Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| |
|
|
| þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
or
| |
|
|
| o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-52049
SYNCHRONOSS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| |
|
|
| Delaware
|
|
06-1594540 |
| (State or other jurisdiction of
|
|
(I.R.S. Employer |
| incorporation or organization)
|
|
Identification No.) |
| |
|
|
| 750 Route 202 South, Suite 600 |
|
|
| 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
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 o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
|
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Shares outstanding of the Registrant’s common stock:
| |
|
|
| Class
|
|
Outstanding at November 2, 2010 |
| Common stock, $0.0001 par value
|
|
31,839,781 shares |
SYNCHRONOSS TECHNOLOGIES, INC.
FORM 10-Q INDEX
1
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
63,116 |
|
|
$ |
89,924 |
|
Marketable securities |
|
|
1,726 |
|
|
|
2,558 |
|
Accounts receivable, net of allowance for doubtful accounts of $463 and $830 at
September 30, 2010 and December 31, 2009, respectively |
|
|
38,804 |
|
|
|
25,939 |
|
Prepaid expenses and other assets |
|
|
6,852 |
|
|
|
4,069 |
|
Deferred tax assets |
|
|
1,548 |
|
|
|
1,462 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
112,046 |
|
|
|
123,952 |
|
Marketable securities |
|
|
7,704 |
|
|
|
5,202 |
|
Property and equipment, net |
|
|
26,473 |
|
|
|
23,735 |
|
Goodwill |
|
|
24,661 |
|
|
|
6,911 |
|
Intangible assets, net |
|
|
34,143 |
|
|
|
2,727 |
|
Deferred tax assets |
|
|
12,919 |
|
|
|
8,992 |
|
Other assets |
|
|
2,783 |
|
|
|
1,040 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
220,729 |
|
|
$ |
172,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,918 |
|
|
$ |
5,171 |
|
Accrued expenses |
|
|
9,488 |
|
|
|
7,350 |
|
Deferred revenues |
|
|
8,797 |
|
|
|
3,095 |
|
Lease financing obligation |
|
|
113 |
|
|
|
— |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
25,316 |
|
|
|
15,616 |
|
Lease financing obligation — long-term |
|
|
9,194 |
|
|
|
9,150 |
|
Contingent consideration obligation — long-term |
|
|
11,317 |
|
|
|
— |
|
Other liabilities |
|
|
1,195 |
|
|
|
1,329 |
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock,
$0.0001 par value; 10,000 shares authorized, 0 shares issued and
outstanding at September 30, 2010 and December 31, 2009, respectively |
|
|
— |
|
|
|
— |
|
Common stock, $0.0001 par value; 100,000 shares authorized, 33,810 and 33,104 shares
issued; 31,810 and 31,104 outstanding at September 30, 2010 and December 31, 2009, respectively |
|
|
3 |
|
|
|
3 |
|
Treasury stock, at cost (2,000 shares at September 30, 2010 and December 31, 2009) |
|
|
(23,713 |
) |
|
|
(23,713 |
) |
Additional paid-in capital |
|
|
137,114 |
|
|
|
117,797 |
|
Accumulated other comprehensive income (loss) |
|
|
91 |
|
|
|
(7 |
) |
Retained earnings |
|
|
60,212 |
|
|
|
52,384 |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
173,707 |
|
|
|
146,464 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
220,729 |
|
|
$ |
172,559 |
|
|
|
|
|
|
|
|
See accompanying consolidated notes.
2
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
| |
|
|
|
Net revenues |
|
$ |
44,456 |
|
|
$ |
33,097 |
|
|
$ |
116,738 |
|
|
$ |
93,204 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services* |
|
|
22,983 |
|
|
|
16,790 |
|
|
|
59,638 |
|
|
|
47,179 |
|
Research and development |
|
|
7,569 |
|
|
|
3,243 |
|
|
|
16,760 |
|
|
|
9,359 |
|
Selling, general and administrative |
|
|
10,465 |
|
|
|
5,561 |
|
|
|
23,310 |
|
|
|
17,218 |
|
Net change in contingent consideration obligation |
|
|
(1,968 |
) |
|
|
— |
|
|
|
(1,968 |
) |
|
|
— |
|
Depreciation and amortization |
|
|
2,606 |
|
|
|
2,154 |
|
|
|
6,459 |
|
|
|
6,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
41,655 |
|
|
|
27,748 |
|
|
|
104,199 |
|
|
|
80,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
2,801 |
|
|
|
5,349 |
|
|
|
12,539 |
|
|
|
13,184 |
|
Interest income and other income |
|
|
706 |
|
|
|
106 |
|
|
|
940 |
|
|
|
458 |
|
Interest expense and other expense |
|
|
(342 |
) |
|
|
(250 |
) |
|
|
(909 |
) |
|
|
(546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
3,165 |
|
|
|
5,205 |
|
|
|
12,570 |
|
|
|
13,096 |
|
Income tax expense |
|
|
(1,024 |
) |
|
|
(2,076 |
) |
|
|
(4,742 |
) |
|
|
(5,305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,141 |
|
|
$ |
3,129 |
|
|
$ |
7,828 |
|
|
$ |
7,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic † |
|
$ |
0.05 |
|
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted † |
|
$ |
0.05 |
|
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic † |
|
|
31,586 |
|
|
|
30,865 |
|
|
|
31,276 |
|
|
|
30,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted † |
|
|
32,480 |
|
|
|
31,355 |
|
|
|
32,196 |
|
|
|
31,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| * |
|
Cost of services excludes depreciation and amortization which is shown separately. |
| |
| † |
|
See notes to financial statements footnote 4 |
See accompanying consolidated notes.
3
SYNCHRONOSS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,828 |
|
|
$ |
7,791 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
6,459 |
|
|
|
6,264 |
|
Loss (gain) on disposal of fixed assets |
|
|
31 |
|
|
|
(6 |
) |
Proceeds from insurance claim |
|
|
(418 |
) |
|
|
— |
|
Deferred income taxes |
|
|
818 |
|
|
|
(1,288 |
) |
Non-cash interest on leased facility |
|
|
684 |
|
|
|
447 |
|
Stock-based compensation |
|
|
8,763 |
|
|
|
6,004 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts |
|
|
(12,604 |
) |
|
|
(3,320 |
) |
Prepaid expenses and other current assets |
|
|
(1,780 |
) |
|
|
117 |
|
Other assets |
|
|
(1,695 |
) |
|
|
(77 |
) |
Accounts payable |
|
|
1,248 |
|
|
|
947 |
|
Accrued expenses |
|
|
888 |
|
|
|
(762 |
) |
Contingent consideration obligation |
|
|
(1,913 |
) |
|
|
— |
|
Excess tax benefit from the exercise of stock options |
|
|
(755 |
) |
|
|
(221 |
) |
Other liabilities |
|
|
(285 |
) |
|
|
(40 |
) |
Lease obligation |
|
|
3 |
|
|
|
— |
|
Deferred revenues |
|
|
2,451 |
|
|
|
1,174 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
9,723 |
|
|
|
17,030 |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of fixed assets |
|
|
(7,310 |
) |
|
|
(10,590 |
) |
Proceeds from the sale of fixed assets |
|
|
— |
|
|
|
6 |
|
Proceeds from insurance claim |
|
|
418 |
|
|
|
— |
|
Purchases of marketable securities available for sale |
|
|
(4,296 |
) |
|
|
(2,631 |
) |
Maturity of marketable securities available for sale |
|
|
2,659 |
|
|
|
1,835 |
|
Business acquired, net of cash |
|
|
(30,779 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(39,308 |
) |
|
|
(11,429 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options |
|
|
2,663 |
|
|
|
879 |
|
Excess tax benefit from the exercise of stock options |
|
|
755 |
|
|
|
221 |
|
Payments on capital obligations |
|
|
(684 |
) |
|
|
(121 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,734 |
|
|
|
979 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
43 |
|
|
|
— |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
(26,808 |
) |
|
|
6,580 |
|
Cash and cash equivalents at beginning of year |
|
|
89,924 |
|
|
|
72,203 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
63,116 |
|
|
$ |
78,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
5,053 |
|
|
$ |
4,328 |
|
|
|
|
|
|
|
|
Non-cash increase in building and related lease liability |
|
$ |
— |
|
|
$ |
2,123 |
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the acquisition |
|
$ |
7,316 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
See accompanying consolidated notes.
4
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS — UNAUDITED
(in thousands, except per share data unless otherwise noted)
The consolidated financial statements as of September 30, 2010 and for the three and
nine months ended September 30, 2010 and 2009 are unaudited, but in the opinion of management
include all adjustments (consisting only of normal recurring adjustments) necessary for a fair
presentation of the results for the interim periods. They do not include all of the information
and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete
financial statements and should be read in conjunction with the financial statements and notes in
the Annual Report of Synchronoss Technologies, Inc. incorporated by reference in the Company’s
annual report on Form 10-K for the year ended December 31, 2009. The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, Synchronoss
Technologies UK Ltd., Synchronoss Technologies Ireland, Ltd., Wisor Telecom Corporation (“Wisor”),
Synchronoss Telecom India Private Ltd., FusionOne, Inc., and FusionOne Esti Ou. All significant
intercompany balances and transactions are eliminated in consolidation. The Company has no
unconsolidated subsidiaries or investments accounted for under the equity method. The results
reported in these consolidated financial statements should not necessarily be taken as indicative
of results that may be expected for the entire year. The balance sheet at December 31, 2009 has
been derived from the audited financial statements at that date but does not include all of the
information and footnotes required by GAAP for complete financial statements.
