10-Q 1 sncr-06301810xqjkcd.htm SNCR - 06.30.18 10-Q Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
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 x  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 x  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
x
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller Reporting Company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
 
Class
 
Outstanding at August 06, 2018
Common stock, $0.0001 par value
 
42,629,469



SYNCHRONOSS TECHNOLOGIES, INC.
FORM 10-Q INDEX
 
 
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I.  FINANCIAL INFORMATION
 
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
 
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)

 
June 30, 2018
 
December 31, 2017
 
 
 

ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
222,785

 
$
156,299

Restricted cash**
3,480

 
89,826

Marketable securities
5,411

 
3,111

Accounts receivable, net of allowances of $3,992 and $3,107 at June 30, 2018 and December 31, 2017, respectively
51,439

 
78,186

Prepaid expenses and other current assets
57,387

 
43,557

Total current assets
340,502

 
370,979

Marketable securities
9,021

 

Property and equipment, net
89,310

 
111,825

Goodwill
233,298

 
237,303

Intangible assets, net
128,164

 
132,167

Other assets
13,090

 
5,236

Note receivable from related party**
84,314


73,984

Equity method investment
30,412

 
33,917

Total assets
$
928,111

 
$
965,411

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
13,924

 
5,959

Accrued expenses
54,540

 
72,739

Deferred revenues, current
31,391

 
75,829

Mandatorily redeemable financial instrument

 
37,959

Total current liabilities
99,855

 
192,486

Lease financing obligation
10,319

 
11,183

Convertible debt, net of debt issuance costs
228,410

 
227,704

Deferred tax liabilities
12,472

 
13,735

Deferred revenues, non-current
39,475

 
25,241

Other liabilities
15,390

 
6,195

Commitments and contingencies (Note 12)


 


Redeemable noncontrolling interest
12,500

 
25,280

Series A Convertible Participating Perpetual Preferred Stock, $0.0001 par value; 10,000 shares authorized; 188 shares issued and outstanding at June 30, 2018
168,945

 

Stockholders’ equity:
 

 
Common stock, $0.0001 par value; 100,000 shares authorized, 49,439 and 52,024 shares issued; 42,277 and 46,965 outstanding at June 30, 2018 and December 31, 2017, respectively
5

 
5

Treasury stock, at cost (7,162 and 5,059 shares at June 30, 2018 and December 31, 2017, respectively)
(82,084
)
 
(105,584
)
Additional paid-in capital
554,218

 
597,553

Accumulated other comprehensive loss
(28,938
)
 
(23,373
)
Accumulated deficit
(102,456
)
 
(5,014
)
Total stockholders’ equity
340,745

 
463,587

Total liabilities and stockholders’ equity
$
928,111

 
$
965,411

________________________________
**
See Note 5 -Investments in Affiliates and Related Transactions for related party transactions reflected in this account.

See accompanying notes to condensed consolidated financial statements.

3


SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net revenues
 
$
76,742

 
$
118,990

 
$
160,451

 
$
205,087

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of revenues*
 
39,525

 
47,755

 
84,074

 
93,810

Research and development
 
20,200

 
20,819

 
41,105

 
46,308

Selling, general and administrative
 
33,938

 
29,353

 
72,048

 
68,168

Restructuring charges
 
2,778

 
6,405

 
3,886

 
9,403

Depreciation and amortization
 
23,401

 
23,552

 
46,672

 
47,639

Total costs and expenses
 
119,842

 
127,884

 
247,785

 
265,328

Loss from continuing operations
 
(43,100
)
 
(8,894
)
 
(87,334
)
 
(60,241
)
Interest income
 
3,763

 
3,026

 
7,315

 
5,883

Interest expense
 
(1,318
)
 
(11,844
)
 
(2,565
)
 
(22,461
)
Other (expense) income, net
 
(23
)
 
(1,556
)
 
4,259

 
2,630

Equity method investment (loss) income
 
(7
)
 
233

 
(212
)
 
981

Loss from continuing operations, before taxes
 
(40,685
)
 
(19,035
)
 
(78,537
)
 
(73,208
)
(Provision) benefit for income taxes
 
(579
)
 
(3,573
)
 
(704
)
 
5,148

Net loss from continuing operations
 
(41,264
)
 
(22,608
)
 
(79,241
)
 
(68,060
)
Net loss from discontinued operations, net of tax**
 

 
(6,775
)
 

 
(22,909
)
Net loss
 
(41,264
)
 
(29,383
)
 
(79,241
)
 
(90,969
)
Net loss attributable to redeemable noncontrolling interests
 
1,259

 
2,815

 
2,544

 
5,704

Preferred stock dividend
 
(7,260
)
 

 
(10,613
)
 

Net loss attributable to Synchronoss
 
$
(47,265
)
 
$
(26,568
)
 
$
(87,310
)
 
$
(85,265
)
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(1.20
)
 
$
(0.44
)
 
$
(2.14
)
 
$
(1.40
)
Discontinued operations**
 

 
(0.16
)
 

 
(0.52
)
 
 
$
(1.20
)
 
$
(0.60
)
 
$
(2.14
)
 
$
(1.92
)
Diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(1.20
)
 
$
(0.44
)
 
$
(2.14
)
 
$
(1.40
)
Discontinued operations**
 

 
(0.16
)
 

 
(0.52
)
 
 
$
(1.20
)
 
$
(0.60
)
 
$
(2.14
)
 
$
(1.92
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
39,456

 
44,618

 
40,812

 
44,416

Diluted
 
39,456

 
44,618

 
40,812

 
44,416

________________________________
*
Cost of revenues excludes depreciation and amortization which is shown separately.
**
See Note 3 - Acquisitions and Divestitures for transactions classified as discontinued operations.

See accompanying notes to condensed consolidated financial statements.








4


SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)
(Unaudited) (In thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(41,264
)
 
$
(29,383
)
 
$
(79,241
)
 
$
(90,969
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(7,857
)
 
9,064

 
(4,985
)
 
12,724

Unrealized (loss) gain on available for sale securities
(28
)
 
10

 
(49
)
 
18

Net (loss) income on intra-entity foreign currency transactions
(1,360
)
 
1,160

 
(531
)
 
1,353

Total other comprehensive (loss) income
(9,245
)
 
10,234

 
(5,565
)
 
14,095

Comprehensive loss
(50,509
)
 
(19,149
)
 
(84,806
)
 
(76,874
)
Comprehensive loss attributable to redeemable noncontrolling interests
1,259

 
2,815

 
2,544

 
5,704

Comprehensive loss attributable to Synchronoss
$
(49,250
)
 
$
(16,334
)
 
$
(82,262
)
 
$
(71,170
)


5


SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
 
Six months ended June 30,
 
2018
 
2017
Operating activities: 
 
 
 
Net loss from continuing operations
$
(79,241
)
 
$
(68,060
)
Net loss from discontinued operations**

 
(22,909
)
 
 
 
 
Adjustments to reconcile Net Loss to net cash used in operating activities:
 
 
 
