10-Q 1 c554-20150630x10q.htm 10-Q sncr-Current Folio-10Q_2014Taxonomy

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

Or

 

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to

 

Commission file number 000-52049

 

SYNCHRONOSS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

 

06-1594540

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

200 Crossing Boulevard, 8th Floor

Bridgewater, New Jersey

 

08807

(Address of principal executive offices)

 

(Zip Code)

 

(866) 620-3940

(Registrant’s telephone number, including area code)

 

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

Shares outstanding of the Registrant’s common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Class

 

Outstanding at July 27, 2015

Common stock, $0.0001 par value

 

43,862,687

 

 

 


 

SYNCHRONOSS TECHNOLOGIES, INC.

FORM 10-Q INDEX

 

 

 

 

PART I.

FINANCIAL INFORMATION

PAGE NO.

 

 

 

Item 1.

Consolidated Financial Statements and Notes

 

 

 

 

 

Consolidated Balance Sheets (unaudited)

3

 

 

 

 

Consolidated Statements of Income and Comprehensive Income (unaudited) 

4

 

 

 

 

Consolidated Statements of Cash Flows (unaudited)

5

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

6

 

 

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4. 

Controls and Procedures

28

 

 

 

 

 

 

PART II. 

OTHER INFORMATION

29

 

 

 

Item 1. 

Legal Proceedings

29

 

 

 

Item 1A. 

Risk Factors

29

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3. 

Defaults Upon Senior Securities

29

 

 

 

Item 4. 

Mine Safety Disclosures

29

 

 

 

Item 5. 

Other Information

29

 

 

 

Item 6. 

Exhibits

30

 

 

 

SIGNATURES 

31

 

 

 

 

 

 

 

 


 

SYNCHRONOSS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

June 30, 2015

    

December 31, 2014

 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

176,053

 

$

235,967

Marketable securities

 

65,939

 

 

51,097

Accounts receivable, net of allowance for doubtful accounts of $117 and $88 at June 30, 2015 and December 31, 2014, respectively

 

136,391

 

 

118,371

Prepaid expenses and other assets

 

43,275

 

 

35,023

Deferred tax assets

 

5,151

 

 

1,475

Total current assets

 

426,809

 

 

441,933

Marketable securities

 

7,324

 

 

3,313

Property and equipment, net

 

164,142

 

 

151,171

Goodwill

 

175,611

 

 

147,135

Intangible assets, net

 

105,529

 

 

99,489

Deferred tax assets

 

4,355

 

 

1,232

Other assets

 

18,009

 

 

18,549

Total assets

$

901,779

 

$

862,822

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable

$

19,476

 

$

25,059

Accrued expenses

 

37,933

 

 

42,679

Deferred revenues

 

14,424

 

 

11,897

Contingent consideration obligation

 

 —

 

 

8,000

Total current liabilities

 

71,833

 

 

87,635

Lease financing obligation - long term

 

13,836

 

 

9,204

Convertible debt

 

230,000

 

 

230,000

Deferred tax liability

 

10,879

 

 

3,698

Other liabilities

 

3,309

 

 

3,178

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000 shares authorized, 0 shares issued and outstanding at June 30, 2015 and December 31, 2014

 

 —

 

 

 —

Common stock, $0.0001 par value; 100,000 shares authorized, 47,514 and 46,444 shares issued; 43,810 and 42,711 outstanding at  June 30, 2015 and December 31, 2014, respectively

 

4

 

 

4

Treasury stock, at cost (3,704 and 3,733 shares at June 30, 2015 and December 31, 2014, respectively)

 

(65,969)

 

 

(66,336)

Additional paid-in capital

 

484,161

 

 

454,740

Accumulated other comprehensive loss

 

(32,702)

 

 

(20,014)

Retained earnings

 

186,428

 

 

160,713

Total stockholders’ equity

 

571,922

 

 

529,107

Total liabilities and stockholders’ equity

$

901,779

 

$

862,822

 

See accompanying notes to consolidated financial statements.

 

3


 

SYNCHRONOSS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2015

 

2014

    

2015

    

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

137,820

 

$

103,451

 

$

270,746

 

$

201,928

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services*

 

 

54,920

 

 

41,290

 

 

108,575

 

 

81,269

Research and development

 

 

22,462

 

 

17,305

 

 

44,486

 

 

32,845

Selling, general and administrative

 

 

18,717

 

 

17,149

 

 

39,600

 

 

34,274

Net change in contingent consideration obligation

 

 

 —

 

 

115

 

 

 —

 

 

1,326

Restructuring charges

 

 

1,451

 

 

 —

 

 

4,691

 

 

 —

Depreciation and amortization

 

 

16,632

 

 

13,758

 

 

31,467

 

 

26,024

Total costs and expenses

 

 

114,182

 

 

89,617

 

 

228,819

 

 

175,738

Income from operations

 

 

23,638

 

 

13,834

 

 

41,927

 

 

26,190

Interest income

 

 

471

 

 

154

 

 

937

 

 

286

Interest expense

 

 

(1,418)

 

 

(371)

 

 

(2,760)

 

 

(874)

Other income

 

 

415

 

 

256

 

 

429

 

 

1,052

Income before income tax expense

 

 

23,106

 

 

13,873

 

 

40,533

 

 

26,654

Income tax expense

 

 

(7,952)

 

 

(5,509)

 

 

(14,818)

 

 

(10,705)

Net income

 

$

15,154

 

$

8,364

 

$

25,715

 

$

15,949

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

$

0.21

 

$

0.61

 

$

0.40

Diluted

 

$

0.33

 

$

0.20

 

$

0.56

 

$

0.39

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

41,870

 

 

40,139

 

 

41,898

 

 

39,961

Diluted

 

 

47,271

 

 

40,978

 

 

47,371

 

 

40,878

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

21,934

 

$

7,867

 

$

13,027

 

$

16,451

 

 

 

 

 

*  

Cost of services excludes depreciation and amortization which is shown separately.

 

 

 

 

 

See accompanying notes to consolidated financial statements.

