10-Q 1 c554-20160630x10q.htm 10-Q sncr-Current Folio-10Q_Taxonomy2015

 

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, 2016

 

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 29, 2016

Common stock, $0.0001 par value

 

45,135,189

 

 

 


 

SYNCHRONOSS TECHNOLOGIES, INC.

FORM 10-Q INDEX

 

 

 

 

 

 

PAGE NO.

PART I. 

FINANCIAL INFORMATION

3

 

 

 

Item 1. 

Condensed Consolidated Financial Statements and Notes

3

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income (unaudited) 

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

 

 

 

 

Item 2. 

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

22

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

Item 4. 

Controls and Procedures

32

 

 

 

 

 

 

PART II. 

OTHER INFORMATION

33

 

 

 

Item 1. 

Legal Proceedings

33

 

 

 

Item 1A. 

Risk Factors

33

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 3. 

Defaults Upon Senior Securities

34

 

 

 

Item 4. 

Mine Safety Disclosures

34

 

 

 

Item 5. 

Other Information

34

 

 

 

Item 6. 

Exhibits

35

 

 

 

SIGNATURES 

36

 

 

 

 

 

 

 

 


 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

 

SYNCHRONOSS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

June 30, 2016

    

December 31, 2015

 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

111,028

 

$

147,634

Marketable securities

 

62,274

 

 

66,357

Accounts receivable, net of allowance for doubtful accounts of $1,508 and $3,029 at June 30, 2016 and December 31, 2015, respectively

 

162,386

 

 

143,692

Prepaid expenses and other assets

 

49,947

 

 

49,262

Total current assets

 

385,635

 

 

406,945

Marketable securities

 

13,949

 

 

19,635

Property and equipment, net

 

167,135

 

 

168,280

Goodwill

 

317,586

 

 

221,271

Intangible assets, net

 

222,045

 

 

174,322

Deferred tax assets

 

1,902

 

 

3,560

Other assets

 

14,780

 

 

16,215

Total assets

$

1,123,032

 

$

1,010,228

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable

$

35,150

 

$

26,038

Accrued expenses

 

52,534

 

 

45,819

Deferred revenues

 

28,009

 

 

8,323

Contingent consideration obligation

 

7,657

 

 

 —

Short term debt

 

47,000

 

 

 —

Total current liabilities

 

170,350

 

 

80,180

Lease financing obligation - long term

 

13,623

 

 

13,343

Contingent consideration obligation - long-term

 

 —

 

 

930

Convertible debt

 

225,585

 

 

224,878

Deferred tax liability  1

 

29,716

 

 

16,404

Other liabilities

 

22,545

 

 

3,227

Redeemable noncontrolling interest

 

55,459

 

 

61,452

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000 shares authorized, 0 shares issued and outstanding at June 30, 2016 and December 31, 2015

 

 —

 

 

 —

Common stock, $0.0001 par value; 100,000 shares authorized, 49,132 and 48,084 shares issued; 45,079 and 44,405 outstanding at June 30, 2016 and December 31, 2015, respectively

 

4

 

 

4

Treasury stock, at cost (4,053 and 3,679 shares at June 30, 2016 and December 31, 2015, respectively)

 

(95,812)

 

 

(65,651)

Additional paid-in capital  1

 

547,970

 

 

512,802

Accumulated other comprehensive loss

 

(34,880)

 

 

(38,684)

Retained earnings 1

 

188,472

 

 

201,343

Total stockholders’ equity

 

605,754

 

 

609,814

Total liabilities and stockholders’ equity

$

1,123,032

 

$

1,010,228

 

1 See Note 2 for discussion of the adoption of ASU 2016-09.

 

See accompanying notes to consolidated financial statements.

3


 

SYNCHRONOSS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2016

 

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

157,551

 

$

137,820

 

$

300,237

 

$

270,746

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services*

 

 

71,468

 

 

54,920

 

 

139,774

 

 

108,575

Research and development

 

 

26,170

 

 

22,462

 

 

50,267

 

 

44,486

Selling, general and administrative

 

 

30,618

 

 

18,717

 

 

58,199

 

 

39,600

Net change in contingent consideration obligation

 

 

6,386

 

 

 —

 

 

6,727

 

 

 —

Restructuring charges

 

 

1,191

 

 

1,451

 

 

4,162

 

 

4,691

Depreciation and amortization

 

 

25,262

 

 

16,632

 

 

49,317

 

 

31,467

Total costs and expenses

 

 

161,095

 

 

114,182

 

 

308,446

 

