The Indenture contains customary events of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of at least 25% of the principal amount of the Senior Notes may declare the entire amount of the Senior Notes, together with accrued and unpaid interest, if any, to be immediately due and payable. In the case of an event of default involving the Company’s bankruptcy, insolvency or reorganization, the principal of, and accrued and unpaid interest on, the principal amount of the Senior Notes, together with accrued and unpaid interest, if any, will automatically, and without any declaration or other action on the part of the Trustee or the holders of the Senior Notes, become due and payable.
On October 25, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) between the Company and B. Riley Securities, Inc. (the “Agent”), a related party, pursuant to which the Company may offer and sell, from time to time, up to $18.0 million of the Company’s 8.375% Senior Notes due 2026. Sales of the additional Senior Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). Under the Sales Agreement, the Agent will be entitled to compensation of 2.0% of the gross proceeds of all notes sold through it as the Company’s agent.
During the fourth quarter of 2021, the Company sold an additional $16.1 million aggregate principal amount of Senior Notes pursuant to the Sales Agreement. The additional Senior Notes sold have terms identical to the initial Senior Notes and are fungible and vote together with, the initial Senior Notes. The Senior Notes are listed and trade on The Nasdaq Global Market under the symbol “SNCRL.”
On June 28, 2024, Synchronoss repurchased 787,590 of its Senior Notes from BRPI, as described above.
The Company is in compliance with its debt covenants pertaining to the Senior Notes as of September 30, 2024.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Carrying Value of Debt
The carrying amounts of the Company’s borrowings were as follows:
September 30, 2024
December 31, 2023
8.375% Senior Notes due 2026:
Senior Notes
$
121,387
$
141,077
Unamortized discount and debt issuance cost1
(3,025)
(4,862)
Carrying value of Senior Notes
118,362
136,215
2024 Term Loan:
Term Loan
74,531
—
Unamortized debt issuance cost1
(6,491)
—
Carrying value of Term Loan
68,040
—
Total carrying value of debt
186,402
136,215
Current portion of long-term debt
1,875
—
Long-term debt, net of current portion
$
184,527
$
136,215
________________________________
1 Debt issuance costs are deferred and amortized into interest expense using the effective interest method.
Fair Value of Debt
The fair value of the Senior Notes was determined based on the closing trading price of the Senior Notes as of September 30, 2024 and is categorized accordingly as Level 2 in the fair value hierarchy. The fair value of the Term Loan was obtained using the Discounted Cash Flow valuation model (DCF) with observable inputs as of September 30, 2024 and is categorized accordingly as Level 2 in the fair value hierarchy.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 11. Capital Structure
Reverse Stock Split
On December 4, 2023, the Company’s stockholders approved proposals at a special meeting of stockholders (the “Special Meeting”) amending the Company’s Restated Certificate of Incorporation (as amended, the “Certificate of Incorporation”), to effect a reverse stock split of the Company’s common stock, $0.0001 par value (“Common Stock”), at a ratio in the range of 1-to-5 to 1-to-20, and an associated reduction in the number of shares of Common Stock the Company is authorized to issue. On December 4, 2023, the Company’s Board of Directors (the “Board”) approved a final split ratio of 1-for-9 (the “Reverse Stock Split”) where each nine (9) shares of Common Stock issued and outstanding immediately prior to the Effective Time shall, automatically and without any action on the part of the respective holders thereof, be combined and converted into one (1) share of Common Stock.
Following such approvals, the Company filed an amendment to the Certificate of Incorporation (the “Certificate of Amendment”) to affect the Reverse Stock Split with the Secretary of State of the State of Delaware on December 8, 2023 as of 4:01 p.m. Eastern Time. The Certificate of Amendment states that the Company is authorized to issue two classes of stock to be designated common stock (“Common Stock”) and preferred stock (“Preferred Stock”). The number of shares of Common Stock authorized to be issued is sixteen million six hundred sixty-six thousand six hundred sixty-seven (16,666,667), par value $0.0001 per share, and the number of shares of Preferred Stock authorized to be issued is ten million (10,000,000), par value $0.0001 per share.
As of the opening of trading on December 11, 2023, the Company’s Common Stock began trading on a post-split basis under CUSIP number 87157B400. The Company’s Common Stock will continue to trade on the Nasdaq Capital Market under the symbol “SNCR”.
The Reverse Stock Split went in effect simultaneously for all shares of Common Stock issued and outstanding, and affected all holders of the Company’s Common Stock uniformly and did not affect any stockholder’s percentage ownership interests in the Company, except with respect to the treatment of fractional shares. The Company did not issue fractional shares for post-Reverse Stock Split shares in connection with the Reverse Stock Split. Stockholders who otherwise were entitled to receive a fractional share of Common Stock had such fractional share rounded up to the nearest whole share. The Company retroactively displayed the effect of the Reverse Stock Split change in the Consolidated Balance Sheets, and retroactively adjusted the computations of basic and diluted EPS for all periods presented on the Consolidated Statement of Operations.
As of September 30, 2024, the Company’s authorized capital stock was 26,666,667 shares of stock with a par value of $0.0001, of which 16,666,667 shares were designated as common stock and 10,000,000 shares were designated as preferred stock.
Common Stock
Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held. Dividends on common stock will be paid when, and if, declared by the Company’s Board of Directors. No dividends have ever been declared or paid by the Company.
