10-Q 1 sncr-09301810xq.htm 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 September 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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
 
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 November 02, 2018
Common stock, $0.0001 par value
 
42,474,351



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)

 
September 30, 2018
 
December 31, 2017
 
 
 

ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
222,438

 
$
156,299

Restricted cash**
4,377

 
89,826

Marketable securities, current
6,989

 
3,111

Accounts receivable, net of allowances of $3,492 and $3,107 at September 30, 2018 and December 31, 2017, respectively
52,617

 
78,186

Prepaid expenses
46,922

 
33,957

Other current assets
14,115

 
9,600

Total current assets
347,458

 
370,979

Marketable securities, non-current
8,716

 

Property and equipment, net
80,519

 
111,825

Goodwill
234,480

 
237,303

Intangible assets, net
117,448

 
132,167

Other assets
8,940

 
5,236

Note receivable from related party**
66,089


73,984

Equity method investment
30,694

 
33,917

Total assets
$
894,344

 
$
965,411

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
14,300

 
$
5,959

Accrued expenses
53,794

 
72,739

Deferred revenues, current
54,046

 
75,829

Short-term debt
228,764

 

Mandatorily redeemable financial instrument

 
37,959

Total current liabilities
350,904

 
192,486

Lease financing obligation
10,006

 
11,183

Convertible debt, net of debt issuance costs

 
227,704

Deferred tax liabilities
12,109

 
13,735

Deferred revenues, non-current
29,815

 
25,241

Other liabilities
11,329

 
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; 195 shares issued and outstanding at September 30, 2018
176,160

 

Stockholders’ equity:
 

 
Common stock, $0.0001 par value; 100,000 shares authorized, 49,817 and 52,024 shares issued; 42,655 and 46,965 outstanding at September 30, 2018 and December 31, 2017, respectively
5

 
5

Treasury stock, at cost (7,162 and 5,059 shares at September 30, 2018 and December 31, 2017, respectively)
(82,087
)
 
(105,584
)
Additional paid-in capital
561,144

 
597,553

Accumulated other comprehensive loss
(30,557
)
 
(23,373
)
Accumulated deficit
(156,984
)
 
(5,014
)
Total stockholders’ equity
291,521

 
463,587

Total liabilities and stockholders’ equity
$
894,344

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net revenues
 
$
83,286

 
$
91,015

 
$
243,737

 
$
296,102

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of revenues*
 
43,714

 
45,576

 
127,788

 
139,386

Research and development
 
18,684

 
20,926

 
59,789

 
67,234

Selling, general and administrative
 
27,320

 
34,881

 
99,368

 
103,049

Restructuring charges
 
4,539

 
2,312

 
8,425

 
11,715

Depreciation and amortization
 
23,658

 
23,459

 
70,330

 
71,098

Total costs and expenses
 
117,915

 
127,154

 
365,700

 
392,482

Loss from continuing operations
 
(34,629
)
 
(36,139
)
 
(121,963
)
 
(96,380
)
Interest income
 
203

 
3,274

 
7,518

 
9,157

Interest expense
 
(1,370
)
 
(25,555
)
 
(3,935
)
 
(48,016
)
Other (expense) income, net
 
(13,439
)
 
(256
)
 
(9,180
)
 
2,374

Equity method investment income
 
283

 
645

 
71

 
1,626

Loss from continuing operations, before taxes
 
(48,952
)
 
(58,031
)
 
(127,489
)
 
(131,239
)
Benefit for income taxes
 
2,308

 
12,825

 
1,604

 
17,973

Net loss from continuing operations
 
(46,644
)
 
(45,206
)
 
(125,885
)
 
(113,266
)
Net income (loss) from discontinued operations, net of tax**
 

 
8,842

 

 
(14,067
)
Net loss
 
(46,644
)
 
(36,364
)
 
(125,885
)
 
(127,333
)
Net (income) loss attributable to redeemable noncontrolling interests
 
(422
)
 
1,276

 
2,122

 
6,980

Preferred stock dividend
 
(7,463
)
 

 
(18,076
)
 

Net loss attributable to Synchronoss
 
$
(54,529
)
 
$
(35,088
)
 
$
(141,839
)
 
$
(120,353
)
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(1.38
)
 
$
(0.98
)
 
$
(3.51
)
 
$
(2.38
)
Discontinued operations**
 

 
0.20

 

 
(0.32
)
 
 
$
(1.38
)
 