1. Description of Business
Synchronoss Technologies, Inc. (the “Company” or “Synchronoss”) is a leading provider of
on-demand transaction management platforms that enable communications service providers (CSPs),
cable operators/ multi-services operators (MSOs), original equipment manufacturers (OEMs) with
embedded connectivity (e.g. smartphones, laptops, netbooks and mobile Internet devices, among
others), e-Tailers/retailers and other customers to accelerate and monetize their go-to-market
strategies for connected devices. This includes automating subscriber activation, order management
and service provisioning from any channel (e.g., e-commerce, telesales, customer stores, indirect
and other retail outlets, etc.) to any communication service (e.g., wireless(2G, 3G, 4G), high
speed access, local access, IPTV, cable, satellite TV, etc.) across any connected device type and
content transfer. The Company’s ConvergenceNow ®, ConvergenceNow ® Plus
+ and InterconnectNow TM platforms provide end-to-end seamless integration between
customer-facing channels/applications, communication services, or devices and “back-office”
infrastructure-related systems and processes. The Company’s customers rely on its cloud-based
solutions and technology to automate the process of activating customers while delivering
additional communication services, including new service offerings and ongoing customer care.
Synchronoss has designed its platforms to be flexible and scalable to enable multiple converged
communication services to be managed across multiple distribution channels, including e-commerce,
telesales, customer stores, indirect, and other retail outlets, etc., allowing the Company to meet
the rapidly changing and converging services and connected devices offered by its customers. The
Company enables its customers to acquire, retain and service subscribers quickly, reliably and
cost-effectively by simplifying the processes associated with managing the customer experience for
ordering and activating connected devices and services through the use of its platforms.
On July 19, 2010 the Company acquired FusionOne, Inc. and its subsidiary, FusionOne Esti ou
(“Estonia”) (collectively, “FusionOne”) for approximately $32 million in cash and issued
approximately 400 thousand common shares of the Company’s Common Stock. FusionOne was incorporated
in Delaware on May 19, 1998 and began operations on November 4, 1998 (inception) (Note 7).
FusionOne provides internet synchronization technology and marketing services that make information
access seamless and simple across multiple communications and computing devices across both
compatible and traditionally incompatible systems. In addition, FusionOne has expanded its
technology to provide personal content management applications for mobile phone users which
includes affordable backup of the users address book, calendar, pictures and downloaded content.
2. Basis of Presentation
For further information about the Company’s basis of presentation or its significant
accounting policies, refer to the financial statements and footnotes thereto included in the
Company’s annual report on Form 10-K for the year ended December 31, 2009.
5
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS — UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
3. Recent Accounting Pronouncements
Impact of Recently Issued Accounting Standards
In April 2010, the FASB issued ASU 2010-17, Revenue Recognition — Milestone Method (Topic
605): Milestone Method of Revenue Recognition (“ASU 2010-17”). ASU 2010-17 provides guidance on
defining a milestone and determining when it may be appropriate to apply the milestone method of
revenue recognition for research or development transactions. Consideration that is contingent on
achievement of a milestone in its entirety may be recognized as revenue in the period in which the
milestone is achieved only if the milestone is judged to meet certain criteria to be considered
substantive. Milestones should be considered substantive in their entirety and may not be
bifurcated. An arrangement may contain both substantive and non-substantive milestones, and each
milestone should be evaluated individually to determine if it is substantive. ASU 2010-17 is
effective on a prospective basis for milestones achieved in fiscal years, and interim periods
within those years, beginning on or after June 15, 2010, with early adoption permitted. The
Company is currently evaluating the early adoption option and because the Company currently does
not have performance payment milestones in its contractual arrangements it does not expect that the
adoption would have a material impact on the consolidated financial statements.
4. Earnings per Common Share
The Company calculates basic and diluted per share amounts based on net earnings adjusted for
the effects to earnings that would result if contingently issuable shares related to contingent
consideration settleable in the Company’s stock were reported as equity for the periods presented.
To calculate basic earnings per share the Company uses the weighted average number of common shares
outstanding during the period adjusted for the weighted average number of contingently issuable
shares. The weighted average numbers of shares contingently issuable are calculated as if they were
outstanding as of the last day of the period. The diluted earnings per share calculation is based
on the weighted average number of shares of common stock outstanding adjusted for the number of
additional shares that would have been outstanding had all potentially dilutive common shares been
issued. Potentially dilutive shares of common stock include stock options, non-vested share awards
and contingently issuable shares related to contingent consideration settleable in stock. The
dilutive effects of stock options and restricted stock awards are based on the treasury stock
method. The dilutive effects of the contingent consideration settleable in stock are calculated as
if the contingently issuable shares were outstanding as of the acquisition date, July 19, 2010.
The following table provides a reconciliation of the numerator and denominator used in computing
basic and diluted net income attributable to common stockholders per common share. Stock options
that are anti-dilutive and excluded from the following table totaled 2,281 and 1,460 for the three
months ended September 30, 2010 and 2009, respectively, and 1,769 and 1,462 for the nine months
ended September 30, 2010 and 2009, respectively.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,141 |
|
|
$ |
3,129 |
|
|
$ |
7,828 |
|
|
$ |
7,791 |
|
Income effect of contingent consideration obligation, net of tax |
|
|
(591 |
) |
|
|
|
|
|
|
(544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to shares of common stock for earnings per share |
|
|
1,550 |
|
|
|
3,129 |
|
|
|
7,284 |
|
|
|
7,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic |
|
|
31,586 |
|
|
|
30,865 |
|
|
|
31,276 |
|
|
|
30,767 |
|
Dilutive effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net issuable common share equivalents |
|
|
30 |
|
|
|
— |
|
|
|
10 |
|
|
|
— |
|
Options and unvested restricted shares |
|
|
864 |
|
|
|
490 |
|
|
|
910 |
|
|
|
515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — diluted |
|
|
32,480 |
|
|
|
31,355 |
|
|
|
32,196 |
|
|
|
31,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS — UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
5. Comprehensive Income
The components of comprehensive income are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net Income |
|
$ |
2,141 |
|
|
$ |
3,129 |
|
|
$ |
7,828 |
|
|
$ |
7,791 |
|
Translation adjustments |
|
|
66 |
|
|
|
(166 |
) |
|
|
64 |
|
|
|
(79 |
) |
Unrealized gain (loss) on securities, (net of tax) |
|
|
23 |
|
|
|
26 |
|
|
|
34 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income |
|
$ |
2,230 |
|
|
$ |
2,989 |
|
|
$ |
7,926 |
|
|
$ |
7,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Fair Value Measurements of Assets and Liabilities
The Company classifies marketable securities as available-for-sale. The fair value hierarchy
established in the guidance adopted by the Company prioritizes the inputs used in valuation
techniques into three levels as follows:
| |
• |
|
Level 1 — Observable inputs — quoted prices in active markets for identical assets and
liabilities; |
| |
• |
|
Level 2 — Observable inputs other than the quoted prices in active markets for identical
assets and liabilities — includes quoted prices for similar instruments, quoted prices for
identical or similar instruments in inactive markets, and amounts derived from valuation
models where all significant inputs are observable in active markets; and |
| |
• |
|
Level 3 — Unobservable inputs — include amounts derived from valuation models where one
or more significant inputs are unobservable and require us to develop relevant assumptions. |
The following is a summary of assets and liabilities held by the Company and their related
classifications under the fair value hierarchy.
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 30, |
|
| |
|
2010 |
|
|
2009 |
|
Level 1 (A) |
|
$ |
63,116 |
|
|
$ |
89,924 |
|
Level 2 (B) |
|
|
9,430 |
|
|
|
7,760 |
|
Level 3 (C) |
|
|
(11,317 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Total |
|
$ |
61,229 |
|
|
$ |
97,684 |
|
|
|
|
|
|
|
|
| |
|
|
| (A) |
|
Level 1 assets include money market funds which are classified as cash equivalents. |
| |
| (B) |
|
Level 2 assets include certificates of deposit which are classified as marketable securities. |
| |
| (C) |
|
Level 3 liabilities includes the contingent consideration obligation which is classified as
long term liabilities. |
The Company utilizes the market approach to measure fair value for its financial assets. The
market approach uses prices and other relevant information generated by market transactions
involving identical or comparable assets. The Company’s marketable securities investments
classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these
securities. No transfers of assets between Level 1 and Level 2 of the fair value measurement
hierarchy occurred during the three months and nine months ended September 30, 2010.
The aggregate fair value of available for sale securities and aggregate amount of unrealized
gains and losses for available for sale securities at September 30, 2010 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Aggregate Amount of |
|
| |
|
Aggregate |
|
|
Unrealized |
|
| |
|
Fair Value |
|
|
Gains |
|
|
Losses |
|
Due in one year or less |
|
$ |
1,726 |
|
|
$ |
23 |
|
|
$ |
— |
|
Due after one year, less than five years |
|
|
7,704 |
|
|
|
117 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,430 |
|
|
$ |
140 |
|
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
|
7
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS — UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
The aggregate fair value of available for sale securities and aggregate amount of unrealized
gains and losses for available for sale securities at December 31, 2009 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Aggregate Amount of |
|
| |
|
Aggregate |
|
|
Unrealized |
|
| |
|
Fair Value |
|
|
Gains |
|
|
Losses |
|
Due in one year or less |
|
$ |
2,558 |
|
|
$ |
43 |
|
|
$ |
— |
|
Due after one year, less than five years |
|
|
5,202 |
|
|
|
48 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,760 |
|
|
$ |
91 |
|
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses are reported as a component of accumulated other comprehensive
income (loss) in stockholders’ equity. The cost of securities sold is based on specific
identification method. No available for sale securities have been in a continuous unrealized loss
position for twelve months or longer.
The Company determined the fair value of the contingent consideration obligation based on a
probability-weighted income approach derived from quarterly revenue estimates and a probability
assessment with respect to the likelihood of achieving the various earn-out criteria. The fair
value measurement is based on significant inputs not observable in the market and thus represents a
Level 3 measurement. No changes in valuation techniques or inputs occurred during the three months
and nine months ended September 30, 2010.