Preferred Stock
The Company’s Board of Directors (the “Board”) is authorized to issue preferred shares and has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of preferred stock.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Investor Rights Agreement
On June 30, 2021, the Company, B. Riley Financial and BRPI entered into an Investor Rights Agreement (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, for so long as affiliates of B. Riley Financial beneficially own at least 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to nominate one Class II director (the “B. Riley Nominee”) to the Company’s board of directors (the “Board”), who shall be an employee of B. Riley Financial or its affiliates and is approved by the Board, such approval not to be unreasonably withheld. For so long as affiliates of B. Riley Financial beneficially own 5% or more but less than 10% of the outstanding shares of common stock (unless such equity threshold percentage is not met due to dilution from equity issuances), B. Riley Financial is entitled to certain board observer rights. As of September 30, 2024, B. Riley Financial owned or beneficially owned 6.8% of the Company’s outstanding common stock.
Series B Non-Convertible Preferred
On June 30, 2021, the Company closed a private placement of 75,000 shares of its Series B Perpetual Non-Convertible Preferred Stock, par value $0.0001 per share, with an initial liquidation preference of $1,000 per share (the “Series B Preferred”), for net proceeds of $72.5 million (the “Series B Transaction”). The sale of the Series B Preferred was pursuant to the Series B Preferred Stock Purchase Agreement, dated as of June 24, 2021 (the “Series B Purchase Agreement”), between the Company and BRPI. In connection with the closing of the Series B Transaction, the Company (i) filed a Certificate of Designation with the State of Delaware setting forth the rights, preferences, privileges, qualifications, restrictions and limitations on the Series B Preferred (the “Series B Certificate”) and (ii) entered into an Investor Rights Agreement with B. Riley Financial, Inc. (“B. Riley Financial”) and BRPI setting forth certain governance and registration rights of B. Riley Financial with respect to the Company.
Repurchase of Series B Preferred
On June 28, 2024 the Company repurchased all outstanding shares of the Series B Preferred stock, as discussed in Note 9. Debt of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q. On July 1, 2024 the Company filed a Certificate of Elimination to the Series B Certificate with the Secretary of State of the State of Delaware. As a result of the Series B Repurchase, no shares of the Series B Preferred remain outstanding and none are authorized for issuance as of September 30, 2024, and the authorized shares of Series B Preferred Stock were returned to the status of authorized but unissued shares of preferred stock of the Company, without designation as to series pursuant to the Certificate of Designations.
A summary of the Company’s Series B Perpetual Non-Convertible Preferred Stock balance at September 30, 2024 and changes during the nine months ended September 30, 2024, are presented below:
Series B Preferred Stock
Shares
Amount
Balance at December 31, 20231
61
$
58,802
Excise tax on fair value of Series B Preferred stock at repurchase
—
(576)
Repurchase of Series B Preferred stock
(61)
(58,226)
Balance at September 30, 2024
—
$
—
________________________________
1 Series B Preferred stock net principal balance of $58.8 million is presented as gross principal balance of $60.8 million net of $2.0 million unamortized issuance costs.
The Company paid Series B Perpetual Preferred stock dividends of $4.3 million in cash for the nine months ended September 30, 2024.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 12. Stock Plans
On December 8, 2023 the Company filed an amendment to the Certificate of Amendment to effect the Reverse Stock Split with the Secretary of State of the State of Delaware. The Certificate of Amendment states that the Company is authorized to issue 16,666,667 shares of Common Stock, par value $0.0001 per share, and 10,000,000 shares of Preferred Stock, par value $0.0001 per share.
As of September 30, 2024, the Company maintains two stock-based compensation plans, the 2015 Equity Incentive Plan (the “2015 Plan”) and the 2017 New Hire Equity Incentive Plan (“2017 Plan”).
At the annual meeting of stockholders the Company held on June 5, 2024, the Company’s stockholders approved the amendment and restatement of the Company’s 2015 Equity Incentive Plan to increase the maximum total number of shares of common stock issuable under the Plan by 1,053,000 shares.
As of September 30, 2024 the maximum number of shares of common stock authorized for issuance under the 2015 Plan and 2017 Plan was 5,741,576 shares and 229,635, respectively.
As of September 30, 2024, there were 1.1 million shares available for the grant or award under the Company’s 2015 Plan and 0.1 million shares available for the grant or award under the Company’s 2017 Plan.
The Company grants restricted stock awards (“RSA”) and stock options that are subject to service conditions. The Company accounts for these awards under equity accounting. RSA are measured at the closing stock price at the date of grant and the fair value of stock options is calculated by using the Black-Scholes option pricing model. The expense for such awards is recognized straight line over the requisite service period.
The Company’s performance-based cash unit (“PBCU”) awards granted to employees under the Long-Term Incentive (“LTI”) Plans have been accounted for as liability awards, due to the Company’s intent and ability to settle such awards in cash upon vesting. Performance-based cash units are measured at the closing stock price and at the fair value obtained using the Monte-Carlo simulation at the reporting period end date. The expense is recognized straight line over the requisite service period. The Company has reflected the short-term portion of PBCU liability in Accrued expenses, and the long-term portion in Other liabilities, non-current on the Consolidated Balance Sheets. As of December 31, 2023 the total liability for such awards was $0.4 million with the entire amount recorded as a short-term. As of September 30, 2024, the total liability for such awards was $2.9 million, of which $2.0 million was short-term and $0.9 million was long-term.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Stock-Based Compensation
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by operating expense categories, as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Cost of revenues
$
164
$
62
$
258
$
214
Research and development
832
320
1,415
1,176
Selling, general and administrative
2,025
656
3,703
2,499
Total stock-based compensation expense
$
3,021
$
1,038
$
5,376
$
3,889
The following table summarizes stock-based compensation expense related to all of the Company’s stock awards included by award type, as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Stock options
$
123
$
347
$
453
$
1,127
Restricted stock awards
761
791
1,950
2,411
Performance-based cash units
2,137
(100)
2,973
351
Total stock-based compensation before taxes
$
3,021
$
1,038
$
5,376
$
3,889
Tax benefit
$
463
$
220
$
987
$
836
Stock-based compensation expense related to stock options and restricted stock awards is recorded to APIC and reflected on the Statements of Stockholders’ Equity, net of adjustments. PBCU expense is recorded to PBCU liability under Accrued expenses and Other liabilities, non-current on the Consolidated Balance Sheets due to the Company accounting for these awards as liability awards.
