ITEM 7. 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 MD&A should be read in conjunction with the Financial Statements and Notes to the consolidated financial statements.
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 it 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.
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 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 2021 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 most 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 and Digital 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.
The Company’s top five customers accounted for 68.0%, 69.2% and 69.0% of net revenues for the years ended December 31, 2020, 2019 and 2018, respectively. Contracts with these customers typically run for three to five years. Of these customers,
Verizon accounted for more than 10% of the Company’s revenues in 2020, 2019, and 2018. 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.
Current Trends Affecting Our Results of Operations
As the COVID-19 pandemic continues to develop, we are actively monitoring the global situation. The extent of the continuing impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our business operations, impact on our customer, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. The extent to which the COVID-19 pandemic may continue to impact our business, financial condition or results of operations is uncertain, but may include, without limitation, impacts to our paying user growth as well as disruptions to our business operations as a result of travel restrictions, shutdown of workplaces and potential impacts to our vendors. Additionally, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our 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 (Email) has been driven by a resurgence in the need for white label secure messaging platforms that favor the Mobile Network Operator’s (“MNO”) business objectives and 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.
To support our growth, which we expect to 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, and Digital 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.
Discussion of the Consolidated Statements of Operations
The following table presents an overview of our results of operations for the years ended December 31, 2020, 2019 and 2018 (in thousands).
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Twelve Months Ended December 31,
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2020 vs 2019
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2019 vs 2018
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2020
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2019
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2018
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$ Change
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$ Change
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Net revenues
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$
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291,670
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$
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308,749
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$
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325,839
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$
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(17,079)
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$
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(17,090)
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Cost of revenues*
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121,817
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150,407
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158,802
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(28,590)
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(8,395)
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Research and development
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77,043
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75,568
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79,172
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1,475
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(3,604)
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Selling, general and administrative
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89,292
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112,771
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122,112
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(23,479)
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(9,341)
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Restructuring charges
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7,955
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755
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12,375
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7,200
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(11,620)
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Depreciation and amortization
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43,685
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77,036
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117,654
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(33,351)
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(40,618)
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Total costs and expenses
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339,792
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416,537
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490,115
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(76,745)
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(73,578)
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Loss from continuing operations
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$
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(48,122)
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$
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(107,788)
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$
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(164,276)
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$
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59,666
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$
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56,488
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________________________________
* Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues decreased $17.1 million to $291.7 million for the year ended December 31, 2020, compared to the same period in 2019. The overall change is due to:
•a $0.5 million decrease in Cloud revenues is primarily due to the extension of a significant commercial arrangement which extended recognition of deferred revenue across the term of the new contract, partially offset by increased subscriber growth and professional services revenue.
•a $2.3 million increase in Digital revenues is primarily driven an uptick in subscription services partially offset by a reduction in professional service business.
•an $18.8 million decrease in Messaging revenues was primarily driven by a significant 2019 non-recurring license and professional services revenue deal in advanced messaging. This revenue change was partially offset by favorable license renewals in 2020.
Net revenues decreased $17.1 million to $308.7 million for the year ended December 31, 2019, compared to the same period in 2018. The overall change is due to:
•a $0.1 million increase in Cloud revenues due to a decrease in transaction revenue of $3.4 million offset by an increase in subscription revenue of $2.8 million and an increase in professional services revenue of $0.7 million.
•a $45.6 million decrease in Digital Transformation revenues is primarily driven by changes to the STIN business that led the Company to conclude that its collection of certain STIN receivables is no longer probable. In accordance with ASC 842, the portion of revenue that is no longer deemed collectible is reversed in the current period against revenue. Accordingly, the Company determined a contingency reserve is required, which was included as a reduction of revenue. The year over year change to STIN revenue was in excess of $34.6 million. The remaining change is primarily driven by a decline in business activity.
•an increase in Messaging revenues of $28.4 million primarily due to a growth in advanced messaging in North America as well as the continued delivery of an advanced messaging solution to a customer in the Japanese market.
Cost of revenues decreased $28.6 million to $121.8 million for the year ended December 31, 2020, compared to the same period in 2019. The 2020 decrease was primarily attributable to the year over year reduction in revenue and the cost savings from strategic initiatives implemented in the year driven mainly by data center consolidation and operating expense savings.
Cost of revenues decreased $8.4 million to $150.4 million for the year ended December 31, 2019, compared to the same period in 2018. The 2019 decrease was primarily due to cost savings initiatives implemented in 2018 and continuing into 2019. These initiatives resulted in a decrease in cost of revenues driven mainly by data center consolidation and operating expense savings.
Research and development expense increased $1.5 million to $77.0 million for the year ended December 31, 2020, compared to the same period in 2019. The increase in 2020 is primarily related to the costs associated with the impairment of
the right of use assets. Excluding the impairment charges incurred in 2020, the research and development costs decreased year over year mainly as a result of executed cost savings initiatives to streamline our workforce and reduce vendor spend.
Research and development expense decreased $3.6 million to $75.6 million for the year ended December 31, 2019, compared to the same period in 2018. The decrease in 2019 is primarily due to the realization of our strategic efforts to reduce costs and refocus our resources on key strategic priorities. These efforts resulted in decreased personnel related costs including stock-based compensation expense.
Selling, general and administrative expense decreased $23.5 million to $89.3 million for the year ended December 31, 2020, compared to the same period in 2019. The 2020 decrease was primarily attributable to significant cost cutting initiatives executed in year which included headcount reductions, reduced vendor spending and lower facility costs offset by impairments to our right of use assets.
Selling, general and administrative expense decreased $9.3 million to $112.8 million for the year ended December 31, 2019, compared to the same period in 2018. The 2019 decrease was primarily due to a net reduction in professional services and outside consulting fees incurred and lower telecommunication and facility costs offset by a right of use asset impairment.
Restructuring charges were $8.0 million, $0.8 million and $12.4 million for the years ended December 31, 2020, 2019 and 2018 respectively. The 2020 restructuring costs was primarily driven by our strategic cost savings initiatives to streamline our business operations and reduce headcount. 2019 restructuring costs were primarily related to employment termination costs as a result of the work-force reduction and facility consolidation plans. In prior years, we commenced separate plans designed to reduce operating costs and align our resources with our key strategic priorities, which resulted in work-force reductions and facility consolidations.
Depreciation and amortization expense decreased $33.4 million to $43.7 million for the year ended December 31, 2020, compared to the same period in 2019. The 2020 decrease was primarily attributable to the expiration of amortizable acquired assets and a reduction in capital expenditures. These changes were partially offset by the increased amortization of capitalized software.
Depreciation and amortization expense decreased $40.6 million to $77.0 million for the year ended December 31, 2019, compared to the same period in 2018. The 2019 decrease was primarily attributable to the expiration of amortizable acquired assets, a reduction in capital expenditures, and the one-time Zentry, LLC (“Zentry”) impairment charge in 2018. These changes were partially offset by the increased amortization of capitalized software.
Income tax. The Company recognized approximately $27.1 million in related income tax benefit and $2.2 million in related income tax provision during the year ended December 31, 2020 and 2019, respectively. The effective tax rate was approximately 72.4% for the year ended December 31, 2020, which was higher than the U.S. federal statutory rate primarily due to the benefit of the CARES Act provision allowing for a 5 year carryback of Net Operating Losses arising in 2018, 2019 and 2020. The Company’s effective tax rate was approximately (2.1)% for the year ended December 31, 2019, 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 and permanent differences associated with U.S. Base Erosion and Anti Abuse Tax elections, offset by certain foreign jurisdictions projecting current income tax expense.
Liquidity and Capital Resources
As of December 31, 2020, our principal sources of liquidity have been cash provided by operations. Our cash and cash equivalents balance was $33.7 million at December 31, 2020. We anticipate that our principal uses of cash and cash equivalents will be to fund our business, including technology expansion and working capital.
At December 31, 2020, our non-U.S. subsidiaries held approximately $6.2 million of cash and cash equivalents that are available for use by all of our operations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to U.S. tax for the incremental amount in excess of the foreign tax paid. Due to the timing and circumstances of repatriation of these earnings, if any, it is not practical to determine the unrecognized deferred tax liability related to the amount.
We believe that our 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 of this Annual Report on Form 10-K. 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.
Convertible Senior Notes
The Company paid off the remaining carrying amount of the convertible senior notes on August 15, 2019. For further details, see Note 12. Debt of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
2019 Revolving Credit Facility
On October 4, 2019, the Company entered into a Credit Agreement with Citizens Bank, N.A., for a $10.0 million Revolving Credit Facility. Borrowings under the Revolving Credit Facility 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 0.00%. In addition, on a quarterly basis, the Company is required to pay each lender under the Revolving Credit Facility a 0.2% commitment fee on the undrawn balance under the Revolving Credit Facility, which may be subject to adjustment based on the Company’s total leverage ratio.
In the first quarter of fiscal 2020, the Company drew the $10.0 million from our Revolving Credit Facility, which remains outstanding as of December 31, 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 costs and expenses incurred in connection with the Preferred Transaction.
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 the fifth anniversary of February 15, 2018, 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 December 31, 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.
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).
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):
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Twelve Months Ended December 31,
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Change
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Change
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2020
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2019
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2018
|
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2020 vs 2019
|
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2019 vs 2018
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Net cash provided by (used in):
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Operating activities
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$
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(564)
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$
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32,583
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$
|
(31,369)
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$
|
(33,147)
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$
|
63,952
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Investing activities
|
(14,339)
|
|
|
19,377
|
|
|
(67,282)
|
|
|
(33,716)
|
|
|
86,659
|
|
Financing activities
|
9,991
|
|
|
(121,257)
|
|
|
(35,885)
|
|
|
131,248
|
|
|
(85,372)
|
|
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 year ended December 31, 2020 was a $0.6 million of cash used by operating activities, as compared to $32.6 million of cash provided by operating activities for the same period in 2019. The decrease of cash used by operating activities of $33.1 million was primarily due to favorable changes in cash earnings of $21.4 million offset by an unfavorable change in working capital of $70.2 million. The main driver of the unfavorable movement in working
capital was the continued run-off of the deferred revenue balance which is in line with our business as our customers shift away from larger prepayments of services.
Cash flows from operating activities for the year ended December 31, 2019 was $32.6 million of cash provided by operating activities, as compared to $31.4 million of cash used by operating activities for the same period in 2018. The increase of cash provided by operating activities of $64.0 million was primarily due to favorable changes in cash earnings of $16.1 million, a $20.7 million tax refund and a favorable change in working capital of $27.1 million.
Cash flows from investing activities for the year ended December 31, 2020 was $14.3 million of cash used by investing activities, as compared to $19.4 million in cash provided by investing activities during the same period in 2019. The cash used for investing in the current year was primarily related to the $16.7 million 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 investing activities for the year ended December 31, 2019 was $19.4 million of cash provided by investing activities, as compared to $67.3 million in cash used for investing activities during the same period in 2018. The 2019 cash provided from investing activities was driven by the sale of marketable securities offset by our continued investment in capitalized software. The increased spend in 2018 was due primarily to purchase marketable securities and fund the Honeybee acquisition.
Cash flows from financing activities for the year ended December 31, 2020 was $10.0 million of cash provided, as compared to $121.3 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. 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.
Cash flows from financing activities for the year ended December 31, 2019 was $121.3 million use of cash, as compared to $35.9 million of cash used by financing activities for the same period in 2018. The cash used for financing activities was mainly attributable to the repayment of the convertible debt in August 2019.
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, 2019 and 2018. We do not expect the current rate of inflation to have a material impact on our business for the foreseeable future.
Contractual Obligations
Our contractual obligations consist of contingent consideration, office equipment and colocation services and contractual commitments under third-party hosting, software licenses and maintenance agreements. The following table summarizes our long‑term contractual obligations as of December 31, 2020 (in thousands).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
Total
|
|
2021
|
|
2022-2024
|
|
2025-2026
|
|
Thereafter
|
Finance lease obligations
|
|
$
|
258
|
|
|
$
|
87
|
|
|
$
|
171
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
$
|
69,000
|
|
|
$
|
13,766
|
|
|
$
|
28,273
|
|
|
$
|
16,367
|
|
|
$
|
10,594
|
|
Purchase obligations*
|
|
58,222
|
|
|
11,632
|
|
|
36,891
|
|
|
9,699
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
127,480
|
|
|
$
|
25,485
|
|
|
$
|
65,335
|
|
|
$
|
26,066
|
|
|
$
|
10,594
|
|
_______________________________
* Amount represents customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax positions are $3.3 million at December 31, 2020. 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
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements in accordance with U.S. GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during a fiscal period. We have discussed the selection and development of the critical accounting policies with the Audit Committee, and the Audit Committee has reviewed our related disclosures in this Form 10-K. Although we believe that our judgments and estimates are appropriate, correct and reasonable under the circumstances, actual results may differ from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See Part I, “Item 1A. Risk Factors” in this Form 10-K for certain matters bearing risks on our future results of operations.
We believe the following to be our critical accounting policies because they are important to the portrayal of our consolidated financial condition and results of operations and they require critical management judgments and estimates about matters that are uncertain.
Significant accounting policies that we employ are presented in the Notes to our Consolidated Financial Statements in Item 8 Note 2. Summary of Significant Accounting Policies. There were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K during the year ended December 31, 2020.
Revenue Recognition and Deferred Revenue
The Company generates revenue from the delivery of a range of products, solutions and services for operators, enterprises, OEMs and technology providers. We offer services principally on a Transactional or Subscription basis (SaaS) or in the form of Professional Services or Software Licenses. Revenues are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company generates all of its revenue from contracts with customers.
Subscription and Transaction revenues consist of revenues derived from the processing of transactions through the Company’s service platforms, providing enterprise portal management services on a subscription basis and maintenance agreements on software licenses. The Company generates revenue from Subscription services from monthly active user fees, software as a service (“SaaS”) fees, hosting and storage fees, and fees for the related maintenance support for those services. In most cases, the subscription or transaction arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage, under Topic 606 Section 10-25-14(b). When the Company does not allocate variable consideration to distinct periods of service, the total estimated transaction price is recognized ratably over the term of the contract, where the level of service provided to the customer does not vary significantly from one period to another.
Transaction service arrangements include services such as processing equipment orders, new account setup and activation, number port requests, credit checks and inventory management. Transaction revenues are principally based on a contractual price per transaction and are recognized based on the number of transactions processed during each reporting period. Revenues are recorded based on the total number of transactions processed at the applicable price established in the relevant contract.
Many of the Company’s contracts guarantee minimum volume transactions from the customer. In these instances, if the customer’s total estimated transaction volume for the period is expected to be less than the contractual amount, the Company records revenues at the minimum guaranteed amount on a straight line based over the period covered by the minimum. Setup fees for transactional service arrangements are deferred until set up activities are completed and recognized on a straight‑line basis over remaining expected customer relationship period. Revenues are presented net of discounts, which are volume level driven.
In accordance with Topic 606 Section 10-50-20, any credits due to customers, which are generally performance driven and based upon system availability or response times to incidents, are determined and accounted for in the period in which the services are provided. The Company recognizes revenues from support and maintenance performance obligations over the service delivery period.
The Company’s software licenses typically provide for a perpetual or term right to use the Company’s software. The Company has concluded that in most cases its software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered to the customer. Contracts that include software customization or specified upgrades may result in the combination of the customization services with the software license as one performance obligation. The Company does not have a history of returns, or refunds of is software licenses, however, in limited instances, the Company may constrain consideration to high-risk customers, until collection is resolved.
The Company’s professional services include software development and customization. The contracts generally include project deliverables specified by each customer. The performance obligations in the agreements are generally combined into one deliverable and generally result in the transfer of control over time. The underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to us. The Company recognizes revenue on fixed fee contracts on the proportion of labor hours expended to the total hours expected to complete the contract performance obligation.
Most of the Company’s contracts with customers contain multiple performance obligations which generally include either 1) a perpetual software license with support and maintenance and sometimes a hosting agreement or 2) a term SaaS agreement, in many cases these are sold along with professional services. For these contracts, the Company accounts for individual goods and services separately if they are distinct performance obligations. This often requires significant judgment based upon knowledge of the products, the solution provided and the structure of the sales contract. In SaaS agreements, the Company provides a service to the customer which combines the software functionality, maintenance and hosting into a single performance obligation when the customer doesn’t have the ability to take possession of the underlying software license. The Company may also sell the same three goods and services in a contract, but there may be three performance obligations, where the customer has the right to take possession of the software license without significant penalty.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company estimates standalone selling prices of software based on observable inputs of past transactions to similarly situated customers. When such observable data is not available for certain software licenses because there is a limited number of transactions or prices are highly variable, the Company will estimate the standalone selling price using the residual approach. Standalone selling prices of services are typically determined based on observable transactions when these services are sold on a standalone basis to similarly situated customers or estimated using a cost-plus margin approach.