$
(0.78
)
 
$
(3.51
)
 
$
(2.70
)
Diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(1.38
)
 
$
(0.98
)
 
$
(3.51
)
 
$
(2.38
)
Discontinued operations**
 

 
0.20

 

 
(0.32
)
 
 
$
(1.38
)
 
$
(0.78
)
 
$
(3.51
)
 
$
(2.70
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
39,612

 
44,893

 
40,405

 
44,576

Diluted
 
39,612

 
44,893

 
40,405

 
44,576

________________________________
*
Cost of revenues excludes depreciation and amortization which are 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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(46,644
)
 
$
(36,364
)
 
$
(125,885
)
 
$
(127,333
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,544
)
 
4,631

 
(6,529
)
 
17,003

Unrealized loss on available for sale securities
(3
)
 
(7
)
 
(52
)
 
20

Net (loss) income on intra-entity foreign currency transactions
(72
)
 
932

 
(603
)
 
1,940

Total other comprehensive (loss) income
(1,619
)
 
5,556

 
(7,184
)
 
18,963

Comprehensive loss
(48,263
)
 
(30,808
)
 
(133,069
)
 
(108,370
)
Comprehensive (income) loss attributable to redeemable noncontrolling interests
(422
)
 
1,276

 
2,122

 
6,980

Comprehensive loss attributable to Synchronoss
$
(48,685
)
 
$
(29,532
)
 
$
(130,947
)
 
$
(101,390
)


5


SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Operating activities: 
 
 
 
Net loss from continuing operations
$
(125,885
)
 
$
(113,266
)
Net loss from discontinued operations**

 
(14,067
)
 
 
 
 
Adjustments to reconcile Net Loss to net cash used in operating activities:
 
 
 
Depreciation and amortization expense
70,330

 
71,098

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

Amortization of debt issuance costs
1,060

 
12,523

Accrued PIK interest*
(7,037
)
 
(8,805
)
Allowance for loan losses*
18,225

 

Loss (earnings) from equity method investments*
(71
)
 
(1,626
)
Loss (Gain) on disposals
277

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

 
68,377

Amortization of bond premium
75

 
219

Deferred income taxes
(1,648
)
 
(8,937
)
Stock-based compensation
22,040

 
14,427

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net of allowance for doubtful accounts
28,789

 
24,029

Prepaid expenses and other current assets
(12,844
)
 
(29,143
)
Other assets
947

 
2,768

Accounts payable
8,195

 
(2,294
)
Accrued expenses
(24,539
)
 
(16,775
)
Other liabilities
(3,886
)
 
594

Deferred revenues
(30,841
)
 
4,732

Net cash used in operating activities
(60,662
)
 
(1,093
)
 
 
 
 
Investing activities:
 
 
 
Purchases of fixed assets
(8,565
)
 
(10,315
)
Purchases of intangible assets and capitalized software
(11,012
)
 
(7,848
)
Proceeds from the sale of SpeechCycle

 
13,500

Purchases of marketable securities available for sale
(15,784
)
 
(219
)
Maturity of marketable securities available for sale
3,050

 
10,856

Equity investment distributions

 
608

Investing in discontinued operations**

 
(11,429
)
Investment in note receivable

 
(6,187
)
Business acquired, net of cash
(9,734
)
 
(815,008
)
Net cash used in investing activities
(42,045
)
 
(826,042
)

6


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

 
2,460

Taxes paid on withholding shares

 
(410
)
Debt issuance costs related to the Credit Facility

 
(3,692
)
Debt issuance cost related to amendment

 
(16,776
)
Debt issuance costs related to long term debt

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

 
900,000

Repayment of long term debt

 
(4,500
)
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
(1,018
)
 
(2,244
)
Net cash provided by financing activities
85,202

 
826,998

Effect of exchange rate changes on cash
(1,805
)
 
4,938

Net decrease in cash, restricted cash and cash equivalents
(19,310
)
 
4,801

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

 
211,433

Cash, restricted cash and cash equivalents, end of period
$
226,815

 
$
216,234

 
 
 
 
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 Condensed Consolidated Balance Sheets
$
222,438

 
$
210,070

Restricted cash per the Condensed Consolidated Balance Sheets
4,377

 
6,164

Total cash, cash equivalents and restricted cash
$
226,815

 
$
216,234

________________________________
*
See Note 5 -Investments in Affiliates and Related Transactions for related party transactions reflected in this account.
**
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, contains offerings such as personal cloud, secure-mobility, identity management, digital transformation and scalable messaging platforms, products and solutions. These essential technologies create a better way of delivering the transformative mobile experiences that our customers 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 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 its solutions and services directly through its 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”).

