations to address circumstances created by COVID-19
•Maintaining effective governance and internal controls in a remote work environment
As the crisis continues, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees, customers and the Company and to continue to provide our products and services.
Revenues
We generate a majority of our revenues on a per transaction or subscription basis, which is derived from contracts that extend up to 60 months from execution.
The future success of our business depends on the continued growth of Business-to-Business and Business-to-Business-to-Consumer driving customer transactions, and continued expansion of our platforms into the TMT Market globally through Cloud, Messaging, Digital Transformation and Internet of Things (“IoT”) markets. As such, the volume of transactions and our ability to expand our footprint in TMT and globally may result in revenue fluctuations on a quarterly basis.
Most of our revenues are recorded in U.S. dollars but as we continue to expand our footprint with international carriers, we will become subject to currency translation that could affect our future net sales as reported in U.S. dollars.
Our top five customers accounted for 69.6% and 67.9% of net revenues for the six months ended June 30, 2020 and June 30, 2019, respectively. Contracts with these customers typically run for three to five years. Of these customers, Verizon accounted for more than 10% of our revenues in 2020 and 2019. The loss of Verizon as a customer would have a material negative impact on our company. However, we believe that the costs incurred and subscriber disruption by Verizon to replace Synchronoss’ solutions would be substantial.
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Current Trends Affecting Our Results of Operations
As the full impact of the COVID-19 pandemic on our business continues to develop, we are actively monitoring the global situation. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our business operations, impact on our customer, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. The extent to which the COVID-19 pandemic may impact our business, financial condition or results of operations is uncertain, but may include, without limitation, impacts to our paying user growth as well as disruptions to our business operations as a result of travel restrictions, shutdown of workplaces and potential impacts to our vendors. Additionally, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our reporting currency, as well as changes in interest rates. Volatile market conditions arising from the COVID-19 pandemic have and may 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 growth in mobile devices globally that are becoming content rich. As these devices replace other traditional devices like PCs, the ability to securely back up content from mobile devices, sync it with other devices and share it with family, friends and business associates have become essential needs and subscriber expectations. Such devices include smartphones, connected cars, personal health and wellness devices and connected home devices. The need for the contents of these devices to be stored in a common cloud are also expected to be drivers of our business in the longer term.
Business from our traditional Synchronoss Messaging business has been driven by a resurgence in the need for white label secure messaging platforms that favor the Mobile Network Operator’s (“MNO”) business objectives and are not beholden to the objectives of a sponsoring over-the-top (“OTT”) platform. We believe that messaging drives higher subscriber engagement than any other application in the market today and holds the potential to stimulate new revenue from traditional services and third-party brands. OTT global success has driven MNOs to look at opportunities to preempt and compete with the OTTs which has potential opportunity for Synchronoss’ future growth to be driven by the need of TMT companies including (and especially) MNOs to embrace Messaging as a Platform (“MaaP”). MaaP will allow TMT and MNO’s to converse with subscribers in an efficient, automated way by streamlining the costs and increasing the effectiveness of self-care, as well as yielding cross-sell upselling of service plans, devices, bundles, etc.. The Synchronoss Advanced Messaging Platform provides state of the art RCS-driven features including the ability to support advanced Peer to Peer communications and introduce new revenue streams driven by commerce and advertising via Application-to-Person capabilities.
Companies in the TMT market all face the dilemma of attempting to pivot their businesses to digital execution in order to create experiences that meet the expectations of their subscribers, generate new revenues and streamline costs creating healthier margins at a faster time to market than they have ever operated before. Their challenges feature the lack of skill sets to conceptualize and run day to day digital operations and the lack of resources to integrate their legacy back end systems to enact digital experiences that achieve their business objectives. The growth of Synchronoss Digital Platforms will be driven by the ability to provide TMT companies’ desire to obtain digital transformation solutions as quickly as possible while educating them on the ability to operate a digital business efficiently. Our Platform as a Service (“PaaS”) model provides a desirable alternative to heavy capital expenditure spending options often tried internally. The ability for our platforms to create low/no code, new customer digital journeys, virtually on the fly, gives TMT Companies the ability to operate new experiences and businesses without heavily investing in development resources.
