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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
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 001-40574
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
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $.0001 par value
| | SNCR | | The Nasdaq Stock Market, LLC
|
8.375% Senior Notes due 2026 | | SNCRL | | The Nasdaq Stock Market, LLC |
As of November 7, 2024, there were 10,839,269 shares of common stock issued and outstanding.
SYNCHRONOSS TECHNOLOGIES, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
| | | | | | | | | | | | | | | |
| | September 30, 2024 | | December 31, 2023 | |
| | | | | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 25,228 | | | $ | 24,572 | | |
| | | | | |
| | | | | |
Accounts receivable, net | | 19,263 | | | 23,477 | | |
Prepaid & other current assets | | 33,449 | | | 33,953 | | |
| | | | | |
| | | | | |
| | | | | |
Total current assets | | 77,940 | | | 82,002 | | |
Non-current assets: | | | | | |
| | | | | |
Property and equipment, net | | 2,973 | | | 3,673 | | |
Operating lease right-of-use assets | | 9,596 | | | 14,791 | | |
Goodwill | | 184,815 | | | 183,908 | | |
Intangible assets, net | | 20,908 | | | 22,214 | | |
| | | | | |
| | | | | |
Other assets, non-current | | 3,466 | | | 3,749 | | |
| | | | | |
| | | | | |
| | | | | |
Total non-current assets | | 221,758 | | | 228,335 | | |
Total assets | | $ | 299,698 | | | $ | 310,337 | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 5,691 | | | $ | 7,475 | | |
Accrued expenses | | 32,489 | | | 39,127 | | |
Deferred revenues, current | | 1,498 | | | 1,095 | | |
Debt, current | | 1,875 | | | — | | |
| | | | | |
| | | | | |
| | | | | |
Total current liabilities | | 41,553 | | | 47,697 | | |
| | | | | |
| | | | | |
| | | | | |
Long-term debt, net of debt issuance costs | | 184,527 | | | 136,215 | | |
Deferred tax liabilities | | 3,918 | | | 3,207 | | |
| | | | | |
| | | | | |
Leases, non-current | | 18,416 | | | 23,593 | | |
Other liabilities, non-current | | 3,481 | | | 1,691 | | |
| | | | | |
Total liabilities | | 251,895 | | | 212,403 | | |
Commitments and contingencies: | | | | | |
| | | | | |
Series B Non-Convertible Perpetual Preferred stock, $0.0001 par value; 0 and 150 shares authorized, 0 and 61 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | | — | | | 58,802 | | |
Redeemable non-controlling interest | | 12,500 | | | 12,500 | | |
Stockholders’ equity: | | | | | |
Common stock, $0.0001 par value; 16,667 shares authorized, 10,839 and 10,314 issued and outstanding at September 30, 2024 and December 31, 2023, respectively | | 1 | | | 1 | | |
| | | | | |
Additional paid-in capital | | 492,914 | | | 483,527 | | |
Accumulated other comprehensive loss | | (24,728) | | | (25,732) | | |
Accumulated deficit | | (432,884) | | | (431,164) | | |
Total stockholders’ equity | | 35,303 | | | 26,632 | | |
Total liabilities and stockholders’ equity | | $ | 299,698 | | | $ | 310,337 | | |
See accompanying notes to condensed consolidated financial statements.
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, |
| | 2024 | | 2023 | | | | 2024 | | 2023 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net revenues | | $ | 42,964 | | | $ | 39,790 | | | | | $ | 129,387 | | | $ | 122,794 | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of revenues1 | | 8,975 | | | 9,478 | | | | | 29,599 | | | 31,926 | | | |
Research and development | | 10,333 | | | 9,304 | | | | | 32,560 | | | 35,322 | | | |
Selling, general and administrative | | 13,755 | | | 20,285 | | | | | 39,800 | | | 53,507 | | | |
Restructuring charges | | — | | | 28 | | | | | 267 | | | 391 | | | |
Depreciation and amortization | | 4,386 | | | 4,482 | | | | | 12,773 | | | 12,478 | | | |
Total costs and expenses | | 37,449 | | | 43,577 | | | | | 114,999 | | | 133,624 | | | |
Income (loss) from operations | | 5,515 | | | (3,787) | | | | | 14,388 | | | (10,830) | | | |
Interest income | | 165 | | | 149 | | | | | 556 | | | 370 | | | |
Interest expense | | (5,526) | | | (3,482) | | | | | (12,529) | | | (10,397) | | | |
| | | | | | | | | | | | |
Other (expense) income, net | | (5,241) | | | 4,456 | | | | | (210) | | | 1,213 | | | |
| | | | | | | | | | | | |
(Loss) income from continuing operations, before taxes | | (5,087) | | | (2,664) | | | | | 2,205 | | | (19,644) | | | |
Provision for income taxes | | (628) | | | (23) | | | | | (3,939) | | | (850) | | | |
Net loss from continuing operations | | (5,715) | | | (2,687) | | | | | (1,734) | | | (20,494) | | | |
Discontinued operations (Note 4): | | | | | | | | | | | | |
Income from discontinued operations, before taxes | | — | | | 851 | | | | | — | | | 224 | | | |
| | | | | | | | | | | | |
Provision for income taxes | | — | | | (843) | | | | | — | | | (1,858) | | | |
Net income (loss) from discontinued operations | | — | | | 8 | | | | | — | | | (1,634) | | | |
Net loss | | (5,715) | | | (2,679) | | | | | (1,734) | | | (22,128) | | | |
Net income (loss) attributable to redeemable non-controlling interests | | 14 | | | (18) | | | | | 14 | | | 10 | | | |
Preferred stock dividend and gain on repurchase of preferred stock | | — | | | (2,474) | | | | | (1,562) | | | (7,423) | | | |
Net loss attributable to Synchronoss | | $ | (5,701) | | | $ | (5,171) | | | | | $ | (3,282) | | | $ | (29,541) | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Earnings (loss) per share: | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | |
Net loss from continuing operations | | $ | (0.56) | | | $ | (0.53) | | | | | $ | (0.33) | | | $ | (2.87) | | | |
Net loss from discontinued operations | | — | | | — | | | | | — | | | (0.17) | | | |
Basic | | $ | (0.56) | | | $ | (0.53) | | | | | $ | (0.33) | | | $ | (3.04) | | | |
Diluted: | | | | | | | | | | | | |
Net loss from continuing operations | | $ | (0.56) | | | $ | (0.53) | | | | | $ | (0.33) | | | $ | (2.87) | | | |
Net loss from discontinued operations | | — | | | — | | | | | — | | | (0.17) | | | |
Diluted | | $ | (0.56) | | | $ | (0.53) | | | | | $ | (0.33) | | | $ | (3.04) | | | |
Weighted-average common shares outstanding: | | | | | | | | | | | | |
Basic | | 10,095 | | | 9,809 | | | | | 9,994 | | | 9,716 | | | |
Diluted | | 10,095 | | | 9,809 | | | | | 9,994 | | | 9,716 | | | |
________________________________
1 Cost of revenues excludes depreciation and amortization which are shown separately.
See accompanying notes to condensed consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited) (In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, |
| | 2024 | | 2023 | | | | 2024 | | 2023 | | |
Net loss: | | $ | (5,715) | | | $ | (2,679) | | | | | $ | (1,734) | | | $ | (22,128) | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
Foreign currency translation adjustments | | 9,279 | | | (8,069) | | | | | 1,004 | | | (3,328) | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total other comprehensive income (loss) | | 9,279 | | | (8,069) | | | | | 1,004 | | | (3,328) | | | |
Comprehensive income (loss) | | 3,564 | | | (10,748) | | | | | (730) | | | (25,456) | | | |
Comprehensive income (loss) attributable to redeemable non-controlling interests | | 14 | | | (18) | | | | | 14 | | | 10 | | | |
Comprehensive income (loss) attributable to Synchronoss | | $ | 3,578 | | | $ | (10,766) | | | | | $ | (716) | | | $ | (25,446) | | | |
See accompanying notes to condensed consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2024 |
| Common Stock | | | | | | | | | | |
| Shares | | Par Value | | | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive (Loss) Income | | Accumulated deficit | | Total Stockholders' Equity |
Balance at June 30, 2024 | 10,815 | | | $ | 1 | | | | | | | $ | 491,808 | | | $ | (34,007) | | | $ | (427,183) | | | $ | 30,619 | |
Stock-based compensation | — | | | — | | | | | | | 884 | | | — | | | — | | | 884 | |
Issuance of restricted stock | 2 | | | — | | | | | | | — | | | — | | | — | | | — | |
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Issuance of common stock on exercise of options | 22 | | | — | | | | | | | 236 | | | — | | | — | | | 236 | |
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Net loss | — | | | — | | | | | | | — | | | — | | | (5,715) | | | (5,715) | |
Non-controlling interest | — | | | — | | | | | | | (14) | | | — | | | 14 | | | — | |
Total other comprehensive income | — | | | — | | | | | | | — | | | 9,279 | | | — | | | 9,279 | |
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Balance at September 30, 2024 | 10,839 | | | $ | 1 | | | | | | | $ | 492,914 | | | $ | (24,728) | | | $ | (432,884) | | | $ | 35,303 | |
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| Three Months Ended September 30, 2023 |
| Common Stock | | | | | | | | | | |
| Shares | | Par Value | | | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive (Loss) Income | | Accumulated deficit | | Total Stockholders' Equity |
Balance at June 30, 2023 | 10,433 | | | $ | 1 | | | | | | | $ | 486,587 | | | $ | (39,390) | | | $ | (396,050) | | | $ | 51,148 | |
Stock-based compensation | — | | | — | | | | | | | 1,349 | | | — | | | — | | | 1,349 | |
Issuance of restricted stock | (6) | | | — | | | | | | | — | | | — | | | — | | | — | |
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Preferred stock dividend | — | | | — | | | | | | | (2,474) | | | — | | | — | | | (2,474) | |
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Shares withheld for taxes in connection with issuance of restricted stock | (14) | | | — | | | | | | | (117) | | | — | | | — | | | (117) | |
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Net loss | — | | | — | | | | | | | — | | | — | | | (2,679) | | | (2,679) | |
Non-controlling interest | — | | | — | | | | | | | 18 | | | — | | | (18) | | | — | |
Total other comprehensive loss | — | | | — | | | | | | | — | | | (8,069) | | | — | | | (8,069) | |
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Balance at September 30, 2023 | 10,413 | | | $ | 1 | | | | | | | $ | 485,363 | | | $ | (47,459) | | | $ | (398,747) | | | $ | 39,158 | |
See accompanying notes to condensed consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands) (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2024 |
| Common Stock | | | | | | | | | | |
| Shares | | Par Value | | | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive (Loss) Income | | Accumulated deficit | | Total Stockholders' Equity |
Balance at December 31, 2023 | 10,314 | | | $ | 1 | | | | | | | $ | 483,527 | | | $ | (25,732) | | | $ | (431,164) | | | $ | 26,632 | |
Stock-based compensation | — | | | — | | | | | | | 2,866 | | | — | | | — | | | 2,866 | |
Issuance of restricted stock | 503 | | | — | | | | | | | — | | | — | | | — | | | — | |
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Preferred stock dividend | — | | | — | | | | | | | (4,258) | | | — | | | — | | | (4,258) | |
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Issuance of common stock on exercise of options | 22 | | | — | | | | | | | 236 | | | — | | | — | | | 236 | |
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Shares withheld for taxes in connection with issuance of restricted stock | — | | | — | | | | | | | (1) | | | — | | | — | | | (1) | |
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Net loss | — | | | — | | | | | | | — | | | — | | | (1,734) | | | (1,734) | |
Non-controlling interest | — | | | — | | | | | | | (14) | | | — | | | 14 | | | — | |
Total other comprehensive income | — | | | — | | | | | | | — | | | 1,004 | | | — | | | 1,004 | |
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Gain on Series B Preferred stock repurchase | — | | | — | | | | | | | 2,696 | | | — | | | — | | | 2,696 | |
Gain on Senior Notes repurchase | — | | | — | | | | | | | 7,862 | | | — | | | — | | | 7,862 | |
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Balance at September 30, 2024 | 10,839 | | | $ | 1 | | | | | | | $ | 492,914 | | | $ | (24,728) | | | $ | (432,884) | | | $ | 35,303 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 |
| Common Stock | | | | | | | | | | |
| Shares | | Par Value | | | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive (Loss) Income | | Accumulated deficit | | Total Stockholders' Equity |
Balance at December 31, 2022 | 10,137 | | | $ | 1 | | | | | | | $ | 488,856 | | | $ | (44,131) | | | $ | (376,629) | | | $ | 68,097 | |
Stock-based compensation | — | | | — | | | | | | | 4,189 | | | — | | | — | | | 4,189 | |
Issuance of restricted stock | 306 | | | — | | | | | | | — | | | — | | | — | | | — | |
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Preferred stock dividend | — | | | — | | | | | | | (7,423) | | | — | | | — | | | (7,423) | |
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Shares withheld for taxes in connection with issuance of restricted stock | (30) | | | — | | | | | | | (249) | | | — | | | — | | | (249) | |
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Net loss | — | | | — | | | | | | | — | | | — | | | (22,128) | | | (22,128) | |
Non-controlling interest | — | | | — | | | | | | | (10) | | | — | | | 10 | | | — | |
Total other comprehensive loss | — | | | — | | | | | | | — | | | (3,328) | | | — | | | (3,328) | |
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Balance at September 30, 2023 | 10,413 | | | $ | 1 | | | | | | | $ | 485,363 | | | $ | (47,459) | | | $ | (398,747) | | | $ | 39,158 | |
See accompanying notes to condensed consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2024 | | 2023 | | |
Operating activities: | | | | | | |
Net loss from continuing operations | | $ | (1,734) | | | $ | (20,494) | | | |
Net loss from discontinued operations | | — | | | (1,634) | | | |
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Adjustments to reconcile net income (loss) to net cash from operating activities: | | | | | | |
Depreciation and amortization | | 12,773 | | | 21,997 | | | |
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Amortization of debt issuance costs | | 1,491 | | | 1,136 | | | |
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Loss on disposals of fixed assets | | 73 | | | 25 | | | |
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Gain on disposals of intangible assets | | (278) | | | — | | | |
Amortization of debt discount | | 79 | | | 72 | | | |
Sublease receivable impairment | | 806 | | | — | | | |
Deferred income taxes | | 710 | | | 76 | | | |
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Stock-based compensation | | 5,376 | | | 4,605 | | | |
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Impairment of STI Loan and iQmetrix receivable | | — | | | 6,317 | | | |
Operating lease impairment, net | | 2,163 | | | 2,075 | | | |
Other, net | | 257 | | | (1,941) | | | |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable, net | | 3,386 | | | 14,717 | | | |
Prepaid expenses and other current assets | | (1,098) | | | (1,240) | | | |
Accounts payable | | (1,527) | | | (1,337) | | | |
Accrued expenses | | (6,717) | | | (7,420) | | | |
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Other assets | | 290 | | | (102) | | | |
Deferred revenues | | 407 | | | 5,427 | | | |
Other liabilities | | (1,252) | | | (3,043) | | | |
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Net cash provided by operating activities | | $ | 15,205 | | | $ | 19,236 | | | |
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SYNCHRONOSS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands) (Continued)
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2024 | | 2023 | | |
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Investing activities: | | | | | | |
Purchases of fixed assets | | $ | (1,038) | | | $ | (1,229) | | | |
Additions to capitalized software | | (9,864) | | | (14,660) | | | |
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Proceeds from the sale of intangibles | | 278 | | | — | | | |
Proceeds from the divestiture, net | | 1,515 | | | — | | | |
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Net cash used in investing activities | | (9,109) | | | (15,889) | | | |
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Financing activities: | | | | | | |
Share-based compensation-related proceeds, net of taxes paid on withholding shares | | 236 | | | — | | | |
Taxes paid on withholding shares | | (1) | | | (249) | | | |
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Debt issuance costs related to Term Loan | | (6,792) | | | — | | | |
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Proceeds from issuance of Term Loan | | 75,000 | | | — | | | |
Repurchase of Senior Notes and related costs | | (11,524) | | | — | | | |
Repayment of Term Loan | | (469) | | | — | | | |
Drawdown on A/R Facility | | 9,000 | | | 6,000 | | | |
Repayment of A/R Facility | | (9,000) | | | (6,000) | | | |
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Series B Preferred dividend paid in the form of cash | | (4,258) | | | (7,247) | | | |
Repurchase of Series B Preferred stock | | (57,576) | | | — | | | |
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Net cash used in financing activities | | (5,384) | | | (7,496) | | | |
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Effect of exchange rate changes on cash | | (56) | | | (198) | | | |
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Net increase (decrease) in cash and cash equivalents | | 656 | | | (4,347) | | | |
Beginning cash and cash equivalents of continuing operations | | 24,572 | | | 18,310 | | | |
Beginning cash and cash equivalents of discontinued operations | | — | | | 3,611 | | | |
Beginning cash and cash equivalents | | 24,572 | | | 21,921 | | | |
Ending cash and cash equivalents of continuing operations | | 25,228 | | | 14,088 | | | |
Ending cash and cash equivalents of discontinued operations | | — | | | 3,486 | | | |
Ending cash and cash equivalents | | $ | 25,228 | | | $ | 17,574 | | | |
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See accompanying notes to condensed consolidated financial statements.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 1. Description of Business
General
Synchronoss Technologies, Inc. (“Synchronoss” or the “Company”) is a leading provider of white label cloud software and services that enable our customers to keep subscribers, systems, networks and content in sync.