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 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 nine months ended September 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 nine months ended September 30, 2018, $87.3 million was released from escrow on notification that Siris Capital Group, LLC (“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.

Out of Period Adjustments

The Company as a part of implementation of more comprehensive reconciliation controls and other ongoing remediation efforts related to the material weaknesses described in Part II, Item 9A of its Annual Report on Form 10-K/A for the year ended December 31, 2017, identified certain adjustments that were not recorded in its financial statements for March 31, 2018 and June 30, 2018 quarterly periods. Specifically, the Company identified an adjustment to cost of revenues, which resulted in reporting an understatement for the three-month period ended March 31, 2018, of approximately $4.9 million, as well as other immaterial adjustments. The Company, considered the effects of all adjustments identified on its current period and prior period financial statements and determined that the adjustments did not have a material effect on its financial statements presented for the nine-month period ended September 30, 2018. Accordingly, the Company recorded this material adjustment of approximately $4.9 million as an out-of-period adjustment to cost of revenues in the three-month period ended September 30, 2018.

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 as of the date of adoption.
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 2018-15 Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Cloud Computing Arrangements
 
In August 2018, the FASB issued final guidance requiring a customer in a cloud computing arrangement that is a service contract to follow the internal use software guidance in Accounting Standards Codification (“ASC”) 350-402 Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40) to determine which implementation costs to capitalize as assets. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019. Early adoption of the amendments is permitted, including adoption in any interim period, for all entities and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
 
The Company is currently reviewing its cloud computing arrangements to evaluate the impact of adoption of the final guidance but 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, 2020.
 
 
 
 
Update 2018-07—Compensation—Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting
 
In June 2018, the FASB issued ASU 2018-07, regarding ASC Topic 718 “Compensation - Stock Compensation,” which largely aligns the accounting for share-based compensation for non-employees with employees. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.  For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.
 
The Company does not expect the adoption of this standard to 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 U.S. 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.
 
 
 
 

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)


ASU 2016-02 Leases (Topic 842 or “ASC 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. The ASU is effective for public companies in interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach.
 
The Company has elected to apply the transition requirements as of January 1, 2019 and as such, the Company will neither restate comparative periods for the effects of applying ASC 842 nor provide the disclosures required by ASC 842 for the comparative periods. In addition, there are several practical expedients and accounting policy elections offered within ASC 842 to both ease the transition to, and simplify the adoption of, ASC 842. In connection therewith, the Company elected the package of transition practical expedients related to lease identification, lease classification, and initial direct costs. The Company also elected the lessor practical expedient to not separate lease and non-lease components when the requisite criteria is met to be treated as such. In addition, the Company made the following accounting policy elections: (1) the Company will not separate lease and non-lease components by class of underlying asset (2) the Company will apply the portfolio approach, specifically in the development of the Company’s discount rates (3) the Company will apply the short-term lease exemption by class of underlying asset (4) the Company will apply a capitalization threshold policy.
Date of adoption: January 1, 2019.
 
 
 
Adoption of the new standard will result in the recording of additional net lease assets and lease liabilities as of January 1, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, will be recorded as an adjustment to retained earnings. The standard will not materially impact our consolidated net earnings and will have no impact on cash flows.

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 nine months ended September 30, 2018 was an increase of $31.9 million as a result of adopting Topic 606. The impact to costs was not material.


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 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, and (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 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, under Topic 606 Section 10-25-14(b). 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, where the level of service provided to the customer does not vary significantly from one period to another.

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.

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)


In accordance with Topic 606 Section 10-50-20, any credits due to customers, which are generally performance driven and based upon system availability or response times to incidents, are determined and accounted for in the period in which 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. The Company does not have a history of returns, or refunds of is software licenses, however, in limited instances, the Company may constrain consideration to high-risk customers, until collection is resolved.

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 there 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.