4


 

SYNCHRONOSS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

    

2015

    

2014

Operating activities:

 

 

 

 

 

 

Net income

 

$

25,715

 

$

15,949

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

31,467

 

 

26,024

Amortization of debt issuance costs

 

 

750

 

 

 —

Amortization of bond premium

 

 

756

 

 

166

Deferred income taxes

 

 

2,065

 

 

2,128

Non-cash interest on leased facility

 

 

464

 

 

460

Stock-based compensation

 

 

13,087

 

 

12,682

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

 

(19,758)

 

 

(21,806)

Prepaid expenses and other current assets

 

 

(4,749)

 

 

(3,913)

Other assets

 

 

(282)

 

 

933

Accounts payable

 

 

2,869

 

 

(2,220)

Accrued expenses

 

 

(7,897)

 

 

(10,095)

Contingent consideration obligation

 

 

(1,532)

 

 

2,127

Excess tax benefit from the exercise of stock options

 

 

(3,898)

 

 

(1,224)

Other liabilities

 

 

(172)

 

 

1,152

Deferred revenues

 

 

2,882

 

 

(3,160)

Net cash provided by operating activities

 

 

41,767

 

 

19,203

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

Purchases of fixed assets

 

 

(34,947)

 

 

(15,672)

Purchases of marketable securities available-for-sale

 

 

(72,015)

 

 

(4,070)

Maturities of marketable securities available-for-sale

 

 

52,375

 

 

880

Business acquired, net of cash

 

 

(59,481)

 

 

(6,322)

Net cash used in investing activities

 

 

(114,068)

 

 

(25,184)

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

11,828

 

 

7,870

Payments on contingent consideration obligation

 

 

(4,468)

 

 

 —

Excess tax benefit from the exercise of stock options

 

 

3,898

 

 

1,224

Proceeds from the sale of treasury stock in connection with an employee stock purchase plan

 

 

975

 

 

740

Repayments of capital obligations

 

 

(564)

 

 

(618)

Net cash provided by financing activities

 

 

11,669

 

 

9,216

Effect of exchange rate changes on cash

 

 

718

 

 

193

Net (decrease) increase in cash and cash equivalents

 

 

(59,914)

 

 

3,428

Cash and cash equivalents at beginning of period

 

 

235,967

 

 

63,512

Cash and cash equivalents at end of period

 

$

176,053

 

$

66,940

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for income taxes

 

$

13,657

 

$

10,275

 

See accompanying notes to consolidated financial statements.

 

 

5


 

Table of Contents

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

The consolidated financial statements as of June 30, 2015 and for the three and six months ended June 30, 2015 and 2014 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results 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 consolidated financial statements and notes in the Annual Report of Synchronoss Technologies, Inc. incorporated by reference in the Company's annual report on Form 10-K for the year ended December 31, 2014.  The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. The Company has no unconsolidated subsidiaries or investments accounted for under the equity method. The results reported in these consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. The balance sheet at December 31, 2014 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts from the prior year’s financial statements have been reclassified to conform to the current year’s presentation.

1. Description of Business

 

Synchronoss Technologies, Inc. (the “Company” or “Synchronoss”) is a mobile innovation company that provides software-based cloud and activation solutions for connected devices to enterprise customers on a global scale.  The Company’s software creates innovative consumer and enterprise solutions that drive billions of transactions on a wide range of connected devices across the world’s leading networks. The Company’s solutions include: intelligent connectivity management and content synchronization, backup and sharing service procurement, provisioning, activation, and support that enable communications service providers (CSPs), cable operators/multi-services operators (MSOs), original equipment manufacturers (OEMs) with embedded connectivity (e.g. smartphones, laptops, tablets and mobile Internet devices, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers and other customers to accelerate and monetize value-add services for connected devices. This includes automating subscriber activation, order management, upgrades, service provisioning and connectivity and content management from any sales channel to any communication service (wireless or wireline), across any connected device type and managing the content transfer, synchronization and share.

 

The Company’s Synchronoss Personal Cloud™ platform is specifically designed to power the activation of the devices and technologies that seamlessly connect today’s consumer and leverage the Company’s cloud assets to manage these devices and content associated with them. The Synchronoss WorkSpace™ platform focuses on providing a secure, integrated file sharing and collaboration solution for small and medium businesses. The Company’s consumer and small business platforms and solutions enable Synchronoss to drive a natural extension of the Company’s mobile activations and cloud services with leading wireless networks around the world to link other non-traditional devices (i.e., automobiles, wearables for personal health and wellness, and connected homes).

 

The Company’s Activation Services, Synchronoss Personal Cloud™ and Synchronoss WorkSpace™ platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services or devices and “back-office” infrastructure-related systems and processes. The Company’s customers rely on the Company’s solutions and technology to automate the process of activation and content and settings management for their subscriber’s devices while delivering additional communication services. The Company’s Integrated Life™ platform brings together the capabilities of device/service activation with content and settings management to provide a seamless experience of activating and managing both traditional and non-traditional devices. The Company’s platforms also support automated customer care processes through use of accurate and effective speech processing technology and enable the Company’s customers to offer their subscribers the ability to store in and retrieve from the Cloud their personal and work content and data which resides on their connected mobile devices, such as personal computers, smartphones and tablets.  The Company’s platforms are designed to be carrier-grade, highly available, flexible and scalable to enable multiple converged communication services to be managed across multiple distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets allowing the Company to meet the rapidly changing and converging services and connected devices offered by the Company’s customers. Synchronoss enables its customers to acquire, retain and service subscribers quickly, reliably and cost-effectively by enabling backup, restore, synchronization and sharing of subscriber content.

6


 

Table of Contents

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

Through the use of the Company’s platforms, the Company’s customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and social media and enterprise-wide sharing/collaboration with connected devices and contents from these devices and associated services.  The extensibility, scalability, reliability and relevance of the Company’s platforms enable new revenue streams and retention opportunities for the Company’s customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud, while optimizing their cost of operations and enhancing customer experience. The Company currently operates in and markets its solutions and services directly through the Company’s sales organizations in North America, Europe and Asia-Pacific.