Estimating the transaction price of variable consideration including the variable quantity subscription or transaction contracts in a multiple performance obligation arrangement requires significant judgment. The Company generally estimates this variable consideration at the most likely amount to which the Company expects to be entitled and in certain cases based on the expected value. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. The Company reviews and updates these estimates on a quarterly basis.
Stock-Based Compensation
As of December 31, 2020, we maintain eight stock-based compensation plans. We utilize the Black-Scholes pricing model to determine the fair value of stock options on the dates of grant. Restricted stock awards are measured based on the fair market values of the underlying stock on the dates of grant. We recognize stock-based compensation over the requisite service period with an offsetting credit to additional paid-in capital.
For our performance restricted stock awards and units, we estimate the number of shares the recipient is to receive by applying a probability of achieving the performance goals. The actual number of shares the recipient receives is determined at the end of the performance period based on the results achieved versus goals based on our performance targets, such as revenue, EBITDA and Total Shareholder Return (TSR). Once the number of awards is determined, the compensation cost is fixed and continues to be recognized using straight line recognition over the requisite service period for each vesting tranche.
Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical information of our stock. The average expected life was determined using historical stock option exercise activity. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. We have never declared or paid cash dividends on our common equity and do not anticipate paying any cash dividends in the foreseeable future. Forfeitures are accounted for as they occur.
Income Taxes
On December 22, 2017, the U.S. government enacted TCJA. The TCJA made changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among others, that are generally effective for taxable years beginning after December 31, 2017.
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses. The CARES Act amends the Net Operating Loss provisions of the Tax Cuts and Jobs Act, allowing for the carryback of losses arising in tax years 2018, 2019 and 2020, to each of the five taxable years preceding the taxable year of loss.
Since we conduct operations on a global basis, our effective tax rate has and will depend upon the geographic distribution of our pre-tax earnings among locations with varying tax rates. We account for the effects of income taxes that result from our activities during the current and preceding years. Under this method, deferred income tax liabilities and assets are based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse or be utilized. The realization of deferred tax assets is contingent upon the generation of future taxable income. A valuation allowance is recorded if it is “more likely than not” that a portion or all of a deferred tax asset will not be realized.
In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
We recognize a tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured by determining the amount that has a greater than 50 percent likelihood of being realized upon the settlement of the position. Components of the reserve are classified as current or a long-term liability in the Consolidated Balance Sheets based on when we expect each of the items to be settled. We record interest and penalties accrued in relation to uncertain tax benefits as a component of interest expense.
While we believe we have identified all reasonably identifiable exposures and that the reserve we have established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved. It is also possible that changes in facts and circumstances could cause us to either materially increase or reduce the carrying amount of our tax reserves. In general, tax returns for the year 2017 and thereafter are subject to future examination by tax authorities.
Our policy has been to leave our cumulative unremitted foreign earnings invested indefinitely outside the United States, and we intend to continue this policy. Although the transition tax in the TCJA has removed U.S. federal taxes on distributions to the U.S. on a go forward basis, the Company continues to assert permanent reinvestment of foreign earnings. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts.
Business Combinations
We account for business combinations in accordance with the acquisition method. The acquisition method of accounting requires that assets acquired, and liabilities assumed and any noncontrolling interest in the acquiree (if any), be recorded at their fair values on the date of a business acquisition. Our consolidated financial statements and results of operations reflect an acquired business from the completion date of the transaction.
The judgments that we make in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income in periods following a business combination. We generally use either the income, cost or market approach to aid in our conclusions of such fair values and asset lives. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the
asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its replacement or reproduction cost. The market approach estimates value based on what other participants in the market have paid for reasonably similar assets. Although each valuation approach is considered in valuing the assets acquired, the approach ultimately selected is based on the characteristics of the asset and the availability of information.
We record contingent consideration resulting from a business combination at its fair value on the acquisition date. Each reporting period thereafter, we revalue these obligations and record increases or decreases in their fair value as an adjustment to net change in contingent consideration obligation within the Consolidated Statements of Operations. Changes in the fair value of the contingent consideration obligation can result from updates in the achievement of financial or other operational targets and changes to the weighted probability of achieving those future targets. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, any change in the assumptions described above, could have a material impact on the amount of the net change in contingent consideration obligation that we record in any given period.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of assets acquired, including other definite-lived intangible assets. Our policy is to perform an impairment test of goodwill at least annually, and more frequently if events or circumstances occurred that would indicate a reduced fair value in our reporting units could exist. Typically, we perform a qualitative assessment in the fourth quarter of the fiscal year to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. As part of this qualitative assessment, we perform a quantitative assessment where necessary in substantiating our qualitative assessment.
During our qualitative assessment we make significant estimates, assumptions, and judgments, around the financial performance of the Company, changes in our share price, and forecasts of earnings, working capital requirements, and cash flows. We consider each reporting unit's historical results and operating trends as well as any strategic difference from our historical results when determining these assumptions.
If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, we perform a quantitative goodwill impairment test. Fair value estimates used in the quantitative impairment test are calculated using a combination of the income and market approaches. The income approach is based on the present value of future cash flows of each reporting unit, while the market approach is based on certain multiples of selected guideline public companies or selected guideline transactions. The approaches incorporate a number of market participant assumptions including future growth rates, discount rates, income tax rates and market activity in assessing fair value and are reporting unit specific. If the carrying amount exceeds the reporting unit's fair value, we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.
The fair value measurement associated with the quantitative goodwill impairment test is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value goodwill could significantly increase or decrease the fair value estimates used for impairment assessments.
For our 2020 impairment tests, the Company identified one reporting unit, Core. The Company performed a quantitative impairment assessment, as of October 1, 2020, for the Core reporting unit. The amounts below represent the results of our quantitative assessment.
We use the average of our fair values for purposes of our comparison between carrying value and fair value for the quantitative impairment test. The table below depicts the methods employed, assumptions used and percentage fair value in excess of carrying value.
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2020 Impairment Test
|
Reporting Unit
|
Discount Rate
|
Growth rate range
|
Terminal Growth Rate
|
Goodwill
|
|
Fair Value Exceeds Carrying Value by
|
|
Fair Value method
|
Core
|
13.0
|
%
|
2.0 - 13.0%
|
2.0
|
%
|
$
|
227,012
|
|
|
45.1
|
%
|
|
Income Approach, Market Approach
|
The 2020 fair value of the reporting unit was estimated using a combination of the income approach, which incorporates the use of the discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue
multiples based on market data. We generally applied an equal weighting to the income and market approaches for our analysis when both are applied.
For the income approach, we used projections, which require the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions. Factors specific to each reporting unit include revenue and cost growth, profit margins, terminal value growth rates, capital expenditures projections, assumed tax rates, discount rates and other assumptions deemed reasonable by management.
For the market approach, we used judgment in identifying the relevant comparable-company market multiples. These estimates and assumptions may vary between each reporting unit depending on the facts and circumstances specific to that unit. If sufficient comparable data is not present, the market approach will not be employed. The discount rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit.
Factors influencing the revenue growth rates include the nature of the services the reporting unit provides for its clients, the maturity of the reporting unit and any known concentrated customer contract renewals. We believe that the estimates and assumptions we made are reasonable, but they are susceptible to change from period to period. Actual results of operations, cash flows and other factors will likely differ from the estimates used in our valuation, and it is possible that differences and changes could be material.
A deterioration in profitability, adverse market conditions, significant client losses, changes in spending levels of our existing clients or a different economic outlook than currently estimated by management could have a significant impact on the estimated fair value of our reporting units and could result in an impairment charge in the future.
Capitalized Software Development Costs
Software development costs are accounted for in accordance with either ASC 985-20, “Software - Costs of Software to be Sold, Leased or Marketed,” or ASC 350-40, “Internal-Use Software.” Costs associated with the planning and designing phase of software development are classified as research and development costs and are expensed as incurred. The amounts capitalized include external direct costs of services used in developing internal-use software, employee compensation and related expenses of personnel directly associated with the development activities. Once technological feasibility has been determined, a portion of the costs incurred in development, including coding, testing and quality assurance, are capitalized until available for general release to clients.
Amortization is calculated on a solution-by-solution basis and is recognized over the estimated economic life of the software, typically ranging two to three years. Amortization begins when the software is substantially completed for its intended use. Costs incurred during the preliminary and post-implementation stages are expensed as incurred. The amounts capitalized include external direct costs of services used in developing internal-use software, employee compensation and related expenses of personnel directly associated with the development activities. Software development costs are evaluated for recoverability whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Unrecoverable costs are reviewed annually and recognized in the period they become unrecoverable, as needed, and are recorded in the Consolidated Statements of Operations as depreciation and amortization expense.
Impairment of Long-Lived Assets
A review of long-lived assets for impairment is performed when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If an indication of impairment is present, the Company compares the estimated undiscounted future cash flows to be generated by the asset to the asset’s carrying amount. If the undiscounted future cash flows are less than the carrying amount of the asset, the Company records an impairment loss equal to the amount by which the asset’s carrying amount exceeds its fair value. The fair value is determined based on valuation techniques such as a comparison to fair values of similar assets or using a discounted cash flow analysis.
This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value long lived assets could significantly increase or decrease the fair value estimates used for impairment assessments.
Long lived assets that do not have indefinite lives are amortized/depreciated over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company reevaluates the useful life determinations each year to determine whether events and circumstances warrant a revision to the remaining useful lives.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards see Note 2. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2020 and December 31, 2019.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Synchronoss Technologies, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Synchronoss Technologies, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 15, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Subscription and license revenue– Identifying contracts, performance obligations and stand-alone selling price
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Description of the Matter
|
|
As discussed in Note 3. Revenue of the financial statements, the Company recognized $230 million in subscription and license revenue. The related revenue agreements frequently contain multiple performance obligations, and judgment is required to determine which performance obligations are distinct and accounted for separately. These agreements may also contain variable consideration in the form of tiered pricing, contractual minimums or discounts. Judgment is also required to estimate the total contract consideration and to allocate the consideration to each distinct performance obligation. Additionally, the Company enters into multiple agreements with the same customer, which may affect the identification of the contract, the performance obligations and the allocation of total contract consideration. Auditing the Company’s subscription and license revenue was complex and involved a high degree of judgment related to management’s identification of performance obligations and its estimate and allocation of contract consideration.
|
How We Addressed the Matter in Our Audit
|
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls related to the Company’s process for recognizing subscription and license revenue, including controls over management’s review of the significant judgments and estimates used in the identification of the contract, distinct performance obligations and the estimation and allocation of amounts to each performance obligation.
Our audit procedures also included, among others, reading a sample of customer contracts and evaluating management’s identification of the contract and the distinct performance obligations based on the terms of the arrangements and the Company’s accounting policies. To test the calculation of the amount of consideration allocated to each distinct performance obligation, we performed procedures to evaluate management’s judgments related to the allocation of consideration to each distinct performance obligation and performed sensitivity analyses to evaluate how these assumptions affect the amount of revenue recognized. We have also evaluated the adequacy of the Company’s disclosures included in Note 3. Revenue.
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|
|
Goodwill
|
Description of the Matter
|
|
At December 31, 2020, the Company's goodwill balance was $232 million. As discussed in Note 9. Goodwill and Intangibles of the consolidated financial statements, goodwill is tested for impairment at least annually on October 1 at the reporting unit level. Auditing the Company's goodwill impairment test was complex due to the significant judgment required in determining the fair value of the reporting unit. In particular, the fair value estimate was sensitive to significant assumptions that require judgment, including revenue growth rates, free cash flow and operating expenses as a percentage of revenue that affect the amount and timing of future cash flows, long-term growth rates, and the weighted average cost of capital ("discount rate"), which are affected by factors such as general market conditions and recent operating performance.
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How We Addressed the Matter in Our Audit
|
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's goodwill impairment review process. For example, we tested controls over management's review of the valuation model and the significant assumptions, discussed above used to develop the prospective financial information. We also tested management's controls to validate the data used in the valuation was complete and accurate.
To test the estimated fair value of the Company's reporting unit, we performed audit procedures that included, among others, assessing the reasonableness of the methodologies used. We also compared the significant assumptions used by management to develop the prospective financial information to current industry and economic trends, analyst expectations, changes to the Company's business model, customer base or product mix and other relevant information. We assessed the historical accuracy of management's projections of future earnings by comparing the actual results to prior forecasts, and we performed analyses of significant assumptions to assess the impact of changes in the assumptions on the calculation of fair value. Further, we evaluated the revenue growth rates, free cash flow, operating expenses as a percentage of revenue and long term growth rates in comparison to the Company’s peers. We also involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. We have also evaluated the adequacy of the Company’s disclosures included in Note 9. Goodwill and Intangibles.
|
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2001.
Iselin, New Jersey
March 15, 2021
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash, restricted cash and cash equivalents
|
$
|
33,671
|
|
|
$
|
39,001
|
|
|
|
|
|
Marketable securities, current
|
—
|
|
|
11
|
|
Accounts receivable, net*
|
47,849
|
|
|
65,863
|
|
Prepaid & Other Current Assets
|
39,847
|
|
|
38,022
|
|
|
|
|
|
|
|
|
|
Total current assets
|
121,367
|
|
|
142,897
|
|
Non-Current Assets:
|
|
|
|
|
|
|
|
Property and equipment, net
|
11,732
|
|
|
26,525
|
|
Operating lease right-of-use assets
|
34,538
|
|
|
53,965
|
|
Goodwill
|
232,771
|
|
|
222,969
|
|
Intangible assets, net
|
69,593
|
|
|
77,613
|
|
Loan Receivable
|
4,834
|
|
|
—
|
|
|
|
|
|
Other Assets, non-current
|
7,420
|
|
|
8,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Current Assets
|
360,888
|
|
|
389,126
|
|
Total assets
|
$
|
482,255
|
|
|
$
|
532,023
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
12,749
|
|
|
$
|
21,551
|
|
Accrued expenses
|
69,326
|
|
|
65,987
|
|
Deferred revenues, current
|
33,045
|
|
|
65,858
|
|
Debt, current
|
10,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
125,120
|
|
|
153,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
1,875
|
|
|
1,679
|
|
Deferred revenues, non-current
|
12,569
|
|
|
21,941
|
|
|
|
|
|
Leases, non-current
|
44,273
|
|
|
60,976
|
|
Other non-current liabilities
|
4,995
|
|
|
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, 250 and 217 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively
|
237,641
|
|
|
200,865
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Common stock, $0.0001 par value; 100,000 shares authorized, 51,177 and 51,704 shares issued; 44,015 and 44,542 outstanding at December 31, 2020 and December 31, 2019, respectively
|
5
|
|
|
5
|
|
Treasury stock, at cost (7,162 and 7,162 shares at December 31, 2020 and December 31, 2019, respectively)
|
(82,087)
|
|
|
(82,087)
|
|
Additional paid-in capital
|
499,348
|
|
|
525,739
|
|
Accumulated other comprehensive loss
|
(28,213)
|
|
|
(33,261)
|
|
Accumulated deficit
|
(345,771)
|
|
|
(334,319)
|
|
Total stockholders’ equity
|
43,282
|
|
|
76,077
|
|
Total liabilities and stockholders’ equity
|
$
|
482,255
|
|
|
$
|
532,023
|
|
_______________________________
* See Note 7. Investments in Affiliates and Related Transactions for related party transactions reflected in this account.