Depreciation and amortization expense
46,672

 
47,639

Change in fair value of financial instruments
(3,849
)
 

Amortization of debt issuance costs
706

 
3,147

Accrued PIK interest
(7,037
)
 
(5,643
)
Loss (earnings) from equity method investments
212

 
(981
)
Gain on disposals

 
(4,947
)
Discontinued operations non-cash and working capital adjustments**

 
59,278

Amortization of bond premium
44

 
177

Deferred income taxes
(1,223
)
 
(13,304
)
Non-cash interest on leased facility
547

 
533

Stock-based compensation
14,824

 
10,749

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net of allowance for doubtful accounts
29,334

 
623

Prepaid expenses and other current assets
(13,415
)
 
(14,869
)
Other assets
1,260

 
2,351

Accounts payable
8,109

 
(9,847
)
Accrued expenses
(24,685
)
 
(18,746
)
Other liabilities
632

 
(31
)
Lease obligation interest payment
(483
)
 

Deferred revenues
(43,788
)
 
14,539

Net cash used in operating activities
(71,381
)
 
(20,301
)
 
 
 
 
Investing activities:
 
 
 
Purchases of fixed assets
(3,820
)
 
(5,235
)
Purchases of intangible assets and capitalized software
(8,201
)
 
(5,300
)
Proceeds from the sale of SpeechCycle

 
13,500

Purchases of marketable securities available for sale
(13,383
)
 
(219
)
Maturity of marketable securities available for sale
1,970

 
7,191

Equity investment

 
608

Investing in discontinued operations**

 
(7,213
)
Investment in note receivable

 
(6,187
)
Business acquired, net of cash
(9,798
)
 
(815,008
)
Net cash used in investing activities
(33,232
)
 
(817,863
)

6


Financing activities:
 
 
 
Share-based compensation-related proceeds, net of taxes paid on withholding shares 

 
2,460

Debt issuance costs related to the Credit Facility

 
(3,692
)
Debt issuance costs related to long term debt

 
(19,887
)
Proceeds from issuance of long term debt

 
900,000

Repayment of long term debt

 
(2,250
)
Repayment of revolving line of credit

 
(29,000
)
Proceeds from the sale of treasury stock in connection with an employee stock purchase plan

 
1,047

Proceeds from issuance of preferred stock
86,220

 

Payments on capital obligations
(718
)
 
(1,359
)
Net cash provided by financing activities
85,502

 
847,319

Effect of exchange rate changes on cash
(749
)
 
2,550

Net decrease in cash, restricted cash and cash equivalents
(19,860
)
 
11,705

Cash, restricted cash and cash equivalents, beginning of period
246,125

 
211,433

Cash, restricted cash and cash equivalents, end of period
$
226,265

 
$
223,138

 
 
 
 
Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Issuance of common stock in connection with Intralinks acquisition
$

 
$
4,700

 
 
 
 
Cash and cash equivalents per the Consolidated Balance Sheets
$
222,785

 
$
216,558

Restricted cash per the Consolidated Balance Sheets
3,480

 
6,580

Total cash, cash equivalents and restricted cash
$
226,265

 
$
223,138

________________________________
**
See Note 3 - Acquisitions and Divestitures for transactions classified as discontinued operations.

 See accompanying notes to condensed consolidated financial statements.

7

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)



1. Description of Business

General

Synchronoss Technologies, Inc. (“Synchronoss” or the “Company”) is a global software and services company that provides essential technologies for the mobile transformation of business. The Company’s portfolio, which is targeted at the Consumer and Enterprise markets, contains offerings such as personal cloud, secure-mobility, identity management and scalable messaging platforms, products and solutions. These essential technologies create a better way of delivering the transformative mobile experiences that service providers and enterprises need to help them stay ahead of the curve in competition, innovation, productivity, growth and operational efficiency.

Synchronoss’ products and platforms are designed to be carrier-grade, flexible and scalable, enabling multiple converged communication services to be managed across a range of distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets. This business model allows the Company to meet the rapidly changing converged services and connected devices offered by their customers. Synchronoss’ products, platforms and solutions enable its enterprise and service provider customers to acquire, retain and service subscribers and employees quickly, reliably and cost-effectively with white label and custom-branded solutions. Synchronoss customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and 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 their customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud. By using the Company’s technologies, Synchronoss customers can optimize their cost of operations while enhancing their customer experience.

The Company currently operates in and markets their solutions and services directly through their sales organizations in the United States, Canada and Latin America (collectively, the “Americas”); Europe, Middle East and Africa (collectively, “EMEA”); and Australia, Japan, Southeast Asia and China (collectively, “APAC”). Synchronoss delivers essential technologies for mobile transformation to two primary types of customers: service provider and enterprise customers in regulated verticals and use cases.

Service Providers, Retailers, OEMs, Re-sellers and Service Integrators

The Company’s 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. Synchronoss’ customers rely on these solutions and technology to automate the process of activation and content and settings management for their subscribers’ devices while delivering additional communication services. Synchronoss’ portfolio includes: cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, identity/access 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, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices.

2. Basis of Presentation and Consolidation

Basis of Presentation and Consolidation

The accompanying interim unaudited condensed consolidated financial statements have been prepared by Synchronoss and in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. They do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2017. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018.


8

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 condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities (“VIE”) in which the Company is the primary beneficiary and entities in which the Company has a controlling interest. Investments in less than majority-owned companies in which the Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. Investments in less than majority-owned companies in which the Company does not have the ability to exert significant influence over the operating and financial policies of the investee are accounted for using the cost method. All material intercompany transactions and accounts are eliminated in consolidation. Certain prior year amounts 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/A for the year ended December 31, 2017.

Restricted Cash

Restricted cash includes amounts to various deposits, escrows and other cash collateral that are restricted by contractual obligation. During the six months ended June 30, 2018, $87.3 million was released from escrow on notification that Siris would exercise its option on the issuance of preferred stock. These funds were restricted from the proceeds received upon the sale of Intralinks, through the date of issuance of preferred stock. Remaining amounts were primarily attributed to cash held in transit, and operating cash held by the Company’s consolidated joint venture Zentry, LLC (“Zentry”), which cannot be used to fulfill the obligations of the Company as a whole.

Recently Issued Accounting Standards

Recent accounting pronouncements adopted
Standard
 
Description
 
Effect on the financial statements
Accounting Standards Update (“ASU”) 2017-09 Stock Compensation (Topic 718), Scope of Modification
 
In May 2017, the Financial Accounting Standards Board (“FASB”) issued guidance which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The guidance also clarifies that a modification to an award could be significant and therefore require disclosure, even if modification accounting is not required. ASU 2017-09 is effective for fiscal years, and interim periods within those years, beginning after December 31, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued. ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date.
 
This ASU did not have a material effect on the Company’s condensed consolidated financial statements.
Date of adoption: January 1, 2018.
 
 
 
 





9

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


Standards issued not yet adopted
Standard
 
Description
 
Effect on the financial statements
ASU 2017-09 Stock Compensation (Topic 718), Scope of Modification
 
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for the Company in its first quarter of fiscal 2019, and earlier adoption is not permitted except for certain provisions.
 