Synchronoss Advanced Messaging, Cloud and Digital Platforms are poised to bring IoT initiatives to life across MNO and TMT companies creating new use cases that will help stimulate the commercial growth of the robust potential of the IoT market. As new devices and sensors come online in connected cities, Synchronoss, partnering with carriers like AT&T, has technology to unify and harness data from legacy systems; provide analytic insights that fuel automated communications, via our Advanced Messaging Platform between sensors, devices and people; and create a common storage reservoir with our secure Cloud. There is opportunity in many areas of the IoT ecosystem for Synchronoss to support utilizing our Activation, Cloud and Analytics tools.
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To support our growth, which will be driven by these favorable industry trends mentioned above, we will leverage modular components from our existing software platforms to build new products. We believe that these opportunities will continue to provide future benefits and position us for future revenue growth. We are also making investments in research and development of new products designed to enable us to grow rapidly in the mobile wireless market. Our purchase of capital assets and equipment may also increase based on aggressive deployment, subscriber growth and promotional offers for free or bundled storage by our major Tier 1 carrier customers.
We continue to expand our platforms into the converging TMT, MNO, Digital and IoT spaces to enable connected devices to do more things across multiple networks, brands and communities. Our initiatives with AT&T, Verizon, Sprint, British Telecom, Softbank and other CSPs continue to grow both with regard to our current business as well as our new product offerings. We are also exploring additional opportunities through merger and acquisition activities to support our customer, product and geographic diversification strategies.
Three months ended June 30, 2020 compared to the three months ended June 30, 2019
The following table presents an overview of our results of operations for the three months ended June 30, 2020 and 2019 (in thousands):
Three Months Ended June 30, 2020 | 2020 vs 2019 | ||||||||||||||||
2020 | 2019 | $ Change | |||||||||||||||
Net revenues | $ | 76,535 | $ | 77,846 | $ | (1,311) | |||||||||||
Cost of revenues* | 29,480 | 33,403 | (3,923) | ||||||||||||||
Research and development | 19,096 | 19,026 | 70 | ||||||||||||||
Selling, general and administrative | 24,640 | 23,080 | 1,560 | ||||||||||||||
Restructuring charges | 4,493 | 356 | 4,137 | ||||||||||||||
Depreciation and amortization | 10,284 | 20,269 | (9,985) | ||||||||||||||
Total costs and expenses | 87,993 | 96,134 | (8,141) | ||||||||||||||
Loss from continuing operations | $ | (11,458) | $ | (18,288) | $ | 6,830 |
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* Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues decreased $1.3 million to $76.5 million for the three months ended June 30, 2020, compared to the same period in 2019. The decrease in revenue is primarily driven by the expiration of the STIN Cloud Telephony and Support services agreement and the sunset of certain legacy products offset by new commercial cloud and messaging agreements.
Cost of revenues decreased $3.9 million to $29.5 million for the three months ended June 30, 2020, compared to the same period in 2019. The 2020 decrease was primarily due to cost savings initiatives implemented by the Company. These initiatives resulted in a significant decrease in cost of revenues driven mainly by data center consolidation and operating expense savings.
Research and development expense increased $0.1 million to $19.1 million for the three months ended June 30, 2020, compared to the same period in 2019. Research and development remained relatively flat against the comparable period.
Selling, general and administrative expense increased $1.6 million to $24.6 million for the three months ended June 30, 2020, compared to the same period in 2019. The 2020 increase was primarily driven by external costs related to outside consultants and legal fees.
Restructuring charges were $4.5 million and $0.4 million for the three months ended June 30, 2020 and 2019, respectively, which primarily related to employment termination costs as a result of the work-force reductions initiated in the current year to reduce operating costs and align our resources with our key strategic priorities.
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Depreciation and amortization expense decreased $10.0 million to $10.3 million for the three months ended June 30, 2020, compared to the same period in 2019. The 2020 decrease was primarily attributable to the expiration of amortizable acquired assets in combination with reduced capital expenditures mainly as a result of the data center consolidation efforts, partially offset by the increased amortization of capitalized software.