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
$
|
291,670
|
|
|
$
|
308,749
|
|
|
$
|
325,839
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues*
|
|
|
|
|
|
121,817
|
|
|
150,407
|
|
|
158,802
|
|
Research and development
|
|
|
|
|
|
77,043
|
|
|
75,568
|
|
|
79,172
|
|
Selling, general and administrative
|
|
|
|
|
|
89,292
|
|
|
112,771
|
|
|
122,112
|
|
Restructuring charges
|
|
|
|
|
|
7,955
|
|
|
755
|
|
|
12,375
|
|
Depreciation and amortization
|
|
|
|
|
|
43,685
|
|
|
77,036
|
|
|
117,654
|
|
Total costs and expenses
|
|
|
|
|
|
339,792
|
|
|
416,537
|
|
|
490,115
|
|
Loss from continuing operations
|
|
|
|
|
|
(48,122)
|
|
|
(107,788)
|
|
|
(164,276)
|
|
Interest income
|
|
|
|
|
|
1,597
|
|
|
1,258
|
|
|
7,770
|
|
Interest expense
|
|
|
|
|
|
(476)
|
|
|
(1,355)
|
|
|
(4,911)
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
—
|
|
|
822
|
|
|
1,760
|
|
Other Income (expense), net
|
|
|
|
|
|
9,535
|
|
|
7,389
|
|
|
(74,917)
|
|
Equity method investment loss
|
|
|
|
|
|
—
|
|
|
(1,619)
|
|
|
(28,600)
|
|
Loss from continuing operations, before taxes
|
|
|
|
|
|
(37,466)
|
|
|
(101,293)
|
|
|
(263,174)
|
|
Benefit (provision) for income taxes
|
|
|
|
|
|
27,108
|
|
|
(2,174)
|
|
|
17,894
|
|
Net loss from continuing operations
|
|
|
|
|
|
(10,358)
|
|
|
(103,467)
|
|
|
(245,280)
|
|
Net income from discontinued operations, net of tax**
|
|
|
|
|
|
—
|
|
|
—
|
|
|
18,288
|
|
Net loss
|
|
|
|
|
|
(10,358)
|
|
|
(103,467)
|
|
|
(226,992)
|
|
Net income (loss) attributable to redeemable noncontrolling interests
|
|
|
|
|
|
(344)
|
|
|
(1,126)
|
|
|
8,837
|
|
Preferred stock dividend
|
|
|
|
|
|
(37,981)
|
|
|
(32,134)
|
|
|
(25,593)
|
|
Net loss attributable to Synchronoss
|
|
|
|
|
|
$
|
(48,683)
|
|
|
$
|
(136,727)
|
|
|
$
|
(243,748)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Net loss from Continuing operations
|
|
|
|
|
|
$
|
(1.16)
|
|
|
$
|
(3.36)
|
|
|
$
|
(6.51)
|
|
Net income from Discontinued operations**
|
|
|
|
|
|
—
|
|
|
—
|
|
|
0.46
|
|
|
|
|
|
|
|
$
|
(1.16)
|
|
|
$
|
(3.36)
|
|
|
$
|
(6.05)
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
Net loss from Continuing operations
|
|
|
|
|
|
$
|
(1.16)
|
|
|
$
|
(3.36)
|
|
|
$
|
(6.51)
|
|
Net income from Discontinued operations**
|
|
|
|
|
|
—
|
|
|
—
|
|
|
0.46
|
|
|
|
|
|
|
|
$
|
(1.16)
|
|
|
$
|
(3.36)
|
|
|
$
|
(6.05)
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
41,950
|
|
|
40,694
|
|
|
40,277
|
|
Diluted
|
|
|
|
|
|
41,950
|
|
|
40,694
|
|
|
40,277
|
|
________________________________
* Cost of revenues excludes depreciation and amortization which are shown separately.
** See Note 4. Acquisitions and Divestitures for transactions classified as discontinued operations
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Net loss
|
|
|
|
|
|
|
|
$
|
(10,358)
|
|
|
$
|
(103,467)
|
|
|
$
|
(226,992)
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
2,128
|
|
|
(1,768)
|
|
|
(6,152)
|
|
Unrealized gain (loss) on available for sale securities
|
|
|
|
|
|
|
|
751
|
|
|
(710)
|
|
|
(37)
|
|
Net income (loss) on inter-company foreign currency transactions
|
|
|
|
|
|
|
|
2,169
|
|
|
(400)
|
|
|
(821)
|
|
Total other comprehensive income (loss)
|
|
|
|
|
|
|
|
5,048
|
|
|
(2,878)
|
|
|
(7,010)
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
(5,310)
|
|
|
(106,345)
|
|
|
(234,002)
|
|
Comprehensive (loss) income attributable to redeemable noncontrolling interests
|
|
|
|
|
|
|
|
(344)
|
|
|
(1,126)
|
|
|
8,837
|
|
Comprehensive loss attributable to Synchronoss
|
|
|
|
|
|
|
|
$
|
(5,654)
|
|
|
$
|
(107,471)
|
|
|
$
|
(225,165)
|
|
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
|
|
Accumulative Other
|
|
|
|
Total
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Comprehensive Income (Loss)
|
|
Accumulated deficit
|
|
Stockholders' Equity
|
Balance at December 31, 2017
|
52,028
|
|
|
$
|
5
|
|
|
(5,060)
|
|
|
$
|
(105,584)
|
|
|
$
|
597,553
|
|
|
$
|
(23,373)
|
|
|
$
|
(5,014)
|
|
|
$
|
463,587
|
|
Stock based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,201
|
|
|
—
|
|
|
—
|
|
|
27,201
|
|
Issuance of restricted stock
|
1,707
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,331)
|
|
|
—
|
|
|
—
|
|
|
(24,331)
|
|
Amortization of preferred stock issuance costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,262)
|
|
|
—
|
|
|
—
|
|
|
(1,262)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury stock
|
(3,893)
|
|
|
—
|
|
|
3,893
|
|
|
68,327
|
|
|
(68,327)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares withheld for taxes in connection with issuance of restricted stock
|
(6)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(76)
|
|
|
—
|
|
|
—
|
|
|
(76)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares received in connection with PIPE Purchase Agreement
|
—
|
|
|
—
|
|
|
(5,995)
|
|
|
(44,830)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(44,830)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Synchronoss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(218,155)
|
|
|
(218,155)
|
|
Non-controlling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,943
|
|
|
—
|
|
|
—
|
|
|
3,943
|
|
Total other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,059)
|
|
|
—
|
|
|
(7,059)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASC 606 revenue recognition implementation impact
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49
|
|
|
(10,130)
|
|
|
(10,081)
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28)
|
|
|
—
|
|
|
—
|
|
|
(28)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
49,836
|
|
|
$
|
5
|
|
|
(7,162)
|
|
|
$
|
(82,087)
|
|
|
$
|
534,673
|
|
|
$
|
(30,383)
|
|
|
$
|
(233,299)
|
|
|
$
|
188,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
|
|
Accumulative Other
|
|
|
|
Total
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Comprehensive Income (Loss)
|
|
Accumulated deficit
|
|
Stockholders' Equity
|
Balance at December 31, 2018
|
49,836
|
|
|
$
|
5
|
|
|
(7,162)
|
|
|
$
|
(82,087)
|
|
|
$
|
534,673
|
|
|
$
|
(30,383)
|
|
|
$
|
(233,299)
|
|
|
$
|
188,909
|
|
Stock based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,050
|
|
|
—
|
|
|
—
|
|
|
22,050
|
|
Issuance of restricted stock
|
1,863
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends accrued
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,877)
|
|
|
—
|
|
|
—
|
|
|
(29,877)
|
|
Amortization of preferred stock issuance costs
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
(2,257)
|
|
|
|
|
|
|
(2,257)
|
|
Issuance of common stock on exercise of options
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares withheld for taxes in connection with issuance of restricted stock
|
(2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15)
|
|
|
—
|
|
|
—
|
|
|
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of new lease accounting standard
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,574
|
|
|
3,574
|
|
Net loss attributable to Synchronoss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(104,593)
|
|
|
(104,593)
|
|
Non-controlling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,126
|
|
|
—
|
|
|
—
|
|
|
1,126
|
|
Total other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,878)
|
|
|
—
|
|
|
(2,878)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
51,704
|
|
|
$
|
5
|
|
|
(7,162)
|
|
|
$
|
(82,087)
|
|
|
$
|
525,739
|
|
|
$
|
(33,261)
|
|
|
$
|
(334,319)
|
|
|
$
|
76,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
|
|
Accumulative Other
|
|
|
|
Total
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-In Capital
|
|
Comprehensive Income (Loss)
|
|
Accumulated deficit
|
|
Stockholders' Equity
|
Balance at December 31, 2019
|
51,704
|
|
|
$
|
5
|
|
|
(7,162)
|
|
|
$
|
(82,087)
|
|
|
$
|
525,739
|
|
|
$
|
(33,261)
|
|
|
$
|
(334,319)
|
|
|
$
|
76,077
|
|
Stock based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,246
|
|
|
—
|
|
|
—
|
|
|
11,246
|
|
Issuance of restricted stock
|
(525)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends accrued
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(34,451)
|
|
|
—
|
|
|
—
|
|
|
(34,451)
|
|
Amortization of preferred stock issuance costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,530)
|
|
|
—
|
|
|
—
|
|
|
(3,530)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares withheld for taxes in connection with issuance of restricted stock
|
(2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Synchronoss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,358)
|
|
|
(10,358)
|
|
Non-controlling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
344
|
|
|
—
|
|
|
(344)
|
|
|
—
|
|
Total other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,048
|
|
|
—
|
|
|
5,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of new credit loss accounting standard
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(750)
|
|
|
(750)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
51,177
|
|
|
$
|
5
|
|
|
(7,162)
|
|
|
$
|
(82,087)
|
|
|
$
|
499,348
|
|
|
$
|
(28,213)
|
|
|
$
|
(345,771)
|
|
|
$
|
43,282
|
|
See accompanying notes to consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Operating activities:
|
|
|
|
|
|
Net loss continuing operations
|
$
|
(10,358)
|
|
|
$
|
(103,467)
|
|
|
$
|
(245,280)
|
|
|
|
|
|
|
|
Gain (loss) on Sale of discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
18,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
42,672
|
|
|
77,037
|
|
|
97,092
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
9,100
|
|
Impairment of long-lived assets and capitalized software
|
1,013
|
|
|
—
|
|
|
11,462
|
|
Change in fair value of financial instruments
|
—
|
|
|
(163)
|
|
|
(3,849)
|
|
Amortization of debt issuance costs
|
—
|
|
|
285
|
|
|
1,294
|
|
(Gain) loss on extinguishment of debt
|
—
|
|
|
(822)
|
|
|
(1,760)
|
|
|
|
|
|
|
|
Accrued PIK interest
|
—
|
|
|
—
|
|
|
(7,037)
|
|
Allowance for loan losses
|
—
|
|
|
—
|
|
|
84,314
|
|
Loss (earnings) from Equity method investments
|
—
|
|
|
1,619
|
|
|
28,600
|
|
|
|
|
|
|
|
(Gain) loss on Disposals of fixed assets
|
12
|
|
|
15
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on Disposals of intangible assets
|
(3,477)
|
|
|
(5,429)
|
|
|
—
|
|
Amortization of bond premium
|
—
|
|
|
(34)
|
|
|
107
|
|
|
|
|
|
|
|
Deferred income taxes
|
(911)
|
|
|
357
|
|
|
(12,350)
|
|
|
|
|
|
|
|
Stock-based compensation
|
11,137
|
|
|
22,287
|
|
|
27,604
|
|
|
|
|
|
|
|
Cumulative adjustment to STI receivable
|
—
|
|
|
26,044
|
|
|
—
|
|
Operating lease impairment
|
5,350
|
|
|
6,268
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable, net
|
11,703
|
|
|
10,891
|
|
|
(21,521)
|
|
Prepaid expenses and other current assets
|
(1,641)
|
|
|
18,209
|
|
|
(5,315)
|
|
Accounts payable
|
(7,127)
|
|
|
8,879
|
|
|
6,846
|
|
Accrued expenses
|
898
|
|
|
2,115
|
|
|
(18,068)
|
|
|
|
|
|
|
|
Other assets
|
—
|
|
|
1,710
|
|
|
973
|
|
Deferred revenues
|
(43,200)
|
|
|
(28,856)
|
|
|
2,529
|
|
Other liabilities
|
(6,635)
|
|
|
(4,362)
|
|
|
(4,675)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
(564)
|
|
|
32,583
|
|
|
(31,369)
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
Purchases of fixed assets
|
(885)
|
|
|
(8,183)
|
|
|
(11,656)
|
|
Additions to capitalized software
|
(16,665)
|
|
|
(13,008)
|
|
|
(14,372)
|
|
|
|
|
|
|
|
Acquisition of intangible assets
|
(400)
|
|
|
—
|
|
|
—
|
|
Proceeds from the sale of intangibles
|
3,600
|
|
|
5,429
|
|
|
—
|
|
|
|
|
|
|
|
Purchases of marketable securities available for sale
|
—
|
|
|
(51,745)
|
|
|
(36,789)
|
|
Maturity of marketable securities available for sale
|
11
|
|
|
86,884
|
|
|
4,865
|
|
|
|
|
|
|
|
Equity investment
|
—
|
|
|
—
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquired, net of cash
|
—
|
|
|
—
|
|
|
(9,734)
|
|
Net cash provided by (used in) investing activities
|
(14,339)
|
|
|
19,377
|
|
|
(67,282)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
Share-based compensation-related proceeds, net of taxes paid on withholding shares
|
$
|
—
|
|
|
$
|
39
|
|
|
$
|
—
|
|
Taxes paid on withholding shares
|
(9)
|
|
|
(15)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of Convertible Senior Notes & related costs
|
—
|
|
|
(113,006)
|
|
|
(113,696)
|
|
|
|
|
|
|
|
Borrowings on revolving line of credit
|
10,000
|
|
|
2,000
|
|
|
—
|
|
Repayment of revolving line of credit
|
—
|
|
|
(2,000)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock
|
—
|
|
|
—
|
|
|
86,220
|
|
Preferred dividend payment
|
—
|
|
|
(7,075)
|
|
|
(7,075)
|
|
|
|
|
|
|
|
Payments on capital obligations
|
—
|
|
|
(1,200)
|
|
|
(1,334)
|
|
Net cash provided by (used in) financing activities
|
9,991
|
|
|
(121,257)
|
|
|
(35,885)
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
(418)
|
|
|
(1,562)
|
|
|
(1,729)
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
(5,330)
|
|
|
(70,859)
|
|
|
(136,265)
|
|
Cash and cash equivalents, beginning of period
|
39,001
|
|
|
109,860
|
|
|
246,125
|
|
Cash and cash equivalents, end of period
|
$
|
33,671
|
|
|
$
|
39,001
|
|
|
$
|
109,860
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
6,138
|
|
|
$
|
3,598
|
|
|
$
|
22,549
|
|
Cash refund for income taxes
|
$
|
15,585
|
|
|
$
|
20,733
|
|
|
$
|
—
|
|
Cash paid for interest
|
$
|
212
|
|
|
$
|
666
|
|
|
$
|
3,258
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
Paid in kind dividends on Series A Convertible Participating Perpetual Preferred Stock
|
$
|
36,776
|
|
|
$
|
14,407
|
|
|
$
|
7,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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See accompanying notes to consolidated financial statement
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
1. Description of Business
General
Synchronoss Technologies, Inc. (“Synchronoss” or the “Company”) Digital, Cloud, Messaging and Total Network Management platforms help the world’s leading companies, including operators, original equipment manufacturers (“OEMs”), and Media and Technology 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 Telecommunications, Media and Technology (“TMT”) space, taking advantage of the rapidly converging services, connected devices, networks and applications.
The Company delivers platforms, products and solutions including:
•White Label Personal Cloud: Cloud sync, backup, storage, device set up, content transfer and content engagement for user generated content.
•Messaging: White label consumer email solutions. Advanced, multi-channel messaging peer-to-peer (“P2P”) communications and application-to-person (“A2P”) commerce solutions.
•Digital: Customer journey and workflow design, development, orchestration and experience management.
•Total Network Management (“TNM”): integrated application suite that designs, procures, manages and optimizes telecom network infrastructure.
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 a carrier’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 Company’s 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 Platform is a suite of technology, tools and solutions that includes digital experience creation and management, automated provisioning, artificial intelligence and financial analytics that service a broad swatch of TMT markets. The products equip customers with a toolkit of capabilities where they can design, deploy and manage end user customer journeys and workflows easily and quickly from one central platform that also integrates across front end customer engagement channels as well as enterprise business systems (e.g. CRM, POS) allowing non-citizen developers to configure rather than code experiences. The platform sits between customer-facing touch points and a customer’s existing back-office systems to orchestrate data, workflows and processes into digital customer journeys that interface with end user channels creating user experiences that can be centrally managed and coordinated with less resources than is typical in a traditional IT environment.
The Synchronoss Total Network Management application suite provides Operators with the tools and software to design their physical network, streamline their infrastructure purchases, and comprehensive network expense optimization and management for leading top tier carriers around the globe.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The 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.
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 year ended December 31, 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.
Recently Issued Accounting Standards
Recent accounting pronouncements adopted
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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 consolidated financial statements.
|
Date of adoption: January 1, 2020
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SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Standards issued not yet adopted
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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.
