e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
or
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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)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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06-1594540
(I.R.S. Employer
Identification No.) |
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750 Route 202 South, Suite 600
Bridgewater, New Jersey
(Address of principal executive offices)
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08807
(Zip Code) |
(866) 620-3940
(Registrants 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 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 o Non-accelerated filer þ
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 Registrants common stock:
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Class
Common stock, $0.0001 par value
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Outstanding at April 30, 2007
32,319,394 shares |
SYNCHRONOSS TECHNOLOGIES, INC.
FORM 10-Q INDEX
1
SYNCHRONOSS TECHNOLOGIES, INC.
BALANCE SHEETS
(In thousands, except per share data)
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March 31, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
73,898 |
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$ |
73,905 |
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Marketable securities |
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3,031 |
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3,780 |
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Accounts receivable, net of allowance for doubtful accounts of $176 and
$171 at March 31, 2007 and December 31, 2006, respectively |
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19,869 |
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16,917 |
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Prepaid expenses and other assets |
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1,917 |
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1,653 |
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Deferred tax assets |
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325 |
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312 |
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Total current assets |
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99,040 |
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96,567 |
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Marketable securities |
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1,222 |
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1,267 |
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Property and equipment, net |
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8,591 |
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5,262 |
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Deferred tax assets |
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1,643 |
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1,643 |
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Other assets |
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159 |
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186 |
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Total assets |
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$ |
110,655 |
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$ |
104,925 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
3,753 |
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$ |
728 |
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Accrued expenses |
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5,729 |
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7,807 |
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Short-term portion of equipment loan payable |
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500 |
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666 |
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Deferred revenues |
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763 |
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451 |
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Total current liabilities |
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10,745 |
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9,652 |
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Stockholders equity: |
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Common stock, $0.0001 par value; 100,000 shares authorized, 32,409 and
32,250 shares issued; 32,313 and 32,154 outstanding at March 31, 2007 and
December 31, 2006, respectively |
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3 |
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3 |
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Treasury stock, at cost (96 shares at March 31, 2007 and December 31, 2006) |
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(19 |
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(19 |
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Additional paid-in capital |
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91,780 |
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90,844 |
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Accumulated other comprehensive income (loss) |
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1 |
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(6 |
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Retained earnings |
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8,145 |
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4,451 |
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Total stockholders equity |
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99,910 |
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95,273 |
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Total liabilities and stockholders equity |
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$ |
110,655 |
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$ |
104,925 |
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See accompanying notes.
2
SYNCHRONOSS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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Net revenues |
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$ |
21,329 |
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$ |
15,724 |
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Costs and expenses: |
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Cost of services ($0 and $2,136 were
purchased from a related party during
the three months ended March 31, 2007
and 2006, respectively)* |
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9,642 |
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8,763 |
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Research and development |
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1,932 |
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1,685 |
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Selling, general and administrative |
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3,240 |
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2,010 |
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Depreciation and amortization |
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1,087 |
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719 |
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Total costs and expenses |
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15,901 |
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13,177 |
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Income from operations |
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5,428 |
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2,547 |
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Interest and other income |
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944 |
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100 |
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Interest expense |
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(15 |
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(29 |
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Income before income tax expense |
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6,357 |
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2,618 |
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Income tax expense |
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(2,663 |
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(1,089 |
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Net income |
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$ |
3,694 |
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$ |
1,529 |
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Net income per common share:
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Basic |
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$ |
0.12 |
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$ |
0.07 |
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Diluted |
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$ |
0.11 |
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$ |
0.06 |
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Weighted-average common shares outstanding: |
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Basic |
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32,112 |
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22,053 |
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Diluted |
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32,989 |
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24,956 |
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* |
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Cost of services excludes depreciation and amortization which is shown separately. |
See accompanying notes.
3
SYNCHRONOSS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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Operating activities: |
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Net income |
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$ |
3,694 |
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$ |
1,529 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization expense |
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1,087 |
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719 |
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Deferred income taxes |
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(13 |
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743 |
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Stock-based compensation |
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563 |
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78 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net of allowance for doubtful accounts |
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(2,952 |
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(2,146 |
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Prepaid expenses and other current assets |
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(264 |
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(26 |
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Other assets |
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27 |
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(531 |
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Accounts payable |
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3,025 |
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1,052 |
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Accrued expenses |
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(2,078 |
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(2,700 |
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Due to a related party |
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151 |
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Deferred revenues |
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312 |
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111 |
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Net cash provided by (used in) operating activities |
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3,401 |
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(1,020 |
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Investing activities: |
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Purchases of fixed assets |
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(4,416 |
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(1,429 |
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Purchases of marketable securities available for sale |
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(787 |
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(820 |
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Sale of marketable securities available for sale |
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1,588 |
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909 |
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Net cash used in investing activities |
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(3,615 |
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(1,340 |
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Financing activities: |
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Proceeds from the exercise of stock options |
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373 |
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1,033 |
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Repayments of equipment loan |
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(166 |
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(166 |
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Net cash provided by financing activities |
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207 |
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867 |
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Net decrease in cash and cash equivalents |
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(7 |
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(1,493 |
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Cash and cash equivalents at beginning of year |
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73,905 |
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8,786 |
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Cash and cash equivalents at end of period |
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$ |
73,898 |
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$ |
7,293 |
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See accompanying notes.
4
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS UNAUDITED
(in thousands, except per share data unless otherwise noted)
The financial statements at March 31, 2007 and for the three months ended March 31, 2007 and 2006
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.
Accordingly, they do not include all of the information and footnotes required by U.S. generally
accepted accounting principles (U.S. GAAP) for complete financial statements and should be read
in conjunction with the financial statements and notes in our Annual Report incorporated by
reference in Form 10-K for calendar year 2006. The results reported in these 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, 2006 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by U.S. GAAP for
complete financial statements.
