ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
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| | September 30, 2022 | | December 31, 2021 | |
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ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 22,584 | | | $ | 31,504 | | |
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Accounts receivable, net | | 45,903 | | | 47,586 | | |
Prepaid & other current assets | | 43,890 | | | 42,901 | | |
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Total current assets | | 112,377 | | | 121,991 | | |
Non-current assets: | | | | | |
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Property and equipment, net | | 4,556 | | | 6,979 | | |
Operating lease right-of-use assets | | 21,471 | | | 26,399 | | |
Goodwill | | 203,261 | | | 224,577 | | |
Intangible assets, net | | 47,586 | | | 60,335 | | |
Loan receivable | | 4,834 | | | 4,834 | | |
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Other assets, non-current | | 4,804 | | | 5,619 | | |
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Total non-current assets | | 286,512 | | | 328,743 | | |
Total assets | | $ | 398,889 | | | $ | 450,734 | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 8,902 | | | $ | 11,097 | | |
Accrued expenses | | 58,165 | | | 61,916 | | |
Deferred revenues, current | | 14,600 | | | 22,368 | | |
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Total current liabilities | | 81,667 | | | 95,381 | | |
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Long-term debt, net of debt issuance costs | | 134,200 | | | 133,104 | | |
Deferred tax liabilities | | 578 | | | 560 | | |
Deferred revenues, non-current | | 402 | | | 548 | | |
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Leases, non-current | | 30,725 | | | 36,095 | | |
Other non-current liabilities | | 4,904 | | | 9,218 | | |
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Total liabilities | | 252,476 | | | 274,906 | | |
Commitments and contingencies: | | | | | |
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Series B Non-Convertible Perpetual Preferred Stock, $0.0001 par value; 150 shares authorized, 71 and 75 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | | 68,348 | | | 72,505 | | |
Redeemable noncontrolling interest | | 12,500 | | | 12,500 | | |
Stockholders’ equity: | | | | | |
Common stock, $0.0001 par value; 150,000 shares authorized, 91,192 and 88,305 issued and outstanding at September 30, 2022 and December 31, 2021, respectively | | 9 | | | 9 | | |
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Additional paid-in capital | | 490,072 | | | 492,512 | | |
Accumulated other comprehensive loss | | (61,517) | | | (32,985) | | |
Accumulated deficit | | (362,999) | | | (368,713) | | |
Total stockholders’ equity | | 65,565 | | | 90,823 | | |
Total liabilities and stockholders’ equity | | $ | 398,889 | | | $ | 450,734 | | |
See accompanying notes to condensed consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
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Net revenues | | $ | 59,896 | | | $ | 69,753 | | | $ | 190,998 | | | $ | 206,784 | | | |
Costs and expenses: | | | | | | | | | | |
Cost of revenues1 | | 22,440 | | | 27,245 | | | 69,595 | | | 83,024 | | | |
Research and development | | 12,911 | | | 15,368 | | | 42,162 | | | 49,962 | | | |
Selling, general and administrative | | 15,338 | | | 27,953 | | | 48,523 | | | 67,790 | | | |
Restructuring charges | | 201 | | | 1,485 | | | 1,905 | | | 3,075 | | | |
Depreciation and amortization | | 7,726 | | | 8,215 | | | 24,019 | | | 26,567 | | | |
Total costs and expenses | | 58,616 | | | 80,266 | | | 186,204 | | | 230,418 | | | |
Income (loss) from operations | | 1,280 | | | (10,513) | | | 4,794 | | | (23,634) | | | |
Interest income | | 20 | | | 24 | | | 230 | | | 54 | | | |
Interest expense | | (3,463) | | | (2,933) | | | (10,131) | | | (3,172) | | | |
(Loss) gain on divestiture | | (73) | | | — | | | 2,549 | | | — | | | |
Other income (expense), net | | 4,437 | | | (1,669) | | | 10,206 | | | (3,489) | | | |
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Income (loss) from operations, before taxes | | 2,201 | | | (15,091) | | | 7,648 | | | (30,241) | | | |
(Provision) benefit for income taxes | | (1,115) | | | 6,982 | | | (1,678) | | | 7,346 | | | |
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Net income (loss) | | 1,086 | | | (8,109) | | | 5,970 | | | (22,895) | | | |
Net (loss) income attributable to redeemable noncontrolling interests | | (66) | | | — | | | (256) | | | 286 | | | |
Preferred stock dividend | | (2,298) | | | (1,722) | | | (7,255) | | | (33,728) | | | |
Net loss attributable to Synchronoss | | $ | (1,278) | | | $ | (9,831) | | | $ | (1,541) | | | $ | (56,337) | | | |
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Earnings (loss) per share: | | | | | | | | | | |
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Basic | | $ | (0.01) | | | $ | (0.11) | | | $ | (0.02) | | | $ | (0.98) | | | |
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Diluted | | $ | (0.01) | | | $ | (0.11) | | | $ | (0.02) | | | $ | (0.98) | | | |
Weighted-average common shares outstanding: | | | | | | | | | | |
Basic | | 86,400 | | | 85,646 | | | 86,156 | | | 57,662 | | | |
Diluted | | 86,400 | | | 85,646 | | | 86,156 | | | 57,662 | | | |
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1 Cost of revenues excludes depreciation and amortization which are shown separately.
See accompanying notes to condensed consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited) (In thousands)
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| | Three Months Ended September 30, | | | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | | | 2022 | | 2021 | | |
Net income (loss) | | $ | 1,086 | | | $ | (8,109) | | | | | $ | 5,970 | | | $ | (22,895) | | | |
Other comprehensive loss, net of tax: | | | | | | | | | | | | |
Foreign currency translation adjustments | | (13,331) | | | (1,827) | | | | | (28,647) | | | (3,595) | | | |
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Net income on inter-company foreign currency transactions | | 35 | | | 358 | | | | | 115 | | | 897 | | | |
Total other comprehensive loss | | (13,296) | | | (1,469) | | | | | (28,532) | | | (2,698) | | | |
Comprehensive loss | | (12,210) | | | (9,578) | | | | | (22,562) | | | (25,593) | | | |
Comprehensive (loss) income attributable to redeemable noncontrolling interests | | (66) | | | — | | | | | (256) | | | 286 | | | |
Comprehensive loss attributable to Synchronoss | | $ | (12,276) | | | $ | (9,578) | | | | | $ | (22,818) | | | $ | (25,307) | | | |
See accompanying notes to condensed consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands)
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| Three Months Ended September 30, 2022 |
| Common Stock | | Treasury Stock | | Additional | | Accumulated Other | | | | Total |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Comprehensive Income (Loss) | | Accumulated deficit | | Stockholders' Equity |
Balance at June 30, 2022 | 89,045 | | | $ | 9 | | | — | | | $ | — | | | $ | 490,594 | | | $ | (48,221) | | | $ | (364,019) | | | $ | 78,363 | |
Stock based compensation | — | | | — | | | — | | | — | | | 1,710 | | | — | | | — | | | 1,710 | |
Issuance of restricted stock | 2,147 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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Preferred stock dividend | — | | | — | | | — | | | — | | | (2,298) | | | — | | | — | | | (2,298) | |
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Net income attributable to Synchronoss | — | | | — | | | — | | | — | | | — | | | — | | | 1,086 | | | 1,086 | |
Non-controlling interest | — | | | — | | | — | | | — | | | 66 | | | — | | | (66) | | | — | |
Total other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (13,296) | | | — | | | (13,296) | |
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Balance at September 30, 2022 | 91,192 | | | $ | 9 | | | — | | | $ | — | | | $ | 490,072 | | | $ | (61,517) | | | $ | (362,999) | | | $ | 65,565 | |
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| Three Months Ended September 30, 2021 |
| Common Stock | | Treasury Stock | | Additional | | Accumulated Other | | | | Total |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Comprehensive Income (Loss) | | Accumulated deficit | | Stockholders' Equity |
Balance at June 30, 2021 | 88,121 | | | $ | 9 | | | — | | | $ | — | | | $ | 491,660 | | | $ | (29,442) | | | $ | (360,271) | | | $ | 101,956 | |
Stock based compensation | — | | | — | | | — | | | — | | | 2,438 | | | — | | | — | | | 2,438 | |
Issuance of restricted stock | (122) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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Preferred stock dividends accrued | — | | | — | | | — | | | — | | | (1,722) | | | — | | | — | | | (1,722) | |
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Net loss attributable to Synchronoss | — | | | — | | | — | | | — | | | — | | | — | | | (8,109) | | | (8,109) | |
Non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (1,469) | | | — | | | (1,469) | |
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Balance at September 30, 2021 | 87,999 | | | $ | 9 | | | — | | | $ | — | | | $ | 492,376 | | | $ | (30,911) | | | $ | (368,380) | | | $ | 93,094 | |
See accompanying notes to condensed consolidated financial statements.