The Company does not expect that the pending adoption of this ASU will have a material effect on its condensed consolidated financial statements.
Date of adoption: January 1, 2019.
 
 
 
 
ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
 
In June 2016, the FASB issued ASU 2016-13 which replaces the incurred loss impairment methodology in current 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 the adoption of this ASU on its condensed consolidated financial statements.
Date of adoption: January 1, 2020.
 
 
 
 
ASU 2016-02 Leases (Topic 842)
 
In February 2016, the FASB issued ASU 2016-02 which requires lessees to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach.
 
The Company is in the process of evaluating the effect of the new guidance on its condensed consolidated financial statements and disclosures.This guidance may be adopted using a modified retrospective approach. The Company is in the process of forming a project team to evaluate and implement this guidance and is reviewing its practical expedient elections.
Date of adoption: January 1, 2019.
 
 
 
 

In May 2014, the FASB issued a new accounting standard related to revenue recognition, ASU 2014-09, “Revenue from Contracts with Customers,” (“Topic 606”). The new standard supersedes the existing revenue recognition requirements under U.S. GAAP and requires entities to recognize revenue when they transfer control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. It also requires increased disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers.

On January 1, 2018, the Company adopted Topic 606 applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net reduction to opening retained earnings of approximately $10.1 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606.  The impact to revenues for the six months ended June 30, 2018 was an increase of $20.3 million as a result of adopting Topic 606. The impact to costs is not material.

The impact of adoption primarily relates to (1) the delayed pattern of recognition under Topic 606 for certain professional services revenue when such professional services involve the customization of features and functionality for subscription services customers, (2) the earlier pattern of recognition under Topic 606 for license revenue when the Company provides hosting services for on-premise license customers. In the case of professional services that involve the customization of features and functionality for subscription services, under historic accounting policies the professional services were considered to have standalone value, and as a result were recognized as the services were performed.  Under Topic 606, such professional services are not considered to be a distinct performance obligation within the context of the subscription services contract, and as such each month’s customization services revenue is recognized over the shorter of the estimated remaining life of the subscription software (typically three years) or the remaining term of the subscription services contract. In the case of license contracts sold in association with

10

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


hosting, under historic accounting policies the license revenue was recognized over the hosting term due to the lack of vendor specific objective evidence (“VSOE”) of fair value for the hosting services.  Under Topic 606, VSOE is no longer required in order separate revenue between the license and the hosting elements, and the license revenue is generally recognized upon delivery of the software based on the relative allocation of the contract price based on the established standalone selling price (“SSP”).

Additional impacts of adoption include (1) in certain cases changes in the amount allocated to the various performance obligations in accordance with the relative standalone selling price method required by Topic 606 compared to the amount allocated to the various elements in accordance with the residual method or the relative selling price method, as applicable, under historic accounting policies, (2) the capitalization and subsequent amortization of certain sales commissions as costs to obtain a contract under ASC 340-40, whereas under historic accounting policies all such amounts were expensed as incurred (3) the timing and amount of revenue recognition for certain sales contracts that are considered to involve variable consideration under Topic 606, but were considered to either not be fixed or determinable or to involve contingent revenue features under historic accounting policies, (4) in certain limited cases, the accounting for discounted customer options to purchase future software or services as material rights under Topic 606, as well as (5) the income tax impact of the above items, as applicable.

Changes in accounting policies as a result of adopting Topic 606 and nature of goods

The following is a description of principal activities from which the Company generates revenue. Revenues are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company generates all of its revenue from contracts with customers.

Subscription and Transaction revenues consist of revenues derived from the processing of transactions through the Company’s service platforms, providing enterprise portal management services on a subscription basis and maintenance agreements on software licenses. The Company generates revenue from Subscription services from monthly active user fees, software as a service (“SaaS”) fees, hosting and storage fees, and fees for the related maintenance support for those services. In most cases, the subscription or transaction arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and that have the same pattern of transfer (i.e., distinct days of service). The Company applies a measure of progress (typically time-based) to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage. When the Company does not allocate variable consideration to distinct periods of service, the total estimated transaction price is recognized ratably over the term of the contract.

Transaction service arrangements include services such as processing equipment orders, new account set‑up and activation, number port requests, credit checks and inventory management.

Transaction revenues are principally based on a contractual price per transaction and are recognized based on the number of transactions processed during each reporting period. Revenues are recorded based on the total number of transactions processed at the applicable price established in the relevant contract.

Many of the Company’s contracts guarantee minimum volume transactions from the customer. In these instances, if the customer’s total estimated transaction volume for the period is expected to be less than the contractual amount, the Company records revenues at the minimum guaranteed amount on a straight line based over the period covered by the minimum. Set‑up fees for transactional service arrangements are deferred until set up activities are completed and recognized on a straight‑line basis over remaining expected customer relationship period. Revenues are presented net of discounts, which are volume level driven, or credits, which are performance driven, and are determined in the period in which the volume thresholds are met, or the services are provided. The Company recognizes revenues from support and maintenance performance obligations over the service delivery period.

The Company’s software licenses typically provide for a perpetual or term right to use the Company’s software. The Company has concluded that in most cases its software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered to the customer. Contracts that include software customization or specified upgrades may result in the combination of the customization services with the software license as one performance obligation.


11

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’s professional services include software development and customization. The contracts generally include project deliverables specified by each customer. The performance obligations in the agreements are generally combined into one deliverable and generally result in the transfer of control over time. The underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to us. The Company recognizes revenue on fixed fee contracts on the proportion of labor hours expended to the total hours expected to complete the contract performance obligation.

Most of the Company’s contracts with customers contain multiple performance obligations which generally include either 1) a perpetual software license with support and maintenance and sometimes a hosting agreement or 2) a term SaaS agreement, in many cases these are sold along with professional services. For these contracts, the Company accounts for individual goods and services separately if they are distinct performance obligations, this often requires significant judgment based upon knowledge of the products, the solution provided and the structure of the sales contract. In SaaS agreements, the Company provides a service to the customer which combines the software functionality, maintenance and hosting into a single performance obligation when the customer doesn’t have the ability to take possession of the underlying software license. The Company may also sell the same three goods and services in a contract, but they may be three performance obligations, where the customer has the right to take possession of the software license without significant penalty.

The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company estimates standalone selling prices of software based on observable inputs of past transactions to similarly situated customers. When such observable data is not available for certain software licenses because there is a limited number of transactions or prices are highly variable, the Company will estimate the standalone selling price using the residual approach. Standalone selling prices of services are typically determined based on observable transactions when these services are sold on a standalone basis to similarly situated customers or estimated using a cost plus margin approach.

Estimating the transaction price of variable consideration including the variable quantity subscription or transaction contracts in a multiple performance obligation arrangement requires significant judgment. The Company generally estimates this variable consideration at the most likely amount to which the Company expects to be entitled and in certain cases based on the expected value. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. The Company reviews and update these estimates on a quarterly basis.

