Restatement of Previously Issued Consolidated Financial Statements

6 Months Ended

Jun. 30, 2017

Accounting Changes and Error Corrections [Abstract]

Restatement of Previously Issued Consolidated Financial Statements

The Company has restated its audited consolidated financial statements for the years ended December 31, 2016 and 2015 for the matters described below. The effects of these restatement adjustments on (i) the Company’s Consolidated Balance Sheet at December 31, 2016, (ii) the Company’s Consolidated Statement of Operations for the years ended December 31, 2016 and 2015, (iii) the Company’s Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015, (iv) the Company’s Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016 and 2015 and (v) the Company’s Consolidated Statement of Cash Flows for the years ended December 31, 2016 and 2015 are presented in the Company’s 2017 Form 10-K.

The effects of the restatement adjustments on the Company’s unaudited Condensed Consolidated financial statements as of June 30, 2016 and for the three and six month periods then ended are reflected in the tables below.

The individual restatement matters that underlie the restatement adjustments are described below.

Revenue Recognition Adjustments Related to Hosting Services

The Company typically sells hosting services to its subscription services customers, as well as to certain software license customers. As part of the Company’s review of its historical accounting, it has determined that adjustments are required related to certain transactions in each of these two categories of customers that purchase hosting services.

It was observed that in certain instances, the Company has historically entered into hosting arrangements that included various components to the fee structure with certain fees accelerated during the initial years of the arrangement. Historically, the Company recognized the accelerated fees as billed and maintenance and support fees were recognized on a straight-line basis through the term of the arrangement. However, the Company has determined to revise its accounting treatment for certain hosting services to reflect revenue recognition on a straight-line basis for such fees over the appropriate period of time during which (i) the benefits of hosting services were provided to the customer or (ii) the customer benefited from the set-up fees. The revised accounting treatment for the revenue recognition is reflected in the restated consolidated financial statements, whereby there has been a deferral of a portion of the accelerated fees out of the initial period of the arrangement, and recognition of those deferred amounts in the later periods of the hosting services arrangement.

In the case of certain perpetual software license customers, the Company historically recognized the perpetual software license fee revenue on an upfront basis. The Company has determined to revise its accounting treatment of that software license fee revenue to recognize it ratably over a period of time due to the inclusion of hosting services, as part of the same multiple element arrangement. In certain of these cases, the Company had entered into a separate hosting services contract with the customer that the Company has now determined should have been combined with the software license agreement and treated as part of a larger multiple element arrangement.

In accordance with the software revenue recognition rules, since the Company cannot establish vendor specific objective evidence of fair value of the hosting services, the software license element cannot be separated from the hosting services. The revised accounting treatment for the revenue recognition is reflected in the restated consolidated financial statements, whereby the bundled arrangement fees have been recognized ratably over the economic life of the hosting services.

Revenue Recognition Adjustments Related to Establishing Persuasive Evidence of an Arrangement and Other Revenue Adjustments

The Company historically has had, and continues to have, contractual arrangements with certain customers whereby there is an established master services agreement that includes general terms and conditions. Such master services agreements contemplate the delivery by the customer of purchasing documentation for purposes of completing orders, indicating the nature, price and quantity of products and services ordered. In certain cases, the Company historically formed a view that persuasive evidence of an arrangement existed relating to such orders based upon its receipt from a customer of written confirmation of the order and commitment to pay the agreed price, such as a quote approval sent by the customer in response to a quote issued by the Company, but prior to that customer’s subsequent delivery to the Company an executed statement of work or, in some instances, a purchase order, pursuant to a master services agreement.

The Company has determined, in certain situations, to revise the timing of revenue recognition to when it received final formal contract documentation, which occurred in a future period. In those cases where the adjustment to defer revenue has been recorded prior to when cash payment was received from the customer, the balance sheet impact has been to reduce the related accounts receivable balance, whereas the balance sheet impact of these adjustments after the receipt of cash payment from the customer has been to increase accrued liabilities.

The Company also adjusted revenue recognition in connection with certain other transactions, including (i) where the payment obligation on the date of sale was found not to have been fixed and determinable; (ii) where collectability was not reasonably assured; (iii) where the software delivered to the customer was ultimately deemed not to have met acceptance criteria; or (iv) where formal acceptance was not obtained.