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| Nine Months Ended September 30, 2022 |
| Common Stock | | Treasury Stock | | Additional | | Accumulated Other | | | | Total |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Comprehensive Income (Loss) | | Accumulated deficit | | Stockholders' Equity |
Balance at December 31, 2021 | 88,305 | | | $ | 9 | | | — | | | $ | — | | | $ | 492,512 | | | $ | (32,985) | | | $ | (368,713) | | | $ | 90,823 | |
Stock based compensation | — | | | — | | | — | | | — | | | 4,639 | | | — | | | — | | | 4,639 | |
Issuance of restricted stock | 2,954 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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Preferred stock dividend | — | | | — | | | — | | | — | | | (7,112) | | | — | | | — | | | (7,112) | |
Amortization of preferred stock issuance costs | — | | | — | | | — | | | — | | | (143) | | | — | | | — | | | (143) | |
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Shares withheld for taxes in connection with issuance of restricted stock | (67) | | | — | | | — | | | — | | | (80) | | | — | | | — | | | (80) | |
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Net income attributable to Synchronoss | — | | | — | | | — | | | — | | | — | | | — | | | 5,970 | | | 5,970 | |
Non-controlling interest | — | | | — | | | — | | | — | | | 256 | | | — | | | (256) | | | — | |
Total other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (28,532) | | | — | | | (28,532) | |
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Balance at September 30, 2022 | 91,192 | | | $ | 9 | | | — | | | $ | — | | | $ | 490,072 | | | $ | (61,517) | | | $ | (362,999) | | | $ | 65,565 | |
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| Nine Months Ended September 30, 2021 |
| Common Stock | | Treasury Stock | | Additional | | Accumulated Other | | | | Total |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Comprehensive Income (Loss) | | Accumulated deficit | | Stockholders' Equity |
Balance at December 31, 2020 | 51,177 | | | $ | 5 | | | (7,162) | | | $ | (82,087) | | | $ | 499,348 | | | $ | (28,213) | | | $ | (345,771) | | | $ | 43,282 | |
Stock based compensation | — | | | — | | | — | | | — | | | 7,472 | | | — | | | — | | | 7,472 | |
Issuance of restricted stock | 1,676 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
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Preferred stock dividends accrued | — | | | — | | | — | | | — | | | (20,937) | | | — | | | — | | | (20,937) | |
Amortization of preferred stock issuance costs | — | | | — | | | — | | | — | | | (12,791) | | | — | | | — | | | (12,791) | |
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Issuance of common stock related to acquisition | 42,308 | | | 4 | | | — | | | — | | | 109,996 | | | — | | | — | | | 110,000 | |
Common Stock - Issuance Costs | — | | | — | | | — | | | — | | | (8,340) | | | — | | | — | | | (8,340) | |
Retirement of treasury stock | (7,162) | | | — | | | 7,162 | | | 82,087 | | | (82,087) | | | — | | | — | | | — | |
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Net loss attributable to Synchronoss | — | | | — | | | — | | | — | | | — | | | — | | | (22,895) | | | (22,895) | |
Non-controlling interest | — | | | — | | | — | | | — | | | (286) | | | — | | | 286 | | | — | |
Total other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (2,698) | | | — | | | (2,698) | |
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Balance at September 30, 2021 | 87,999 | | | $ | 9 | | | — | | | $ | — | | | $ | 492,376 | | | $ | (30,911) | | | $ | (368,380) | | | $ | 93,094 | |
See accompanying notes to condensed consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands) | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 | | |
Operating activities: | | | | | | |
Net income (loss) | | $ | 5,970 | | | $ | (22,895) | | | |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | |
Depreciation and amortization | | 24,019 | | | 26,567 | | | |
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Amortization of debt issuance costs | | 1,030 | | | 305 | | | |
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Loss on disposals of fixed assets | | 1 | | | 58 | | | |
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Gain on sale of DXP & Activations Solutions | | (2,549) | | | — | | | |
Gain on disposals of intangible assets | | — | | | (550) | | | |
Amortization of bond discount (premium) | | 66 | | | — | | | |
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Deferred income taxes | | (56) | | | (1,574) | | | |
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Stock-based compensation | | 4,692 | | | 7,230 | | | |
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Operating lease impairment, net | | 175 | | | 1,794 | | | |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable, net | | 401 | | | 8,905 | | | |
Prepaid expenses and other current assets | | 2,684 | | | (7,275) | | | |
Accounts payable | | (1,319) | | | (6,441) | | | |
Accrued expenses | | (164) | | | 8,237 | | | |
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Deferred revenues | | (6,839) | | | (13,338) | | | |
Other liabilities | | (17,033) | | | 4,528 | | | |
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Net cash provided by operating activities | | 11,078 | | | 5,551 | | | |
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Investing activities: | | | | | | |
Purchases of fixed assets | | (1,021) | | | (1,386) | | | |
Additions to capitalized software | | (15,250) | | | (17,004) | | | |
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Proceeds from the sale of intangibles | | — | | | 550 | | | |
Proceeds from the sale of DXP & Activations Solutions | | 8,000 | | | — | | | |
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Net cash used in investing activities | | (8,271) | | | (17,840) | | | |
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Financing activities: | | | | | | |
Share-based compensation-related proceeds, net of taxes paid on withholding shares | | — | | | (1) | | | |
Taxes paid on withholding shares | | (80) | | | (1) | | | |
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Debt issuance costs related to long term debt | | — | | | (7,811) | | | |
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Proceeds from issuance of long term debt | | — | | | 125,000 | | | |
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Repayment of revolving line of credit | | — | | | (10,000) | | | |
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Proceeds from issuance of common stock | | — | | | 110,000 | | | |
Common stock issuance costs | | — | | | (8,340) | | | |
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Proceeds from issuance of Series B preferred stock | | — | | | 75,000 | | | |
Series B preferred stock issuance costs | | — | | | (2,495) | | | |
Series B preferred dividend paid in the form of cash | | (4,157) | | | — | | | |
Redemption of Series B Preferred stock | | (6,738) | | | — | | | |
Redemption of Series A Preferred stock | | — | | | (278,665) | | | |
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Net cash (used in) provided by financing activities | | (10,975) | | | 2,687 | | | |
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Effect of exchange rate changes on cash | | (752) | | | 72 | | | |
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Net decrease in cash and cash equivalents | | (8,920) | | | (9,530) | | | |
Cash and cash equivalents, beginning of period | | 31,504 | | | 33,671 | | | |
Cash and cash equivalents, end of period | | $ | 22,584 | | | $ | 24,141 | | | |
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Supplemental disclosures of non-cash investing and financing activities: | | | | | | |
Paid in kind dividends on Series A Preferred Stock | | $ | — | | | $ | 31,277 | | | |
Paid in kind dividends on Series B Preferred Stock | | $ | 2,581 | | | $ | — | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
See accompanying notes to condensed consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
1. Description of Business
General
Synchronoss Technologies, Inc. (“Synchronoss” or the “Company”) is a leading provider of white label cloud, messaging, and digital solutions that enable our customers to keep subscribers, systems, networks and content in sync.
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.
The Synchronoss Personal Cloud™ platform is specifically designed to support smartphones, tablets and wirelessly enabled consumer electronics such as wearables for health and wellness, cameras, tablets, e-readers, personal navigation devices, and GPS enabled devices, as well as connected automobiles and homes.
The Synchronoss Messaging Platform powers mobile messaging and mailboxes for hundreds of millions of telecommunication subscribers. The Advanced Messaging platform is a powerful, secure, intelligent, white-label messaging platform that expands capabilities for communications service provider and multi-service providers to offer P2P messaging via Rich Communications Services (“RCS”). The Mobile Messaging Platform (“MMP”) provides a single standard ecosystem for onboarding and management to brands, advertisers and message wholesalers.
The Synchronoss Digital Portfolio includes the Total Network Management application which provides operators with the tools and software to design their physical network, streamline their infrastructure purchases, and manage and optimize comprehensive network expense for leading top tier carriers around the globe.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
2. Basis of Presentation and Consolidation
Basis of Presentation and Consolidation
The accompanying interim unaudited condensed consolidated financial statements have been prepared by Synchronoss and in the opinion of management, include all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. They do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities (“VIE”) in which the Company is the primary beneficiary and entities in which the Company has a controlling interest. Investments in less than majority-owned companies in which the Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. Investments in less than majority-owned companies in which the Company does not have the ability to exert significant influence over the operating and financial policies of the investee are accounted for using the cost method. All material intercompany transactions and accounts are eliminated in consolidation.
For further information about the Company’s basis of presentation and consolidation or its significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Risks and Uncertainties
There continue to be uncertainties regarding the coronavirus ("COVID-19") pandemic and current geopolitical environment. The Company is closely monitoring the impact of the pandemic and geopolitical environment on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, business partners and distribution channels. While the pandemic or geopolitical environment did not materially affect the Company’s financial results and business operations for the three and nine months ended September 30, 2022, the Company is unable to predict the impact these factors 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 geopolitical environment and will make adjustments to its operations as necessary.
Recently Issued Accounting Standards
Recent accounting pronouncements adopted
| | | | | | | | | | | | | | |
Standard | | Description | | Effect on the financial statements |
ASU 2021-04 Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) | | The amendments in this Update provide guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. | | We adopted this standard on January 1, 2022. The Company evaluated these changes and concluded that they did not have any material impact on the Company’s consolidated financial position or results of operations upon adoption.
|
Date of adoption: January 1, 2022. | | | | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
| | | | | | | | | | | | | | |
ASU 2021-05 Leases (Topic 842). Lessors—Certain Leases with Variable Lease Payments | | The amendments in this Update affect lessors with lease contracts that (1) have variable lease payments that do not depend on a reference index or a rate and (2) would have resulted in the recognition of a selling loss at lease commencement if classified as sales-type or direct financing. FASB amends lessor classification guidance to prevent selling losses on leases with variable payments. | | We adopted this standard on January 1, 2022. The Company evaluated these changes and concluded that they did not have any material impact on the Company’s consolidated financial position or results of operations upon adoption.
|
Date of adoption: January 1, 2022. | | | | |
| | | | | | | | | | | | | | |
ASU 2021-08 Business Combinations (Topic 805). Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | | The amendments in this Update primarily address the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination. However, the amendments also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply, such as contract liabilities from the sale of nonfinancial assets within the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets. | | We adopted this standard on January 1, 2022. The Company evaluated these changes and concluded that they did not have any material impact on the Company’s consolidated financial position or results of operations upon adoption.