1. Description of Business
Synchronoss Technologies, Inc. (the Company or Synchronoss) is a leading provider of
on-demand multi-channel transaction management solutions to the communications services marketplace
based on its penetration into key providers of communications services. The Company conducts its
business operations primarily in the United States of America, with some aspects of its operations
being outsourced to entities located in India and Canada. The Companys proprietary on-demand
platform enables communications service providers (CSPs) to take, manage and provision orders and
other customer-oriented transactions and perform related critical service tasks. The Company
targets complex and high-growth markets including wireless, high speed access (i.e., cable, DSL,
and Wi-Max), Voice over Internet Protocol (VoIP), video and also target CSPs bundling of these
services (e.g., double, triple, and quadruple plays) and their intersection (i.e., video over
wireless, IPTV, content activation). By simplifying technological complexities through the
automation and integration of disparate systems, the Companys platform automates, synchronizes and
simplifies electronic order management, activation, and provisioning of these services.
On June 20, 2006, the Company completed its initial public offering (IPO) pursuant to which
it sold 6,532 shares of common stock at a price to the public of $8.00 per share. Upon completion
of the IPO, all 13,549 outstanding shares of the Companys Series A and Series 1 convertible
preferred stock automatically converted into common stock on a one-for-one basis. On July 3, 2006,
the Companys IPO underwriters exercised their option to purchase an additional 960 shares of
common stock at the IPO price of $8.00 per share before underwriting discounts and commissions.
2. Basis of Presentation and Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Revenue Recognition and Deferred Revenue
The Company provides services principally on a transaction fee basis or, at times, on a fixed
fee basis and recognizes the revenues as the services are performed or delivered as described
below:
Transaction Service Arrangements: Transaction revenues consist of revenues derived from the
processing of transactions through the Companys service platform and represent approximately 81%
and 87% net revenues during the three months ended March 31, 2007 and 2006, respectively.
Transaction service arrangements include services such as equipment orders, new account set-up,
number port requests, credit checks and inventory management.
Transaction revenues are principally based on a contractual price per transaction and are
recognized based on the number of transactions processed during each reporting period. Revenues are
recorded based on the total number of transactions processed at the applicable price established in
the relevant contract. The total amount of revenues recognized is based primarily on the volume of
transactions. Many of our contracts guarantee minimum volume transactions from the customer. In
these instances, if the customers
5
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
total transaction volume for the period is less than the contractual amount, we record
revenues at the minimum guaranteed amount. Set-up fees for transactional service arrangements are
deferred and recognized on a straight-line basis over the life of the contract since these amounts
would not have been paid by the customer without the related transactional service arrangement. The
amount of set-up fees amortized in revenues during the three months ended March 31, 2007 and 2006
was $221 and $69, respectively. Revenues are presented net of a provision for discounts, which are
volume level driven, or credits, which are performance driven, and are determined in the period in
which the volume thresholds are met or the services are provided. Deferred revenues represent
billings to customers for services in advance of the performance of services, with revenues
recognized as the services are rendered.
Professional Service Arrangements: Professional services represented approximately 18% and 11%
of net revenues for the three months ended March 31, 2007 and 2006, respectively. Professional
services include process and workflow consulting services and development services. Professional
services, when sold with transactional service arrangements, are accounted for separately when the
professional services have value to the customer on a standalone basis and there is objective and
reliable evidence of fair value of the professional services. When accounted for separately,
professional service revenues are recognized on a monthly basis, as services are performed and all
other elements of revenue recognition have been satisfied.
In addition, in determining whether professional service revenues can be accounted for
separately from transaction service revenues, the Company considers the following factors for each
professional services agreement: availability of the consulting services from other vendors,
whether objective and reliable evidence of fair value exists for these services and the undelivered
transaction revenues, the nature of the consulting services, the timing of when the consulting
contract was signed in comparison to the transaction service start date and the contractual
dependence of the transactional service on the customers satisfaction with the consulting work.
If a professional service arrangement does not qualify for separate accounting, the Company
would recognize the professional service revenues ratably over the remaining term of the
transaction contract. For the three months ended March 31, 2007 and 2006, all professional services
have been accounted for separately.
Subscription Service Arrangements: Subscription service arrangements which are generally based
upon fixed fees represent approximately 1% and 2% of net revenues for the three months ended March
31, 2007 and 2006, respectively, and relate principally to the Companys enterprise portal
management services. The Company records revenues on a straight-line basis over the life of the
contract for its subscription service contracts.
Concentration of Credit Risk
The Companys financial instruments that are exposed to concentration of credit risk consist
primarily of cash and cash equivalents, marketable securities and accounts receivable. The Company
maintains its cash and cash equivalents in bank accounts, which, at times, exceed federally insured
limits. The Company invests in high-quality financial instruments, primarily money market funds,
certificates of deposits and United States bonds. The Company has not recognized any losses in such
accounts. The Company believes it is not exposed to significant credit risk on cash, cash
equivalents and marketable securities. Concentration of credit risk with respect to accounts
receivable is limited because of the creditworthiness of the Companys major customers.
Our top five customers accounted for 93% and 88% of net revenues for the three months ended
March 31, 2007 and 2006, respectively. Our top five customers accounted for 93% and 88% of
accounts receivable at March 31, 2007 and December 31, 2006, respectively. We are the primary
provider of e-commerce transaction management solutions to AT&T Mobility LLC (formerly
Cingular Wireless) our largest customer, under an agreement which runs through January of
2008, but which will be automatically renewed for an additional twelve months unless either party
terminates prior to November 1, 2007. Under the terms of this agreement, AT&T Mobility LLC may
terminate its relationship with us for convenience, although we believe AT&T Mobility LLC would
encounter substantial costs in replacing our transaction management solution.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of
Financial Instruments, requires disclosures of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
6
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
practicable to estimate that value. Due to their short-term nature, the carrying amounts
reported in the financial statements approximate the fair value for cash and cash equivalents,
accounts receivable and accounts payable. The Company believes the carrying amount of its equipment
loan approximates its fair value as of March 31, 2007 and 2006, since the interest rate of the
equipment loan approximates a market rate.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months
or less at the date of acquisition to be cash equivalents.