Interest Income was $1.5 million for the three months ended June 30, 2020. The interest income was primarily attributable to the settlement of the PIK note receivable, which resulted in a reversal of past interest expenses incurred for tax purposes.
Income tax. The Company recognized approximately $8.0 million and $1.8 million in related income tax benefit during the three months ended June 30, 2020 and 2019, respectively. The effective tax rate was approximately 92.0% for the three months ended June 30, 2020. The effective tax rate was primarily driven by the impact of the redemption of the Company’s interest in STIN, the new NOL carryback provisions discussed above and valuation allowances recorded in domestic and foreign jurisdictions, partially offset by the impact of permanent book-tax differences. The Company’s effective tax rate was approximately 10.0% for the three months ended June 30, 2019, which was lower than the U.S. federal statutory rate primarily due to the valuation allowance recorded in domestic and foreign jurisdictions offset by certain jurisdictions projecting current tax expense.
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Discussion of the Condensed Consolidated Statements of Operations
Six months ended June 30, 2020 compared to the six months ended June 30, 2019
The following table presents an overview of our results of operations for the six months ended June 30, 2020 and 2019 (in thousands):
Six Months Ended June 30, | 2020 vs 2019 | ||||||||||||||||
2020 | 2019 | $ Change | |||||||||||||||
Net revenues | $ | 153,657 | $ | 165,951 | $ | (12,294) | |||||||||||
Cost of revenues* | 64,951 | 72,356 | (7,405) | ||||||||||||||
Research and development | 38,884 | 38,707 | 177 | ||||||||||||||
Selling, general and administrative | 50,984 | 52,326 | (1,342) | ||||||||||||||
Restructuring charges | 5,943 | 777 | 5,166 | ||||||||||||||
Depreciation and amortization | 21,640 | 40,412 | (18,772) | ||||||||||||||
Total costs and expenses | 182,402 | 204,578 | (22,176) | ||||||||||||||
Loss from continuing operations | $ | (28,745) | $ | (38,627) | $ | 9,882 |
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* Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues decreased $12.3 million to $153.7 million for the six months ended June 30, 2020, compared to the same period in 2019. The decrease in revenue is primarily driven by the expiration of the STIN Cloud Telephony and Support services agreement and the sunset of certain legacy products offset by new commercial cloud and messaging agreements.
Cost of revenues decreased $7.4 million to $65.0 million for the six months ended June 30, 2020, compared to the same period in 2019. The 2020 decrease was primarily due to cost savings initiatives implemented by the Company. These initiatives resulted in a significant decrease in cost of revenues driven mainly by data center consolidation and operating expense savings.
Research and development expense increased $0.2 million to $38.9 million for the six months ended June 30, 2020, compared to the same period in 2019. Research and development remained relatively flat against the comparable period.
Selling, general and administrative expense decreased $1.3 million to $51.0 million for the six months ended June 30, 2020, compared to the same period in 2019. The 2020 decrease was primarily driven by a continued effort to streamline external costs related to outside consultants and legal fees.
Restructuring charges were $5.9 million and $0.8 million for the six months ended June 30, 2020 and 2019, respectively, which primarily related to employment termination costs as a result of the work-force reductions initiated in the current year to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization expense decreased $18.8 million to $21.6 million for the six months ended June 30, 2020, compared to the same period in 2019. The 2020 decrease was primarily attributable to the expiration of amortizable acquired assets, partially offset by the increased amortization of capitalized software.
Interest Income was $1.6 million for the six months ended June 30, 2020. The interest income was primarily attributable to the settlement of the PIK note receivable, which resulted in a reversal of past interest expenses incurred for tax purposes.