The changes in fair value of the Company’s Level 3 contingent consideration obligation during
the nine months ended September 30, 2010 were as follows:
| |
|
|
|
|
| |
|
Level 3 |
|
Contingent consideration obligation related to acquisition of FusionOne as of July 19, 2010 |
|
$ |
13,230 |
|
Fair value adjustment to contingent consideration included in net income |
|
|
(1,968 |
) |
Earn-out compensation due to employees |
|
|
55 |
|
|
|
|
|
Balance at September 30, 2010 |
|
$ |
11,317 |
|
|
|
|
|
7. Acquisition
On July 19, 2010 the Company acquired 100% of FusionOne, Inc. a leader in mobile content
transfer and synchronization software. The acquisition of FusionOne accelerates the Company’s
overall connected device growth strategy and customer diversification efforts. Pursuant to the
Agreement and Plan of Merger and Reorganization dated July 6, 2010 (the Merger Agreement), the
Company paid approximately $32 million in cash and issued approximately 400 thousand common shares
of the Company’s Common Stock valued at approximately $7.1 million based on the Company’s July 19,
2010 closing stock price per share, and potentially may make payments (“Earn-out”) totaling up to
$35 million in cash and stock, based on achievements of certain financial targets for the period
from July 1, 2010 through December 31, 2011. The maximum that could be paid to existing employees
of FusionOne is $7 million and will be recorded as compensation expense over the service period.
Acquisition-related Costs
Acquisition-related costs recognized in the three and nine months ended September 30, 2010,
including transaction costs such as legal, accounting, valuation and other professional services,
were $2.4 million and $2.7 million, respectively.
8
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS — UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
The Earn-out acquisition date fair value of $13.2 million was determined based on a
probability-weighted income approach derived from quarterly revenue estimates and a probability
assessment with respect to the likelihood of achieving the various earn-out criteria. The fair
value measurement is based on significant inputs not observable in the market and thus represents a
Level 3 measurement. For the three and nine months ended September 30, 2010, a change in the
Earn-out fair value of $2.0 million was recorded as a credit in the consolidated statement of
income. As of September 30, 2010, the preliminary range of outcomes and the assumptions used to develop the
estimates had not changed significantly. The decrease in the fair
value was due principally to FusionOne not achieving all of their quarterly metrics. Each reporting period, the Company will estimate the change in
the fair value of the contingent consideration and any change in fair value will be recognized in
the statement of income. The estimate of the fair value of the contingent consideration requires
subjective assumptions to be made of various potential operating result scenarios. Future
revisions to these assumptions could materially change the estimate of the fair value of the
contingent consideration and therefore materially affect the Company’s future financial results.
During September 2010, in its efforts to improve efficiencies and better align its costs and
structure for the future the Company communicated its decision to exit the activities of the
Estonia operations and consolidate some functions in its corporate headquarters. The Company
recorded charges of $335 thousand associated with these exit and restructure activities. These
charges were recorded in research and development and selling, general and administrative costs in
the Company’s consolidated financial statements of income. The Company plans to cease operations
in Estonia on December 31, 2010.
The following table summarizes the acquisition-related costs, the fair value change in
contingent consideration and the acquisition-related contingent consideration to be paid to the
existing employees of FusionOne, recognized in the three and nine months ended September 30, 2010
and 2009.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Cost of services |
|
$ |
4 |
|
|
|
— |
|
|
$ |
4 |
|
|
$ |
— |
|
Research and development |
|
|
162 |
|
|
|
— |
|
|
|
162 |
|
|
|
— |
|
Selling, general and administrative |
|
|
2,626 |
|
|
|
— |
|
|
|
2,940 |
|
|
|
— |
|
Net change in contingent consideration obligation |
|
|
(1,968 |
) |
|
|
— |
|
|
|
(1,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition-related costs and contingent consideration costs |
|
$ |
824 |
|
|
$ |
— |
|
|
$ |
1,138 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary allocation of Consideration Transferred
Total estimated purchase price is summarized as follows:
| |
|
|
|
|
| |
|
July 19, 2010 |
|
Cash consideration |
|
$ |
32,172 |
|
Value of Synchronoss common stock issued |
|
|
7,136 |
|
Estimated fair value of the Earn-out payments |
|
|
13,230 |
|
Working Capital Deficiency |
|
|
(346 |
) |
|
|
|
|
|
|
$ |
52,192 |
|
|
|
|
|
The Company accounted for this business combination by applying the acquisition method, and
accordingly, the preliminary estimated purchase price was allocated to the tangible assets and
identifiable intangible assets acquired and liabilities assumed based upon their relative fair
values. The excess of the purchase price over the net tangible and identifiable intangible assets
and liabilities was recorded as goodwill. Goodwill associated with the acquisition of FusionOne is
not tax deductible. The results of FusionOne’s operations have
been included in the consolidated financial statements since the
acquisition date. The Company is in the process of finalizing the
purchase allocation and the value of contingent consideration, thus
the provisional measures of contingent consideration, intangible
assets, deferred income taxes and goodwill are subject to change. The Company expects the purchase
price allocation will be finalized in 2011.
9
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS — UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
The following table summarizes the estimated fair values of the assets and liabilities assumed
at the acquisition date. Estimates of both current and non-current deferred tax assets are subject
to change, pending the finalization of certain tax returns:
| |
|
|
|
|
| |
|
July 19, 2010 |
|
Cash and cash equivalents |
|
$ |
1,286 |
|
Accounts receivable |
|
|
261 |
|
Prepaid expenses and other assets |
|
|
296 |
|
Property and equipment |
|
|
609 |
|
Deferred tax assets, net |
|
|
4,832 |
|
Intangible assets |
|
|
32,700 |
|
|
|
|
|
Total identifiable assets acquired |
|
|
39,984 |
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
(1,988 |
) |
Captial lease |
|
|
(154 |
) |
Deferred revenue |
|
|
(3,400 |
) |
|
|
|
|
Total liabilities assumed |
|
|
(5,542 |
) |
|
|
|
|
|
Net identifiable assets acquired |
|
|
34,442 |
|
|
|
|
|
|
Goodwill |
|
|
17,750 |
|
|
|
|
|
Net assets acquired |
|
$ |
52,192 |
|
|
|
|
|
Intangible Assets
The Company is amortizing the value of the trade name, technology, and customer relationships
on a straight-line basis over an estimated useful life of 8, 10, and 16 years, respectively.
Amortization expense related to the acquired intangible assets resulting from the FusionOne
acquisition, which is included in depreciation and amortization expense, was approximately $525
thousand for the three and nine months ended September 30, 2010.
Intangible assets consist of the following (in thousands):
| |
|
|
|
|
| |
|
September 30, 2010 |
|
Intangible assets: |
|
|
|
|
Trade name |
|
$ |
500 |
|
Accumulated amortization |
|
|
(12 |
) |
|
|
|
|
Trade name, net |
|
|
488 |
|
|
|
|
|
Technology |
|
|
15,000 |
|
Accumulated amortization |
|
|
(299 |
) |
|
|
|
|
Technology, net |
|
|
14,701 |
|
|
|
|
|
Customer relationships |
|
|
17,200 |
|
Accumulated amortization |
|
|
(214 |
) |
|
|
|
|
Customer relationships, net |
|
|
16,986 |
|
|
|
|
|
Intangibles assets, net |
|
$ |
32,175 |
|
|
|
|
|
10
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS — UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
Deferred Revenues
In connection with the purchase price allocation, the Company estimated the fair value of the
service obligations assumed from FusionOne as a consequence of the acquisition. The estimated fair
value of the service obligations was determined using a cost build-up approach. The cost build-up
approach determines fair value by estimating the costs relating to fulfilling the obligations plus
a normal profit margin of a market participant. The estimated costs to fulfill the service
obligations were based on the historical direct costs and indirect costs related to FusionOne’s
service agreements with its customers. The Company recorded $3.4 million of deferred revenue to
reflect the estimate of the fair value of FusionOne’s service obligations assumed.
Pro forma
The following unaudited pro forma financial information reflects the consolidated results of
operations of Synchronoss as if the acquisition of FusionOne had taken place on January 1, 2010 and
January 1, 2009. The pro forma information includes adjustments for the amortization of intangible
assets. The pro forma financial information is not necessarily indicative of the results of
operations as they would have been had the transaction been effected on the assumed date.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
44,742 |
|
|
|
34,829 |
|
|
|
127,012 |
|
|
|
99,078 |
|
Net earnings |
|
|
3,078 |
|
|
|
(2,373 |
) |
|
|
4,547 |
|
|
|
(8,098 |
) |
Diluted earnings per common share |
|
|
0.09 |
|
|
|
(0.08 |
) |
|
|
0.14 |
|
|
|
(0.26 |
) |
8. Stockholders’ Equity
Stock Options
The Company uses the Black-Scholes option pricing model for determining the estimated fair
value for stock-based awards. The weighted-average assumptions used in the Black-Scholes option
pricing model are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Expected stock price volatility |
|
|
62 |
% |
|
|
63 |
% |
|
|
62 |
% |
|
|
62 |
% |
Risk-free interest rate |
|
|
2.44 |
% |
|
|
2.76 |
% |
|
|
2.52 |
% |
|
|
2.85 |
% |
Expected life of options (in years) |
|
|
4.87 |
|
|
|
4.89 |
|
|
|
4.89 |
|
|
|
4.91 |
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
The weighted-average fair value (as of the date of grant) of the options granted was $9.57 and
$6.11 per share for the three months ended September 30, 2010 and 2009, respectively, and $10.07
and $6.09 for the nine months ended September 30, 2010 and 2009, respectively. During the three
months ended September 30, 2010 and 2009, the Company recorded total pre-tax stock-based
compensation expense of $3.2 million ($2.3 million after tax or $0.07 per diluted share) and $2.1
million ($1.5 million after tax or $0.05 per diluted share), respectively, which includes fair
value for equity awards issued after January 1, 2006. During the nine months ended September 30,
2010 and 2009, the Company recorded total pre-tax stock-based compensation expense of $8.8 million
($6.0 million after tax or $0.19 per diluted share) and $6.0 million ($4.2 million after tax or
$0.14 per diluted share), respectively, which includes both intrinsic value for equity awards
issued prior to 2006 and fair value for equity awards issued after January 1, 2006. The total
stock-based compensation cost related to non-vested equity awards not yet recognized as an expense
as of September 30, 2010 was approximately $22.9 million. That cost is expected to be recognized
over a weighted-average period of approximately 2.84 years.