 

The Company’s industry-leading customers include Tier 1 mobile service providers such as AT&T Inc., Verizon Wireless, Vodafone, Orange, Sprint, Telstra and U.S. Cellular, Tier 1 cable operators/MSOs and wireline operators like AT&T Inc., Comcast, Cablevision, Charter, CenturyLink, Mediacom and Level 3 Communications and large OEMs such as Apple and Ericsson.  These customers utilize the Company’s platforms, technology and services to service both consumer and business customers.

 

2. Basis of Presentation and 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, 2014.

 

Impact of Recently Issued Accounting Standards

 

In May 2015, the FASB issued ASU 2015-08, “'Business Combinations (Topic 805): Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115” (“ASU 2015-08”). The amendments in ASU 2015-08 amend various SEC paragraphs included in the FASB’s Accounting Standards Codification to reflect the issuance of Staff Accounting Bulletin No. 115 (“SAB 115”). SAB 115 rescinds portions of the interpretive guidance included in the SEC’s Staff Accounting Bulletins series and brings existing guidance into conformity with ASU No. 2014-17, “Business Combinations (Topic 805): Pushdown Accounting,” which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The Company has adopted the amendments in ASU 2015-08, effective May 8, 2015, as the amendments in the update are effective upon issuance. The adoption of this ASU did not significantly impact the consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” This amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share. The updated guidance is effective for public entities for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. The Company does not expect the adoption of this ASU to significantly impact the consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance clarified how customers in cloud computing arrangements should determine whether the arrangement includes a software license. The guidance also eliminates the existing requirement for customers to account for software licenses that they acquire by analogizing to the guidance on leases. Instead, entities will account for these arrangements as licenses of intangible assets. For public business entities, the FASB decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for all entities. The Company does not expect the adoption of this ASU to significantly impact the consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement

7


 

Table of Contents

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

guidance of debt issuance costs are not affected by the amendments in this update. The guidance is effective for fiscal years beginning after 15 December 2015, and interim periods within those fiscal years. Upon adoption, an entity must apply the guidance retrospectively to all prior periods presented. The Company does not expect the adoption of this ASU to significantly impact the consolidated financial statements.

 

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) (collectively, the “Boards”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under US GAAP and IFRS. The standard’s core principle (issued as ASU 2014-09 by the FASB and as IFRS 15 by the IASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The effective date is fiscal years beginning after December 15, 2016. Early application is not permitted. The Company is currently evaluating the methods of adoption and the impact that ASU 2014-09 will have on the consolidated financial statements. In April 2015, the FASB proposed a one-year deferral of the effective dates of its new revenue recognition standard for public and nonpublic entities reporting under US GAAP.

 

3. Earnings per Common Share

 

Basic earnings per share is calculated by using the weighted-average number of common shares outstanding during the period.

 

The diluted earnings per share calculation is based on the weighted-average number of shares of common stock outstanding adjusted for the number of additional shares that would have been outstanding had all potentially dilutive common shares been issued.

 

Potentially dilutive shares of common stock include stock options, convertible debt and unvested share awards.  The dilutive effects of stock options and restricted stock awards are based on the treasury stock method.  The dilutive effect of the assumed conversion of convertible debt is determined using the if-converted method. The after-tax effect of interest expense related to the convertible securities is added back to net income, and the convertible debt is assumed to have been converted into common shares at the beginning of the period.

 

The 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. Stock options that are anti-dilutive and excluded from the following table totaled 459 and 1,508 for the three months ended June 30, 2015 and 2014, respectively, and 345 and 1,329 for the six months ended June 30, 2015 and 2014, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,  

 

Six Months Ended June 30,  

 

 

 

2015

 

 

2014

   

 

2015

 

 

2014

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

15,154

    

$

8,364

 

$

25,715

 

$

15,949

Income effect for interest on convertible debt, net of tax

 

 

514

 

 

 —

 

 

995

 

 

 —

Numerator for diluted EPS- Income to common stockholders after assumed conversions

 

$

15,668

 

$

8,364

 

$

26,710

 

$

15,949

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic

 

 

41,870

 

 

40,139

 

 

41,898

 

 

39,961

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

Shares from assumed conversion of convertible debt

 

 

4,326

 

 

 —

 

 

4,326

 

 

 —

Options and unvested restricted shares

 

 

1,075

 

 

839

 

 

1,147

 

 

917

Weighted average common shares outstanding — diluted

 

 

47,271

 

 

40,978

 

 

47,371

 

 

40,878

 

8


 

Table of Contents

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

4. Fair Value Measurements of Assets and Liabilities 

 

The Company classifies marketable securities as available-for-sale.  The fair value hierarchy established in the guidance adopted by the Company prioritizes the inputs used in valuation techniques into three levels 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 and liabilities held by the Company and their related classifications under the fair value hierarchy: 

 

 

 

 

 

 

 

 

 

June 30, 2015

    

December 31, 2014

Level 1 (A)

$

176,053

 

$

235,967

Level 2 (B)

 

73,263

 

 

54,410

Level 3 (C)

 

 —

 

 

(8,000)

Total

$

249,316

 

$

282,377

 

(A)

Level 1 assets include money market funds which are classified as cash equivalents and marketable securities, respectively.  

(B)

Level 2 assets include certificates of deposit, municipal bonds, enhanced income money market funds and corporate bonds which are classified as marketable securities.

(C)

Level 3 liabilities include the contingent consideration obligation.

 

The Company utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company's marketable securities investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the six months ended June 30, 2015.