Income tax. The Company recognized approximately $20.4 million and $3.2 million in related income tax benefit during the six months ended June 30, 2020 and 2019, respectively. The effective tax rate was approximately 83.5% for the six months ended June 30, 2020, 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 and in zero tax rate jurisdictions, offset by certain foreign jurisdictions projecting current income tax expense. In addition, during the second quarter, the Company recorded a $12.1 million U.S. federal current benefit as a discrete item related to the redemption of its partnership interest in STIN and the related settlement of certain trade receivables. The Company’s effective tax rate was approximately 8.2% for the six months ended June 30, 2019, which was lower than the U.S. federal statutory rate primarily due to the valuation allowance recorded in domestic and foreign jurisdictions offset by certain jurisdictions projecting current tax expense.
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Liquidity and Capital Resources
As of June 30, 2020, our principal sources of liquidity have been cash provided by operations and capital from our revolving credit facility. Our cash, cash equivalents, marketable securities and restricted cash balance was $42.8 million at June 30, 2020. Subsequent to June 30, 2020, the Company received a $13.4 million tax refund for the carryback claim filed in the second quarter of 2020. For further details, see Note 15. Subsequent Events of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
We anticipate that our principal uses of cash, cash equivalents, and marketable securities will be to fund the expansion of our business through both organic growth and the expansion of our customer base. Uses of cash will also include technology expansion, capital expenditures, and working capital.
At June 30, 2020, our non-U.S. subsidiaries held approximately $6.0 million of cash and cash equivalents that are available for use by our operations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to U.S. tax for the incremental amount in excess of the foreign tax paid. Due to the timing and circumstances of repatriation of these earnings, if any, it is not practical to determine the unrecognized deferred tax liability related to the amount.
We believe that our existing cash, cash equivalents, credit facility, and our ability to manage working capital and expected positive cash flows generated from operations in combination with continued expense reductions will be sufficient to fund our operations for the next twelve months from the date of filing based on our current business plans. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. Given the economic uncertainty as a result of the pandemic, we have taken actions to improve our current liquidity position, including, reducing working capital, reducing operating costs and substantially reducing discretionary spending. Even with these actions however, an extended period of economic disruption as a result of COVID-19 could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the "Forward-Looking Statements" section of this MD&A and Part I, Item 1A. “Risk Factors”, some of which are outside of our control.
Revolving Credit Facility
In the first quarter of fiscal 2020, the Company drew the $10.0 million from our Revolving Credit Facility. For further details, see Note 7. Debt of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Share Repurchase Program
There were no repurchases in 2020.
Shares of Preferred Stock
In accordance with the terms of the Share Purchase Agreement dated as of October 17, 2017 (the “PIPE Purchase Agreement”), with Silver Private Holdings I, LLC, an affiliate of Siris (“Silver”), on February 15, 2018, we issued to Silver 185,000 shares of our newly issued Series A Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share, in exchange for $97.7 million in cash and the transfer from Silver to us of the 5,994,667 shares of our common stock held by Silver (the “Preferred Transaction”). In connection with the issuance of the Series A Preferred Stock, we (i) filed the Series A Certificate and (ii) entered into an Investor Rights Agreement with Silver setting forth certain registration, governance and preemptive rights of Silver with respect to us (the “Investor Rights Agreement”). Pursuant to the PIPE Purchase Agreement, at the closing, we paid to Siris $5.0 million as a reimbursement of Silver’s reasonable costs and expenses incurred in connection with the Preferred Transaction.
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Certificate of Designation of the Series A Preferred Stock
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series A Preferred Stock are set forth in the Series A Certificate. Under the Series A Certificate, the holders of the Series A Preferred Stock are entitled to receive Preferred Dividends. The Preferred Dividends are due on each Series A Dividend Payment Date. We may choose to pay the Preferred Dividends in cash or in additional shares of Series A Preferred Stock. In the event we do not declare and pay a dividend in-kind or in cash on any Series A Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. In addition, the Series A Preferred Stock participates in dividends declared and paid on shares of our common stock.
Each share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal to the “Conversion Price” (as that term is defined in the Series A Certificate) multiplied by the then applicable “Conversion Rate” (as that term is defined in the Series A Certificate). Each share of Series A Preferred Stock is initially convertible into 55.5556 shares of common stock, representing an initial “conversion price” of approximately $18.00 per share of common stock. The Conversion Rate is subject to equitable proportionate adjustment in the event of stock splits, recapitalizations and other events set forth in the Series A Certificate.
