10-Q 1 c554-20150930x10q.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 September 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 October 28, 2015

Common stock, $0.0001 par value

 

44,124,489

 

 

 


 

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

27

 

 

 

Item 4. 

Controls and Procedures

28

 

 

 

 

 

 

PART II. 

OTHER INFORMATION

28

 

 

 

Item 1. 

Legal Proceedings

28

 

 

 

Item 1A. 

Risk Factors

28

 

 

 

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)

 

 

 

 

 

 

 

 

 

September 30, 2015

    

December 31, 2014

 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

143,352

 

$

235,967

Marketable securities

 

67,452

 

 

51,097

Accounts receivable, net of allowance for doubtful accounts of $376 and $88 at September 30, 2015 and December 31, 2014, respectively

 

157,166

 

 

118,371

Prepaid expenses and other assets

 

32,515

 

 

35,023

Deferred tax assets

 

3,899

 

 

1,475

Total current assets

 

404,384

 

 

441,933

Marketable securities

 

16,195

 

 

3,313

Property and equipment, net

 

168,785

 

 

151,171

Goodwill

 

186,973

 

 

147,135

Intangible assets, net

 

119,408

 

 

99,489

Deferred tax assets

 

7,754

 

 

1,232

Other assets

 

18,140

 

 

18,549

Total assets

$

921,639

 

$

862,822

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable

$

14,814

 

$

25,059

Accrued expenses

 

41,594

 

 

42,679

Deferred revenues

 

14,039

 

 

11,897

Contingent consideration obligation

 

170

 

 

8,000

Total current liabilities

 

70,617

 

 

87,635

Lease financing obligation - long term

 

13,886

 

 

9,204

Convertible debt

 

230,000

 

 

230,000

Deferred tax liability

 

8,440

 

 

3,698

Other liabilities

 

2,970

 

 

3,178

Stockholders’ equity:

 

 

 

 

 

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

 

 —

 

 

 —

Common stock, $0.0001 par value; 100,000 shares authorized, 47,757 and 46,444 shares issued; 44,078 and 42,711 outstanding at September 30, 2015 and December 31, 2014, respectively

 

4

 

 

4

Treasury stock, at cost (3,679 and 3,733 shares at September 30, 2015 and December 31, 2014, respectively)

 

(65,651)

 

 

(66,336)

Additional paid-in capital

 

498,653

 

 

454,740

Accumulated other comprehensive loss

 

(33,353)

 

 

(20,014)

Retained earnings

 

196,073

 

 

160,713

Total stockholders’ equity

 

595,726

 

 

529,107

Total liabilities and stockholders’ equity

$

921,639

 

$

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 September 30, 

 

Nine Months Ended September 30, 

 

    

2015

 

2014

    

2015

    

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

150,874

 

$

125,175

 

$

421,620

 

$

327,103

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services*

 

 

63,438

 

 

50,496

 

 

172,013

 

 

131,766

Research and development

 

 

23,986

 

 

21,056

 

 

68,472

 

 

53,902

Selling, general and administrative

 

 

21,003

 

 

21,382

 

 

60,603

 

 

55,656

Net change in contingent consideration obligation

 

 

 —

 

 

355

 

 

 —

 

 

1,680

Restructuring charges

 

 

399

 

 

 —

 

 

5,090

 

 

 —

Depreciation and amortization

 

 

19,754

 

 

16,268

 

 

51,221

 

 

42,292

Total costs and expenses

 

 

128,580

 

 

109,557

 

 

357,399

 

 

285,296

Income from operations

 

 

22,294

 

 

15,618

 

 

64,221

 

 

41,807

Interest income

 

 

546

 

 

358

 

 

1,483

 

 

867

Interest expense

 

 

(1,448)

 

 

(1,164)

 

 

(4,208)

 

 

(2,258)

Other (expense) income

 

 

(1,030)

 

 

3

 

 

(601)

 

 

1,052

Income before income tax expense

 

 

20,362

 

 

14,815

 

 

60,895

 

 

41,468

Income tax expense

 