11
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS — UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
The following table summarizes information about stock options outstanding:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
| |
|
|
|
|
|
|
|
|
|
Option |
|
|
Weighted- |
|
| |
|
Shares |
|
|
Number |
|
|
Exercise Price |
|
|
Average |
|
| |
|
Available |
|
|
of |
|
|
per Share |
|
|
Exercise |
|
| |
|
for Grant |
|
|
Shares |
|
|
Range |
|
|
Price |
|
Balance at December 31, 2009 |
|
|
310 |
|
|
|
4,623 |
|
|
$ |
0.29 – 38.62 |
|
|
$ |
13.44 |
|
Options granted |
|
|
(1,152 |
) |
|
|
1,152 |
|
|
$ |
15.89 – 20.91 |
|
|
$ |
19.72 |
|
Options exercised |
|
|
— |
|
|
|
(278 |
) |
|
$ |
0.29 – 17.90 |
|
|
$ |
9.58 |
|
Options forfeited |
|
|
70 |
|
|
|
(122 |
) |
|
$ |
10.27 – 38.62 |
|
|
$ |
17.31 |
|
Expansion of pool in May 2010 |
|
|
3,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Expansion of pool in Aug. 2010 |
|
|
414 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
|
2,642 |
|
|
|
5,375 |
|
|
$ |
0.29 – 38.62 |
|
|
$ |
14.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the Company’s non-vested restricted stock at September 30, 2010, and changes
during the nine months ended September 30, 2010, is presented below:
| |
|
|
|
|
| |
|
Number of |
|
| Non-Vested Restricted Stock |
|
Awards |
|
Non-vested at January 1, 2010 |
|
|
114 |
|
Granted |
|
|
37 |
|
Vested |
|
|
(42 |
) |
Forfeited |
|
|
— |
|
|
|
|
|
Non-vested at September 30, 2010 |
|
|
109 |
|
|
|
|
|
On August 3, 2010, the Company’s Board of Directors granted equity awards made to one hundred
three employees and one newly appointed executive officer of the Company. Pursuant to NASDAQ
Listing Rule 5635(c)(4), the equity awards were granted under the Synchronoss Technologies, Inc.
2010 New Hire Equity Incentive Plan, which the Board of Directors adopted to facilitate the
granting of equity awards as an inducement to new employees to join Synchronoss. In accordance
with Nasdaq rules, these grants were made under a stock incentive plan without stockholder
approval.
9. Income Taxes
The Company’s effective tax rate was approximately 32.4% and approximately 39.9% during the
three months ended September 30, 2010 and 2009, respectively. The Company reviews the expected
annual effective income tax rate and makes changes on a quarterly basis as necessary based on
certain factors such as changes in forecasted annual operating income, changes to the actual and
forecasted permanent book-to-tax differences, or changes resulting from the impact of a tax law
change. The Company’s effective tax rate is lower than its US federal statutory rate due to taxes
in foreign jurisdictions where the rate is lower than the US federal statutory rate offset by
increases in its allocation to states with higher income taxes. Additionally, the Company received
benefits from discrete items during the quarter as described below.
12
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS — UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
The Company received a benefit due to the fair market value adjustment for the contingent
consideration obligation related to the Earn-out for the FusionOne equity holders. The Company
expects to be exposed to fluctuations in its effective rate during the Earn-out period for the
contingent consideration liability. Due to the nature of this transaction the Company may
experience significant adjustments to fair value of the contingent consideration obligation
depending on the outcome of the quarterly achievements. In addition, the Company received a
benefit due to the reduction in our uncertain tax position reserve.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as
follows:
| |
|
|
|
|
Unrecognized tax benefit at December 31, 2009 |
|
$ |
993 |
|
Additions for tax positions of prior periods |
|
|
52 |
|
Decreases for tax positions of prior periods |
|
|
(99 |
) |
Reductions related to the expiration of statutes of limitations |
|
|
(460 |
) |
|
|
|
|
Unrecognized tax benefit at September 30, 2010 |
|
$ |
486 |
|
|
|
|
|
These benefits were partially offset by the tax impact of the non-deductible transaction costs
related to the FusionOne acquisition. Also, the Company had a tax rate increase primarily
resulting from the expiration of the tax holiday in India and increased state taxes due to more
contracts being performed in those locations.
During the three months ended September 30, 2010 and 2009, the Company recognized
approximately $1.0 million and $2.1 million, respectively,
in related tax expense. During the nine months ended
September 30, 2010 and 2009, the Company recognized
approximately $4.7 million and $5.3 million in related tax
expense, respectively.
10. Capital Transactions
On February 1, 2010, the Company filed with the Securities and Exchange Commission a universal
shelf registration statement on Form S-3. The registration statement covers the offer and sale of
up to $150 million of securities which may include debt securities, warrants, common stock and
preferred stock. The registration statement was declared effective by the Securities and Exchange
Commission on April 14, 2010. The Company has no immediate plans or current commitments to sell
securities. The terms of any offering under its shelf registration statement will be determined at
the time of the offering and disclosed in a prospectus supplement filed with the Securities and
Exchange Commission.
11. Legal Matters
On September 5, 2008, September 18, 2008, and September 23, 2008, three complaints were filed
against the Company and certain of its officers and directors in the United States District Court
for the District of New Jersey purportedly on behalf of a class of shareholders who purchased the
Company’s common stock between February 4, 2008 and June 9, 2008 (the “Securities Law Actions”).
The complaints were consolidated and an amended complaint was filed by the plaintiffs on March 13,
2009. The plaintiffs in each complaint asserted claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. They alleged that certain of the Company’s public disclosures
regarding its financial prospects during the proposed class period were false and/or misleading.
The principal allegation set forth in each complaint was that the Company issued misleading
statements concerning its business prospects relating to the activation of Apple Inc.’s iPhone
product. On April 7, 2010, the Court granted the Company’s Motion to Dismiss all of the claims
against all of the defendants without prejudice. On August 9, 2010, the parties filed a notice of
voluntary dismissal with prejudice, noting that the plaintiff was dismissing the case without
receiving payment of any kind.
13
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS — UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
On October 23, 2008 and November 3, 2008, complaints were filed in the state court of New
Jersey (the “State Derivative Suit”) and the United States District Court for the District of New
Jersey (the “Federal Derivative Suit”) against certain of the Company’s officers and directors,
purportedly derivatively on behalf of the Company (collectively, the “Derivative Suits”). The
Complaints in the Derivative Suits assert that the named officers and directors breached their
fiduciary duties and other obligations in connection with the disclosures that also are the subject
of the Securities Law Actions described above. The Company is also named as a nominal defendant in
the Derivative Suits, although the lawsuits are derivative in nature and purportedly asserted on
the Company’s behalf. The plaintiffs seek compensatory damages, costs, fees, and other relief
within the Court’s discretion. On October 20, 2010, the parties to the Federal Derivative Suit
filed a notice of voluntary dismissal with prejudice as to the named plaintiff, noting that
the plaintiff was dismissing the case without receiving payment of any kind. The proceedings in
the State Derivative Suit are currently subject to a stay order. Due to the inherent uncertainties
of litigation, the Company cannot predict the outcome of the State Derivative Suit at this time,
and the Company can give no assurance that the claims in these complaints will not have a material
adverse effect on its financial position or results of operations.
12. Subsequent Events Review
The Company has evaluated subsequent events and transactions through the filing date.
14
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the information set
forth in our consolidated financial statements and related notes included elsewhere in this
quarterly report on Form 10-Q and in our annual report Form 10-K for the year ended December 31,
2009. This report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties
and are based on the beliefs and assumptions of our management as of the date hereof based on
information currently available to our management. Use of words such as “believes,” “expects,”
“anticipates,” “intends,” “plans,” “should, “continues,” “likely” or similar expressions, indicate
a forward-looking statement. Forward-looking statements are not guarantees of future performance
and involve risks, uncertainties and assumptions. 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 report. These statements speak only as of the date of
this report (unless another date is indicated), 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
We are a leading provider of on-demand transaction management platforms that enable
communications service providers (CSPs), cable operators/ multi-services operators (MSOs), original
equipment manufacturers (OEMs) with embedded connectivity (e.g. smartphones, laptops, netbooks and
mobile Internet devices, among others), e-Tailers/retailers and other customers to accelerate and
monetize their go-to-market strategies for connected devices. This includes automating subscriber
activation, order management and service provisioning from any channel (e.g., e-commerce,
telesales, customer stores, indirect and other retail outlets, etc.) to any communication service
(e.g., wireless(2G, 3G, 4G), high speed access, local access, IPTV, cable, satellite TV, etc.)
across any connected device type and content transfer. Our ConvergenceNow ®,
ConvergenceNow ® Plus + and InterconnectNow TM platforms provide
end-to-end seamless integration between customer-facing channels/applications, communication
services, or devices and “back-office” infrastructure-related systems and processes. Our customers
rely on our cloud-based solutions and technology to automate the process of activating customers
while delivering additional communication services, including new service offerings and ongoing
customer care. Our platforms are designed to be flexible and scalable to enable multiple converged
communication services to be managed across multiple distribution channels allowing us to meet the
rapidly changing and converging services and connected devices offered by our customers. We enable
our customers to acquire, retain and service subscribers quickly, reliably and cost-effectively by
simplifying the processes associated with managing the customer experience for ordering and
activating connected devices and services through the use of our platforms.