The total unamortized stock-based compensation cost related to unvested equity awards as of September 30, 2024 was $5.0 million. The expense is expected to be recognized over a weighted-average period of approximately 2.0 years.
The total unamortized stock-based compensation cost related to unvested performance-based cash units as of September 30, 2024 was $5.9 million. The expense is expected to be recognized over a weighted-average period of approximately 1.7 years.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 13. Restructuring
The Company continues to identify workforce optimization opportunities to better align the Company’s resources with its key strategic priorities.
A summary of the Company’s restructuring accrual at September 30, 2024 and changes during the nine months ended September 30, 2024, are presented below:
Employee Termination Costs
Balance at December 31, 2023
$
2,388
Charges
267
Payments
(1,916)
Other adjustments
(7)
Balance at September 30, 2024
$
732
Note 14. Income Taxes
The Company recognized an income tax expense of approximately $0.6 million for the three months ended September 30, 2024 and immaterial amount for the three months ended September 30, 2023. The Company recognized an income tax expense of approximately $3.9 million and $0.9 million during the nine months ended September 30, 2024 and 2023, respectively. The effective tax rate was approximately 178.6% for the nine months ended September 30, 2024, which was higher than the U.S. federal statutory rate primarily due to the impact of permanent adjustments, most notably Global Intangible Low-Taxed Income, partially offset by foreign tax rate differential. The Company’s projection of U.S. current income tax expense for the period is driven by the impact of Global Intangible Low-Taxed Income and enacted Internal Revenue Code Section 174 rules that require the Company to capitalize and amortize qualifying research and development expenses and by operating income generated in certain foreign jurisdictions. The Company’s effective tax rate was approximately (4.3)% for the nine months ended September 30, 2023, which was lower than the U.S. federal statutory rate primarily due to pre-tax losses in jurisdictions where full valuation allowances have been recorded and certain jurisdictions projecting current income tax expense. The Company continues to consider all available evidence, including historical profitability and projections of future taxable income together with new evidence, both positive and negative, that could affect the view of the future realization of deferred tax assets. As a result of this analysis, the Company continues to maintain a valuation allowance against the net deferred tax assets of the U.S. and most foreign jurisdictions as the realization of these assets is not more likely than not, given the uncertainty of future earnings in these jurisdictions.
Unrecognized tax benefits associated with uncertain tax positions were $4.4 million at September 30, 2024. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. It is reasonably possible that the balance of unrecognized tax benefits will decrease by approximately $0.5 million over the next twelve months.
During 2021 the Internal Revenue Service commenced an audit of certain of the Company’s prior year U.S. federal income tax filings, including the 2013 through 2020 tax years. The audit is currently ongoing and while the receipt of the associated refunds would materially improve its financial position, the Company does not believe that the results of this audit will have a material adverse effect on its results of operations. The Company has not accrued for any potential interest income related to the expected tax refund as of September 30, 2024.
The Pillar Two Global Anti-Base Erosion rules issued by the Organization for Economic Co-operation and Development ("OECD"), a global policy forum, introduced a global minimum tax of 15% which would apply to multinational groups with consolidated financial statement revenue in excess of EUR 750 million. Nearly all OECD member jurisdictions have agreed in principle to adopt these provisions and numerous jurisdictions, including jurisdictions where the Company operates, have enacted these rules effective January 1, 2024. The Company is not currently subject to these rules but is continuing to evaluate the Pillar Two Framework and its potential impact on future periods.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 15. Earnings per Common Share (“EPS”)
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of the Company’s common stock for the year. The Company includes participating securities (Redeemable Convertible Preferred Stock - Participation with Dividends on Common Stock that contain preferred dividend) in the computation of EPS pursuant to the two-class method. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share from operations.
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Numerator - Basic:
Net loss from continuing operations
$
(5,715)
$
(2,687)
$
(1,734)
$
(20,494)
Net income (loss) attributable to redeemable non-controlling interests
14
(18)
14
10
Preferred stock dividend and gain on repurchase of preferred stock
—
(2,474)
(1,562)
(7,423)
Net loss attributable to Synchronoss from continuing operations
(5,701)
(5,179)
(3,282)
(27,907)
Net income (loss) from discontinued operations
—
8
—
(1,634)
Net loss attributable to Synchronoss
$
(5,701)
$
(5,171)
$
(3,282)
$
(29,541)
Numerator - Diluted:
Net loss attributable to Synchronoss from continuing operations
(5,701)
(5,179)
$
(3,282)
$
(27,907)
Net income (loss) from discontinued operations
—
8
—
(1,634)
Net loss attributable to Synchronoss
$
(5,701)
$
(5,171)
$
(3,282)
$
(29,541)
Denominator:
Weighted average common shares outstanding — basic
10,095
9,809
9,994
9,716
Weighted average common shares outstanding — diluted
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
Note 16. Commitments
Non-cancelable agreements
The Company has various non-cancelable arrangements such as services for hosting, support, and software that expire at various dates, with the latest expiration in 2027.
Aggregate annual future minimum payments under non-cancelable agreements as of September 30, 2024 for each year subsequent to December 31, 2023 and thereafter, are as follows:
Non-cancelable agreements
2024
$
5,010
2025
13,532
2026
1,715
2027
158
Total
$
20,415
Note 17. Legal Matters
In the ordinary course of business, the Company is regularly subject to various claims, suits, regulatory inquiries and investigations. The Company records a liability for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable, and the loss can be reasonably estimated. Management has also identified certain other legal matters where they believe an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that resolving claims against the Company, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the Company’s business, financial position, results of operations, or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. The Company also evaluates other contingent matters, including income and non-income tax contingencies, to assess the likelihood of an unfavorable outcome and estimated extent of potential loss. It is possible that an unfavorable outcome of one or more of these lawsuits or other contingencies could have a material impact on the liquidity, results of operations, or financial condition of the Company.