On and after February 15, 2023, holders of shares of Series A Preferred Stock have the right to cause the Company to redeem each share of Series A Preferred Stock for cash in an amount equal to the sum of the current liquidation preference and any accrued dividends. Each share of Series A Preferred Stock is also redeemable at the option of the holder upon the occurrence of a “Fundamental Change” (as that term is defined in the Series A Certificate) at a specified premium (“Liquidation Value”). In addition, the Company is also permitted to redeem all outstanding shares of the Series A Preferred Stock at any time (i) within the first 30 months of the date of issuance for the sum of the then-applicable Liquidation Preference, accrued but unpaid dividends and a make whole amount (known as “Redemption Value”) and (ii) following the 30-month anniversary of the date of issuance for the sum of the then-applicable Liquidation Preference and the accrued but unpaid dividends. As of June 30, 2020, the Liquidation Value and Redemption Value of the Preferred Shares was $243.1 million.
The holders of a majority of the Series A Preferred Stock, voting separately as a class, are entitled at each of our annual meetings of stockholders or at any special meeting called for the purpose of electing directors (or by written consent signed by the holders of a majority of the then-outstanding shares of Series A Preferred Stock in lieu of such a meeting): (i) to nominate and elect two members of our Board of Directors for so long as the Preferred Percentage (as defined in the Series A Certificate) is equal to or greater than 10%; and (ii) to nominate and elect one member of our Board of Directors for so long as the Preferred Percentage is equal to or greater than 5% but less than 10%.
For so long as the holders of shares of Series A Preferred Stock have the right to nominate at least one director, we are required to obtain the prior approval of Silver prior to taking certain actions, including: (i) certain dividends, repayments and redemptions; (ii) any amendment to our certificate of incorporation that adversely effects the rights, preferences, privileges or voting powers of the Series A Preferred Stock; (iii) issuances of stock ranking senior or equivalent to shares of Series A Preferred Stock (including additional shares of Series A Preferred Stock) in the priority of payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of us; (iv) changes in the size of our Board of Directors; (v) any amendment, alteration, modification or repeal of the charter of our Nominating and Corporate Governance Committee of the Board of Directors and related documents; and (vi) any change in our principal business or the entry into any line of business outside of our existing lines of businesses. In addition, in the event that we are in EBITDA Non-Compliance (as defined in the Series A Certificate) or the undertaking of certain actions would result in us exceeding a specified pro forma leverage ratio, then the prior approval of Silver would be required to incur indebtedness (or alter any debt document) in excess of $10.0 million, enter or consummate any transaction where the fair market value exceeds $5.0 million individually or $10.0 million in the aggregate in a fiscal year or authorize or commit to capital expenditures in excess of $25.0 million in a fiscal year.
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Each holder of Series A Preferred Stock has one vote per share on any matter on which holders of Series A Preferred Stock are entitled to vote separately as a class, whether at a meeting or by written consent. The holders of Series A Preferred Stock are permitted to take any action or consent to any action with respect to such rights without a meeting by delivering a consent in writing or electronic transmission of the holders of the Series A Preferred Stock entitled to cast not less than the minimum number of votes that would be necessary to authorize, take or consent to such action at a meeting of stockholders. In addition to any vote (or action taken by written consent) of the holders of the shares of Series A Preferred Stock as a separate class provided for in the Series A Certificate or by the General Corporation Law of the State of Delaware, the holders of shares of the Series A Preferred Stock are entitled to vote with the holders of shares of common stock (and any other class or series that may similarly be entitled to vote on an as-converted basis with the holders of common stock) on all matters submitted to a vote or to the consent of the stockholders of the Company (including the election of directors) as one class.