Marketable Securities
Marketable securities consist of fixed income investments with a maturity of greater than
three months and other highly liquid investments that can be readily purchased or sold using
established markets. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, these investments are classified as available-for-sale and are reported at
fair value on the Companys balance sheet. The Company classifies its securities with maturity
dates of 12 months or more as long term. Unrealized holding gains and losses are reported within
accumulated other comprehensive loss as a separate component of stockholders equity. If a decline
in the fair value of a marketable security below the Companys cost basis is determined to be other
than temporary, such marketable security is written down to its estimated fair value as a new cost
basis and the amount of the write-down is included in earnings as an impairment charge. No other
than temporary impairment charges have been recorded in any of the periods presented herein.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due to the Company from normal business activities. The
Company maintains an allowance for estimated losses resulting from the inability of its customers
to make required payments. The Company estimates uncollectible amounts based upon historical bad
debts, current customer receivable balances, the age of customer receivable balances, the
customers financial condition and current economic trends.
Property and Equipment
Property and equipment and leasehold improvements are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, which range from 3 to 5 years, or the lesser
of the related initial term of the lease or useful life for leasehold improvements.
Expenditures for routine maintenance and repairs are charged against cost of services. Major
replacements, improvements and additions are capitalized.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, a review of long-lived assets for impairment is performed when events or changes in
circumstances indicate that the carrying value of such assets may not be recoverable. If an
indication of impairment is present, the Company compares the estimated undiscounted future cash
flows to be generated by the asset to the assets carrying amount. If the undiscounted future cash
flows are less than the carrying amount of the asset, the Company records an impairment loss equal
to the amount by which the assets carrying amount exceeds its fair value. The fair value is
determined based on valuation techniques such as a comparison to fair values of similar assets or
using a discounted cash flow analysis. There were no impairment charges recognized during the three
months ended March 31, 2007 and 2006.
7
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
Cost of Services
Cost of services includes direct labor and those indirect costs related to revenues such as
indirect labor, materials and supplies and facilities cost, exclusive of depreciation expense.
Research and Development
Research and development costs 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. The Company also expenses costs relating to developing modifications and
minor enhancements of its existing technology and services.
Advertising
The Company expenses advertising as incurred. The Company did not incur any advertising costs
during the three month periods presented herein.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, the liability method is used in accounting for income taxes. Under this
method deferred income tax liabilities and assets are determined based on the difference between
the financial statement carrying amounts and the tax basis of assets and liabilities. For operating
losses and tax credit carryforwards, the Company determines the related deferred tax asset using
enacted tax rates in effect in the years in which the differences are expected to reverse. A
valuation allowance is recorded if it is more likely than not that a portion or all of a deferred
tax asset will not be realized.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109 (FIN 48) to create a single model to address
accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company
adopted FIN 48 as of January 1, 2007, as required and determined that the adoption of FIN 48 did
not have a material impact on the Companys financial position and results of operations. Interest
costs and penalties related to income taxes are classified as interest expense and selling, general
and administrative costs, respectively in the Companys financial statements. The Company did not
recognize interest or penalties related to income tax during the three months ended March 31, 2007
or 2006 and did not accrue for interest or penalties as of March 31, 2007 or December 31, 2006.
The Company did not have any unrecognized tax benefits as of March 31, 2007 or December 31, 2006.
Tax returns for all years 2000 and thereafter are subject to future examination by tax authorities.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires components of other comprehensive
income, including unrealized gains and losses on available-for-sale securities, to be included as
part of total comprehensive income. Comprehensive income is comprised of net income and other
comprehensive income.
Basic and Diluted Net Income Attributable to Common Stockholders per Common Share
The Company calculates net income per share in accordance with SFAS No. 128, Earnings Per
Share. The Company determined that its Series A redeemable convertible preferred stock represented
a participating security prior to the IPO. Because the Series A redeemable convertible preferred
stock participates equally with common stock in dividends and unallocated income, the Company
calculated basic earnings per share when the Company reports net income using the if-converted
method, which in the Companys
8
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
circumstances, is equivalent to the two class approach required by EITF 03-6, Participating
Securities and the Two Class Method under FASB Statement No. 128. Net losses are not allocated
to the Series A redeemable convertible preferred stockholders.
In connection with the Companys IPO, all of the Companys Series A and Series 1 redeemable
convertible preferred stock was automatically converted into common stock. Since the Series A
redeemable convertible preferred stock participated in dividend rights on a one-for-one basis with
common stockholders, the security is included in the denominator of basic earnings per share for
the period such preferred stock was outstanding. The Companys Series 1 redeemable convertible
preferred stock is included in the denominator of diluted earnings per share for the period it was
outstanding.
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. There
were no stock options that were anti-dilutive and excluded from the following table for the three
months ended March 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,694 |
|
|
$ |
1,529 |
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
32,112 |
|
|
|
10,504 |
|
Conversion of Series A redeemable convertible preferred stock |
|
|
|
|
|
|
11,549 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic |
|
|
32,112 |
|
|
|
22,053 |
|
Dilutive effect of: |
|
|
|
|
|
|
|
|
Options, restricted shares and warrants |
|
|
877 |
|
|
|
903 |
|
Conversion of Series 1 convertible preferred stock into common stock |
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
32,989 |
|
|
|
24,956 |
|
|
|
|
|
|
|
|
Stock-Based Compensation
As of March 31, 2007, the Company maintains two stock-based compensation plans. Prior to
January 1, 2006, the Company was applying the disclosure only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123). Compensation cost is recognized for all
share-based payments granted subsequent to January 1, 2006 and is based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). Under SFAS 123(R), an equity
instrument is not considered to be issued until the instrument vests. As a result, compensation
cost is recognized over the requisite service period with an offsetting credit to additional
paid-in capital. Compensation expense also includes the amortization on a straight-line basis over
the remaining vesting period of the intrinsic values of the stock options granted prior to 2006
calculated in accordance with Accounting for Stock Issued to Employees (APB 25).