 

The aggregate fair value of available-for-sale securities and aggregate amount of unrealized gains and losses for available-for-sale securities at June 30, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate Amount of

 

 

Aggregate

 

Unrealized

 

    

Fair Value

    

Gains

    

Losses

Due in one year or less

 

$

65,939

 

$

7

 

$

(92)

Due after one year, less than five years

 

 

7,324

 

 

7

 

 

(7)

 

 

$

73,263

 

$

14

 

$

(99)

 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

The aggregate fair value of available-for-sale securities and aggregate amount of unrealized gains and losses for available-for-sale securities at December 31, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate Amount of

 

 

Aggregate

 

Unrealized

 

    

Fair Value

    

Gains

    

Losses

Due in one year or less

 

$

51,097

 

$

10

 

$

(72)

Due after one year, less than five years

 

 

3,313

 

 

2

 

 

(3)

 

 

$

54,410

 

$

12

 

$

(75)

 

Unrealized gains and losses are reported as a component of accumulated other comprehensive loss in stockholders' equity. The cost of securities sold is based on the specific identification method. The Company evaluates investments with unrealized losses to determine if the losses are other than temporary. The Company has determined that the gross unrealized losses as of June 30, 2015 and December 31, 2014 are temporary. In making this determination, the Company considered the financial condition, credit ratings and near-term prospects of the issuers, the underlying collateral of the investments, and the magnitude of the losses as compared to the cost and the length of time the investments have been in an unrealized loss position. Additionally, while the Company classifies the securities as available-for-sale, the Company does not currently intend to sell such investments and it is more likely than not to recover the carrying value prior to being required to sell such investments.

 

The Company determined the fair value of the contingent consideration obligation using the probability-weighted income approach derived from quarterly revenue estimates and a probability assessment with respect to the likelihood of achieving the various performance criteria. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration obligation are the probabilities of achieving certain financial targets and contractual milestones.  Significant increases (decreases) in any of those probabilities in isolation may result in a higher (lower) fair value measurement.  As of December 31, 2014, all of the financial targets and contractual milestones were met and on February 20, 2015 the Company paid out $8 million related to the Strumsoft Earn-out.

 

The changes in fair value of the Company’s Level 3 contingent consideration obligation during the six months ended June 30, 2015 were as follows:

 

 

 

 

 

    

Level 3

Balance at December 31, 2014

 

$

8,000

Payment of contingent consideration

 

 

(8,000)

Balance at June 30, 2015

 

$

 —

 

 

5. Acquisition

 

F-Secure Corporation (“F-Secure”)

 

On February 23, 2015, the Company acquired certain cloud assets from F-Secure, an online security and privacy company headquartered in Finland, for cash consideration of $59.5 million, net of liabilities assumed. The Company believes that the purchase will expand the Company’s cloud services customer base.

 

On February 18, 2015, the Company entered into a patent license and settlement agreement whereby the Company granted F-Secure a limited license to the Company's patents. As part of the business combination accounting rules, the Company calculated the fair value of the license using an income approach, specifically a relief from royalty method, which incorporates significant estimates and assumptions made by management, which by their nature are characterized by uncertainty. Inputs used to value the license are considered Level 3 inputs.

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

The Company determined the preliminary fair value of the net assets acquired as follows:

 

 

 

 

 

 

 

 

 

 

Preliminary

 

 

 

 

Purchase Price

 

 

 

 

Allocation

 

 

Intangible assets:

 

 

 

 

Wtd. Avg.

Technology

 

$

3,071

 

1 year

Customer relationships

 

 

20,475

 

5 years

Goodwill

 

 

36,454

 

 

Total assets acquired

 

 

60,000

 

 

Accrued expenses

 

 

519

 

 

Net assets acquired

 

$

59,481

 

 

 

The goodwill recorded in connection with this acquisition is based on operating synergies and other benefits expected to result from the combined operations and the assembled workforce acquired. The goodwill acquired will not be deductible for tax purposes.

 

Acquisition-related costs recognized during the six months ended June 30, 2015, including transaction costs such as legal, accounting, valuation and other professional services, were $862 thousand.

 

Voxmobili SA (“Vox”)

 

On July 11, 2014, the Company acquired all outstanding shares of Vox, a French company, for $25.1 million, net of cash acquired and liabilities assumed, subject to certain working capital adjustments. The Company believes that this acquisition contributed to its position as the leading provider of personal cloud solutions to the world’s largest mobile operators.

 

The Company determined the preliminary fair value of the net assets acquired as follows:

 

 

 

 

 

 

 

 

 

 

Purchase Price

 

 

 

 

Allocation

 

 

Cash

 

$

1,414

 

 

Prepaid expenses and other assets

 

 

220

 

 

Accounts receivable

 

 

3,750

 

 

Intangible assets:

 

 

 

 

Wtd. Avg.

Technology

 

 

4,900

 

5 years

Customer relationships

 

 

5,000

 

5 years

Goodwill

 

 

16,252

 

 

Total assets acquired

 

 

31,536

 

 

Accounts payable and accrued liabilities

 

 

2,118

 

 

Deferred revenues

 

 

457

 

 

Deferred taxes

 

 

2,402

 

 

Net assets acquired

 

$

26,559

 

 

 

The Company adjusted the preliminary purchase price allocation during the quarter ended June 30, 2015 to increase deferred tax asset by $932 thousand. This adjustment offset goodwill and was the result of the Company analyzing and revising its tax positions in foreign jurisdictions.

 

The goodwill recorded in connection with this acquisition was based on operating synergies and other benefits expected to result from the combined operations and the assembled workforce acquired. The goodwill acquired is not deductible for tax purposes.

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

 

Acquisition-related costs, including transaction costs such as legal, accounting, valuation and other professional services, were $1.5 million.