 

(10,717)

 

 

(5,488)

 

 

(25,535)

 

 

(16,193)

Net income

 

$

9,645

 

$

9,327

 

$

35,360

 

$

25,275

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

$

0.23

 

$

0.84

 

$

0.63

Diluted

 

$

0.21

 

$

0.22

 

$

0.77

 

$

0.61

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42,491

 

 

40,833

 

 

42,077

 

 

40,173

Diluted

 

 

47,692

 

 

44,265

 

 

47,505

 

 

41,795

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

8,994

 

$

(3,004)

 

$

22,021

 

$

13,446

 

 

 

 

 

*  

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)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2015

    

2014

Operating activities:

 

 

 

 

 

 

Net income

 

$

35,360

 

$

25,275

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

 

 

 

 

 

 

Depreciation and amortization expense

 

 

51,221

 

 

42,292

Amortization of debt issuance costs

 

 

1,125

 

 

242

Amortization of bond premium

 

 

1,261

 

 

263

Deferred income taxes

 

 

(11,772)

 

 

(2,407)

Non-cash interest on leased facility

 

 

694

 

 

709

Stock-based compensation

 

 

21,234

 

 

20,470

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

 

(40,442)

 

 

(40,795)

Prepaid expenses and other current assets

 

 

8,020

 

 

(4,434)

Other assets

 

 

(670)

 

 

(2,804)

Accounts payable

 

 

106

 

 

8,331

Accrued expenses

 

 

(4,975)

 

 

(1,570)

Contingent consideration obligation

 

 

(1,532)

 

 

2,881

Excess tax benefit from the exercise of stock options

 

 

(4,710)

 

 

(754)

Other liabilities

 

 

(138)

 

 

1,228

Deferred revenues

 

 

1,610

 

 

(3,925)

Net cash provided by operating activities

 

 

56,392

 

 

45,002

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

Purchases of fixed assets

 

 

(53,461)

 

 

(24,796)

Purchases of intangible assets

 

 

(1,200)

 

 

 —

Purchases of marketable securities available-for-sale

 

 

(105,817)

 

 

(27,657)

Maturities of marketable securities available-for-sale

 

 

75,370

 

 

1,990

Businesses acquired, net of cash

 

 

(83,592)

 

 

(38,085)

Net cash used in investing activities

 

 

(168,700)

 

 

(88,548)

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

16,752

 

 

20,727

Payments on contingent consideration obligation

 

 

(4,468)

 

 

 —

Debt issuance costs related to convertible notes

 

 

 —

 

 

(6,561)

Proceeds from issuance of convertible notes

 

 

 —

 

 

230,000

Borrowings on revolving line of credit

 

 

 —

 

 

40,000

Repayment of revolving line of credit

 

 

 —

 

 

(40,000)

Excess tax benefit from the exercise of stock options

 

 

4,710

 

 

754

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

 

 

1,902

 

 

1,677

Repayments of capital obligations

 

 

(1,772)

 

 

(1,129)

Net cash provided by financing activities

 

 

17,124

 

 

245,468

Effect of exchange rate changes on cash

 

 

2,569

 

 

189

Net (decrease) increase in cash and cash equivalents

 

 

(92,615)

 

 

202,111

Cash and cash equivalents at beginning of period

 

 

235,967

 

 

63,512

Cash and cash equivalents at end of period

 

$

143,352

 

$

265,623

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for income taxes

 

$

24,052

 

$

14,152

Cash paid for interest

 

$

3,918

 

$

1,998

 

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)

 

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 transfer, synchronization and sharing of content.

 

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 leveraging 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.

 

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 content 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, 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.

 

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)

 

2. Basis of Presentation and Consolidation

 

The consolidated financial statements as of September 30, 2015 and for the three and nine months ended September 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. Certain amounts from the prior year’s financial statements have been reclassified to conform to the current year’s presentation and such amounts were not considered material to amend prior periods.

 

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.