Impact of Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands
disclosures about fair value measurements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company will adopt SFAS 157 as required and does not expect the adoption of this
standard to have a significant impact on the Companys financial statements.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159
provides companies with an option to report selected financial assets and liabilities at fair value
that are not currently required to be measured at fair value. Accordingly, companies would then be
required to report unrealized gains and losses on these items in earnings at each subsequent
reporting date. The objective is to improve financial reporting by providing companies with the
opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently. SFAS 159 also establishes presentation and disclosure requirements
designed to facilitate
comparisons between companies that choose different measurement attributes for similar types
of assets and liabilities. The Company is currently evaluating the effects of the adoption of SFAS
159 on our consolidated results of operations and financial position.
9
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
Segment Information
The Company currently operates in one business segment providing critical technology services
to the communications industry. The Company is not organized by market and is managed and operated
as one business. A single management team reports to the chief operating decision maker who
comprehensively manages the entire business. The Company does not operate any material separate
lines of business or separate business entities with respect to its services. Accordingly, the
Company does not accumulate discrete financial information with respect to separate service lines
and does not have separately reportable segments as defined by SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information.
3. Marketable Securities
The following is a summary of available-for-sale securities held by the Company at March 31,
2007 and December 31, 2006. All securities held by the Company are domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
2,252 |
|
|
$ |
2 |
|
|
$ |
(4 |
) |
|
$ |
2,250 |
|
Government bonds |
|
|
2,000 |
|
|
|
5 |
|
|
|
(2 |
) |
|
|
2,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,252 |
|
|
$ |
7 |
|
|
$ |
(6 |
) |
|
$ |
4,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
1,937 |
|
|
$ |
1 |
|
|
$ |
(6 |
) |
|
$ |
1,932 |
|
Government bonds |
|
|
3,120 |
|
|
|
2 |
|
|
|
(7 |
) |
|
|
3,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,057 |
|
|
$ |
3 |
|
|
$ |
(13 |
) |
|
$ |
5,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses are reported as a component of accumulated other comprehensive
loss in stockholders equity. For the three months ended March 31, 2007 and 2006, realized gains
and losses were insignificant. The cost of securities sold is based on specific identification
method.
4. Stock Plans
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 |
|
|
March 31, 2007 |
Expected stock price volatility |
|
|
54.24 |
% |
Risk-free interest rate |
|
|
4.81 |
% |
Expected life of options (in years) |
|
|
5.91 |
|
Expected dividend yield |
|
|
0 |
% |
The weighted-average fair value (as of the date of grant) of the options granted was $8.38 and
$4.36 for the three months ended March 31, 2007 and 2006, respectively. During the three months
ended March 31, 2007, the Company recorded total pre-tax stock-based compensation expense of $563
($327 after tax or $0.01 per diluted share), 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 March 31, 2007 was
approximately $4.9 million. That cost is expected to be recognized over a weighted-average period
of approximately 3.0 years.
Stock Options
The following table summarizes information about stock options outstanding.
10
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
|
Option |
|
|
|
|
|
|
Shares |
|
|
Number |
|
|
Exercise Price |
|
|
Weighted- |
|
|
|
Available |
|
|
of |
|
|
per Share |
|
|
Average |
|
|
|
for Grant |
|
|
Shares |
|
|
Range |
|
|
Exercise Price |
|
Balance at December 31, 2006 |
|
|
1,796 |
|
|
|
2,187 |
|
|
$ |
0.29 - $12.68 |
|
|
$ |
7.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(147 |
) |
|
|
147 |
|
|
$ |
14.00 - $16.19 |
|
|
$ |
14.92 |
|
Options exercised |
|
|
|
|
|
|
(66 |
) |
|
$ |
0.29 - $10.00 |
|
|
$ |
5.60 |
|
Options forfeited |
|
|
8 |
|
|
|
(8 |
) |
|
$ |
0.29 - $8.98 |
|
|
$ |
8.09 |
|
Restricted stock granted |
|
|
(19 |
) |
|
|
|
|
|
$ |
14.00 |
|
|
$ |
14.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
1,638 |
|
|
|
2,260 |
|
|
$ |
0.29 - $16.19 |
|
|
$ |
6.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at March 31, 2007 |
|
|
|
|
|
|
1,581 |
|
|
$ |
0.29 - $16.19 |
|
|
$ |
9.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the Companys non-vested restricted stock at March 31, 2007, and changes during
the three months ended March 31, 2007, is presented below:
|
|
|
|
|
|
|
Number of |
Non-Vested Restricted Stock |
|
Awards |
Non-vested at January 1, 2007 |
|
|
213 |
|
Granted |
|
|
19 |
|
Vested |
|
|
(8 |
) |
|
|
|
|
|
Non-vested at March 31, 2007 |
|
|
224 |
|
|
|
|
|
|
5. Related Parties
Omniglobe International, L.L.C.
Omniglobe International, L.L.C., (Omniglobe) a Delaware limited liability company with
operations in India, provides data entry services relating to the Companys exception handling
management. The Company pays Omniglobe an hourly rate for each hour worked by each of its data
entry agents. As of March 31, 2007 and 2006, the Company had agreements with Omniglobe. One of the
Companys agreements with Omniglobe provides for minimum levels of staffing at a specific price
level resulting in an overall minimum commitment of $350 over a six month period. Services provided
include data entry and related services as well as development and testing services. The current
agreements may be terminated by either party without cause with 30 or 60 days written notice prior
to the end of the term. Unless terminated, the agreement will automatically renew in six month
increments. As of March 31, 2007, the Company fulfilled the overall minimum contractual commitment.
The Company does not intend to terminate its arrangements with Omniglobe.