 

6. Stockholders’ Equity

 

Stock Options

 

The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2015

    

2014

 

2015

 

2014

Expected stock price volatility

 

48

%

 

49

%

 

48

%

 

58

%

Risk-free interest rate

 

1.29

%

 

1.27

%

 

1.26

%

 

1.43

%

Expected life of options (in years)

 

4.00

 

 

4.20

 

 

4.01

 

 

4.25

 

Expected dividend yield

 

0

%

 

0

%

 

0

%

 

0

%

 

The weighted-average fair value (as of the date of grant) of the options was $17.47 and $12.02 per share for the three months ended June 30, 2015 and 2014, respectively, and $16.56 and $14.59 per share for  the six months ended June 30, 2015 and 2014, respectively.  During the three months ended June 30, 2015 and 2014, the Company recorded total pre-tax stock-based compensation expense of $6.5 million ($4.5 million after tax or $0.10 per diluted share) and $6.8 million ($4.5 million after tax or $0.11 per diluted share), respectively, which includes the fair value for equity awards issued. During the six months ended June 30, 2015 and 2014, the Company recorded total pre-tax stock-based compensation expense of $13.1 million ($9.0 million after tax or $0.19 per diluted share) and $12.7 million ($8.4 million after tax or $0.20 per diluted share), respectively, which includes the fair value for equity awards issued. The total stock-based compensation cost related to unvested equity awards not yet recognized as an expense as of June 30, 2015 was approximately $56.1 million. The expense is expected to be recognized over a weighted-average period of approximately 2.86 years. 

 

The following table summarizes information about stock options outstanding as of June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

 

Aggregate

 

 

Number of

 

Average

 

Contractual

 

 

Intrinsic

Options

    

Options

    

Exercise Price

    

Term (Years)

    

 

Value

Outstanding at December 31, 2014 

 

2,767

 

$

25.81

 

 

 

 

 

Options Granted

 

515

 

 

43.04

 

 

 

 

 

Options Exercised

 

(505)

 

 

23.43

 

 

 

 

 

Options Cancelled

 

(161)

 

 

31.80

 

 

 

 

 

Outstanding at June 30, 2015 

 

2,616

 

$

29.28

 

4.61

 

$

43,230

Vested or expected to vest at June 30, 2015

 

2,442

 

$

28.86

 

4.51

 

$

41,395

Exercisable at June 30, 2015

 

1,347

 

$

23.17

 

3.35

 

$

30,533

 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO 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 restricted stock at June 30, 2015, and changes during the six months ended June 30, 2015, is presented below:

 

 

 

 

 

 

 

Number of

Non-Vested Restricted Stock

    

Awards

Non-vested at December 31, 2014

 

1,342

Granted

 

693

Vested

 

(456)

Forfeited

 

(128)

Non-vested at June 30, 2015

 

1,451

 

Employee Stock Purchase Plan

 

On February 1, 2012, the Company established a ten year Employee Stock Purchase Plan (“ESPP” or the “Plan”) for certain eligible employees.  The Plan is to be administered by the Company’s Board of Directors.  The total number of shares available for purchase under the Plan is 500 thousand shares of the Company’s Common Stock.  Employees participate over a six month period through payroll withholdings and may purchase, at the end of the six month period, the Company’s Common Stock at the lower of 85% of the fair market value on the first day of the offering period or the fair market value on the purchase date.  No participant will be granted a right to purchase Common Stock under the Plan if such participant would own more than 5% of the total combined voting power of the Company.  In addition, no participant may purchase more than one thousand shares of Common Stock within any purchase period.

 

The expected life of ESPP shares is the average of the remaining purchase period under each offering period.  The weighted-average assumptions used to value employee stock purchase rights are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2015

    

2014

 

2015

 

2014

Expected stock price volatility

 

42

%

 

63

%

 

40

%

 

64

%

Risk-free interest rate

 

0.07

%

 

0.07

%

 

0.05

%

 

0.08

%

Expected life (in years)

 

0.50

 

 

0.50

 

 

0.50

 

 

0.50

 

Expected dividend yield

 

0

%

 

0

%

 

0

%

 

0

%

 

During the three months ended June 30, 2015 and 2014, the Company recorded $175 thousand and $156 thousand, respectively, of compensation expense related to the ESPP.  During the six months ended June 30, 2015 and 2014, the Company recorded $325 thousand and $355 thousand, respectively, of compensation expense related to the ESPP. During the six months ended June 30, 2015 and 2014, the Company sold a total of 29 thousand and 27 thousand shares, respectively, of its Treasury Stock pursuant to purchases under its ESPP. There were no shares sold during the three months ended June 30, 2015 and 2014. Cash received from purchases through the ESPP during the three months ended June 30, 2015 and 2014, was approximately $975 thousand and $740 thousand, respectively, and is included within the financing activities section of the consolidated statements of cash flows. The total unrecognized compensation expense related to the ESPP as of June 30, 2015 was approximately $77 thousand, which is expected to be recognized over the remainder of the offering period.

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

7. Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income (loss) was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2015

    

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,154

 

$

8,364

 

$

25,715

 

$

15,949

Translation adjustments

 

 

6,357

 

 

(497)

 

 

(10,480)

 

 

498

Unrealized (loss) gain on securities, (net of tax)

 

 

(107)

 

 

 —

 

 

134

 

 

4

Net income (loss) on intra-entity foreign currency transactions

 

 

530

 

 

 —

 

 

(2,342)

 

 

 —

Total comprehensive income

 

$

21,934

 

$

7,867

 

$

13,027

 

$

16,451

 

The changes in accumulated other comprehensive income (loss) during the six months ended June 30, 2015, are as follows, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Unrealized (Loss) 

 

 

 

 

 

 

 

 

 

 

Income on

 

Unrealized Holding

 

 

 

 

 

 

 

 

Intra-Entity

 

Gains (Losses) on

 

 

 

 

 

Foreign

 

Foreign Currency

 

Available-for-Sale

 

 

 

 

 

Currency

 

Transactions

 

Securities

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

$

(16,980)

 

$

(2,857)

 

$

(177)

 

$

(20,014)

Other comprehensive (loss) income

 

 

(10,480)

 

 

(2,342)

 

 

134

 

 

(12,688)

Total comprehensive (loss) income

 

 

(10,480)

 

 

(2,342)

 

 

134

 

 

(12,688)

Balance at June 30, 2015

 

$

(27,460)

 

$

(5,199)

 

$

(43)

 

$

(32,702)

 

8. Goodwill and Intangibles

 

Goodwill

 

The Company recorded Goodwill which represents the excess of the purchase price over the fair value of assets acquired, including other definite-lived intangible assets. Goodwill is not amortized, but reviewed annually for impairment or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

 

The changes in Goodwill during the six months ended June 30, 2015 are as follows:

 

 

 

 

 

Balance at December 31, 2014

    

$

147,135

F-Secure acquisition

 

 

36,454

Reclassifications, adjustments and other

 

 

(932)

Translation adjustments

 

 

(7,046)

Balance at June 30, 2015

 

$

175,611

 

The reclassification adjustment of $932 thousand is primarily related to an increase in the Company’s deferred tax asset in connection with a pre-acquisition tax loss.

