SYNCHRONOSS TECHNOLOGIES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide a reader of our financial statements
with a narrative from the perspective of our management on our financial
condition, results of operations, liquidity and certain other factors that may
affect our future results. The following discussion and analysis should be read
in conjunction with our Condensed Consolidated Financial Statements and the
related notes included in Item 1 "Financial Information" of this Form 10-Q.
The words "Synchronoss ," "we," "our," "ours," "us," and the "Company" refer to
Synchronoss Technologies, Inc. and its consolidated subsidiaries. This quarterly
report contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties and are based on the beliefs and assumptions
of our management based on information currently available to our management.
Use of words such as "believes," "expects," "anticipates," "intends," "plans,"
"hopes," "should," "continues," "seeks," "likely" or similar expressions,
indicate a forward-looking statement. Forward-looking statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions, including, but not limited to, risks, uncertainties and assumptions
relating to the duration and severity of the COVID-19 pandemic and its impact on
our business and financial performance. Actual results may differ materially
from the forward-looking statements we make. We caution investors not to place
substantial reliance on the forward-looking statements included in this
quarterly report. These statements speak only as of the date of this quarterly
report, and we undertake no obligation to update or revise the statements in
light of future developments. All numbers are expressed in thousands unless
otherwise stated.
Overview
Synchronoss Technologies, Inc. ("Synchronoss" or the "Company") is a global software and services company that provides essential technologies for the mobile transformation of business. The Company's portfolio contains offerings such as personal cloud, secure-mobility, identity management and scalable messaging platforms, products and solutions. These essential technologies create a better way of delivering the transformative mobile experiences that the Company's customers need to help them stay ahead of the curve in competition, innovation, productivity, growth and operational efficiency.Synchronoss' products and platforms are designed to be carrier-grade, flexible and scalable, enabling multiple converged communication services to be managed across a range of distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets. This business model allows the Company to meet the rapidly changing converged services and connected devices offered by their customers.Synchronoss' products, platforms and solutions enable its customers to acquire, retain and service subscribers and employees quickly, reliably and cost-effectively with white label and custom-branded solutions.Synchronoss' customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and sharing/collaboration with connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of the Company's platforms enable new revenue streams and retention opportunities for their customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud. By using the Company's technologies,Synchronoss' customers can optimize their cost of operations while enhancing their customer experience.
The Company currently operates in and markets its solutions and services
directly through its sales organizations in
Impacts of the Recent Novel Coronavirus (COVID-19)
This disclosure discusses the actions the Company has taken in response to the COVID-19 crisis and the impacts that the situation has had on our business, as well as related known or expected trends. COVID-19 was identified inChina in late 2019 and has since spread throughout the world, including throughoutthe United States (U.S. ). COVID-19 has resulted in authorities implementing numerous preventative measures to contain or mitigate the outbreak of the virus, such as travel bans and restrictions, limitations on business activity, quarantines, and shelter-in-place orders. 26 -------------------------------------------------------------------------------- Table of Contents These restrictions and our responses to them are impacting our customers and their use of our products and services. In addition, governments have imposed a wide variety of consumer protection measures that limit how certain businesses, including TMT companies, can operate their businesses and interact with their customers. The crisis and governmental responses to the crisis have also resulted in a slowdown of global economic activity, which has impacted our customers. As a result, prior trends in our business may not be applicable to our operations during the pendency of the crisis. The impact of COVID-19 for the remainder of the year and beyond will depend significantly on the duration and potential cyclicality of the health crisis and the related public policy actions, additional initiatives we undertake in response to employee, market or regulatory needs or demands, the length and severity of the global economic slowdown, and whether and how our customers change their behaviors over the longer term. As a result, the demand for our products and services, as well as our overall results of operations, may be materially and adversely impacted by the pandemic for the duration of 2020 or longer, and we are unable to predict the duration or degree of such impact with any certainty. In response to COVID-19, we have been executing our business continuity plans and evolving our operations to protect the safety of our employees while continuing to provide critical products and services to our customers. Some of the initiatives the Company has undertaken include: •Working with our customers to continue to provide our products and services through the pandemic •Enhancing our safety protocols moving the majority of our employees to remote work arrangements •Adjusting business operations to address circumstances created by COVID-19 •Maintaining effective governance and internal controls in a remote work environment As the crisis continues, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees, customers and the Company and to continue to provide our products and services.