 

228,819

(Loss) income from operations

 

 

(3,544)

 

 

23,638

 

 

(8,209)

 

 

41,927

Interest income

 

 

591

 

 

471

 

 

1,221

 

 

937

Interest expense

 

 

(1,834)

 

 

(1,418)

 

 

(3,410)

 

 

(2,760)

Other income (expense), net

 

 

865

 

 

415

 

 

(19)

 

 

429

(Loss) income before income tax expense

 

 

(3,922)

 

 

23,106

 

 

(10,417)

 

 

40,533

Income tax expense 1

 

 

(3,381)

 

 

(7,952)

 

 

(7,969)

 

 

(14,818)

Net (loss) income

 

 

(7,303)

 

 

15,154

 

 

(18,386)

 

 

25,715

Net loss attributable to noncontrolling interests

 

 

(2,864)

 

 

 —

 

 

(5,993)

 

 

 —

Net (loss) income attributable to Synchronoss

 

$

(4,439)

 

$

15,154

 

$

(12,393)

 

$

25,715

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share attributable to Synchronoss:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10)

 

$

0.36

 

$

(0.29)

 

$

0.61

Diluted

 

$

(0.10)

 

$

0.33

 

$

(0.29)

 

$

0.56

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

43,450

 

 

41,870

 

 

43,449

 

 

41,898

Diluted

 

 

43,450

 

 

47,271

 

 

43,449

 

 

47,371

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income attributable to Synchronoss

 

$

(10,061)

 

$

21,934

 

$

(8,589)

 

$

13,027

 

 

 

 

*  

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

 

1 See Note 2 for discussion of the adoption of ASU 2016-09.

 

 

 

 

See accompanying notes to consolidated financial statements.

4


 

SYNCHRONOSS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

    

2016

    

2015

Operating activities:

 

 

 

 

 

(As Adjusted)

Net (loss) income

 

$

(18,386)

 

$

25,715

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

49,317

 

 

31,467

Amortization of debt issuance costs

 

 

750

 

 

750

Loss on disposals

 

 

68

 

 

 —

Amortization of bond premium

 

 

754

 

 

756

Deferred income taxes

 

 

5,980

 

 

2,065

Non-cash interest on leased facility

 

 

458

 

 

464

Stock-based compensation

 

 

16,426

 

 

13,087

Contingent consideration obligation

 

 

6,727

 

 

(1,532)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

 

(18,170)

 

 

(19,758)

Prepaid expenses and other current assets 1

 

 

2,948

 

 

(4,749)

Other assets

 

 

2,580

 

 

(282)

Accounts payable

 

 

51

 

 

2,869

Accrued expenses 1

 

 

1,110

 

 

8,947

Other liabilities

 

 

(6,811)

 

 

(172)

Deferred revenues

 

 

30,388

 

 

2,882

Net cash provided by operating activities

 

 

74,190

 

 

62,509

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

Purchases of fixed assets

 

 

(26,864)

 

 

(34,947)

Purchases of marketable securities available-for-sale

 

 

(11,592)

 

 

(72,015)

Maturities of marketable securities available-for-sale

 

 

20,567

 

 

52,375

Businesses acquired, net of cash

 

 

(98,428)

 

 

(59,481)

Net cash used in investing activities

 

 

(116,317)

 

 

(114,068)

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

4,945

 

 

11,828

Taxes paid on withholding shares 1

 

 

(5,380)

 

 

(16,844)

Payments on contingent consideration obligation

 

 

 —

 

 

(4,468)

Borrowings on revolving line of credit

 

 

50,000

 

 

 —

Repayment of revolving line of credit

 

 

(3,000)

 

 

 —

Repurchases of common stock

 

 

(40,025)

 

 

 —

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

 

 

955

 

 

975

Repayments of capital lease obligations

 

 

(1,484)

 

 

(564)

Net cash provided by (used in) financing activities

 

 

6,011

 

 

(9,073)

Effect of exchange rate changes on cash

 

 

(490)

 

 

718

Net decrease in cash and cash equivalents

 

 

(36,606)

 

 

(59,914)

Cash and cash equivalents at beginning of period

 

 

147,634

 

 

235,967

Cash and cash equivalents at end of period

 

$

111,028

 

$

176,053

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Issuance of common stock in connection with Openwave acquisition

 

$

22,000

 

$

 —

Cash paid for income taxes

 

$

3,208

 

$

13,657

Cash paid for interest

 

$

1,355

 

$

698

 

1 See Note 2 for discussion of the adoption of ASU 2016-09.

 

 

See accompanying notes to consolidated financial statements.