12

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’s typical performance obligations include the following:
Performance Obligation
 
When Performance Obligation is Typically Satisfied
 
When Payment is Typically Due
 
How Standalone Selling Price is Typically Estimated
Software License
 
 
 
 
 
 
Software License
 
Upon shipment or made available for download (point in time)
 
Within 90 days of delivery
 
Observable transactions or residual approach when prices are highly variable or uncertain
Software License with significant customization
 
Over the performance of the customization and installation of the software (over time)
 
Within 90 days of services
being performed
 
Residual approach
Hosting Services
 
As hosting services are provided (over time)
 
Within 90 days of services
being provided
 
Estimated using a cost-plus margin approach
Professional Services
 
 
 
 
 
 
Consulting
 
As work is performed (over time)
 
Within 90 days of services
being performed
 
Observable transactions
Customization
 
SaaS: Over the remaining term of the SaaS agreement

License: Over the performance of the customization and installation of the software (over time)
 
Within 90 days of services
being performed
 
Observable transactions
Transaction Services
 
As transaction is processed (over time)
 
Within 90 days of transaction
 
Observable transactions
Subscription Services
 
 
 
 
 
 
Customer Support
 
Ratably over the course of the support contract
(over time)
 
At the beginning of the
contract period
 
Observable transactions
SaaS
 
Over the course of the SaaS service once the system is available for use
(over time)
 
Within 90 days of services
being performed
 
Estimated using a cost-plus margin approach

Disaggregation of revenue

The Company disaggregates revenue from contracts with customers into the nature of the products and services and geographical regions. The Company’s geographic regions are the Americas, EMEA, and APAC. The majority of the Company’s revenue is from the Technology, Media and Telecom (collectively, “TMT”) sector.
 
Three Months Ended June 30, 2018
 
Cloud
 
Digital
 
Messaging
 
Total
Geography
 
 
 
 
 
 
 
Americas
$
36,563

 
$
20,172

 
$
2,260

 
$
58,995

APAC

 
931

 
9,717

 
10,648

EMEA
2,157

 
1,083

 
3,859

 
7,099

Total
$
38,720

 
$
22,186

 
$
15,836

 
$
76,742

 
 
 
 
 
 
 
 
Service Line
 
 
 
 
 
 
 
Professional Services
$
3,576

 
$
4,294

 
$
1,831

 
$
9,701

Transaction Services
2,442

 
2,116

 

 
4,558

Subscription Services
32,666

 
14,454

 
6,954

 
54,074

License
36

 
1,322

 
7,051

 
8,409

Total
$
38,720

 
$
22,186

 
$
15,836

 
$
76,742



13

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


 
Three Months Ended June 30, 2017
 
Cloud
 
Digital
 
Messaging
 
Total
Geography
 
 
 
 
 
 
 
Americas
$
75,910

 
$
24,808

 
$
3,103

 
$
103,821

APAC

 
2,047

 
7,574

 
9,621

EMEA
1,786

 
1,296

 
2,466

 
5,548

Total
$
77,696

 
$
28,151

 
$
13,143

 
$
118,990

 
 
 
 
 
 
 
 
Service Line
 
 
 
 
 
 
 
Professional Services
$
16,915

 
$
5,429

 
$
335

 
$
22,679

Transaction Services
3,136

 
5,587

 

 
8,723

Subscription Services
54,488

 
13,558

 
9,875

 
77,921

License
3,157

 
3,577

 
2,933

 
9,667

Total
$
77,696

 
$
28,151

 
$
13,143

 
$
118,990


 
Six Months Ended June 30, 2018
 
Cloud
 
Digital
 
Messaging
 
Total
Geography
 
 
 
 
 
 
 
Americas
$
72,423

 
$
41,051

 
$
4,871

 
$
118,345

APAC

 
2,615

 
25,640

 
28,255

EMEA
4,601

 
1,531

 
7,719

 
13,851

Total
$
77,024

 
$
45,197

 
$
38,230

 
$
160,451

 
 
 
 
 
 
 
 
Service Line
 
 
 
 
 
 
 
Professional Services
$
7,020

 
$
10,002

 
$
6,390

 
$
23,412

Transaction Services
4,785

 
3,895

 

 
8,680

Subscription Services
64,795

 
29,531

 
15,733

 
110,059

License
424

 
1,769

 
16,107

 
18,300

Total
$
77,024

 
$
45,197

 
$
38,230

 
$
160,451





14

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


 
Six Months Ended June 30, 2017
 
Cloud
 
Digital
 
Messaging
 
Total
Geography
 
 
 
 
 
 
 
Americas
$
126,005

 
$
47,300

 
$
3,687

 
$
176,992

APAC

 
3,520

 
13,324

 
16,844

EMEA
3,540

 
1,996

 
5,715

 
11,251

Total
$
129,545

 
$
52,816

 
$
22,726

 
$
205,087

 
 
 
 
 
 
 
 
Service Line
 
 
 
 
 
 
 
Professional Services
$
19,422

 
$
12,317

 
$
3,614

 
$
35,353

Transaction Services
6,215

 
10,945

 

 
17,160

Subscription Services
98,393

 
22,441

 
16,002

 
136,836

License
5,515

 
7,113

 
3,110

 
15,738

Total
$
129,545

 
$
52,816

 
$
22,726

 
$
205,087


Trade Accounts Receivable and Contract balances

The Company classifies its right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). For example, the Company recognizes a receivable for revenues related to its time and materials and transaction or volume-based contracts. The Company presents such receivables in Trade accounts receivable, net in its consolidated statements of financial position at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors.

A contract asset is a right to consideration that is conditional upon factors other than the passage of time. For example, the Company would record a contract asset if it records revenue on a professional services engagement, but are not entitled to bill until the Company achieves specified milestones. Contract asset balance at June 30, 2018 was immaterial.

Amounts collected in advance of services being provided are accounted for as contract liabilities, which are presented as deferred revenue on the accompanying balance sheet and are realized with the associated revenue recognized under the contract. Nearly all of the Company's contract liabilities balance is related to services revenue, primarily subscription services contracts.

The Company’s contract assets and liabilities are reported in a net position on a customer basis at the end of each reporting period.

Significant changes in the contract liabilities balance (current and noncurrent) during the period are as follows (in thousands):
 
Contract Liabilities*
Balance - January 1, 2018
$
115,009

Revenue recognized that was included in the contract liability (def. revenue) balance at January 1, 2018
(82,424
)
Increases due to cash received, excluding amounts recognized as revenue during the period
38,281

Balance - June 30, 2018
$
70,866

________________________________
*
Comprised of Deferred Revenue

Revenues recognized during the six months ended June 30, 2018 for performance obligations satisfied or partially satisfied in previous periods were immaterial.

15

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)



Contract acquisition costs

In connection with the adoption of Topic 606 and the related cost accounting guidance under Accounting Standards Codification (“ASC”) 340, the Company is required to capitalize certain contract acquisition costs consisting primarily of commissions and bonuses paid when contracts are signed. The Company adopted Topic 606 on January 1, 2018 and capitalized $0.7 million in contract acquisition costs related to contracts that were not completed. For contracts that have a duration of less than one year, the Company follows a Topic 606 practical expedient and expenses these costs over the estimated customer life, because it does not pay commissions upon renewals that are commensurate with the initial contract. In the six months ended June 30, 2018, the amount of amortization was immaterial and there was no impairment loss in relation to costs capitalized.