The Synchronoss Personal CloudTM solution is designed to create an engaging and trusted customer experience through ongoing content management and engagement. The Synchronoss Personal CloudTM platform is a secure and highly scalable, white label platform that allows our customers’ subscribers to backup and protect, engage with, and manage their personal content and gives our operator customers the ability to increase average revenue per user (“ARPU”) and reduce churn.
Our Synchronoss Personal CloudTM platform is specifically designed to support smartphones, tablets, desktops computers, and laptops.
Synchronoss’ Messaging platform (Owned and operated through October 31, 2023) had powered mobile messaging and mailboxes for hundreds of millions of telecommunication subscribers. Our Advanced Messaging platform had been a powerful, secure, intelligent, white label messaging platform that expanded capabilities for communications service provider and multi-service providers to offer P2P messaging via Rich Communications Services (“RCS”). Our Mobile Messaging Platform (“MMP”) provided a single standard ecosystem for onboarding and management to brands, advertisers and message wholesalers.
The Synchronoss NetworkX (Owned and operated through October 31, 2023) products had provided operators with the tools and software to design their physical network, streamlined their infrastructure purchases, and managed and optimized comprehensive network expenses for leading top tier carriers around the globe.
On October 31, 2023, Synchronoss Technologies, Inc. entered into an Asset Purchase Agreement with Lumine Group Software Solutions (Ireland) Limited, pursuant to which the Company sold its Messaging and NetworkX businesses. This transaction represented a strategic shift designed to maximize shareholder value and allow the Company to solely focus on providing cloud-centric solutions. In connection with the sale transaction, the Company determined its Messaging and NetworkX Businesses qualified for discontinued operations accounting treatment in accordance with ASC 205-20. Accordingly, the operating results of, and costs to separate the Messaging and NetworkX businesses are reported in Net income (loss) from discontinued operations, before taxes in the Consolidated Statements of Operations for prior periods presented. There were no assets and liabilities related to discontinued operations as of September 30, 2024 and December 31, 2023, as all balances were transferred to Lumine Group upon sale. The notes to the financial statements have been adjusted on a retrospective basis. For additional information, see Note 4. Divestitures and Discontinued Operations of the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q.
Note 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 for the year ended December 31, 2023. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024.
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
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, 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.
Unless otherwise noted, tables are presented in U.S. dollars in thousands. Certain columns and rows may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in thousands. Earnings per share amounts are computed independently for earnings from continuing operations, earnings from discontinued operations and net earnings. As a result, the sum of per-share amounts may not equal the total. We have reclassified certain prior year amounts to conform with current year presentation. Unless otherwise noted, all amounts and disclosures included in the Notes to Consolidated Financial Statements reflect only the Company's continuing operations except for the Consolidated Statements of Cash Flows, which are presented for the whole company for the nine months ended September 30, 2023. For supplemental cash flow disclosures, see Note 4. Divestitures and Discontinued Operations of the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q.
During the fourth quarter of 2023 there was a change in the capital structure due to a reverse stock split, which decreased the number of common shares outstanding. The Company retroactively displayed the effect of the change in the Consolidated Balance Sheets, and retroactively adjusted the computations of basic and diluted Earnings Per Share (“EPS”) for all periods presented on the Consolidated Statement of Operations. For additional information, see Note 11. Capital Structure of the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q.
For further information about the Company’s basis of presentation and consolidation or its significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Recently Issued Accounting Standards
Standards issued not yet adopted
| | | | | | | | | | | | | | |
Standard | | Description | | Effect on the financial statements |
Update 2024-01 - Compensation—Stock Compensation (Topic 718) - Scope Application of Profits Interest and Similar Awards | | The amendments in this Update related to the scope application issue apply to all reporting entities that account for profits interest awards as compensation to employees or nonemployees in return for goods or services. This Update provides specific examples to help stakeholders to determine whether a profits interest award should be accounted for as a share-based payment arrangement (Topic 718) or similar to a cash bonus or profit-sharing arrangement (Topic 710, Compensation—General, or other Topics). | | The Company continues to evaluate these changes and does not anticipate any material impact on the Company’s consolidated financial position or results of operations upon adoption. |
Planned date of adoption: January 1, 2025 | | | | |
Update 2023-09 - Income Taxes (Topic 740) - Improvements to Income Tax Disclosures | | The amendments in this Update related to the rate reconciliation and income taxes paid disclosures improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. | | The Company continues to evaluate these changes and does not anticipate any material impact on the Company’s consolidated financial position or results of operations upon adoption. |
Planned date of adoption: January 1, 2025 | | | | |
Update 2023-07 - Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures | | The amendments in this Update improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this Update Requires that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this Update and all existing segment disclosures in Topic 280. | | The Company continues to evaluate these changes and does not anticipate any material impact on the Company’s consolidated financial position or results of operations upon adoption. |
Planned date of adoption: December 31, 2024 | | | | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 3. Revenue
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, Europe, the Middle East and Africa (“EMEA”), and Asia Pacific (“APAC”). The majority of the Company’s revenue is from the technology, media, and telecom (“TMT”) sector.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2024 | | Three Months Ended September 30, 2023 |
| Cloud | | NetworkX | | Messaging2 | | Total | | Cloud | | NetworkX1 | | Messaging2 | | Total |
Geography: | | | | | | | | | | | | | | | |
Americas | $ | 40,200 | | | $ | — | | | $ | — | | | $ | 40,200 | | | $ | 36,714 | | | $ | (39) | | | $ | 102 | | | $ | 36,777 | |
APAC | 1,076 | | | — | | | — | | | 1,076 | | | 1,328 | | | — | | | — | | | 1,328 | |
EMEA | 1,688 | | | — | | | — | | | 1,688 | | | 1,685 | | | — | | | — | | | 1,685 | |
Total | $ | 42,964 | | | $ | — | | | $ | — | | | $ | 42,964 | | | $ | 39,727 | | | $ | (39) | | | $ | 102 | | | $ | 39,790 | |
| | | | | | | | | | | | | | | |
Service Line: | | | | | | | | | | | | | | | |
Professional Services | $ | 3,369 | | | $ | — | | | $ | — | | | $ | 3,369 | | | $ | 4,248 | | | $ | — | | | $ | (51) | | | $ | 4,197 | |
Transaction Services | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Subscription Services | 39,595 | | | — | | | — | | | 39,595 | | | 35,479 | | | (39) | | | 153 | | | 35,593 | |
License | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 42,964 | | | $ | — | | | $ | — | | | $ | 42,964 | | | $ | 39,727 | | | $ | (39) | | | $ | 102 | | | $ | 39,790 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2024 | | Nine Months Ended September 30, 2023 |
| Cloud | | NetworkX | | Messaging2 | | Total | | Cloud | | NetworkX1 | | Messaging2 | | Total |
Geography: | | | | | | | | | | | | | | | |
Americas | $ | 120,031 | | | $ | — | | | $ | 124 | | | $ | 120,155 | | | $ | 111,674 | | | $ | 779 | | | $ | 773 | | | $ | 113,226 | |
APAC | 4,229 | | | — | | | — | | | 4,229 | | | 4,122 | | | — | | | — | | | 4,122 | |
EMEA | 5,003 | | | — | | | — | | | 5,003 | | | 5,446 | | | — | | | — | | | 5,446 | |
Total | $ | 129,263 | | | $ | — | | | $ | 124 | | | $ | 129,387 | | | $ | 121,242 | | | $ | 779 | | | $ | 773 | | | $ | 122,794 | |
| | | | | | | | | | | | | | | |
Service Line: | | | | | | | | | | | | | | | |
Professional Services | $ | 11,231 | | | $ | — | | | $ | — | | | $ | 11,231 | | | $ | 13,278 | | | $ | — | | | $ | (102) | | | $ | 13,176 | |
Transaction Services | — | | | — | | | — | | | — | | | 185 | | | — | | | — | | | 185 | |
Subscription Services | 118,032 | | | — | | | 26 | | | 118,058 | | | 107,375 | | | 779 | | | 875 | | | 109,029 | |
License | — | | | — | | | 98 | | | 98 | | | 404 | | | — | | | — | | | 404 | |
Total | $ | 129,263 | | | $ | — | | | $ | 124 | | | $ | 129,387 | | | $ | 121,242 | | | $ | 779 | | | $ | 773 | | | $ | 122,794 | |
_____________________________
1 Includes revenue recognized in prior periods associated with residual NetworkX contracts not included in the Asset Purchase Agreement with Lumine Group.
2 Includes revenue recognized in the current and prior periods associated with residual Messaging contracts not included in the Asset Purchase Agreement with Lumine Group.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
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 Accounts receivable, net in its Consolidated Balance Sheets at their net estimated realizable value. The Company maintains an allowance for credit losses 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 was $0.1 million and $1.2 million as of September 30, 2024 and December 31, 2023, respectively.
Amounts collected in advance of services being provided are accounted for as contract liabilities, which are presented as Deferred revenue, current on the accompanying Consolidated Balance Sheets 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 non-current) during the period are as follows: | | | | | | |
| | Contract Liabilities1 |
Balance at December 31, 2023 | | $ | 1,095 | |
Revenue recognized in the period | | (129,618) | |
Amounts billed but not initially recognized as revenue | | 130,021 | |
| | |
| | |
Balance at September 30, 2024 | | $ | 1,498 | |
________________________________
1 Comprised of Deferred Revenue. $1.0 million of revenue recognized in the period was included in the contract liability balance at the beginning of the period.
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, 2024. 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 the Company is 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 the Company’s remaining performance obligations, all of which will be resolved in the period in which amounts are known:
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
•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, 2024, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $181.2 million, of which approximately 72.7% 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.
