Investments in Affiliates and Related Transactions

Sequential Technology International, LLC

The Company includes investments which are accounted for using the equity method, under the caption equity method investments on the Company’s Consolidated Balance Sheets. As of December 31, 2017, the Company’s investments in equity interests was comprised of $33.9 million related to a 30% equity interest in STIN.

STIH, which holds a 70% equity interest in STIN, also holds a senior note issued by a Third Party (“Third-Party Note” or “Seller Note”). The Third-Party Note is secured against STIH’s equity interest in STIN and is senior to the Company’s equity interest in STIN. Under the arrangement, the recognition of cash dividends received by the Company from STIN, other than required cash distributions made for tax purposes, are deferred until the Third-Party Note is paid in full. Under the terms of the PIK note with STIH, deferred distributions are added to the amounts outstanding under the PIK note.

The Company concluded that STIN is a VIE as it lacks sufficient equity to finance its activities. However, the Company is not the primary beneficiary of STIN, as the Company does not have the power to direct the activities that most significantly impact STIN’s economic performance and the obligation to absorb losses or the right to receive benefits from STIN that could potentially be significant to STIN.

Impairments of Investments

The Company regularly reviews its equity investments for impairments based on criteria that include the extent to which the investment’s carrying value exceeds its related market value, the duration of the market decline, the Company’s ability to hold its investment until recovery and the investment’s financial strength and specific prospects.

Impairments of investments are reflected in “Equity method income/loss” in the Consolidated Statements of Operations and were recorded as a result of either the deteriorating financial position of the investee or due to a permanent impairment resulting from sustained losses and limited prospects for recovery.

During 2017, the Company recorded $9.1 million in losses in its Consolidated Statement of Operations related to its investment in STIN. No impairment charges were recognized during the period.

Transactions with Affiliates

Cloud Telephony and Support Services

In connection with the divestiture of business process outsourcing (“BPO”), Synchronoss entered into a three-year Cloud Telephony and Support services agreement to grant STIN access to certain Synchronoss software and private branch exchange (“PBX”) systems to facilitate exception handling operations required to support STIN customers. The agreement requires the Company provide the following:


•	Access to use its PBX system, which acts as a digital call exchange used to process both in-bound and out-bound calls as well as any corresponding interactive voice response (“IVR”).

•

Solution access and hosting, including Synchronoss Activation Gateway (“SAG”) and iNow virtual front office platforms (the “Solution” service) includes access to a number of order managers, call tracker and reporting (visibility) modules used to initiate and perform necessary tasks as part of the exception handling process. Access to the Solution provides a mechanism for the exception handling business, whether STIN or any other BPO customer, to process orders manually. The Company is obligated to host and maintain the related technology throughout the term. In the event additional programs arise, requiring the use of Synchronoss products, such incremental programs will be priced in negotiations at such time.


•	Technical support service, including network infrastructure support and maintenance. The Company will provide access to use and support to ensure fully operational workstations (including personal computers), including desktop, workstation and network support to the PBX systems, including firewall and anti-virus protection.

The Company recognized $26.0 million and $1.2 million in revenue related to these services during 2017 and 2016, respectively.

Support Services Agreement

Additionally, the Company entered into a Support Services Agreement (“SSA”) to perform certain general and administrative support services, including billing and cash collections. The SSA is currently operating month-to-month and the Company expects to cease its support within the calendar year. Fees earned for services performed by the Company under the SSA were recorded as a reduction in the costs to perform within selling, general and administrative in the Consolidated Statements of Operations. Amounts earned under the arrangement were immaterial during all periods presented.

Seller Note

The Company holds a subordinated seller’s note receivable from STIH which has a carrying value of $74.0 million as of December 31, 2017, which is secured by STIH’s interest in STIN. The Company recognized $12.1 million in interest income related to this note during 2017. The related party note receivable earns paid-in-kind (“PIK”), until such time that the Third-Party Note is paid-in-full and shall earn interest at a rate equal to LIBOR plus 1100 basis points per annum, maturing on June 16, 2022. As a result, of STIH’s covenant violation, in June 2017, the Company distributed approximately $6.2 million to Goldman (“Distribution Note”). The remaining amounts guaranteed under the Escrow arrangement were released upon assignment of certain customer contracts under the terms of the Escrow Agreement. As of December 31, 2017, the Company has no further obligations to guarantee the debt outstanding to Goldman. Under the terms of the PIK note with STIH, distributions made by STIN to the Company must be deferred and any deferred distributions or distributions made to Goldman are added to the amounts outstanding under the PIK note. During the year, the Company recognized an allowance for loan losses of $14.6 million in other expense in the Consolidated Statement of Operations, due concerns over collectibility of the remaining balance of the seller’s note.

The following is a summary of the PIK note related balances as of December 31:



	Seller Note		Allowance			Unamortized discount			Loan accrued interest		Distribution Note		Distribution interest		Total
Balance at December 31, 2016 (Restated)	$	83,000	$	—		$	(13,146	)	$	415	$	—	$	—	$	70,269
Activity			(14,562		)	984			10,681		6,187		425		3,715
Balance at December 31, 2017	$	83,000	$	(14,562	)	$	(12,162	)	$	11,096	$	6,187	$	425	$	73,984

Related Party Balances

The STIN affiliate balances and their classification in the Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016 were as follows:



	Year Ended December 31,
	2017		2016
Restricted cash ^(A)	$	118	$	—
Accounts receivable ^(B)	18,033		1,164
Total assets	$	18,151	$	1,164


^(A)	Represents cash balances outstanding as of year end in which the Company collected accounts receivable from STIN customers on behalf of STIN. This amount has been classified in short term restricted cash on the Consolidated Balance Sheets.


^(B)	These amounts principally included revenues generated from the Cloud and Telephony Support Services agreement and pass-through of vendor expenses incurred during the transition and assignment of vendor contracts.

Meeker Sharkey

During 2017, the Company engaged Meeker Sharkey as its insurance broker for its officers and directors, commercial liability and health benefits insurance. Thomas Sharkey, Jr., a principal of Meeker Sharkey, is the brother in law of James M. McCormick, a member of the Board of Directors. The Company paid Meeker Sharkey approximately $0.1 million, $0.4 million and $0.5 million during the years ended December 31, 2017, 2016 and 2015, respectively.