On March 12, 2004, certain of the Companys executive officers and their family members
acquired indirect equity interests in Omniglobe by purchasing an ownership interest in Rumson
Hitters, L.L.C. (Rumson Hitters), a Delaware limited liability company, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds Received |
|
|
|
|
|
|
|
|
|
|
|
|
from Sale of |
|
|
|
|
Equity |
|
Purchase Price of |
|
Interest in |
|
|
|
|
Interest in |
|
Interest in Rumson |
|
Rumson Hitters, |
Name |
|
Position with Synchronoss |
|
Omniglobe |
|
Hitters, L.L.C. |
|
L.L.C. |
Stephen G. Waldis
|
|
Chairman of the Board of Directors,
President and Chief Executive Officer
|
|
|
12.23 |
% |
|
$ |
95,000 |
|
|
$ |
95,000 |
|
Lawrence R. Irving
|
|
Executive Vice President, Chief
Financial Officer and Treasurer
|
|
|
2.58 |
% |
|
$ |
20,000 |
|
|
$ |
20,000 |
|
David E. Berry
|
|
Former Vice President and Chief
Technology Officer
|
|
|
2.58 |
% |
|
$ |
20,000 |
|
|
$ |
20,000 |
|
Robert Garcia
|
|
Executive Vice President, Chief
Operating Officer
and Service Delivery
|
|
|
1.29 |
% |
|
$ |
10,000 |
|
|
$ |
10,000 |
|
11
SYNCHRONOSS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS UNAUDITED (Continued)
(in thousands, except per share data unless otherwise noted)
On June 20, 2006, members of Rumson Hitters repurchased, at the original purchase price, the
equity interests in Rumson Hitters held by each of the Companys employees and their family
members, such that no employee of the Company or family member of such employee had any interest in
Rumson Hitters or Omniglobe after June 20, 2006. Neither the Company nor any of its employees
provided any of the funds to be used by members of Rumson Hitters in repurchasing such equity
interests. Since June 20, 2006, Omniglobe is no longer a related party.
From March 12, 2004 through June 12, 2006, Omniglobe paid an aggregate of $1,300 in
distributions to all of its interest holders, including Rumson Hitters. In turn, during this
period, Rumson Hitters paid an aggregate of $700 in distributions to its interest holders,
including approximately $154 in distributions to Stephen G. Waldis and his family members,
approximately $32 in distributions to Lawrence R. Irving, approximately $32 in distributions to
David E. Berry and his family members and approximately $16 in distributions to Robert Garcia.
During the period in which the Companys employees and their family members owned equity
interests in Rumson Hitters, fees paid for services rendered related to these agreements for the
three months ended March 31, 2006 were $2.1 million. Since June 20, 2006, Omniglobe is no longer a
related party.
12
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion and analysis in conjunction with the information set
forth in our financial statements and related notes included elsewhere in this quarterly report on
Form 10-Q and in our Form 10-K for the year ended December 31, 2006. All numbers are expressed in
thousands unless otherwise stated. The statements in this discussion regarding our expectations of
our future performance, liquidity and capital resources, and other non-historical statements are
forward-looking statements. These forward-looking statements are subject to numerous risks and
uncertainties, including, but not limited to, the risks and uncertainties described under Risk
Factors and elsewhere in this From 10-Q and our Annual Report on Form 10-K for the year ended
December 31, 2006. Our actual results may differ materially from those contained herein to reflect
any change in our expectations with regard thereto or any change in events, conditions or
circumstances on which any such statements are based.
Overview
We are a leading provider of on-demand multi-channel transaction management solutions to
communications service providers (CSPs). We have designed our solution to be flexible across
communication services and channels (i.e., e-commerce, CSP stores and other retail outlets, etc.),
allowing us to meet the rapidly changing and converging services offered by CSPs. By simplifying
technological complexities through the automation and integration of disparate systems, we enable
CSPs to acquire, retain and service customers quickly, reliably and cost-effectively. We enable
service providers to drive growth in new and existing markets while delivering an improved customer
experience at lower costs. We target complex and high-growth markets including wireless, high speed
access (i.e., cable, DSL and wi-max), Voice over Internet Protocol (VoIP), video and also target
the bundling of these services (e.g., double, triple and quadruple plays) and their intersection
(i.e., video over wireless, IPTV, content activation). Our ActivationNow® and
ConvergenceNowTM platforms automate, synchronize and simplify electronic order
management, activation and provisioning of these services. Our industry-leading customers include
AT&T Inc., Vonage Holdings, Cablevision Systems Corporation, Level 3 Communications, SunRocket,
Covad, Verizon Business Solutions, Clearwire, Time Warner Cable and Comcast. Our CSP customers use
our platform and technology to service both consumer and business customers, including over 300 of
the Fortune 500 companies.
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 48 months. We have increased our revenues rapidly, growing
at a compound annual growth rate of 67% from 2001 to 2006. Over the last three years we have
derived an increasing percentage of our revenues from transactions. For the three months ended
March 31, 2007, we derived approximately 81% of our revenues from transactions processed; and for
the three months ended March 31, 2006, we derived approximately 87% of our revenues from
transactions processed. The remainder of our revenues were generated by professional services and
subscription revenues. As the year progresses, we expect to derive an increasing percentage of our
net revenues from transaction processing.
Costs and Expenses
Our costs and expenses consist of cost of services, research and development, selling, general
and administrative and depreciation and amortization.
Cost of services includes all direct materials, direct labor 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 expense consists primarily of costs related to personnel, including
salaries and other personnel related expense, consulting fees and the costs of facilities, computer
and support services used in service and technology development. We also expense costs relating to
developing modifications and minor enhancements of our existing technology and services.
13
Selling 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 license fees and bad debt expense.
Depreciation and amortization relates to our property and equipment and includes our network
infrastructure and facilities related to our services.
Current Trends Affecting Our Results of Operations
We have experienced increased demand for our services, which has been driven by market trends
such as local number portability, the implementation of new technologies, such as Voice over
Internet Protocol, or VoIP, subscriber growth, competitive churn, network changes and
consolidations. In particular, the emergence of VoIP and local number portability has increased the
need for our services and will continue to be a factor contributing to competitive churn. As a
result of market trends, our revenue stream has expanded from primarily wireline customers to the
addition of wireless customers and services. In 2004 we began providing local number portability
services, and in 2005 and 2006 we further expanded our service offerings into the VoIP markets.