Revenues
We generate a majority of our revenues on a per transaction or subscription basis, which is derived from contracts that extend up to 60 months from execution.
The future success of our business depends on the continued growth of
Business-to-Business and Business-to-Business-to-Consumer driving customer
transactions, and continued expansion of our platforms into the TMT Market
globally through Cloud, Messaging, Digital Transformation and Internet of Things
("IoT") markets. As such, the volume of transactions and our ability to expand
our footprint in TMT and globally may result in revenue fluctuations on a
quarterly basis.
Most of our revenues are recorded in U.S. dollars but as we continue to expand
our footprint with international carriers, we will become subject to currency
translation that could affect our future net sales as reported in U.S. dollars.
Our top five customers accounted for 74.7% and 66.0% of net revenues for the
three months ended March 31, 2020 and March 31, 2019 , respectively. Contracts
with these customers typically run for three to five years. Of these customers,
Verizon accounted for more than 10% of our revenues in 2020 and 2019. The loss
of Verizon as a customer would have a material negative impact on our company.
However, we believe that the costs incurred and subscriber disruption by Verizon
to replace Synchronoss' solutions would be substantial.
Current Trends Affecting Our Results of Operations
As the full impact of the COVID-19 pandemic on our business continues to
develop, we are actively monitoring the global situation. The extent of the
impact of the COVID-19 pandemic on our operational and financial performance
will depend on certain developments, including the duration and spread of the
outbreak, impact on our customers and our sales cycles, impact on our business
operations, impact on our customer, employee or industry events, and effect on
our vendors, all of which are uncertain and cannot be predicted. The extent to
which the COVID-19 pandemic may impact our business, financial condition or
results of operations is uncertain, but may include, without limitation, impacts
to our paying user growth as well as disruptions to our business operations as a
result of travel restrictions, shutdown of workplaces and potential impacts to
our vendors. Additionally, our results of operations and cash flows are subject
to fluctuations due to changes in foreign currency
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exchange rates relative to U.S. dollars, our reporting currency, as well as
changes in interest rates. Volatile market conditions arising from the COVID-19
pandemic have and may continue to negatively impact our results of operations
and cash flows, due to a weakening of foreign currencies relative to the U.S.
dollar, which may cause our revenues to decline relative to our costs.
Business from our Synchronoss Personal Cloud solution has been driven by the
growth in mobile devices globally that are becoming content rich. As these
devices replace other traditional devices like PCs, the ability to securely back
up content from mobile devices, sync it with other devices and share it with
family, friends and business associates have become essential needs and
subscriber expectations. Such devices include smartphones, connected cars,
personal health and wellness devices and connected home devices. The need for
the contents of these devices to be stored in a common cloud are also expected
to be drivers of our business in the longer term.
Business from our traditional Synchronoss Messaging business has been driven by
a resurgence in the need for white label secure messaging platforms that favor
the Mobile Network Operator's ("MNO") business objectives and are not beholden
to the objectives of a sponsoring over-the-top ("OTT") platform. We believe that
messaging drives higher subscriber engagement than any other application in the
market today and holds the potential to stimulate new revenue from traditional
services and third-party brands. OTT global success has driven MNOs to look at
opportunities to preempt and compete with the OTTs which has potential
opportunity for Synchronoss' future growth to be driven by the need of TMT
companies including (and especially) MNOs to embrace Messaging as a Platform
("MaaP"). MaaP will allow TMT and MNO's to converse with subscribers in an
efficient, automated way by streamlining the costs and increasing the
effectiveness of self-care, as well as yielding cross-sell upselling of service
plans, devices, bundles, etc.. The Synchronoss Advanced Messaging Platform
provides state of the art RCS-driven features including the ability to support
advanced Peer to Peer communications and introduce new revenue streams driven by
commerce and advertising via Application-to-Person capabilities.