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The Company continues to evaluate these changes and does not anticipate any material impact on the Company’s consolidated financial position or results of operations upon adoption.
|
Planned date of adoption: January 1, 2021.
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Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company generates all of its revenue from contracts with customers.
Subscription and Transaction revenues consist of revenues derived from the processing of transactions through the Company’s service platforms, providing enterprise portal management services on a subscription basis and maintenance agreements on software licenses. The Company generates revenue from Subscription services from monthly active user fees, software as a service (“SaaS”) fees, hosting and storage fees, and fees for the related maintenance support for those services. In most cases, the subscription or transaction arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage, under Topic 606 Section 10-25-14(b). When the Company does not allocate variable consideration to distinct periods of service, the total estimated transaction price is recognized ratably over the term of the contract, where the level of service provided to the customer does not vary significantly from one period to another.
Transaction service arrangements include services such as processing equipment orders, new account setup and activation, number port requests, credit checks and inventory management.
Transaction revenues are principally based on a contractual price per transaction and are recognized based on the number of transactions processed during each reporting period. Revenues are recorded based on the total number of transactions processed at the applicable price established in the relevant contract.
Many of the Company’s contracts guarantee minimum volume transactions from the customer. In these instances, if the customer’s total estimated transaction volume for the period is expected to be less than the contractual amount, the Company records revenues at the minimum guaranteed amount on a straight line based over the period covered by the minimum. Setup fees for transactional service arrangements are deferred until set up activities are completed and recognized on a straight‑line
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
basis over remaining expected customer relationship period. Revenues are presented net of discounts, which are volume level driven.
In accordance with Topic 606 Section 10-50-20, any credits due to customers, which are generally performance driven and based upon system availability or response times to incidents, are determined and accounted for in the period in which the services are provided. The Company recognizes revenues from support and maintenance performance obligations over the service delivery period.
The Company’s software licenses typically provide for a perpetual or term right to use the Company’s software. The Company has concluded that in most cases its software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered to the customer. Contracts that include software customization or specified upgrades may result in the combination of the customization services with the software license as one performance obligation. The Company does not have a history of returns, or refunds of is software licenses, however, in limited instances, the Company may constrain consideration to high-risk customers, until collection is resolved.
The Company’s professional services include software development and customization. The contracts generally include project deliverables specified by each customer. The performance obligations in the agreements are generally combined into one deliverable and generally result in the transfer of control over time. The underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to us. The Company recognizes revenue on fixed fee contracts on the proportion of labor hours expended to the total hours expected to complete the contract performance obligation.
Most of the Company’s contracts with customers contain multiple performance obligations which generally include either 1) a perpetual software license with support and maintenance and sometimes a hosting agreement or 2) a term SaaS agreement, in many cases these are sold along with professional services. For these contracts, the Company accounts for individual goods and services separately if they are distinct performance obligations. This often requires significant judgment based upon knowledge of the products, the solution provided and the structure of the sales contract. In SaaS agreements, the Company provides a service to the customer which combines the software functionality, maintenance and hosting into a single performance obligation when the customer doesn’t have the ability to take possession of the underlying software license. The Company may also sell the same three goods and services in a contract, but there may be three performance obligations, where the customer has the right to take possession of the software license without significant penalty.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company estimates standalone selling prices of software based on observable inputs of past transactions to similarly situated customers. When such observable data is not available for certain software licenses because there is a limited number of transactions or prices are highly variable, the Company will estimate the standalone selling price using the residual approach. Standalone selling prices of services are typically determined based on observable transactions when these services are sold on a standalone basis to similarly situated customers or estimated using a cost-plus margin approach.
Estimating the transaction price of variable consideration including the variable quantity subscription or transaction contracts in a multiple performance obligation arrangement requires significant judgment. The Company generally estimates this variable consideration at the most likely amount to which the Company expects to be entitled and in certain cases based on the expected value. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. The Company reviews and update these estimates on a quarterly basis.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The Company’s typical performance obligations include the following:
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Performance Obligation
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When Performance Obligation is Typically Satisfied
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When Payment is Typically Due
|
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How Standalone Selling Price is Typically Estimated
|
Software License
|
|
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|
Software License
|
|
Upon shipment or made available for download (point in time)
|
|
Within 90 days of delivery
|
|
Observable transactions or residual approach when prices are highly variable or uncertain
|
Software License with significant customization
|
|
Over the performance of the customization and installation of the software (over time)
|
|
Within 90 days of services
being performed
|
|
Residual approach
|
Hosting Services
|
|
As hosting services are provided (over time)
|
|
Within 90 days of services
being provided
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|
Estimated using a cost-plus margin approach
|
Professional Services
|
|
|
|
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Consulting
|
|
As work is performed (over time)
|
|
Within 90 days of services
being performed
|
|
Observable transactions
|
Customization
|
|
SaaS: Over the remaining term of the SaaS agreement
License: Over the performance of the customization and installation of the software (over time)
|
|
Within 90 days of services
being performed
|
|
Observable transactions
|
Transaction Services
|
|
As transaction is processed (over time)
|
|
Within 90 days of transaction
|
|
Observable transactions
|
Subscription Services
|
|
|
|
|
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|
Customer Support
|
|
Ratably over the course of the support contract
(over time)
|
|
Within 90 days of the start of the contract period
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|
Observable transactions
|
SaaS
|
|
Over the course of the SaaS service once the system is available for use
(over time)
|
|
Within 90 days of services
being performed
|
|
Estimated using a cost-plus margin approach
|
Deferred Revenue
Deferred revenues represent billings to customers for services in advance of the performance of services, with revenues recognized as the services are rendered, and also include the fair value of deferred revenues recorded as a result of acquisitions.
Service Level Standards
Pursuant to certain contracts, the Company is subject to service level standards and to corresponding penalties for failure to meet those standards. All performance-related penalties are reflected as a corresponding reduction of the Company’s revenues. These penalties, if applicable, are recorded in the month incurred and were insignificant for the years ended December 31, 2020, 2019 and 2018, respectively.
Cost of Revenues
Cost of services includes all direct materials, direct labor and those indirect costs related to revenues such as indirect labor, materials and supplies and facilities cost, exclusive of depreciation expense.
Research and Development
Software development costs are accounted for in accordance with either ASC 985-20, “Software - Costs of Software to be Sold, Leased or Marketed,” or ASC 350-40, “Internal-Use Software.” Costs associated with the planning and designing phase of software development are classified as research and development costs and are expensed as incurred. The amounts capitalized include external direct costs of services used in developing internal-use software, employee compensation and related expenses of personnel directly associated with the development activities. Once technological feasibility has been determined, a portion of the costs incurred in development, including coding, testing and quality assurance, are capitalized until available for general release to clients.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Amortization is calculated on a solution-by-solution basis and is recognized over the estimated economic life of the software, typically ranging two to three years. Amortization begins when the software is substantially completed for its intended use. Costs incurred during the preliminary and post-implementation stages are expensed as incurred. The amounts capitalized include external direct costs of services used in developing internal-use software, employee compensation and related expenses of personnel directly associated with the development activities. Software development costs are evaluated for recoverability whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Unrecoverable costs are reviewed annually and recognized in the period they become unrecoverable, as needed, and are recorded in the Consolidated Statements of Operations as depreciation and amortization expense.
The unamortized software development costs and amortization expense were as follows:
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Year ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Unamortized software development costs
|
|
$
|
28,512
|
|
|
$
|
22,240
|
|
|
$
|
17,490
|
|
Software development amortization expense
|
|
10,843
|
|
|
8,258
|
|
|
8,123
|
|
The Company recognized impairment charges to its capitalized software intangible assets, of $0.9 million, nil and $0.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company includes these impairments within the depreciation and amortization in its Consolidated Statements of Operations.
Concentration of Credit Risk
The Company’s financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents at several major financial institutions. The Company believes that concentration of credit risk with respect to accounts receivable is limited because of the creditworthiness of its major customers.
The Company’s top five customers accounted for 68.0%, 69.2% and 69.0% of net revenues for the years ended December 31, 2020, 2019 and 2018, respectively. Contracts with these customers typically run for three to five years. Of these customers, Verizon accounted for more than 10% of the Company’s revenues in 2020, 2019, and 2018.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of acquisition to be cash equivalents.
Accounts Receivable
Accounts receivable include current notes, amounts billed to customers, claims, and unbilled revenue, which consists of amounts recognized as sales but not yet billed. Substantially all amounts of unbilled receivables are expected to be billed and collected in the subsequent year. The Company had unbilled receivable balances of $3.4 million and $5.1 million as of December 31, 2020 and 2019, respectively.
Allowance for Credit Losses
The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Customers are pooled based on sharing specific risk factors, including geographic location. Due to the short-term nature of such receivables, the estimated accounts receivable that may not be collected is based on aging of the accounts receivable balances.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Customers are assessed for credit worthiness upfront through a credit review, which includes assessment based on our analysis of their financial statements when a credit rating is not available. The Company evaluates contract terms and conditions, country and political risk, and may require prepayment to mitigate risk of loss. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company monitors changes to the receivables balance on timely basis, and balances are written off as they are determined to be uncollectible after all collection efforts have been exhausted. Estimates of potential credit losses are used to determine the allowance. It is based on assessment of anticipated payment and all other historical, current and future information that is reasonably available.
Fair Value of Financial Instruments and Liabilities
The Company includes disclosures of fair value information about financial instruments and liabilities, whether or not recognized on the Consolidated Balance Sheets, for which it is practicable to estimate that value. Due to their short-term nature, the carrying amounts reported in the financial statements approximate the fair value for cash and cash equivalents, marketable securities, accounts receivable and accounts payable.
Property and Equipment
Property and equipment and leasehold improvements are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 5 years, or the lesser of the related initial term of the lease or useful life for leasehold improvements. Amortization of property and equipment recorded under a capital lease is included with depreciation expense. Expenditures for routine maintenance and repairs are charged against operations, while major replacements, improvements and additions are capitalized.
Noncontrolling Interests and Mandatorily Redeemable Financial Instruments
Noncontrolling interests (“NCI”) are evaluated by the Company and are shown as either a liability, temporary equity (shown between liabilities and equity) or as permanent equity depending on the nature of the redeemable features at amounts based on formulas specific to each entity. Generally, mandatorily redeemable NCIs are classified as liabilities and non-mandatorily redeemable NCIs are classified outside of stockholders’ equity in the Consolidated Balance Sheets as temporary equity under the caption, redeemable noncontrolling interests, and are measured at their redemption values at the end of each period. If the redemption value is greater than the carrying value, an adjustment is recorded in retained earnings to record the NCI at its redemption value. Redeemable NCIs that are mandatorily redeemable are classified as a liability in the Consolidated Balance Sheets under either other current liabilities or other long-term liabilities, depending on the remaining duration until settlement, and are measured at the amount of cash that would be paid if settlement occurred at the balance sheet date with any change from the prior period recognized as interest expense.
If the noncontrolling interest is not currently redeemable yet probable of becoming redeemable, the Company is required to either (1) accrete changes in the redemption value over the period from the date of issuance to the earliest redemption date of the instrument using an appropriate methodology, usually the interest method, or (2) recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the redemption value at the end of each reporting period. The Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the noncontrolling interest to the greater of the estimated redemption value, which approximates fair value, at the end of each reporting period or the initial carrying amount.
Net income attributable to NCIs reflects the portion of the net income (loss) of consolidated entities applicable to the NCI stockholders in the accompanying Consolidated Statements of Operations. The net income attributable to NCI is classified in the Consolidated Statements of Operations as part of consolidated net income and deducted from total consolidated net income to arrive at the net income attributable to the Company.
Business Combinations
The Company accounts for business combinations in accordance with the acquisition method. The acquisition method of accounting requires that assets acquired, liabilities assumed and any noncontrolling interest in the acquiree (if any), be recorded
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
at their fair values on the date of a business acquisition. The Company’s consolidated financial statements and results of operations reflect an acquired business from the completion date of the transaction.
The judgments that the Company makes in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income in periods following a business combination. The Company generally uses either the income, cost or market approach to aid in its conclusions of such fair values and asset lives. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its replacement or reproduction cost. The market approach estimates value based on what other participants in the market have paid for reasonably similar assets. Although each valuation approach is considered in valuing the assets acquired, the approach ultimately selected is based on the characteristics of the asset and the availability of information.
The Company records contingent consideration resulting from a business combination at its fair value on the acquisition date. Each reporting period thereafter, the Company revalues these obligations and records increases or decreases in their fair value as an adjustment to net change in contingent consideration obligation within the Consolidated Statements of Operations. Changes in the fair value of the contingent consideration obligation can result from updates in the achievement of financial or other operational targets and changes to the weighted probability of achieving those future targets. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, any change in the assumptions described above, could have a material impact on the amount of the net change in contingent consideration obligation that the Company records in any given period.
Discontinued Operations
The Company generally classifies a disposal transaction as discontinued operation in the consolidated financial statements when it qualifies as a component of the Company, meets the held for sale criteria, is disposed of by sale, or is disposed of other than by sale and it represents a strategic shift that has a major effect on the Company’s operations and financial results. Insignificant and non-strategic shifting divestitures are not classified within discontinued operations.
Investments in Affiliates and Other Entities
In the normal course of business, Synchronoss enters into various types of investment arrangements, each having unique terms and conditions. These investments may include equity interests held by Synchronoss in business entities, including general or limited partnerships, contractual ventures, or other forms of equity participation. Synchronoss determines whether such investments involve a variable interest entity (“VIE”) based on the characteristics of the subject entity. If the entity is determined to be a VIE, then management determines if Synchronoss is the primary beneficiary of the entity and whether or not consolidation of the VIE is required. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct the activities of a VIE that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE, in either case that could potentially be significant to the VIE. When Synchronoss is deemed to be the primary beneficiary, the VIE is consolidated and the other party’s equity interest in the VIE is accounted for as a noncontrolling interest.
The Company generally accounts for investments it makes in VIEs in which it has determined that it does not have a controlling financial interest but has significant influence over and holds at least a 20% ownership interest using the equity method. Any such investment not meeting the parameters to be accounted under the equity method would be accounted for using the cost method unless the investment had a readily determinable fair value, at which it would then be reported.
If an entity fails to meet the characteristics of a VIE, the Company then evaluates such entity under the voting model. Under the voting model, the Company consolidates the entity if they determine that they, directly or indirectly, have greater than 50% of the voting shares, and determine that other equity holders do not have substantive participating rights.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of assets acquired, including other definite-lived intangible assets. Goodwill is reviewed for impairment annually in the fourth quarter or when an interim triggering event has
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
occurred indicating potential impairment. The Company has concluded that it has two operating segments and one reportable segment because the aggregation criteria and the quantitative threshold test was met. The Company tests for goodwill impairment on each of its reporting units, which is at the operating segment or one level below the operating segment.
During the Company’s qualitative assessment, the Company makes significant estimates, assumptions, and judgments, around the financial performance of the Company, changes in share price, and forecasts of earnings, working capital requirements, and cash flows. The Company considers each reporting unit's historical results and operating trends as well as any strategic difference from the Company’s historical results when determining these assumptions.
The Company can opt to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or the Company can directly perform the quantitative impairment test. If the Company determines that the fair value of a reporting unit is more likely than not to be less than its carrying amount, a quantitative impairment test is performed.
Fair value estimates used in the quantitative impairment test are calculated using a combination of the income and market approaches. The income approach is based on the present value of future cash flows of each reporting unit, while the market approach is based on certain multiples of selected guideline public companies or selected guideline transactions. The approaches incorporate a number of market participant assumptions including future growth rates, discount rates, income tax rates and market activity in assessing fair value and are reporting unit specific. If the carrying amount exceeds the reporting unit's fair value, the Company recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.
The fair value measurement associated with the quantitative goodwill impairment test is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value goodwill could significantly increase or decrease the fair value estimates used for impairment assessments.
In order to assess the reasonableness of the estimated fair value of the Company’s reporting units, the Company compares the aggregate reporting unit fair value to the Company’s market capitalization on an overall basis and calculates an implied control premium (the excess of the sum of the reporting units’ fair value over the Company’s market capitalization on an overall basis). The Company evaluates the control premium by comparing it to observable control premiums from recent comparable transactions. If the implied control premium is determined to not be reasonable in light of these recent transactions, the Company re-evaluates its reporting unit fair values, which may result in an adjustment to the discount rate and/or other assumptions.
This re-evaluation could result in a change to the estimated fair value for certain or all reporting units. If the fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired.
If the fair value of the reporting unit is less than its carrying amount, goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment loss.