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)


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 September 30, 2018
 
Three Months Ended September 30, 2017
 
Cloud
 
Digital
 
Messaging
 
Total
 
Cloud
 
Digital
 
Messaging
 
Total
Geography
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
41,029

 
$
24,563

 
$
2,714

 
$
68,306

 
$
49,555

 
$
28,071

 
$
2,125

 
$
79,751

APAC

 
2,082

 
4,647

 
6,729

 

 
1,637

 
4,540

 
6,177

EMEA
1,967

 
2,216

 
4,068

 
8,251

 
1,708

 
634

 
2,745

 
5,087

Total
$
42,996

 
$
28,861

 
$
11,429

 
$
83,286

 
$
51,263

 
$
30,342

 
$
9,410

 
$
91,015

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service Line
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional Services
$
2,982

 
$
4,051

 
$
1,728

 
$
8,761

 
$
4,309

 
$
6,990

 
$
1,809

 
$
13,108

Transaction Services
1,918

 
2,845

 

 
4,763

 
2,883

 
4,113

 

 
6,996

Subscription Services
38,096

 
20,572

 
7,976

 
66,644

 
41,831

 
17,666

 
5,706

 
65,203

License

 
1,393

 
1,725

 
3,118

 
2,240

 
1,573

 
1,895

 
5,708

Total
$
42,996

 
$
28,861

 
$
11,429

 
$
83,286

 
$
51,263

 
$
30,342

 
$
9,410

 
$
91,015




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)


 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Cloud
 
Digital
 
Messaging
 
Total
 
Cloud
 
Digital
 
Messaging
 
Total
Geography
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
113,452

 
$
65,614

 
$
7,585

 
$
186,651

 
$
175,560

 
$
75,371

 
$
5,812

 
$
256,743

APAC

 
4,697

 
30,287

 
34,984

 

 
5,157

 
17,864

 
23,021

EMEA
6,568

 
3,747

 
11,787

 
22,102

 
5,248

 
2,630

 
8,460

 
16,338

Total
$
120,020

 
$
74,058

 
$
49,659

 
$
243,737

 
$
180,808

 
$
83,158

 
$
32,136

 
$
296,102

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service Line
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional Services
$
10,002

 
$
14,053

 
$
8,118

 
$
32,173

 
$
23,731

 
$
19,307

 
$
5,423

 
$
48,461

Transaction Services
6,703

 
6,740

 

 
13,443

 
9,098

 
15,058

 

 
24,156

Subscription Services
102,891

 
50,103

 
23,709

 
176,703

 
140,224

 
40,107

 
21,708

 
202,039

License
424

 
3,162

 
17,832

 
21,418

 
7,755

 
8,686

 
5,005

 
21,446

Total
$
120,020

 
$
74,058

 
$
49,659

 
$
243,737

 
$
180,808

 
$
83,158

 
$
32,136

 
$
296,102


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 September 30, 2018 is $3.6 million.

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 in the period
(99,405
)
Amounts billed but not recognized as revenue
68,257

Balance - September 30, 2018
$
83,861

________________________________
*
Comprised of Deferred Revenue

Revenues recognized during the nine months ended September 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 nine months ended September 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 September 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 September 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. This applies to a limited number of situations where we are dependent upon data from a third party or where fees are highly variable.

Many of the Company’s performance obligations meet one or more of these exemptions. Specifically, the Company has excluded the following from our remaining performance obligations, all of which will be resolved in the period in which amounts are known:
consideration for future transactions, above any contractual minimums
consideration for success-based transactions contingent on third party data
credits for failure to meet future service level requirements

As of September 30, 2018, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $401.9 million, of which approximately 87.4% 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:
 
 
September 30, 2018
 
 
As Reported
Impacts of the New Revenue Standard
Adjusted amounts under prior GAAP
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
222,438

$

$
222,438

Restricted cash**
 
4,377


4,377

Marketable securities, current
 
6,989


6,989

Accounts receivable, net
 
52,617

19,718

32,899

Prepaid expenses
 
46,922


46,922

Other current assets (2)
 
14,115

(415
)
14,530

Total current assets
 
347,458

19,303

328,155

Marketable securities, non-current
 
8,716


8,716

Property and equipment, net
 
80,519


80,519

Goodwill
 
234,480


234,480

Intangible assets, net
 
117,448


117,448

Other assets (2)
 
8,940

369

8,571

Note receivable from related party**
 
66,089


66,089

Equity method investment
 
30,694


30,694

Total assets
 
$
894,344

$
19,672

$
874,672

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
14,300

$

$
14,300

Accrued expenses
 
53,794

(14,756
)
68,550

Deferred revenues, current (3)
 