|
Date of adoption: January 1, 2022. | | | | |
Standards issued not yet adopted
| | | | | | | | | | | | | | |
ASU 2022-04 Liabilities - Supplier Finance Programs (Subtopic 405-50). Disclosure of Supplier Finance Program Obligations | | The amendments in this Update apply to all entities that use supplier finance programs in connection with the purchase of goods and services (herein described as buyer parties). Supplier finance programs, which also may be referred to as reverse factoring, payables finance, or structured payables arrangements, allow a buyer to offer its suppliers the option for access to payment in advance of an invoice due date, which is paid by a third-party finance provider or intermediary on the basis of invoices that the buyer has confirmed as valid. The amendments in this Update require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. To achieve that objective, the buyer should disclose qualitative and quantitative information about its supplier finance programs. | | The Company continues to evaluate these changes and does not anticipate any material impact on the Company’s consolidated financial position or results of operations upon adoption.
|
Planned date of adoption: January 1, 2023. | | | | |
Digital Experience Platform and Activation Solutions Sale
On March 7, 2022, Synchronoss Technologies, Inc. and iQmetrix Global Ltd. (“iQmetrix ”), entered into an Asset Purchase Agreement, pursuant to which Synchronoss has agreed to sell its Digital Experience Platform and activation solutions (the “DXP Business”) to iQmetrix for up to a total purchase price of $14 million. The purchase price is payable as follows: (i) $7.5 million on the closing date of the Transaction, (ii) $0.5 million deposited into an escrow account on the Closing Date, (iii) $1 million paid twelve (12) months from the Closing Date, and (iv) $5 million that may be payable as an earn-out.
This transaction closed on May 11, 2022. The Company received the $7.5 million cash payment on the transaction close date. The Company received the $0.5 million payment in escrow during the third quarter in accordance with the terms of the
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Asset Purchase Agreement. The remaining $1 million escrow payment was recorded into other current assets. This consideration is not contingent on any further actions.
The Company determined the fair value of the earn-out provision was $3.6 million of which $3.0 million was recorded as an other current asset and the remaining portion was recorded as non-current other asset.
The book value of the divested intangible assets associated with the DXP Business was $2.3 million. For the goodwill allocation, the fair value of the core reporting unit was estimated using a combination of the income approach, which incorporates the use of the discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. Based on the fair value of the core reporting unit and the aggregate consideration received in the transaction, the Company determined the attributable fair value of goodwill to the DXP Business was $7.6 million. The transaction resulted in a $2.5 million gain for the nine months ended September 30, 2022.
Accounts Receivable Securitization Facility
On June 23, 2022 (the “Closing Date”), the Company and certain of its subsidiaries (together with the Company, the “Company Group”) entered into a $15 million accounts receivable securitization facility (the “A/R Facility”) with Norddeutsche Landesbank Girozentrale.
The A/R Facility transaction includes (i) Receivables Purchase Agreements (the “Receivables Purchase Agreements”) dated as of the Closing Date, among the Company, as initial servicer, SN Technologies, LLC, a wholly owned special purpose subsidiary of the Company (“SN Technologies”), as seller, Norddeutsche Landesbank Girozentrale, as administrative agent (the “Administrative Agent”), and the purchasers party thereto, the group agents party thereto and the originators party thereto; (ii) Purchase and Sale Agreements (the “Purchase and Sale Agreements”) dated as of the Closing Date, between the Company Group, as originators (the “Originators”), and SN Technologies, as purchaser; (iii) the Administration Agreement (the “Administration Agreement”) dated as of the Closing Date, between the Company, as servicer, and Finacity Corporation, as administrator; and (iv) the Performance Guaranty (the “Performance Guaranty”) dated as of the Closing Date made by the Company in favor of the Administrative Agent.
Pursuant to the Purchase and Sale Agreements, the Originators will sell existing and future accounts receivable [and related assets] (the “Receivables”) to SN Technologies in exchange for cash and/or subordinated notes. The Originators and SN Technologies intend the transactions contemplated by the Purchase and Sale Agreements to be true sales to SN Technologies by the respective Originators. Pursuant to the Receivables Purchase Agreement, SN Technologies will in turn grant an undivided security interest to the Administrative Agent in the Receivables in exchange for a credit facility permitting borrowings of up to $15 million outstanding from time to time. Yield is payable to the Administrative Agent under the Receivables Purchase Agreements at a variable rate based on the Norddeutsche Landesbank Girozentrale’s Hanover funding rate plus a 2.35% margin. The Company pays a commitment fee shall equal 0.85% per annum on the average daily unused outstanding capital. Pursuant to the Performance Guaranty, the Company guarantees the performance of the Originators of their obligations under the Purchase and Sale Agreements.
The Company has not agreed to guarantee any obligations of SN Technologies or the collection of any of the receivables and will not be responsible for any obligations to the extent the failure to perform such obligations by the Company or any Originators results from receivables being uncollectible on account of the insolvency, bankruptcy or lack of creditworthiness or other financial inability to pay of the related obligor.
Unless earlier terminated or subsequently extended pursuant to the terms of the Receivables Purchase Agreement, the A/R Facility will expire on June 23, 2025.
The foregoing description of the A/R Facility and the respective transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to the full text of the Receivables Purchase Agreements, Purchase and Sale Agreements, Administration Agreement and Performance Guaranty, copies of which are filed as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, on Form 8-K filed with Securities and Exchange Commission on June 23, 2022.
The Company has not drawn on the A/R Facility as of September 30, 2022.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(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 TMT sector.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
| Cloud | | Digital | | Messaging | | Total | | Cloud | | Digital | | Messaging | | Total |
Geography: | | | | | | | | | | | | | | | |
Americas | $ | 36,811 | | | $ | 8,868 | | | $ | 1,907 | | | $ | 47,586 | | | $ | 41,090 | | | $ | 12,486 | | | $ | 2,426 | | | $ | 56,002 | |
APAC | 114 | | | 767 | | | 7,479 | | | 8,360 | | | 245 | | | 1,123 | | | 6,929 | | | 8,297 | |
EMEA | 1,633 | | | — | | | 2,317 | | | 3,950 | | | 1,789 | | | 756 | | | 2,909 | | | 5,454 | |
Total | $ | 38,558 | | | $ | 9,635 | | | $ | 11,703 | | | $ | 59,896 | | | $ | 43,124 | | | $ | 14,365 | | | $ | 12,264 | | | $ | 69,753 | |
| | | | | | | | | | | | | | | |
Service Line: | | | | | | | | | | | | | | | |
Professional Services | $ | 3,192 | | | $ | 626 | | | $ | 2,334 | | | $ | 6,152 | | | $ | 3,542 | | | $ | 1,983 | | | $ | 3,709 | | | $ | 9,234 | |
Transaction Services | 161 | | | 1,655 | | | — | | | 1,816 | | | 1,237 | | | 1,113 | | | 2 | | | 2,352 | |
Subscription Services | 35,205 | | | 5,456 | | | 7,684 | | | 48,345 | | | 38,345 | | | 9,456 | | | 7,830 | | | 55,631 | |
License | — | | | 1,898 | | | 1,685 | | | 3,583 | | | — | | | 1,813 | | | 723 | | | 2,536 | |
Total | $ | 38,558 | | | $ | 9,635 | | | $ | 11,703 | | | $ | 59,896 | | | $ | 43,124 | | | $ | 14,365 | | | $ | 12,264 | | | $ | 69,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
| Cloud | | Digital | | Messaging | | Total | | Cloud | | Digital | | Messaging | | Total |
Geography: | | | | | | | | | | | | | | | |
Americas | $ | 118,369 | | | $ | 28,308 | | | $ | 6,908 | | | $ | 153,585 | | | $ | 115,192 | | | $ | 34,329 | | | $ | 17,207 | | | $ | 166,728 | |
APAC | 177 | | | 2,433 | | | 20,640 | | | 23,250 | | | 245 | | | 3,166 | | | 19,878 | | | 23,289 | |
EMEA | 4,990 | | | 1,495 | | | 7,678 | | | 14,163 | | | 5,474 | | | 1,978 | | | 9,315 | | | 16,767 | |
Total | $ | 123,536 | | | $ | 32,236 | | | $ | 35,226 | | | $ | 190,998 | | | $ | 120,911 | | | $ | 39,473 | | | $ | 46,400 | | | $ | 206,784 | |
| | | | | | | | | | | | | | | |
Service Line: | | | | | | | | | | | | | | | |
Professional Services | $ | 9,780 | | | $ | 3,642 | | | $ | 8,117 | | | $ | 21,539 | | | $ | 11,351 | | | $ | 6,212 | | | $ | 8,907 | | | $ | 26,470 | |
Transaction Services | 707 | | | 4,404 | | | 56 | | | 5,167 | | | 4,533 | | | 4,326 | | | 5 | | | 8,864 | |
Subscription Services | 113,049 | | | 20,104 | | | 24,236 | | | 157,389 | | | 105,027 | | | 26,435 | | | 36,365 | | | 167,827 | |
License | — | | | 4,086 | | | 2,817 | | | 6,903 | | | — | | | 2,500 | | | 1,123 | | | 3,623 | |
Total | $ | 123,536 | | | $ | 32,236 | | | $ | 35,226 | | | $ | 190,998 | | | $ | 120,911 | | | $ | 39,473 | | | $ | 46,400 | | | $ | 206,784 | |
Trade Accounts Receivable and Contract balances
The Company classifies its right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). For example, the Company recognizes a receivable for revenues related to its time and materials and transaction or volume-based contracts. The Company presents such receivables in Trade accounts receivable, net in its Condensed Consolidated Statements of Financial Position at their net estimated realizable value. The Company maintains an allowance for credit losses to provide
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other economic indicators.