The Company recorded a nil, nil and $9.1 million impairment charge on the Zentry joint venture for the years ended December 31, 2020, 2019 and 2018, respectively. For further details, see Note 9. Goodwill and Intangibles.
Impairment of Long-Lived Assets
A review of long-lived assets for impairment is performed when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If an indication of impairment is present, the Company compares the estimated undiscounted future cash flows to be generated by the asset to the asset’s carrying amount. If the undiscounted future cash flows are less than the carrying amount of the asset, the Company records an impairment loss equal to the amount by which the asset’s carrying amount exceeds its fair value. The fair value is determined based on valuation techniques such as a comparison to fair values of similar assets or using a discounted cash flow analysis.
This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value long lived assets could significantly increase or decrease the fair value estimates used for impairment assessments.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Long lived assets that do not have indefinite lives are amortized/depreciated over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company reevaluates the useful life determinations each year to determine whether events and circumstances warrant a revision to the remaining useful lives.
Leases
The Company adopted Accounting Standards Codification Topic 842, Leases (ASC 842) on January 1, 2019. ASC 842 applies to a number of arrangements to which the Company is party whereby the Company acts as a lessee.
Whenever the Company enters into a new arrangement, it must determine, at the inception date, whether the arrangement contains a lease. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified fixed asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset.
If a lease exists, the Company must then determine the separate lease and non-lease components of the arrangement. Each right to use an underlying asset conveyed by a lease arrangement should generally be considered a separate lease component if it both: (i) can benefit the Company without depending on other resources not readily available to the Company and (ii) does not significantly affect and is not significantly affected by other rights of use conveyed by the lease. Aspects of a lease arrangement that transfer other goods or services to the Company but do not meet the definition of lease components are considered non-lease components. The consideration owed by the Company pursuant to a lease arrangement is generally allocated to each lease and non-lease component for accounting purposes. However, the Company has elected to not separate lease and non-lease components. Each lease component is accounted for separately from other lease components, but together with the associated non-lease components.
For each lease, the Company must then determine:
•The lease term - The lease term is the period of the lease not cancellable by the Company, together with periods covered by: (i) renewal options the Company is reasonably certain to exercise or that are controlled by the lessor and (ii) termination options the Company is reasonably certain not to exercise.
•The present value of lease payments is calculated based on:
–Lease payments - Lease payments include certain fixed and variable payments, less lease incentives, together with amounts probable of being owed by the Company under residual value guarantees and, if reasonably certain of being paid, the cost of certain renewal options and early termination penalties set forth in the lease arrangement. Lease payments exclude consideration that is: (i) not related to the transfer of goods and services to the Company and (ii) allocated to the non-lease components in a lease arrangement, except for the classes of assets where the Company has elected to not separate lease and non-lease components.
–Discount rate - The discount rate must be determined based on information available to the Company upon the commencement of a lease. Lessees are required to use the rate implicit in the lease whenever such rate is readily available; however, as the implicit rate in the Company's leases is generally not readily determinable, the Company generally uses the hypothetical incremental borrowing rate it would have to pay to borrow an amount equal to the lease payments, on a collateralized basis, over a timeframe similar to the lease term.
•Lease classification - In making the determination of whether a lease is an operating lease or a finance lease, the Company considers the lease term in relation to the economic life of the leased asset, the present value of lease payments in relation to the fair value of the leased asset and certain other factors, including the lessee's and lessor's rights, obligations and economic incentives over the term of the lease.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Generally, upon the commencement of a lease, the Company will record a lease liability and a right-of-use (ROU) asset. However, the Company has elected, for certain classes of underlying assets with initial lease terms of twelve months or less (known as short-term leases), to not recognize a lease liability or ROU asset. Lease liabilities are initially recorded at lease commencement as the present value of future lease payments. ROU assets are initially recorded at lease commencement as the initial amount of the lease liability, together with the following, if applicable: (i) initial direct costs and (ii) lease payments made, net of lease incentives received, prior to lease commencement.
Over the lease term, the Company generally increases it lease liabilities using the effective interest method and decreases its lease liabilities for lease payments made. The Company generally amortizes its ROU assets over the shorter of the estimated useful life and the lease term and assesses its ROU assets for impairment, similar to other long-lived assets.
For finance leases, amortization expense and interest expense are recognized separately in the Consolidated Statements of Operations, with amortization expense generally recorded on a straight-line basis and interest expense recorded using the effective interest method. For operating leases, a single lease cost is generally recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term. Lease costs for short-term leases not recognized in the Consolidated Balance Sheets are recognized in the Consolidated Statements of Operations and are expensed as incurred. Variable lease costs not initially included in the lease liability and ROU asset impairment charges are expensed as incurred.
Income Taxes
On December 22, 2017, the U.S. government enacted TCJA. The TCJA makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among others, that will generally be effective for taxable years beginning after December 31, 2017. While our accounting for the recorded impact of the TCJA is deemed to be complete as of December 31, 2020, these amounts are based on prevailing regulations and currently available information, and any additional guidance issued by the Internal Revenue Service (IRS) could impact our recorded amounts in future periods.
Since we conduct operations on a global basis, our effective tax rate has and will depend upon the geographic distribution of our pre-tax earnings among locations with varying tax rates. We account for the effects of income taxes that result from our activities during the current and preceding years. Under this method, deferred income tax liabilities and assets are based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse or be utilized. The realization of deferred tax assets is contingent upon the generation of future taxable income. A valuation allowance is recorded if it is “more likely than not” that a portion or all of a deferred tax asset will not be realized.
In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
We recognize a tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured by determining the amount that has a greater than 50 percent likelihood of being realized upon the settlement of the position. Components of the reserve are classified as current or a long-term liability in the Consolidated Balance Sheets based on when we expect each of the items to be settled. We record interest and penalties accrued in relation to uncertain tax benefits as a component of interest expense.
While we believe we have identified all reasonably identifiable exposures and that the reserve we have established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved. It is also possible that changes in facts and circumstances could cause us to either materially increase or reduce the carrying amount of our tax reserves. In general, tax returns for the year 2016 and thereafter are subject to future examination by tax authorities.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Our policy has been to leave our cumulative unremitted foreign earnings invested indefinitely outside the United States, and we intend to continue this policy. Although the transition tax in the TCJA has removed U.S. federal taxes on distributions to the U.S. on a go forward basis, the Company continues to assert permanent reinvestment of foreign earnings. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts.
Foreign Currency
The functional currency of non-U.S. entities is translated into U.S. dollars for balance sheet accounts using the month end rates in effect as of the balance sheet date and average exchange rate for revenue and expense accounts for each respective period. The translation adjustments are deferred as a separate component of stockholders’ equity within accumulated other comprehensive income.
Gains or losses resulting from transactions denominated in foreign currencies are included in other income or expense, within the Consolidated Statements of Operations and were as follows:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Net gain (loss) on foreign currency translations
|
|
$
|
4,234
|
|
|
$
|
31
|
|
|
$
|
(478)
|
|
Comprehensive Income (Loss)
Reporting on comprehensive income requires components of other comprehensive income, including unrealized gains or losses on available-for-sale securities, to be included as part of total comprehensive income. Comprehensive income is comprised of net income, translation adjustments and unrealized gains and losses on available-for-sale securities. The components of comprehensive income are included in the Consolidated Statements of Comprehensive Income (Loss).
Basic and Diluted Net Income Attributable to Common Stockholders per Common Share
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year, excluding amounts associated with restricted shares.
Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the potential 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 potential dilutive effect of common stock includes stock options, convertible debt and unvested restricted stock. The dilutive effects of stock options and restricted stock awards are based on the treasury stock method. The dilutive effect of the assumed conversion of convertible debt is determined using the if-converted method. The after-tax effect of interest expense related to the convertible securities is added back to net income, and the convertible debt is assumed to have been converted into common shares at the beginning of the period.
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.
Stock-Based Compensation
As of December 31, 2020, the Company maintains eight stock-based compensation plans.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The Company utilizes the Black-Scholes pricing model to determine the fair value of stock options on the dates of grant. Restricted stock awards are measured based on the fair market values of the underlying stock on the dates of grant. The Company recognizes stock-based compensation over the requisite service period with an offsetting credit to additional paid-in capital.
For the Company’s performance restricted stock awards, the Company estimates the number of shares the recipient is to receive by applying a probability of achieving the performance goals. The actual number of shares the recipient receives is determined at the end of the performance period based on the results achieved versus goals based on the performance targets, such as revenues and earnings before interest, tax, depreciation and amortization (“EBITDA”) after certain adjustments. Once the number of awards is determined, the compensation cost is fixed and continues to be recognized using straight line recognition over the requisite service period for each vesting tranche.
Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on historical information of the Company’s stock. The average expected life was determined using historical stock option exercise activity. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The Company has never declared or paid cash dividends on the common or preferred equity and does not anticipate paying any cash dividends in the foreseeable future. Forfeitures are accounted for as they occur.
Segment and Geographic Information
The Company’s chief operating decision‑maker is the Principal Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions. However, in assessing financial performance and allocating resources, the Company considers the markets in which it operates. The Company has determined that it currently operates in two business segments: (i) providing cloud solutions and software‑based activation for connected devices globally and (ii) enterprise solutions. Given the size of the Company’s enterprise segment, and the Company’s shift in focus toward the telecommunications, media and technology (“TMT”) market, the Company concluded that it has one reportable segment. Although the Company operates in North America, Europe and Asia‑Pacific a majority of the Company’s revenue and long-lived assets are in the U.S.
Revenues by geography are based on the billing addresses of the Company’s customers. The following tables set forth revenues and property and equipment, net by geographic area:
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|
|
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|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
|
Domestic
|
|
$
|
228,639
|
|
|
$
|
232,183
|
|
|
$
|
249,674
|
|
Foreign
|
|
63,031
|
|
|
76,566
|
|
|
76,165
|
|
Total
|
|
$
|
291,670
|
|
|
$
|
308,749
|
|
|
$
|
325,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
Property and equipment, net:
|
|
|
|
|
Domestic
|
|
$
|
7,282
|
|
|
$
|
19,278
|
|
Foreign
|
|
4,450
|
|
|
7,247
|
|
Total
|
|
$
|
11,732
|
|
|
$
|
26,525
|
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
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.
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
Twelve Months Ended December 31, 2020
|
|
Twelve Months Ended December 31, 2019
|
|
Cloud
|
|
Digital
|
|
Messaging
|
|
Total
|
|
Cloud
|
|
Digital
|
|
Messaging
|
|
Total
|
Geography
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
155,287
|
|
|
$
|
45,893
|
|
|
$
|
27,459
|
|
|
$
|
228,639
|
|
|
$
|
155,076
|
|
|
$
|
46,765
|
|
*
|
$
|
30,342
|
|
|
$
|
232,183
|
|
APAC
|
—
|
|
|
4,502
|
|
|
31,310
|
|
|
35,812
|
|
|
—
|
|
|
3,658
|
|
|
45,403
|
|
|
49,061
|
|
EMEA
|
6,888
|
|
|
5,687
|
|
|
14,644
|
|
|
27,219
|
|
|
7,620
|
|
|
3,379
|
|
|
16,506
|
|
|
27,505
|
|
Total
|
$
|
162,175
|
|
|
$
|
56,082
|
|
|
$
|
73,413
|
|
|
$
|
291,670
|
|
|
$
|
162,696
|
|
|
$
|
53,802
|
|
|
$
|
92,251
|
|
|
$
|
308,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services
|
$
|
18,391
|
|
|
$
|
13,512
|
|
|
$
|
16,741
|
|
|
$
|
48,644
|
|
|
$
|
14,939
|
|
|
$
|
16,576
|
|
|
$
|
30,923
|
|
|
$
|
62,438
|
|
Transaction Services
|
5,651
|
|
|
7,396
|
|
|
—
|
|
|
13,047
|
|
|
5,606
|
|
|
6,690
|
|
|
—
|
|
|
12,296
|
|
Subscription Services
|
138,133
|
|
|
32,831
|
|
|
43,873
|
|
|
214,837
|
|
|
141,941
|
|
|
27,577
|
|
*
|
37,785
|
|
|
207,303
|
|
License
|
—
|
|
|
2,343
|
|
|
12,799
|
|
|
15,142
|
|
|
210
|
|
|
2,959
|
|
|
23,543
|
|
|
26,712
|
|
Total
|
$
|
162,175
|
|
|
$
|
56,082
|
|
|
$
|
73,413
|
|
|
$
|
291,670
|
|
|
$
|
162,696
|
|
|
$
|
53,802
|
|
|
$
|
92,251
|
|
|
$
|
308,749
|
|
________________________________
* In 2019, changes to the STIN business led the Company to conclude that its collection of certain STIN receivables is no longer probable. The Company has updated its collectability assessment in accordance with ASC 842 and concluded that a contingency reserve is required, which included a reduction of digital revenue in America in the amount $26.0 million. For further details, see 7. Investments in Affiliates and Related Transactions of the Notes to Consolidated Financial Statements of this Form 10-K.
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 consolidated statements of financial position at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors.
A contract asset is a right to consideration that is conditional upon factors other than the passage of time. For example, the Company would record a contract asset if its records revenue on a professional services engagement but are not entitled to bill until the Company achieves specified milestones. Contract asset balance at December 31, 2020 is $7.1 million.
Amounts collected in advance of services being provided are accounted for as contract liabilities, which are presented as deferred revenue on the accompanying balance sheet and are realized with the associated revenue recognized under the contract. Nearly all of the Company's contract liabilities balance is related to services revenue, primarily subscription services contracts.
The Company’s contract assets and liabilities are reported in a net position on a customer basis at the end of each reporting period.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Significant changes in the contract liabilities balance (current and noncurrent) during the period are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Contract Liabilities*
|
Balance - January 1, 2020
|
|
$
|
87,799
|
|
Revenue recognized in the period
|
|
(249,465)
|
|
Amounts billed but not recognized as revenue
|
|
207,280
|
|
|
|
|
|
|
|
Balance - December 31, 2020
|
|
$
|
45,614
|
|
________________________________
* Comprised of Deferred Revenue
Revenues recognized during the year ended December 31, 2020 for performance obligations satisfied or partially satisfied in previous periods were immaterial.
Contract acquisition costs
In connection with the adoption of Topic 606 and the related cost accounting guidance under Accounting Standards Codification (“ASC”) 340, the Company is required to capitalize certain contract acquisition costs consisting primarily of commissions and bonuses paid when contracts are signed. The Company adopted Topic 606 on January 1, 2018 and capitalized $0.7 million in contract acquisition costs related to contracts that were not completed. For contracts that have a duration of less than one year, the Company follows a Topic 606 practical expedient and expenses these costs over the estimated customer life, because it does not pay commissions upon renewals that are commensurate with the initial contract. During the year ended December 31, 2020, the amount of amortization was $0.2 million and there was no impairment loss in relation to costs capitalized.
Contract Fulfillment Costs
Under ASC 340-40, the Company evaluates whether or not it should capitalize the costs of fulfilling a contract. Such costs would be capitalized when they are not within the scope of other standards and: (1) are directly related to a contract; (2) generate or enhance resources that will be used to satisfy performance obligations; and (3) are expected to be recovered. As of December 31, 2020, the Company had $0.1 million of capitalized contract fulfillment costs.
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 December 31, 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
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
As of December 31, 2020, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $280.4 million, of which approximately 70.19% is expected to be recognized as revenues within 2 years, and the remainder thereafter.
Estimates of revenue expected to be recognized in future periods also exclude unexercised customer options to purchase services that do not represent material rights to the customer. Customer options that do not represent a material right are only accounted for in accordance with Topic 606 when the customer exercises its option to purchase additional goods or services.
4. Acquisitions and Divestitures
2018 Transactions
Acquisition
Honeybee
In May 2018, the Company completed the acquisition of the honeybee software business (“honeybee”), a provider of digital solutions targeted at optimizing the customer experience from Dixons Carphone plc which offers a digital transformation platform that makes it easier for companies to design and launch omni-channel customer journeys. Consideration paid by the Company consisted of approximately $9.7 million in cash at the time of closing and deferred consideration of $8.7 million to be paid over the next three years.
Customers of the honeybee platform, such as mobile operators and other communication service providers, can rapidly create and adapt digital sales processes for contact centers, retail stores, and online channels. This helps reduce complexity for the end-user as well as internal employees, while delivering a single customer experience at all touch-points and improved business outcomes such as reduced cost and increased revenue. The acquisition did not have a material impact on the Company’s Consolidated Statements of Operations.