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
this program 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. These development efforts are expected to reduce
exception handling costs.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on
our financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles (U.S. GAAP). The preparation of these 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 companys 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 the following to be our critical accounting policies because they are important to
the portrayal of our financial condition and results of operations and they require critical
management judgments and estimates about matters that are uncertain. 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.
14
Revenue Recognition and Deferred Revenue
We provide services principally on a transactional basis or, at times, on a fixed fee basis
and recognize the revenues as the services are performed or delivered as discussed below:
Transactional Service Arrangements: Transaction revenues consist of revenues derived from the
processing of transactions through our service platform and represented approximately 81% and 87%
of our revenues for the three months ended March 31, 2007 and 2006, respectively. Transaction
service arrangements include services such as equipment orders, new account set-up, number port
requests, credit checks and inventory management.
Transaction revenues are principally based on a set price per transaction and are recognized
based on the number of transactions processed during each reporting period. Revenues are recorded
based on the total number of transactions processed at the applicable price established in the
relevant contract. The total amount of revenues recognized is based primarily on the volume of
transactions.
Many of our contracts guarantee minimum volume transactions from the customer. In these
instances, if the customers total transaction volume for the period is less than the contractual
amount, we record revenues at the minimum guaranteed amount. Set-up fees for transactional service
arrangements are deferred and recognized on a straight-line basis over the life of the contract
since these amounts would not have been paid by the customer without the related transactional
service arrangement. Revenues are presented net of a provision for discounts, which are volume
level driven, or credits, which are performance driven, and are determined in the period in which
the volume thresholds are met or the services are provided. Deferred revenues represent billings to
customers for services in advance of the performance of services, with revenues recognized as the
services are rendered.
Professional Service Arrangements: Professional service revenues represented approximately 18%
and 11% of our revenues for the three months ended March 31, 2007 and 2006, respectively.
Professional services, when sold with transactional service arrangements, are accounted for
separately when these services have value to the customer on a standalone basis and there is
objective and reliable evidence of the fair value of the professional services. When accounted for
separately, professional service revenues are recognized on a monthly basis, as services are
performed and all other elements of revenue recognition have been satisfied.
In determining whether professional services can be accounted for separately from transaction
service revenues, we consider the following factors for each professional services agreement:
availability of the consulting services from other vendors, whether objective and reliable evidence
for fair value exists of the undelivered elements, the nature of the consulting services, the
timing of when the consulting contract was signed in comparison to the transaction service start
date and the contractual dependence of the transactional service on the customers satisfaction
with the consulting work.
If a professional service arrangement does not qualify for separate accounting, we would
recognize the professional service revenues ratably over the remaining term of the transaction
contract. There were no such arrangements for the three months ended March 31, 2007 and 2006.
Subscription Service Arrangements: Subscription service arrangements represented approximately
1% and 2% of our revenues for the three months ended March 31, 2007 and 2006, respectively, and
relate principally to our ActivationNow® platform service which the customer accesses
through a graphical user interface. We record revenues on a straight-line basis over the life of
the contract for our subscription service contracts.
Service Level Standards
Pursuant to certain contracts, we are subject to service level standards and to corresponding
penalties for failure to meet those standards. We record a provision for those performance-related
penalties for failure to meet those standards. All performance-related penalties are reflected as a
corresponding reduction of our revenues. These penalties, if applicable, are recorded in the month
incurred.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated bad debts resulting from the
inability of our customers to make required payments. The amount of the allowance account is based
on historical experience and our analysis of the accounts receivable
15
balance outstanding. While
credit losses have historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit losses that we have in the past
or that our reserves will be adequate. If the financial condition of one of our customers were to
deteriorate, resulting in its inability to make payments, additional allowances may be required
which would result in an additional expense in the period that this determination was made.
Valuation Allowance
We record a valuation allowance on our deferred tax assets when it is more likely than not
that an asset will not be realized. Determining when we will recognize our deferred tax assets is a
matter of judgment based on facts and circumstances. We determined that it was appropriate to
record our deferred tax assets at full value at March 31, 2007 and December 31, 2006, based on our
recent cumulative earnings history and our expected future earnings. However, if there were a
significant change in facts, such as a loss of a significant customer, we may determine that a
valuation allowance is required.
Stock-Based Compensation
As of March 31, 2007, the Company maintains two stock-based compensation plans. Prior to
January 1, 2006, the Company was applying the disclosure only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123). Compensation cost is recognized for all
share-based payments granted subsequent to January 1, 2006 and is based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). Under SFAS 123(R), an equity
instrument is not considered to be issued until the instrument vests. As a result, compensation
cost is recognized over the requisite service period with an offsetting credit to additional
paid-in capital. Compensation expense also includes the amortization on a straight-line basis over
the remaining vesting period of the intrinsic values of the stock options granted prior to 2006
calculated in accordance with Accounting for Stock Issued to Employees (APB 25).
The Company utilizes the Black-Scholes option pricing model for determining the estimated fair
value for stock-based awards. Use of a valuation model requires management to make certain
assumptions with respect to selected model inputs. Expected volatility was calculated based on a
blended weighted-average of historical information of our stock and the weighted average of
historical information of similar public entities for which historical information was available.
We will continue to use a blended weighted average approach using our own historical volatility and
other similar public entity volatility information until our historical volatility is relevant to
measure expected volatility for future option grants. The average expected life was determined
according to the SEC shortcut approach as described in Staff Accounting Bulletin (SAB) 107,
Disclosure about Fair Value of Financial Instruments, which is the mid-point between the vesting
date and the end of the contractual term. The risk-free interest rate is based on U.S. Treasury
zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant.
Forfeitures are estimated based on voluntary termination behavior, as well as a historical analysis
of actual option forfeitures.