54,046

2,281

51,765

Short-term debt
 
228,764


228,764

Total current liabilities
 
350,904

(12,475
)
363,379

Lease financing obligation
 
10,006


10,006

Deferred tax liabilities
 
12,109


12,109

Deferred revenues, non-current (3)
 
29,815

11,200

18,615

Other liabilities
 
11,329


11,329

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; 195 shares issued and outstanding at September 30, 2018
 
176,160


176,160

Stockholders’ equity:
 
 
 
 
Common stock, $0.0001 par value; 100,000 shares authorized, 49,817 and 52,024 shares issued; 42,655 and 46,965 outstanding at September 30, 2018 and December 31, 2017, respectively
 
5


5

Treasury stock, at cost (7,162 and 5,059 shares at September 30, 2018 and December 31, 2017, respectively)
 
(82,087
)

(82,087
)
Additional paid-in capital
 
561,144


561,144

Accumulated other comprehensive loss (4)
 
(30,557
)
76

(30,633
)
Accumulated deficit
 
(156,984
)
20,871

(177,855
)
Total stockholders’ equity
 
291,521

20,947

270,574

Total liabilities and stockholders’ equity
 
$
894,344

$
19,672

$
874,672

________________________________
**
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 September 30, 2018
 
Nine Months Ended September 30, 2018
 
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)
$
83,286

$
11,605

$
71,681

 
$
243,737

$
31,871

$
211,866

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues* (5)
43,714

249

43,465

 
127,788

613

127,175

Research and development
18,684


18,684

 
59,789


59,789

Selling, general and administrative (2)
27,320

51

27,269

 
99,368

152

99,216

Restructuring charges
4,539


4,539

 
8,425


8,425

Depreciation and amortization
23,658


23,658

 
70,330


70,330

Total costs and expenses
117,915

300

117,615

 
365,700

765

364,935

Loss from continuing operations
(34,629
)
11,305

(45,934
)
 
(121,963
)
31,106

(153,069
)
Interest income
203


203

 
7,518


7,518

Interest expense
(1,370
)
(33
)
(1,337
)
 
(3,935
)
(105
)
(3,830
)
Other expense, net
(13,439
)

(13,439
)
 
(9,180
)

(9,180
)
Equity method investment income
283


283

 
71


71

Loss from continuing operations, before taxes
(48,952
)
11,272

(60,224
)
 
(127,489
)
31,001

(158,490
)
Benefit for income taxes
2,308


2,308

 
1,604


1,604

Net loss from continuing operations
(46,644
)
11,272

(57,916
)
 
(125,885
)
31,001

(156,886
)
Net loss
(46,644
)
11,272

(57,916
)
 
(125,885
)
31,001

(156,886
)
Net (income) loss attributable to redeemable noncontrolling interests
(422
)

(422
)
 
2,122


2,122

Preferred stock dividend
(7,463
)

(7,463
)
 
(18,076
)

(18,076
)
Net loss attributable to Synchronoss
$
(54,529
)
$
11,272

$
(65,801
)
 
$
(141,839
)
$
31,001

$
(172,840
)
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
(1.38
)
$
0.28

$
(1.66
)
 
$
(3.51
)
$
0.77

$
(4.28
)
Diluted:
 
 
 
 
 
 
 
Continuing operations
$
(1.38
)
$
0.28

$
(1.66
)
 
$
(3.51
)
$
0.77

$
(4.28
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
39,612

 
39,612

 
40,405

 
40,405

Diluted
39,612

 
39,612

 
40,405

 
40,405

________________________________
*
Cost of revenues excludes depreciation and amortization which are shown separately.
(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.

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
31,001

Retained Earnings at September 30, 2018
$
20,871


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)



3. Acquisitions and Divestitures

Acquisition-Related Costs

Total acquisition-related costs recognized during the nine months ended September 30, 2018 and 2017 including transaction costs such as legal, accounting, valuation and other professional services, were $1.9 million and $13.4 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 $9.7 million in cash at the time of closing and deferred consideration of $8.7 million to be paid over the next three years. As of September 30, 2018, the preliminary opening balance sheet reflected intangible assets and net working capital in the amount of $8.0 million and $10.4 million respectively. The Company is currently evaluating the impact of 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 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.


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)


On June 23, 2017, the Company received a non-binding indication of interest from 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
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.