In certain situations, these adjustments represent issues related to the timing of revenue recognition, while in other cases, these adjustments represent amounts that had subsequently been written-off to bad debt expense (whereby now both the revenue and the related bad debt expense has been reversed).

Adjustments Related to Accounting for Acquisitions and Divestiture

The Company has identified and corrected errors related to fees received under license agreements entered into with parties of certain historical acquisitions and a divestiture. In each case, the Company had originally treated the license agreement as a separate transaction and recorded the license fees on a gross basis as revenue. The Company has determined to revise its accounting treatment of the license arrangements, to record the license fees as part of the accounting for the acquisition or divestiture, as follows:

•

In certain cases, the Company entered into a license agreement as part of settling prior intellectual property infringement claims against an acquired entity and/or its selling parent company and affiliates. Historically, the Company had recognized these license fees separately as revenue. However, the Company has determined to net these license fees against the consideration paid as part of the acquisitions, resulting in a reduction of the goodwill and/or intangible assets recorded in purchase accounting.

•

The Company’s consolidated joint venture Zentry LLC (“Zentry”) and the Company’s partner in that joint venture entered into a license agreement in December 2015 at the same time as the formation of the joint venture. Historically, the Company recorded the license fees as revenue separately from the Zentry formation. The Company has determined to net these license fees against the cash contributions paid as part of the joint venture formation, resulting in a reduction of the goodwill and intangible assets recorded in purchase accounting.

•

The Company entered into a licensing agreement in December 2016 with Sequential Technology International, LLC (“STIN”) shortly after closing the divestiture of its activation business to Sequential Technology International Holdings, LLC (“STIH”). Historically, the Company recorded the license fees as revenue separately from the accounting for the divestiture. The Company has determined to classify these license fees as additional gain on sale of the activation exception handling business.

•

The Company made adjustments to reduce the contingent consideration payable to shareholders of Razorsight Corporation (“Razorsight”), which was acquired by the Company in August 2015, and the related losses previously recorded to adjust that liability to fair value, as a result of the determination that many of the sales of Razorsight software that had originally been included in the earn-out calculation have now been adjusted as part of the restatement.


•	The Company made adjustments to record the fair value of the Company’s guarantee of certain of STIN’s debt as part of the divestiture of its activation exception handling business to STIH in December 2016, to record the sellers note extended in the transaction at fair value, and to adjust certain receivables and other assets sold in the transaction.


•	The Company made certain adjustments to the opening balances of Openwave Messaging, Inc. (“Openwave”) and SNCR, LLC (“SNCR, LLC”); impacting deferred revenue, goodwill and intangibles. Adjustments in deferred revenue and intangibles resulted were reported post-acquisition as revenues and costs were realized.

Other Adjustments and Capitalized Software

The Company also identified and corrected certain errors in the amounts reported as capitalized software development. These adjustments were primarily around (i) the recognition of impairment or immediate expensing of certain previously capitalized software development costs and (ii) revisions of amounts capitalized and the timing of when such capitalized costs are amortized. Adjustments pertaining to capitalized software development were driven primarily due to misalignment on the unit of account being measured in tracking project progress and ultimately general release as well as the appropriateness of the capitalization of certain administrative costs.

The Company also identified and corrected certain other errors, primarily due to timing of recognition of (i) stock-based compensation arrangements, (ii) accruals and reserves, (iii) noncontrolling interests and (iv) impairment charges. Impairment charges were primarily due to long-lived asset impairments realized on SNCR, LLC assets, due to continued delays in product development and sales. Additionally, the Company identified certain prior year balance sheet classification adjustments requiring, the most significant of which, a reclassification between cash and restricted cash due to certain contractual restrictions on cash balances, and reclassifications between treasury stock and additional paid-in-capital due to share issuances from the Company’s common stock pool, rather than its treasury stock.

Income Taxes

The Company recorded adjustments to income taxes to reflect the impact of the restatement adjustments, as well as a discrete tax adjustment to record a valuation allowance at a specific foreign jurisdiction in an earlier year than originally recorded. See Note 11 - Income Taxes for discussion of the related impact to the Company’s effective tax rate.