The weighted-average assumptions used in the Black-Scholes option pricing model are as
follows:
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|
|
Three Months Ended |
|
|
March 31, 2007 |
Stock Options |
|
|
|
|
Expected stock price volatility |
|
|
54.24 |
% |
Risk-free interest rate |
|
|
4.81 |
% |
Expected life of options (in years) |
|
|
5.91 |
|
Expected dividend yield |
|
|
0 |
% |
The weighted-average fair value (as of the date of grant) of the options granted was $8.38 and
$4.36 for the three months ended March 31, 2007 and 2006, respectively. Beginning in 2006, in
certain cases, we granted members of our board of directors and certain employees NSOs in addition
to ISOs. The total stock-based compensation cost related to non-vested stock options, non-vested
restricted stock and stock option awards not yet recognized as of March 31, 2007 was approximately
$4.9 million.
Results of Operations
16
Three months ended March 31, 2007 compared to the three months ended March 31, 2006
The following table presents an overview of our results of operations for the three months
ended March 31, 2007 and 2006.
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Three Months Ended |
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|
Three Months Ended |
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|
March 31, |
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|
March 31, |
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|
|
2007 |
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|
2006 |
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|
2007 vs. 2006 |
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|
$ |
|
|
% of Revenue |
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|
$ |
|
|
% of Revenue |
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$ Change |
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|
% Change |
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|
(in thousands) |
|
Net revenue |
|
$ |
21,329 |
|
|
|
100.0 |
% |
|
$ |
15,724 |
|
|
|
100.0 |
% |
|
$ |
5,605 |
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|
|
35.6 |
% |
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|
Cost of services (excluding depreciation and
amortization shown separately below) |
|
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9,642 |
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|
45.2 |
% |
|
|
8,763 |
|
|
|
55.7 |
% |
|
|
879 |
|
|
|
10.0 |
% |
Research and development |
|
|
1,932 |
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|
|
9.1 |
% |
|
|
1,685 |
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|
|
10.7 |
% |
|
|
247 |
|
|
|
14.7 |
% |
Selling, general and administrative |
|
|
3,240 |
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|
|
15.2 |
% |
|
|
2,010 |
|
|
|
12.8 |
% |
|
|
1,230 |
|
|
|
61.2 |
% |
Depreciation and amortization |
|
|
1,087 |
|
|
|
5.1 |
% |
|
|
719 |
|
|
|
4.6 |
% |
|
|
368 |
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|
|
51.1 |
% |
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|
|
|
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|
|
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|
|
|
|
|
15,901 |
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|
74.6 |
% |
|
|
13,177 |
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|
|
83.8 |
% |
|
|
2,724 |
|
|
|
20.7 |
% |
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|
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|
|
Income from operations |
|
$ |
5,428 |
|
|
|
25.4 |
% |
|
$ |
2,547 |
|
|
|
16.2 |
% |
|
$ |
2,881 |
|
|
|
113.1 |
% |
Net Revenue. Net revenues increased $5.6 million to $21.3 million for the three months ended
March 31, 2007, compared to the three months ended March 31, 2006. This increase is primarily due
to increased revenues from existing customers. Net revenues from our wireless customer increased
$3.2 million to $14.5 million for the three months ended March 31, 2007, compared to the three
months ended March 31, 2006. LNP and VoIP transactions accounted for $6.7 million of our revenues
during the three months ended March 31, 2007, as compared to $4.2 million for the corresponding
period last year. Transaction revenues recognized for the three months ended March 31, 2007
represented 81% of net revenues compared to 87% for the same period in 2006. The increase in
transaction revenues of $3.6 million was supplemented by an increase of professional service
revenues of $2.1 million. Professional service revenues increased as a percentage of sales to 18%
for the three months ended March 31, 2007, compared to 11% for the three months ended March 31,
2006. As the year progresses, we expect to derive an increasing percentage of our net revenues
from transaction processing.
Expense
Cost of Services. Cost of services increased $0.9 million to $9.6 million for the three months
ended March 31, 2007, compared to the three months ended March 31, 2006, due primarily to the
growth in personnel costs required to support higher transaction volumes submitted to us by our
customers and increases in telecommunication costs. In particular, personnel and related costs and
third party consulting service costs increased $0.5 million to manage exception handling. Also,
additional telecommunication and maintenance expense in our data facilities, contributed
approximately $0.3 million to the increase in cost of services. In addition, stock-based
compensation expense increased $0.1 million. Cost of services as a percentage of revenues decreased
to 45.2% for the three months ended March 31, 2007, as compared to 55.7% for the three months ended
March 31, 2006. We are continuing to realize the benefits and efficiencies gained by increased
automation rates in our customers.
Research and Development. Research and development expense increased $0.2 million to $1.9
million for the three months ended March 31, 2007, compared to the three months ended March 31,
2006, due to the continued investment in and further development of the ActivationNow®
and ConvergenceNowTM platforms to enhance our service offerings and increases in
automation that have continued to allow us to gain operational efficiencies. Research and
development expense as a percentage of revenues decreased to 9.1% for the three months ended March
31, 2007, as compared to 10.7% for the three months ended March 31, 2006.
17
Selling, General and Administrative. Selling, general and administrative expense increased
$1.2 million to $3.2 million for the three months ended March 31, 2007, compared to the three
months ended March 31, 2006, due in part to increases in personnel and related costs totaling $0.3
million, increased expenses of $0.4 million associated with being a public company, and increased
stock-based compensation expense of $0.3 million. Selling, general and administrative expense as a
percentage of revenues increased to
15.2% for the three months ended March 31, 2007, as compared to 12.8% for the three months
ended March 31, 2006. We anticipate that our selling, general and administrative expenses will
increase on an absolute basis in the future as we incur public company costs and make continued
investments in sales and marketing.
Depreciation and Amortization. Depreciation and amortization expense increased $0.4 million to
$1.1 million due to the commencement of depreciation expense associated with recent fixed asset
additions.
Income Tax. Our effective tax rate was approximately 41.9% and approximately 41.6% during the
three months ended March 31, 2007 and 2006, 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. During the three
months ended March 31, 2007 and 2006, we recognized approximately $2.7 million and $1.1 million in
related tax expense, respectively.