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)


The following is a summary of assets, liabilities and redeemable noncontrolling interests and their related classifications under the fair value hierarchy:
 
September 30, 2018
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash (1)
$
226,815

 
$
226,815

 
$

 
$

Marketable securities-short term (2)
6,989

 

 
6,989

 

Marketable securities-long term (2)
8,716

 

 
8,716

 

Total assets
$
242,520

 
$
226,815

 
$
15,705

 
$

Temporary equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests (3)
$
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 (4)
$
193

 
$

 
$

 
$
193

Mandatorily redeemable financial instrument (5)
$
37,959

 
$

 
$

 
$
37,959

Total liabilities
$
38,152

 
$

 
$

 
$
38,152

Temporary Equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests (3)
$
25,280

 
$

 
$

 
$
25,280

Total temporary equity
$
25,280

 
$

 
$

 
$
25,280

________________________________
(1) 
Cash equivalents primarily included money market funds.
(2) 
Marketable securities are comprised of municipal bonds and certificates of deposit.
(3) 
Put arrangements held by the noncontrolling interests in certain of the Company’s joint ventures.
(4) 
Contingent interest derivative related to convertible debt is included in accrued expenses, for further details see Note 6 - Debt.
(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 nine months ended September 30, 2018.

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 nine months ended September 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 September 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

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)


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 September 30, 2018 and December 31, 2017, the estimated fair value of investments classified as available-for-sale, were as follows:
 
September 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable securities:
 
 
 
 
 
 
 
Certificates of deposit
$
3,776

 
$

 
$
(15
)
 
$
3,761

Corporate bonds
402

 

 
(3
)
 
399

Municipal bonds
11,598

 
1

 
(54
)
 
11,545

Total marketable securities
$
15,776

 
$
1

 
$
(72
)
 
$
15,705


As of September 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 $14.8 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, 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:
 
September 30, 2018
 
Amortized
Cost
 
Fair
Value
Due within one year
$
7,006

 
$
6,989

Due after 1 year through 5 years
8,718

 
8,664

Due after 5 years through 10 years
52

 
52

Due after 10 years

 

Total available-for-sale debt securities
$
15,776

 
$
15,705


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.

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)



The changes in fair value of the Company’s Level 3 redeemable noncontrolling interests during the nine months ended September 30, 2018 were as follows:
Balance at December 31, 2017
$
25,280

Fair value adjustment
(10,658
)
Net loss attributable to redeemable noncontrolling interests
(2,122
)
Balance at September 30, 2018
$
12,500


Fair Value of PIK Note

The fair value of the PIK note was estimated by applying an income approach using a discounted cash flow analysis to derive the fair value of the STIH’s interest in STIN, the collateral supporting the PIK Note. Additionally, the Company considered synthetic credit ratings of comparable notes in the market. 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 PIK note, for impairment, such as discount rate, credit rating, and growth rates could significantly increase or decrease the fair value estimates recorded in the Condensed Consolidated Balance Sheets. For further details see Note 5 - Investments in Affiliates and Related Transactions.

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 investment on the Company’s Condensed Consolidated Balance Sheets. As of September 30, 2018, the Company’s investments in equity interests was comprised of $30.7 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 September 30, 2018, all the amounts under the 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 September 30, 2018 and 2017, the Company recognized $6.4 million and $8.3 million, respectively, in revenue related to Cloud Telephony and Support services, and $0.9 million and $1.0 million, respectively, in revenue related to all other services. For the nine months ended September 30, 2018 and 2017, the Company recognized $12.8 million and $12.5 million, respectively in revenue related to Cloud Telephony and Support services, and $8.2 million and $1.9 million, respectively, in revenue related to all other services.


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)


STIN - Selected financial data

The following table displays certain key financial data pertaining to the operations of STIN for the three and nine months ended September 30, 2018:
 
 
Three Months Ended
 
Nine Months Ended
Revenues
 
$
33,119

 
$
94,758

Expenses
 
32,177

 
94,523

Net(loss) income
 
$
942

 
$
235


PIK Note

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
)
$
(12,163
)
$
11,096

$
6,187

$
426

$
73,984

Activity

(18,225
)
438

6,103

3,293

496

(7,895
)
September 30, 2018
$
83,000

$
(32,787
)
$
(11,725
)
$
17,199

$
9,480

$
922

$
66,089


During the nine months ended September 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.