A contract asset is a right to consideration that is conditional upon factors other than the passage of time. For example, the Company would record a contract asset if it records revenue on a professional services engagement but are not entitled to bill until the Company achieves specified milestones. Contract assets balance at September 30, 2022 is $15.0 million.
Amounts collected in advance of services being provided are accounted for as contract liabilities, which are presented as deferred revenue on the accompanying Condensed Consolidated Balance Sheets and are realized with the associated revenue recognized under the contract. Nearly all of the Company's contract liabilities balance is related to services revenue, primarily subscription services contracts.
The Company’s contract assets and liabilities are reported in a net position on a customer basis at the end of each reporting period.
Significant changes in the contract liabilities balance (current and non-current) during the period are as follows: | | | | | | |
| | Contract Liabilities1 |
Balance - January 1, 2022 | | $ | 22,916 | |
Revenue recognized in the period | | (188,243) | |
Amounts billed but not recognized as revenue | | 180,329 | |
| | |
| | |
Balance - September 30, 2022 | | $ | 15,002 | |
________________________________
1 Comprised of Deferred Revenue
Transaction price allocated to the remaining performance obligations
Topic 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of September 30, 2022. The Company has elected not to disclose transaction price allocated to remaining performance obligations for:
1.Contracts with an original duration of one year or less, including contracts that can be terminated for convenience without a substantive penalty;
2.Contracts for which the Company recognizes revenues based on the right to invoice for services performed;
3.Variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with Topic 606 Section 10-25-14(b), for which the criteria in Topic 606 Section 10-32-40 have been met. This applies to a limited number of situations where the Company is dependent upon data from a third party or where fees are highly variable.
Many of the Company’s performance obligations meet one or more of these exemptions. Specifically, the Company has excluded the following from the Company’s remaining performance obligations, all of which will be resolved in the period in which amounts are known:
•consideration for future transactions, above any contractual minimums
•consideration for success-based transactions contingent on third party data
•credits for failure to meet future service level requirements
As of September 30, 2022, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $136.0 million, of which approximately 93.2 percent is expected to be recognized as revenues within 2 years, and the remainder thereafter.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
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. Fair Value Measurements
In accordance with accounting principles generally accepted in the United States, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy prioritizes the inputs used to measure fair value as follows:
•Level 1 - Observable inputs - quoted prices in active markets for identical assets and liabilities;
•Level 2 - Observable inputs other than the quoted prices in active markets for identical assets and liabilities includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and
•Level 3 - Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.
The following is a summary of assets, liabilities and redeemable noncontrolling interests and their related classifications under the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Total | | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | |
Cash and cash equivalents | $ | 22,584 | | | $ | 22,584 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
Total assets | $ | 22,584 | | | $ | 22,584 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Temporary equity | | | | | | | |
Redeemable noncontrolling interests1 | $ | 12,500 | | | $ | — | | | $ | — | | | $ | 12,500 | |
Total temporary equity | $ | 12,500 | | | $ | — | | | $ | — | | | $ | 12,500 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Total | | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | |
Cash and cash equivalents | $ | 31,504 | | | $ | 31,504 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
Total assets | $ | 31,504 | | | $ | 31,504 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Temporary Equity | | | | | | | |
Redeemable noncontrolling interests1 | $ | 12,500 | | | $ | — | | | $ | — | | | $ | 12,500 | |
Total temporary equity | $ | 12,500 | | | $ | — | | | $ | — | | | $ | 12,500 | |
________________________________
1 Put arrangements held by the noncontrolling interests in certain of the Company’s joint venture.
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
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
noncontrolling interests could significantly increase or decrease the fair value estimates recorded in the Condensed Consolidated Balance Sheets.
The changes in fair value of the Company’s Level 3 redeemable noncontrolling interests during the nine months ended September 30, 2022 were as follows:
| | | | | |
| Redeemable noncontrolling interests |
Balance at December 31, 2021 | $ | 12,500 | |
Fair value adjustment | (256) | |
Net loss attributable to redeemable noncontrolling interests | 256 | |
Balance at September 30, 2022 | $ | 12,500 | |
5. Leases
The Company has entered into contracts with third parties to lease a variety of assets, including certain real estate, equipment, automobiles and other assets. The Company’s leases frequently allow for lease payments that could vary based on factors such as inflation or the degree of utilization of the underlying asset. For example, certain of the Company’s real estate leases could require us to make payments that vary based on common area maintenance charges, insurance and other charges. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company is party to certain sublease arrangements, primarily related to the Company’s real estate leases, where it acts as the lessee and intermediate lessor.
The Company reflects finance leases as a component of Leases, non-current on the Condensed Consolidated Balance Sheet. The finance leases were not material for the period ended September 30, 2022.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table presents information about the Company's Right of Use (ROU) assets and lease liabilities at September 30, 2022:
| | | | | | |
| | |
ROU assets: | | |
Non-current operating lease ROU assets | | $ | 21,471 | |
| | |
| | |
| | |
Operating lease liabilities: | | |
Current operating lease liabilities1 | | $ | 5,682 | |
Non-current operating lease liabilities | | 30,280 | |
Total operating lease liabilities | | $ | 35,962 | |
| | |
| | |
| | |
| | |
| | |
________________________________
1 Amounts are included in Accrued Expenses on the Condensed Consolidated Balance Sheet.
The following table presents information about lease expense and sublease income for the three and nine months ended September 30, 2022:
| | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
Operating lease cost1 | $ | 1,677 | | | $ | 5,691 | |
Other lease costs and income: | | | |
Variable lease costs1 | 193 | | | 1,364 | |
Operating lease impairments1 | — | | | 175 | |
Sublease income1 | (684) | | | (2,058) | |
| | | |
Total net lease cost | $ | 1,186 | | | $ | 5,172 | |
________________________________
1 Amounts are included in Cost of revenues, Selling, general and administrative and/or Research and development based on the function that the underlying leased asset supports which are reflected in the Condensed Consolidated Statements of Operations.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table provides the undiscounted amount of future cash flows included in our lease liabilities at September 30, 2022 for each of the five years subsequent to December 31, 2021 and thereafter, as well as a reconciliation of such undiscounted cash flows to our lease liabilities at September 30, 2022:
| | | | | | | | |
Year | | Operating Leases |
2022 | | $ | 2,346 | |
2023 | | 7,915 | |
2024 | | 8,052 | |
2025 | | 7,909 | |
2026 | | 7,759 | |
Thereafter | | 10,386 | |
Total future lease payments | | 44,367 | |
Less: amount representing interest | | (8,405) | |
Present value of future lease payments (lease liability) | | $ | 35,962 | |
The following table provides the weighted-average remaining lease term and weighted-average discount rates for our leases as of September 30, 2022:
| | | | | |
Operating Leases: | |
Weighted-average remaining lease term (years), weighted based on lease liability balances | 5.50 |
Weighted-average discount rate (percentages), weighted based on the remaining balance of lease payments | 7.9% |
The following table provides certain cash flow and supplemental noncash information related to our lease liabilities for the nine months ended September 30, 2022:
| | | | | |
| |
Operating Leases: | |
Cash paid for amounts included in the measurement of lease liabilities | $ | 7,292 | |
| |
6. Investments in Affiliates and Related Transactions
Sequential Technology International, LLC
In connection with the divestiture of the exception handling business of the Company in 2017, Synchronoss entered into a three-year Cloud Telephony and Support services agreement (“CTS Agreement”) to grant Sequential Technology International, LLC (“STIN”) access to certain Synchronoss software and private branch exchange systems to facilitate exception handling operations required to support STIN customers.
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 the maturity date is April 27, 2025. 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. No gain or loss was recognized as a result of the transaction. As of September 30, 2022, the Company reassessed the fair value of the Note and there were no material changes.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
In accordance with the terms of the agreement, STIN has made the required payments to the Company as of September 30, 2022.
7. Debt
Offering of Senior Notes
On June 30, 2021, the Company closed its underwritten public offering of $120.0 million aggregate principal amount of 8.375% senior notes due 2026 at a par value of $25.00 per senior note (the “Senior Notes”). The offering was conducted pursuant to an underwriting agreement (the “Notes Underwriting Agreement”) dated June 25, 2021, by and among the Company and B. Riley Securities, Inc., as representative of the several underwriters (the “Notes Underwriters”). At the closing, the Company issued $125.0 million aggregate principal amount of Senior Notes, inclusive of $5.0 million aggregate principal amount of Senior Notes issued pursuant to the full exercise of the Notes Underwriters’ option to purchase additional Senior Notes.
The Notes Underwriting Agreement contains customary representations, warranties and covenants of the Company, customary conditions to closing, indemnification obligations of the Company and the Notes Underwriters, including for liabilities under the Securities Act, other obligations of the parties and termination provisions.
On June 30, 2021, the Company entered into an indenture (the “Base Indenture”) and a supplemental indenture (the “First Supplemental Indenture” and, together with the Base Indenture, the “Indenture”) with The Bank of New York Mellon Trust Company National Association, as trustee (the “Trustee”), between the Company and the Trustee. The Indenture establishes the form and provides for the issuance of the Senior Notes.
The Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. The Senior Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The Senior Notes bear interest at the rate of 8.375% per annum. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The Senior Notes will mature on June 30, 2026, unless redeemed prior to maturity.
The Company may, at its option, at any time and from time to time, redeem the Senior Notes for cash in whole or in part (i) on or after June 30, 2022 and prior to June 30, 2023, at a price equal to $25.75 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after June 30, 2023 and prior to June 30, 2024, at a price equal to $25.50 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (iii) on or after June 30, 2024 and prior to June 30, 2025, at a price equal to $25.25 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iv) on or after June 30, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Senior Notes.