In the third quarter of 2017, the SEC and Department of Justice (the “DoJ”) initiated investigations in connection with certain financial transactions that the Company effected in 2015 and 2016 and its disclosure of and accounting for such transactions, which the Company restated in the third quarter of 2018 in its restated annual and quarterly financial statements for 2015 and 2016. On June 7, 2022 the SEC approved the Offer of Settlement and filed an Order Instituting Cease-And-Desist Proceedings pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-And-Desist Order (the “SEC Order”). Pursuant to the terms of the SEC Order, the Company consented to pay a civil penalty in the amount of $12.5 million in equal quarterly installments over two years and to cease and desist from committing or causing any violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and the associated rules thereunder. Failure to comply with the provisions of the SEC Order could result in further actions by one or both governmental agencies which could have a material adverse effect on the Company’s results of operations. The penalties have been paid in full as of March 31, 2024. Also on June 7, 2022, the SEC filed a civil action against two former members of the Company’s management team (the “defendants”), alleging misconduct arising out of certain of the restated transactions that took place in 2015 and 2016 investigated by the SEC as set forth above. During the three months ended June 30, 2024, the Court entered final judgments in both of these civil actions pursuant to which the defendants agreed to pay civil penalties totaling an aggregate of $145,000 and one defendant agreed to disgorge incentive compensation received during the period of the restated transactions in the amount of $430,741. The Company has indemnified the defendants in these actions for certain costs and expenses, including reasonable attorney’s fees, and as of September 30, 2024 the Company has accrued $2.1 million relating to these actions.
On or about July 12, 2023, the Company filed a complaint in the Superior Court of the State of Delaware against iQmetrix Global Ltd. (“iQmetrix") for breach of the asset purchase and transition services agreements by and between the Company and iQmetrix as a result of iQmetrix’s failure to pay amounts due under those agreements in excess of $1.2 million. On September
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
11, 2023, iQmetrix filed its “Answer Defenses and Counterclaims” against the Company, claiming the Company breached the asset purchase, transition services and software license agreements, committed fraud and breached the implied covenant of good faith and fair dealing entitling iQmetrix to an amount to be determined at trial. On October 10, 2023, the Company filed its “Answer to Defendant’s Counterclaims” denying all counts asserted by iQmetrix and asserting certain affirmative defenses thereto. The parties are currently engaged in discovery. The Company believes that the counterclaims are without merit, and the Company intends to defend all such counterclaims.
Due to the inherent uncertainty of litigation, the Company cannot predict the outcome of the litigation and can give no assurance that the asserted claims will not have a material adverse effect on its financial position, prospects, or results of operations.
Except as set forth above, the Company is not currently subject to any other legal proceedings that would be expected to have a material adverse effect on its operations; however, the Company may from time to time become a party to various legal proceedings arising in the ordinary course of its business.
Note 18. Additional Financial Information
Other Income (expense), net
The following table sets forth the components of Other Income (expense), net included in the Condensed Consolidated Statements of Operations:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Foreign exchange gains (losses)
$
(5,461)
$
4,455
$
(440)
$
1,234
Income from sale of intangible assets1
278
—
278
—
Loss on disposal of fixed assets
(73)
(25)
(73)
(25)
Other2
15
26
25
4
Total
$
(5,241)
$
4,456
$
(210)
$
1,213
________________________________
1 Represents gain on sale on the Company’s IP addresses and patents.
2 Represents an aggregate of individually immaterial transactions.
The non-cash impact of the foreign exchange gains and losses on intercompany payables and receivables is reflected as an adjustment to reconcile the Net income to cash within the Other, net line item in the operating activities, as reported in the Consolidated Statements of Cash Flows.
ITEM 2.MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OFOPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included in Item 1 “Financial Information” of this Form 10-Q.
The words “Synchronoss,” “we,” “our,” “ours,” “us,” and the “Company” refer to Synchronoss Technologies, Inc. and its consolidated subsidiaries. This quarterly report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management based on information currently available to our management. Use of words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “hopes,” “should,” “continues,” “seeks,” “likely” or similar expressions, indicate a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions, including, but not limited to, risks, uncertainties and assumptions relating to the duration and severity of the geopolitical tensions and its impact on our business and financial performance. Actual results may differ materially from the forward-looking statements we make. We caution investors not to place substantial reliance on the forward-looking statements included in this quarterly report. These statements speak only as of the date of this quarterly report, and we undertake no obligation to update or revise the statements in light of future developments. All numbers are expressed in thousands unless otherwise stated.
Overview
Synchronoss Technologies, Inc. (“Synchronoss” or the “Company”) is a leading provider of white label cloud software and services that enable our customers to keep subscribers, systems, networks and content in sync.
The Synchronoss Personal CloudTM solution is designed to create an engaging and trusted customer experience through ongoing content management and engagement. The Synchronoss Personal CloudTM platform is a secure and highly scalable, white label platform that allows our customers’ subscribers to backup and protect, engage with, and manage their personal content and gives our operator customers the ability to increase average revenue per user (“ARPU”) and reduce churn.
Our Synchronoss Personal CloudTM platform is specifically designed to support smartphones, tablets, desktops computers, and laptops.