Companies in the TMT market all face the dilemma of attempting to pivot their
businesses to digital execution in order to create experiences that meet the
expectations of their subscribers, generate new revenues and streamline costs
creating healthier margins at a faster time to market than they have ever
operated before. Their challenges feature the lack of skill sets to
conceptualize and run day to day digital operations and the lack of resources to
integrate their legacy back end systems to enact digital experiences that
achieve their business objectives. The growth of Synchronoss Digital Platforms
will be driven by the ability to provide TMT companies' desire to obtain digital
transformation solutions as quickly as possible while educating them on the
ability to operate a digital business efficiently. Our Platform as a Service
("PaaS") model provides a desirable alternative to heavy capital expenditure
spending options often tried internally. The ability for our platforms to create
low/no code, new customer digital journeys, virtually on the fly, gives TMT
Companies the ability to operate new experiences and businesses without heavily
investing in development resources.
Synchronoss Advanced Messaging, Cloud and Digital Platforms are poised to bring
IoT initiatives to life across MNO and TMT companies creating new use cases that
will help stimulate the commercial growth of the robust potential of the IoT
market. As new devices and sensors come online in connected cities, Synchronoss ,
partnering with carriers like AT&T, has technology to unify and harness data
from legacy systems; provide analytic insights that fuel automated
communications, via our Advanced Messaging Platform between sensors, devices and
people; and create a common storage reservoir with our secure Cloud. There is
opportunity in many areas of the IoT ecosystem for Synchronoss to support
utilizing our Activation, Cloud and Analytics tools.
To support our growth, which will be driven by these favorable industry trends
mentioned above, we will leverage modular components from our existing software
platforms to build new products. We believe that these opportunities will
continue to provide future benefits and position us for future revenue growth.
We are also making investments in research and development of new products
designed to enable us to grow rapidly in the mobile wireless market. Our
purchase of capital assets and equipment may also increase based on aggressive
deployment, subscriber growth and promotional offers for free or bundled storage
by our major Tier 1 carrier customers.
We continue to expand our platforms into the converging TMT, MNO, Digital and
IoT spaces to enable connected devices to do more things across multiple
networks, brands and communities. Our initiatives with AT&T, Verizon, Sprint,
British Telecom , Softbank and other CSPs continue to grow both with regard to
our current business as well as our new product offerings. We are also exploring
additional opportunities through merger and acquisition activities to support
our customer, product and geographic diversification strategies.
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Three months ended
The following table presents an overview of our results of operations for
the three months ended
Three months ended March 31, 2020 vs 2019
2020 2019 $ Change
Net revenues $ 77,122 $ 88,105 $ (10,983)
Cost of revenues* 35,471 38,953 (3,482)
Research and development 19,788 19,681 107
Selling, general and administrative 26,344 29,246 (2,902)
Restructuring charges 1,450 421 1,029
Depreciation and amortization 11,356 20,143 (8,787)
Total costs and expenses 94,409 108,444 (14,035)
Loss from continuing operations $ (17,287) $ (20,339) $ 3,052 ________________________________
* Cost of revenues excludes depreciation and amortization which are shown separately.
Net revenues decreased$11.0 million to$77.1 million for the three months endedMarch 31, 2020 , compared to the same period in 2019. The decrease in revenue is primarily driven by the expiration of the STIN Cloud Telephony and Support services agreement and the sunset of certain legacy products. Cost of revenues decreased$3.5 million to$35.5 million for the three months endedMarch 31, 2020 , compared to the same period in 2019. The 2020 decrease was primarily due to cost savings initiatives implemented by the Company. These initiatives resulted in a significant decrease in cost of revenues driven mainly by data center consolidation and operating expense savings. Research and development expense increased$0.1 million to$19.8 million for the three months endedMarch 31, 2020 , compared to the same period in 2019. Research and development remained relatively flat against the comparable period.