Under the Series A Certificate, if Silver and certain of its affiliates have elected to effect a conversion of some or all of their shares of Series A Preferred Stock and if the sum, without duplication, of (i) the aggregate number of shares of our common stock issued to such holders upon such conversion and any shares of our common stock previously issued to such holders upon conversion of Series A Preferred Stock and then held by such holders, plus (ii) the number of shares of our common stock underlying shares of Series A Preferred Stock that would be held at such time by such holders (after giving effect to such conversion), would exceed the 19.9% of the issued and outstanding shares of our voting stock on an as converted basis (the “Conversion Cap”), then such holders would only be entitled to convert such number of shares as would result in the sum of clauses (i) and (ii) (after giving effect to such conversion) being equal to the Conversion Cap (after giving effect to any such limitation on conversion). Any shares of Series A Preferred Stock which a holder has elected to convert but which, by reason of the previous sentence, are not so converted, will be treated as if the holder had not made such election to convert and such shares of Series A Preferred Stock will remain outstanding. Also, under the Series A Certificate, if the sum, without duplication, of (i) the aggregate voting power of the shares previously issued to Silver and certain of its affiliates held by such holders at the record date, plus (ii) the aggregate voting power of the shares of Series A Preferred Stock held by such holders as of such record date, would exceed 19.99% of the total voting power of our outstanding voting stock at such record date, then, with respect to such shares, Silver and certain of its affiliates are only entitled to cast a number of votes equal to 19.99% of such total voting power. The limitation on conversion and voting ceases to apply upon receipt of the requisite approval of holders of our common stock under the applicable listing standards.
Investor Rights Agreement
Concurrently with the closing of the Preferred Transaction, Synchronoss and Silver entered into an Investor Rights Agreement. Under the terms of the Investor Rights Agreement, Silver and Synchronoss have agreed that, effective as of the closing of the Preferred Transaction, the Board of Directors of Synchronoss will consist of ten members. From and after the closing of the Preferred Transaction, so long as the holders of Series A Preferred Stock have the right to nominate a member to the Board of Directors pursuant to the Series A Certificate, the Board of Directors of Synchronoss will consist of (i) two directors nominated and elected by the holders of shares of Series A Preferred Stock; (ii) four directors who meet the independence criteria set forth in the applicable listing standards (each of whom will be initially agreed upon by Synchronoss and Silver); and (iii) four other directors, two of whom shall satisfy the independence criteria of the applicable listing standards and, as of the closing of the Preferred Transaction, one of whom shall be the individual then serving as chief executive officer of Synchronoss and one of whom shall be the current chairman of the Board of Directors of Synchronoss as of the date of execution of the Investors Rights Agreement. Following the closing of the Preferred Transaction, so long as the holders of Series A Preferred Stock have the right to nominate at least one director to the Board of Directors of Synchronoss pursuant to the Series A Certificate, Silver will have the right to designate two members of the Nominating and Corporate Governance Committee of the Board of Directors.
Pursuant to the terms of the Investor Rights Agreement, neither Silver nor its affiliates may transfer any shares of Series A Preferred Stock subject to certain exceptions (including transfers to affiliates that agree to be bound by the terms of the Investor Rights Agreement).
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For so long as Silver has the right to appoint a director to the Board of Directors of Synchronoss, without the prior approval by a majority of directors voting who are not appointed by the holders of shares of Series A Preferred Stock, neither Silver nor its affiliates will directly or indirectly purchase or acquire any debt or equity securities of Synchronoss (including equity-linked derivative securities) if such purchase or acquisition would result in Silver’s Standstill Percentage (as defined in the Investor Rights Agreement) being in excess of 30%. However, the foregoing standstill restrictions would not prohibit the purchase of shares pursuant to the PIPE Purchase Agreement or the receipt of shares of Series A Preferred Stock issued as Preferred Dividends pursuant to the Series A Certificate, shares of Common Stock received upon conversion of shares of Series A Preferred Stock or receipt of any shares of Series A Preferred Stock, Common Stock or other securities of the Company otherwise paid as dividends or as an increase of the Liquidation Preference (as defined in the Series A Certificate) or distributions thereon. Silver will also have preemptive rights with respect to issuances of securities of Synchronoss in order to maintain its ownership percentage.