Acquisition-Related Costs
Total acquisition-related costs recognized during the year ended December 31, 2020, 2019, and 2018 including transaction costs such as legal, accounting, valuation and other professional services, were nil, nil, $0.1 million, respectively, and are included in selling, general and administrative expense in the Consolidated Statements of Operations.
Divestitures
SNCR, LLC
On November 16, 2015, the Company formed a venture with Goldman Sachs (“Goldman”), referred to as SNCR, LLC in order to develop and deploy the Synchronoss Secure Mobility Suite, which would include integration of Synchronoss Workspace platform with Goldman's internally developed mobile security intellectual property to help provide a safe, secure mobile device environment that also effectively supports bring your own device (“BYOD”).
During the fourth quarter of 2017, the Company entered into a termination agreement with Goldman to terminate the venture, and provide a perpetual, irrevocable license of the venture’s intellectual property for use in Goldman’s back-office. As part of the agreement, the Company was relieved of any future obligations to support Goldman’s use of the software. The venture formally ended in the first quarter of 2018 resulting in the elimination of the Company’s associated noncontrolling interest balance and an increase to additional paid in capital balance of $12.8 million on the Company’s Consolidated Balance Sheet.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
5. Allowance for Credit Losses
Effective January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” prospectively. ASU 2016-13 replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. The guidance requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due. Upon adoption, changes in the allowance were not material for the transition period starting January 1, 2020 through the year ended December 31, 2020.
The accounts receivable balance on the Company’s consolidated balance sheet as of December 31, 2020 was $47.8 million, net of $0.5 million of allowances. Changes in the allowance were not material for the year ended December 31, 2020. The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected (amounts in thousands):
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
1,864
|
|
Adjustment due to adoption of ASU 2016-13
|
|
751
|
|
Balance at January 1, 2020
|
|
2,615
|
|
Current period change for expected credit losses
|
|
(2,072)
|
|
Balance at December 31, 2020
|
|
$
|
543
|
|
In connection with the PIK note referenced in Note 7. Investments in Affiliates and Related Transactions , the company recorded a CECL adjustment of $1.4 million which offset the current year accretion of the interest of $1.4 million.
6. 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.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following is a summary of assets, liabilities and redeemable noncontrolling interests and their related classifications under the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash (1)
|
$
|
33,671
|
|
|
$
|
33,671
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable securities-short term (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Marketable securities-long term (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
33,671
|
|
|
$
|
33,671
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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
|
|
|
—
|
|
Marketable securities-long term (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
39,012
|
|
|
$
|
39,001
|
|
|
$
|
11
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Marketable Securities
The Company utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company’s marketable securities investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No transfers of assets between Level 1, Level 2 and Level 3 of the fair value measurement hierarchy occurred during the year ended December 31, 2020.
For marketable debt securities, unrealized gains and losses are reported as a component of accumulated other comprehensive income in stockholders’ equity. The cost of securities sold is based on the specific identification method. The Company evaluates investments with unrealized losses to determine if the losses are other than temporary. There were no unrealized losses as of December 31, 2020 and the Company has determined that the gross unrealized losses were temporary as of December 31, 2019. In making this determination, the Company considered the financial condition, credit ratings and near-term prospects of the issuers, the underlying collateral of the investments, and the magnitude of the losses as compared to the cost and the length of time the investments have been in an unrealized loss position.
The marketable equity securities are mutual funds measured at fair value and classified within Level 2 in the fair value hierarchy. Unrealized gains and losses related to the Company’s marketable equity securities were recognized in other income (expense), net.
The estimated fair value of investments in marketable debt securities were immaterial at December 31, 2020 and 2019, respectively.
At December 31, 2020 and December 31, 2019, the aggregate related fair value of investment with unrealized losses was approximately nil and nil respectively.
At December 31, 2020, the estimated fair value of investments in marketable equity securities, were as follows:
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
11
|
|
Mutual funds purchases
|
|
—
|
|
Mutual funds sales
|
|
(11)
|
|
Realized gains (losses)
|
|
—
|
|
Balance at December 31, 2020
|
|
$
|
—
|
|
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 noncontrolling interests could significantly increase or decrease the fair value estimates recorded in the Consolidated Balance Sheets.
The changes in fair value of the Company’s Level 3 redeemable noncontrolling interests during the year ended December 31, 2020 were as follows:
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
12,500
|
|
Fair value adjustment
|
(344)
|
|
Net income attributable to redeemable noncontrolling interests
|
344
|
|
Balance at December 31, 2020
|
$
|
12,500
|
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
7. 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 Loan Receivable on the Consolidated balance sheet. No gain or loss was recognized as a result of the transaction. As of December 31, 2020, the Company reassessed the fair value of the note and there were no material changes.
For the year ended December 31, 2020 and 2019, the Company recognized nil and $(6.9) million, respectively, in revenue related to Cloud Telephony and Support services, and nil and nil, respectively, in revenue related to all other services.
In 2019, changes to the STIN business led the Company to conclude that its collection of certain STIN receivables was no longer probable. In accordance with ASC 842, the portion of revenue that is no longer deemed collectible is reversed in the current period against revenue. Accordingly, the Company determined a contingency reserve was required, which included a reduction of revenue in the amount $26.0 million in the third quarter of 2019. The impacts of this change are reflected in the STIN affiliate revenue and accounts receivable.
The STIN affiliate accounts receivable balances in the Consolidated Balance Sheet as of December 31, 2020 and December 31, 2019, were nil and $8.1 million, respectively. These amounts principally included revenues generated from the Cloud and Telephony Support Services agreement and pass-through of vendor expenses incurred during the transition and assignment of vendor contracts.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
8. Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Computer hardware
|
|
$
|
184,145
|
|
|
$
|
214,880
|
|
Computer software
|
|
52,135
|
|
|
64,509
|
|
|
|
|
|
|
Furniture and fixtures
|
|
8,951
|
|
|
9,546
|
|
|
|
|
|
|
Leasehold improvements
|
|
23,389
|
|
|
25,768
|
|
|
|
268,620
|
|
|
314,703
|
|
Less: Accumulated depreciation
|
|
(256,888)
|
|
|
(288,178)
|
|
Total
|
|
$
|
11,732
|
|
|
$
|
26,525
|
|
Depreciation expense was approximately $15.6 million, $43.5 million and $55.8 million for 2020, 2019, and 2018, respectively. Amortization of property and equipment recorded under capital leases are included in depreciation expense.
9. Goodwill and Intangibles
Goodwill
The Company records goodwill which represents the excess of the purchase price over the fair value of assets acquired, including other definite-lived intangible assets. Goodwill is reviewed annually for impairment or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
The following table shows the adjustments to goodwill during 2020 and 2019:
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
224,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
(1,930)
|
|
Balance at December 31, 2019
|
|
$
|
222,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
9,802
|
|
Balance at December 31, 2020
|
|
$
|
232,771
|
|
When performing its annual impairment test, the Company compares the fair value of each reporting unit to its carrying amount with the fair values derived from the market approach the income approach. Under the market approach, the Company estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit. The Company weights the fair value derived from the market approach depending on the level of comparability of these publicly-traded companies to the reporting unit. When market comparables are not meaningful or not available, the Company estimates the fair value of a reporting unit using only the income approach. Under the income approach, the Company estimates the fair value of a reporting unit based on the present value of estimated future cash flows. The Company bases cash flow projections on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The Company bases the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected cash flows.
In order to assess the reasonableness of the estimated fair value of the Company’s reporting units, the Company compares the aggregate reporting unit fair value to the Company’s market capitalization on an overall basis and calculates an implied control premium (the excess of the sum of the reporting units’ fair value over the Company’s market capitalization on an
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
overall basis). The Company evaluates the control premium by comparing it to observable control premiums from recent comparable transactions. If the implied control premium is determined to not be reasonable in light of these recent transactions, the Company re-evaluates its reporting unit fair values, which may result in an adjustment to the discount rate and/or other assumptions. This re-evaluation could result in a change to the estimated fair value for certain or all reporting units. If the fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired.
If the fair value of the reporting unit is less than its carrying amount, goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment loss.
For the years ended December 31, 2020, 2019, and 2018 the Company recognized goodwill impairment charges of nil, nil, and $9.1 million, respectively. The Company recorded a $9.1 million impairment charge on the Zentry joint venture in 2018 as a result of various business changes to Zentry, which ultimately led the Company to sunset certain Zentry product offerings. The Company evaluated the impact of these business changes and determined that the future cash flows generated by the assets were not sufficient to support its recoverability and accordingly, the Company recognized an impairment charge for Zentry’s outstanding goodwill.
Other Intangible Assets
The Company’s intangible assets with definite lives consist primarily of technology, capitalized software, trade names, and customer lists and relationships. These intangible assets are being amortized on the straight-line method over the estimated useful lives of the assets. Amortization expense related to intangible assets for the years ended December 31, 2020, 2019 and 2018 was $27.0 million, $33.5 million and $41.3 million, respectively.
The Company recognized impairment charges to its intangible assets of $0.9 million, nil and $11.0 million for the years ended December 31, 2020, 2019 and 2018 respectively. The Company includes these impairments within depreciation and amortization in its Consolidated Statements of Operations. The 2018 impairment charge was incurred to the outstanding Zentry intangible assets for the same reasons discussed above.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The Company’s intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
Technology
|
|
$
|
105,642
|
|
|
$
|
(94,867)
|
|
|
$
|
10,775
|
|
Customer lists and relationships
|
|
131,500
|
|
|
(101,468)
|
|
|
30,032
|
|
Capitalized software and patents
|
|
63,268
|
|
|
(34,482)
|
|
|
28,786
|
|
Trade name
|
|
2,477
|
|
|
(2,477)
|
|
|
—
|
|
Total
|
|
$
|
302,887
|
|
|
$
|
(233,294)
|
|
|
$
|
69,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
Technology
|
|
$
|
99,832
|
|
|
$
|
(83,608)
|
|
|
$
|
16,224
|
|
Customer lists and relationships
|
|
125,308
|
|
|
(86,555)
|
|
|
38,753
|
|
Capitalized software and patents
|
|
46,222
|
|
|
(23,586)
|
|
|
22,636
|
|
Trade name
|
|
2,450
|
|
|
(2,450)
|
|
|
—
|
|
Total
|
|
$
|
273,812
|
|
|
$
|
(196,199)
|
|
|
$
|
77,613
|
|
Estimated future amortization expense of its intangible assets for the next five years is as follows:
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
|
2021
|
|
$
|
23,348
|
|
2022
|
|
18,474
|
|
2023
|
|
8,858
|
|
2024
|
|
5,288
|
|
2025
|
|
4,798
|
|
Thereafter
|
|
1,236
|
|
Total *
|
|
$
|
62,002
|
|
____________________________
* As of December 31, 2020, the Company had $7.6 million of capitalized software costs that are currently in the development stage. Amortization of these costs will begin once the software projects are complete and ready for their intended use.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
10. Accrued Expenses
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Accrued compensation and benefits
|
|
$
|
28,172
|
|
|
$
|
26,507
|
|
Accrued professional service fees
|
|
5,344
|
|
|
7,248
|
|
Accrued telecommunications and hosting
|
|
4,570
|
|
|
2,493
|
|
Accrued income taxes payable
|
|
3,227
|
|
|
4,063
|
|
Accrued preferred dividend
|
|
9,078
|
|
|
7,873
|
|
Accrued other
|
|
18,935
|
|
|
17,803
|
|
Total
|
|
$
|
69,326
|
|
|
$
|
65,987
|
|
11. 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 does not have material sublease arrangements.
The following table presents information about the Company's ROU assets and lease liabilities at December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
ROU assets:
|
|
|
Non-current operating lease ROU assets
|
|
$
|
34,538
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities:
|
|
|
Current operating lease liabilities*
|
|
$
|
10,078
|
|
Non-current operating lease liabilities
|
|
44,126
|
|
Total operating lease liabilities
|
|
$
|
54,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________
* Amounts are included in Accrued Expenses on Consolidated Balance Sheets.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table presents information about lease expense and sublease income for the year ended December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
Operating lease cost*
|
|
$
|
11,994
|
|
Other lease costs and income:
|
|
|
Variable lease costs* (1)
|
|
6,487
|
|
Sublease income*
|
|
(3,888)
|
|
|
|
|
Total net lease cost
|
|
$
|
14,593
|
|
________________________________
* 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 Consolidated Statements of Operations.
(1) As part of the Company’s in year cost savings initiatives, the Company closed certain office spaces and terminated various lease agreements. These actions resulted in a $5.4 million ROU asset impairment charge, which was determined by the present value of the forecasted future cash flows for the remaining lease term.
The following table provides the undiscounted amount of future cash flows included in the Company’s lease liabilities at December 31, 2020 for each of the five years subsequent to December 31, 2020 and thereafter, as well as a reconciliation of such undiscounted cash flows to the Company’s lease liabilities at December 31, 2020 (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
2021
|
$
|
13,766
|
|
2022
|
11,220
|
|
2023
|
8,652
|
|
2024
|
8,401
|
|
2025
|
8,275
|
|
Thereafter
|
18,686
|
|
Total future lease payments
|
69,000
|
|
Less: amount representing interest
|
(14,796)
|
|
Present value of future lease payments (lease liability)
|
$
|
54,204
|
|
The following table provides the weighted-average remaining lease term and weighted-average discount rates for the Company’s leases as of December 31, 2020:
|
|
|
|
|
|
Operating Leases:
|
|
Weighted-average remaining lease term (years), weighted based on lease liability balances
|
6.36
|
Weighted-average discount rate (percentages), weighted based on the remaining balance of lease payments
|
7.5
|
%
|
The following table provides certain cash flow and supplemental noncash information related to the Company’s lease liabilities for the year ended December 31, 2020 (in thousands):
|
|
|
|
|
|
Operating Leases:
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
13,181
|
|
Lease liabilities arising from obtaining right-of-use assets
|
1,739
|
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
12. 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 0.00%. 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 December 31, 2020 is $10.0 million.
Convertible Senior Notes
On August 12, 2014, the Company issued $230.0 million aggregate principal amount of its 0.75% Convertible Senior Notes due in 2019 (the “2019 Notes”). The 2019 Notes were paid at maturity on August 15, 2019. The 2019 Notes bore an interest rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. The Company accounted for the $230.0 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance.
During the years ended December 31, 2020, 2019 and 2018, interest expense was $0.2 million, $0.4 million, and $1.6 million respectively.
Interest expense
The following table summarizes the Company’s interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Convertible Senior Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
285
|
|
|
1,294
|
|
Interest on borrowings
|
|
|
|
|
|
|
|
—
|
|
|
363
|
|
|
1,578
|
|
Additional interest on default
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
191
|
|
2019 Revolving Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs
|
|
|
|
|
|
|
|
52
|
|
|
8
|
|
|
—
|
|
Commitment fee
|
|
|
|
|
|
|
|
4
|
|
|
5
|
|
|
—
|
|
Interest on borrowings
|
|
|
|
|
|
|
|
202
|
|
|
3
|
|
|
—
|
|
Capital leases
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
964
|
|
Other*
|
|
|
|
|
|
|
|
218
|
|
|
691
|
|
|
884
|
|
Total
|
|
|
|
|
|
|
|
$
|
476
|
|
|
$
|
1,355
|
|
|
$
|
4,911
|
|
________________________________
* Mainly finance leases’ related interest expense.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
13. Accumulated Other Comprehensive (Loss) / Income
The changes in accumulated other comprehensive (loss) income during the years ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
Other comprehensive (loss) income
|
|
Tax effect
|
|
Balance at December 31, 2020
|
Foreign currency
|
$
|
(28,204)
|
|
|
$
|
2,128
|
|
|
|
|
$
|
(26,076)
|
|
Unrealized loss on intra-entity foreign currency transactions
|
(4,306)
|
|
|
3,130
|
|
|
(961)
|
|
|
(2,137)
|
|
Unrealized holding gains (losses) on marketable debt securities
|
(751)
|
|
|
751
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
(33,261)
|
|
|
$
|
6,009
|
|
|
$
|
(961)
|
|
|
$
|
(28,213)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
Other comprehensive (loss) income
|
|
Tax effect
|
|
Balance at December 31, 2019
|
Foreign currency
|
$
|
(26,436)
|
|
|
$
|
(1,768)
|
|
|
$
|
—
|
|
|
$
|
(28,204)
|
|
Unrealized income (loss) on intra-entity foreign currency transactions
|
(3,906)
|
|
|
(579)
|
|
|
179
|
|
|
(4,306)
|
|
Unrealized holding gains (losses) on marketable debt securities
|
(41)
|
|
|
(710)
|
|
|
—
|
|
|
(751)
|
|
Total
|
$
|
(30,383)
|
|
|
$
|
(3,057)
|
|
|
$
|
179
|
|
|
$
|
(33,261)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
Other comprehensive (loss) income
|
|
Tax effect
|
|
Balance at December 31, 2018
|
Foreign currency
|
$
|
(20,284)
|
|
|
$
|
(6,152)
|
|
|
$
|
—
|
|
|
$
|
(26,436)
|
|
Unrealized (loss) income on intra-entity foreign currency transactions
|
(3,085)
|
|
|
(1,263)
|
|
|
442
|
|
|
(3,906)
|
|
Unrealized holding gains (losses) on marketable debt securities
|
(4)
|
|
|
(37)
|
|
|
—
|
|
|
(41)
|
|
Total
|
$
|
(23,373)
|
|
|
$
|
(7,452)
|
|
|
$
|
442
|
|
|
$
|
(30,383)
|
|
14. Capital Structure
As of December 31, 2020, the Company’s authorized capital stock was 110 million shares of stock with a par value of $0.0001, of which 100 million shares were designated as common stock and 10 million shares were designated as preferred stock. There were no significant changes to Company’s authorized capital stock and preferred stock during the year ended December 31, 2020.