Note 4. Divestitures and Discontinued Operations
Discontinued Operations
Messaging and NetworkX Businesses Sale
On October 31, 2023 (the “Lumine Closing Date”), Synchronoss Technologies, Inc. and certain of its affiliated entities (such entities, together with the Company, the “Company Group”) entered into an Asset Purchase Agreement (the “Agreement”) with Lumine Group Software Solutions (Ireland) Limited, a private limited company incorporated under the laws of Ireland, Lumine Group UK Holdco Ltd, Incognito Software Systems Inc., Lumine Group US Holdco, Inc., Lumine Group Australia Holdco Pty Ltd, Openwave Messaging (Ireland) Limited, Razersight Software Solutions Ireland Limited, Spatial Software Solutions Ireland Limited, Razorsight Software Solutions US Inc., and Openwave Messaging US Inc. (such entities, the “Buyer”), pursuant to which the Company Group sold its Messaging and NetworkX businesses (the “Messaging and NetworkX Businesses”) to Buyer (the “Transaction”) for a total purchase price of up to $41,800,000 (the “Purchase Price”), and Buyer assumed certain liabilities of the Messaging and Digital Businesses. Lumine Group Inc., the parent entity of Lumine Group Software Solutions (Ireland) Limited, guaranteed certain obligations of Buyer under the Agreement pursuant to a separate Limited Guaranty, by and between Lumine Group Inc. and the Company, dated as of the date of the Agreement. The Purchase Price, which was subject to set-off rights in certain circumstances and certain adjustments, was payable as follows: (i) $31,300,000 (as adjusted) was paid in cash to the Company on the Lumine Closing Date, (ii) an additional $7,200,000 was deposited by Buyer into an escrow account on the Lumine Closing Date (which amount remained in escrow until reconciliation of a net tangible asset adjustment), with any amounts in such escrow account released from escrow to either Buyer or the Company, based on whether such reconciliation indicated a deficit or a surplus in net tangible assets relative to a negotiated target amount, following such reconciliation process, which took in excess of 150 days following the Lumine Closing Date for the initial portion of the net tangible asset reconciliation and 300 days or more following the Lumine Closing Date for reconciliation of certain specified assets to be completed, (iii) an additional $300,000 in cash (which amount was not deposited into an escrow account) could have become payable to the Company in accordance with the terms of the Agreement in the event that the voluntary disclosure process with respect to certain sales tax matters related to the Messaging and NetworkX Businesses were resolved by the Company within 9 months following the Lumine Closing Date, and (iv) an additional amount of up to $3,000,000 in cash (which amount was not deposited into an escrow account) may have become payable to the Company as an earn-out based on the achievement of specified gross revenue targets for the Messaging and NetworkX Businesses in fiscal year 2023. Pursuant to the Certificate of Designations of the Series B Perpetual Non-Convertible Preferred Stock, on November 3, 2023 the Company redeemed 9,874 shares of its outstanding Series B Preferred Stock by using $10,000,000 of the Purchase Price, of which $9.9 million was related to principal and $0.1 million was related to accrued dividends.
This transaction represented a strategic shift designed to maximize shareholder value and allow the Company to solely focus on providing cloud-centric solutions. In connection with the sale transaction, the Company determined its Messaging and NetworkX Businesses qualified for discontinued operations accounting treatment in accordance with ASC 205-20. During the fourth quarter of 2023 the Company allocated $28.6 million goodwill to the transaction using level 3 estimates, and recognized a loss on divestiture of $16.4 million reported in Loss on divestiture in the Consolidated Statements of Operations. The Company received $31.3 million in cash proceeds from the sale of Messaging and NetworkX, which was offset by $0.4 million of assumed transaction expenses and $7.2 million of operating cash on the divested entities. Total consideration for the sale also included $1.5 million of deferred consideration representing the estimated fair value of Purchase Price items ii, iii and iv
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
referenced above, which were reflected in the Prepaid & other current assets line on the Consolidated Balance Sheets as of December 31, 2023. During the third quarter of 2024 final settlements were completed in accordance with the terms of the Purchase Agreement, resulting in the Company receiving $1.5 million in cash which was reported under investing activities on the Consolidated Statements of Cash Flows.
The following tables set forth details of net income (loss) from discontinued operations for the three and nine months ended September 30, 2024 and 2023, respectively, related to Messaging and NetworkX Businesses sale.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2024 | | 2023 | | 2024 | | 2023 | | |
| | | | | | | | | | |
Net revenues | | $ | — | | | $ | 15,858 | | | $ | — | | | $ | 50,275 | | | |
Costs and expenses: | | | | | | | | | | |
Cost of revenues1 | | — | | | 8,419 | | | — | | | 28,134 | | | |
Research and development | | — | | | 1,552 | | | — | | | 5,312 | | | |
Selling, general and administrative | | — | | | 1,979 | | | — | | | 6,941 | | | |
Restructuring charges | | — | | | — | | | — | | | 3 | | | |
Depreciation and amortization | | — | | | 3,056 | | | — | | | 9,519 | | | |
Total costs and expenses | | — | | | 15,006 | | | — | | | 49,909 | | | |
Income from operations | | — | | | 852 | | | — | | | 366 | | | |
Interest income | | — | | | — | | | — | | | 1 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other expense, net | | — | | | (1) | | | — | | | (143) | | | |
| | | | | | | | | | |
Income from operations, before taxes | | — | | | 851 | | | — | | | 224 | | | |
| | | | | | | | | | |
Provision for income taxes | | — | | | (843) | | | — | | | (1,858) | | | |
Net income (loss) | | $ | — | | | $ | 8 | | | $ | — | | | $ | (1,634) | | | |
_____________________________
1 Cost of revenues excludes depreciation and amortization, which are shown separately.
There were no assets and liabilities related to discontinued operations as of September 30, 2024 and December 31, 2023, as all balances were transferred to Lumine Group upon sale.
The following table summarizes the significant non-cash items and capital expenditures of the discontinued operations that are included in the consolidated statements of cash flows for the nine months ended September 30, 2024 and 2023:
| | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 | | |
Operating activities: | | | | | |
Depreciation and amortization | $ | — | | | $ | 9,519 | | | |
Stock-based compensation | — | | | 716 | | | |
| | | | | |
Investing activities: | | | | | |
Additions to capitalized software | $ | — | | | $ | (4,077) | | | |
| | | | | |
Divestitures
Digital Experience Platform and Activation Solutions Sale
On March 7, 2022, Synchronoss Technologies, Inc. and iQmetrix Global Ltd. (“iQmetrix ”), entered into an Asset Purchase Agreement, pursuant to which Synchronoss has agreed to sell its Digital Experience Platform and activation solutions (the “DXP Business”) to iQmetrix for up to a total purchase price of $14 million (the “iQmetrix Transaction”). The purchase price is payable as follows: (i) $7.5 million on the iQmetrix closing date of the iQmetrix Transaction, (ii) $0.5 million deposited into an
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
escrow account on the iQmetrix Closing Date, (iii) $1 million paid twelve (12) months from the iQmetrix Closing Date, and (iv) $5 million that may be payable as an earn-out.
This transaction closed on May 11, 2022. The Company received the $7.5 million cash payment on the transaction close date. The Company received the $0.5 million payment in escrow during the third quarter of 2022 in accordance with the terms of the Asset Purchase Agreement. The remaining $1 million escrow payment has not been received by the Company in accordance with the agreement. As of December 31, 2023 the Company had fully reserved for the asset and related receivables recorded within the Selling, general and administrative expenses line item on the Consolidated Statements of Income, and is pursuing collection of the payment.
Note 5. Accounts Receivable Securitization Facility
On June 23, 2022 (the “A/R Closing Date”), the Company and certain of its subsidiaries (together with the Company, the “Company Group”) entered into a $15 million accounts receivable securitization facility (the “A/R Facility”) with Norddeutsche Landesbank Girozentrale.
The A/R Facility transaction includes (i) Receivables Purchase Agreements (the “Receivables Purchase Agreements”) dated as of the A/R Closing Date, among the Company, as initial servicer, SN Technologies, LLC, a wholly owned special purpose subsidiary of the Company (“SN Technologies”), as seller, Norddeutsche Landesbank Girozentrale, as administrative agent (the “Administrative Agent”), and the purchasers party thereto, the group agents party thereto and the originators party thereto; (ii) Purchase and Sale Agreements (the “Purchase and Sale Agreements”) dated as of the A/R Closing Date, between the Company Group, as originators (the “Originators”), and SN Technologies, as purchaser; (iii) the Administration Agreement (the “Administration Agreement”) dated as of the A/R Closing Date, between the Company, as servicer, and Finacity Corporation, as administrator; and (iv) the Performance Guaranty (the “Performance Guaranty”) dated as of the A/R Closing Date made by the Company in favor of the Administrative Agent.
Pursuant to the Purchase and Sale Agreements, the Originators will sell existing and future accounts receivable (and related assets) (the “Receivables”) to SN Technologies in exchange for cash and/or subordinated notes. The Originators and SN Technologies intend the transactions contemplated by the Purchase and Sale Agreements to be true sales to SN Technologies by the respective Originators. Pursuant to the Receivables Purchase Agreement, SN Technologies will in turn grant an undivided security interest to the Administrative Agent in the Receivables in exchange for a credit facility permitting borrowings of up to $15 million outstanding from time to time. Yield is payable to the Administrative Agent under the Receivables Purchase Agreements at a variable rate based on the Norddeutsche Landesbank Girozentrale’s Hanover funding rate plus a 2.35% margin. The Company’s commitment fee shall equal 0.85% per annum on the average daily unused outstanding capital. Pursuant to the Performance Guaranty, the Company guarantees the performance of the Originators of their obligations under the Purchase and Sale Agreements.
The Company has not agreed to guarantee any obligations of SN Technologies or the collection of any of the receivables and will not be responsible for any obligations to the extent the failure to perform such obligations by the Company or any Originators results from receivables being uncollectible on account of the insolvency, bankruptcy or lack of creditworthiness or other financial inability to pay of the related obligor.
Unless earlier terminated or subsequently extended pursuant to the terms of the Receivables Purchase Agreement, the A/R Facility will expire on June 23, 2025.
The foregoing description of the A/R Facility and the respective transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to the full text of the Receivables Purchase Agreements, Purchase and Sale Agreements, Administration Agreement and Performance Guaranty, copies of which are filed as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, on Form 8-K filed with Securities and Exchange Commission on June 23, 2022.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
For the nine months ended September 30, 2024 the Company drew $9.0 million on the A/R Facility, and had repaid the balance in full as of September 30, 2024. For the nine months ended September 30, 2023 the Company drew $6.0 million on the A/R Facility, and had repaid the balance in full as of September 30, 2023. The interest associated with the draw and repayment was not material for either period. The drawdown and subsequent repayment of the A/R Facility represent financing activities, as reported in the Consolidated Statements of Cash Flows. As of September 30, 2024 approximately $3.1 million of the Company’s receivables are held by SN Technologies. As of September 30, 2024 there were no outstanding borrowings against the A/R facility and $3.1 million was available for the Company to draw under the A/R Facility.
Note 6. Fair Value Measurements
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.
•Level 3 - Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.
The following is a summary of assets and liabilities, and their related classifications under the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 |
| Total | | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | |
Money market accounts1 | $ | 7,995 | | | $ | 7,995 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
Total assets | $ | 7,995 | | | $ | 7,995 | | | $ | — | | | $ | — | |
Liabilities | | | | | | | |
Performance-based cash units2,3 | $ | 2,945 | | | $ | — | | | $ | 2,945 | | | $ | — | |
| | | | | | | |
Total liabilities | $ | 2,945 | | | $ | — | | | $ | 2,945 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Total | | (Level 1) | | (Level 2) | | (Level 3) |
Assets | | | | | | | |
Money market accounts1 | $ | 12,500 | | | $ | 12,500 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
Total assets | $ | 12,500 | | | $ | 12,500 | | | $ | — | | | $ | — | |
Liabilities | | | | | | | |
Performance-based cash units2,3 | $ | 434 | | | $ | — | | | $ | 434 | | | $ | — | |
| | | | | | | |
Total liabilities | $ | 434 | | | $ | — | | | $ | 434 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
________________________________
1 Included in Cash and cash equivalents on the Consolidated Balance Sheets.
2 The short term portion is included in Accrued expenses and the long-term portion is included in Other liabilities, non-current on the Consolidated Balance Sheets.
3 For a discussion of performance-based cash units see Note 12. Stock Plans of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Refer to Note 9. Debt of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for presentation of Fair Value of Debt.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 7. Note Receivable
Sequential Technology International, LLC
During the second quarter of 2020, the Company entered into an agreement with Sequential Technology International, LLC (“STIN”) and AP Capital Holdings II, LLC (“APC”) to divest its remaining equity interest in STIN as well as settle its paid-in-kind purchase money note (“PIK note”) and certain amounts due as of December 31, 2019 in consideration for a $9.0 million secured promissory note (the “Note”). As of December 31, 2022, the carrying value of the Note after the consideration of the allowance for credit loss was approximately $4.8 million. The Company determined the allowance on the Note using a discounted cash flow analysis, which discounts the expected future cash flows of the asset to determine the collectible amount.
During the third quarter of 2023, the interest payment for the Note was not received by the Company from STIN. In the third quarter of 2023 the Company reassessed the collectability of the Note and determined that a full allowance for credit losses was required equal to the carrying value of the Note, recorded within the Selling, general and administrative expenses line item on the Consolidated Statements of Operations.
During the first quarter of 2024, the Company entered into an agreement with STIN and APC to amend the aforementioned promissory note and reduce the principal balance to $3.0 million, forgive outstanding accrued interest and extend the maturity date of the Note to September 2027. Certain circumstances may enable the Company to receive consideration in excess of the amended principal balance. In the first quarter of 2024 the Company reassessed the collectability of the note and determined a full allowance for credit losses was required equal to the carrying value of the note. Accordingly, the modification of the terms of the Note had no net impact on the condensed consolidated financial statements for the three and nine months ended September 30, 2024.
Note 8. Leases
The Company has entered into contracts with third parties to lease a variety of assets, including certain real estate, equipment, automobiles and other assets. The Company’s leases frequently allow for lease payments that could vary based on factors such as inflation or the degree of utilization of the underlying asset. For example, certain of the Company’s real estate leases could require us to make payments that vary based on common area maintenance charges, insurance and other charges. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company is party to certain sublease arrangements, primarily related to the Company’s real estate leases, where it acts as the lessee and intermediate lessor.
Assets under operating leases are included in Operating lease right-of-use assets, with the related short term liabilities included in Accrued expenses and long term portion included in Leases, non-current on the Consolidated Balance Sheets.
Assets under finance leases are included in Property, plant and equipment, net, with the related short term liabilities included in Accrued Expenses and long term portion in Leases, non-current on the Consolidated Balance Sheets.