The following table presents the Condensed Consolidated Balance Sheet as previously reported, restatement adjustments and the Condensed Consolidated Balance Sheet as restated at December 31, 2016:



			Adjustments
	As Previously Reported **		Revenue - Hosting			Revenue - Evidence of Arrangement and Other Revenue			Acquisitions & Divestiture			Capitalized Software and Other			Income Taxes			As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	181,018	$	—		$	—		$	—		$	(11,217	)	$	—		$	169,801
Restricted cash	—		—			—			—			41,632			—			41,632
Marketable securities	12,506		—			—			—			—			—			12,506
Accounts receivable, net	137,233		(344		)	(36,509		)	7,896			(802		)	—			107,474
Prepaid expenses and other assets	33,696		—			—			1,408			(1,166		)	4,339			38,277
Total current assets	364,453		(344		)	(36,509		)	9,304			28,447			4,339			369,690
Restricted cash	30,000		—			—			—			(30,000		)	—			—
Marketable securities	2,974		—			—			—			—			—			2,974
Property and equipment, net	155,599		—			—			(823		)	3,429			—			158,205
Goodwill	269,905		—			—			(41,358		)	—			(3,896		)	224,651
Intangible assets, net	203,864		—			—			(19,830		)	(21,066		)	—			162,968
Deferred tax assets	1,503		—			—			—			—			11,783			13,286
Other assets	7,541		—			—			(70		)	1,187			—			8,658
Note receivable from related party	83,000		—			—			(12,731		)	—			—			70,269
Equity method investment	45,890		—			—			(2,240		)	—			—			43,650
Total Assets	$	1,164,729	$	(344	)	$	(36,509	)	$	(67,748	)	$	(18,003	)	$	12,226		$	1,054,351

** Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations.



				Adjustments
	As Previously Reported **			Revenue - Hosting			Revenue - Evidence of Arrangement and Other Revenue			Acquisitions & Divestiture			Capitalized Software and Other			Income Taxes			As Restated
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,770		$	—		$	—		$	—		$	1,287		$	—		$	17,057
Accrued expenses	69,435			—			5,274			971			246			956			76,882
Deferred revenues	27,542			33,398			(151		)	(3,360		)	1			—			57,430
Contingent consideration obligation	11,860			—			—			(9,027		)	—			—			2,833
Short-term debt	29,000			—			—			—			—			—			29,000
Total current liabilities	153,607			33,398			5,123			(11,416		)	1,534			956			183,202
Lease financing obligation - long term	12,121			—			—			41			288			—			12,450
Long-term debt	226,291			—			—			—			—			—			226,291
Deferred tax liability	49,822			—			—			—			—			(46,314		)	3,508
Deferred revenues	12,134			52,965			531			—			—			—			65,630
Other liabilities	3,783			—			—			—			1,679			2,731			8,193
Redeemable noncontrolling interests	49,856			—			—			(28,813		)	4,237			—			25,280
Commitments and contingencies
Stockholder's equity
Common stock	5			—			—			—			—			—			5
Treasury stock	(95,183		)	—			—			—			(11,448		)	—			(106,631		)
Additional paid-in capital	575,093			—			—			(7,667		)	3,727			—			571,153
Accumulated other comprehensive loss	(43,253		)	—			658			—			138			107			(42,350		)
Retained earnings	220,453			(86,707		)	(42,821		)	(19,893		)	(18,158		)	54,746			107,620
Total stockholders' equity	657,115			(86,707		)	(42,163		)	(27,560		)	(25,741		)	54,853			529,797
Total liabilities & stockholders' equity	$	1,164,729		$	(344	)	$	(36,509	)	$	(67,748	)	$	(18,003	)	$	12,226		$	1,054,351

** Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations.

The following table presents the Condensed Consolidated Statement of Operations as previously reported, restatement adjustments and the Condensed Consolidated Statement of Operations as restated for the three months ended June 30, 2016:



				Adjustments
	As Previously Reported**			Revenue - Hosting			Revenue - Evidence of Arrangement and Other Revenue			Acquisitions & Divestiture			Capitalized Software and Other			Income Taxes			As Restated
Net revenues	$	118,255		$	(12,840	)	$	16,211		$	(525	)	$	—		$	—		$	121,101
Costs and expenses:
Cost of revenues*	48,467			—			—			(171		)	(116		)	—			48,180
Research and development	26,170			—			—			—			1,877			—			28,047
Selling, general and administrative	29,952			153			(472		)	296			(49		)	—			29,880
Net change in contingent consideration obligation	6,386			—			—			(3,276		)	—			—			3,110
Restructuring charges	1,139			—			—			—			—			—			1,139
Depreciation and amortization	25,262			—			—			(1,111		)	(58		)	—			24,093
Total costs and expenses	137,376			153			(472		)	(4,262		)	1,654			—			134,449
Loss from continuing operations	(19,121		)	(12,993		)	16,683			3,737			(1,654		)	—			(13,348		)
Interest income	591			—			—			—			—			—			591
Interest expense	(1,834		)	—			—			—			—			—			(1,834		)
Other expense, net	865			—			(197		)	—			—			—			668
Loss from continuing operations, before taxes	(19,499		)	(12,993		)	16,486			3,737			(1,654		)	—			(13,923		)
Benefit (provision) for income taxes	2,074			—			—			—			—			(2,444		)	(370		)
Net (loss) income from continuing operations	(17,425		)	(12,993		)	16,486			3,737			(1,654		)	(2,444		)	(14,293		)
Net income from discontinued operations, net of tax	10,122			—			(1,188		)	—			1			10,050			18,985
Net (loss) income	(7,303		)	(12,993		)	15,298			3,737			(1,653		)	7,606			4,692
Net loss attributable to redeemable noncontrolling interests	(2,864		)	—			—			—			(276		)	—			(3,140		)
Net (loss) income attributable to Synchronoss	$	(4,439	)	$	(12,993	)	$	15,298		$	3,737		$	(1,377	)	$	7,606		$	7,832

Basic:
Continuing operations	$	(0.34	)																$	(0.26	)
Discontinued operations	0.24																		0.44
	$	(0.10	)																$	0.18
Diluted:
Continuing operations	$	(0.34	)																$	(0.26	)
Discontinued operations	0.24																		0.44
	$	(0.10	)																$	0.18
Weighted-average common shares outstanding:
Basic	43,450																		43,450
Diluted	43,450																		43,450


*	Cost of services excludes depreciation and amortization which is shown separately.


**	Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations.



				Adjustments
	As Previously Reported**			Revenue - Hosting			Revenue - Evidence of Arrangement and Other Revenue			Acquisitions & Divestiture			Capitalized Software and Other			Income Taxes		As Restated
Net revenues	$	222,474		$	(10,721	)	$	(1,875	)	$	(10,531	)	$	—		$	—	$	199,347
Costs and expenses:
Cost of revenues*	94,915			—			—			(172		)	(412		)	—		94,331
Research and development	50,267			—			—			—			3,607			—		53,874
Selling, general and administrative	56,875			153			(472		)	380			(1,142		)	—		55,794
Net change in contingent consideration obligation	6,727			—			—			(3,612		)	—			—		3,115
Restructuring charges	4,049			—			—			—			—			—		4,049
Depreciation and amortization	49,317			—			—			(2,222		)	(220		)	—		46,875
Total costs and expenses	262,150			153			(472		)	(5,626		)	1,833			—		258,038
Loss from continuing operations	(39,676		)	(10,874		)	(1,403		)	(4,905		)	(1,833		)	—		(58,691		)
Interest income	1,221			—			—			—			—			—		1,221
Interest expense	(3,410		)	—			—			—			—			—		(3,410		)
Other expense, net	(19		)	—			306			—			—			—		287
Loss from continuing operations, before taxes	(41,884		)	(10,874		)	(1,097		)	(4,905		)	(1,833		)	—		(60,593		)
Benefit for income taxes	2,435			—			—			—			—			12,715		15,150
Net loss from continuing operations	(39,449		)	(10,874		)	(1,097		)	(4,905		)	(1,833		)	12,715		(45,443		)
Net income from discontinued operations, net of tax	21,063			—			(3,299		)	—			1			34		17,799
Net loss	(18,386		)	(10,874		)	(4,396		)	(4,905		)	(1,832		)	12,749		(27,644		)
Net loss attributable to redeemable noncontrolling interests	(5,993		)	—			—			—			(154		)	—		(6,147		)
Net loss attributable to Synchronoss	$	(12,393	)	$	(10,874	)	$	(4,396	)	$	(4,905	)	$	(1,678	)	$	12,749	$	(21,497	)

Basic:
Continuing operations	$	(0.77	)															$	(0.90	)
Discontinued operations	0.48																	0.41
	$	(0.29	)															$	(0.49	)
Diluted:
Continuing operations	$	(0.77	)															$	(0.90	)
Discontinued operations	0.48																	0.41
	$	(0.29	)															$	(0.49	)
Weighted-average common shares outstanding:
Basic	43,449																	43,430
Diluted	43,449																	43,430


*	Cost of services excludes depreciation and amortization which is shown separately.