Selling, general and administrative expense decreased
Restructuring charges were$1.5 million and$0.4 million for the three months endedMarch 31, 2020 and 2019, respectively, which primarily related to employment termination costs as a result of the work-force reductions initiated in the current year to reduce operating costs and align our resources with our key strategic priorities. Depreciation and amortization expense decreased$8.8 million to$11.4 million for the three months endedMarch 31, 2020 , compared to the same period in 2019. The 2020 decrease was primarily attributable to the expiration of amortizable acquired assets in combination with reduced capital expenditures mainly as a result of the data center consolidation efforts, partially offset by the increased amortization of capitalized software. Income tax. The Company recognized approximately$12.4 million and$1.4 million in related income tax benefit during the three months endedMarch 31, 2020 and 2019, respectively. The effective tax rate was approximately 78.8% for the three months endedMarch 31, 2020 . The effective tax rate was primarily driven by the Company's ability to recognize certain loss carrybacks as a result of the enactment of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") in the first quarter. The Company's effective tax rate was approximately 6.6% for the three months endedMarch 31, 2019 , which was lower than theU.S. federal statutory rate primarily due to the full valuation allowance recorded in the fourth quarter of 2018 and the tax benefits recorded discretely in the third quarter of 2018 from the expiration of the statute of limitations for uncertain tax positions and the reversal of a deferred tax liability related to a change in foreign tax residency. 29
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Liquidity and Capital Resources
As ofMarch 31, 2020 , our principal sources of liquidity have been cash provided by operations and capital from our revolving credit facility. Our cash, cash equivalents, marketable securities and restricted cash balance was$30.9 million atMarch 31, 2020 . We anticipate that our principal uses of cash, cash equivalents, and marketable securities will be to fund the expansion of our business through both organic growth and the expansion of our customer base. Uses of cash will also include technology expansion, capital expenditures, and working capital. AtMarch 31, 2020 , our non-U.S. subsidiaries held approximately$5.8 million of cash and cash equivalents that are available for use by our operations around the world. At this time, we believe the funds held by all non-U.S. subsidiaries will be permanently reinvested outside of theU.S. However, if these funds were repatriated to theU.S. or used forU.S. operations, certain amounts could be subject toU.S. tax for the incremental amount in excess of the foreign tax paid. Due to the timing and circumstances of repatriation of these earnings, if any, it is not practical to determine the unrecognized deferred tax liability related to the amount. We believe that our existing cash, cash equivalents, marketable securities, credit facility, and our ability to manage working capital and expected positive cash flows generated from operations in combination with continued expense reductions will be sufficient to fund our operations for the next twelve months from the date of filing based on our current business plans. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. Given the economic uncertainty as a result of the pandemic, we have taken actions to improve our current liquidity position, including, reducing working capital, reducing operating by and substantially reducing discretionary spending. Even with these actions however, an extended period of economic disruption as a result of COVID-19 could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the "Forward-Looking Statements" section of this MD&A and Part I, Item 1A. "Risk Factors", some of which are outside of our control.
Revolving Credit Facility
During the quarter, the Company drew the
Share Repurchase Program
There were no repurchases in 2020.
Shares of Preferred Stock
In accordance with the terms of the Share Purchase Agreement dated as ofOctober 17, 2017 (the "PIPE Purchase Agreement"), withSilver Private Holdings I, LLC , an affiliate of Siris ("Silver"), onFebruary 15, 2018 , we issued to Silver 185,000 shares of our newly issued Series A Preferred Stock, par value$0.0001 per share, with an initial liquidation preference of$1,000 per share, in exchange for$97.7 million in cash and the transfer from Silver to us of the 5,994,667 shares of our common stock held by Silver (the "Preferred Transaction"). In connection with the issuance of the Series A Preferred Stock, we (i) filed the Series A Certificate and (ii) entered into an Investor Rights Agreement with Silver setting forth certain registration, governance and preemptive rights of Silver with respect to us (the "Investor Rights Agreement"). Pursuant to the PIPE Purchase Agreement, at the closing, we paid to Siris$5.0 million as a reimbursement of Silver's reasonable costs and expenses incurred in connection with the Preferred Transaction. 