Operating lease costs are recognized on a straight-line basis over the lease terms. Finance lease assets are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease terms.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table presents information about the Company's right-of-use (“ROU”) assets and lease liabilities:
| | | | | | | | | | | | | | |
| | September 30, 2024 | | December 31, 2023 |
Operating lease assets: | | | | |
Non-current operating lease ROU assets | | $ | 9,596 | | | $ | 14,791 | |
Finance lease assets: | | | | |
Equipment, net | | 899 | | | 1,094 | |
| | | | |
| | | | |
| | | | |
Operating lease liabilities: | | | | |
Lease liabilities, current | | 5,953 | | | 5,838 | |
Lease liabilities, non-current | | 18,024 | | | 23,037 | |
Total operating lease liabilities | | $ | 23,977 | | | $ | 28,875 | |
| | | | |
Finance lease liabilities: | | | | |
Lease liabilities, current | | 548 | | | 562 | |
Lease liabilities, non-current | | 392 | | | 556 | |
Total finance lease liabilities | | $ | 940 | | | $ | 1,118 | |
The following table presents information about lease expense and sublease income:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2024 | | 2023 | | 2024 | | 2023 | | |
Finance leases: | | | | | | | | | |
Interest expense | $ | 26 | | | $ | 20 | | | $ | 77 | | | $ | 55 | | | |
Depreciation expense | 164 | | | 147 | | | 478 | | | 407 | | | |
Total finance leases | $ | 190 | | | $ | 167 | | | $ | 555 | | | $ | 462 | | | |
| | | | | | | | | |
Operating leases: | | | | | | | | | |
Operating lease cost1 | $ | 1,139 | | | $ | 1,461 | | | $ | 3,960 | | | $ | 4,503 | | | |
Other lease costs and income: | | | | | | | | | |
Variable lease costs1 | 262 | | | 205 | | | 572 | | | 928 | | | |
ROU assets impairments, net1,2 | (115) | | | — | | | 2,163 | | | 2,075 | | | |
Sublease income1 | (572) | | | (1,003) | | | (1,882) | | | (2,541) | | | |
Total operating leases | 714 | | | 663 | | | 4,813 | | | 4,965 | | | |
Total net lease cost | $ | 904 | | | $ | 830 | | | $ | 5,368 | | | $ | 5,427 | | | |
| | | | | | | | | |
________________________________
1 Amounts are included in Cost of revenues, Selling, general and administrative and/or Research and development based on the function that the underlying leased asset supports, which are reflected in the Consolidated Statements of Operations.
2 Reflects impairments and remeasurements recorded for Bethlehem, Pennsylvania and Bangalore, India office locations in the current and prior periods, respectively.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table provides the undiscounted amount of future cash flows included in our lease liabilities at September 30, 2024 for each of the five years subsequent to December 31, 2023 and thereafter, as well as a reconciliation of such undiscounted cash flows to our lease liabilities at September 30, 2024:
| | | | | | | | | | | | | | |
| | Operating Leases | | Finance Leases |
2024 | | $ | 1,901 | | | $ | 168 | |
2025 | | 7,614 | | | 546 | |
2026 | | 7,621 | | | 280 | |
2027 | | 6,241 | | | 23 | |
2028 | | 4,278 | | | — | |
| | | | |
Total future lease payments | | 27,655 | | | 1,017 | |
Less: amount representing interest | | (3,678) | | | (77) | |
Present value of future lease payments (lease liability) | | $ | 23,977 | | | $ | 940 | |
The following table provides the weighted-average remaining lease term and weighted-average discount rates for our leases:
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Weighted-average remaining lease term (years), weighted based on lease liability balances: | | | |
Finance leases | 1.83 | | 2.19 |
| | | |
Operating leases | 3.72 | | 4.40 |
| | | |
Weighted-average discount rate (percentages), weighted based on the remaining balance of lease payments: | | | |
Finance leases | 9.8% | | 9.3% |
Operating leases | 8.0% | | 8.0% |
The following table provides certain cash flow and supplemental noncash information related to our lease liabilities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Finance leases | $ | 186 | | | $ | 170 | | | $ | 534 | | | $ | 456 | |
Operating leases | 1,924 | | | 1,979 | | | $ | 5,848 | | | $ | 5,985 | |
| | | | | | | |
Lease liabilities arising from obtaining right-of-use assets: | | | | | | | |
Finance leases | $ | 178 | | | $ | 223 | | | $ | 283 | | | $ | 581 | |
Operating leases | — | | | — | | | — | | | — | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 9. Debt
2024 Term Loan
On June 28, 2024 (the “Effective Date”), the Company entered into a Credit Agreement (the “Credit Agreement”) with BGC Lender Rep LLC, as administrative agent, and the lenders party thereto. The Credit Agreement established a senior secured term loan facility of up to $75.0 million (the “Term Loan”), all of which was funded on the Effective Date. The proceeds of the Term Loan were used to (i) fund the Senior Note Repurchase (as defined below), (ii) to fund the Series B Repurchase (as defined below) and (iii) to pay transaction fees and expenses associated with the closing of the transactions contemplated by the Credit Agreement.
The Term Loan matures on June 28, 2028 (the “Maturity Date”); provided that if (i) the Company’s 8.375% Senior Notes due 2026 (the “Senior Notes”) are not refinanced, redeemed or repaid in full prior to March 31, 2026, the Maturity Date shall be March 31, 2026 and (ii) in the event of a refinancing, redemption or repayment of the Senior Notes in full prior to March 31, 2026, the Maturity Date shall be the earlier of (A) June 28, 2028 and (B) the date that is twelve (12) months prior to the final stated maturity date for the indebtedness resulting from such refinancing, redemption or repayment of the Senior Notes in full.
The Term Loan bears interest at a rate per annum equal to the Adjusted Term Secured Overnight Financing Rate (“SOFR”) (as defined in the Credit Agreement) for the applicable interest period, plus 5.50%, subject to a floor of 2.50%.
The Credit Agreement requires the Company to repay the outstanding principal amounts of the Term Loan in an amount of $468,750 on the last day of each fiscal quarter beginning on September 30, 2024 and ending on June 30, 2026. Starting on September 30, 2026, and on the last day of each fiscal quarter thereafter, such repayments of outstanding principal shall be $1,875,000. The final principal repayment of the Term Loan shall be repaid on the Maturity Date in an amount equal to the aggregate principal amount of the Term Loan outstanding on such date. The Company may at any time voluntarily prepay the Term Loan, in whole or in part subject to a variable prepayment fee if such prepayment is made prior to the third anniversary of the Effective Date. The Company is required to pay an exit fee of $1.5 million if, among other things, the Maturity Date is extended beyond March 31, 2026. The Credit Agreement also contains mandatory prepayment provisions that are customary for secured financings of this type from excess cash flow and with the proceeds of certain asset sales, tax refunds, equity sales or issuances, and debt issuances, each as more fully described in the Credit Agreement.
The Company made principal payments of $0.5 million on the Term Loan for the three and nine months ending September 30, 2024 in line with the terms of the Credit Agreement.
The Company’s obligations under the Credit Agreement are secured by substantially all of the assets (other than existing real property) of Synchronoss. Other than an Irish Subsidiary (as defined in the Credit Agreement), none of the Company’s direct or indirect foreign subsidiaries or immaterial subsidiaries has guaranteed the loans under the Credit Agreement, but under certain circumstances, such subsidiaries may become guarantors. The Credit Agreement contains customary covenants that limit the Company’s ability and its restricted subsidiaries to, among other things, (i) incur additional indebtedness, (ii) pay dividends or make certain other restricted payments, (iii) sell assets, (iv) make certain investments, (v) grant liens and (vi) enter into transactions with affiliates. These covenants are subject to exceptions and qualifications set forth in the Credit Agreement. The financial covenants set forth in the Credit Agreement include (i) a maximum consolidated secured leverage ratio, which will be tested at the end of each of the Company’s fiscal quarter and (ii) an average liquidity requirement for any calendar month. All borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including the absence of a default and the accuracy of representations and warranties subject to certain exceptions. Upon the occurrence and continuance of an event of default, which, for example, could be triggered by a breach or violation of, or default under, certain material contracts of the Company, BGC Lender Rep may take either or both of the following actions: (i) terminate the commitments and (ii) declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Credit Agreement.
The foregoing description of the Credit Agreement and Term Loan does not purport to be complete and is qualified in its entirety by the full text of the Credit Agreement, a copy of which is filed as Exhibit 10.1 to the Company’s Quarterly Report for the quarter ended June 30, 2024, which is on file with the SEC and available on the SEC’s website at www.sec.gov.
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 is in compliance with its debt covenants pertaining to the Term Loan as of September 30, 2024.
Repurchase of Senior Notes and Series B Preferred
The Company used $66.5 million of the proceeds from the Term Loan and $2.6 million non-interest-bearing deferred consideration, payable to B. Riley 180 calendar days following the Effective Date, for a total consideration of $69.1 million (“the total consideration”) to repurchase 100% of its outstanding Series B Perpetual Non-Convertible Preferred Stock (the “Series B Preferred”) and 787,590 (14%) of its outstanding Senior Notes from B. Riley Principal Investments, LLC (“BRPI”), a related party.
The fair value of Series B Preferred stock of $57.6 million was determined using a discounted cash flow model using level two inputs. The carrying value of Series B Preferred was $58.2 million. The second quarter’s accrued dividend of $2.1 million was forgiven at the time of the repurchase. The Series B Preferred repurchase gain of $2.7 million was calculated as the fair value of consideration paid less the carrying value, less the second quarter’s accrued dividend forgiven. The $2.7 million gain was accounted for as capital transaction and reflected as an adjustment to additional paid-in capital (“APIC”). While the transaction was not reflected in the income statement, the gain was reflected in the adjustment to net income from common shareholders for purposes of calculating EPS, for the nine months ended September 30, 2024.
The Company allocated $57.6 million of the total consideration to the Series B Preferred based on the fair value and allocated the remaining consideration of $11.5 million to the Senior Notes repurchase. The carrying value of Senior notes repurchased was $19.1 million including $0.6 million of unamortized debt issuance costs. The second quarter’s accrued interest of $0.3 million was forgiven at the time of the repurchase. The Senior Note Repurchase gain of $7.9 million was calculated as the remaining consideration paid of $11.5 million less the carrying value, less the second quarter’s accrued interest forgiven. The Company accounted for the debt repurchase as a redemption with a related party. ASC 470-50-40-2 indicates that such an extinguishment transaction may be in essence a capital transaction. Therefore, the transaction was accounted for as a capital transaction and reflected as an adjustment to APIC, which resulted in a gain of $7.9 million for the nine months ended September 30, 2024.
Offering of Senior Notes
On June 30, 2021, the Company closed its underwritten public offering of $120.0 million aggregate principal amount of 8.375% senior notes due 2026 at a par value of $25.00 per senior note (the “Senior Notes”). The offering was conducted pursuant to an underwriting agreement (the “Notes Underwriting Agreement”) dated June 25, 2021, by and among the Company and B. Riley Securities, Inc., as representative of the several underwriters (the “Notes Underwriters”). At the closing, the Company issued $125.0 million aggregate principal amount of Senior Notes, inclusive of $5.0 million aggregate principal amount of Senior Notes issued pursuant to the full exercise of the Notes Underwriters’ option to purchase additional Senior Notes.
The Notes Underwriting Agreement contains customary representations, warranties and covenants of the Company, customary conditions to closing, indemnification obligations of the Company and the Notes Underwriters, including for liabilities under the Securities Act, other obligations of the parties and termination provisions.
On June 30, 2021, the Company entered into an indenture (the “Base Indenture”) and a supplemental indenture (the “First Supplemental Indenture” and, together with the Base Indenture, the “Indenture”) with The Bank of New York Mellon Trust Company National Association, as trustee (the “Trustee”), between the Company and the Trustee. The Indenture establishes the form and provides for the issuance of the Senior Notes.
The Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. The Senior Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The Senior Notes bear interest at the rate of 8.375% per annum. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on July 31, 2021. The Senior Notes will mature on June 30, 2026, unless redeemed prior to maturity.
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 may, at its option, at any time and from time to time, redeem the Senior Notes for cash in whole or in part (i) on or after June 30, 2022 and prior to June 30, 2023, at a price equal to $25.75 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after June 30, 2023 and prior to June 30, 2024, at a price equal to $25.50 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (iii) on or after June 30, 2024 and prior to June 30, 2025, at a price equal to $25.25 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iv) on or after June 30, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Senior Notes.
The Indenture contains customary events of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of at least 25% of the principal amount of the Senior Notes may declare the entire amount of the Senior Notes, together with accrued and unpaid interest, if any, to be immediately due and payable. In the case of an event of default involving the Company’s bankruptcy, insolvency or reorganization, the principal of, and accrued and unpaid interest on, the principal amount of the Senior Notes, together with accrued and unpaid interest, if any, will automatically, and without any declaration or other action on the part of the Trustee or the holders of the Senior Notes, become due and payable.
On October 25, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) between the Company and B. Riley Securities, Inc. (the “Agent”), a related party, pursuant to which the Company may offer and sell, from time to time, up to $18.0 million of the Company’s 8.375% Senior Notes due 2026. Sales of the additional Senior Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). Under the Sales Agreement, the Agent will be entitled to compensation of 2.0% of the gross proceeds of all notes sold through it as the Company’s agent.
During the fourth quarter of 2021, the Company sold an additional $16.1 million aggregate principal amount of Senior Notes pursuant to the Sales Agreement. The additional Senior Notes sold have terms identical to the initial Senior Notes and are fungible and vote together with, the initial Senior Notes. The Senior Notes are listed and trade on The Nasdaq Global Market under the symbol “SNCRL.”
On June 28, 2024, Synchronoss repurchased 787,590 of its Senior Notes from BRPI, as described above.