Synchronoss’ Messaging platform (Owned and operated through October 31, 2023) had powered mobile messaging and mailboxes for hundreds of millions of telecommunication subscribers. Our Advanced Messaging platform had been a powerful, secure, intelligent, white label messaging platform that expanded capabilities for communications service provider and multi-service providers to offer P2P messaging via Rich Communications Services (“RCS”). Our Mobile Messaging Platform (“MMP”) provided a single standard ecosystem for onboarding and management to brands, advertisers and message wholesalers.
The Synchronoss NetworkX (Owned and operated through October 31, 2023) products had provided operators with the tools and software to design their physical network, streamlined their infrastructure purchases, and managed and optimized comprehensive network expenses for leading top tier carriers around the globe.
We market our solutions and services directly through our sales organizations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia-Pacific (“APAC”).
Revenues
We generate most of our revenues on a subscription basis, which is derived from contracts that extend up to 48 months from execution.
The future success of our business depends on the continued growth of Business-to-Business and Business-to-Business-to-Consumer driving customer transactions, and continued expansion of our platforms into the TMT market globally through cloud markets. As such, the volume of subscribers and our ability to expand our footprint in TMT and globally may result in revenue fluctuations on a quarterly basis.
Most of our revenues are recorded in U.S. dollars but as we continue to expand our footprint with international carriers, we are subject to currency translation that could affect our future net sales as reported in U.S. dollars.
The Company’s top five customers accounted for 97.9% and 97.4% of net revenues for the nine months ended September 30, 2024 and September 30, 2023, respectively. Contracts with these customers typically run for three to five years. Of these customers, both Verizon and AT&T accounted for more than 10% of our revenues in 2024 and 2023. The loss of Verizon or AT&T as a customer would have a material negative impact on our company. However, we believe that the costs incurred and subscriber disruption by Verizon or AT&T to replace Synchronoss’ solutions would be substantial.
Current Trends Affecting Our Results of Operations
Business from our Synchronoss Personal Cloud™ solution has been driven by the growth in mobile devices globally that are becoming content rich. As these devices replace other traditional devices like PCs, the ability to securely back up content from mobile devices, sync it with other devices and share it with family, friends and business associates have become an essential need and subscriber expectation. Such devices include smartphones, connected cars, personal health and wellness devices and connected home devices. The need for the content from these devices to be stored in a common cloud is also expected to drive our business in the longer term.
To support our growth, which we expect to be driven by the favorable industry trends, we plan to leverage modular components from our existing software platforms to build new products. We believe that these opportunities will continue to provide future benefits and position us for future revenue growth. We have focused our product development efforts on expanding the functionality, scalability and security of our products and solutions. We expect to sustain our research and development investments as we intend to continue on an aggressive path to develop new features and functionality, upgrade and extend our product offerings and develop new technology. Our purchase of capital assets and equipment may increase based on aggressive deployment, subscriber growth and promotional offers for free or bundled storage by our major Tier 1 carrier customers.
We continue to expand our platforms into the converging TMT market to enable connected devices to do more things across multiple networks, brands and communities. Our initiatives with our customers continue to grow both with regard to our current business as well as our new product offerings. We are also exploring additional opportunities to support our customer, product and geographic diversification strategies.
Discussion of the Condensed Consolidated Statements of Operations
Three months ended September 30, 2024 compared to the three months ended September 30, 2023
The following table presents an overview of our results of operations for the three months ended September 30, 2024 and 2023 (in thousands):
Three Months Ended September 30,
$ Change
2024
2023
2024 vs 2023
Net revenues
$
42,964
$
39,790
$
3,174
Cost of revenues1
8,975
9,478
(503)
Research and development
10,333
9,304
1,029
Selling, general and administrative
13,755
20,285
(6,530)
Restructuring charges
—
28
(28)
Depreciation and amortization
4,386
4,482
(96)
Total costs and expenses
37,449
43,577
(6,128)
Income (loss) from operations
5,515
(3,787)
9,302
Interest income
165
149
16
Interest expense
(5,526)
(3,482)
(2,044)
Other (expense) income, net
(5,241)
4,456
(9,697)
(Loss) income from continuing operations, before taxes
$
(5,087)
$
(2,664)
$
(2,423)
Provision for income taxes
$
(628)
$
(23)
$
(605)
________________________________
1 Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues increased $3.2 million to $43.0 million for the three months ended September 30, 2024, compared to the same period in 2023. The overall increase in revenue was primarily due to continued cloud subscriber growth, partially offset by $0.9 million higher professional services revenue in the prior year associated with the implementation and launch of SoftBank.
Cost of revenues decreased $0.5 million to $9.0 million for the three months ended September 30, 2024, compared to the same period in 2023. The 2024 decrease was primarily attributable to the reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023, partially offset by higher performance-based compensation expense in the current period due to expected full-year metric attainment compared to the prior period performance.
Research and development expense increased $1.0 million to $10.3 million for the three months ended September 30, 2024, compared to the same period in 2023. The increase was primarily attributable to higher performance-based compensation expense in the current period due to expected full-year metric attainment compared to the prior period performance, partially offset by reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023.
Selling, general and administrative expense decreased $6.5 million to $13.8 million for the three months ended September 30, 2024, compared to the same period in 2023. The 2024 decrease was mainly related to reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023, $2.1 million higher non-recurring professional fees incurred in the prior period and $4.8 million impairment of the Note Receivable recorded in the third quarter of 2023. This was partially offset by a higher performance-based compensation expense in the current period due to expected full-year metric attainment compared to the prior period performance.
Restructuring charges were immaterial for the three months ended September 30, 2024 and immaterial for the three months ended September 30, 2023. Restructuring charges were primarily related to employment termination costs as a result of the work-force reductions initiated to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization expense decreased immaterially for the three months ended September 30, 2024, compared to the same period in 2023.
Interest expense increased $2.0 million for the three months ended September 30, 2024, compared to the same period in 2023. The increase is mainly due to $2.1 million interest expense related to the new Term Loan the Company obtained at the end of the second quarter of 2024, which was used to retire the Series B Preferred stock, improving the Company’s overall capital structure.