Amendment to PIK Note

During the three months ended September 30, 2018, the Company entered into an amendment with STIH to modify the terms, of the PIK Note (“PIK Amendment”). The PIK Amendment modified the terms of the arrangement, lowering the interest rate from LIBOR plus 1100 basis points to a rate equal to the sum of LIBOR plus 300 basis points per annum. Additionally, the PIK Amendment provided relief on required payments, to allow STIH to continue its operations.

Concurrent with the modification described above, STIH and the Company agreed to modify the liquidation preferences set forth in the PIK Note, which would allow for cash distributions, senior to the PIK Note, as amended by the PIK Amendment, in the amount of $24.0 million, which would be distributed evenly in the event of sale.

The Company determined that the above modifications qualified as a troubled debt restructuring, due primarily to the following factors (i) STIN continues to experience declines in its business, deteriorating the overall EBITDA available to provide adequate payment for debt, (ii) the terms of the debt modification, and in combination with the preference payments agreed to in the operating agreement provided a return-of-capital claim senior to the debt, and waived the Company’s right to include such future distribution as a qualified distribution subject to PIK under the distribution note and (iii) the terms of the arrangement were significantly below market for which no consideration was granted to the Company.

The troubled debt restructuring resulted in an impairment on the PIK Note, as amended by the PIK Amendment, in the amount of $18.2 million, as reflected in the table above. Subsequent to modification and based on the concessions made under the troubled debt restructuring, the Company determined that collectability beyond the impaired carrying value is no longer probable and will account the PIK Note, as amended by the PIK Amendment, on a modified cost recovery basis, recognizing into income, only those amounts collected above the impaired carrying value of $66.1 million.


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)


STIN affiliate balances

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

 
$
118

Accounts receivable (B)
22,274

 
18,033

Total assets
$
22,274

 
$
18,151

 
 
 
 
Accrued expenses (A)

 
118

Total liabilities
$

 
$
118

________________________________
(A)  
The Company collected zero and $0.1 million from STIN customers, on behalf of STIN, which remained outstanding as of September 30, 2018 and December 31, 2017, respectively. 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:
 
September 30, 2018
 
December 31, 2017
Convertible Senior Notes
$
230,000

 
$
230,000

Unamortized debt issuance cost (1)
(1,236
)
 
(2,296
)
Total debt, carrying value
$
228,764

 
$
227,704

Total short-term debt, carrying value
$
228,764

 
$

Total long-term debt, carrying value
$

 
$
227,704

________________________________
(1)
Unamortized debt issuance cost 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 September 30, 2018, none of these conditions existed with respect to the 2019 Notes.

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)



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 was suspended on Nasdaq, however, it was not delisted. On September 26, 2018, the Company received notice, that the Nasdaq Listing Qualifications Staff (the “Staff”) approved the listing of its common stock on Nasdaq. The result of this approval caused the suspension of trading in Company’s common stock on The Nasdaq Stock Market to be lifted. For further details see Note 14 - Subsequent Events Review.

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 nine months ended September 30, 2018, interest expense for the Company’s 2019 Notes related to the contractual interest coupon was $0.4 million and $1.3 million, respectively.

At September 30, 2018, the carrying amount of the liability was $228.8 million and the outstanding principal of the 2019 Notes was $230.0 million, with an effective interest rate of approximately 1.37%. The fair value of the 2019 Notes was $222.9 million at September 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 to be compliant 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 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 was 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 September 30, 2018, the recorded contingent interest derivative liability within accrued expenses was zero as a result of Company regaining compliance with its SEC filing requirements.

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. On November 2018, the parties filed a stipulation of dismissal of the BNY Action. For further details, see Note 14 - Subsequent Events Review.

On November 2, 2018, the Company retired $116.0 million of 2019 Notes as a part of settlement agreement entered into on November 1, 2018, among the Company, Indaba Capital Fund, L.P. (“Indaba”) and Westwood Management Corp. (“Westwood”) related to the BNY Action. For further details see Note 12 - Commitments and Contingencies.


26

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


Interest expense

The following table summarizes the Company’s interest expense:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
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
 

 
1,021

 

 
2,376

Interest on borrowings
 

 
12,411

 

 
29,047

Contingent Interest Derivative
 

 
2,489

 

 
2,489

Amendment fees paid to third parties
 

 
5,716

 

 
5,716

Revolving Facility
 
 
 
 
 
 
 
 
Amortization of debt issuance costs
 

 
204

 

 
542

Commitment fee
 

 
114

 

 
448

Amendment fees paid to third parties
 

 
1,662

 

 
1,662

Convertible Senior Notes