The Company is in compliance with its debt covenants pertaining to the Senior Notes as of September 30, 2024.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Carrying Value of Debt
The carrying amounts of the Company’s borrowings were as follows:
| | | | | | | | | | | | | | |
| | September 30, 2024 | | December 31, 2023 |
8.375% Senior Notes due 2026: | | | | |
Senior Notes | | $ | 121,387 | | | $ | 141,077 | |
Unamortized discount and debt issuance cost1 | | (3,025) | | | (4,862) | |
Carrying value of Senior Notes | | 118,362 | | | 136,215 | |
2024 Term Loan: | | | | |
Term Loan | | 74,531 | | | — | |
Unamortized debt issuance cost1 | | (6,491) | | | — | |
| | | | |
Carrying value of Term Loan | | 68,040 | | | — | |
Total carrying value of debt | | 186,402 | | | 136,215 | |
Current portion of long-term debt | | 1,875 | | | — | |
Long-term debt, net of current portion | | $ | 184,527 | | | $ | 136,215 | |
________________________________
1 Debt issuance costs are deferred and amortized into interest expense using the effective interest method.
Fair Value of Debt
The fair value of the Senior Notes was determined based on the closing trading price of the Senior Notes as of September 30, 2024 and is categorized accordingly as Level 2 in the fair value hierarchy. The fair value of the Term Loan was obtained using the Discounted Cash Flow valuation model (DCF) with observable inputs as of September 30, 2024 and is categorized accordingly as Level 2 in the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at September 30, 2024 |
| | | | Fair Value |
| | Carrying Amount | | (Level 1) | | (Level 2) | | (Level 3) | | Total |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total debt | | $ | 186,402 | | | $ | — | | | $ | 189,508 | | | $ | — | | | $ | 189,508 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at December 31, 2023 |
| | | | Fair Value |
| | Carrying Amount | | (Level 1) | | (Level 2) | | (Level 3) | | Total |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total debt | | $ | 136,215 | | | $ | — | | | $ | 107,557 | | | $ | — | | | $ | 107,557 | |
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, |
| | 2024 | | 2023 | | | | 2024 | | 2023 | | |
2021 8.375% Senior Notes due 2026: | | | | | | | | | | | | |
Amortization of debt issuance costs | | $ | 364 | | | $ | 388 | | | | | $ | 1,190 | | | $ | 1,136 | | | |
Interest on borrowings | | 2,541 | | | 2,954 | | | | | 8,449 | | | 8,862 | | | |
Amortization of debt discount | | 27 | | | 25 | | | | | 79 | | | 72 | | | |
2024 Term Loan: | | | | | | | | | | | | |
Amortization of debt issuance costs | | 293 | | | — | | | | | 301 | | | — | | | |
Amortization of exit fee | | 64 | | | — | | | | | 66 | | | — | | | |
Interest on borrowings | | 2,118 | | | — | | | | | 2,163 | | | — | | | |
| | | | | | | | | | | | |
Other1 | | 119 | | | 115 | | | | | 281 | | | 327 | | | |
Total | | $ | 5,526 | | | $ | 3,482 | | | | | $ | 12,529 | | | $ | 10,397 | | | |
________________________________
1 Includes interest on uncertain tax provisions.
Note 10. Accumulated Other Comprehensive (Loss) / Income
The changes in accumulated other comprehensive (loss) income during the nine months ended September 30, 2024 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2023 | | Other comprehensive income | | Tax effect | | Balance at September 30, 2024 |
Foreign currency | $ | (22,212) | | | $ | 1,004 | | | $ | — | | | $ | (21,208) | |
Unrealized loss on intercompany foreign currency transactions | (3,520) | | | — | | | — | | | (3,520) | |
| | | | | | | |
Total | $ | (25,732) | | | $ | 1,004 | | | $ | — | | | $ | (24,728) | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 11. Capital Structure
Reverse Stock Split
On December 4, 2023, the Company’s stockholders approved proposals at a special meeting of stockholders (the “Special Meeting”) amending the Company’s Restated Certificate of Incorporation (as amended, the “Certificate of Incorporation”), to effect a reverse stock split of the Company’s common stock, $0.0001 par value (“Common Stock”), at a ratio in the range of 1-to-5 to 1-to-20, and an associated reduction in the number of shares of Common Stock the Company is authorized to issue. On December 4, 2023, the Company’s Board of Directors (the “Board”) approved a final split ratio of 1-for-9 (the “Reverse Stock Split”) where each nine (9) shares of Common Stock issued and outstanding immediately prior to the Effective Time shall, automatically and without any action on the part of the respective holders thereof, be combined and converted into one (1) share of Common Stock.
Following such approvals, the Company filed an amendment to the Certificate of Incorporation (the “Certificate of Amendment”) to affect the Reverse Stock Split with the Secretary of State of the State of Delaware on December 8, 2023 as of 4:01 p.m. Eastern Time. The Certificate of Amendment states that the Company is authorized to issue two classes of stock to be designated common stock (“Common Stock”) and preferred stock (“Preferred Stock”). The number of shares of Common Stock authorized to be issued is sixteen million six hundred sixty-six thousand six hundred sixty-seven (16,666,667), par value $0.0001 per share, and the number of shares of Preferred Stock authorized to be issued is ten million (10,000,000), par value $0.0001 per share.
As of the opening of trading on December 11, 2023, the Company’s Common Stock began trading on a post-split basis under CUSIP number 87157B400. The Company’s Common Stock will continue to trade on the Nasdaq Capital Market under the symbol “SNCR”.
The Reverse Stock Split went in effect simultaneously for all shares of Common Stock issued and outstanding, and affected all holders of the Company’s Common Stock uniformly and did not affect any stockholder’s percentage ownership interests in the Company, except with respect to the treatment of fractional shares. The Company did not issue fractional shares for post-Reverse Stock Split shares in connection with the Reverse Stock Split. Stockholders who otherwise were entitled to receive a fractional share of Common Stock had such fractional share rounded up to the nearest whole share. The Company retroactively displayed the effect of the Reverse Stock Split change in the Consolidated Balance Sheets, and retroactively adjusted the computations of basic and diluted EPS for all periods presented on the Consolidated Statement of Operations.
As of September 30, 2024, the Company’s authorized capital stock was 26,666,667 shares of stock with a par value of $0.0001, of which 16,666,667 shares were designated as common stock and 10,000,000 shares were designated as preferred stock.
Common Stock
Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held. Dividends on common stock will be paid when, and if, declared by the Company’s Board of Directors. No dividends have ever been declared or paid by the Company.
Preferred Stock
The Company’s Board of Directors (the “Board”) is authorized to issue preferred shares and has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of preferred stock.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Investor Rights Agreement
On June 30, 2021, the Company, B. Riley Financial and BRPI entered into an Investor Rights Agreement (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, for so long as affiliates of B. Riley Financial beneficially own at least 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to nominate one Class II director (the “B. Riley Nominee”) to the Company’s board of directors (the “Board”), who shall be an employee of B. Riley Financial or its affiliates and is approved by the Board, such approval not to be unreasonably withheld. For so long as affiliates of B. Riley Financial beneficially own 5% or more but less than 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to certain board observer rights. As of September 30, 2024, B. Riley Financial owned or beneficially owned 6.8% of the Company’s outstanding common stock.
Series B Non-Convertible Preferred
On June 30, 2021, the Company closed a private placement of 75,000 shares of its Series B Perpetual Non-Convertible Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share (the “Series B Preferred”), for net proceeds of $72.5 million (the “Series B Transaction”). The sale of the Series B Preferred was pursuant to the Series B Preferred Stock Purchase Agreement, dated as of June 24, 2021 (the “Series B Purchase Agreement”), between the Company and BRPI. In connection with the closing of the Series B Transaction, the Company (i) filed a Certificate of Designation with the State of Delaware setting forth the rights, preferences, privileges, qualifications, restrictions and limitations on the Series B Preferred (the “Series B Certificate”) and (ii) entered into an Investor Rights Agreement with B. Riley Financial, Inc. (“B. Riley Financial”) and BRPI setting forth certain governance and registration rights of B. Riley Financial with respect to the Company.
Repurchase of Series B Preferred
On June 28, 2024 the Company repurchased all outstanding shares of the Series B Preferred stock, as discussed in Note 9. Debt of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q. On July 1, 2024 the Company filed a Certificate of Elimination to the Series B Certificate with the Secretary of State of the State of Delaware. As a result of the Series B Repurchase, no shares of the Series B Preferred remain outstanding and none are authorized for issuance as of September 30, 2024, and the authorized shares of Series B Preferred Stock were returned to the status of authorized but unissued shares of preferred stock of the Company, without designation as to series pursuant to the Certificate of Designations.
A summary of the Company’s Series B Perpetual Non-Convertible Preferred Stock balance at September 30, 2024 and changes during the nine months ended September 30, 2024, are presented below:
| | | | | | | | | | | |
| Series B Preferred Stock |
| Shares | | Amount |
Balance at December 31, 20231 | 61 | | | $ | 58,802 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Excise tax on fair value of Series B Preferred stock at repurchase | — | | | (576) | |
Repurchase of Series B Preferred stock | (61) | | | (58,226) | |
Balance at September 30, 2024 | — | | | $ | — | |
________________________________
1 Series B Preferred stock net principal balance of $58.8 million is presented as gross principal balance of $60.8 million net of $2.0 million unamortized issuance costs.
The Company paid Series B Perpetual Preferred stock dividends of $4.3 million in cash for the nine months ended September 30, 2024.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 12. Stock Plans
On December 8, 2023 the Company filed an amendment to the Certificate of Amendment to effect the Reverse Stock Split with the Secretary of State of the State of Delaware. The Certificate of Amendment states that the Company is authorized to issue 16,666,667 shares of Common Stock, par value $0.0001 per share, and 10,000,000 shares of Preferred Stock, par value $0.0001 per share.
As of September 30, 2024, the Company maintains two stock-based compensation plans, the 2015 Equity Incentive Plan (the “2015 Plan”) and the 2017 New Hire Equity Incentive Plan (“2017 Plan”).
At the annual meeting of stockholders the Company held on June 5, 2024, the Company’s stockholders approved the amendment and restatement of the Company’s 2015 Equity Incentive Plan to increase the maximum total number of shares of common stock issuable under the Plan by 1,053,000 shares.
As of September 30, 2024 the maximum number of shares of common stock authorized for issuance under the 2015 Plan and 2017 Plan was 5,741,576 shares and 229,635, respectively.
As of September 30, 2024, there were 1.1 million shares available for the grant or award under the Company’s 2015 Plan and 0.1 million shares available for the grant or award under the Company’s 2017 Plan.
The Company grants restricted stock awards (“RSA”) and stock options that are subject to service conditions. The Company accounts for these awards under equity accounting. RSA are measured at the closing stock price at the date of grant and the fair value of stock options is calculated by using the Black-Scholes option pricing model. The expense for such awards is recognized straight line over the requisite service period.
The Company’s performance-based cash unit (“PBCU”) awards granted to employees under the Long-Term Incentive (“LTI”) Plans have been accounted for as liability awards, due to the Company’s intent and ability to settle such awards in cash upon vesting. Performance-based cash units are measured at the closing stock price and at the fair value obtained using the Monte-Carlo simulation at the reporting period end date. The expense is recognized straight line over the requisite service period. The Company has reflected the short-term portion of PBCU liability in Accrued expenses, and the long-term portion in Other liabilities, non-current on the Consolidated Balance Sheets. As of December 31, 2023 the total liability for such awards was $0.4 million with the entire amount recorded as a short-term. As of September 30, 2024, the total liability for such awards was $2.9 million, of which $2.0 million was short-term and $0.9 million was long-term.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Stock-Based Compensation
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by operating expense categories, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | | | 2024 | | 2023 | | |
Cost of revenues | $ | 164 | | | $ | 62 | | | | | $ | 258 | | | $ | 214 | | | |
Research and development | 832 | | | 320 | | | | | 1,415 | | | 1,176 | | | |
Selling, general and administrative | 2,025 | | | 656 | | | | | 3,703 | | | 2,499 | | | |
Total stock-based compensation expense | $ | 3,021 | | | $ | 1,038 | | | | | $ | 5,376 | | | $ | 3,889 | | | |
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by award type, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | | | 2024 | | 2023 | | |
Stock options | $ | 123 | | | $ | 347 | | | | | $ | 453 | | | $ | 1,127 | | | |
Restricted stock awards | 761 | | | 791 | | | | | 1,950 | | | 2,411 | | | |
Performance-based cash units | 2,137 | | | (100) | | | | | 2,973 | | | 351 | | | |
| | | | | | | | | | | |
Total stock-based compensation before taxes | $ | 3,021 | | | $ | 1,038 | | | | | $ | 5,376 | | | $ | 3,889 | | | |
Tax benefit | $ | 463 | | | $ | 220 | | | | | $ | 987 | | | $ | 836 | | | |
Stock-based compensation expense related to stock options and restricted stock awards is recorded to APIC and reflected on the Statements of Stockholders’ Equity, net of adjustments. PBCU expense is recorded to PBCU liability under Accrued expenses and Other liabilities, non-current on the Consolidated Balance Sheets due to the Company accounting for these awards as liability awards.
The total unamortized stock-based compensation cost related to unvested equity awards as of September 30, 2024 was $5.0 million. The expense is expected to be recognized over a weighted-average period of approximately 2.0 years.
The total unamortized stock-based compensation cost related to unvested performance-based cash units as of September 30, 2024 was $5.9 million. The expense is expected to be recognized over a weighted-average period of approximately 1.7 years.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 13. Restructuring
The Company continues to identify workforce optimization opportunities to better align the Company’s resources with its key strategic priorities.
A summary of the Company’s restructuring accrual at September 30, 2024 and changes during the nine months ended September 30, 2024, are presented below:
| | | | | | |
| | Employee Termination Costs |
Balance at December 31, 2023 | | $ | 2,388 | |
Charges | | 267 | |
Payments | | (1,916) | |
Other adjustments | | (7) | |
Balance at September 30, 2024 | | $ | 732 | |
Note 14. Income Taxes
The Company recognized an income tax expense of approximately $0.6 million for the three months ended September 30, 2024 and immaterial amount for the three months ended September 30, 2023. The Company recognized an income tax expense of approximately $3.9 million and $0.9 million during the nine months ended September 30, 2024 and 2023, respectively. The effective tax rate was approximately 178.6% for the nine months ended September 30, 2024, which was higher than the U.S. federal statutory rate primarily due to the impact of permanent adjustments, most notably Global Intangible Low-Taxed Income, partially offset by foreign tax rate differential. The Company’s projection of U.S. current income tax expense for the period is driven by the impact of Global Intangible Low-Taxed Income and enacted Internal Revenue Code Section 174 rules that require the Company to capitalize and amortize qualifying research and development expenses and by operating income generated in certain foreign jurisdictions. The Company’s effective tax rate was approximately (4.3)% for the nine months ended September 30, 2023, which was lower than the U.S. federal statutory rate primarily due to pre-tax losses in jurisdictions where full valuation allowances have been recorded and certain jurisdictions projecting current income tax expense. The Company continues to consider all available evidence, including historical profitability and projections of future taxable income together with new evidence, both positive and negative, that could affect the view of the future realization of deferred tax assets. As a result of this analysis, the Company continues to maintain a valuation allowance against the net deferred tax assets of the U.S. and most foreign jurisdictions as the realization of these assets is not more likely than not, given the uncertainty of future earnings in these jurisdictions.