Other income (expense), net decreased $9.7 million to expense of $5.2 million for the three months ended September 30, 2024 from income of $4.5 million during the same period in 2023 primarily due to the impact of foreign exchange losses on intercompany payables and receivables.
Income tax. The Company recognized an income tax expense of approximately $0.6 million for the three months ended September 30, 2024 and immaterial amount for the three months ended September 30, 2023. The effective tax rate was approximately (12.3)% for the three months ended September 30, 2024, which was lower than the U.S. federal statutory rate primarily due to the impact of permanent adjustments including Global Intangible Low-Taxes Income and adjustments to valuation allowances associated with current year activity, partially offset by foreign tax rate differential. The Company’s projection of U.S. current income tax expense for the period is driven by the impact of Global Intangible Low-Taxed Income and enacted Internal Revenue Code Section 174 rules that require the Company to capitalize and amortize qualifying research and development expenses and by operating income generated in certain foreign jurisdictions. The Company’s effective tax rate was approximately (0.9)% for the three months ended September 30, 2023, which was lower than the U.S. federal statutory rate due to pre-tax losses in jurisdictions where full valuation allowances have been recorded and certain jurisdictions projecting current income tax expense.
Discussion of the Condensed Consolidated Statements of Operations
Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023
The following table presents an overview of our results of operations for the nine months ended September 30, 2024 and 2023 (in thousands):
Nine Months Ended September 30,
$ Change
2024
2023
2024 vs 2023
Net revenues
$
129,387
$
122,794
$
6,593
Cost of revenues1
29,599
31,926
(2,327)
Research and development
32,560
35,322
(2,762)
Selling, general and administrative
39,800
53,507
(13,707)
Restructuring charges
267
391
(124)
Depreciation and amortization
12,773
12,478
295
Total costs and expenses
114,999
133,624
(18,625)
Income (loss) from operations
14,388
(10,830)
25,218
Interest income
556
370
186
Interest expense
(12,529)
(10,397)
(2,132)
Other (expense) income, net
(210)
1,213
(1,423)
(Loss) income from continuing operations, before taxes
$
2,205
$
(19,644)
$
21,849
Provision for income taxes
$
(3,939)
$
(850)
$
(3,089)
________________________________
1 Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues increased $6.6 million to $129.4 million for the nine months ended September 30, 2024, compared to the same period in 2023. The overall increase in revenue was primarily due to continued cloud subscriber growth, partially offset by $2.0 million higher professional services revenue in the prior year associated with the implementation and launch of SoftBank.
Cost of revenues decreased $2.3 million to $29.6 million for the nine months ended September 30, 2024, compared to the same period in 2023. The 2024 decrease was primarily attributable to reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023; partially offset by a higher performance-based compensation expense in the current period due to expected full-year metric attainment compared to the prior period performance.
Research and development expense decreased $2.8 million to $32.6 million for the nine months ended September 30, 2024, compared to the same period in 2023. The decrease was primarily attributable to reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023; partially offset by a higher performance-based compensation expense in the current period due to expected full-year metric attainment compared to the prior period performance.
Selling, general and administrative expense decreased $13.7 million to $39.8 million for the nine months ended September 30, 2024, compared to the same period in 2023. The decrease was primarily attributable to reduced baseline employee costs due to restructuring measures taken in the fourth quarter of 2023, $5.8 million higher non-recurring professional fees incurred in the prior period, and the $4.8 million note receivable impairment recorded in the third quarter of 2023. This was partially offset by a higher performance-based compensation expense in the current period due to the expected full-year metric attainment compared to the prior period performance.
Restructuring charges were $0.3 million and $0.4 million for the nine months ended September 30, 2024 and 2023, respectively, which primarily related to employment termination costs as a result of the work-force reductions initiated to reduce operating costs and align our resources with our key strategic priorities.
Depreciation and amortization expense increased $0.3 million to $12.8 million for the nine months ended September 30, 2024, compared to the same period in 2023. The 2024 increase was primarily attributable to increased amortization of capitalized software due to more amortizable assets placed in service in the current period.
Interest expense increased $2.1 million for the nine months ended September 30, 2024, compared to the same period in 2023. The increase is mainly due to $2.2 million interest expense related to the new Term Loan the Company obtained at the end of the second quarter of 2024, which was used to retire the Series B Preferred stock, improving the Company’s overall capital structure.
Other income (expense), net decreased $1.4 million to expense of $0.2 million for the nine months ended September 30, 2024 from income of $1.2 million during the same period in 2023. The 2024 decrease is primarily due to the impact of foreign exchange gains on intercompany payables and receivables.
Income tax. The Company recognized an income tax expense of approximately $3.9 million and $0.9 million during the nine months ended September 30, 2024 and 2023, respectively. The effective tax rate was approximately 178.6% for the nine months ended September 30, 2024, which was higher than the U.S. federal statutory rate primarily due to the impact of permanent adjustments, most notably Global Intangible Low-Taxed Income, partially offset by foreign tax rate differential. The Company’s projection of U.S. current income tax expense for the period is driven by the impact of Global Intangible Low-Taxed Income and enacted Internal Revenue Code Section 174 rules that require the Company to capitalize and amortize qualifying research and development expenses and by operating income generated in certain foreign jurisdictions. The Company’s effective tax rate was approximately (4.3)% for the nine months ended September 30, 2023, which was lower than the U.S. federal statutory rate due to pre-tax losses in jurisdictions where full valuation allowances have been recorded and certain jurisdictions projecting current income tax expense.