Under the terms of the Investor Rights Agreement, Silver will be entitled to (i) three demand registrations, with no more than two demand registrations in any single calendar year and provided that each demand registration must include at least 10% of the shares of Common Stock held by Silver, including shares of Common Stock issuable upon conversion of shares of Series A Preferred Stock and (ii) unlimited piggyback registration rights with respect to primary issuances and all other issuances.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands):
Six Months Ended June 30, | Change | ||||||||||||||||
2020 | 2019 | 2020 vs 2019 | |||||||||||||||
Net cash provided by (used in): | |||||||||||||||||
Operating activities | $ | 1,608 | $ | 18,564 | $ | (16,956) | |||||||||||
Investing activities | (6,934) | (20,250) | 13,316 | ||||||||||||||
Financing activities | 9,991 | (73,574) | 83,565 |
Our primary source of cash is receipts from revenue. The primary uses of cash are personnel and related costs, telecommunications and facility costs related primarily to our cost of revenue and general operating expenses including professional service fees, consulting fees, building and equipment maintenance and marketing expense.
Cash flows from operating activities for the six months ended June 30, 2020 was $1.6 million cash provided by operating activities, as compared to $18.6 million of cash used in operating activities for the same period in 2019. The decrease of cash used by operating activities of $17.0 million was primarily due to a significant tax refund received in the prior year.
Cash flows from investing for the six months ended June 30, 2020 was $6.9 million cash used for investing, as compared to $20.3 million in cash used in investing activities during the same period in 2019. The cash used for investing in the current year was primarily related to the purchase of fixed assets and investment in capitalized software offset by the sale of certain IP address assets. The net decrease in cash from investing activities from the prior year mainly related to the net proceeds from the purchases and sales of marketable securities in the prior year that were not present in the current period.
Cash flows from financing for six months ended June 30, 2020 was $10.0 million of cash provided, as compared to $73.6 million of cash used by financing activities for the same period in 2019. The cash provided from investing activities was attributable to the $10.0 million drawdown from our Revolving Credit Facility in the current quarter. The net change in cash provided from financing activities from the prior year is primarily attributable to the cash provided from the Revolving Credit Facility offset by repayments for our Convertible Senior Notes in 2019.
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Effect of Inflation
Although inflation generally affects us by increasing our cost of labor and equipment, we do not believe that inflation has had any material effect on our results of operations during 2020 and 2019. We do not expect the current rate of inflation to have a material impact on our business.
Contractual Obligations
Our contractual obligations consist of contingent consideration, office equipment and colocation services and contractual commitments under third-party hosting, software licenses and maintenance agreements. The following table summarizes our long-term contractual obligations as of June 30, 2020 (in thousands).
Payments Due by Period | ||||||||||||||||||||||||||||||||
Total | 2020 | 2021-2023 | 2024-2025 | Thereafter | ||||||||||||||||||||||||||||
Capital lease obligations | $ | 62 | $ | 8 | $ | 49 | $ | 5 | $ | — | ||||||||||||||||||||||
Revolving Credit Facility | $ | 10,000 | $ | 10,000 | $ | — | $ | — | $ | — | ||||||||||||||||||||||
Interest | — | — | — | — | — | |||||||||||||||||||||||||||
Operating lease obligations | 83,044 | 6,743 | 34,526 | 18,852 | 22,923 | |||||||||||||||||||||||||||
Purchase obligations* | 24,976 | 17,541 | 7,435 | — | — | |||||||||||||||||||||||||||
Total | $ | 118,082 | $ | 34,292 | $ | 42,010 | $ | 18,857 | $ | 22,923 |
_______________________________
* Amount represents obligations associated with colocation agreements and other customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax positions of $3.5 million at June 30, 2020 are excluded from the table above as we are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. We do not expect that the balance of unrecognized tax benefits will significantly increase or decrease over the next twelve months.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements in accordance with U.S. GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during a fiscal period. The SEC considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application.
These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from COVID-19 and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See Part II, “Item 1A. Risk Factors” in this Form 10-Q for certain matters bearing risks on our future results of operations.