Contract Fulfillment Costs

Under ASC 340-40, the Company evaluates whether or not it should capitalize the costs of fulfilling a contract. Such costs would be capitalized when they are not within the scope of other standards and: (1) are directly related to a contract; (2) generate or enhance resources that will be used to satisfy performance obligations; and (3) are expected to be recovered. No such costs were capitalized as of June 30, 2018.

Transaction price allocated to the remaining performance obligations

Topic 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2018. The Company has elected not to disclose transaction price allocated to remaining performance obligations for:

1.
Contracts with an original duration of one year or less, including contracts that can be terminated for convenience without a substantive penalty;
2.
Contracts for which the Company recognizes revenues based on the right to invoice for services performed;
3.
Variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with Topic 606 Section 10-25-14(b), for which the criteria in Topic 606 Section 10-32-40 have been met.

Many of the Company’s performance obligations meet one or more of these exemptions. As of June 30, 2018, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $383.8 million, of which approximately 80% is expected to be recognized as revenues within 2 years, and the remainder thereafter.

Estimates of revenue expected to be recognized in future periods also exclude unexercised customer options to purchase services that do not represent material rights to the customer. Customer options that do not represent a material right are only accounted for in accordance with Topic 606 when the customer exercises its option to purchase additional goods or services.

16

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


In accordance with Topic 606, the disclosure of the impact of adoption to the Company’s Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Operations was as follows:
 
 
June 30, 2018
 
 
As Reported
Impacts of the New Revenue Standard
Adjusted amounts under prior GAAP
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
222,785

$

$
222,785

Restricted cash**
 
3,480


3,480

Marketable securities
 
5,411


5,411

Accounts receivable, net
 
51,439

9,790

41,649

Prepaid expenses and other current assets (2)
 
57,387

(164
)
57,551

Total current assets
 
340,502

9,626

330,876

Marketable securities
 
9,021


9,021

Property and equipment, net
 
89,310


89,310

Goodwill
 
233,298


233,298

Intangible assets, net
 
128,164


128,164

Deferred tax assets
 



Other assets (2)
 
13,090

418

12,672

Note receivable from related party**
 
84,314


84,314

Equity method investment
 
30,412


30,412

Total assets
 
$
928,111

$
10,044

$
918,067

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
13,924

$

$
13,924

Accrued expenses
 
54,540

(12,013
)
66,553

Deferred revenues, current (3)
 
31,391

(2,234
)
33,625

Total current liabilities
 
99,855

(14,247
)
114,102

Lease financing obligation
 
10,319


10,319

Convertible debt, net of debt issuance costs
 
228,410


228,410

Deferred tax liabilities
 
12,472


12,472

Deferred revenues, non-current (3)
 
39,475

14,632

24,843

Other liabilities
 
15,390


15,390

Redeemable noncontrolling interest
 
12,500


12,500

Commitments and contingencies (Note 12)
 
 
 
 
Series A Convertible Participating Perpetual Preferred Stock, $0.0001 par value; 10,000 shares authorized; 188 shares issued and outstanding at June 30, 2018
 
168,945


168,945

Stockholders’ equity:
 
 
 
 
Common stock, $0.0001 par value; 100,000 shares authorized, 49,439 and 52,024 shares issued; 42,277 and 46,965 outstanding at June 30, 2018 and December 31, 2017, respectively
 
5


5

Treasury stock, at cost (7,162 and 5,059 shares at June 30, 2018 and December 31, 2017, respectively)
 
(82,084
)

(82,084
)
Additional paid-in capital
 
554,218


554,218

Accumulated other comprehensive loss (4)
 
(28,938
)
60

(28,998
)
Accumulated deficit
 
(102,456
)
9,599

(112,055
)
Total stockholders’ equity
 
340,745

9,659

331,086

Total liabilities and stockholders’ equity
 
$
928,111

$
10,044

$
918,067

________________________________
**
See Note 5 -Investments in Affiliates and Related Transactions for related party transactions reflected in this account.

17

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
As Reported
Impacts of the New Revenue Standard
Adjusted amounts under prior GAAP
 
As Reported
Impacts of the New Revenue Standard
Adjusted amounts under prior GAAP
Net revenues (3)
$
76,742

$
9,284

$
67,458

 
$
160,451

$
20,266

$
140,185

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues* (5)
39,525

256

39,269

 
84,074

364

83,710

Research and development
20,200


20,200

 
41,105


41,105

Selling, general and administrative (2)
33,938

51

33,887

 
72,048

101

71,947

Restructuring charges
2,778


2,778

 
3,886


3,886

Depreciation and amortization
23,401


23,401

 
46,672


46,672

Total costs and expenses
119,842

307

119,535

 
247,785

465

247,320

Loss from continuing operations
(43,100
)
8,977

(52,077
)
 
(87,334
)
19,801

(107,135
)
Interest income
3,763


3,763

 
7,315


7,315

Interest expense
(1,318
)
(33
)
(1,285
)
 
(2,565
)
(72
)
(2,493
)
Other (expense) income, net
(23
)

(23
)
 
4,259


4,259

Equity method investment loss
(7
)

(7
)
 
(212
)

(212
)
Loss from continuing operations, before taxes
(40,685
)
8,944

(49,629
)
 
(78,537
)
19,729

(98,266
)
Provision for income taxes
(579
)

(579
)
 
(704
)

(704
)
Net loss from continuing operations
(41,264
)
8,944

(50,208
)
 
(79,241
)
19,729

(98,970
)
Net loss
(41,264
)
8,944

(50,208
)
 
(79,241
)
19,729

(98,970
)
Net loss attributable to redeemable noncontrolling interests
1,259


1,259

 
2,544


2,544

Preferred stock dividend
(7,260
)

(7,260
)
 
(10,613
)

(10,613
)
Net loss attributable to Synchronoss
$
(47,265
)
$
8,944

$
(56,209
)
 
$
(87,310
)
$
19,729

$
(107,039
)
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
(1.20
)
$
0.22

$
(1.42
)
 
$
(2.14
)
$
0.48

$
(2.62
)
Discontinued operations**



 



 
$
(1.20
)
$
0.22

$
(1.42
)
 
$
(2.14
)
$
0.48

$
(2.62
)
Diluted:
 
 
 
 
 
 
 
Continuing operations
$
(1.20
)
$
0.22

$
(1.42
)
 
$
(2.14
)
$
0.48

$
(2.62
)
Discontinued operations**



 



 
$
(1.20
)
$
0.22

$
(1.42
)
 
$
(2.14
)
$
0.48

$
(2.62
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
39,456

 
39,456

 
40,812

 
40,812

Diluted
39,456

 
39,456

 
40,812

 
40,812

________________________________
*
Cost of revenues excludes depreciation and amortization which is shown separately.
**
See Note 3 - Acquisitions and Divestitures for transactions classified as discontinued operations.