On August 19, 2020, the Company filed a universal shelf registration statement with the SEC for the issuance of common stock, preferred stock, debt securities, guarantees of debt securities, warrants and units up to an aggregate amount of $250.0 million (“the 2020 Shelf Registration Statement”). On August 28, 2020, the 2020 Shelf Registration Statement was declared effective by the SEC.
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.
Treasury Stock
On February 4, 2016, the Company announced that the Board of Directors approved a share repurchase program under which the Company may repurchase up to $100.0 million of its outstanding common stock for 12 to 18 months following the announcement. In 2016, the Company repurchased approximately 1.3 million shares of the Company’s common stock under this program for an aggregate repurchase price of $40.0 million. There were no share repurchases subsequent to 2016. In 2018, in connection with execution of the Share Purchase Agreement, the Company received approximately 6.0 million shares of Synchronoss common stock, which have been recorded as Treasury shares as of December 31, 2020. Additionally, in 2018 the Company retired 3.9 million shares of Common Stock that were previously repurchased in prior years. Any related additional paid in capital and par values were removed from the Common Stock numbers.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
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 December 31, 2020, there were 250,432 shares of Series A Preferred Stock outstanding, including the initial issuance of 185,000 shares of Series A Preferred Stock and the issuance of 65,432 shares of Series A Preferred Stock as dividends.
In accordance with the terms of the PIPE Purchase Agreement with Silver on February 15, 2018, Silver exercised its option to complete the Preferred Transaction. In connection with the issuance of the Series A Preferred Stock, the Company (i) filed the certificate of designations to its certificate of incorporation to establish the rights, preferences, privileges, qualifications, restrictions and limitations of the Series A Preferred Stock (the “Series A Certificate”) and (ii) entered into the Investor Rights Agreement setting forth certain registration, governance and preemptive rights of Silver with respect to Synchronoss. Pursuant to the PIPE Purchase Agreement, at the closing, the Company paid to Siris $5.0 million as a reimbursement of Silver’s reasonable costs and expenses incurred in connection with the Preferred Transaction. In connection with execution of the Preferred Transaction, Silver delivered 5,994,667 shares of Synchronoss common stock, which have been recorded as Treasury shares as of December 31, 2020.
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.
On and after the fifth anniversary of February 15, 2018, 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 December 31, 2020, the Liquidation Value and Redemption Value of the Preferred Shares was $243.1 million.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
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.
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.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
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.
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 December 31, 2020 and changes during the year ended December 31, 2020, are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
Shares
|
|
Amount
|
Balance at December 31, 2019
|
217
|
|
|
$
|
200,865
|
|
|
|
|
|
|
|
|
|
Amortization of preferred stock issuance costs
|
—
|
|
|
3,530
|
|
Issuance of preferred PIK dividend
|
33
|
|
|
33,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
250
|
|
|
$
|
237,641
|
|
The Company and Siris Capital Group, LLC (“Siris”) entered into an Advisory Services Agreement dated as of May 18, 2020 under which Siris may provide consulting and advisory services to the Company on operational, business, financial and strategic matters. Under the agreement, the Company agreed to pay Siris a fee of $110,000 per month for calendar year 2021, which fee increases by $10,000 a month in each successive calendar year during the term of the agreement. No payment of the fee is required until February 1, 2022 and the Company does not currently intend to pay any portion of the fee until this date. On February 1 of each calendar year commencing on February 1, 2022, the Company shall pay Siris 20% of the aggregate
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
annual amount of the fees with respect to the prior calendar year that were not previously paid. In addition, no later than 30 days following the date on which Silver and its affiliates, including Siris, collectively hold no shares of Series A Preferred Stock, the Company shall pay all fees with respect to the period from January 1, 2021 through the termination date of the agreement not previously paid. The Company shall also reimburse Siris for any pre-approved out-of-pocket expenses in connection with providing services under the agreement.
Registration Rights
There were no significant changes to the Company’s registration rights during the year ended December 31, 2020.
15. Stock Plans
In March 2015, the Company adopted the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan replaces the Company’s prior 2000 Equity Incentive Plan (the “2000 Plan”) and the 2006 Equity Incentive Plan (the “2006 Plan”) (collectively, the “Plans”). Beginning March 2015, all awards were granted under the 2015 Plan. In addition, any awards that were previously granted under any prior Plans that terminate without issuance of shares, shall be eligible for issuance under the 2015 Plan.
Under the 2015 Plan, the Company may grant to its employees, outside directors and consultants awards in the form of non-qualified stock options, shares of restricted stock, stock units, or stock appreciation rights and performance shares. The Company’s Board of Directors administers the Plan and is responsible for determining the individuals to be granted options or shares, the number of options or shares each individual will receive, the price per share and the exercise period of each option.
On December 15, 2017, the Compensation Committee adopted the 2017 New Hire Equity Incentive Plan (“2017 New Hire Plan”), which is intended to be exempt from the stockholder approval requirements under the “inducement grant exception” provided by the Inducement Rule. The Committee authorized the issuance of up to 1.5 million Common Shares to new hires, with the purpose of promoting the long-term success of the Company and the creation of stockholder value by (a) providing for the attraction and retention of new employees with exceptional qualifications, (b) encouraging new employees to focus on critical long-range objectives, and (c) linking new employees directly to stockholder interests through increased stock ownership. As required by the Inducement Rule, the Company issues a press release promptly upon issuing shares to new employees pursuant to the 2017 New Hire Plan.
There were no significant changes to the Company’s Stock Plans during the year ended December 31, 2020. As of December 31, 2020, there were 1.5 million shares available for the grant or award under the Company’s 2015 Plan and 0.4 million shares available for the grant or award under the Company’s 2017 New Hire equity incentive Plan.
The Company’s performance cash awards granted to executives under the Long Term Incentive (“LTI”) Plans have been accounted for as liability awards, due to the Company’s intent and the ability to settle such awards in cash upon vesting and has reflected such awards in accrued expenses. As of December 31, 2020, the liability for such awards is approximately $0.5 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cost of revenues
|
|
|
|
|
|
|
$
|
2,409
|
|
|
$
|
2,929
|
|
|
$
|
4,370
|
|
Research and development
|
|
|
|
|
|
|
4,380
|
|
|
4,227
|
|
|
6,055
|
|
Selling, general and administrative
|
|
|
|
|
|
|
4,348
|
|
|
15,094
|
|
|
17,179
|
|
Total stock-based compensation expense
|
|
|
|
|
|
|
$
|
11,137
|
|
|
$
|
22,250
|
|
|
$
|
27,604
|
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by award types, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Stock options
|
|
|
|
|
|
|
$
|
1,308
|
|
|
$
|
7,348
|
|
|
$
|
7,368
|
|
Restricted stock awards
|
|
|
|
|
|
|
9,743
|
|
|
14,775
|
|
|
20,216
|
|
Performance Based Cash Units
|
|
|
|
|
|
|
86
|
|
|
127
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation before taxes
|
|
|
|
|
|
|
11,137
|
|
|
22,250
|
|
|
27,604
|
|
Tax benefit
|
|
|
|
|
|
|
$
|
1,815
|
|
|
$
|
3,455
|
|
|
$
|
5,387
|
|
The total stock-based compensation cost related to unvested equity awards as of December 31, 2020 was approximately $12.8 million. The expense is expected to be recognized over a weighted-average period of approximately 0.8 years.
The total stock-based compensation cost related to unvested performance-based cash units as of December 31, 2020 was approximately $0.3 million. The expense is expected to be recognized over a weighted-average period of approximately 1.6 years.
Stock Options
Options that were granted under the Company’s 2000, 2006 and 2015 Plans generally vest 25% on the first-year anniversary of the date of grant plus an additional 1/48th for each month of continuous service thereafter.
Options that were granted under the Company’s 2010 Plan generally vest 50% on the second-year anniversary and an additional 1/48th for each month of continuous service thereafter.
Incentive options that were granted under the 2000 and 2006 Plans generally vest 25% on the first-year anniversary on the date of grant and an additional 1/48th for each month of continuous service thereafter.
There were no significant changes to the Company’s Stock Option Plans during the year ended December 31, 2020.
The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock options. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Expected stock price volatility
|
|
|
|
|
|
|
|
74.5
|
%
|
|
69.6
|
%
|
|
65.5
|
%
|
Risk-free interest rate
|
|
|
|
|
|
|
|
1.0
|
%
|
|
1.9
|
%
|
|
2.6
|
%
|
Expected life of options (in years)
|
|
|
|
|
|
|
|
4.47
|
|
4.34
|
|
4.13
|
Expected dividend yield
|
|
|
|
|
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Weighted-average fair value (PSV) of the options
|
|
|
|
|
|
|
|
$
|
2.79
|
|
|
$
|
3.82
|
|
|
$
|
4.91
|
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table summarizes information about stock options outstanding as of December 31, 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
|
|
2,315
|
|
|
4.84
|
|
|
|
|
|
Options Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Options Cancelled
|
|
(2,814)
|
|
|
14.32
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
4,423
|
|
|
$
|
9.60
|
|
|
4.57
|
|
$
|
788,413.19
|
|
Vested at December 31, 2020
|
|
1,809
|
|
|
$
|
15.38
|
|
|
2.59
|
|
$
|
—
|
|
Exercisable at December 31, 2020
|
|
1,809
|
|
|
$
|
15.38
|
|
|
2.59
|
|
$
|
1,547.85
|
|
The total intrinsic value of stock options exercised during the year ended December 31, 2020 and 2019 was nil and $20.5 thousand, respectively. The total intrinsic value of stock options exercisable as of December 31, 2020 and 2019 was $1.5 thousand and $1.2 thousand, respectively.
Awards of Restricted Stock and Performance Stock
Restricted stock awards (“Restricted Stock”) granted under the Company’s Plans generally vest 25% of the applicable shares on the first anniversary of the date of grant and thereafter an additional 1/16th for each three months of continuous service.
Generally, performance stock awards granted under the Company’s 2015 Plan vest at the end of a three-year period based on service and achievement of certain performance objectives determined by the Company’s Board of Directors.
There were no significant changes to the Company’s restricted stock award (“Restricted Stock”) and performance stock plan during the year ended December 31, 2020.
A summary of the Company’s unvested restricted stock at December 31, 2020, and changes during the year ended December 31, 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
|
|
301
|
|
|
4.90
|
|
Vested
|
|
(1,341)
|
|
|
9.11
|
|
Forfeited
|
|
(825)
|
|
|
7.79
|
|
Unvested at December 31, 2020
|
|
1,510
|
|
|
$
|
7.05
|
|
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.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Performance Based Cash Units
Performance based cash units (PBCU) generally 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. The PBCU can be settled in cash or in equity as determined by the Compensation Committee.
A summary of the Company’s unvested performance-based cash units at December 31, 2020 and changes during the year ended December 31, 2020, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Cash Units
|
|
Number of
Awards
|
|
Period end
Fair Value
|
Unvested at December 31, 2019
|
|
1,046
|
|
|
$
|
4.75
|
|
Granted
|
|
1,391
|
|
|
—
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(1,530)
|
|
|
—
|
|
Unvested at December 31, 2020
|
|
907
|
|
|
$
|
4.70
|
|
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 as well as the percentage achievement of the performance metrics at each reporting date.
16. 401(k) Plan
The Company has a 401(k) plan (the “401(k) Plan”) covering all eligible employees. The 401(k) Plan allows for a discretionary employer match. The Company incurred and expensed $2.9 million, $2.6 million, and $2.2 million for the years ended December 31, 2020, 2019 and 2018, respectively, in 401(k) Plan match contributions.
17. Restructuring
The Company continues 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 December 31, 2020 and changes during the year ended December 31, 2020, are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
Charges
|
|
Payments
|
|
Other Adjustments1
|
|
Balance at December 31, 2020
|
Employment termination costs
|
$
|
90
|
|
|
$
|
7,920
|
|
|
$
|
(6,501)
|
|
|
$
|
71
|
|
|
$
|
1,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________
(1)Includes non-cash adjustments and reclassifications.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
18. Income Taxes
The components of income or (loss) from continuing operations before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Domestic
|
$
|
(43,457)
|
|
|
$
|
(104,445)
|
|
|
$
|
(216,589)
|
|
Foreign
|
5,991
|
|
|
3,152
|
|
|
(46,585)
|
|
Total
|
$
|
(37,466)
|
|
|
$
|
(101,293)
|
|
|
$
|
(263,174)
|
|
The components of income tax (expense) benefit from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
Federal
|
$
|
30,365
|
|
|
$
|
(208)
|
|
|
$
|
3,163
|
|
State
|
56
|
|
|
46
|
|
|
116
|
|
Foreign
|
(3,643)
|
|
|
(2,048)
|
|
|
(2,612)
|
|
Deferred:
|
|
|
|
|
|
Federal
|
262
|
|
|
(28)
|
|
|
6,729
|
|
State
|
(229)
|
|
|
(17)
|
|
|
2,214
|
|
Foreign
|
297
|
|
|
81
|
|
|
8,284
|
|
Income tax benefit (provision)
|
$
|
27,108
|
|
|
$
|
(2,174)
|
|
|
$
|
17,894
|
|
The Company recognized approximately $27.1 million in related income tax benefit and $2.2 million in related income tax provision during the year ended December 31, 2020 and 2019, respectively. The effective tax rate was approximately 72.4% for the year ended December 31, 2020, which was higher than the U.S. federal statutory rate primarily due to the benefit of the CARES Act provision allowing for a 5 year carryback of Net Operating Losses arising in 2018, 2019 and 2020. The Company’s effective tax rate was approximately (2.1)% for the year ended December 31, 2019, 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 and permanent differences associated with U.S. Base Erosion and Anti Abuse Tax elections, offset by certain foreign jurisdictions projecting current income tax expense.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Reconciliations of the statutory tax rates and the effective tax rates from continuing operations for the years ended December 31, 2020, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State taxes, net of federal benefit
|
(0.5)
|
%
|
|
(0.8)
|
%
|
|
3.0
|
%
|
Effect of rates different than statutory
|
(2.1)
|
%
|
|
(4.3)
|
%
|
|
(2.0)
|
%
|
Minority interest
|
0.2
|
%
|
|
0.2
|
%
|
|
(1.0)
|
%
|
Non-deductible Bad Debt
|
(2.9)
|
%
|
|
—
|
%
|
|
—
|
%
|
Stock based compensation
|
(6.1)
|
%
|
|
(2.5)
|
%
|
|
(2.0)
|
%
|
Foreign Basis Differences
|
9.8
|
%
|
|
—
|
%
|
|
—
|
%
|
Other permanent differences
|
(0.9)
|
%
|
|
(0.3)
|
%
|
|
—
|
%
|
Research and development credit
|
6.5
|
%
|
|
0.5
|
%
|
|
—
|
%
|
Change in valuation allowance
|
(3.2)
|
%
|
|
6.7
|
%
|
|
(17.0)
|
%
|
Uncertain tax positions
|
(0.7)
|
%
|
|
0.6
|
%
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
1.1
|
%
|
|
(1.2)
|
%
|
|
1.0
|
%
|
Acquisitions and foreign tax residency changes
|
—
|
%
|
|
—
|
%
|
|
3.0
|
%
|
Investment in JV
|
—
|
%
|
|
(1.7)
|
%
|
|
—
|
%
|
Global Intangible Low-Taxed Income
|
3.9
|
%
|
|
(3.3)
|
%
|
|
—
|
%
|
Base Erosion Anti-Abuse Tax and Related Elections
|
0.9
|
%
|
|
(17.0)
|
%
|
|
—
|
%
|
|
|
|
|
|
|
NOL Carryback and Other Refund Claims
|
45.4
|
%
|
|
—
|
%
|
|
—
|
%
|
Effective tax rate
|
72.4
|
%
|
|
(2.1)
|
%
|
|
7.0
|
%
|
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Accrued liabilities
|
$
|
1,660
|
|
|
$
|
78
|
|
Deferred revenue
|
5,410
|
|
|
12,943
|
|
Bad debts reserve
|
2,248
|
|
|
9,291
|
|
Deferred compensation
|
6,816
|
|
|
5,262
|
|
Federal net operating loss carryforwards
|
8,876
|
|
|
7,969
|
|
State net operating loss carryforwards
|
7,415
|
|
|
4,236
|
|
Foreign net operating loss carryforwards
|
10,036
|
|
|
9,401
|
|
Lease obligations
|
10,142
|
|
|
13,791
|
|
Capital loss carryforward
|
10,365
|
|
|
1,563
|
|
Intangible assets
|
6,153
|
|
|
2,716
|
|
Basis difference
|
6,256
|
|
|
8,041
|
|
Installment sale
|
—
|
|
|
8,726
|
|
Credits
|
9,720
|
|
|
—
|
|
Fixed assets
|
1,249
|
|
|
—
|
|
Other
|
26
|
|
|
3,208
|
|
Total deferred tax assets
|
$
|
86,372
|
|
|
$
|
87,225
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Basis difference
|
$
|
(1,555)
|
|
|
$
|
—
|
|
Depreciation and amortization
|
(5,171)
|
|
|
(5,965)
|
|
Lease Assets
|
(6,121)
|
|
|
(9,593)
|
|
Other
|
(439)
|
|
|
—
|
|
Total deferred tax liabilities
|
(13,286)
|
|
|
(15,558)
|
|
Less: valuation allowance
|
(74,961)
|
|
|
(73,346)
|
|
Net deferred income tax (liabilities) assets
|
$
|
(1,875)
|
|
|
$
|
(1,679)
|
|
As of December 31, 2020, the Company has federal and state income tax net operating loss (“NOL”) carryforwards of $42.3 million and $116.3 million, respectively, including NOL carryforwards which will expire at various dates from 2023 through 2039, and NOL carryforwards which do not expire. The Company also has foreign NOL carryforwards in various jurisdictions of $112.3 million that have various carryforward periods. Such NOL carryforwards expire as follows:
|
|
|
|
|
|
|
NOL carryforward
|
2021
|
$
|
2,040
|
|
2022
|
$
|
2,222
|
|
2023 - 2038
|
159,194
|
|
Indefinite
|
107,474
|
|
Total
|
$
|
270,930
|
|
In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results and incorporates assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the underlying businesses.