On July 19, 2010 we acquired FusionOne, Inc. and its subsidiary, FusionOne Esti ou (“Estonia”)
(collectively, “FusionOne”) for approximately $32 million in cash and issued approximately 400
thousand common shares of our Common Stock. FusionOne was incorporated in Delaware on May 19, 1998
and began operations on November 4, 1998 (inception). FusionOne provides internet synchronization
technology and marketing services that make information access seamless and simple across multiple
communications and computing devices across both compatible and traditionally incompatible systems.
In addition, FusionOne has expanded its technology to provide personal content management
applications for mobile phone users which includes affordable backup of the user’s address book,
calendar, pictures and downloaded content.
Our industry-leading customers include tier 1 service providers such as AT&T Inc., Verizon
Wireless and Vodafone, tier 1 cable operators /MSOs like Cablevision, Charter Communications,
Comcast, and Time Warner Cable and large OEMs/e-Tailers such as Apple, Dell and Nokia. These
customers utilize our platforms, technology and services to service both consumer and business
customers, including over 300 of the Fortune 500 companies.
15
Revenues
We generate a substantial portion of our revenues on a per-transaction basis, most of which is
derived from contracts that extend up to 60 months from execution. For the three months ended
September 30, 2010 and 2009, we derived approximately 76% and 83%, respectively, of our revenues
from transactions processed. The remainder of our revenues was generated by professional services,
licenses and subscriptions.
Historically, our revenues have been directly impacted by the number of transactions
processed. In recent years, the fourth quarter has had the highest volume of transactions processed
due to increased consumer activation activity during the holiday season. The future success of our
business depends on the continued growth of consumer and business transactions and, as such, the
volume of transactions that we process could fluctuate on a quarterly basis. See “Current Trends
Affecting Our Results of Operations” for certain matters regarding future results of operations.
We currently derive a significant portion of our revenues from one customer, AT&T. For the
three months ended September 30, 2010, AT&T accounted for approximately 62% of our revenues
compared to 67% for the three months ended September 30, 2009. Our agreement with AT&T was renewed
effective January 1, 2009 and runs through December of 2011. AT&T may renew this agreement for two
additional one year periods. This agreement defines the work activities, transaction pricing,
forecasting process, service level agreements and remedies associated with certain services
performed by us for AT&T’s ecommerce organization. The agreement provides for AT&T to pay us (i) a
monthly hosting fee, (ii) a fee based on the number of transactions processed through our
technology platform, (iii) a fee based on manual processing services and (iv) for professional
services rendered by us. A copy of this agreement has been previously filed with the Securities &
Exchange Commission.
Our five largest customers, for the three months ending September 30, 2010 were AT&T, Frontier
Communications, Level 3, Time Warner Cable, and Verizon, which accounted for approximately 84% of
our revenues, compared to 87% of our revenues from our five largest customers, AT&T, Comcast, Level
3, Time Warner Cable, and Vonage, for the three months ended September 30, 2009. See “Risk
Factors” for certain matters bearing risks on our future results of operations.
Costs and Expenses
Our costs and expenses consist of cost of services, research and development, selling, general
and administrative, depreciation and amortization, change in contingent consideration and interest
and other expense.
Cost of services includes all direct materials, direct labor, cost of facilities and those
indirect costs related to revenues such as indirect labor, materials and supplies. Our primary cost
of services is related to our information technology and systems department, including network
costs, data center maintenance, database management and data processing costs, as well as personnel
costs associated with service implementation, customer deployment and customer care. Also included
in cost of services are costs associated with our exception handling centers and the maintenance of
those centers. Currently, we utilize a combination of employees and third-party providers to
process transactions through these centers.
Research and development costs are expensed as incurred unless they meet GAAP criteria for
deferral and amortization. Software development costs incurred prior to the establishment of
technological feasibility do not meet these criteria, and are expensed as incurred. Research and
development expense consists primarily of costs related to personnel, including salaries and other
personnel-related expenses, consulting fees and the cost of facilities, computer and support
services used in service technology development. We also expense costs relating to developing
modifications and minor enhancements of our existing technology and services.
Selling, general and administrative expense consists of personnel costs including salaries,
sales commissions, sales operations and other personnel-related expense, travel and related
expense, trade shows, costs of communications equipment and support services, facilities costs,
consulting fees and costs of marketing programs, such as internet and print. General and
administrative expense consists primarily of salaries and other personnel-related expense for our
executive, administrative, legal, finance and human resources functions, facilities, professional
services fees, certain audit, tax and bad debt expense.
Depreciation and amortization relates to our property and equipment and includes our network
infrastructure and facilities. Amortization relates to the trademarks, customer lists and
technology acquired from Wisor in 2008 and from FusionOne in 2010.
Net change in contingent consideration obligation consists of the changes to the fair value
estimate of the obligation to the FusionOne former equity holders. The estimate is based on the weighted
probability achievements of certain financial targets for the period from July 1, 2010 through
December 31, 2011.
Interest and other expense consist of interest on our lease financing obligations and other
non-operating expenses.
16
Current Trends Affecting Our Results of Operations
Our on-demand business model enables delivery of our proprietary solutions over the Web as a
service and has been driven by market trends such as various forms of order provisioning, local
number portability, the implementation of new technologies, subscriber growth, competitive churn,
network changes, growth of the emerging device market (i.e., smartphone devices, netbooks, etc.)
and consolidations in the industry. In particular, the emergence of order provisioning of
e-commerce transactions for smartphone devices, wireless, VoIP, LNP, and other communication
services surrounding the convergence of bundled services has increased the need for our services
and we believe will continue to be a source of growth for us.
To support the growth driven by the favorable industry trends mentioned above, we continue to
look for opportunities to improve our operating efficiencies, such as the utilization of offshore
technical and non-technical resources for our exception handling center management. We believe that
these opportunities will continue to provide future benefits and position us to support revenue
growth. In addition, we anticipate further automation of the transactions generated by our more
mature customers and additional transaction types. Our cost of services can fluctuate from period
to period based upon the level of automation and the on-boarding of new transaction types.
We continue to advance our plans for the expansion of our platform footprint with
international carriers to support connected devices and multiple networks through our focus on
transaction management. Our initiatives with AT&T across direct and indirect commerce channels,
business and consumer segments continue to grow along with our account presence with a number of
Tier 1 cable MSO’s and connected device OEM’s. We are also exploring additional opportunities
through merger and acquisition activities to support our customer, product and geographic
diversification strategies.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements
in accordance with 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 Securities and Exchange Commission (“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. We have discussed the selection and development of the critical accounting
policies with the audit committee of our board of directors, and the audit committee has reviewed
our related disclosures in this Form 10-Q. Although we believe that our judgments and estimates are
appropriate, correct and reasonable under the circumstances, actual results may differ from those
estimates.
We believe that of our significant accounting policies, which are described in Note 2 in our
Annual Report on Form 10-K for the year ended December 31, 2009, the following accounting policies
involve a greater degree of judgment and complexity. Accordingly, these are the policies we
believe are the most critical to aid in fully understanding and evaluating our consolidated
financial condition and results of operations. 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 “Risk Factors” for certain matters
bearing risks on our future results of operations.
| |
• |
|
Revenue Recognition and Deferred Revenue |
| |
• |
|
Goodwill and Impairment of Long-Lived Assets |
| |
• |
|
Stock-Based Compensation |
| |
• |
|
Allowance for Doubtful Accounts |
There were no significant changes in our
critical accounting policies and estimates discussed in our Form
10-K during the
three months ended September 30, 2010. In addition, our
preliminary estimates of purchase price allocation and valuation of
contingent consideration is subject to estimates as discussed in Note
7. We are in the process of finalizing these preliminary estimates,
thus the amounts recorded are subject to change, and these changes
could be material. 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, 2009 for a more complete discussion of our critical
accounting policies and estimates.
17
Results of Operations
Three months ended September 30, 2010 compared to the three months ended September 30, 2009
The following table presents an overview of our results of operations for the three months
ended September 30, 2010 and 2009.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Three Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 vs 2009 |
|
| |
|
$ |
|
|
% of Revenue |
|
|
$ |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
| |
|
(in thousands) |
|
Net revenue |
|
$ |
44,456 |
|
|
|
100.0 |
% |
|
$ |
33,097 |
|
|
|
100.0 |
% |
|
$ |
11,359 |
|
|
|
34.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services* |
|
|
22,983 |
|
|
|
51.7 |
% |
|
|
16,790 |
|
|
|
50.7 |
% |
|
|
6,193 |
|
|
|
36.9 |
% |
Research and development |
|
|
7,569 |
|
|
|
17.0 |
% |
|
|
3,243 |
|
|
|
9.8 |
% |
|
|
4,326 |
|
|
|
133.4 |
% |
Selling, general and administrative |
|
|
10,465 |
|
|
|
23.5 |
% |
|
|
5,561 |
|
|
|
16.8 |
% |
|
|
4,904 |
|
|
|
88.2 |
% |
Net change in contingent consideration obligation |
|
|
(1,968 |
) |
|
|
(4.4 |
%) |
|
|
— |
|
|
|
— |
|
|
|
(1,968 |
) |
|
|
(100.0 |
%) |
Depreciation and amortization |
|
|
2,606 |
|
|
|
5.9 |
% |
|
|
2,154 |
|
|
|
6.5 |
% |
|
|
452 |
|
|
|
21.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,655 |
|
|
|
93.7 |
% |
|
|
27,748 |
|
|
|
83.8 |
% |
|
|
13,907 |
|
|
|
50.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
2,801 |
|
|
|
6.3 |
% |
|
$ |
5,349 |
|
|
|
16.2 |
% |
|
$ |
(2,548 |
) |
|
|
(47.6 |
%) |
| |
|
|
| * |
|
Cost of services excludes depreciation and amortization which is shown
separately. |
Net Revenue. Net revenues increased $11.4 million to $44.5 million for the three months ended
September 30, 2010, compared to the same period in 2009. This increase was due primarily to
increased transaction volumes and expansion into new programs from our AT&T and Time Warner Cable
relationships and due to our FusionOne acquisition which contributed additional revenues this
quarter. Net revenues related to AT&T increased $5.2 million to $27.4 million for the three months
ended September 30, 2010 compared to the same period in 2009. AT&T represented 62% of our revenues
for the three months ended September 30, 2010, compared to 67% for the three months ended September
30, 2009. Net revenues outside of AT&T generated $17.1 million of our revenues during the three
months ended September 30, 2010 as compared to $10.9 million during the three months ended
September 30, 2009. Net revenues outside of AT&T represented 38% and 33% of our revenues during
the three months ended September 30, 2010 and 2009, respectively. Transaction revenues recognized
for the three months ended September 30, 2010 and 2009 represented 76% or $33.8 million and 83% or
$27.5 million of net revenues, respectively. Professional service revenues as a percentage of
sales were 16% or $6.9 million for the three months ended September 30, 2010, compared to 16% or
$5.4 million for the previous three months ended September 30, 2009. As a result of the FusionOne
acquisition, license and Subscription revenue increased $3.5 million to 8% or 3.7 million for the
three months ended September 30, 2010 as compared to the same period in 2009.