(1) 
Reflects the impact of changes to the contract term as defined by the new revenue recognition standard.
(2) 
Reflects capitalization of costs to obtain a contract.
(3) 
Reflects the impact of changes in the delayed pattern of recognition on the Company’s professional services, timing of revenue recognition and allocation of purchase price on software license contracts and legally enforceable rights and obligations prior to when persuasive evidence of an arrangement exists.
(4) 
Reflects the impact of foreign currency translation related to the above impacts.
(5) 
Reflects the impact of amortization of third party costs over the term of the contract.

18

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 table below shows Topic 606 Retained earnings reconciliation:
Cumulative catch up Topic 606 adjustment as of January 1, 2018
$
(10,130
)
Net loss from continued operations
19,729

Retained Earnings at June 30, 2018
$
9,599


3. Acquisitions and Divestitures

Acquisition-Related Costs

Total acquisition-related costs recognized during the six months ended June 30, 2018 and 2017 including transaction costs such as legal, accounting, valuation and other professional services, were $1.3 million and $13.0 million, respectively, and are included in selling, general and administrative expense in the Condensed Consolidated Statements of Operations.

Acquisition of honeybee

In May 2018, the Company completed the acquisition of the honeybee software business (“honeybee”), a provider of digital solutions targeted at optimizing the customer experience from Dixons Carphone plc which offers a digital transformation platform that makes it easier for companies to design and launch omni-channel customer journeys. Consideration paid by the Company consisted of approximately $9.8 million in cash and $8.7 million to be paid over the next three years. As of June 30, 2018 the preliminary opening balance sheet reflected intangible assets and net working capital in the amount of $8.9 million and $9.6 million respectively. The Company is currently evaluating the impact of the contracts obtained in the transaction and any changes in net working capital balances.

Customers of the honeybee platform, such as mobile operators and other communication service providers, can rapidly create and adapt digital sales processes for contact centers, retail stores, and online channels. This helps reduce complexity for the end-user as well as internal employees, while delivering a single customer experience at all touch-points and improved business outcomes such as reduced cost and increased revenue. The acquisition did not have a material impact on the Company’s Condensed Consolidated Statements of Operations.

Divestitures

2018 Transactions

SNCR, LLC

On November 16, 2015, the Company formed a venture with Goldman Sachs (“Goldman”), referred to as SNCR, LLC in order to develop and deploy the Synchronoss Secure Mobility Suite, which would include integration of Synchronoss Workspace platform with Goldman's internally developed mobile security intellectual property to help provide a safe, secure mobile device environment that also effectively supports bring your own device (“BYOD”).

During the fourth quarter of 2017, the Company entered into a termination agreement with Goldman to terminate the venture, and provide a perpetual, irrevocable license of the venture’s intellectual property for use in Goldman’s back-office. As part of the agreement, the Company was relieved of any future obligations to support Goldman’s use of the software. The venture formally ended in the first quarter of 2018 resulting in the elimination of the Company’s associated noncontrolling interest balance and an increase to additional paid in capital balance of $12.8 million on the Company’s Condensed Consolidated Balance Sheets.

2017 Transactions

Intralinks

On January 19, 2017, the Company purchased all outstanding shares of Intralinks Holdings, Inc. (“Intralinks”) for approximately $815.0 million, net of cash acquired. In connection with the acquisition, the Company entered into a $900.0 million

19

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


senior secured term loan (the “2017 Term Facility”). Intralinks is a global technology provider of SaaS solutions for secure enterprise content collaboration within and among organizations. Intralinks’ cloud-based solutions enable organizations to securely manage, control, track, search, exchange and collaborate on sensitive information inside and outside the firewall. The total purchase price consideration consisted of the repayment of existing Intralinks indebtedness, and non-cash consideration for services rendered on unvested Intralinks equity awards that were converted into the Company equity awards on the acquisition date. The acquisition was primarily funded from the proceeds of the $900.0 million credit agreement.

On June 23, 2017, the Company received a non-binding indication of interest from Siris Capital Group, LLC (“Siris”) to acquire the Company. In light of the indication of interest, the Board of Directors decided to explore a broad range of strategic alternatives that would have the potential to unlock shareholder value. In October 2017, the Company concluded its review of strategic alternatives and determined that the best approach for the Company to achieve the goal of maximizing shareholder value was to focus on its core TMT business, divest non-core assets and improve its balance sheet strength, cash position and potential profitability. Under the terms of certain definitive agreements, investment funds affiliated with Siris acquired all of the stock of the Company’s wholly-owned subsidiary, Intralinks, for consideration of cash and an investment in convertible preferred equity of the Company.

On October 17, 2017, the Company announced its entry into definitive agreements for the sale of Intralinks, and the right to sell a newly created series of preferred stock of Synchronoss to affiliates of Siris. Subject to the terms and conditions set forth in a share purchase agreement, dated as of October 17, 2017 (the “Share Purchase Agreement”), among Synchronoss, Intralinks and Impala Private Holdings II, LLC, an affiliate of Siris (“Impala”), Impala agreed to acquire from the Company, the issued and outstanding shares of common stock of Intralinks for approximately $977.3 million in cash plus a potential contingent payment of up to $25.0 million, subject to an adjustment for cash, debt and working capital (the “Intralinks Transaction”). The total amount of funds used to complete the Intralinks Transaction and related transactions and pay related fees and expenses was approximately $1.0 billion, which was funded through a combination of equity and debt financing obtained by Impala.

Subsequently, on November 14, 2017, the Company sold Intralinks to Impala, for approximately $991.0 million in cash, subject to post-closing adjustments for changes in cash, debt and working capital. As a result of the sale, the Company prepaid the remaining balance on the 2017 Term Facility. If, in the future, Impala receives net cash proceeds in excess of $440.0 million from any sale of equity or assets of Intralinks, or a dividend or distribution in respect of the shares of Intralinks, then Impala is required to pay the Company up to an additional $25.0 million in cash or publicly traded securities. Immediately following the consummation of the Intralinks Transaction, the Company paid to Impala $5.0 million as partial reimbursement of the out-of-pocket fees and expenses incurred by Impala, Siris and their respective affiliates in connection with the execution of the Share Purchase Agreement and the Intralinks Transaction. Amounts reimbursed were recorded as a reduction in the gain on sale. The operations of Intralinks were presented as discontinued operations in 2017.

SpeechCycle

On February 1, 2017, the Company completed a divestiture of its SpeechCycle business, to an unrelated third party, for consideration of $13.5 million.

As part of the divestiture, the Company entered into a one year transition services agreement with the acquirer to support various indirect activities such as customer software support, technical support services and maintenance and support services. These services were terminated during the first quarter of 2018. The Company recorded a pre-tax gain of $4.9 million as a result of the divestiture which is included in other income (expense), net in the Condensed Consolidated Statement of Operations.