The Indenture contains customary events of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of at least 25% of the principal amount of the Senior Notes may declare the entire amount of the Senior Notes, together with accrued and unpaid interest, if any, to be immediately due and payable. In the case of an event of default involving the Company’s bankruptcy, insolvency or reorganization, the principal of, and accrued and unpaid interest on, the principal amount of the Senior Notes, together with accrued and unpaid interest, if any, will automatically, and without any declaration or other action on the part of the Trustee or the holders of the Senior Notes, become due and payable.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
On October 25, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) between the Company and B. Riley Securities, Inc. (the “Agent”), a related party, pursuant to which the Company may offer and sell, from time to time, up to $18.0 million of the Company’s 8.375% Senior Notes due 2026. Sales of the additional Senior Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). Under the Sales Agreement, the Agent will be entitled to compensation of 2.0% of the gross proceeds of all notes sold through it as the Company’s agent.
During the fourth quarter of 2021, the Company sold an additional $16.1 million aggregate principal amount of Senior Notes pursuant to the Sales Agreement. The additional Senior Notes sold have terms identical to the initial Senior Notes and are fungible and vote together with, the initial Senior Notes. The Senior Notes are listed and trade on The Nasdaq Global Market under the symbol “SNCRL.”
The carrying amounts of the Company’s borrowings were as follows:
| | | | | | | | | | | | | | |
Senior Notes | | September 30, 2022 | | December 31, 2021 |
8.375% Senior Notes due 2026 | | $ | 141,077 | | | $ | 141,077 | |
Unamortized discount and debt issuance cost1 | | (6,877) | | | (7,973) | |
Carrying value of Senior Notes | | $ | 134,200 | | | $ | 133,104 | |
________________________________
1 Debt issuance costs are deferred and amortized into interest expense using the effective interest method.
The total fair value of the outstanding Senior Notes was $124.0 million as of September 30, 2022. The Company is in compliance with its debt covenants as of September 30, 2022.
2019 Revolving Credit Facility
On October 4, 2019, the Company entered into a Credit Agreement with Citizens Bank, N.A., for a $10.0 million Revolving Credit Facility. Borrowings under the Revolving Credit Facility bore interest at a rate equal to, at the Company’s option, either (1) the arithmetic average of the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period (one, three or six months (or 12 months if agreed to by all applicable Lenders)) as selected by the Company relevant to such borrowing plus the applicable margin, or (2) a base rate determined by reference to the greatest of the federal funds rate plus 0.5%, the prime commercial lending rate as determined by the Agent, and the daily LIBOR rate plus 1.0%, in each case plus an applicable margin and subject to a floor of 0.5%.
On June 30, 2021, the Company paid off the outstanding balance and closed the Revolving Credit Facility.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Interest expense
The following table summarizes the Company’s interest expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | | | 2022 | | 2021 | | |
2021 Non-Convertible Senior Notes due 2026: | | | | | | | | | | | | |
Amortization of debt issuance costs | | $ | 352 | | | $ | 306 | | | | | $ | 1,030 | | | $ | 306 | | | |
Interest on borrowings | | 2,954 | | | 2,617 | | | | | 8,862 | | | 2,617 | | | |
Amortization of debt discount | | 22 | | | — | | | | | 66 | | | — | | | |
2019 Revolving Credit Facility: | | | | | | | | | | | | |
Amortization of debt issuance costs | | — | | | — | | | | | — | | | 84 | | | |
| | | | | | | | | | | | |
Interest on borrowings | | — | | | — | | | | | — | | | 126 | | | |
Tax - ASC 740/FIN 48 Interest | | 92 | | | — | | | | | 92 | | | — | | | |
Other | | 43 | | | 10 | | | | | 81 | | | 39 | | | |
Total | | $ | 3,463 | | | $ | 2,933 | | | | | $ | 10,131 | | | $ | 3,172 | | | |
8. Accumulated Other Comprehensive (Loss) / Income
The changes in accumulated other comprehensive (loss) income during the nine months ended September 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | | Other comprehensive loss | | Tax effect | | Balance at September 30, 2022 |
Foreign currency | $ | (29,350) | | | $ | (28,647) | | | | | $ | (57,997) | |
Unrealized (loss) income on intercompany foreign currency transactions | (3,635) | | | 191 | | | (76) | | | (3,520) | |
| | | | | | | |
Total | $ | (32,985) | | | $ | (28,456) | | | $ | (76) | | | $ | (61,517) | |
9. Capital Structure
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.
Common Stock Offering
On June 29, 2021, the Company closed its underwritten public offering of common stock, par value $0.0001 per share. The offering was conducted pursuant to an underwriting agreement (the “Underwriting Agreement”) dated June 24, 2021, by and between the Company and B. Riley Securities, Inc., as representative of the several underwriters (the “Underwriters”) for net proceeds of $102.3 million. At the closing, the Company issued 42,307,692 shares of common stock, inclusive of 3,846,154
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
shares of common stock issued pursuant to the full exercise of the Underwriters’ option to purchase additional shares of common stock. The Company used the net proceeds for the redemption of the Series A Convertible Preferred Stock.
Shelf Registration Statement
On August 19, 2020, the Company filed a universal shelf registration statement with the SEC for the issuance of common stock, preferred stock, debt securities, guarantees of debt securities, warrants and units up to an aggregate amount of $250.0 million (“the 2020 Shelf Registration Statement”). On August 28, 2020, the 2020 Shelf Registration Statement was declared effective by the SEC. As of September 30, 2022, except for the Common Stock offering and the issuance of Senior Notes, the Company has not raised additional capital using the 2020 Shelf Registration Statement.
Preferred Stock
The Company’s Board of Directors (the “Board”) 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.
Series B Non-Convertible Preferred Stock
On June 30, 2021, the Company closed a private placement of 75,000 shares of its Series B Perpetual Non-Convertible Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share (the “Series B Preferred Stock”), for net proceeds of $72.5 million (the “Series B Transaction”). The sale of the Series B Preferred Stock was pursuant to the Series B Preferred Stock Purchase Agreement, dated as of June 24, 2021 (the “Series B Purchase Agreement”), between the Company and B. Riley Principal Investments, LLC (“BRPI”).
In connection with the closing of the Series B Transaction, the Company (i) filed a Certificate of Designation with the State of Delaware setting forth the rights, preferences, privileges, qualifications, restrictions and limitations on the Series B Preferred Stock (the “Series B Certificate”) and (ii) entered into an Investor Rights Agreement with B. Riley Financial, Inc. (“B. Riley Financial”) and BRPI setting forth certain governance and registration rights of B. Riley Financial with respect to the Company.
Certificate of Designation of the Series B Preferred Stock
The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series B Preferred Stock are set forth in the Series B Certificate. Under the Series B Certificate, the holders of the Series B Preferred Stock are entitled to receive, on each share of Series B Preferred Stock on a quarterly basis, an amount equal to the dividend rate, as described in the following sentence, divided by four and multiplied by the then-applicable Liquidation Preference per share of Series B Preferred Stock (collectively, the “Preferred Dividends”). The dividend rate is (1) 9.5% per annum for the period commencing on June 30, 2021 and ending on and including December 31, 2021, (2) 13% per annum for the year commencing on January 1, 2022 and ending on and including December 31, 2022; and (3) 14% per annum for the year commencing on January 1, 2023 and thereafter. The Preferred Dividends will be due in cash on January 1, April 1, July 1 and October 1 of each year (each, a “Series B Dividend Payment Date”). The Company may choose to pay the Series B Preferred Dividends in cash or in additional shares of Series B Preferred Stock. In the event the Company does not declare and pay a dividend in cash on any Series B Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. As of September 30, 2022, the Liquidation Value and Redemption Value of the Series B Preferred Shares was $73.0 million.
On and after the fifth anniversary of the date of issuance, holders of shares of Series B Preferred Stock will have the right to cause the Company to redeem each share of Series B Preferred Stock for cash in an amount equal to the sum of the current liquidation preference and any accrued dividends. Each share of Series B Preferred Stock will also be redeemable at the option of the holder upon the occurrence of a “Fundamental Change” at (i) par in the case of a payment in cash or (ii) 1.5 times par in the case of payment in shares of Common Stock (such shares being, “Registrable Securities”), subject to certain limitations on the amount of stock that could be issued to the holders of Series B Stock. In addition, the Company will be permitted to redeem outstanding shares of the Series B Preferred Stock at any time for the sum of the then-applicable Liquidation Preference and the accrued but unpaid dividends. Pursuant to the Series B Certificate, the Company will be required to use (i) the first $50.0 million of proceeds from certain transactions (i.e., disposition, sale of assets, tax refunds) received by the Company to
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
redeem for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of Series B Preferred Stock and (ii) the next $25.0 million of proceeds from certain transactions received by the Company may be used by the Company to buy back shares of Common Stock and to the extent, not used for such purpose by the Company, to redeem, for cash, shares of the Series B Preferred Stock, on a pro rata basis among each holder of the Series B Preferred Stock.
The Company shall be required to obtain the prior written consent of the holders holding at least a majority of the outstanding shares of the Series B Preferred Stock before taking certain actions, including: (i) certain dividends, repayments and redemptions; (ii) any amendment to the Company’s certificate of incorporation that adversely affects the rights, preferences, privileges or voting powers of the Series B Preferred Stock; and (iii) issuances of stock ranking senior or equivalent to shares of the Series B Preferred Stock (including additional shares of the Series B Preferred Stock) in the priority of payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. Other than with respect to the foregoing consent rights, the Series B Preferred Stock is non-voting stock.
Investor Rights Agreement
On June 30, 2021, the Company, B. Riley Financial and BRPI entered into an Investor Rights Agreement (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, for so long as affiliates of B. Riley Financial beneficially own at least 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to nominate one Class II director (the “B. Riley Nominee”) to the Company’s board of directors (the “Board”), who shall be an employee of B. Riley Financial or its affiliates and is approved by the Board, such approval not to be unreasonably withheld. For so long as affiliates of B. Riley Financial beneficially own 5% or more but less than 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to certain board observer rights.