30 -------------------------------------------------------------------------------- Table of Contents Certificate of Designation of the Series A Preferred Stock The rights, preferences, privileges, qualifications, restrictions and limitations of the shares of Series A Preferred Stock are set forth in the Series A Certificate. Under the Series A Certificate, the holders of the Series A Preferred Stock are entitled to receive Preferred Dividends. The Preferred Dividends are due on each Series A Dividend Payment Date. We may choose to pay the Preferred Dividends in cash or in additional shares of Series A Preferred Stock. In the event we do not declare and pay a dividend in-kind or in cash on any Series A Dividend Payment Date, the unpaid amount of the Preferred Dividend will be added to the Liquidation Preference. In addition, the Series A Preferred Stock participates in dividends declared and paid on shares of our common stock. Each share of Series A Preferred Stock is convertible, at the option of the holder, into the number of shares of common stock equal to the "Conversion Price" (as that term is defined in the Series A Certificate) multiplied by the then applicable "Conversion Rate" (as that term is defined in the Series A Certificate). Each share of Series A Preferred Stock is initially convertible into 55.5556 shares of common stock, representing an initial "conversion price" of approximately$18.00 per share of common stock. The Conversion Rate is subject to equitable proportionate adjustment in the event of stock splits, recapitalizations and other events set forth in the Series A Certificate. On and after the fifth anniversary ofFebruary 15, 2018 , holders of shares of Series A Preferred Stock have the right to cause the Company to redeem each share of Series A Preferred Stock for cash in an amount equal to the sum of the current liquidation preference and any accrued dividends. Each share of Series A Preferred Stock is also redeemable at the option of the holder upon the occurrence of a "Fundamental Change" (as that term is defined in the Series A Certificate) at a specified premium ("Liquidation Value"). In addition, the Company is also permitted to redeem all outstanding shares of the Series A Preferred Stock at any time (i) within the first 30 months of the date of issuance for the sum of the then-applicable Liquidation Preference, accrued but unpaid dividends and a make whole amount (known as "Redemption Value") and (ii) following the 30-month anniversary of the date of issuance for the sum of the then-applicable Liquidation Preference and the accrued but unpaid dividends. As ofMarch 31, 2020 , the Liquidation Value and Redemption Value of the Preferred Shares was$243.1 million . The holders of a majority of the Series A Preferred Stock, voting separately as a class, are entitled at each of our annual meetings of stockholders or at any special meeting called for the purpose of electing directors (or by written consent signed by the holders of a majority of the then-outstanding shares of Series A Preferred Stock in lieu of such a meeting): (i) to nominate and elect two members of our Board of Directors for so long as the Preferred Percentage (as defined in the Series A Certificate) is equal to or greater than 10%; and (ii) to nominate and elect one member of our Board of Directors for so long as the Preferred Percentage is equal to or greater than 5% but less than 10%. For so long as the holders of shares of Series A Preferred Stock have the right to nominate at least one director, we are required to obtain the prior approval of Silver prior to taking certain actions, including: (i) certain dividends, repayments and redemptions; (ii) any amendment to our certificate of incorporation that adversely effects the rights, preferences, privileges or voting powers of the Series A Preferred Stock; (iii) issuances of stock ranking senior or equivalent to shares of Series A Preferred Stock (including additional shares of Series A Preferred Stock) in the priority of payment of dividends or in the distribution of assets upon any liquidation, dissolution or winding up of us; (iv) changes in the size of our Board of Directors; (v) any amendment, alteration, modification or repeal of the charter of ourNominating and Corporate Governance Committee of the Board of Directors and related documents; and (vi) any change in our principal business or the entry into any line of business outside of our existing lines of businesses. In addition, in the event that we are in EBITDA Non-Compliance (as defined in the Series A Certificate) or the undertaking of certain actions would result in us exceeding a specified pro forma leverage ratio, then the prior approval of Silver would be required to incur indebtedness (or alter any debt document) in excess of$10.0 million , enter or consummate any transaction where the fair market value exceeds$5.0 million individually or$10.0 million in the aggregate in a fiscal year or authorize or commit to capital expenditures in excess of$25.0 million in a fiscal year. Each holder of Series A Preferred Stock has one vote per share on any matter on which holders of Series A Preferred Stock are entitled to vote separately as a class, whether at a meeting or by written consent. The holders of Series A Preferred Stock are permitted to take any action or consent to any action with respect to such rights without a meeting by delivering a consent in writing or electronic transmission of the holders of the Series A Preferred Stock entitled to cast not less than the minimum number of votes that would be necessary to authorize, take or consent to such action at a meeting of stockholders. In addition to any vote (or action taken by written consent) of the holders of the shares of Series A Preferred Stock as a separate class 31 -------------------------------------------------------------------------------- Table of Contents provided for in the Series A Certificate or by the General Corporation Law of theState of Delaware , the holders of shares of the Series A Preferred Stock are entitled to vote with the holders of shares of common stock (and any other class or series that may similarly be entitled to vote on an as-converted basis with the holders of common stock) on all matters submitted to a vote or to the consent of the stockholders of the Company (including the election of directors) as one class. Under the Series A Certificate, if Silver and certain of its affiliates have elected to effect a conversion of some or all of their shares of Series A Preferred Stock and if the sum, without duplication, of (i) the aggregate number of shares of our common stock issued to such holders upon such conversion and any shares of our common stock previously issued to such holders upon conversion of Series A Preferred Stock and then held by such holders, plus (ii) the number of shares