4. Fair Value Measurements of Assets and Liabilities

In accordance with accounting principles generally accepted in the United States, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy prioritizes the inputs used to measure fair value as follows:

Level 1 - Observable inputs - quoted prices in active markets for identical assets and liabilities;
Level 2 - Observable inputs other than the quoted prices in active markets for identical assets and liabilities includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and

20

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


Level 3 - Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.

The following is a summary of assets, liabilities and redeemable noncontrolling interests and their related classifications under the fair value hierarchy:
 
June 30, 2018
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash (1)
$
226,265

 
$
226,265

 
$

 
$

Marketable securities-short term (2)
5,411

 

 
5,411

 

Marketable securities-long term (2)
9,021

 

 
9,021

 

Total assets
$
240,697

 
$
226,265

 
$
14,432

 
$

Liabilities
 
 
 
 
 
 
 
Contingent interest derivative (3)
$
327

 
$

 
$

 
$
327

Total liabilities
$
327

 
$

 
$

 
$
327

Temporary equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests (4)
$
12,500

 
$

 
$

 
$
12,500

Total temporary equity
$
12,500

 
$

 
$

 
$
12,500


 
December 31, 2017
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash (1)
$
246,125

 
$
246,125

 
$

 
$

Marketable securities-short term (2)
3,111

 

 
3,111

 

Total assets
$
249,236

 
$
246,125

 
$
3,111

 
$

Liabilities
 
 
 
 
 
 
 
Contingent interest derivative (3)
$
193

 
$

 
$

 
$
193

Mandatorily redeemable financial instrument (5)
$
37,959

 
$

 
$

 
$
37,959

Total liabilities
$
38,152

 
$

 
$

 
$
38,152

Temporary Equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests (4)
$
25,280

 
$

 
$

 
$
25,280

Total temporary equity
$
25,280

 
$

 
$

 
$
25,280

________________________________
(1) 
Cash equivalents primarily included money market funds.
(2) 
Marketable securities is comprised of municipal bonds and certificates of deposit.
(3) 
Contingent interest derivative related to convertible debt is included in accrued expenses, for further details see Note 6 - Debt.
(4) 
Put arrangements held by the noncontrolling interests in certain of the Company’s joint ventures.
(5) 
Mandatorily redeemable financial instruments are comprised of the Company’s contractual obligation to deliver a set number of preferred shares at a time in less than twelve months and the option for the Company to receive a set number of common shares. In 2018, this was exchanged as partial consideration in connection with issuance of the Company’s Series A Convertible Participating Perpetual Preferred Stock.

Available-for-Sale Securities

The Company utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company’s marketable securities investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No transfers of assets between Level 1, Level 2 and Level 3 of the fair value measurement hierarchy occurred during the six months ended June 30, 2018.

21

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)



Unrealized gains and losses are reported as a component of accumulated other comprehensive income in stockholders’ equity. There were no sales of marketable securities during the six months ended June 30, 2018 and 2017. 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 at June 30, 2018 and 2017 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.

At June 30, 2018 and December 31, 2017, the estimated fair value of investments classified as available-for-sale, were as follows:
 
June 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable securities:
 
 
 
 
 
 
 
Certificates of deposit
$
4,026

 
$

 
$
(18
)
 
$
4,008

Corporate bonds
402

 

 
(3
)
 
399

Municipal bonds
10,058

 
1

 
(34
)
 
10,025

Total marketable securities
$
14,486

 
$
1

 
$
(55
)
 
$
14,432


As of June 30, 2018, there were no accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer. The aggregate related fair value of investment with unrealized losses was less than $13.3 million.
 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable securities:
 
 
 
 
 
 
 
Certificates of deposit
$
250

 
$

 
$

 
$
250

Municipal bonds
2,867

 

 
(6
)
 
2,861

Total marketable securities
$
3,117

 
$

 
$
(6
)
 
$
3,111


As of December 31, 2017, an insignificant amount of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer. The aggregate related fair value of investment with unrealized losses was approximately $2.9 million.

The contractual maturities of marketable debt securities were as follows:
 
June 30, 2018
 
Amortized
Cost
 
Fair
Value
Due within one year
$
5,420

 
$
5,411

Due after 1 year through 5 years
8,803

 
8,760

Due after 5 years through 10 years

 

Due after 10 years
263

 
261

Total available-for-sale debt securities
$
14,486

 
$
14,432



22

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


Redeemable Noncontrolling Interests

The redeemable noncontrolling interests recorded at fair value are put arrangements held by the noncontrolling interests in certain of the Company’s joint ventures. The Company recognizes changes in the redemption value immediately as they occur and adjusts the carrying value of the noncontrolling interest to the greater of the estimated redemption value, which approximates fair value, at the end of each reporting period or the initial carrying amount.

The fair value of the redeemable noncontrolling interests was estimated by applying an income approach using a discounted cash flow analysis. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Significant changes in the underlying assumptions used to value the redeemable noncontrolling interests could significantly increase or decrease the fair value estimates recorded in the 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, 2018 were as follows:
Balance at December 31, 2017
$
25,280

Fair value adjustment
(10,236
)
Net loss attributable to redeemable noncontrolling interests
(2,544
)
Balance at June 30, 2018
$
12,500


5. Investments in Affiliates and Related Transactions

Sequential Technology International, LLC

The Company includes investments which are accounted for using the equity method, under the caption equity method investments on the Company’s Condensed Consolidated Balance Sheets. As of June 30, 2018, the Company’s investments in equity interests was comprised of $30.4 million related to a 30% equity interest in Sequential Technology International, LLC (“STIN”).

Sequential Technology International Holdings LLC (“STIH”), which holds a 70% equity interest in STIN, also holds a senior note issued by a Third Party (“Third-Party Note” or “Seller Note”). The Third-Party Note is secured against STIH’s equity interest in STIN and is senior to the Company’s equity interest in STIN. Under the arrangement, cash dividends due to the Company from STIN, other than required cash distributions made for tax purposes, are deferred until the Third-Party Note is paid in full. As of June 30, 2018, all the amounts under Third-Party Note are paid in full. Under the terms of a paid-in-kind purchase money note (the “PIK Note”) issued to the Company by STIH, deferred distributions are added to the amounts outstanding under the PIK Note.

In connection with the divestiture of the exception handling business of the Company, Synchronoss entered into a three-year Cloud Telephony and Support services agreement to grant STIN access to certain Synchronoss software and private branch exchange systems to facilitate exception handling operations required to support STIN customers.

For the three months ended June 30, 2018 and 2017, the Company recognized $6.4 million and $4.2 million, respectively, in revenue related to Cloud Telephony and Support services, and $0.4 million and $0.5 million, respectively, in revenue related to all other services. For the six months ended June 30, 2018 and 2017, the Company recognized $12.8 million and $4.2 million, respectively in revenue related to Cloud Telephony and Support services, and $1.0 million and $0.9 million, respectively, in revenue related to all other services.