Liquidity and Capital Resources
On June 28, 2024, the Company entered into the Credit Agreement with BGC Lender Rep LLC, as administrative agent, and the lenders party thereto. The Credit Agreement established a senior secured term loan facility of up to $75.0 million, all of which was funded on the Effective Date. The proceeds of the Term Loan were used to (i) fund the Senior Note Repurchase, (ii)
to fund the Series B Repurchase and (iii) to pay transaction fees and expenses associated with the closing of the transactions contemplated by the Credit Agreement, as discussed in Note 9. Debt of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
As of September 30, 2024, our principal sources of liquidity were cash provided by operations. Our cash and cash equivalents balance was $25.2 million at September 30, 2024. We anticipate that our principal uses of cash and cash equivalents will be sufficient to fund our business, including technology expansion and working capital.
At September 30, 2024, our non-U.S. subsidiaries held approximately $13.9 million of cash and cash equivalents that are available for use by our operations around the world.
Our policy has been to leave our cumulative unremitted foreign earnings invested indefinitely outside the United States, and we intend to continue this policy for most of our foreign subsidiaries. During 2023, we changed our indefinite reinvestment assertion for our Indian subsidiary and recorded a deferred tax liability associated with the outside basis difference. The Company continues to assert permanent reinvestment of foreign earnings in all other foreign jurisdictions. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts.
We believe that our cash, cash equivalents, financing sources, and our ability to manage working capital and expected positive cash flows generated from operations in combination with continued expense reductions will be sufficient to fund our operations for the next twelve months from the filing date of this Form 10-Q based on our current business plans. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the "Forward-Looking Statements" section of this MD&A and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, some of which are outside of our control.
For further details, see Note 9. Debt and Note 11. Capital Structure of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Discussion of Cash Flows
A summary of net cash flows follows (in thousands):
Nine Months Ended September 30,
2024
2023
Net cash provided by (used in):
Operating activities
$
15,205
$
19,236
Investing activities
(9,109)
(15,889)
Financing activities
$
(5,384)
$
(7,496)
Our primary source of cash is receipts from revenue. The primary uses of cash are personnel and related costs, telecommunications and facility costs related primarily to our cost of revenue and general operating expenses including professional service fees, consulting fees, building and equipment maintenance and marketing expense.
Cash provided by operating activities for the nine months ended September 30, 2024 was $15.2 million as compared to $19.2 million of cash provided by operating activities for the same period in 2023. In the current period, the Company generated cash from operations mainly driven by continued growth in cloud subscribers and reduced operating costs, offset by unfavorable movements in working capital compared to the third quarter of 2023.
Cash used in investingactivities for the nine months ended September 30, 2024 was $9.1 million as compared to $15.9 million of cash used in investing activities during the same period in 2023. The cash used in investing activities during current and prior year primarily funded product development for our Cloud offering and associated labor costs, while last year's expenditures also included investments in Messaging and NetworkX products which were divested in the fourth quarter of
2023. In 2024, cash used in investing activities was offset by $1.5 million of deferred consideration for the sale of Messaging and NetworkX Businesses received by the company in the third quarter of 2024.
Cash used in financing activities for the nine months ended September 30, 2024 was $5.4 million as compared to $7.5 million of cash used in financing activities during the same period in 2023. The cash used in financing activities in the current year was primarily related to the $75.0 million funding of the Term Loan, offset by $6.8 million issuance costs related to the 2024 Term Loan, $57.6 million Series B Preferred Stock Repurchase, $11.5 million Senior Notes Repurchase and $4.3 million Series B Preferred dividend payments. Cash used in financing activities in the prior year was primarily related to $7.2 million Series B Preferred dividend payments.
Effect of Inflation
Inflationary increases in certain input costs, such as occupancy, labor and benefits, and general administrative costs, have impacted our business. Management does not believe these impacts have had a material impact on our results of operations during the nine months ended September 30, 2024 and 2023. We cannot assure you, however, that we will not be affected by general inflation in the future.
Contractual Obligations
Our contractual obligations consist of office and laptop leases, term loan, notes payable and related interest as well as contractual commitments under third-party hosting, software licenses and maintenance agreements. The following table summarizes our long‑term contractual obligations as of September 30, 2024 (in thousands):
Payments Due by Period
Total
2024
2025-2027
2028
Finance lease obligations
$
1,017
$
168
$
849
$
—
Interest
46,412
4,528
37,320
4,564
Operating lease obligations
27,655
1,901
21,476
4,278
Purchase obligations1
20,415
5,010
15,405
—
Senior Notes Payable
121,387
—
121,387
—
Term Loan
74,531
469
14,062
60,000
Total
$
291,417
$
12,076
$
210,499
$
68,842
_______________________________
1 Amount represents obligations associated with colocation agreements and other customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax benefits associated with uncertain tax positions were $4.4 million at September 30, 2024. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. It is reasonably possible that the balance of unrecognized tax benefits will decrease by approximately $0.5 million over the next twelve months.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements in accordance with U.S. GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during a fiscal period. The SEC considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application.
These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable, including but not limited to the potential impacts from current geopolitical tensions. As the extent and duration of the impacts from geopolitical developments remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See Part II, “Item 1A. Risk Factors” in this Form 10-Q for certain matters bearing risks on our future results of operations.
During the nine months ended September 30, 2024, there were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K for the year ended December 31, 2023. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023 for a more complete discussion of our critical accounting policies and estimates.
Recently Issued Accounting Standards
For a discussion of recently issued accounting standards see Note 2. Basis of Presentation and Consolidation of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2024 and December 31, 2023 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The following discussion about market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We deposit our excess cash in what we believe are high-quality financial instruments, primarily money market funds and certificates of deposit and, we may be exposed to market risks related to changes in interest rates. These investments are denominated in United States dollars.