Liquidity and Capital Resources
Our principal source of liquidity has been cash provided by operations and by cash provided
from our initial public offering (IPO) which was completed on June 20, 2006. The net proceeds
from our offering and the exercise of the over-allotment option by our IPO underwriters were
approximately $52.8 million, which enabled us to strengthen our balance sheet. As a result, we had
cash, cash equivalents and short- and long-term marketable securities of $78.2 million at March 31,
2007. We anticipate that our principal uses of cash in the future will be facility expansion,
capital expenditures and working capital.
On October 6, 2004, we entered into a Loan and Security Agreement (the Agreement) with a
bank which expires on December 1, 2007. The Agreement includes a Revolving Promissory Note for up
to $2.0 million and an Equipment Term Note for up to $3.0 million. Availability under the Agreement
for the Revolving Promissory Note is based on defined percentages of eligible accounts receivable.
Borrowings on the revolving credit agreement bear interest at the prime rate plus 1.25% (9.5% at
March 31, 2007 and December 31, 2006). Interest only on the unpaid principal amount is due and
payable monthly in arrears, commencing January 1, 2005 and continuing on the first day of each
calendar month thereafter until maturity, at which point all unpaid principal and interest related
to the revolving advances will be payable in full. There were no borrowings against the Revolving
Promissory Note as of December 31, 2006 and during the three months ended March 31, 2007. As of
March 31, 2007 and December 31, 2006, we had outstanding borrowings of $500 and $666, respectively,
against the Equipment Term Note to fund purchases of eligible equipment. Borrowings on the
equipment line bear interest at the prime rate plus 1.75% (10% at March 31, 2007 and December 31,
2006) and principal and interest are payable monthly. Borrowings under the Agreement are
collateralized by all of our assets.
The Agreement requires us to meet one liquidity financial covenant that must be maintained as
of the last day of each month. The covenant requires us to maintain a ratio of current assets to
current liabilities of 2:1. This calculation and a certification of compliance, along with our
monthly financial statements, are reported to the bank on a monthly basis. We were in compliance
with the financial covenant at March 31, 2007 and December 31, 2006. As of March 31, 2007, we had
$2.0 million available under the revolving promissory note of our bank, subject to the terms and
conditions of that facility.
Discussion of Cash Flows
Cash flows from operations. Net cash provided by operating activities for the three months
ended March 31, 2007 was $3.4 million compared to net cash used of $1.0 million for the three
months March 31, 2006. The increase of $4.4 million is primarily due to increased income and an
increase to accounts payable. The accounts payable account grew partially due to capital
expenditures necessary to continue to grow our business. Payments for accounts payable are
expected to occur during the second quarter of 2007.
Cash flows from investing. Net cash used in investing activities for the three months ended
March 31, 2007 was $3.6 million compared to net cash used of $1.3 million for the three months
March 31, 2006. The increase of $2.3 million was due to the increased purchase of fixed assets of
$3.0 million partially offset by sales of marketable securities.
18
Cash flows from financing. Net cash provided by financing activities for the three months
ended March 31, 2007 was $0.2 million compared to net cash provided of $0.9 million for the three
months March 31, 2006. The decrease of $0.7 million in net cash provided by financing activities
was principally due to lower proceeds received from the exercise of options to purchase common
stock.
We believe that our existing cash and cash equivalents, short-term investments and cash from
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 March 31, 2007 and 2006.
Impact of Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands
disclosures about fair value measurements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company will adopt SFAS 157 as required and does not expect the adoption of this
standard to have a significant impact on the Companys financial statements.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159
provides companies with an option to report selected financial assets and liabilities at fair value
that are not currently required to be measured at fair value. Accordingly, companies would then be
required to report unrealized gains and losses on these items in earnings at each subsequent
reporting date. The objective is to improve financial reporting by providing companies with the
opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently. SFAS 159 also establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different measurement attributes
for similar types of assets and liabilities. The Company is currently evaluating the effects of the
adoption of SFAS 159 on our consolidated results of operations, cash flows, and financial position.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of March 31, 2007 and December 31, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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
invest in a variety of financial instruments, consisting principally of investments in commercial
paper, money market funds and debt securities of municipalities and the United States Government
and its agencies and may be exposed to market risks related to changes in interest rates. We do not
actively manage the risk of interest rate fluctuations on our short-term investments; however, such
risk is mitigated by the relatively short-term nature of these investments. 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, including commercial paper, money market funds and corporate debt securities. Our cash
and cash equivalents at March 31, 2007 and December 31, 2006 included liquid money market accounts.
All market-risk sensitive instruments were entered into for non-trading purposes
ITEM 4. CONTROLS AND PROCEDURES
19
Evaluation of Disclosure Controls and Procedures.
Our chief executive officer and chief financial officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of March 31, 2007, have concluded that, as of such date, our disclosure controls and procedures
were effective based on their evaluation of these controls and procedures required by paragraph (b)
of Exchange Act Rules 13(a)-15 or 15d-15.
Our management, including our chief executive officer, does not expect that our disclosure
controls and procedures or our internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints and the benefits of controls must
be considered relative to their costs. Due to the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, have been detected.
Changes in internal controls over financial reporting
There was no change in our internal controls over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2007 that has
materially affected, or is reasonably likely to materially affect, our internal controls over
financial reporting.
20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings; however, we may from time to
time become a party to various legal proceedings arising in the ordinary course of our business.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part II, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2006, 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 conditions 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
Unregistered Sales of Equity Securities
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 the 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 the 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. There has been no material change in our planned use of proceeds from the IPO from that
described in the final prospectus filed with the SEC pursuant to Rule 424(b).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
|
|
|
Exhibit No. |
|
Description |
3.2*
|
|
Restated Certificate of Incorporation of the Company |
|
|
|
3.4*
|
|
Amended and Restated Bylaws of the Company |
21
|
|
|
Exhibit No. |
|
Description |
4.2*
|
|
Form of Companys 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
Companys Registration Statement on Form S-1 (Commission File No. 333-132080). |
22
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.
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|
|
Synchronoss Technologies, Inc.
|
|
|
/s/ Stephen G. Waldis
|
|
|
Stephen G. Waldis |
|
|
President and Chief Executive Officer
(Principal executive officer) |
|
|
May 4, 2007
23