 

5


 

Table of Contents

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

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

 

1. Description of Business

 

Synchronoss Technologies, Inc. (the “Company” or “Synchronoss”) is a leading innovator of cloud solutions, software-based activation, secure mobility, identity management and secure messaging for mobile carriers, enterprises, retailers and OEMs across the globe. Synchronoss’ software provides innovative service provider 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: activation and provisioning software for devices and services, cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, identity/access management and secure mobility management that enable communications service providers (CSPs), cable operators/multi-services operators (MSOs) and original equipment manufacturers (OEMs) with embedded connectivity (e.g. smartphones, laptops, tablets and mobile Internet devices (MIDs), such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers, medium and large enterprises and their consumers as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices.

 

Synchronoss’ Activation Software, Synchronoss Personal Cloud™ and Enterprise products and 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 subscribers’ devices while delivering additional communication services.

 

The Synchronoss Activation solution orchestrates the complex and different back-end systems of communication service providers to provide a best-in-class ordering system by orchestrating the workflow and consolidated automated customer care services. This allows CSPs using the Company’s platforms to realize the full benefits of their offerings. The platforms also support, among other automated transaction areas, credit card billing, inventory management, and trouble ticketing. In addition to this, the platform supports the physical transactions involved in customer activation and service such as managing access service requests, local service requests, local number portability, and directory listings.

 

The Synchronoss Personal Cloud™ solution seamlessly transfers content from an old device to a new device, syncs, backs up and connects consumer’s content from multiple smart devices to the Company’s cloud platform. This allows carrier customers to protect and manage their growing cache of personally generated, mobile content over long periods of time.

 

The Synchronoss Enterprise solutions support an advanced mobility digital experience for businesses and consumers for accessing and protecting their information.  The Company’s identity and access management platform helps consumers and business users to securely authenticate access to online websites to conduct e-commerce transactions or access important data. The secure mobility platforms help users safely and securely store and share important data.  The solutions are based on understanding assumptions on the behaviors of individuals through the capture of who they are, what they are doing and how, where and when they are doing it. This allows the Company’s platforms to help reduce fraud, improve cybersecurity detection/prevention and overall productivity. The identity and access solution supports both consumers by allowing them to self-register and verify their identity, while providing non-intrusive multi-factor authentication and businesses the ability to be sure the correct person is doing the transaction.  The secure mobility solution combines the identity platform with a “bring your own device” (BYOD) platform that is based on a secure container for accessing data, applications, content and personal information management tools like email, calendar, messaging and notes.

 

Synchronoss Messaging is a white label messaging platform for service providers and offers a full range of deployment options including full integration with on premise systems, hybrid deployment support for optimal mix of technologies and protecting existing investments, and full cloud deployment for both SaaS and hosted models. Synchronoss Messaging features a distributed systems management console (messaging security, administration console for user and domain provisioning and management, integration with Nagios for monitoring and alerts) with support for smartphones, tablets and connected devices (support for leading protocols including iCal, CalDAV, CardDAV, EAS, IMAP/IDLE), Native Mobile App for iOS and Android for mail, contacts, calendar and task management.

 

6


 

Table of Contents

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

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

 

Synchronoss’ products and 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 Synchronoss to meet the rapidly changing and converging services and connected devices offered by the Company’s customers. The Company’s products, platforms and solutions enable its Enterprise customers to acquire, retain and service subscribers quickly, reliably and cost-effectively with white label and custom-branded solutions.  Customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing 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. Synchronoss currently operates in and markets its solutions and services directly through its sales organizations in North America, Europe and Asia-Pacific.

 

2. Basis of Presentation and Consolidation

 

The condensed consolidated financial statements as of June 30, 2016 and for the three and six months ended June 30, 2016 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, 2015. 

 

The condensed consolidated financial statements include the accounts of the Company, its whollyowned subsidiaries, variable interest entities (VIE) in which the Company is the primary beneficiary and entities in which the Company has a controlling interest. The Company has no unconsolidated subsidiaries or investments accounted for under the equity method. All material intercompany transactions and accounts are eliminated in consolidation. 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.

 

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, 2015.

 

Recently Issued Accounting Standards

 

In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The ASU is effective for public companies in annual periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted beginning after December 15, 2018 and interim periods within those years. The Company is currently evaluating the impact of adoption on its condensed consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (ASU 2014-15). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial statements.