 

Recently Issued Accounting Standards

 

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, simplifying the Accounting for Measurement-Period Adjustments that eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance does not change what constitutes a measurement period adjustment. The Company does not expect the adoption of this ASU to significantly impact the consolidated financial statements.

 

In August 2015, the FASB issued ASU 2015-15 Interest- Imputation of Interest, final guidance that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. This publication has been updated to reflect an SEC staff member’s comment in June 2015 that the staff will not object to an entity presenting the cost of securing a revolving line of credit as an asset, regardless of whether a balance is outstanding. 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. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 by one year, and would allow entities the option to early adopt the new revenue standard as of the original effective date. The Company is currently evaluating their adoption method and the impact of the standard on the consolidated financial statements.

 

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)

 

3. Earnings per Common Share

 

Basic earnings per share is calculated by using the weighted-average number of common shares outstanding during the period, excluding amounts associated with restricted shares.  

 

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

 

The 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 745 thousand and 834 thousand for the three months ended September 30, 2015 and 2014, respectively, and 434 thousand and 1.4 million for the nine months ended September 30, 2015 and 2014, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,  

 

Nine Months Ended September 30,  

 

 

 

2015

 

 

2014

   

 

2015

 

 

2014

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

9,645

    

$

9,327

 

$

35,360

 

$

25,275

Income effect for interest on convertible debt, net of tax

 

 

377

 

 

247

 

 

1,366

 

 

247

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

 

$

10,022

 

$

9,574

 

$

36,726

 

$

25,522

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic

 

 

42,491

 

 

40,833

 

 

42,077

 

 

40,173

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

Shares from assumed conversion of convertible debt

 

 

4,326

 

 

2,257

 

 

4,326

 

 

576

Options and unvested restricted shares

 

 

875

 

 

1,175

 

 

1,102

 

 

1,046

Weighted average common shares outstanding — diluted

 

 

47,692

 

 

44,265

 

 

47,505

 

 

41,795

 

 

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.

 

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)

 

The following is a summary of assets and liabilities held by the Company and their related classifications under the fair value hierarchy: 

 

 

 

 

 

 

 

 

September 30, 2015

    

December 31, 2014

Level 1 (A)

$

143,352

 

$

235,967

Level 2 (B)

 

83,647

 

 

54,410

Level 3 (C)

 

(170)

 

 

(8,000)

Total

$

226,829

 

$

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 nine months ended September 30, 2015.

 

Available-for-Sale Securities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate Amount of

 

 

Aggregate

 

Unrealized

 

    

Fair Value

    

Gains

    

Losses

Due in one year or less

 

$

67,452

 

$

15

 

$

(110)

Due after one year, less than five years

 

 

16,195

 

 

19

 

 

(9)

 

 

$

83,647

 

$

34

 

$

(119)

 

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 September 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.

 

9


 

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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)

 

Contingent Consideration

 

The Company determined the fair value of the contingent consideration related to Razorsight using a real options approach which uses a risk-adjusted expected growth rate based on assessments of expected growth in revenue, adjusted by an appropriate factor. 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. 

 

The Company determined the fair value of the contingent consideration obligation related to Strumsoft 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 nine months ended September 30, 2015 were as follows:

 

 

 

 

 

 

    

Level 3

Balance at December 31, 2014

 

$

8,000

Payment of contingent consideration

 

 

(8,000)

Addition of Razorsight earn-out

 

 

170

Balance at September 30, 2015

 

$

170

 

 

5. Acquisition

 

Razorsight Corporation (“Razorsight”)

 

On August 4, 2015, the Company acquired all outstanding shares of Razorsight for $25.3 million, net of liabilities assumed. In addition, the Company potentially may make payments ("Razorsight Earn-out") totaling up to approximately $15 million based on the ability to achieve a range of business objectives for the period from the acquisition date through December 31, 2016.

 

Razorsight offers cloud-based analytics solutions for communications service providers. Their cloud-based products embed advanced statistical analysis and predictive analytics to proactively pinpoint customer attrition risk, revenue opportunities, and better customer experiences.  Synchronoss believes that this acquisition will strategically enhance the Company’s product portfolio allowing the Company to reach a broader client base and by expanding their value proposition and more deeply embedding their platform. 