of our common stock underlying shares of Series A Preferred Stock that would be held at such time by such holders (after giving effect to such conversion), would exceed the 19.9% of the issued and outstanding shares of our voting stock on an as converted basis (the "Conversion Cap"), then such holders would only be entitled to convert such number of shares as would result in the sum of clauses (i) and (ii) (after giving effect to such conversion) being equal to the Conversion Cap (after giving effect to any such limitation on conversion). Any shares of Series A Preferred Stock which a holder has elected to convert but which, by reason of the previous sentence, are not so converted, will be treated as if the holder had not made such election to convert and such shares of Series A Preferred Stock will remain outstanding. Also, under the Series A Certificate, if the sum, without duplication, of (i) the aggregate voting power of the shares previously issued to Silver and certain of its affiliates held by such holders at the record date, plus (ii) the aggregate voting power of the shares of Series A Preferred Stock held by such holders as of such record date, would exceed 19.99% of the total voting power of our outstanding voting stock at such record date, then, with respect to such shares, Silver and certain of its affiliates are only entitled to cast a number of votes equal to 19.99% of such total voting power. The limitation on conversion and voting ceases to apply upon receipt of the requisite approval of holders of our common stock under the applicable listing standards. Investor Rights Agreement Concurrently with the closing of the Preferred Transaction,Synchronoss and Silver entered into an Investor Rights Agreement. Under the terms of the Investor Rights Agreement, Silver andSynchronoss have agreed that, effective as of the closing of the Preferred Transaction, the Board of Directors ofSynchronoss will consist of ten members. From and after the closing of the Preferred Transaction, so long as the holders of Series A Preferred Stock have the right to nominate a member to the Board of Directors pursuant to the Series A Certificate, the Board of Directors ofSynchronoss will consist of (i) two directors nominated and elected by the holders of shares of Series A Preferred Stock; (ii) four directors who meet the independence criteria set forth in the applicable listing standards (each of whom will be initially agreed upon bySynchronoss and Silver); and (iii) four other directors, two of whom shall satisfy the independence criteria of the applicable listing standards and, as of the closing of the Preferred Transaction, one of whom shall be the individual then serving as chief executive officer ofSynchronoss and one of whom shall be the current chairman of the Board of Directors ofSynchronoss as of the date of execution of the Investors Rights Agreement. Following the closing of the Preferred Transaction, so long as the holders of Series A Preferred Stock have the right to nominate at least one director to the Board of Directors ofSynchronoss pursuant to the Series A Certificate, Silver will have the right to designate two members of theNominating and Corporate Governance Committee of the Board of Directors. Pursuant to the terms of the Investor Rights Agreement, neither Silver nor its affiliates may transfer any shares of Series A Preferred Stock subject to certain exceptions (including transfers to affiliates that agree to be bound by the terms of the Investor Rights Agreement). For so long as Silver has the right to appoint a director to the Board of Directors ofSynchronoss , without the prior approval by a majority of directors voting who are not appointed by the holders of shares of Series A Preferred Stock, neither Silver nor its affiliates will directly or indirectly purchase or acquire any debt or equity securities ofSynchronoss (including equity-linked derivative securities) if such purchase or acquisition would result in Silver's Standstill Percentage (as defined in the Investor Rights Agreement) being in excess of 30%. However, the foregoing standstill restrictions would not prohibit the purchase of shares pursuant to the PIPE Purchase Agreement or the receipt of shares of Series A Preferred Stock issued as Preferred Dividends pursuant to the Series A Certificate, shares of Common Stock received upon conversion of shares of Series A Preferred Stock or receipt of any shares of Series A Preferred Stock, Common Stock or other securities of the Company otherwise paid as dividends or as an increase of the Liquidation Preference (as defined in the Series A Certificate) or 32 -------------------------------------------------------------------------------- Table of Contents distributions thereon. Silver will also have preemptive rights with respect to issuances of securities ofSynchronoss in order to maintain its ownership percentage. Under the terms of the Investor Rights Agreement, Silver will be entitled to (i) three demand registrations, with no more than two demand registrations in any single calendar year and provided that each demand registration must include at least 10% of the shares of Common Stock held by Silver, including shares of Common Stock issuable upon conversion of shares of Series A Preferred Stock and (ii) unlimited piggyback registration rights with respect to primary issuances and all other issuances. Discussion of Cash Flows
A summary of net cash flows follows (in thousands):
Three Months Ended March 31, Change
2020 2019 2020 vs 2019
Net cash provided by (used in):
Operating activities $ (15,016) $ (5,684) $ (9,332)
Investing activities (2,823) 9,598 (12,421)
Financing activities 9,996 (23,461) 33,457
Our primary source of cash is receipts from revenue. The primary uses of cash
are personnel and related costs, telecommunications and facility costs related
primarily to our cost of revenue and general operating expenses including
professional service fees, consulting fees, building and equipment maintenance
and marketing expense.