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During the six months ended June 30, 2020, the Company made changes in its accounting policies over Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. These updates are described in detail in Note 2. Basis of Presentation and Consolidation. Aside from the adoption of Topic 326, there were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K for the year ended December 31, 2019 during the six months ended June 30, 2020. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 for a more complete discussion of our critical accounting policies and estimates.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards see Note 2. Basis of Presentation and Consolidation included in Part I, Item 1. “Notes to Condensed Consolidated Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 30, 2020 and December 31, 2019 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 investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The 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 risk 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 United States dollars.
The primary objective of our investment activities is to preserve our capital for the purpose of funding operations, while at the same time maximizing the income, we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short- and long-term investments in a variety of securities, which could include commercial paper, money market funds and corporate and government debt securities. Our cash, cash equivalents and marketable securities at June 30, 2020 and December 31, 2019 were invested in liquid money market 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.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 transaction 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 foreign 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
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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 June 30, 2020 would increase interest income by approximately $0.4 million on an annual basis.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this quarterly report, that ensure that information relating to the registrant which is required to be disclosed in this report is recorded, processed, summarized and reported within required time periods using the criteria for effective internal control established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 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 of June 30, 2020.
Changes in Internal Control Over Financial Reporting
We completed an implementation of a new enterprise resource planning, or ERP, system during the first quarter of 2020. The ERP system replaced or enhanced certain internal financial, operating and other systems that are critical to our business operations. The ERP implementation affected the processes that constitute our internal control over financial reporting. Management has taken steps to ensure that appropriate controls were designed and implemented as the new ERP system was implemented.
With the exception of the ERP implementation described above, there were no changes in the Company's internal control over financial reporting that occurred during the quarterly period ended June 30, 2020 that have materially affected, or are reasonably likely to materially effect, the Company's internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of our material pending legal proceedings that could impact our results of operations, financial condition or cash flows see Note 13. Commitments, Contingencies and Other included in Part I, Item 1. “Notes to Condensed Consolidated Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
Except as stated below, there have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. included in our Annual Report on Form 10-K for the year ended December 31, 2019. In addition, the impacts of COVID-19 and any worsening of the economic environment may exacerbate the risks described below and in our Annual Report on Form 10-K for the year ended December 31, 2019, any of which could have a material impact on us.
Operational Risks
Public health crises, including the recent novel coronavirus (COVID-19) outbreak, could materially adversely affect our business, financial condition and results of operations. Our business is based on our ability to provide products and services to customers throughout the United States and around the world and the ability of those customers to utilize and pay for those products and services for their businesses. As a result, our business could be materially adversely affected by a crisis, like the COVID-19 outbreak, that significantly impacts our current and potential customers and vendors. In addition, such a crisis could significantly increase the probability or consequences of the risks our business faces in ordinary circumstances, such as risks associated with our supplier and vendor relationships, risks of an economic slowdown, regulatory risks, and the costs and availability of financing. Because the severity, magnitude and duration of the COVID-19 outbreak and its economic consequences are uncertain and rapidly changing, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. In addition, the ultimate impact of the COVID-19 outbreak on our business, financial condition and results of operations depends on many factors, including those discussed above, that are not within our control.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibit No. | Description | |||||||
3.1 | ||||||||
3.2 | ||||||||
3.3 | ||||||||
10.1 | ||||||||
31.1 | ||||||||
31.2 | ||||||||
32.1 | ||||||||
32.2 | ||||||||
101.INS | XBRL Instance Document | |||||||
101.SCH | XBRL Schema Document | |||||||
101.CAL | XBRL Calculation Linkbase Document | |||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | |||||||
101.LAB | XBRL Labels Linkbase Document | |||||||
101.PRE | XBRL Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Synchronoss Technologies, Inc. | |||||||||||
/s/ Glenn Lurie | |||||||||||
Glenn Lurie | |||||||||||
Chief Executive Officer | |||||||||||
(Principal Executive Officer) | |||||||||||
/s/ David Clark | |||||||||||
David Clark | |||||||||||
Chief Financial Officer |
August 12, 2020
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