 

10


 

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

 

 

 

 

 

 

 

 

 

Purchase Price

 

 

 

 

Allocation

 

 

Cash

 

$

1,172

 

 

Prepaid expenses and other assets

 

 

1,300

 

 

Accounts receivable

 

 

120

 

 

Equipment

 

 

879

 

 

Other assets - long term

 

 

144

 

 

Intangible assets:

 

 

 

 

Wtd. Avg.

Technology

 

 

9,200

 

4 years

Customer relationships

 

 

11,690

 

10 years

Goodwill

 

 

11,874

 

 

Total assets acquired

 

 

36,379

 

 

Accounts payable and accrued liabilities

 

 

2,211

 

 

Lease obligation

 

 

284

 

 

Deferred revenues

 

 

965

 

 

Contingent consideration

 

 

170

 

 

Deferred taxes

 

 

7,465

 

 

Net assets acquired

 

$

25,284

 

 

 

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.

 

Acquisition-related costs, including transaction costs such as legal, accounting, valuation and other professional services, were $112 thousand.

 

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.

 

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

 

 

 

11


 

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 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 nine months ended September 30, 2015, including transaction costs such as legal, accounting, valuation and other professional services, were $862 thousand.

 

6. Stockholders’ Equity

 

Stock- based Compensation

 

The following table summarizes information about stock-based compensation, which includes the fair value for equity awards issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax stock based compensation expense

 

$

8,143

 

$

7,788

 

$

21,234

 

$

20,470

Tax effect of stock based compensation

 

 

2,570

 

 

2,637

 

 

6,701

 

 

6,962

Cash received from the exercise of options

 

 

4,924

 

 

12,857

 

 

16,752

 

 

20,727

 

The total stock-based compensation cost related to unvested equity awards as of September 30, 2015 was approximately $67.0 million. The expense is expected to be recognized over a weighted-average period of approximately 2.73 years. 

 

A summary of the Company’s unvested restricted stock at September 30, 2015, and changes during the nine months ended September 30, 2015, is presented below:

 

 

 

 

 

 

Number of

Non-Vested Restricted Stock

    

Awards

Non-vested at December 31, 2014

 

1,342

Granted

 

765

Vested

 

(524)

Forfeited

 

(158)

Non-vested at September 30, 2015

 

1,425

 

Stock Options

 

The following table summarizes information about stock options outstanding as of September 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

 

594

 

 

43.22

 

 

 

 

 

Options Exercised

 

(706)

 

 

23.73

 

 

 

 

 

Options Cancelled

 

(173)

 

 

32.00

 

 

 

 

 

Outstanding at September 30, 2015 

 

2,482

 

$

30.13

 

4.52

 

$

13,119

Vested or expected to vest at September 30, 2015

 

2,339

 

$

29.80

 

4.43

 

$

12,973

Exercisable at September 30, 2015

 

1,247

 

$

23.55

 

3.14

 

$

11,681

 

12


 

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 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 September 30, 

 

Nine Months Ended September 30, 

 

    

2015

    

2014

    

2015

 

2014

Expected stock price volatility

 

46

%

 

48

%

 

48

%

 

58

%

Risk-free interest rate

 

1.27

%

 

1.33

%

 

1.26

%

 

1.43

%

Expected life of options (in years)

 

3.98

 

 

4.12

 

 

4.00

 

 

4.25

 

Expected dividend yield

 

0

%

 

0

%

 

0

%

 

0

%

 

The weighted-average fair value (as of the date of grant) of the options was $15.53 and $17.03 per share for the three months ended September 30, 2015 and 2014, respectively, and $16.54 and $14.64 per share for the nine months ended September 30, 2015 and 2014, respectively

 

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 September 30, 

 

Nine Months Ended September 30, 

 

    

2015

    

2014

 

2015

 

2014

Expected stock price volatility

 

36

%

 

63

%

 

36

%

 

52

%

Risk-free interest rate

 

0.25

%

 

0.07

%

 

0.24

%

 

0.06

%

Expected life (in years)

 

0.50

 

 

0.50

 

 

0.50

 

 

0.50

 

Expected dividend yield

 

0

%

 

0

%

 

0

%

 

0

%

 

The weighted-average fair value (as of the date of grant) of the ESPP shares was $11.82 and $10.58 per share for the three months ended September 30, 2015 and 2014, respectively, and $11.82 and $10.54 per share for the nine months ended September 30, 2015 and 2014, respectively.