 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

Other Intangible Assets

 

The Company’s intangible assets with definite lives consist primarily of trade names, technology, and customer lists and relationships. These intangible assets are being amortized on the straightline method over the estimated useful lives of the assets.

 

The Company’s intangible assets consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

June 30, 2015

 

Average

 

 

 

 

Accumulated

 

 

 

 

Life

 

Cost

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

Trade name

4

 

$

1,539

 

$

(1,331)

 

$

208

Technology

7

 

 

66,587

 

 

(28,614)

 

 

37,973

Customer lists and relationships

9

 

 

87,770

 

 

(26,355)

 

 

61,415

Capitalized software and patents

3

 

 

9,036

 

 

(3,103)

 

 

5,933

Order Backlog

 —

 

 

918

 

 

(918)

 

 

 —

 

 

 

$

165,850

 

$

(60,321)

 

$

105,529

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

December 31, 2014

 

Average

 

 

 

 

Accumulated

 

 

 

 

Life

 

Cost

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

Trade name

4

 

$

1,589

 

$

(1,324)

 

$

265

Technology

7

 

 

71,155

 

 

(28,484)

 

 

42,671

Customer lists and relationships

9

 

 

74,601

 

 

(25,283)

 

 

49,318

Capitalized software and patents

3

 

 

9,346

 

 

(2,111)

 

 

7,235

Order Backlog

 —

 

 

918

 

 

(918)

 

 

 —

 

 

 

$

157,609

 

$

(58,120)

 

$

99,489

 

 

9. Debt

 

Credit Facility

 

In September 2013, the Company entered into a Credit Agreement (the “Credit Facility”) with JP Morgan Chase Bank, N.A., as the administrative agent, Wells Fargo Bank, National Association, as the syndication agent and Capital One, National Association and KeyBank National Association, as co-documentation agents.  The Credit Facility, which can be used for general corporate purposes, is a $100 million unsecured revolving line of credit that matures on September 27, 2018.  The Company pays a commitment fee in the range of 25 to 35 basis points on the unused balance of the revolving credit facility under the Credit Agreement. Commitment fees totaled approximately $88 thousand and $44 thousand during the three months ended June 30, 2015 and 2014, respectively and $151 thousand and $106 thousand during the six months ended June 30, 2015 and 2014, respectively. Synchronoss has the right to request an increase in the aggregate principal amount of the Credit Facility to $150 million. 

 

The Credit Facility is subject to certain financial covenants.  As of June 30, 2015, the Company was in compliance with all required covenants and there were no outstanding balances on the Credit Facility. 

 

 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

Convertible Senior Notes

 

On August 12, 2014, the Company issued $230.0 million aggregate principal amount of its 0.75% Convertible Senior Notes due in 2019 (the “2019 Notes”). The 2019 Notes mature on August 15, 2019, and bear interest at a rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. The Company accounted for the $230.0 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance.

 

The 2019 Notes are senior, unsecured obligations of the Company, and are convertible into shares of its common stock based on a conversion rate of 18.8072 shares per $1,000 principal amount of 2019 Notes which is equivalent to an initial conversion price of approximately $53.17 per share. The Company will satisfy any conversion of the 2019 Notes with shares of the Company’s common stock. The 2019 Notes are convertible at the note holders’ option prior to their maturity and if specified corporate transactions occur. The issue price of the 2019 Notes was equal to their face amount.

 

Holders of the 2019 Notes who convert their notes in connection with a qualifying fundamental change, as defined in the related indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, following the occurrence of a fundamental change, holders may require that the Company repurchase some or all of the 2019 Notes for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. As of June 30, 2015, none of these conditions existed with respect to the 2019 Notes and as a result, the 2019 Notes are classified as long term.

 

The 2019 Notes are the Company’s direct senior unsecured obligations and rank equal in right of payment to all of the Company’s existing and future unsecured and unsubordinated indebtedness.

 

At June 30, 2015, the carrying amount of the liability and the outstanding principal of the 2019 Notes was $230.0 million, with an effective interest rate of approximately 1.36%. The fair value of the 2019 Notes was $259.5 million at June 30, 2015.

 

The interest expense of the Company’s 2019 Notes related to the contractual interest coupon was $431 thousand for the three months ended June 30, 2015 and $863 thousand for the six months ended June 30, 2015. There was no interest expense related to the 2019 Notes for the three and six months ended June 30, 2014.

 

10. Restructuring

 

In January 2015, the Company initiated the preliminary phase of a work-force reduction as part of a corporate restructuring, with reductions occurring across all levels and departments within the Company. This measure was intended to reduce costs and to align the Company’s resources with its key strategic priorities.  As of June 30, 2015, there was $825 thousand of unpaid restructuring charges classified under accrued expenses on the balance sheet.