Unrecognized tax benefits associated with uncertain tax positions were $4.4 million at September 30, 2024. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. It is reasonably possible that the balance of unrecognized tax benefits will decrease by approximately $0.5 million over the next twelve months.
During 2021 the Internal Revenue Service commenced an audit of certain of the Company’s prior year U.S. federal income tax filings, including the 2013 through 2020 tax years. The audit is currently ongoing and while the receipt of the associated refunds would materially improve its financial position, the Company does not believe that the results of this audit will have a material adverse effect on its results of operations. The Company has not accrued for any potential interest income related to the expected tax refund as of September 30, 2024.
The Pillar Two Global Anti-Base Erosion rules issued by the Organization for Economic Co-operation and Development ("OECD"), a global policy forum, introduced a global minimum tax of 15% which would apply to multinational groups with consolidated financial statement revenue in excess of EUR 750 million. Nearly all OECD member jurisdictions have agreed in principle to adopt these provisions and numerous jurisdictions, including jurisdictions where the Company operates, have enacted these rules effective January 1, 2024. The Company is not currently subject to these rules but is continuing to evaluate the Pillar Two Framework and its potential impact on future periods.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 15. Earnings per Common Share (“EPS”)
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of the Company’s common stock for the year. The Company includes participating securities (Redeemable Convertible Preferred Stock - Participation with Dividends on Common Stock that contain preferred dividend) in the computation of EPS pursuant to the two-class method. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share from operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | | | 2024 | | 2023 | | |
Numerator - Basic: | | | | | | | | | | | |
Net loss from continuing operations | $ | (5,715) | | | $ | (2,687) | | | | | $ | (1,734) | | | $ | (20,494) | | | |
Net income (loss) attributable to redeemable non-controlling interests | 14 | | | (18) | | | | | 14 | | | 10 | | | |
Preferred stock dividend and gain on repurchase of preferred stock | — | | | (2,474) | | | | | (1,562) | | | (7,423) | | | |
Net loss attributable to Synchronoss from continuing operations | (5,701) | | | (5,179) | | | | | (3,282) | | | (27,907) | | | |
| | | | | | | | | | | |
Net income (loss) from discontinued operations | — | | | 8 | | | | | — | | | (1,634) | | | |
Net loss attributable to Synchronoss | $ | (5,701) | | | $ | (5,171) | | | | | $ | (3,282) | | | $ | (29,541) | | | |
| | | | | | | | | | | |
Numerator - Diluted: | | | | | | | | | | | |
Net loss attributable to Synchronoss from continuing operations | (5,701) | | | (5,179) | | | | | $ | (3,282) | | | $ | (27,907) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income (loss) from discontinued operations | — | | | 8 | | | | | — | | | (1,634) | | | |
Net loss attributable to Synchronoss | $ | (5,701) | | | $ | (5,171) | | | | | $ | (3,282) | | | $ | (29,541) | | | |
| | | | | | | | | | | |
Denominator: | | | | | | | | | | | |
Weighted average common shares outstanding — basic | 10,095 | | | 9,809 | | | | | 9,994 | | | 9,716 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Weighted average common shares outstanding — diluted | $ | 10,095 | | | $ | 9,809 | | | | | $ | 9,994 | | | $ | 9,716 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Earnings (loss) per share: | | | | | | | | | | | |
Basic EPS: | | | | | | | | | | | |
Net loss from continuing operations | $ | (0.56) | | | $ | (0.53) | | | | | $ | (0.33) | | | $ | (2.87) | | | |
Net loss from discontinued operations | — | | | — | | | | | — | | | (0.17) | | | |
Basic EPS | $ | (0.56) | | | $ | (0.53) | | | | | $ | (0.33) | | | $ | (3.04) | | | |
Diluted EPS: | | | | | | | | | | | |
Net loss from continuing operations | $ | (0.56) | | | $ | (0.53) | | | | | $ | (0.33) | | | $ | (2.87) | | | |
Net loss from discontinued operations | — | | | — | | | | | — | | | (0.17) | | | |
Diluted EPS | $ | (0.56) | | | $ | (0.53) | | | | | $ | (0.33) | | | $ | (3.04) | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 16. Commitments
Non-cancelable agreements
The Company has various non-cancelable arrangements such as services for hosting, support, and software that expire at various dates, with the latest expiration in 2027.
Aggregate annual future minimum payments under non-cancelable agreements as of September 30, 2024 for each year subsequent to December 31, 2023 and thereafter, are as follows:
| | | | | | | | | | | | |
| | Non-cancelable agreements | | | | |
2024 | | $ | 5,010 | | | | | |
2025 | | 13,532 | | | | | |
2026 | | 1,715 | | | | | |
2027 | | 158 | | | | | |
| | | | | | |
Total | | $ | 20,415 | | | | | |
Note 17. Legal Matters
In the ordinary course of business, the Company is regularly subject to various claims, suits, regulatory inquiries and investigations. The Company records a liability for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable, and the loss can be reasonably estimated. Management has also identified certain other legal matters where they believe an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that resolving claims against the Company, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the Company’s business, financial position, results of operations, or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. The Company also evaluates other contingent matters, including income and non-income tax contingencies, to assess the likelihood of an unfavorable outcome and estimated extent of potential loss. It is possible that an unfavorable outcome of one or more of these lawsuits or other contingencies could have a material impact on the liquidity, results of operations, or financial condition of the Company.
In the third quarter of 2017, the SEC and Department of Justice (the “DoJ”) initiated investigations in connection with certain financial transactions that the Company effected in 2015 and 2016 and its disclosure of and accounting for such transactions, which the Company restated in the third quarter of 2018 in its restated annual and quarterly financial statements for 2015 and 2016. On June 7, 2022 the SEC approved the Offer of Settlement and filed an Order Instituting Cease-And-Desist Proceedings pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-And-Desist Order (the “SEC Order”). Pursuant to the terms of the SEC Order, the Company consented to pay a civil penalty in the amount of $12.5 million in equal quarterly installments over two years and to cease and desist from committing or causing any violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and the associated rules thereunder. Failure to comply with the provisions of the SEC Order could result in further actions by one or both governmental agencies which could have a material adverse effect on the Company’s results of operations. The penalties have been paid in full as of March 31, 2024. Also on June 7, 2022, the SEC filed a civil action against two former members of the Company’s management team (the “defendants”), alleging misconduct arising out of certain of the restated transactions that took place in 2015 and 2016 investigated by the SEC as set forth above. During the three months ended June 30, 2024, the Court entered final judgments in both of these civil actions pursuant to which the defendants agreed to pay civil penalties totaling an aggregate of $145,000 and one defendant agreed to disgorge incentive compensation received during the period of the restated transactions in the amount of $430,741. The Company has indemnified the defendants in these actions for certain costs and expenses, including reasonable attorney’s fees, and as of September 30, 2024 the Company has accrued $2.1 million relating to these actions.
On or about July 12, 2023, the Company filed a complaint in the Superior Court of the State of Delaware against iQmetrix Global Ltd. (“iQmetrix") for breach of the asset purchase and transition services agreements by and between the Company and iQmetrix as a result of iQmetrix’s failure to pay amounts due under those agreements in excess of $1.2 million. On September
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
11, 2023, iQmetrix filed its “Answer Defenses and Counterclaims” against the Company, claiming the Company breached the asset purchase, transition services and software license agreements, committed fraud and breached the implied covenant of good faith and fair dealing entitling iQmetrix to an amount to be determined at trial. On October 10, 2023, the Company filed its “Answer to Defendant’s Counterclaims” denying all counts asserted by iQmetrix and asserting certain affirmative defenses thereto. The parties are currently engaged in discovery. The Company believes that the counterclaims are without merit, and the Company intends to defend all such counterclaims.
Due to the inherent uncertainty of litigation, the Company cannot predict the outcome of the litigation and can give no assurance that the asserted claims will not have a material adverse effect on its financial position, prospects, or results of operations.
Except as set forth above, the Company is not currently subject to any other legal proceedings that would be expected to have a material adverse effect on its operations; however, the Company may from time to time become a party to various legal proceedings arising in the ordinary course of its business.
Note 18. Additional Financial Information
Other Income (expense), net
The following table sets forth the components of Other Income (expense), net included in the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2024 | | 2023 | | 2024 | | 2023 | | |
Foreign exchange gains (losses) | | $ | (5,461) | | | $ | 4,455 | | | $ | (440) | | | $ | 1,234 | | | |
| | | | | | | | | | |
Income from sale of intangible assets1 | | 278 | | | — | | | 278 | | | — | | | |
Loss on disposal of fixed assets | | (73) | | | (25) | | | (73) | | | (25) | | | |
Other2 | | 15 | | | 26 | | | 25 | | | 4 | | | |
Total | | $ | (5,241) | | | $ | 4,456 | | | $ | (210) | | | $ | 1,213 | | | |
________________________________1 Represents gain on sale on the Company’s IP addresses and patents.
2 Represents an aggregate of individually immaterial transactions.
The non-cash impact of the foreign exchange gains and losses on intercompany payables and receivables is reflected as an adjustment to reconcile the Net income to cash within the Other, net line item in the operating activities, as reported in the Consolidated Statements of Cash Flows.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included in Item 1 “Financial Information” of this Form 10-Q.
The words “Synchronoss,” “we,” “our,” “ours,” “us,” and the “Company” refer to Synchronoss Technologies, Inc. and its consolidated subsidiaries. This quarterly report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “hopes,” “should,” “continues,” “seeks,” “likely” or similar expressions, indicate a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions, including, but not limited to, risks, uncertainties and assumptions relating to the duration and severity of the geopolitical tensions and its impact on our business and financial performance. Actual results may differ materially from the forward-looking statements we make. We caution investors not to place substantial reliance on the forward-looking statements included in this quarterly report. These statements speak only as of the date of this quarterly report, and we undertake no obligation to update or revise the statements in light of future developments. All numbers are expressed in thousands unless otherwise stated.
Overview
Synchronoss Technologies, Inc. (“Synchronoss” or the “Company”) is a leading provider of white label cloud software and services that enable our customers to keep subscribers, systems, networks and content in sync.
The Synchronoss Personal CloudTM solution is designed to create an engaging and trusted customer experience through ongoing content management and engagement. The Synchronoss Personal CloudTM platform is a secure and highly scalable, white label platform that allows our customers’ subscribers to backup and protect, engage with, and manage their personal content and gives our operator customers the ability to increase average revenue per user (“ARPU”) and reduce churn.
Our Synchronoss Personal CloudTM platform is specifically designed to support smartphones, tablets, desktops computers, and laptops.
Synchronoss’ Messaging platform (Owned and operated through October 31, 2023) had powered mobile messaging and mailboxes for hundreds of millions of telecommunication subscribers. Our Advanced Messaging platform had been a powerful, secure, intelligent, white label messaging platform that expanded capabilities for communications service provider and multi-service providers to offer P2P messaging via Rich Communications Services (“RCS”). Our Mobile Messaging Platform (“MMP”) provided a single standard ecosystem for onboarding and management to brands, advertisers and message wholesalers.
The Synchronoss NetworkX (Owned and operated through October 31, 2023) products had provided operators with the tools and software to design their physical network, streamlined their infrastructure purchases, and managed and optimized comprehensive network expenses for leading top tier carriers around the globe.
We market our solutions and services directly through our sales organizations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia-Pacific (“APAC”).
Revenues
We generate most of our revenues on a subscription basis, which is derived from contracts that extend up to 48 months from execution.
The future success of our business depends on the continued growth of Business-to-Business and Business-to-Business-to-Consumer driving customer transactions, and continued expansion of our platforms into the TMT market globally through cloud markets. As such, the volume of subscribers and our ability to expand our footprint in TMT and globally may result in revenue fluctuations on a quarterly basis.
Most of our revenues are recorded in U.S. dollars but as we continue to expand our footprint with international carriers, we are subject to currency translation that could affect our future net sales as reported in U.S. dollars.
The Company’s top five customers accounted for 97.9% and 97.4% of net revenues for the nine months ended September 30, 2024 and September 30, 2023, respectively. Contracts with these customers typically run for three to five years. Of these customers, both Verizon and AT&T accounted for more than 10% of our revenues in 2024 and 2023. The loss of Verizon or AT&T as a customer would have a material negative impact on our company. However, we believe that the costs incurred and subscriber disruption by Verizon or AT&T to replace Synchronoss’ solutions would be substantial.
Current Trends Affecting Our Results of Operations
Business from our Synchronoss Personal Cloud™ solution has been driven by the growth in mobile devices globally that are becoming content rich. As these devices replace other traditional devices like PCs, the ability to securely back up content from mobile devices, sync it with other devices and share it with family, friends and business associates have become an essential need and subscriber expectation. Such devices include smartphones, connected cars, personal health and wellness devices and connected home devices. The need for the content from these devices to be stored in a common cloud is also expected to drive our business in the longer term.
To support our growth, which we expect to be driven by the favorable industry trends, we plan to leverage modular components from our existing software platforms to build new products. We believe that these opportunities will continue to provide future benefits and position us for future revenue growth. We have focused our product development efforts on expanding the functionality, scalability and security of our products and solutions. We expect to sustain our research and development investments as we intend to continue on an aggressive path to develop new features and functionality, upgrade and extend our product offerings and develop new technology. Our purchase of capital assets and equipment may increase based on aggressive deployment, subscriber growth and promotional offers for free or bundled storage by our major Tier 1 carrier customers.