Cash flows from operating activities for the three months ended March 31, 2020
was $15.0 million cash used in operating activities, as compared to $5.7 million
of cash used in operating activities for the same period in 2019. The increase
of cash used by operating activities of $9.3 million was primarily due to
favorable changes in cash earnings of $4.9 million in 2020 vs 2019 and an
unfavorable change in working capital of $14.3 million .
Cash flows from investing for the three months ended March 31, 2020 was
$2.8 million cash used for investing, as compared to $9.6 million in cash
provided by investing activities during the same period in 2019. The cash used
for investing in the current year was primarily related to the purchase of fixed
assets and investment in capitalized software offset by the sale of certain IP
address assets. The net decrease in cash from investing activities from the
prior year mainly related to the net proceeds from the purchases and sales of
marketable securities in the prior year that were not present in the current
period.
Cash flows from financing for three months ended March 31, 2020 was
$10.0 million of cash provided, as compared to $23.5 million of cash used by
financing activities for the same period in 2019. The cash provided from
investing activities was attributable to the $10.0 million drawdown from our
Revolving Credit Facility in the current quarter. The net change in cash
provided from financing activities from the prior year is primarily attributable
to the cash provided from the Revolving Credit Facility in the current quarter
offset by first quarter repayments for our Convertible Senior Notes in 2019.
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 during 2020 and 2019. We do not expect the current rate of
inflation to have a material impact on our business.
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Contractual Obligations
Our contractual obligations consist of contingent consideration, office
equipment and colocation services and contractual commitments under third-party
hosting, software licenses and maintenance agreements. The following table
summarizes our long-term contractual obligations as of March 31, 2020 (in
thousands).
Payments Due by Period
Total 2020 2021-2023 2024-2025 Thereafter
Revolving Credit Facility $ 10,000 $ 10,000 $ - $ - $ -
Interest 18 18 - - -
Operating lease obligations 90,067 10,242 35,715 20,163 23,947
Purchase obligations * 25,317 19,628 5,689 - -
Total $ 125,402 $ 39,888 $ 41,404 $ 20,163 $ 23,947 _______________________________
* Amount represents obligations associated with colocation agreements and other customer delivery related purchase obligations.
Uncertain Tax Positions
Unrecognized tax positions of$3.5 million atMarch 31, 2020 are excluded from the table above as we are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but we do not believe that the ultimate settlement of our obligations will materially affect our liquidity. We do not expect that the balance of unrecognized tax benefits will significantly increase or decrease over the next twelve months.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements in accordance withU.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. TheSEC considers an accounting policy to be critical if it is important to a company's financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from COVID-19 and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of the impacts from COVID-19 remain unclear, the Company's estimates and assumptions may evolve as conditions change. Actual results could differ significantly from those estimates. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See Part II, "Item 1A. Risk Factors" in this Form 10-Q for certain matters bearing risks on our future results of operations. During the three months endedMarch 31, 2020 , the Company made changes in its accounting policies over Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. These updates are described in detail in Note 2. Basis of Presentation and Consolidation. Aside from the adoption of Topic 326, there were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K for the year endedDecember 31, 2019 during the three months endedMarch 31, 2020 . Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 for a more complete discussion of our critical accounting policies and estimates. 34 -------------------------------------------------------------------------------- Table of Contents Recently Issued Accounting Standards For a discussion of recently issued accounting standards see Note 2. Basis of Presentation and Consolidation included in Part I, Item 1. "Notes to Condensed Consolidated Financial Statements (unaudited)" of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as ofMarch 31, 2020 andDecember 31, 2019 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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