 

7


 

Table of Contents

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

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

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications. The new standards are effective for public reporting companies for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the effect that these ASUs will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the full effect of these standards on its ongoing financial reporting.

 

Impact of New Accounting Pronouncements

 

In March, 2016, the FASB released Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments may significantly impact net income, earnings per share, and the statement of cash flows. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The Company elected to early adopt this standard in the second quarter ended June 30, 2016.  

 

ASU 2016-09 eliminates the requirement to estimate and apply a forfeiture rate to reduce stock compensation expense during the vesting period and, instead, account for forfeitures as they occur. ASU 2016-09 requires that this change be adopted using the modified retrospective approach. As such, the Company recorded a cumulative-effect adjustment of $959 thousand to adjust retained earnings.

 

Under ASU 2016-09, excess tax benefits related to employee share-based payments are not reclassified from operating activities to financing activities in the statement of cash flows. The Company applied the effect of ASU 2016-09 to the presentation of excess tax benefits in the statement of cash flows, retrospectively. This change increased the net cash provided by operating activities and decreased net cash provided by financing activities by $3.9 million for the six months ended June 30, 2015.

 

Under ASU 2016-09, cash paid when withholding shares for tax withholding purposes are classified as a financing activity in the statement of cash flows. ASU 2016-09 requires that this change be adopted retrospectively. The presentation requirements for cash flows related to employee taxes paid for withheld shares increased the net cash provided by operating activities and decreased net cash provided by financing activities by $16.8 million for the six months ended June 30, 2015.

 

ASU 2016-09 eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. This resulted in an increase in the effective tax rate for the three and six months ended June 30, 2016 of 13% and 9%, respectively. The ASU requires that this change be adopted prospectively. The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share for the three months ended June 30, 2016. This increased the diluted weighted average common shares outstanding by 121,671 shares and 162,241 for the three and six months ended June 30, 2016, respectively.

 

ASU 2016-09 eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before they can be recognized. Previously unrecognized deferred tax assets were recognized on a modified retrospective basis which resulted in a cumulative-effect adjustment to retained earnings of $481 thousand.

 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

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

 

Adoption of the new standard impacted previously reported quarterly results as follows:

 

 

 

 

 

 

 

 

Three Months Ended March 31,  2016,

 

As reported

 

As adjusted

Income statement:

 

 

 

 

 

Provision for income taxes

$

(3,965)

    

$

(4,588)

 

 

 

 

 

 

Cash flows statement:

 

 

 

 

 

Net cash from operations

$

37,731

 

$

40,489

Net cash used in financing

 

35,253

 

 

32,495

 

 

 

 

 

 

Balance sheet:

 

 

 

 

 

Deferred tax liability

$

23,096

 

$

22,864

Additional paid-in capital

 

535,326

 

 

536,659

Retained earnings

 

194,012

 

 

192,911

 

The Company adopted ASU 2015-03, “Interest- Imputation of Interest (subtopic 835-30); Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associate with Line of Credit Arrangements, during the first quarter of 2016, concurrently. The adoption of these ASUs required the Company to reclassify its deferred financing costs associated with its Convertible Senior Notes from other assets to long-term debt on a retrospective basis. The Company's consolidated balance sheets included deferred financing costs of $4.4 million and $5.1 million as of June 30, 2016 and December 31, 2015, respectively, which were reclassified from other assets to long-term debt. The debt issuance costs associated with the Company's Credit Facility continue to be presented in other assets on the condensed consolidated balance sheets.

 

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 (loss), and the convertible debt is assumed to have been converted into common shares at the beginning of the period.

 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

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

 

The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) attributable to common stockholders per common share. For the three and six months ended June 30, 2016, common stock options were excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive. Stock options that are anti-dilutive and excluded from the following table totaled 459 thousand and 345 thousand for the three and six months ended June 30, 2015, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,  

 

Six Months Ended June 30,  

 

 

 

2016

 

 

2015

   

 

2016

 

 

2015

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to Synchronoss

 

$

(4,439)

    

$

15,154

 

$

(12,393)

 

$

25,715

Income effect for interest on convertible debt, net of tax

 

 

 —

 

 

514

 

 

 —

 

 

995

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

 

$

(4,439)

 

$

15,668

 

$

(12,393)

 

$

26,710

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic

 

 

43,450

 

 

41,870

 

 

43,449

 

 

41,898

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

Shares from assumed conversion of convertible debt

 

 

 —

 

 

4,326

 

 

 —

 

 

4,326

Options and unvested restricted shares

 

 

 —

 

 

1,075

 

 

 —

 

 

1,147

Weighted average common shares outstanding — diluted

 

 

43,450

 

 

47,271

 

 

43,449

 

 

47,371

 

 

 

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.