We continue to expand our platforms into the converging TMT market to enable connected devices to do more things across multiple networks, brands and communities. Our initiatives with our customers continue to grow both with regard to our current business as well as our new product offerings. We are also exploring additional opportunities to support our customer, product and geographic diversification strategies.
Discussion of the Condensed Consolidated Statements of Operations
Three months ended September 30, 2024 compared to the three months ended September 30, 2023
The following table presents an overview of our results of operations for the three months ended September 30, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | $ Change | | |
| 2024 | | 2023 | | | | 2024 vs 2023 | | |
Net revenues | $ | 42,964 | | | $ | 39,790 | | | | | $ | 3,174 | | | |
Cost of revenues1 | 8,975 | | | 9,478 | | | | | (503) | | | |
Research and development | 10,333 | | | 9,304 | | | | | 1,029 | | | |
Selling, general and administrative | 13,755 | | | 20,285 | | | | | (6,530) | | | |
Restructuring charges | — | | | 28 | | | | | (28) | | | |
Depreciation and amortization | 4,386 | | | 4,482 | | | | | (96) | | | |
Total costs and expenses | 37,449 | | | 43,577 | | | | | (6,128) | | | |
Income (loss) from operations | 5,515 | | | (3,787) | | | | | 9,302 | | | |
Interest income | 165 | | | 149 | | | | | 16 | | | |
Interest expense | (5,526) | | | (3,482) | | | | | (2,044) | | | |
| | | | | | | | | |
Other (expense) income, net | (5,241) | | | 4,456 | | | | | (9,697) | | | |
| | | | | | | | | |
(Loss) income from continuing operations, before taxes | $ | (5,087) | | | $ | (2,664) | | | | | $ | (2,423) | | | |
Provision for income taxes | $ | (628) | | | $ | (23) | | | | | $ | (605) | | | |
________________________________
1 Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues increased $3.2 million to $43.0 million for the three months ended September 30, 2024, compared to the same period in 2023. The overall increase in revenue was primarily due to continued cloud subscriber growth, partially offset by $0.9 million higher professional services revenue in the prior year associated with the implementation and launch of SoftBank.
Cost of revenues decreased $0.5 million to $9.0 million for the three months ended September 30, 2024, compared to the same period in 2023. The 2024 decrease was primarily attributable to the reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023, partially offset by higher performance-based compensation expense in the current period due to expected full-year metric attainment compared to the prior period performance.
Research and development expense increased $1.0 million to $10.3 million for the three months ended September 30, 2024, compared to the same period in 2023. The increase was primarily attributable to higher performance-based compensation expense in the current period due to expected full-year metric attainment compared to the prior period performance, partially offset by reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023.
Selling, general and administrative expense decreased $6.5 million to $13.8 million for the three months ended September 30, 2024, compared to the same period in 2023. The 2024 decrease was mainly related to reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023, $2.1 million higher non-recurring professional fees incurred in the prior period and $4.8 million impairment of the Note Receivable recorded in the third quarter of 2023. This was partially offset by a higher performance-based compensation expense in the current period due to expected full-year metric attainment compared to the prior period performance.
Restructuring charges were immaterial for the three months ended September 30, 2024 and immaterial for the three months ended September 30, 2023. Restructuring charges were primarily related to employment termination costs as a result of the work-force reductions initiated to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization expense decreased immaterially for the three months ended September 30, 2024, compared to the same period in 2023.
Interest expense increased $2.0 million for the three months ended September 30, 2024, compared to the same period in 2023. The increase is mainly due to $2.1 million interest expense related to the new Term Loan the Company obtained at the end of the second quarter of 2024, which was used to retire the Series B Preferred stock, improving the Company’s overall capital structure.
Other income (expense), net decreased $9.7 million to expense of $5.2 million for the three months ended September 30, 2024 from income of $4.5 million during the same period in 2023 primarily due to the impact of foreign exchange losses on intercompany payables and receivables.
Income tax. The Company recognized an income tax expense of approximately $0.6 million for the three months ended September 30, 2024 and immaterial amount for the three months ended September 30, 2023. The effective tax rate was approximately (12.3)% for the three months ended September 30, 2024, which was lower than the U.S. federal statutory rate primarily due to the impact of permanent adjustments including Global Intangible Low-Taxes Income and adjustments to valuation allowances associated with current year activity, partially offset by foreign tax rate differential. The Company’s projection of U.S. current income tax expense for the period is driven by the impact of Global Intangible Low-Taxed Income and enacted Internal Revenue Code Section 174 rules that require the Company to capitalize and amortize qualifying research and development expenses and by operating income generated in certain foreign jurisdictions. The Company’s effective tax rate was approximately (0.9)% for the three months ended September 30, 2023, which was lower than the U.S. federal statutory rate due to pre-tax losses in jurisdictions where full valuation allowances have been recorded and certain jurisdictions projecting current income tax expense.
Discussion of the Condensed Consolidated Statements of Operations
Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023
The following table presents an overview of our results of operations for the nine months ended September 30, 2024 and 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | $ Change | | |
| 2024 | | 2023 | | | | 2024 vs 2023 | | |
Net revenues | $ | 129,387 | | | $ | 122,794 | | | | | $ | 6,593 | | | |
Cost of revenues1 | 29,599 | | | 31,926 | | | | | (2,327) | | | |
Research and development | 32,560 | | | 35,322 | | | | | (2,762) | | | |
Selling, general and administrative | 39,800 | | | 53,507 | | | | | (13,707) | | | |
Restructuring charges | 267 | | | 391 | | | | | (124) | | | |
Depreciation and amortization | 12,773 | | | 12,478 | | | | | 295 | | | |
Total costs and expenses | 114,999 | | | 133,624 | | | | | (18,625) | | | |
Income (loss) from operations | 14,388 | | | (10,830) | | | | | 25,218 | | | |
Interest income | 556 | | | 370 | | | | | 186 | | | |
Interest expense | (12,529) | | | (10,397) | | | | | (2,132) | | | |
| | | | | | | | | |
Other (expense) income, net | (210) | | | 1,213 | | | | | (1,423) | | | |
| | | | | | | | | |
(Loss) income from continuing operations, before taxes | $ | 2,205 | | | $ | (19,644) | | | | | $ | 21,849 | | | |
Provision for income taxes | $ | (3,939) | | | $ | (850) | | | | | $ | (3,089) | | | |
________________________________
1 Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues increased $6.6 million to $129.4 million for the nine months ended September 30, 2024, compared to the same period in 2023. The overall increase in revenue was primarily due to continued cloud subscriber growth, partially offset by $2.0 million higher professional services revenue in the prior year associated with the implementation and launch of SoftBank.
Cost of revenues decreased $2.3 million to $29.6 million for the nine months ended September 30, 2024, compared to the same period in 2023. The 2024 decrease was primarily attributable to reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023; partially offset by a higher performance-based compensation expense in the current period due to expected full-year metric attainment compared to the prior period performance.
Research and development expense decreased $2.8 million to $32.6 million for the nine months ended September 30, 2024, compared to the same period in 2023. The decrease was primarily attributable to reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023; partially offset by a higher performance-based compensation expense in the current period due to expected full-year metric attainment compared to the prior period performance.
Selling, general and administrative expense decreased $13.7 million to $39.8 million for the nine months ended September 30, 2024, compared to the same period in 2023. The decrease was primarily attributable to reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023, $5.8 million higher non-recurring professional fees incurred in the prior period, and the $4.8 million note receivable impairment recorded in the third quarter of 2023. This was partially offset by a higher performance-based compensation expense in the current period due to the expected full-year metric attainment compared to the prior period performance.
Restructuring charges were $0.3 million and $0.4 million for the nine months ended September 30, 2024 and 2023, respectively, which primarily related to employment termination costs as a result of the work-force reductions initiated to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization expense increased $0.3 million to $12.8 million for the nine months ended September 30, 2024, compared to the same period in 2023. The 2024 increase was primarily attributable to increased amortization of capitalized software due to more amortizable assets placed in service in the current period.
Interest expense increased $2.1 million for the nine months ended September 30, 2024, compared to the same period in 2023. The increase is mainly due to $2.2 million interest expense related to the new Term Loan the Company obtained at the end of the second quarter of 2024, which was used to retire the Series B Preferred stock, improving the Company’s overall capital structure.
Other income (expense), net decreased $1.4 million to expense of $0.2 million for the nine months ended September 30, 2024 from income of $1.2 million during the same period in 2023. The 2024 decrease is primarily due to the impact of foreign exchange gains on intercompany payables and receivables.
Income tax. The Company recognized an income tax expense of approximately $3.9 million and $0.9 million during the nine months ended September 30, 2024 and 2023, respectively. The effective tax rate was approximately 178.6% for the nine months ended September 30, 2024, which was higher than the U.S. federal statutory rate primarily due to the impact of permanent adjustments, most notably Global Intangible Low-Taxed Income, partially offset by foreign tax rate differential. The Company’s projection of U.S. current income tax expense for the period is driven by the impact of Global Intangible Low-Taxed Income and enacted Internal Revenue Code Section 174 rules that require the Company to capitalize and amortize qualifying research and development expenses and by operating income generated in certain foreign jurisdictions. The Company’s effective tax rate was approximately (4.3)% for the nine months ended September 30, 2023, which was lower than the U.S. federal statutory rate due to pre-tax losses in jurisdictions where full valuation allowances have been recorded and certain jurisdictions projecting current income tax expense.
Liquidity and Capital Resources
On June 28, 2024, the Company entered into the Credit Agreement with BGC Lender Rep LLC, as administrative agent, and the lenders party thereto. The Credit Agreement established a senior secured term loan facility of up to $75.0 million, all of which was funded on the Effective Date. The proceeds of the Term Loan were used to (i) fund the Senior Note Repurchase, (ii)
to fund the Series B Repurchase and (iii) to pay transaction fees and expenses associated with the closing of the transactions contemplated by the Credit Agreement, as discussed in Note 9. Debt of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
As of September 30, 2024, our principal sources of liquidity were cash provided by operations. Our cash and cash equivalents balance was $25.2 million at September 30, 2024. We anticipate that our principal uses of cash and cash equivalents will be sufficient to fund our business, including technology expansion and working capital.
At September 30, 2024, our non-U.S. subsidiaries held approximately $13.9 million of cash and cash equivalents that are available for use by our operations around the world.
Our policy has been to leave our cumulative unremitted foreign earnings invested indefinitely outside the United States, and we intend to continue this policy for most of our foreign subsidiaries. During 2023, we changed our indefinite reinvestment assertion for our Indian subsidiary and recorded a deferred tax liability associated with the outside basis difference. The Company continues to assert permanent reinvestment of foreign earnings in all other foreign jurisdictions. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts.
We believe that our cash, cash equivalents, financing sources, and our ability to manage working capital and expected positive cash flows generated from operations in combination with continued expense reductions will be sufficient to fund our operations for the next twelve months from the filing date of this Form 10-Q based on our current business plans. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the "Forward-Looking Statements" section of this MD&A and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, some of which are outside of our control.
For further details, see Note 9. Debt and Note 11. Capital Structure of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands): | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | | |
| 2024 | | 2023 | | | | | | |
Net cash provided by (used in): | | | | | | | | | |
Operating activities | $ | 15,205 | | | $ | 19,236 | | | | | | | |
Investing activities | (9,109) | | | (15,889) | | | | | | | |
Financing activities | $ | (5,384) | | | $ | (7,496) | | | | | | | |
Our primary source of cash is receipts from revenue. The primary uses of cash are personnel and related costs, telecommunications and facility costs related primarily to our cost of revenue and general operating expenses including professional service fees, consulting fees, building and equipment maintenance and marketing expense.
Cash provided by operating activities for the nine months ended September 30, 2024 was $15.2 million as compared to $19.2 million of cash provided by operating activities for the same period in 2023. In the current period, the Company generated cash from operations mainly driven by continued growth in cloud subscribers and reduced operating costs, offset by unfavorable movements in working capital compared to the third quarter of 2023.
Cash used in investing activities for the nine months ended September 30, 2024 was $9.1 million as compared to $15.9 million of cash used in investing activities during the same period in 2023. The cash used in investing activities during current and prior year primarily funded product development for our Cloud offering and associated labor costs, while last year's expenditures also included investments in Messaging and NetworkX products which were divested in the fourth quarter of
2023. In 2024, cash used in investing activities was offset by $1.5 million of deferred consideration for the sale of Messaging and NetworkX Businesses received by the company in the third quarter of 2024.
Cash used in financing activities for the nine months ended September 30, 2024 was $5.4 million as compared to $7.5 million of cash used in financing activities during the same period in 2023. The cash used in financing activities in the current year was primarily related to the $75.0 million funding of the Term Loan, offset by $6.8 million issuance costs related to the 2024 Term Loan, $57.6 million Series B Preferred Stock Repurchase, $11.5 million Senior Notes Repurchase and $4.3 million Series B Preferred dividend payments. Cash used in financing activities in the prior year was primarily related to $7.2 million Series B Preferred dividend payments.
Effect of Inflation
Inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have impacted our business. Management does not believe these impacts have had a material impact on our results of operations during the nine months ended September 30, 2024 and 2023. We cannot assure you, however, that we will not be affected by general inflation in the future.
Contractual Obligations
Our contractual obligations consist of office and laptop leases, term loan, notes payable and related interest as well as contractual commitments under third-party hosting, software licenses and maintenance agreements. The following table summarizes our long‑term contractual obligations as of September 30, 2024 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | 2024 | | 2025-2027 | | 2028 | | |
Finance lease obligations | | $ | 1,017 | | | $ | 168 | | | $ | 849 | | | $ | — | | | |
Interest | | 46,412 | | | 4,528 | | | 37,320 | | | 4,564 | | | |
Operating lease obligations | | 27,655 | | | 1,901 | | | 21,476 | | | 4,278 | | | |
Purchase obligations1 | | 20,415 | | | 5,010 | | | 15,405 | | | — | | | |
Senior Notes Payable | | 121,387 | | | — | | | 121,387 | | | — | | | |
Term Loan | | 74,531 | | | 469 | | | 14,062 | | | 60,000 | | | |
Total | | $ | 291,417 | | | $ | 12,076 | | | $ | 210,499 | | | $ | 68,842 | | | |
_______________________________
1 Amount represents obligations associated with colocation agreements and other customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax benefits associated with uncertain tax positions were $4.4 million at September 30, 2024. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. It is reasonably possible that the balance of unrecognized tax benefits will decrease by approximately $0.5 million over the next twelve months.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements in accordance with U.S. GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during a fiscal period. The SEC considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application.