The following is a summary of the PIK Note related balances:
 
Seller Note
Impairment
Unamortized Discount
Loan Accrued Interest
Distribution Note
Distribution interest
Total
December 31, 2017
$
83,000

$
(14,562
)
$
(12,162
)
$
11,096

$
6,187

$
425

$
73,984

Activity


438

6,104

3,293

495

10,330

June 30, 2018
$
83,000

$
(14,562
)
$
(11,724
)
$
17,200

$
9,480

$
920

$
84,314



23

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


During the six months ended June 30, 2018, STIN distributed approximately $3.3 million to the Company, which was recognized as reduction in the Company’s equity investment in STIN and a corresponding adjustment to increase the PIK Note. Amounts were used by STIH to facilitate accelerated payment on the Third-Party Note held by STIH.

The STIN affiliate balances and their classification in the Condensed Consolidated Balance Sheet as of June 30, 2018, were as follows:
 
June 30, 2018
 
December 31, 2017
Restricted cash (A)
$
83

 
$
118

Accounts receivable (B)
18,934

 
18,033

Total assets
$
19,017

 
$
18,151

 
 
 
 
Accrued expenses (A)
83

 
118

Total liabilities
$
83

 
$
118

________________________________
(A)  
The Company collected less than $0.1 million from STIN customers, on behalf of STIN, which remained outstanding as of June 30, 2018. This amount has been classified in short term restricted cash and in accrued expenses on the Condensed Consolidated Balance Sheets.
(B)  
These amounts principally included revenues generated from the Cloud and Telephony Support Services agreement and pass-through of vendor expenses incurred during the transition and assignment of vendor contracts.

6. Debt

Total debt consists of the following:
 
June 30, 2018
 
December 31, 2017
Convertible Senior Notes
$
230,000

 
$
230,000

Unamortized debt issuance costs (1)
(1,590
)
 
(2,296
)
Total long-term debt, carrying value
$
228,410

 
$
227,704

________________________________
(1)
Unamortized debt issuance costs is related to Convertible Senior Notes.

Convertible Senior Notes

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

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

Holders of the 2019 Notes who convert their notes in connection with a qualifying fundamental change, as defined in the related indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, following the occurrence of a fundamental change, holders may require that the Company repurchase some or all of the 2019 Notes for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. As of June 30, 2018, none of these conditions existed with respect to the 2019 Notes and as a result, the 2019 Notes are classified as long term.

24

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)



Included in the definition of a fundamental change is whether the Company’s common stock ceases to be listed or quoted on Nasdaq. In May 2018, trading of the Company’s common stock has been suspended on Nasdaq, however, it has not been delisted.

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

During the three and six months ended June 30, 2018, interest expense for the Company’s 2019 Notes related to the contractual interest coupon was $0.5 million and $0.9 million, respectively.

At June 30, 2018, the carrying amount of the liability was $228.4 million and the outstanding principal of the 2019 Notes was $230.0 million, with an effective interest rate of approximately 1.38%. The fair value of the 2019 Notes was $221.0 million at June 30, 2018. The fair value of the liability of the 2019 Notes was determined using a discounted cash flow model based on current market interest rates available to the Company. These inputs are corroborated by observable market data for similar liabilities and therefore classified within Level 2 of the fair-value hierarchy.

The Company is required to meet all SEC filing requirements and deadlines in order to be in compliance with the 2019 Notes. In the event that the Company does not meet the filing requirements, the Company will be in default under the 2019 Notes unless it elects to pay the noteholders additional interest of 0.25% up to 180 days from the date of the notice of default and 0.50% thereafter up to 360 days. The Company may agree to pay additional interest to the holders by notifying holders and the trustee within 90 days from the notice of default. If the Company decides to pay the additional interest, but has not remedied its failure to meet all SEC filing requirements within 360 days from the notice of default, it will be in default. If the Company fails to elect to pay the additional interest, it will be in default if it does not remedy the its failure to meet all SEC filing requirements within the 90 days from the notice of default.

The Company received a notice of default from holders of more than 25% of the outstanding principal amount of the 2019 Notes on October 13, 2017. In accordance with the terms of the 2019 Notes, the Company elected to begin paying additional interest starting January 11, 2018 (the 90th day following the Company’s receipt of the notice of default). As a result of the Company regaining compliance with its SEC filing requirements, the Company was no longer required to pay the additional interest as of July 9, 2018. The Company is required to record a derivative related to this contingent interest as a liability and expense in its financial statements due to the late filings of the Company’s quarterly reports on Form 10-Q in 2017. At June 30, 2018, the recorded contingent interest derivative liability within accrued expenses was approximately $0.3 million.

2019 Notes Notice

On June 13, 2018, The Bank of New York Mellon, in its capacity as trustee (the “Trustee”) under the indenture dated as of August 12, 2014 (the “Indenture”) governing for the 2019 Notes, filed a verified complaint with the Court of Chancery of the State of Delaware, captioned The Bank of New York Mellon, as Indenture Trustee v. Synchronoss Technologies, Inc. (the “BNY Action”). The BNY Action complaint alleges that a “Fundamental Change” has occurred under the Indenture as a result of the Company’s Common Stock ceasing to be listed or quoted on Nasdaq and that an event of default under the Indenture has occurred as a result of the Company’s failure to provide a notice of such Fundamental Change which, if true, following notice from holders of more than 25% of the outstanding principal under the Notes would trigger the acceleration of the principal and interest outstanding under the 2019 Notes, which otherwise mature on August 15, 2019. The Company intends to defend against all of the claims vigorously. Pursuant to a scheduling order entered by the Court (the “Scheduling Order”), the Company filed its opening brief in support of its motion to dismiss the BNY Action on July 27, 2018. The Scheduling Order provides for the completion of briefing on the Company’s motion to dismiss and any dispositive motion filed by the Trustee on September 17, 2018. Thereafter, the Court may in its discretion hold oral argument prior to rendering its decision. Due to the inherent uncertainties of litigation, the Company cannot predict the outcome of the BNY Action at this time, and the Company can give no assurance that the asserted claims will not have a material adverse effect on the Company’s financial position or results of operations.


25

SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)


Interest expense

The following table summarizes the Company’s interest expense:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Amended Credit Facility
 
 
 
 
 
 
 
 
Amortization of debt issuance costs
 
$

 
$

 
$

 
$
748

Commitment fee
 

 

 

 
25

Interest on borrowings
 

 

 

 
24

2017 Term Facility
 
 
 
 
 
 
 
 
Amortization of debt issuance costs
 

 
739

 

 
1,355

Interest on borrowings
 

 
9,288

 

 
16,636

Revolving Facility
 
 
 
 
 
 
 
 
Amortization of debt issuance costs
 

 
184

 

 
338

Commitment fee
 

 
187

 

 
334

Convertible Senior Notes
 
 
 
 
 
 
 
 
Amortization of debt issuance costs
 
353

 
353

 
706

 
706

Interest on borrowings
 
431

 
432

 
862

 
863

Additional interest on default
 
63

 

 
192

 
288

Capital leases
 
241

 
243

 
483

 
486

Other
 
230

 
418

 
322

 
658

Total
 
$
1,318

 
$
11,844

 
$
2,565

 
$