A summary of the Company’s Series B Perpetual Non-Convertible Preferred Stock balance at September 30, 2022 and changes during the nine months ended September 30, 2022, are presented below:
| | | | | | | | | | | |
| Series B Preferred Stock |
| Shares | | Amount |
Balance at December 31, 2021 | 75 | | | $ | 72,505 | |
Issuance of Series B preferred stock | — | | | — | |
Issuance costs related to preferred stock | — | | | — | |
Amortization of preferred stock issuance costs | — | | | 143 | |
Issuance of preferred PIK dividend | 3 | | | 2,438 | |
| | | |
| | | |
| | | |
Redemption of Series B preferred shares | (7) | | | (6,738) | |
Balance at September 30, 20221 | 71 | | | $ | 68,348 | |
________________________________
1 Series B preferred stock principal balance of $70.7 million is presented net of $2.4 million unamortized issuance costs.
On April 1, 2022 the Company paid in-kind the accrued Series B Perpetual Non-Convertible Preferred Stock dividend of $2.4 million. On April 18, 2022, the Company made a $2.5 million principal and interest payment to redeem 2,438 shares of Series B Preferred Stock. On May 10, 2022, the Company made an additional $4.4 million principal and interest payment to redeem 4,300 shares of Series B Preferred Stock.
On October 3, 2022 the Company paid the accrued Series B Perpetual Non-Convertible Preferred Stock dividend of $2.3 million in form of cash.
Series A Convertible Preferred Stock
In accordance with the terms of the Share Purchase Agreement dated as of October 17, 2017 (the “PIPE Purchase Agreement”), with Silver Private Holdings I, LLC, an affiliate of Siris (“Silver”), on February 15, 2018, the Company issued to Silver 185,000 shares of its newly issued Series A Convertible Participating Perpetual Preferred Stock (the “Series A Preferred
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Stock”), 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”).
Redemption of Series A Preferred Stock
The net proceeds from the common stock public offering, Senior Note offering and the Series B transaction was used in part to fully redeem all outstanding shares of the Company’s Series A Preferred Stock on June 30, 2021 (the “Redemption”). The Company redeemed in full all of the 268,917 outstanding shares of the Series A Preferred Stock for an aggregate Redemption Price of $278.7 million and all rights under the Investor Rights Agreement relating to the Series A Preferred Stock were terminated effective with the Redemption. No Series A Preferred Stock remain outstanding or authorized as of September 30, 2022.
Registration Rights
The Investor Rights Agreement entered into on June 30, 2021 provides that in the event Synchronoss issues Registrable Securities to the holders of Series B Preferred Stock, such holders will have certain demand and piggy-back registration rights with respect to such Registrable Securities. In addition, on June 30, 2021, in connection with the redemption of the Series A Preferred Stock, the Investor Rights Agreement between the Company and Silver terminated.
Stock Plans
At the annual meeting of stockholders the Company held on June 16, 2022, the stockholders of the Company approved and adopted the Certificate of Amendment of the Company’s restated certificate of incorporation to increase the total number of shares of authorized common stock from 100 million shares to 150 million shares.
As of September 30, 2022, there were 7.9 million shares available for the grant or award under the Company’s 2015 Equity Incentive Plan and 0.5 million shares available for the grant or award under the Company’s 2017 New Hire Equity Incentive Plan.
The Company’s performance cash awards granted to executives under the Long Term Incentive (“LTI”) Plans have been accounted for as liability awards, due to the Company’s intent and the ability to settle such awards in cash upon vesting and the Company has reflected such awards in accrued expenses. As of September 30, 2022, the liability for such awards is approximately $0.6 million.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Stock-Based Compensation
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by operating expense categories, as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | | | 2022 | | 2021 | | |
Cost of revenues | $ | 232 | | | $ | 432 | | | | | $ | 592 | | | $ | 1,289 | | | |
Research and development | 494 | | | 725 | | | | | 1,366 | | | 2,276 | | | |
Selling, general and administrative | 1,075 | | | 1,132 | | | | | 2,734 | | | 3,790 | | | |
Total stock-based compensation expense | $ | 1,801 | | | $ | 2,289 | | | | | $ | 4,692 | | | $ | 7,355 | | | |
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by award type, as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | | | 2022 | | 2021 | | |
Stock options | $ | 779 | | | $ | 1,064 | | | | | $ | 2,019 | | | $ | 2,912 | | | |
Restricted stock awards | 933 | | | 1,373 | | | | | 2,320 | | | 4,412 | | | |
Performance Based Cash Units | 89 | | | (148) | | | | | 353 | | | 31 | | | |
| | | | | | | | | | | |
Total stock-based compensation before taxes | $ | 1,801 | | | $ | 2,289 | | | | | $ | 4,692 | | | $ | 7,355 | | | |
Tax benefit | $ | 364 | | | $ | 420 | | | | | $ | 931 | | | $ | 1,357 | | | |
The total stock-based compensation cost related to unvested equity awards as of September 30, 2022 was approximately $10.0 million. The expense is expected to be recognized over a weighted-average period of approximately 2.1 years.
The total stock-based compensation cost related to unvested performance based cash units as of September 30, 2022 was approximately $0.9 million. The expense is expected to be recognized over a weighted-average period of approximately 1.9 years.
Stock Options
The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock options. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | | | 2022 | | 2021 | | |
Expected stock price volatility | | 74.1 | % | | 78.5 | % | | | | 74.1 | % | | 82.9 | % | | |
Risk-free interest rate | | 3.0 | % | | 0.6 | % | | | | 3.1 | % | | 0.6 | % | | |
Expected life of options (in years) | | 4.17 | | 4.20 | | | | 4.15 | | 4.24 | | |
Expected dividend yield | | 0.0 | % | | 0.0 | % | | | | 0.0 | % | | 0.0 | % | | |
Weighted-average fair value (PSV) of the options | | $ | 0.70 | | | $ | 1.72 | | | | | $ | 0.71 | | | $ | 1.88 | | | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table summarizes information about stock options outstanding as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Options | | Number of Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Outstanding at December 31, 2021 | | 4,715 | | | $ | 6.53 | | | | | |
Options Granted | | 3,009 | | | 1.22 | | | | | |
Options Exercised | | — | | | — | | | | | |
Options Cancelled | | (710) | | | 10.55 | | | | | |
Outstanding at September 30, 2022 | | 7,014 | | | $ | 3.85 | | | 5.44 | | $ | — | |
Vested and exercisable at September 30, 2022 | | 2,571 | | | $ | 7.14 | | | 3.88 | | $ | — | |
| | | | | | | | |
The total intrinsic value of stock options exercisable was nil at September 30, 2022 and 2021, respectively. The total intrinsic value of stock options exercised was nil and nil during the nine months ended September 30, 2022 and 2021, respectively.
Awards of Restricted Stock and Performance Stock
A summary of the Company’s unvested restricted stock at September 30, 2022, and changes during the nine months ended September 30, 2022, is presented below:
| | | | | | | | | | | | | | |
Unvested Restricted Stock | | Number of Awards | | Weighted- Average Grant Date Fair Value |
Unvested at December 31, 2021 | | 2,574 | | | $ | 3.57 | |
Granted | | 3,163 | | | 1.26 | |
Granted adjustment1 | | 63 | | | 1.64 | |
Vested | | (748) | | | 4.33 | |
Forfeited | | (273) | | | 3.14 | |
Unvested at September 30, 2022 | | 4,779 | | | $ | 1.90 | |
___________________________
1 Represents performance based cash units grants that vested and were paid out in form of shares of stock during the period.
Restricted stock awards are granted subject to service conditions or service and performance conditions. Restricted stock awards (“RSA”) and performance based restricted stock awards (“PRSA”) are measured at the closing stock price at the date of grant and the expense is recognized straight line over the requisite service period.
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.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
A summary of the Company’s unvested performance based cash units at September 30, 2022 and changes during the nine months ended September 30, 2022, is presented below:
| | | | | | | | | | | | | | |
Unvested Cash Units | | Number of Units | | Period End Fair Value |
Unvested at December 31, 2021 | | 1,996 | | | $ | 2.44 | |
Granted | | 4,622 | | | — | |
Granted adjustment1 | | (216) | | | — | |
Vested | | (63) | | | — | |
Forfeited | | (168) | | | — | |
Unvested at September 30, 2022 | | 6,171 | | | $ | 1.14 | |
___________________________
1 Includes changes in the unvested performance based cash units due to performance adjustments.
Performance based cash units are measured at the closing stock price at the reporting period end date and the expense is recognized straight line over the requisite service period. The expense for the period will increase or decrease based on updated fair values of these units at each reporting date. Unvested units’ fluctuations are shown as adjustments to units granted in the table above. These fluctuations are based on the percentage achievement of the performance metrics at the end of each reporting period.
10. Income Taxes
The Company recognized an income tax expense of approximately $1.7 million and an income tax benefit of approximately $7.3 million during the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate was approximately 21.9% for the nine months ended September 30, 2022, which approximated the U.S. federal statutory rate. The Company’s effective tax rate was approximately 24.3% for the nine months ended September 30, 2021, which was higher than the U.S. federal statutory rate primarily due to discrete income tax benefit recorded in the period associated with the finalization of the Company’s U.S. federal income tax return, which reflected a net operating loss that was carried back to prior tax years. Based on the final carryback claim, the Company recorded a discrete income tax benefit of $7.4 million and discrete income tax expense related to a liability for unrecognized tax benefits in the amount of $2.1 million, all of which, if recognized, would impact the Company’s effective tax rate. This increase was partially offset by pre-tax losses in jurisdictions where full valuation allowances have been recorded, pre-tax losses in jurisdictions which have a zero tax rate, and certain foreign jurisdictions projecting current income tax expense. The Company continues to consider all available evidence, including historical profitability and projections of future taxable income together with new evidence, both positive and negative, that could affect the view of the future realization of deferred tax assets. As a result of the assessment, no change was recorded by the Company to the valuation allowance during the nine months ended September 30, 2022.