**	Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations.

The following table presents the Condensed Consolidated Statement of Comprehensive (Loss) as previously reported, restatement adjustments and the Condensed Consolidated Statement of Comprehensive (Loss) as restated for the three months ended June 30, 2016:



				Adjustments
	As Previously Reported**			Revenue - Hosting			Revenue - Evidence of Arrangement and Other Revenue		Acquisitions & Divestiture		Capitalized Software and Other			Income Taxes		As Restated
Net (loss) income	$	(7,303	)	$	(12,993	)	$	15,298	$	3,737	$	(1,653	)	$	7,606	$	4,692
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments	(6,224		)	—			109		—		—			—		(6,115		)
Unrealized loss on available for sale securities	(22		)	—			—		—		—			—		(22		)
Net income (loss) on intra-entity foreign currency transactions	624			—			—		—		—			—		624
Total other comprehensive loss, net of tax	(5,622		)	—			109		—		—			—		(5,513		)
Comprehensive loss	(12,925		)	(12,993		)	15,407		3,737		(1,653		)	7,606		(821		)
Comprehensive loss attributable to redeemable noncontrolling interests	(2,864		)	—			—		—		(276		)	—		(3,140		)
Comprehensive (loss) income attributable to Synchronoss	$	(10,061	)	$	(12,993	)	$	15,407	$	3,737	$	(1,377	)	$	7,606	$	2,319


**	Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations.



				Adjustments
	As Previously Reported**			Revenue - Hosting			Revenue - Evidence of Arrangement and Other Revenue			Acquisitions & Divestiture			Capitalized Software and Other			Income Taxes		As Restated
Net (loss) income	$	(18,386	)	$	(10,874	)	$	(4,396	)	$	(4,905	)	$	(1,832	)	$	12,749	$	(27,644	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	3,444			—			(115		)	—			19			—		3,348
Unrealized loss on available for sale securities	(2		)	—			—			—			—			—		(2		)
Net income on intra-entity foreign currency transactions	362			—			—			—			—			—		362
Total other comprehensive income, net of tax	3,804			—			(115		)	—			19			—		3,708
Comprehensive loss	(14,582		)	(10,874		)	(4,511		)	(4,905		)	(1,813		)	12,749		(23,936		)
Comprehensive loss attributable to redeemable noncontrolling interests	(5,993		)	—			—			—			(154		)	—		(6,147		)
Comprehensive (loss) income attributable to Synchronoss	$	(8,589	)	$	(10,874	)	$	(4,511	)	$	(4,905	)	$	(1,659	)	$	12,749	$	(17,789	)


**	Certain amounts reflected in this column have been adjusted for retrospective application of discontinued operations.

The following table presents the Condensed Consolidated Statement of Cash Flows as previously reported, restatement adjustments, and the Condensed Consolidated Statement of Cash Flows as restated for the six months ended June 30, 2016:



	As Previously Reported			Adjustments			As Restated
Operating activities:
Net loss continuing operations	$	(39,449	)	$	(5,994	)	$	(45,443	)
Net income from discontinued operations	21,063			(3,264		)	17,799
Adjustments to reconcile net loss to net cash provided by operating activities:	80,480			(18,425		)	62,055
Changes in operating assets and liabilities:	12,096			6,549			18,645
Net cash provided by operating activities	74,190			(21,134		)	53,056
Investing activities:
Net cash used in investing activities	(116,317		)	16,156			(100,161		)
Financing activities:
Net cash provided by financing activities	6,011			5,380			11,391
Effect of exchange rate changes on cash	(490		)	(640		)	(1,130		)
Net decrease in cash and cash equivalents	(36,606		)	(238		)	(36,844		)
Cash, restricted cash and cash equivalents at beginning of period	147,634			238			147,872
Cash, restricted cash and cash equivalents at end of period	111,028			—			111,028
Cash and cash equivalents per Condensed Consolidated Balance Sheet	111,028			(21,042		)	89,986
Restricted cash per the Condensed Consolidated Balance Sheet	—			21,042			21,042
Total cash, cash equivalents and restricted cash	$	111,028		$	—		$	111,028

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	3,208		$	—		$	3,208
Cash paid for interest	$	1,355		$	—		$	1,355