 

A summary of the Company’s restructuring accrual at June 30, 2015 and changes during the six months ended June 30, 2015, is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

 

 

 

 

Balance at

 

    

December 31, 2014

    

Charges

    

Payments

    

June 30, 2015

Employment termination costs

 

$

 —

 

$

4,628

 

$

(3,866)

 

$

762

Facilities consolidation

 

 

 —

 

 

63

 

 

 —

 

 

63

Total

 

$

 —

 

$

4,691

 

$

(3,866)

 

$

825

 

 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(Amounts in tables in thousands, except for per share data or unless otherwise noted)

 

11. Legal Matters

 

On October 7, 2014, the company filed an amended complaint in the United States District Court for the District of New Jersey (Civ Act. No. 3:14-cv-06220) against F-Secure Corporation and F-Secure, Inc. (collectively, “F-Secure"), claiming that F-Secure has infringed, and continues to infringe, several of the Company’s patents. In February 2015, Synchronoss entered into a patent license and settlement agreement with F-Secure Corporation and F-Secure, Inc. whereby the Company granted each of these companies (but not their subsidiaries or affiliates) a limited license to Synchronoss’ patents. As a result of entering into the patent license and settlement agreement, the parties filed a joint stipulation to dismiss the above complaint.

 

The Company’s 2011 acquisition agreement with Miyowa SA provided that former shareholders of Miyowa SA would be eligible for earn-out payments, to the extent specified business milestones were achieved following the acquisition.  In December 2013, Eurowebfund and Bakamar, two former shareholders of Miyowa SA, filed a complaint against the Company in the Commercial Court of Paris, France claiming that they are entitled to certain earn-out payments  under the acquisition agreement.  The Company was served with a copy of this complaint in January 2014.  The Company believes Miyowa SA failed to meet the criteria required for it to pay the claimed amounts and that no earn-out payments are owed.  The Company continues to pursue its claims and defend all counterclaims, which counterclaims the Company believes are without merit.  However, due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the lawsuit or estimate any potential loss if the outcome is adverse to the Company.

 

The Company is not currently subject to any legal proceedings that could have a material adverse effect on its operations; however, it may from time to time become a party to various legal proceedings arising in the ordinary course of its business. The Company is currently the plaintiff in several patent infringement cases. The defendants in several of these cases have filed counterclaims. Although the Company cannot predict the outcome of the cases at this time due to the inherent uncertainties of litigation, the Company continues to pursue its claims and believes that the counterclaims are without merit, and the Company intends to defend all such counterclaims.

 

12. Subsequent Events Review

 

The Company has evaluated all subsequent events and transactions through the filing date.

 

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the information set forth in our consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and in our annual report Form 10-K for the year ended December 31, 2014. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “hopes,” “should,” “continues,” “seeks,” “likely” or similar expressions, indicate a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. We caution investors not to place substantial reliance on the forward-looking statements included in this report. These statements speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments.  All numbers are expressed in thousands unless otherwise stated.

 

Overview

 

We are a mobile innovation company that provides cloud solutions and software-based activation for connected devices globally.  Such services include intelligent connectivity management and content synchronization, backup and sharing, as well as device and service procurement, provisioning, activation, and support, that enable communications service providers (“CSPs”), cable operators/multi-services operators (“MSOs”), original equipment manufacturers (“OEMs”) with embedded connectivity (e.g. smartphones, laptops, tablets and mobile Internet devices, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers and other customers to accelerate and monetize their go-to-market strategies for connected devices. This includes automating subscriber activation, order management, upgrades, service provisioning and connectivity and content management from any sales channel to any communication service (wireless or wireline), across any connected device type and managing the content transfer, synchronization and share.  Our global solutions touch all aspects of connected devices on the mobile Internet.

 

Our Synchronoss Personal Cloud™ solution targets individual consumers while our Synchronoss WorkSpace™ solution focuses on providing a secure, integrated file sharing and collaboration solution for small and medium businesses.  In addition, our Integrated Life™ platform is specifically designed to power the activation of the devices and technologies that seamlessly connect today’s consumer and leverage our cloud assets to manage these devices and contents associated with them. The Integrated Life™ platform enables us to drive a natural extension of our mobile activations and cloud services with leading wireless networks around the world to link other non-traditional devices (i.e., automobiles, wearables for personal health and wellness, and connected homes).

 

Our Activation Services, Synchronoss Personal Cloud™, Synchronoss WorkSpace™, and Synchronoss Integrated Life™ platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and “back-office” infrastructure-related systems and processes. Our customers rely on our solutions and technology to automate the process of activation and content and settings management for their customers’ devices while delivering additional communication services. Our Synchronoss Integrated Life™ platform brings together the capabilities of device/service activation with content and settings management to provide a seamless experience of activating and managing non-traditional devices.  Our platforms also support automated customer care processes through use of accurate and effective speech processing technology and enable our customers to offer their subscribers the ability to store in and retrieve from the Cloud their personal and work content and data to their connected mobile devices, such as personal computers, smartphones and tablets.  Our platforms are designed to be carrier-grade, high availability, flexible and scalable to enable multiple converged communication services to be managed across multiple distribution channels, including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets, allowing us to meet the rapidly changing and converging services and connected devices offered by our customers. We enable our customers to acquire, retain and service subscribers quickly, reliably and cost-effectively by enabling backup, restore, synchronization and sharing of subscriber content.  Through the use of our platforms, our customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and social media and enterprise-wide sharing/collaboration connected devices and contents from these devices and associated services.  The extensibility, scalability, reliability and relevance of our platforms enable new revenue streams and retention opportunities for our customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud, while optimizing their cost of operations and enhancing customer experience.

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We currently operate in and market our solutions and services directly through our sales organizations in North America, Europe and Asia-Pacific.

 

Our industry-leading customers include Tier 1 mobile service providers such as AT&T Inc., Verizon Wireless, Vodafone, Orange, Sprint, Telstra and U.S. Cellular, Tier 1 cable operators/MSOs and wireline operators like AT&T Inc., Comcast, Cablevision, Charter, CenturyLink, Mediacom and Level 3 Communications, and large OEMs such as Apple and Ericsson.  These customers utilize our platforms, technology and services to service both consumer and business customers.

 

Revenues

 

We generate a substantial portion of our revenues on a per-transaction or subscription basis, which is derived from contracts that extend up to 60 months from execution. For the three months ended June 30, 2015 and 2014, we derived approximately 73% and 77%, respectively, of our revenues from transactions processed and subscription arrangements. This increase is a result of new subscription arrangements with our existing customers and increased transaction volumes.  The remainder of our revenues were generated from professional services and licenses.