On March 11, 2021 the American Rescue Plan Act ("ARPA") was signed into law which is aimed at addressing the continuing economic and health impacts of the COVID-19 pandemic. This legislation relief, along with the previous governmental relief packages provide for numerous changes to current tax law. The ARPA does not have a material impact on the Company’s financial statements in the period ending September 30, 2022.
On August 16, 2022, the Inflation Reduction Act of 2022 ("IRA") was signed into law. This legislation includes significant changes relating to tax, climate change, energy and health care. Among other provisions, the IRA introduces a book minimum tax assessed on financial statement income of certain large corporations and an excise tax on share repurchases. The Company does not anticipate these provisions will have a material impact on our results of operations or financial position, when effective.
During 2021 the Internal Revenue Service commenced an audit of certain of the Company’s prior year U.S. federal income tax filings, including the 2013 through 2020 tax years. The audit is currently ongoing and the while receipt of the associated refunds would materially improve its financial position, the Company does not believe that the results of this audit will have a material effect on its results of operations.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The Company received $4.3 million in federal tax refunds in the second quarter of 2022. There is no change to the Company’s position on the remaining tax refunds.
11. Restructuring
The Company continues to execute certain restructurings to identify workforce optimization opportunities to better align the Company’s resources with its key strategic priorities. A summary of the Company’s restructuring accrual at September 30, 2022 and changes during the nine months ended September 30, 2022, are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | | Charges | | Payments | | Other Adjustments | | Balance at September 30, 2022 |
Employment termination costs | $ | 3,247 | | | $ | 1,905 | | | $ | (3,582) | | | $ | (152) | | | $ | 1,418 | |
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| | | | | | | | | |
12. Earnings per Common Share (“EPS”)
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of the Company’s common stock for the year. The Company includes participating securities (Redeemable Convertible Preferred Stock - Participation with Dividends on Common Stock that contain preferred dividend) in the computation of EPS pursuant to the two-class method. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share from operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | | | 2022 | | 2021 | | |
Numerator - Basic: | | | | | | | | | | | |
Net income (loss) from operations | $ | 1,086 | | | $ | (8,109) | | | | | $ | 5,970 | | | $ | (22,895) | | | |
Net (loss) income attributable to redeemable noncontrolling interests | (66) | | | — | | | | | (256) | | | 286 | | | |
Preferred stock dividend | (2,298) | | | (1,722) | | | | | (7,255) | | | (33,728) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income (loss) attributable to Synchronoss | $ | (1,278) | | | $ | (9,831) | | | | | $ | (1,541) | | | $ | (56,337) | | | |
| | | | | | | | | | | |
Numerator - Diluted: | | | | | | | | | | | |
Net income (loss) from operations attributable to Synchronoss | $ | (1,278) | | | $ | (9,831) | | | | | $ | (1,541) | | | $ | (56,337) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income (loss) attributable to Synchronoss | $ | (1,278) | | | $ | (9,831) | | | | | $ | (1,541) | | | $ | (56,337) | | | |
| | | | | | | | | | | |
Denominator: | | | | | | | | | | | |
Weighted average common shares outstanding — basic | 86,400 | | | 85,646 | | | | | 86,156 | | | 57,662 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Weighted average common shares outstanding — diluted | 86,400 | | | 85,646 | | | | | 86,156 | | | 57,662 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Earnings (loss) per share: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Basic | $ | (0.01) | | | $ | (0.11) | | | | | $ | (0.02) | | | $ | (0.98) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Diluted | $ | (0.01) | | | $ | (0.11) | | | | | $ | (0.02) | | | $ | (0.98) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Anti-dilutive stock options excluded | — | | | — | | | | | — | | | — | | | |
Unvested shares of restricted stock awards | 4,779 | | | 2,319 | | | | | 4,779 | | | 2,319 | | | |
13. Commitments, Contingencies and Other
Non-cancelable agreements
The Company has various non-cancelable arrangements such as services for hosting, support, and software that expire at various dates, with the latest expiration in 2025.
Aggregate annual future minimum payments under non-cancelable agreements as of September 30, 2022 are as follows:
| | | | | | | | | | | | |
Year | | Non-cancelable agreements | | | | |
2022 | | $ | 6,349 | | | | | |
2023 | | 19,002 | | | | | |
2024 | | 17,490 | | | | | |
2025 | | 10,601 | | | | | |
Total | | $ | 53,442 | | | | | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
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.
In the third quarter of 2017, the SEC and Department of Justice initiated investigations in connection with certain financial transactions that the Company effected in 2015 and 2016 and its disclosure of and accounting for such transactions, which the Company restated in the third quarter of 2018 in its restated annual and quarterly financial statements for 2015 and 2016. On June 7, 2022 the SEC approved the Offer of Settlement and filed an Order Instituting Cease-And-Desist Proceedings pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-And-Desist Order (the “SEC Order”). Pursuant to the terms of the SEC Order, the Company consented to pay a civil penalty in the amount of $12.5 million in equal quarterly installments over two years and to cease and desist from committing or causing any violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and the associated rules thereunder. The expense associated with this settlement of the SEC Order has previously been accrued in the Company’s financial statements. Also on June 7, 2022, the SEC filed a civil action against two former members of the Company’s management team, alleging misconduct arising out of the restated transactions that took place in 2015 and 2016 investigated by the SEC as set forth above. The Company may be required to indemnify the former members of management in that action. Due to the inherent uncertainty of litigation, the Company cannot predict the outcome of the litigation and can give no assurance that the asserted claims will not have a material adverse effect on its financial position, prospects, or results of operations.
Except as set forth above, the Company is not currently subject to any other legal proceedings that could have a material adverse effect on its operations; however, the Company may from time to time become a party to various legal proceedings arising in the ordinary course of our business.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
14. Additional Financial Information
Other Income (expense), net
The following table sets forth the components of Other Income (expense), net included in the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | |
FX gains (losses)1 | | $ | 4,810 | | | $ | (1,752) | | | $ | 10,424 | | | $ | (4,055) | | | |
Government refunds2 | | 35 | | | 195 | | | 128 | | | 199 | | | |
Income from sale of intangible assets3 | | — | | | — | | | — | | | 550 | | | |
Other4 | | (408) | | | (112) | | | (346) | | | (183) | | | |
Total | | $ | 4,437 | | | $ | (1,669) | | | $ | 10,206 | | | $ | (3,489) | | | |
________________________________
1 Represents foreign exchange gains and losses
2 Represents government and tax refunds
3 Represents gain on sale on the Company’s IP addresses and Patents
4 Represents an aggregate of individually immaterial transactions
Discussion of the Condensed Consolidated Statements of Operations
Three months ended September 30, 2022 compared to the three months ended September 30, 2021
The following table presents an overview of our results of operations for the three months ended September 30, 2022 and 2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | $ Change | | |
| 2022 | | 2021 | | | | 2022 vs 2021 | | |
Net revenues | $ | 59,896 | | | $ | 69,753 | | | | | $ | (9,857) | | | |
Cost of revenues1 | 22,440 | | | 27,245 | | | | | (4,805) | | | |
Research and development | 12,911 | | | 15,368 | | | | | (2,457) | | | |
Selling, general and administrative | 15,338 | | | 27,953 | | | | | (12,615) | | | |
Restructuring charges | 201 | | | 1,485 | | | | | (1,284) | | | |
Depreciation and amortization | 7,726 | | | 8,215 | | | | | (489) | | | |
Total costs and expenses | 58,616 | | | 80,266 | | | | | (21,650) | | | |
Income (loss) from operations | $ | 1,280 | | | $ | (10,513) | | | | | $ | 11,793 | | | |
| | | | | | | | | |
________________________________
1 Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues decreased $9.9 million to $59.9 million for the three months ended September 30, 2022, compared to the same period in 2021. The change in revenue is mainly attributable to increased cloud revenue driven by continued subscriber growth which was more than offset by the (i) expected deferred revenue run-off in the current quarter, (ii) continued impact of DXP business unit divestiture, and (iii) lower professional service revenue and unfavorable foreign exchange movements in messaging.
Cost of revenues decreased $4.8 million to $22.4 million for the three months ended September 30, 2022, compared to the same period in 2021. The 2022 decrease was primarily attributable to unfavorable revenue changes and continued efforts to streamline our business operations, reduce costs and focus on higher margin products.
Research and development expense decreased $2.5 million to $12.9 million for the three months ended September 30, 2022, compared to the same period in 2021. 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 and overhead costs.
Selling, general and administrative expense decreased $12.6 million to $15.3 million for the three months ended September 30, 2022, compared to the same period in 2021. We executed significant strategic cost reductions by optimizing our workforce, reducing vendor spend and lowering facility costs. These strategic cost savings in addition to certain legal reserves recorded in the prior year and favorable foreign exchange movements, positively impacted our current period selling, general and administrative costs.
Restructuring charges were $0.2 million and $1.5 million for the three months ended September 30, 2022 and 2021, respectively, which primarily related to employment termination costs as a result of the work-force reductions initiated to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization expense decreased $0.5 million to $7.7 million for the three months ended September 30, 2022, compared to the same period in 2021. The 2022 decrease was primarily attributable to the expiration of amortizable acquired assets in combination with reduced capital expenditures mainly as a result of efforts to streamline business operations, partially offset by the increased amortization of capitalized software.