 

The following table summarizes information about the ESPP Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation expense

 

$

150

 

$

148

 

$

475

 

$

503

Treasury shares sold

 

 

25

 

 

34

 

 

54

 

 

61

Cash received from purchases (1)

 

$

927

 

$

937

 

$

1,902

 

$

1,677

 

(1)

Included within the financing activities section of the consolidated statements of cash flows.

 

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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 total unrecognized compensation expense related to the ESPP as of September 30, 2015 was approximately $197 thousand, which is expected to be recognized over the remainder of the offering period.

 

7. Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income (loss) was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

   

2015

   

2014

   

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

9,645

 

$

9,327

 

$

35,360

 

$

25,275

Translation adjustments

 

 

(971)

 

 

(10,652)

 

 

(11,681)

 

 

(6,735)

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

 

 

255

 

 

(47)

 

 

389

 

 

(43)

Net income (loss) on intra-entity foreign currency transactions, (net of tax)

 

 

65

 

 

(1,632)

 

 

(2,047)

 

 

(5,051)

Total comprehensive income (loss)

 

$

8,994

 

$

(3,004)

 

$

22,021

 

$

13,446

 

The changes in accumulated other comprehensive income (loss) during the nine months ended September 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

 

$

(16,880)

 

$

(2,957)

 

$

(177)

 

$

(20,014)

Other comprehensive (loss) income

 

 

(11,681)

 

 

(3,715)

 

 

400

 

 

(14,996)

Tax effect

 

 

 —

 

 

1,668

 

 

(11)

 

 

1,657

Total comprehensive (loss) income

 

 

(11,681)

 

 

(2,047)

 

 

389

 

 

(13,339)

Balance at September 30, 2015

 

$

(28,561)

 

$

(5,004)

 

$

212

 

$

(33,353)

 

 

 

8. Goodwill and Intangibles

 

Goodwill

 

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

 

The changes in Goodwill during the nine months ended September 30, 2015 are as follows:

 

 

 

 

 

Balance at December 31, 2014

    

$

147,135

Acquisitions

 

 

48,328

Reclassifications, adjustments and other

 

 

(30)

Translation adjustments

 

 

(8,460)

Balance at September 30, 2015

 

$

186,973

 

The reclassification adjustment of $30 thousand is primarily related to a change in the Company’s deferred tax asset in connection with a pre-acquisition tax loss.

 

14


 

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)

 

Other Intangible Assets

 

Intangible assets consist primarily of trade names, technology, and customer lists and relationships. These intangible assets are amortized on the straightline method over the estimated useful life. Amortization expense for the nine months ended September 30, 2015 and the year ended December 31, 2014 was $20.0 million and $19.8 million, respectively.

 

The Company’s intangible assets consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

September 30, 2015

 

Average

 

 

 

 

Accumulated

 

 

 

 

Life

 

Cost

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

Trade name

4

 

$

1,539

 

$

(1,360)

 

$

179

Technology

7

 

 

75,549

 

 

(31,845)

 

 

43,704

Customer lists and relationships

9

 

 

99,992

 

 

(29,935)

 

 

70,057

Capitalized software and patents

3

 

 

9,051

 

 

(3,583)

 

 

5,468

Order Backlog

 —

 

 

918

 

 

(918)

 

 

 —

 

8

 

$

187,049

 

$

(67,641)

 

$

119,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

December 31, 2014

 

Average

 

 

 

 

Accumulated

 

 

 

 

Life

 

Cos