 

Historically, our revenues have been directly impacted by the number of transactions processed.  The future success of our business depends on the continued growth of consumer and business transactions and, as such, the volume of transactions that we process could fluctuate on a quarterly basis.  See “Current Trends Affecting Our Results of Operations” for certain matters regarding future results of operations.

 

Most of our revenues are recorded in U.S. dollars but as we continue to expand our footprint with international carriers and increase the extent of recording our international activities in local currencies, we will become subject to currency translation risk that could affect our future net sales.

 

Each of AT&T and Verizon Wireless accounted for more than 10% of our revenues for the three months ended June 30, 2015 and 2014. AT&T and Verizon Wireless in the aggregate accounted for 74% and 75% of our revenues for the three months ended June 30, 2015 and 2014, respectively. See “Risk Factors” for certain matters bearing risks on our future results of operations.

 

 

Costs and Expenses

 

Our costs and expenses consist of cost of services, research and development, selling, general and administrative, depreciation and amortization, change in contingent consideration and interest and other expense.

 

Cost of services includes all direct materials, direct labor, cost of facilities and those indirect costs related to revenues such as indirect labor, materials and supplies. Our primary cost of services is related to our information technology and systems department, including colocation fees, network costs, data center maintenance, database management and data processing costs, as well as personnel costs associated with service implementation, customer deployment and customer care. Also included in cost of services are costs associated with our exception handling centers and the maintenance of those centers. Currently, we utilize a combination of employees and third-party providers to process transactions through these centers.

 

Research and development costs are expensed as incurred unless they meet U.S. Generally Accepted Accounting Principles (“GAAP”) criteria for deferral and amortization. Software development costs incurred prior to the establishment of technological feasibility do not meet these criteria, and are expensed as incurred. Research and development expense consists primarily of costs related to personnel, including salaries and other personnel-related expenses, consulting fees and the cost of facilities, computer and support services used in service technology development. We also expense costs relating to developing modifications and minor enhancements of our existing technology and services.

 

Selling, general and administrative expense consists of personnel costs including salaries, sales commissions, sales operations and other personnel-related expenses, travel and related expenses, trade shows, costs of communications equipment and support services, facilities costs, consulting fees, costs of marketing programs, such as internet and print and other overhead costs.

 

Net change in contingent consideration obligation consists of the changes to the fair value estimate of the obligation to the former equity holders which resulted from our acquisitions. The estimate is based on the weighted probability of achieving certain financial

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targets and milestones. The contingent consideration obligation earn-out periods are no longer than 12 months in duration.  As such, we recognize the changes in fair value over that period.  Final determination of the payment is done up to 90 days after the earn-out period.

 

Restructuring charges consist of the costs associated with the January 2015 work-force reduction plan to reduce costs and align our resources with our key strategic priorities. The restructuring charges include employee termination costs.

 

Depreciation relates to our property and equipment and includes our network infrastructure and facilities. Amortization primarily relates to trademarks, customer lists, technology acquired and internally developed software.

 

Interest expense consists primarily of interest on our lease financing obligations and our convertible senior notes.

 

Current Trends Affecting Our Results of Operations

 

Business from our Activation and Cloud Solutions has been driven by the unprecedented growth in mobile devices globally. Certain industry trends, such as Next programs from AT&T, have resulted in faster device upgrade cycles increasing device order transactions and activations. Our recent acquisition of the Personal Cloud assets of F-Secure is intended to provide additional penetration within our AT&T account. With mobile devices becoming content rich and starting to act as a replacement for other traditional devices like PC’s, the need to securely back up content from mobile devices, sync it with other devices and share it with others in their community of family, friends and business associates have become essential needs. The major Tier 1 carriers are also publicly discussing achieving 500% penetration (multiple connected devices per user) by enabling connectivity to non-traditional devices. Such devices include connected cars, health and wellness devices, connected home and health care. The need for these devices to be activated, managed and the contents from them to be stored in a common cloud are also expected to be drivers of our businesses in the long term.

 

Bring Your Own Technology is impacting the work environment for Small and Medium Businesses, which find themselves in a position where they need to offer their employees a safe environment to share and collaborate on their work documents and files via mobile devices. Leveraging our Synchronoss Personal Cloud solution infrastructure and technology to build our Synchronoss WorkSpace™ solution for this purpose is enabling us to serve a completely new market, which we believe will also contribute to our growth.

 

To support our expected growth driven by the favorable industry trends mentioned above, we continue to look for opportunities to improve our operating efficiencies, such as the utilization of offshore technical and non-technical resources for our exception handling center management as well as routine software maintenance activities. We also leverage modular components from our existing software platforms to build new products.   We believe that these opportunities will continue to provide future benefits and position us to support revenue growth. In addition, we anticipate further automation of the transactions generated by our more mature customers and additional transaction types. Our cost of services can fluctuate from period to period based upon the level of automation and the on-boarding of new transaction and service types. We are also making investments in new research and development for development of products designed to enable us to grow rapidly in the mobile wireless market. Our purchase of capital assets and equipment may also increase based on aggressive deployment, subscriber growth and promotional offers for storage incentives by our major Tier 1 carrier customers.

 

We continue to advance our plans for the expansion of our platforms' footprint with broadband carriers and international mobile carriers to support connected devices and multiple networks through our focus on transaction management and cloud-based services for back up, synchronization and sharing of content. Our initiatives with AT&T, Verizon Wireless, Vodafone and other CSPs continue to grow both with our current businesses as well as new products. We are also exploring additional opportunities through merger and acquisition activities to support our customer, product and geographic diversification strategies.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements in accordance with GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the consolidated financial statements and the reported amounts of

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revenues and expenses during a fiscal period. The Securities and Exchange Commission (“SEC”) considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the audit committee of our Board of Directors, and the audit committee has reviewed our related disclosures in this Form 10-Q.  Although we believe that our judgments and estimates are appropriate, correct and reasonable under the circumstances, actual results may differ from those estimates.  If actual results or eve