Expense
Cost of Services. Cost of services increased $6.2 million to $23.0 million for the three
months ended September 30, 2010, compared to the same period in 2009, due primarily to an increase
of $3.1 million for outside consultants related to growth in existing and new programs with our
customers. There was an increase of $1.6 million in our personnel and related costs and an increase
of $557 thousand in stock-based compensation. The increase in personnel and related costs and
stock-based compensation was due primarily to the continued expansion of programs which have led to
an increase in headcount. Also contributing to the increase in cost of services was $1.2 million
in telecommunication and facility costs related to the increased call volume and capacity
associated with our data facilities and our expansions related to the FusionOne acquisition offset
by a decrease of $390 thousand in license fees related to our 2009 ATG license purchase.
Additionally there was an increase in travel costs of $74 thousand related to our global and
domestic expansion. Cost of services as a percentage of revenues increased to 51.7% for the three
months ended September 30, 2010, as compared to 50.7% for the three months ended September 30,
2009.
18
Research and Development. Research and development expense increased $4.3 million to $7.6
million for the three months ended September 30, 2010, compared to the same period in 2009, due
primarily to the acquisition of FusionOne. We had an increase of $2.1 million in our personnel and
related costs and an increase of $341 thousand in stock-based compensation. The increase in
personnel and related costs and stock-based compensation was due to an increase in headcount
primarily as a result of the FusionOne acquisition. Also included in the increase in personnel and
related costs and in stock-based compensation costs were costs of $29 thousand related to the
employee Earn-out achieved in the three months ended September 30, 2010. In addition there was an
increase of $1.3 million in professional services augmenting our staff related to the development
of new technologies and an increase of $358 thousand in telecommunication and facility costs
related to the increase in headcount and the utilization of our expanded resources. In the three
months ended September 30, 2010 there were restructuring and exit activity costs of $133 thousand
related to the exit activities of the Estonia operations. Research and development expense as a
percentage of revenues increased to 17.0% for the three months ended September 30, 2010 as compared
to 9.8% for the three months ended September 30, 2009.
Selling, General and Administrative. Selling, general and administrative expense increased
$4.9 million to $10.5 million for the three months ended September 30, 2010, compared to the same
period in 2009 primarily due to the acquisition of FusionOne including acquisition related fees of
$2.4 million for investment banking and professional services. We had increases in our personnel
and related costs of $1.6 million, stock-based compensation expense of $244 thousand, consulting
costs of $148 thousand, franchise taxes and other taxes of $158 thousand, an increase in
professional services of $48 thousand, an increase in telecommunication and facility costs of $73
thousand, and an increase in our bad debt expense of $34 thousand. The increase in personnel and
related and stock-based compensation costs was primarily due to an increase in headcount from the
FusionOne acquisition. Also included in the increase in personnel and related costs and in
stock-based compensation costs were costs of $22 thousand related to the employee Earn-out achieved
in the three months ended September 30, 2010. In the three months ended September 30, 2010 there
were restructure and exit activity costs of $202 thousand related to the consolidation of FusionOne
into Synchronoss. Selling, general and administrative expense as a percentage of revenues
increased to 23.5% for the three months ended September 30, 2010, compared to 16.8% for the three
months ended September 30, 2009.
Depreciation and amortization. Depreciation and amortization expense increased $452 thousand
to $2.6 million for the three months ended September 30, 2010, compared to the same period in 2009,
primarily related to the amortization of our newly acquired intangible assets of FusionOne by the
completion of the depreciation of certain assets which have, for accounting purposes, reached the
end of their respective useful lives. Depreciation and amortization expense as a percentage of
revenues decreased to 5.9% for the three months ended September 30, 2010, as compared to 6.5% for
the same period in 2009. The decrease in percentage was the result of a higher revenue base as
compared to the same period in 2009.
Net change in contingent consideration obligation. The fair value change in the contingent
consideration liability related to the FusionOne former equity holders resulted in a credit to expenses of
$2.0 million for the three months ended September 30, 2010. The decrease in the estimate of the
fair value is due principally to FusionOne not achieving all of their quarterly metrics. As of September 30,
2010 the range of outcomes and the assumptions used to develop the estimates for the remaining
Earn-out period had not changed significantly.
Income from Operations. Income from operations decreased $2.5 million to $2.8 million for the
three months ended September 30, 2010, compared to the same period in 2009. This decrease was due
primarily to the costs associated with the July 19, 2010 acquisition of FusionOne and our increased
investments in our research and development staff. Income from operations decreased as a
percentage of revenues to 6.3% for the three months ended September 30, 2010, as compared to 16.2%
for the three months ended September 30, 2009.
Interest and other income. Interest and other income increased $600 thousand to $706 thousand
for the three months ended September 30, 2010, compared to the same period in 2009. Interest and
other income increased primarily due to other income from insurance claim proceeds received offset
by decreased interest income due to decreased cash balances and rates on our investments.
Interest and other expense. Interest expense and other expense increased $92 thousand to $342
thousand for the three months ended September 30, 2010, compared to the same period in 2009.
Interest and other expense increased primarily due to currency fluctuations related to the
settlement of our customer account sales. During three months ended September 30, 2010 and 2009 we
recognized $229 thousand and $220 thousand, respectively, of interest expense related to the
Bethlehem facility lease.
19
Income Tax. Our effective tax rate was approximately 32.4% and approximately 39.9% during the
three months ended September 30, 2010 and 2009, respectively. We review the expected annual
effective income tax rate and make changes on a quarterly basis as necessary based on certain
factors such as changes in forecasted annual operating income, changes to the actual and forecasted
permanent book-to-tax differences, or changes resulting from the impact of a tax law change. Our
effective tax rate is lower than our US federal statutory rate due to taxes in foreign
jurisdictions where the rate is lower than the US federal statutory rate offset by increases in our
allocation to states with higher income taxes. Additionally, we received benefits from discrete
items during the quarter as described below.
We received a benefit due to our fair market value adjustment for the contingent consideration
obligation related to the Earn-out for the FusionOne equity holders. We expect to be exposed to
fluctuations in our effective rate during the Earn-out period for our contingent consideration
liability. Due to the nature of this transaction we may experience significant adjustments to fair
value of the contingent consideration obligation depending on the outcome of the quarterly
achievements. In addition, we received a benefit due to the reduction in our uncertain tax
position reserve.
A reconciliation of the beginning and ending amounts of unrecognized
tax benefits for the three months ended September 30, 2010 is as
follows:
| |
|
|
|
|
Unrecognized
tax benefit at June 30, 2010 |
|
$ |
1,012 |
|
Additions for tax positions of prior periods |
|
|
33 |
|
Decreases for tax positions of prior periods |
|
|
(99 |
) |
Reductions related to the expiration of statutes of limitations |
|
|
(460 |
) |
|
|
|
|
Unrecognized tax benefit at September 30, 2010 |
|
$ |
486 |
|
|
|
|
|
These benefits were partially offset by the tax impact of the non-deductible transaction costs
related to the FusionOne acquisition. Also, we had a tax rate increase primarily resulting from
the expiration of the tax holiday in India and increased state taxes due to more contracts being
performed in those locations.
During the three months ended September 30, 2010 and 2009, we recognized approximately $1.0
million and $2.1 million, respectively, in related tax expense.