 

10


 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

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

 

The following is a summary of assets, liabilities and redeemable noncontrolling interest and their related classifications under the fair value hierarchy: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (A)

 

$

111,028

 

$

111,028

 

$

 —

 

$

Securities available-for-sale (B)

 

 

76,223

 

 

 —

 

 

76,223

 

 

 —

Total assets

 

$

187,251

 

$

111,028

 

$

76,223

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration obligation

 

$

7,657

 

$

 —

 

$

 —

 

$

7,657

Total liabilities

 

$

7,657

 

$

 —

 

$

 —

 

$

7,657

 

 

 

 

 

 

 

 

 

 

 

 

 

Temporary Equity

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest (C)

 

$

55,459

 

$

 —

 

$

 —

 

$

55,459

Total temporary equity

 

$

55,459

 

$

 —

 

$

 —

 

$

55,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (A)

 

$

147,634

 

$

147,634

 

$

 —

 

$

Securities available-for-sale (B)

 

 

85,992

 

 

 —

 

 

85,992

 

 

 —

Total assets

 

$

233,626

 

$

147,634

 

$

85,992

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration obligation

 

$

930

 

$

 —

 

$

 —

 

$

930

Total liabilities

 

$

930

 

$

 —

 

$

 —

 

$

930

 

 

 

 

 

 

 

 

 

 

 

 

 

Temporary Equity

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

$

61,452

 

$

 —

 

$

 —

 

$

61,452

Total temporary equity

 

$

61,452

 

$

 —

 

$

 —

 

$

61,452

 

(A)

Cash and cash equivalents includes money market funds.

(B)

Securities available-for-sale include municipal bonds, commercial papers, certificates of deposit, enhanced income money market fund and corporate bonds which are classified as marketable securities.

(C)

As of June 30, 2016, the carrying amount of the redeemable noncontrolling interest was greater than the fair value and accordingly no adjustment to the fair value was recorded.

 

The Company utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company's marketable securities investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No transfers of assets between Level 1, Level 2 and Level 3 of the fair value measurement hierarchy occurred during the six months ended June 30, 2016.

 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

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

 

Available-for-Sale Securities

 

At June 30, 2016 and December 31, 2015, the estimated fair value of investments classified as available for sale, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

Gross

 

Gross

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

2,328

 

$

4

 

$

 —

 

$

2,332

Corporate bonds

 

35,627

 

 

 —

 

 

(410)

 

 

35,217

Municipal bonds

 

36,744

 

 

20

 

 

(11)

 

 

36,753

Fixed Income Fund

 

2,105

 

 

 —

 

 

(184)

 

 

1,921

Total available-for-sale securities

$

76,804

 

$

24

 

$

(605)

 

$

76,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Gross

 

Gross

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

2,329

 

$

 —

 

$

(5)

 

$

2,324

Corporate bonds

 

39,986

 

 

 —

 

 

(253)

 

 

39,733

Municipal bonds

 

38,564

 

 

11

 

 

(44)

 

 

38,531

Fixed Income Fund

 

5,593

 

 

 —

 

 

(189)

 

 

5,404

Total available-for-sale securities

$

86,472

 

$

11

 

$

(491)

 

$

85,992

 

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, 2016 and December 31, 2015 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 unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2016, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

Securities in unrealized loss position

 

Securities in unrealized loss position

 

 

 

 

 

 

 

less than 12 months

 

greater than 12 months

 

Total

 

 

 

 

 

 

 

 

 

Gross

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

unrealized

 

Fair

 

Losses

 

Value

 

Losses

 

Value

 

losses

 

Value

Corporate bonds

$

(410)

 

$

35,017

 

$

 —

 

$

 —

 

$

(410)

 

$

35,017

Municipal bonds

 

(8)

 

 

14,771

 

 

(1)

 

 

1,191

 

 

(9)

 

 

15,962

Fixed Income Fund

 

 —

 

 

 —

 

 

(184)

 

 

1,920

 

 

(184)

 

 

1,920

 

$

(418)

 

$

49,788

 

$

(185)

 

$

3,111

 

$

(603)

 

$

52,899

 

12


 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

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

 

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2015, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

Securities in unrealized loss position

 

Securities in unrealized loss position

 

 

 

 

 

 

 

less than 12 months

 

greater than 12 months

 

Total

 

 

 

 

 

 

 

 

 