These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable, including but not limited to the potential impacts from current geopolitical tensions. As the extent and duration of the impacts from geopolitical developments remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See Part II, “Item 1A. Risk Factors” in this Form 10-Q for certain matters bearing risks on our future results of operations.
During the nine months ended September 30, 2024, there were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K for the year ended December 31, 2023. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023 for a more complete discussion of our critical accounting policies and estimates.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards see Note 2. Basis of Presentation and Consolidation of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2024 and December 31, 2023 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The following discussion about market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We deposit our excess cash in what we believe are high-quality financial instruments, primarily money market funds and certificates of deposit and, we may be exposed to market risks related to changes in interest rates. These investments are denominated in United States dollars.
The primary objective of our investment activities is to preserve our capital for the purpose of funding operations, while at the same time maximizing the income, we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short- and long-term investments in a variety of securities, which could include commercial paper, money market funds and corporate and government debt securities. Our cash and cash equivalents at September 30, 2024 and December 31, 2023 were invested in liquid money market accounts and certificates of deposit. All market-risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Exchange Risk
We are exposed to translation risk because certain of our foreign operations utilize the local currency as their functional currency and those financial results must be translated into U.S. dollars. As currency exchange rates fluctuate, translation of the financial statements of foreign businesses into U.S. dollars affects the comparability of financial results between years.
We do not hold any derivative instruments and do not engage in any hedging activities. Although our reporting currency is the U.S. dollar, we may conduct business and incur costs in the local currencies of other countries in which we may operate, make sales and buy materials and services. As a result, we are subject to foreign currency transaction risk. Further, changes in exchange rates between foreign currencies and the U.S. dollar could affect our future net sales, cost of sales and expenses and could result in foreign currency transaction gains or losses.
We cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on our business, results of operations and financial condition. To the extent that our international activities recorded in local currencies increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase and hedging activities may be considered if appropriate.
Interest Rate Risk
We are exposed to the risk of interest rate fluctuations on the interest income earned on our cash and cash equivalents. A hypothetical 100 basis point movement in interest rates applicable to our cash and cash equivalents outstanding at September 30, 2024 would increase interest income by approximately $0.3 million on an annual basis.
Borrowings pursuant to the Credit Agreement bear interest at a rate per annum equal to the Adjusted Term SOFR (as defined in the Credit Agreement) for the applicable interest period, plus 5.50%, subject to a floor of 2.50%, plus Term SOFR adjustment of 0.1%. As such, our net income is sensitive to movements in interest rates. If interest rates increase, our debt obligations pursuant to the Credit Agreement would increase even though the amount borrowed remained the same, and our net income would decrease. Such increases in interest rates could have a material adverse effect on our cash flow and financial condition. We do not hold any derivative instruments and do not engage in any hedging activities to mitigate interest rate risk.
Based on our outstanding borrowings pursuant to the Credit Agreement as of September 30, 2024 a hypothetical 100 basis point movement in interest rates would have affected interest expense on the debt by $0.8 million on an annual basis.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this quarterly report, that ensure that information relating to the registrant which is required to be disclosed in this report is recorded, processed, summarized and reported within required time periods using the criteria for effective internal control established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the registrant’s disclosure controls and procedures were effective as of September 30, 2024.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of our material pending legal proceedings that could impact our results of operations, financial condition or cash flows see Note 17. Legal Matters of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
ITEM 1A. RISK FACTORS
Other than set forth below, there have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. included in our Annual Report on Form 10-K for the year ended December 31, 2023.
We may not be able to generate sufficient cash flows to meet our Senior Notes obligations and may be forced to take other actions to satisfy our Senior Notes obligations, which may not be successful.
Our operations may not generate sufficient cash to enable us to service our Senior Notes, which mature on June 30, 2026. If we fail to generate sufficient cash flows to redeem or repay in full our Senior Notes prior to June 30, 2026, we may have to raise additional funds to pay such amounts on a timely basis. We cannot guarantee that any refinancing of the Senior Notes will be possible on a timely basis, on terms we find acceptable, or at all.
We may fail to refinance, redeem or repay in full our Senior Notes prior to March 31, 2026, and in that event the maturity date of our Term Loan will be March 31, 2026.
We entered into the Credit Agreement with BGC Lender Rep LLC, as administrative agent (“BGC”), and the lenders party thereto on June 28, 2024 (the “Credit Agreement”). The Credit Agreement established a senior secured term loan facility of up to $75.0 million (the “Term Loan”), all of which was funded on June 28, 2024. The Term Loan matures on June 28, 2028 (the “Maturity Date”); provided that if (i) the Senior Notes are not refinanced, redeemed or repaid in full prior to March 31, 2026, the Maturity Date shall be March 31, 2026 and (ii) in the event of a refinancing, redemption or repayment of the Senior Notes in full prior to March 31, 2026, the Maturity Date shall be the earlier of (A) June 28, 2028 and (B) the date that is twelve (12) months prior to the final stated maturity date for the indebtedness resulting from such refinancing, redemption or repayment of the Senior Notes in full.
If we fail to refinance, redeem or repay in full our Senior Notes prior to March 31, 2026, then the Maturity Date will be March 31, 2026, and we will be required to pay all amounts outstanding under the Term Loan sooner than they would otherwise be due, we may not have sufficient funds available to pay such amounts at that time, and we may not be able to raise additional funds to pay such amounts on a timely basis, on terms we find acceptable, or at all.
The terms of our Credit Agreement restrict our operating and financial flexibility, and any breach of the covenants in that agreement, if the lenders elected to accelerate the due date of the loan, could significantly harm our business and prospects and lead to the liquidation of our business.
The Credit Agreement contains certain operating covenants and restricts our operating and financial flexibility. Our obligations under the Credit Agreement are secured by substantially all of our assets (other than existing real property). The Credit Agreement contains customary covenants that limit our ability and our restricted subsidiaries to, among other things, (i) incur additional indebtedness, (ii) pay dividends or make certain other restricted payments, (iii) sell assets, (iv) make certain investments, (v) grant liens and (vi) enter into transactions with affiliates. These covenants are subject to exceptions and qualifications set forth in the Credit Agreement. The financial covenants set forth in the Credit Agreement include (i) a maximum consolidated secured leverage ratio, which will be tested at the end of each of Synchronoss’ fiscal quarter and (ii) an average liquidity requirement for any calendar month. We are currently in compliance with the Credit Agreement covenants, but we may fall out of compliance with these covenants. We may also enter into other debt agreements in the future which may contain similar or more restrictive terms.
Upon the occurrence and continuance of an event of default, which, for example, could be triggered by a breach or violation of, or default under, certain material contracts of the Company, BGC may take either or both of the following actions: (i) terminate the commitments and (ii) declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Credit Agreement. Any declaration by BGC of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline significantly. Further, if we were liquidated, the lenders’ right to repayment would be senior to the rights of our stockholders.
We have, and in the future may be, the target of stockholder derivative complaints or other securities related legal actions that could adversely affect our results of operations and our business.
We have, and in the future may be, the target of stockholder derivative complaints or other securities related legal actions. The existence of any litigation may have an adverse effect on our reputation with referral sources and our customers themselves, which could have an adverse effect on our results of operations and financial condition. The outcome and amount of resources needed to respond to, defend or resolve lawsuits is unpredictable and may remain unknown for long periods of time. Our exposure under these matters may also include our indemnification obligations, to the extent we have any, to current and former officers and directors and, in some cases former underwriters, against losses incurred in connection with these matters, including reimbursement of legal fees and other expenses. For instance, on June 7, 2022, the SEC filed a civil action against two former members of our management team (the “defendants”), alleging misconduct arising out of certain restated transactions that took place in 2015 and 2016 investigated by the SEC. We will be required to indemnify the defendants in these actions for certain costs and expenses, including reasonable attorney’s fees. As of September 30, 2024, we had paid approximately $7.3 million life to date for costs incurred in these actions. Additionally, as of September 30, 2024, the Company has accrued approximately $2.1 million relating to these actions for certain costs and expenses, including reasonable attorney’s fees to be paid in the future. Additional amounts may be subject to claims for indemnification for these actions and any future actions. Although we maintain insurance for claims of this nature, our insurance coverage does not apply in all circumstances and may be denied or insufficient to cover the costs related to the class action and stockholder derivative lawsuits. For instance, our insurance coverage was insufficient to cover our indemnification obligations to the defendants. Large indemnity payments, individually or in the aggregate, could have a material impact on our financial position. In addition, future lawsuits or legal claims involving us may increase our insurance premiums, deductibles or co-insurance requirements or otherwise make it more difficult for us to maintain or obtain adequate insurance coverage on acceptable terms, if at all. Moreover, adverse publicity associated with negative developments in any such legal proceedings could decrease customer demand for our services. As a result, future lawsuits involving us, or our officers or directors, could have a material adverse effect on our business, reputation, financial condition, results of operations, liquidity and the trading price of our common stock.
A 1% U.S. federal excise tax may be imposed upon us in connection with the redemptions or repurchases by us of our Series B Non-Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) or other redemptions or repurchases of our equity.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act (“IRA”), which, among other things, imposes a new U.S. federal 1% excise tax on certain repurchases (including redemptions) of stock by publicly traded domestic corporations and certain domestic subsidiaries of publicly traded foreign corporations. This excise tax is imposed on the repurchasing corporation itself, not its stockholders from which shares are repurchased. Generally, the amount of the excise tax is 1% of the fair market value of the shares repurchased at the time of the repurchase. For the purposes of calculating the excise tax, the repurchasing corporation is permitted to net the fair market value of certain new stock issuances against the fair market value of the stock repurchases that occur in the same taxable year. On December 27, 2022, the U.S. Treasury Department issued a notice that provides interim guidance regarding the application of the 1% excise tax pending forthcoming proposed regulations. The IRA excise tax applies to repurchases and redemptions that occur after December 31, 2022.
We expect that each redemption or repurchase of our equity, such as Series B Preferred Stock repurchases, after December 31, 2022 will be subject to the 1% excise tax. Whether and to what extent we would be subject to the excise tax would depend on a number of factors, including (i) the fair market value of the redemptions and repurchase, (ii) the nature and amount of any equity issuances within the same taxable year and (iii) the regulations and other guidance issued by the U.S. Treasury Department and the IRS. For example, on November 3, 2023, we repurchased shares of our outstanding Series B Preferred Stock, pursuant to the Certificate of Designations of the Series B Preferred Stock, which, for the purposes of calculating the excise tax, were offset by the fair market value of new stock issuances in the same taxable year. Additionally, on June 28, 2024,
we repurchased all outstanding Series B Preferred Stock and following such repurchase filed a certificate of elimination of the Series B Preferred Stock with the Secretary of State of the State of Delaware. The 1% excise tax may increase our costs and impact our operations. This could have an adverse effect on our margins and financial position and would negatively affect our revenues and results of operations and/or trading price of our common stock. The company has accrued for potential exposure related to excise tax as of September 30, 2024.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the period covered by this Quarterly Report on Form 10-Q, other than as set forth below, no director or officer of the Company “adopted” or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” as each term is defined in Item 408(a) of Regulation S-K.
On September 10, 2024, Laurie Harris, director and chairperson of the audit committee of the Company’s Board of Directors, adopted a trading arrangement for the sale of shares of the Company’s common stock (a “Rule 10b5-1 Trading Plan”) that is intended to satisfy the affirmative defense conditions of Securities Exchange Act Rule 10b5-1(c). Ms. Harris’ Rule 10b5-1 Trading Plan provides for the sale of up to 4,800 shares of the Company’s common stock pursuant to the terms of the plan. Ms. Harris’ Rule 10b5-1 Trading Plan expires on September 3, 2025, unless earlier terminated in accordance with the terms of the plan.
ITEM 6. EXHIBITS
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| | | | Incorporated by Reference | | |
Exhibit No. | | Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
3.1 | | | | 10-K | | 001-40574 | | 3.1 | | March 15, 2023 | | |
3.2 | | | | 8-K | | 001-40574 | | 3.1 | | June 23, 2022 | | |
3.3 | | | | S-1 | | 333-132080 | | 3.4 | | May 9, 2006 | | |
3.4 | | | | 8-K | | 000-52049 | | 3.2 | | February 20, 2018 | | |
3.5 | | | | 8-K | | 000-52049 | | 3.3 | | June 30, 2021 | | |
3.6 | | | | 8-K | | 000-52049 | | 3.1 | | June 30, 2021 | | |
3.7 | | | | 8-K | | 001-40574 | | 3.1 | | December 7, 2023 | | |
3.8 | | | | 8-K | | 001-40574 | | 3.1 | | July 1, 2024 | | |
10.1 | | | | | | | | | | | | X |
31.1 | | | | | | | | | | | | X |
31.2 | | | | | | | | | | | | X |
32.1 | | | | | | | | | | | | X |
32.2 | | | | | | | | | | | | X |
101.INS | | XBRL Instance Document | | | | | | | | | | X |
101.SCH | | XBRL Schema Document | | | | | | | | | | X |
101.CAL | | XBRL Calculation Linkbase Document | | | | | | | | | | X |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase | | | | | | | | | | X |
101.LAB | | XBRL Labels Linkbase Document | | | | | | | | | | X |
101.PRE | | XBRL Presentation Linkbase Document | | | | | | | | | | X |
| | | | | | | | | | | | |
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | Synchronoss Technologies, Inc. | |
| | | |
| | | |
| | | |
| | /s/ Jeff Miller | |
| | Jeff Miller | |
| | Chief Executive Officer | |
| | (Principal Executive Officer)
| |
| | | |
| | | |
| | /s/ Louis Ferraro | |
| | Louis Ferraro | |
| | Chief Financial Officer | |
November 12, 2024