Results of Operations
Nine months ended September 30, 2010 compared to the nine months ended September 30, 2009
The following table presents an overview of our results of operations for the nine months
ended September 30, 2010 and 2009.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
|
2010 vs 2009 |
|
| |
|
$ |
|
|
% of Revenue |
|
|
$ |
|
|
% of Revenue |
|
|
$ Change |
|
|
% Change |
|
| |
|
(in thousands) |
|
|
|
|
Net revenue |
|
$ |
116,738 |
|
|
|
100.0 |
% |
|
$ |
93,204 |
|
|
|
100.0 |
% |
|
$ |
23,534 |
|
|
|
25.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services* |
|
|
59,638 |
|
|
|
51.1 |
% |
|
|
47,179 |
|
|
|
50.6 |
% |
|
|
12,459 |
|
|
|
26.4 |
% |
Research and development |
|
|
16,760 |
|
|
|
14.4 |
% |
|
|
9,359 |
|
|
|
10.0 |
% |
|
|
7,401 |
|
|
|
79.1 |
% |
Selling, general and administrative |
|
|
23,310 |
|
|
|
20.0 |
% |
|
|
17,218 |
|
|
|
18.5 |
% |
|
|
6,092 |
|
|
|
35.4 |
% |
Net change in contingent consideration obligation |
|
|
(1,968 |
) |
|
|
(1.7 |
%) |
|
|
— |
|
|
|
— |
|
|
|
(1,968 |
) |
|
|
(100.0 |
%) |
Depreciation and amortization |
|
|
6,459 |
|
|
|
5.5 |
% |
|
|
6,264 |
|
|
|
6.7 |
% |
|
|
195 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,199 |
|
|
|
89.3 |
% |
|
|
80,020 |
|
|
|
85.9 |
% |
|
|
24,179 |
|
|
|
30.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
12,539 |
|
|
|
10.7 |
% |
|
$ |
13,184 |
|
|
|
14.1 |
% |
|
$ |
(645 |
) |
|
|
(4.9 |
%) |
| |
|
|
| * |
|
Cost of services excludes depreciation and amortization which is shown
separately. |
Net Revenue. Net revenues increased $23.5 million to $116.7 million for the nine months ended
September 30, 2010, compared to the nine months ended September 30, 2009. This increase was due
primarily to increased transaction volumes and expansion into new programs from our customers as
well as the acquisition of FusionOne. Net revenues related to AT&T increased $14.3 million to
$75.1 million for the nine months ended September 30, 2010 compared to the same period in 2009.
AT&T represented 64% and 65% of our revenues for the nine months ended September 30, 2010 and 2009,
respectively. Net revenues outside of AT&T increased $9.2 million to $41.6 million for the nine
months ended September 30, 2010, as compared to $32.4 million during the nine months ended
September 30, 2009. Net revenues outside of AT&T represented 36% and 35% of our revenues during
the nine months ended September 30, 2010 and 2009, respectively. Transaction revenues recognized
for the nine months ended September 30, 2010 and 2009 represented 79% or $91.6 million and 84% or
$77.8 million of net revenues, respectively. Professional service revenues increased as a
percentage of sales to 18% or $20.5 million for the nine months ended September 30, 2010, compared
to 16% or $14.7 million for the previous nine months ended September 30, 2009. License and
Subscription revenues increased $3.9 million to 4% or $4.6 million for the nine months ended
September 30, 2010 as compared to the same period in 2009 due to our FusionOne acquisition.
20
Expense
Cost of Services. Cost of services increased $12.5 million to $59.6 million for the nine
months ended September 30, 2010, compared to the same period in 2009, due primarily to an increase
of $3.8 million in personnel and related costs and an increase of $1.3 million in stock-based
compensation. The increase in personnel and related costs and stock-based compensation was due
primarily to an increase in headcount to support the growth of existing and new programs. There
was an increase of $5.0 million for outside consultants related to growth in programs with existing
customers. There was an increase of $2.4 million in telecommunication and facility costs related
to the increased call volume and capacity associated with our data facilities and our expansions
related to the FusionOne acquisition offset by a decrease of $390 thousand in license fees related
to our 2009 ATG license purchase. Additionally there was an increase in travel costs of $281
thousand related to our global and domestic expansion. Cost of services as a percentage of
revenues increased to 51.1% for the nine months ended September 30, 2010, as compared to 50.6% for
the nine months ended September 30 2009.
Research and Development. Research and development expense increased $7.4 million to $16.8
million for the nine months ended September 30, 2010, compared to the same period in 2009, due
primarily to the acquisition of FusionOne. We had an increase of $3.6 million in our personnel and
related costs and an increase of $758 thousand in stock based compensation due to increase in
headcounts resulting from continued growth and the FusionOne acquisition. Also included the
increase in personnel and related costs and in stock-based compensation costs were costs of $29
thousand related to the employee Earn-out achieved in the three months ended September 30, 2010.
Contributing to the increase was $2.2 million in professional services related to the development
of new technologies and an increase of $751 thousand in telecommunication and facility costs
related to the increase in headcount and the utilization of our expanded resources. In the nine
months ended September 30, 2010 there were restructuring and exit activity costs of $133 thousand
related to the exit activities of the Estonia operations. Research and development expense as a
percentage of revenues increased to 14.4% for the nine months ended September 30, 2010 as compared
to 10.0% for the nine months ended September 30, 2009.
Selling, General and Administrative. Selling, general and administrative expense increased
$6.1 million to $23.3 million for the nine months ended September 30, 2010, compared to the same
period in 2009 due to $2.7 million of investment banking and professional services fees associated
with the acquisition of FusionOne on July 19, 2010. We had increases in our personnel and related
costs of $2.0 million and stock-based compensation expense of $743 thousand, consulting costs of
$357 thousand and marketing costs of $322 thousand, an increase in franchise and other taxes of
$207 thousand, and an increase in our bad debt expense of $126 thousand. The increase in personnel
and related and stock-based compensation costs was primarily due to an increase in headcount
primarily as a result of our continued growth and the FusionOne acquisition. Also included in the
increase in personnel and related costs and in stock-based compensation costs were costs of $22
thousand related to the employee Earn-out achieved in the nine months ended September 30, 2010. The
consulting and marketing costs increases relate to our expanded business development and marketing
activities. These expenses were offset by decreases in professional services of $448 thousand,
telecommunication and facility costs of $70 thousand, company meetings of $58 thousand, and $49
thousand in other costs. The decrease in professional services relates to a reduction in legal
fees and the decrease in telecommunication and facility costs was primarily due to a reduction in
services. In the nine months ended September 30, 2010 there were restructure and exit activity
costs of $202 thousand related to the consolidation of FusionOne into Synchronoss. Selling,
general and administrative expense as a percentage of revenues increased to 20.0% for the nine
months ended September 30, 2010, compared to 18.5% for the nine months ended September 30 2009.
Depreciation and amortization. Depreciation and amortization expense increased $195 thousand
to $6.5 million for the nine months ended September 30, 2010, compared to the same period in 2009,
related to the amortization of our newly acquired intangible assets of FusionOne and by the
completion of the depreciation of certain assets which, for accounting purposes, have reached the
end of their respective lives. Depreciation and amortization expense as a percentage of revenues
decreased to 5.5% for the nine months ended September 30, 2010, as compared to 6.7% for the same
period in 2009. The decrease in percentage was a result of a higher revenue base as compared to
the same period 2009.
Net change in contingent consideration obligation. The fair value change in the contingent
consideration liability related to the FusionOne former equity holders resulted in a credit to expenses of
$2.0 million for the nine months ended September 30, 2010. The decrease in the estimate of the
fair value is due principally to FusionOne not achieving all of their quarterly metrics. As of September 30,
2010 the range of outcomes and the assumptions used to develop the estimates for the remaining
Earn-out period had not changed significantly.
21
Income from Operations. Income from operations decreased $645 thousand to $12.5 million for
the nine months ended September 30, 2010, compared to the same period in 2009. This decrease was
due primarily to the costs associated with the July 19, 2010 acquisition of FusionOne and increased
investments in our research and development staff and related costs. Income from operations
decreased as a percentage of revenues to 10.7% for the nine months ended September 30, 2010, as
compared to 14.1% for the nine months ended September 30, 2009.
Interest and other income. Interest and other income increased $482 thousand to $940 thousand
for the nine months ended September 30, 2010, compared to the same period in 2009. Interest and
other income increased primarily due to proceeds from insurance claims offset by decreased interest
income due to decreased cash balances and lower rates on our investments.
Interest and other expense. Interest expense and other expense increased $363 thousand to
$909 thousand for the nine months ended September 30, 2010, compared to the same period in 2009.
Interest and other expense increased primarily due to the lease financing obligation related to our
Pennsylvania facility that began in April 2009. During nine months ended September 30, 2010 and
2009 we recognized $684 thousand and $447 thousand, respectively, of interest expense related to
the facility lease.
Income Tax. Our effective tax rate was approximately 37.7% and approximately 40.5% during the
nine months ended September 30, 2010 and 2009, respectively. We review the expected annual
effective income tax rate and make changes on a quarterly basis as necessary based on certain
factors such as changes in forecasted annual operating income, changes to the actual and forecasted
permanent book-to-tax differences, or changes resulting from the impact of a tax law change. Our
effective tax rate is lower than our US federal statutory rate due to taxes in foreign
jurisdictions where the rate is lower than the US federal statutory rate offset by increases in our
allocation to states with higher income taxes. Additionally, we received benefits from discrete
items during the nine months ended September 30, 2010, as described below.
We received a benefit due to our fair market value adjustment for the contingent consideration
obligation related to the Earn-out for the FusionOne equity holders. We expect to be exposed to
fluctuations in our effective rate during the Earn-out period for our contingent consideration
liability. Due to the nature of this transaction we may experience significant adjustments to fair
value of the contingent consideration obligation depending on the outcome of the quarterly
achievements. In addition, we received a benefit due to the reduction in our uncertain tax
position reserve.
A reconciliation of the beginning and ending amounts of unrecognized
tax benefits for the nine months ended September 30, 2010 is as
follows:
| |
|
|
|
|
Unrecognized tax benefit at December 31, 2009 |
|
$ |
993 |
|
Additions for tax positions of prior periods |
|
|
52 |
|
Decreases for tax positions of prior periods |
|
|
(99 |
) |
Reductions related to the expiration of statutes of limitations |
|
|
(460 |
) |
|
|
|
|
Unrecognized tax benefit at September 30, 2010 |
|
$ |
486 |
|
|
|
|
|
These benefits were partially offset by the tax impact of the non-deductible transaction costs
related to the FusionOne acquisition. Also, we had a tax rate increase primarily resulting from
the expiration of the tax holiday in India and increased state taxes due to more contracts being
performed in those locations.
During the nine months ended September 30, 2010 and 2009, we recognized approximately $4.7
million and $5.3 million in related tax expense, respectively.