The primary objective of our investment activities is to preserve our capital for the purpose of funding operations, while at the same time maximizing the income, we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short- and long-term investments in a variety of securities, which could include commercial paper, money market funds and corporate and government debt securities. Our cash and cash equivalents at September 30, 2024 and December 31, 2023 were invested in liquid money market accounts and certificates of deposit. All market-risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Exchange Risk
We are exposed to translation risk because certain of our foreign operations utilize the local currency as their functional currency and those financial results must be translated into U.S. dollars. As currency exchange rates fluctuate, translation of the financial statements of foreign businesses into U.S. dollars affects the comparability of financial results between years.
We do not hold any derivative instruments and do not engage in any hedging activities. Although our reporting currency is the U.S. dollar, we may conduct business and incur costs in the local currencies of other countries in which we may operate, make sales and buy materials and services. As a result, we are subject to foreign currency transaction risk. Further, changes in exchange rates between foreign currencies and the U.S. dollar could affect our future net sales, cost of sales and expenses and could result in foreign currency transaction gains or losses.
We cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on our business, results of operations and financial condition. To the extent that our international activities recorded in local currencies increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase and hedging activities may be considered if appropriate.
Interest Rate Risk
We are exposed to the risk of interest rate fluctuations on the interest income earned on our cash and cash equivalents. A hypothetical 100 basis point movement in interest rates applicable to our cash and cash equivalents outstanding at September 30, 2024 would increase interest income by approximately $0.3 million on an annual basis.
Borrowings pursuant to the Credit Agreement bear interest at a rate per annum equal to the Adjusted Term SOFR (as defined in the Credit Agreement) for the applicable interest period, plus 5.50%, subject to a floor of 2.50%, plus Term SOFR adjustment of 0.1%. As such, our net income is sensitive to movements in interest rates. If interest rates increase, our debt obligations pursuant to the Credit Agreement would increase even though the amount borrowed remained the same, and our net income would decrease. Such increases in interest rates could have a material adverse effect on our cash flow and financial condition. We do not hold any derivative instruments and do not engage in any hedging activities to mitigate interest rate risk.
Based on our outstanding borrowings pursuant to the Credit Agreement as of September 30, 2024 a hypothetical 100 basis point movement in interest rates would have affected interest expense on the debt by $0.8 million on an annual basis.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this quarterly report, that ensure that information relating to the registrant which is required to be disclosed in this report is recorded, processed, summarized and reported within required time periods using the criteria for effective internal control established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the registrant’s disclosure controls and procedures were effective as of September 30, 2024.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
For a discussion of our material pending legal proceedings that could impact our results of operations, financial condition or cash flows see Note 17. Legal Matters of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
ITEM 1A. RISK FACTORS
Other than set forth below, there have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. included in our Annual Report on Form 10-K for the year ended December 31, 2023.
We may not be able to generate sufficient cash flows to meet our Senior Notes obligations and may be forced to take other actions to satisfy our Senior Notes obligations, which may not be successful.
Our operations may not generate sufficient cash to enable us to service our Senior Notes, which mature on June 30, 2026. If we fail to generate sufficient cash flows to redeem or repay in full our Senior Notes prior to June 30, 2026, we may have to raise additional funds to pay such amounts on a timely basis. We cannot guarantee that any refinancing of the Senior Notes will be possible on a timely basis, on terms we find acceptable, or at all.
We may fail to refinance, redeem or repay in full our Senior Notes prior to March 31, 2026, and in that event the maturity date of our Term Loan will be March 31, 2026.
We entered into the Credit Agreement with BGC Lender Rep LLC, as administrative agent (“BGC”), and the lenders party thereto on June 28, 2024 (the “Credit Agreement”). The Credit Agreement established a senior secured term loan facility of up to $75.0 million (the “Term Loan”), all of which was funded on June 28, 2024. The Term Loan matures on June 28, 2028 (the “Maturity Date”); provided that if (i) the Senior Notes are not refinanced, redeemed or repaid in full prior to March 31, 2026, the Maturity Date shall be March 31, 2026 and (ii) in the event of a refinancing, redemption or repayment of the Senior Notes in full prior to March 31, 2026, the Maturity Date shall be the earlier of (A) June 28, 2028 and (B) the date that is twelve (12) months prior to the final stated maturity date for the indebtedness resulting from such refinancing, redemption or repayment of the Senior Notes in full.
If we fail to refinance, redeem or repay in full our Senior Notes prior to March 31, 2026, then the Maturity Date will be March 31, 2026, and we will be required to pay all amounts outstanding under the Term Loan sooner than they would otherwise be due, we may not have sufficient funds available to pay such amounts at that time, and we may not be able to raise additional funds to pay such amounts on a timely basis, on terms we find acceptable, or at all.
The terms of our Credit Agreement restrict our operating and financial flexibility, and any breach of the covenants in that agreement, if the lenders elected to accelerate the due date of the loan, could significantly harm our business and prospects and lead to the liquidation of our business.
The Credit Agreement contains certain operating covenants and restricts our operating and financial flexibility. Our obligations under the Credit Agreement are secured by substantially all of our assets (other than existing real property). The Credit Agreement contains customary covenants that limit our ability and our restricted subsidiaries to, among other things, (i) incur additional indebtedness, (ii) pay dividends or make certain other restricted payments, (iii) sell assets, (iv) make certain investments, (v) grant liens and (vi) enter into transactions with affiliates. These covenants are subject to exceptions and qualifications set forth in the Credit Agreement. The financial covenants set forth in the Credit Agreement include (i) a maximum consolidated secured leverage ratio, which will be tested at the end of each of Synchronoss’ fiscal quarter and (ii) an average liquidity requirement for any calendar month. We are currently in compliance with the Credit Agreement covenants, but we may fall out of compliance with these covenants. We may also enter into other debt agreements in the future which may contain similar or more restrictive terms.