Gross

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

unrealized

 

Fair

 

Losses

 

Value

 

Losses

 

Value

 

losses

 

Value

Certificates of deposit

$

(5)

 

$

2,324

 

$

 —

 

$

 —

 

$

(5)

 

$

2,324

Corporate bonds

 

(253)

 

 

39,808

 

 

 —

 

 

 —

 

 

(253)

 

 

39,808

Municipal bonds

 

(43)

 

 

20,630

 

 

(1)

 

 

550

 

 

(44)

 

 

21,180

Fixed Income Fund

 

 —

 

 

 —

 

 

(189)

 

 

5,404

 

 

(189)

 

 

5,404

 

$

(301)

 

$

62,762

 

$

(190)

 

$

5,954

 

$

(491)

 

$

68,716

 

Expected maturities of available-for-sale securities are as follows:

 

 

 

 

 

 

 

 

June 30, 2016

 

Amortized

 

Fair

 

Cost

 

Value

 

 

 

 

 

 

Due within one year

$

60,763

 

$

60,353

Due after 1 year through 5 years

 

13,935

 

 

13,949

Total available-for-sale securities

$

74,698

 

$

74,302

 

Contingent Consideration

 

The Company determined the fair value of the contingent consideration related to the acquisition of 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 changes in any of those probabilities in isolation may result in a higher (lower) fair value measurement. 

 

The changes in fair value of the Company’s Level 3 contingent consideration obligation during the six months ended June 30, 2016 were as follows:

 

 

 

 

 

Balance at December 31, 2015

 

$

930

Fair value adjustment to contingent consideration obligation included in net loss

 

 

6,727

Balance at June 30, 2016

 

$

7,657

 

Redeemable Noncontrolling Interests

 

The Company accounts for the redeemable noncontrolling interest at its fair value as temporary equity, due to the redemption option existing outside the control of the Company. The noncontrolling shareholders have the option, which is embedded in the noncontrolling interest, to require the Company to purchase the remaining noncontrolling share at a formula price designed to approximate fair value based on operating results of the entity.

 

13


 

Table of Contents

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

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

 

The Company recognizes changes in the redemption value immediately as they occur and adjusts the carrying value of the noncontrolling interest to the greater of the estimated redemption value, which approximates fair value, at the end of each reporting period or the initial carrying amount. As of June 30, 2016, the carrying amount of the redeemable noncontrolling interest was greater than the fair value and accordingly no adjustment to the fair value was recorded.

 

The fair value of the redeemable noncontrolling interest was estimated by applying an income approach using a discounted cash flow analysis. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value the redeemable noncontrolling interest could significantly increase or decrease the fair value estimates recorded in the condensed consolidated balance sheets.

 

The changes in fair value of the Company’s Level 3 redeemable noncontrolling interests during the six months ended June 30, 2016 were as follows:

 

 

 

 

 

 

Balance at December 31, 2015

 

$

61,452

Fair value adjustment

 

 

 —

Net loss attributable to redeemable noncontrolling interests

 

 

(5,993)

Balance at June 30, 2016

 

$

55,459

 

 

 

5. Acquisition

 

Openwave Messaging, Inc. (“Openwave”)

 

On March 1, 2016, the Company acquired all outstanding shares of Openwave for $124.5 million, net of working capital adjustments and liabilities assumed, comprised of $102.5 million paid in cash and $22 million paid in shares of the Company’s common stock, based upon the average market value of the common stock for the ten trading days prior to the acquisition date.

 

Openwave’s product portfolio includes its core complete messaging platform optimized for today’s most complex messaging requirements worldwide with a particular geographic strength in Asia Pacific. With this acquisition and combined with Synchronoss’ current global footprint, Synchronoss will have increased direct access to subscribers around the world for the Synchronoss Personal Cloud™ platform and bolster the Company’s go-to-market efforts internationally.

 

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SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

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

 

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

 

 

 

 

 

 

 

 

 

Purchase Price

 

 

 

 

Allocation

 

 

Cash

 

$

4,110

 

 

Prepaid expenses and other assets

 

 

3,473

 

 

Property, Plant & Equipment

 

 

2,882

 

 

Long term assets

 

 

2,396

 

 

Intangible assets:

 

 

 

 

Wtd. Avg.

Tradename

 

 

1,000

 

1 year

Technology

 

 

32,100

 

7 years

Customer relationships

 

 

29,000

 

10 years

Goodwill

 

 

93,930

 

 

Total assets acquired

 

 

168,891

 

 

Accounts payable and accrued liabilities