Liquidity and Capital Resources
Our principal source of liquidity has been cash provided by operations. Our cash, cash
equivalents and marketable securities balance was $72.5 million at September 30, 2010, a decrease
of $25.1 million as compared to the end of 2009. This decrease was primarily due to the $32
million in cash used for the purchase of FusionOne. We anticipate that our principal uses of cash
in the future will be to fund the expansion of our business through both organic growth as well as
possible acquisition activities and the expansion of our customer base internationally. Uses of
cash will also include facility expansion, capital expenditures and working capital.
Discussion of Cash Flows
Cash flows from operations. Net cash provided by operating activities for the nine months
ended September 30, 2010 was $9.7 million, as compared to $17.0 million for the nine months ended
September 30, 2009. Our primary uses of cash from operating activities are for personnel related
expenditures and outside consultants. We also make cash payments related to taxes and leased
facilities. During the nine months ended September 30, 2010 we also made payments of approximately
$2.7 million related to our FusionOne related acquisition transaction costs. The decrease in net
cash provided by operating activities for the nine months ended September 30, 2010 of $7.3 million
as compared to the same period in 2009 is due to the change in working capital which included a
$9.3 million increase in our accounts receivable balance as our collection of customer accounts
only partially offset the increase of $23.5 million in customer sales and a $2.0 million increase
in our accounts payable and accrued expenses.
22
Cash flows from investing. Net cash used in investing activities for the nine months ended
September 30, 2010 was $39.3 million, as compared to $11.4 million for the nine months September
30, 2009. The primary use of cash was $30.8 million used in the July 19, 2010 acquisition of
FusionOne net of cash acquired. In addition there was $7.3 million used to purchase property and
equipment primarily related to our continued investments in our global information technology and
business system infrastructure. We also used $1.6 million related to the purchases and maturity of
our marketable securities available for sale.
Cash flows from financing. Net cash provided by financing activities for the nine months
ended September 30, 2010 was $2.7 million, as compared to $1.0 million for the nine months ended
September 30, 2009. The increase was due to the increase in proceeds from the exercise of stock
options and an increase in the tax benefit from the exercise of stock options, offset by payments
on our capital obligation related to our data facility in the nine months ended September 30, 2010.
We believe that our existing cash and cash equivalents, and cash generated from our existing
operations will be sufficient to fund our operations for the next twelve months.
Effect of Inflation
Although inflation generally affects us by increasing our cost of labor and equipment, we do
not believe that inflation has had any material effect on our results of operations for the three
months ended June 30, 2010 and 2009.
Impact of Recently Issued Accounting Standards
In April 2010, the FASB issued ASU 2010-17, Revenue Recognition — Milestone Method (Topic
605): Milestone Method of Revenue Recognition (“ASU 2010-17”). ASU 2010-17 provides guidance on
defining a milestone and determining when it may be appropriate to apply the milestone method of
revenue recognition for research or development transactions. Consideration that is contingent on
achievement of a milestone in its entirety may be recognized as revenue in the period in which the
milestone is achieved only if the milestone is judged to meet certain criteria to be considered
substantive. Milestones should be considered substantive in their entirety and may not be
bifurcated. An arrangement may contain both substantive and non-substantive milestones, and each
milestone should be evaluated individually to determine if it is substantive. ASU 2010-17 is
effective on a prospective basis for milestones achieved in fiscal years, and interim periods
within those years, beginning on or after June 15, 2010, with early adoption permitted. We are
currently evaluating the early adoption option and because we currently do not have performance
payment milestones in our contractual arrangements we do not expect that the adoption would have a
material impact on the consolidated financial statements.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2010 and December 31, 2009.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part II, “Item 7A. Quantitative and Qualitative Disclosures about Market
Risk” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could
materially affect our business, financial condition or future results. We believe our exposure
associated with these market risks has not changed materially since December 31, 2009.
Foreign Currency Exchange Risk
We conduct business outside the U.S. in several currencies including the British Pound
Sterling, Euro, Indian Rupee, and Estonian Kroons. The financial statements of these foreign
subsidiaries are translated into U.S. dollars using period-end rates of exchange for assets and
liabilities and average rates for the period for revenues and expenses.
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. As a
result, we are subject to currency translation risk. Further, changes in exchange rates between
foreign currencies and the U.S. dollar could affect our future net sales and cost of sales and
could result in exchange 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.
24
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of September 30, 2010. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective as of September 30, 2010, the end of the period covered by
this quarterly report, to ensure that the information required to be disclosed by us in the reports
that we file or submit under the Securities Exchange Act of 1934, as amended, are recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosures.
Changes in internal controls over financial reporting
There were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that was
conducted during the last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 5, 2008, September 18, 2008, and September 23, 2008, three complaints were filed
against us and certain of our officers and directors in the United States District Court for the
District of New Jersey purportedly on behalf of a class of shareholders who purchased our common
stock between February 4, 2008 and June 9, 2008 (the “Securities Law Actions”). The complaints were
consolidated and an amended complaint was filed by the plaintiffs on March 13, 2009. The plaintiffs
in each complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934. They alleged that certain of our public disclosures regarding its financial prospects during
the proposed class period were false and/or misleading. The principal allegation set forth in each
complaint was that we issued misleading statements concerning its business prospects relating to
the activation of Apple Inc.’s iPhone product. On April 7, 2010, the Court granted our Motion to
Dismiss all of the claims against all of the defendants without prejudice. On August 9, 2010, the
parties filed a notice of voluntary dismissal with prejudice, noting that the plaintiff was
dismissing the case without receiving payment of any kind.
On October 23, 2008 and November 3, 2008, complaints were filed in the state court of New
Jersey (the “State Derivative Suit”) and the United States District Court for the District of New
Jersey (the “Federal Derivative Suit”) against certain of our officers and directors, purportedly
derivatively on our behalf (collectively, the “Derivative Suits”). The Complaints in the Derivative
Suits assert that the named officers and directors breached their fiduciary duties and other
obligations in connection with the disclosures that also are the subject of the Securities Law
Actions described above. We were also named as a nominal defendant in the Derivative Suits,
although the lawsuits are derivative in nature and purportedly asserted on our behalf. The
plaintiffs seek compensatory damages, costs, fees, and other relief within the Court’s discretion.
On October 20, 2010, the parties to the Federal Derivative Suit filed a notice of voluntary
dismissal with prejudice as to the named plaintiff, noting that that the plaintiff was dismissing
the case without receiving payment of any kind. The proceedings in the State Derivative Suit are
currently subject to a stay order. Due to the inherent uncertainties of litigation, we cannot
predict the outcome of the State Derivative Suit at this time, and we can give no assurance that
the claims in these complaints will not have a material adverse effect on its financial position or
results of operations.
25
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2009, which could materially affect our business, financial condition or
future results. The risks described in our Form 10-K are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently deem to be immaterial also
may materially adversely affect our business, financial condition and/or operating results. If any
of the risks actually occur, our business, financial condition or results of operations could be
negatively affected. In that case, the trading price of our stock could decline, and our
stockholders may lose part or all of their investment.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Use of Proceeds
On June 14, 2006, our Registration Statement on Form S-1 (File No. 333-132080) relating to the
IPO was declared effective by the SEC. The managing underwriters of our IPO were Goldman, Sachs &
Co., Deutsche Bank Securities Inc. and Thomas Weisel Partners LLC. On June 20, 2006, we closed the
sale of 6,532,107 shares of common stock in our IPO for net proceeds to us of $45.7 million. In
July 2006, we sold an additional 959,908 shares of common stock upon the exercise of an
over-allotment option granted to the underwriters for net proceeds to us of $7.1 million. No
offering expenses were paid directly or indirectly to any of our directors or officers or persons
owning ten percent or more of any class of our equity securities or to any other affiliates. We
have invested our net proceeds of the offering in money market funds pending their use to fund our
expansion. Part of our current growth strategy is to further penetrate the North American markets
and expand our customer base internationally. We anticipate that a portion of the proceeds of the
offering will enable us to finance this expansion. In addition, we could continue to use portions
of the proceeds of our IPO to make strategic investments in, or pursue acquisitions of, other
businesses, products or technologies.
On July 19, 2010 we acquired 100% of the capital stock of FusionOne, Inc. a leader in mobile
content transfer and synchronization software. The acquisition of FusionOne accelerates our
overall connected device growth strategy and customer diversification efforts. Pursuant to the
Agreement and Plan of Merger and Reorganization dated July 6, 2010 (the Merger Agreement), we paid
approximately $32 million in cash and issued approximately 400 thousand common shares of our Common
Stock valued at approximately $7.1 million based on our July 19, 2010 closing stock price per
share, and potentially may make payments totaling up to $35 million in cash and stock, based on
achievements of certain financial targets for the period from July 1, 2010 through December 31,
2011.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. Reserved
ITEM 5. OTHER INFORMATION
None.
26
ITEM 6. EXHIBITS
| |
|
|
|
|
| Exhibit No. |
|
Description |
| |
3.2 |
* |
|
Restated Certificate of Incorporation of the Company |
| |
|
|
|
|
| |
3.4 |
* |
|
Amended and Restated Bylaws of the Company |
| |
|
|
|
|
| |
4.2 |
* |
|
Form of Company’s Common Stock certificate |
| |
|
|
|
|
| |
31.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
31.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
32.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
32.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
| * |
|
Incorporated herein by reference to the exhibit of the same number in the Company’s
Registration Statement on Form S-1 (Commission File No. 333-132080). |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
| |
|
|
|
|
| |
Synchronoss Technologies, Inc.
|
|
| |
/s/ Stephen G. Waldis
|
|
| |
Stephen G. Waldis |
|
| |
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal executive officer) |
|
| |
|
|
| |
/s/ Lawrence R. Irving
|
|
| |
Lawrence R. Irving |
|
| |
Executive Vice President, Chief
Financial Officer and Treasurer |
|
November 4, 2010
28