Income tax. The Company recognized an income tax expense of approximately $1.1 million and an income tax benefit of approximately $7.0 million during the three months ended September 30, 2022 and 2021, respectively. The effective tax rate was approximately 50.7% for the three months ended September 30, 2022, which was higher than the U.S. federal statutory rate primarily due to discrete income tax expense recorded in the period associated with the accrual of certain reserves for uncertain tax benefits, net of discrete income tax benefit recorded in the period associated with an increase in foreign R&D credits claimed on tax returns filed during the period. The Company’s effective tax rate was approximately 46.3% for the three months ended September 30, 2021, which was higher than the U.S. federal statutory rate primarily due to discrete income tax benefit recorded in the period associated with the finalization of the Company’s U.S. federal income tax return, which reflected a net operating loss that was carried back to prior tax years. Based on the final carryback claim, the Company recorded a discrete income tax benefit of $7.4 million and discrete income tax expense related to a liability for unrecognized tax benefits in the amount of $2.1 million, all of which, if recognized, would impact our effective tax rate. This increase was partially offset by pre-tax losses in jurisdictions where full valuation allowances have been recorded, pre-tax losses in jurisdictions which have a zero tax rate, and certain foreign jurisdictions projecting current income tax expense.
Discussion of the Condensed Consolidated Statements of Operations
Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
The following table presents an overview of our results of operations for the nine months ended September 30, 2022 and 2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | $ Change | | |
| 2022 | | 2021 | | | | 2022 vs 2021 | | |
Net revenues | $ | 190,998 | | | $ | 206,784 | | | | | $ | (15,786) | | | |
Cost of revenues1 | 69,595 | | | 83,024 | | | | | (13,429) | | | |
Research and development | 42,162 | | | 49,962 | | | | | (7,800) | | | |
Selling, general and administrative | 48,523 | | | 67,790 | | | | | (19,267) | | | |
Restructuring charges | 1,905 | | | 3,075 | | | | | (1,170) | | | |
Depreciation and amortization | 24,019 | | | 26,567 | | | | | (2,548) | | | |
Total costs and expenses | 186,204 | | | 230,418 | | | | | (44,214) | | | |
Income (loss) from operations | $ | 4,794 | | | $ | (23,634) | | | | | $ | 28,428 | | | |
| | | | | | | | | |
| | | | | | | | | |
________________________________
1 Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues decreased $15.8 million to $191.0 million for the nine months ended September 30, 2022, compared to the same period in 2021. The change in revenue is mainly attributable to increased cloud revenue driven by continued subscriber growth which was more than offset by the (i) expected deferred revenue run-off in the current quarter, (ii) revenue received from a non-recurring advanced messaging contract in the prior year, lower professional service revenue and unfavorable foreign exchange movements in messaging, and (iii) continued impact of DXP business unit divestiture in digital.
Cost of revenues decreased $13.4 million to $69.6 million for the nine months ended September 30, 2022, compared to the same period in 2021. The 2022 decrease was primarily attributable to unfavorable revenue changes and continued efforts to streamline our business operations, reduce costs and focus on higher margin products.
Research and development expense decreased $7.8 million to $42.2 million for the nine months ended September 30, 2022, compared to the same period in 2021. The research and development costs decreased year over year mainly as a result of executed cost savings initiatives to streamline our workforce and reduce vendor spend.
Selling, general and administrative expense decreased $19.3 million to $48.5 million for the nine months ended September 30, 2022, compared to the same period in 2021. The 2022 decrease was primarily driven by cost savings initiatives and favorable foreign exchange movements as well as the the recognition of certain legal reserves in the prior year that had a favorable impact on current year results.
Restructuring charges decreased $1.2 million to $1.9 million for the nine months ended September 30, 2022, compared to the same period in 2021, which primarily related to employment termination costs as a result of the work-force reductions initiated to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization expense decreased $2.5 million to $24.0 million for the nine months ended September 30, 2022, compared to the same period in 2021. The 2022 decrease was primarily attributable to the expiration of amortizable acquired assets in combination with reduced capital expenditures mainly as a result of the data center consolidation project and efforts to streamline business operations, partially offset by the increased amortization of capitalized software.
Income tax. The Company recognized an income tax expense of $1.7 million and an income tax benefit of $7.3 million during the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate was 21.9% for the nine months ended September 30, 2022, which approximated the U.S. federal statutory rate. The Company’s effective tax rate was approximately 24.3% for the nine months ended September 30, 2021, which was higher than the U.S. federal statutory rate primarily due to discrete income tax benefit recorded in the period associated with the finalization of the Company’s U.S. federal income tax return, which reflected a net operating loss that was carried back to prior tax years. Based on the final carryback claim, the Company recorded a discrete income tax benefit of $7.4 million and discrete income tax expense related to a liability for unrecognized tax benefits in the amount of $2.1 million, all of which, if recognized, would impact the Company’s effective tax rate. This increase was partially offset by pre-tax losses in jurisdictions where full valuation allowances have been recorded, pre-tax losses in jurisdictions which have a zero tax rate, and certain foreign jurisdictions projecting current income tax expense.
Liquidity and Capital Resources
As of September 30, 2022, our principal sources of liquidity were cash provided by operations and the remaining proceeds from the financing transactions. Our cash and cash equivalents balance was $22.6 million at September 30, 2022. We anticipate that our principal uses of cash and cash equivalents will be to fund our business, including technology expansion and working capital.
At September 30, 2022, our non-U.S. subsidiaries held approximately $6.8 million of cash and cash equivalents that are available for use by our operations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to U.S. tax for the incremental amount in excess of the foreign tax paid. Due to the timing and circumstances of repatriation of these earnings, if any, it is not practical to determine the unrecognized deferred tax liability related to the amount.
We believe that our cash, cash equivalents, financing sources, and our ability to manage working capital and expected positive cash flows generated from operations in combination with continued expense reductions will be sufficient to fund our operations for the next twelve months from the filing date of this Form 10-Q based on our current business plans. However, given the impact of the COVID-19 pandemic on the economy and our operations as well as geopolitical developments, we will continue to assess our liquidity needs. Given the economic uncertainty as a result of the pandemic, we have taken actions to improve our current liquidity position, including, reducing working capital, reducing operating costs and substantially reducing discretionary spending. Even with these actions however, an extended period of economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the "Forward-Looking Statements" section of this MD&A and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, some of which are outside of our control.
For further details, see Note 7. Debt and Note 9. Capital Structure of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands): | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | | |
| 2022 | | 2021 | | | | | | |
Net cash provided by (used in): | | | | | | | | | |
Operating activities | $ | 11,078 | | | $ | 5,551 | | | | | | | |
Investing activities | (8,271) | | | (17,840) | | | | | | | |
Financing activities | $ | (10,975) | | | $ | 2,687 | | | | | | | |
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 provided by operating activities for the nine months ended September 30, 2022 was $11.1 million as compared to $5.6 million of cash provided by operating activities for the same period in 2021. In the current period, the Company generated cash from operations mainly driven by continued growth in cloud subscribers, reduced operating costs, and $4.3 million tax refund received in the second quarter. The prior year’s cash provided from operations was positively impacted by a non-recurring cash payment for an advanced messaging contract.
Cash used in investing activities for the nine months ended September 30, 2022 was $8.3 million as compared to $17.8 million in cash used in investing activities during the same period in 2021. The cash used for investing activities in the current year and prior year was primarily related to increased investment in product development for our Cloud offering and capitalization of associated labor costs, in addition to annual vendor payments made in the current period. This investment was offset in the current period by the $8 million of cash received as part of the DXP and Activation sale.
Cash (used in) provided by financing activities for the nine months ended September 30, 2022 was $11.0 million of cash used primarily due to principal and interest payments associated with the redemption of Series B Preferred Stock. In 2021, the net proceeds from our public offering of common stock, Senior Note offering and Series B Preferred Stock transaction was primarily used to fully redeem all outstanding shares of the Company’s Series A Preferred Stock and repay and close the Revolving Credit Facility.
Effect of Inflation
Inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have impacted our business. Management does not believe these impacts however have had a material impact on our results of
operations during the nine months September 30, 2022 and 2021. We cannot assure you, however, that we will not be affected by general inflation in the 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 September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | 2022 | | 2023-2025 | | 2026-2027 | | Thereafter |
Finance lease obligations | | $ | 997 | | | $ | 118 | | | $ | 860 | | | $ | 19 | | | $ | — | |
Interest | | 47,261 | | | 2,954 | | | 35,446 | | | 8,861 | | | — | |
Operating lease obligations | | 44,367 | | | 2,346 | | | 23,876 | | | 13,881 | | | 4,264 | |
Purchase obligations1 | | 53,442 | | | 6,349 | | | 47,093 | | | — | | | — | |
Senior Note Payable | | 141,077 | | | — | | | — | | | 141,077 | | | — | |
Total | | $ | 287,144 | | | $ | 11,767 | | | $ | 107,275 | | | $ | 163,838 | | | $ | 4,264 | |
_______________________________
1 Amount represents obligations associated with colocation agreements and other customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax positions of $5.0 million at September 30, 2022 are excluded from the table above as we are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. We anticipate that the balance of unrecognized tax benefits will decrease by approximately $0.5 million over the next twelve months.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements in accordance with U.S. GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during a fiscal period. The SEC considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application.
These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts continuing to arise from COVID-19 and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See Part II, “Item 1A. Risk Factors” in this Form 10-Q for certain matters bearing risks on our future results of operations.
During the nine months ended September 30, 2022, there were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K for the year ended December 31, 2021. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 for a more complete discussion of our critical accounting policies and estimates.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards see Note 2. Basis of Presentation and Consolidation included in Part I, Item 1. “Notes to Condensed Consolidated Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2022 and December 31, 2021 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.