The foreign NOL carryforwards in the income tax returns filed included unrecognized tax benefits taken in prior years. The NOLs for which a deferred tax asset is recognized for financial statement purposes in accordance with ASC 740 are presented net of these unrecognized tax benefits.
The Company continues to evaluate the ability to realize all of its net deferred tax assets at each reporting date and records a benefit for deferred tax assets to the extent it has deferred tax liabilities that provide a source of income to benefit the deferred tax asset. As a result of this analysis, the Company recorded a valuation allowance against the net deferred tax assets of certain foreign jurisdictions as the realization of these assets is not more likely than not, given uncertainty of future earnings in these jurisdictions. The valuation allowance increased by $1.6 million and decreased by $7.7 million during the years ended December 31, 2020 and December 31, 2019, respectively. The increase in tax year ended December 31, 2020 is primarily related to NOL and tax credits generated during the period and a decrease in deferred tax liabilities, partially offset by decreases in other deferred tax assets due to current year activity. The decrease in tax year ended December 31, 2019 is primarily related to utilization of NOL carryforwards.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2020, the Company’s tax years for 2017 through 2020 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2020, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before 2016. Due to the amended returns filed to carryback NOLs under the CARES Act, U.S. federal tax returns for years 2013 – 2016 remain subject to future examination by the tax authorities. Additionally, to the extent we utilize our NOL carryforwards in the future, the tax years in which the attribute was generated may still be adjusted upon examination by the tax authorities in the future period when the attribute is utilized.
The Company is currently under income tax examinations in Illinois for the tax years 2014 through 2015, Colorado for tax years 2014 through 2017, and Massachusetts for the tax years 2015 through 2017. The Company does not believe that the results of this audit will have a material effect on its financial position or results of operations.
In 2017, the TCJA included a transition tax based on undistributed, untaxed foreign earnings analyzed in aggregate. The final analysis performed by the Company resulted in an overall untaxed deficit and no transition tax. In addition, no income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Should the Company decide to repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings will no longer be indefinitely invested outside the United States. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts.
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses. The CARES Act amends the Net Operating Loss provisions of the Tax Cuts and Jobs Act, allowing for the carryback of losses arising in tax years 2018, 2019 and 2020, to each of the five taxable years preceding the taxable year of loss.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
A reconciliation of the amounts of unrecognized tax benefits excluding interest, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefit at December 31, 2017
|
$
|
6,475
|
|
Decrease for tax positions taken during prior year
|
(567)
|
|
Increases related to acquired entities
|
—
|
|
Reduction due to lapse of applicable statute of limitations
|
(2,657)
|
|
Decreases related to divested entities
|
—
|
|
Increases for tax positions of current period
|
721
|
|
Unrecognized tax benefit at December 31, 2018
|
3,972
|
|
Increase for tax positions taken during prior year
|
—
|
|
Increases related to acquired entities
|
—
|
|
Increases and (decreases) related to Lapse of Statute of Limitations
|
(703)
|
|
Decreases related to divested entities
|
—
|
|
Increases for tax positions of current period
|
—
|
|
Unrecognized tax benefit at December 31, 2019
|
3,269
|
|
Increase for tax positions taken during prior year
|
—
|
|
Increases related to acquired entities
|
—
|
|
Increases and (decreases) related to Lapse of Statute of Limitations
|
(262)
|
|
Decreases related to divested entities
|
—
|
|
Increases (decreases) for tax positions of current period
|
276
|
|
Unrecognized tax benefit at December 31, 2020
|
$
|
3,283
|
|
Included in the balance of unrecognized tax benefits as of the years ended December 31, 2020 and 2019, are $2.7 million and $2.8 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense. The liability for unrecognized tax benefits excludes accrued interest of $0.3 million, $0.3 million and $0.4 million, for the years ended December 31, 2020, 2019 and 2018, respectively. The Company believes that it is reasonably possible that approximately $1.1 million of its currently unrecognized tax benefits primarily related to research and development credits, which are individually insignificant, may be recognized by the end of 2021 as a result of a lapse of the statute of limitations.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
19. 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.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share from continued and discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Numerator - Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
|
|
|
|
$
|
(10,358)
|
|
|
$
|
(103,467)
|
|
|
$
|
(245,280)
|
|
Net income (loss) attributable to redeemable noncontrolling interests
|
|
|
|
|
|
|
(344)
|
|
|
(1,126)
|
|
|
8,837
|
|
Preferred stock dividend
|
|
|
|
|
|
|
(37,981)
|
|
|
(32,134)
|
|
|
(25,593)
|
|
Net loss from continuing operations attributable to Synchronoss
|
|
|
|
|
|
|
(48,683)
|
|
|
(136,727)
|
|
|
(262,036)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes**
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
18,288
|
|
Net loss attributable to Synchronoss
|
|
|
|
|
|
|
$
|
(48,683)
|
|
|
$
|
(136,727)
|
|
|
$
|
(243,748)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator - Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to Synchronoss
|
|
|
|
|
|
|
$
|
(48,683)
|
|
|
$
|
(136,727)
|
|
|
$
|
(262,036)
|
|
Income effect for interest on convertible debt, net of tax
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss from continuing operations adjusted for the convertible debt
|
|
|
|
|
|
|
(48,683)
|
|
|
(136,727)
|
|
|
(262,036)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes**
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
18,288
|
|
Net loss attributable to Synchronoss
|
|
|
|
|
|
|
$
|
(48,683)
|
|
|
$
|
(136,727)
|
|
|
$
|
(243,748)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
|
|
|
|
|
|
41,950
|
|
|
40,694
|
|
|
40,277
|
|
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
|
|
|
|
|
|
|
41,950
|
|
|
40,694
|
|
|
40,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from Continuing operations
|
|
|
|
|
|
|
$
|
(1.16)
|
|
|
$
|
(3.36)
|
|
|
$
|
(6.51)
|
|
Net income from Discontinued operations**
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
$
|
(1.16)
|
|
|
$
|
(3.36)
|
|
|
$
|
(6.05)
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from Continuing operations
|
|
|
|
|
|
|
$
|
(1.16)
|
|
|
$
|
(3.36)
|
|
|
$
|
(6.51)
|
|
Net income from Discontinued operations**
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
$
|
(1.16)
|
|
|
$
|
(3.36)
|
|
|
$
|
(6.05)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options excluded
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Unvested shares of restricted stock awards
|
|
|
|
|
|
|
1,510
|
|
|
3,375
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________
(1) The calculation does not include the effect of assumed conversion of convertible debt of 0, 1,288,292 and 3,972,939 shares for the year ended December 31, 2020, 2019 and 2018, respectively; 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 13,202,267, 11,383,105 and 9,312,528 shares for the year ended December 31, 2020, 2019 and 2018 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.
** See Note 4. Acquisitions and Divestitures for transactions classified as discontinued operations
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
20. Commitments
Non-cancelable agreements
The Company leases office space, automobiles, office equipment and co-location services under non-cancelable agreements that expire at various dates, with the latest expiration in 2028.
Aggregate annual future minimum payments under non-cancelable agreements as of December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
Year
|
|
Non-cancelable agreements
|
2021
|
|
$
|
11,632
|
|
2022
|
|
11,942
|
|
2023
|
|
12,654
|
|
2024 and thereafter
|
|
21,994
|
|
Total
|
|
$
|
58,222
|
|
21. 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 to leave to amend its complaint. On August 14, 2019, lead plaintiff filed a second amended complaint. The second amended complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and it alleges, among other things, that the defendants made false and misleading statements of material information concerning the Company’s financial results, business operations, and prospects. The plaintiff seeks unspecified damages, fees, interest, and costs. On October 4, 2019, the defendants moved to dismiss the second amended complaint in its entirety. On May 29, 2020, the court granted in part and denied in part defendants’ motion to dismiss the second amended complaint, without prejudice. Plaintiff filed its motion for class certification on October 30, 2020, which motion remains pending. The Company believes that 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 action at this time and can give no assurance that the asserted claims will not have a material adverse effect on its financial position or results of operations.
On September 15, 2017, October 24, 2017, October 27, 2017 and October 30, 2017, Company shareholders filed derivative lawsuits against certain of the Company’s current and former officers and directors and the Company (as nominal defendant) in the United States District Court for the District of New Jersey (the “Derivative Suits”). On May 24, 2018, the Court
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
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 duties and unjust enrichment. The amended complaint’s allegations relate to substantially 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. On September 11, 2020, the defendants filed a motion to dismiss the amended complaint, which remains pending before the Court. 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 action 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 March 7, 2019, Synchronoss shareholders, Beth Daniel and Juan Solis, filed a separate derivative lawsuit against certain of the Company’s current and former officers and directors and the Company (as nominal defendant) in the Court of Chancery of the State of Delaware, asserting substantially the same allegations as those underlying the Derivative Suits and the Securities Law Action described above. Plaintiffs seek unspecified damages and for the Company to take steps to improve its corporate governance and internal procedures. On May 20, 2019, the parties stipulated to a stay of the action pending a ruling on the pending motion to dismiss in the Derivative Suits. The Company believes that the asserted claims lack merit and intends to defend against all of the claims vigorously. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the action at this time and can give no assurance that the asserted claims will not have a material adverse effect on our financial position or results of operations.
On June 11, 2020 and June 12, 2020, Company shareholders filed derivative lawsuits against certain of the Company’s current and former officers and directors and the Company (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. On October 20, 2020, the Court consolidated the actions and appointed co-lead plaintiffs. On December 4, 2020, co-lead plaintiffs filed a consolidated amended complaint. On February 3, 2021, the defendants filed motions to dismiss the amended complaint, which remain pending before the Court. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the action at this time and can give no assurance that the asserted claims will not have a material adverse effect on its financial position or results of operations.
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.
22. Subsequent Events
Subsequent to December 31, 2020, the Company paid in-kind the accrued Preferred Dividends of $9.1 million.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
23. Additional Financial Information
Other Income (expense), net
The following table sets forth the components of Other Income (expense), net included in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
FX gains (losses) (1)
|
$
|
4,234
|
|
|
$
|
31
|
|
|
$
|
(478)
|
|
PIK Note impairment (2)
|
—
|
|
|
—
|
|
|
(84,314)
|
|
Litigation settlement (3)
|
—
|
|
|
—
|
|
|
4,495
|
|
Remeasurement gain (loss) on financial instrument (4)
|
—
|
|
|
—
|
|
|
3,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Tax credit (5), Investment (6) and Government refunds (7)
|
1,597
|
|
|
1,039
|
|
|
519
|
|
Income from sale of intangible assets (8)
|
3,477
|
|
|
5,518
|
|
|
—
|
|
Others (9)
|
227
|
|
|
801
|
|
|
1,012
|
|
|
$
|
9,535
|
|
|
$
|
7,389
|
|
|
$
|
(74,917)
|
|
________________________________
(1)Fair value of foreign exchange gains and losses
(2)PIK Note impairment on the troubled debt restructuring
(3)Represents Legal settlement of $4.2 million and $0.3 million IP settlement from third parties
(4)Remeasurement of gain/loss on Mandatorily Redeemable Put option for common shares held by Siris.
(5)Represents VOX Acquisition R&D Tax Credit.
(6)Represents gain on sale on the Company’s cost investment in Clarity, Money Inc.
(7)Represents government and tax refunds
(8)Represents gain on sale on the Company’s IP addresses
(9)Represents an aggregate of individually immaterial transactions
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
24. Summary of Quarterly Results of Operations (Unaudited)
Quarterly results of operations for 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
2020
|
(In thousands, except per share data)
|
Net revenues
|
$
|
77,122
|
|
|
$
|
76,535
|
|
|
$
|
68,636
|
|
|
$
|
69,377
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
(17,287)
|
|
|
(11,458)
|
|
|
(16,998)
|
|
|
(2,380)
|
|
Net (loss) income
|
(3,350)
|
|
|
(694)
|
|
|
(5,622)
|
|
|
(692)
|
|
Net (loss) income attributable to Synchronoss
|
(12,276)
|
|
|
(10,148)
|
|
|
(15,367)
|
|
|
(10,892)
|
|
EPS
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net loss from Continuing operations (1)
|
$
|
(0.30)
|
|
|
$
|
(0.24)
|
|
|
$
|
(0.36)
|
|
|
$
|
(0.26)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Net loss from Continuing operations (1)
|
$
|
(0.30)
|
|
|
$
|
(0.24)
|
|
|
$
|
(0.36)
|
|
|
$
|
(0.26)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
2019
|
(In thousands, except per share data)
|
Net revenues
|
$
|
88,105
|
|
|
$
|
77,846
|
|
|
$
|
52,210
|
|
|
$
|
90,588
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
(20,339)
|
|
|
(18,288)
|
|
|
(50,972)
|
|
|
(18,189)
|
|
Net (loss) income
|
(19,737)
|
|
|
(16,577)
|
|
|
(61,213)
|
|
|
(5,940)
|
|
Net (loss) income attributable to Synchronoss
|
(27,587)
|
|
|
(25,030)
|
|
|
(69,432)
|
|
|
(14,678)
|
|
EPS
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net loss from Continuing operations (1)
|
$
|
(0.68)
|
|
|
$
|
(0.61)
|
|
|
$
|
(1.70)
|
|
|
$
|
(0.36)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Net loss from Continuing operations (1)
|
$
|
(0.68)
|
|
|
$
|
(0.61)
|
|
|
$
|
(1.70)
|
|
|
$
|
(0.36)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________
(1)Per common share amounts for the quarters and full year have been calculated separately. Accordingly, quarterly amounts do not add to the annual amount because of differences in the number of weighted-average common shares outstanding during each period which results principally from the effect of issuing shares of the Company’s common stock and options throughout the year.