The velocity of the destruction of Synchronoss Technologies investors’ capital is brutal to behold: In less than four months, the value of their investments has been halved.

There’s a reason for that.

Synchronoss SNCR

On Dec. 6 Bridgewater, New Jersey-based Synchronoss announced an unusual pair of transactions that radically altered its business model just weeks before the end of its fiscal year: It paid twice the then price of shares to merge with the public company Intralinks and simultaneously sold the mobile-phone activation unit, which was responsible for almost half of annual sales for Synchronoss. This prompted the Southern Investigative Reporting Foundation to take a hard look at the company’s shift in strategy, whose sheer complexity masked some troubling details.

The Form 10-K annual report for 2016, filed on Feb. 27, probably won’t inspire investor confidence, though: Instead of providing reassurance about the radical transformation afoot, it reveals a series of accounting- and disclosure-related gambits that make for a very different company than the acquisitive, growth-driven one that’s been touted in press releases and conference calls.

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The cloud services unit of Synchronoss peddles data storage and analytics software to wireless providers who use it to offer customers branded cloud storage, such as Verizon Cloud. Apart from all the hype about “the cloud,” wireless companies view it as a customer retention tool, on the view that people who are already using one cloud service to store their photos, music or address books may be less likely to jump to a rival when a better deal comes along.

Synchronoss entered the cloud storage business by purchasing FusionOne in July 2010. Then just as the cloud storage market took off, Synchronoss began rolling up a hodgepodge of other companies involved with cloud-based software, including Newbay Software in December 2012 and F-Secure’s personal cloud business in February 2015.

With Synchronoss’ breakneck pace of acquisitions, its cloud services sales expanded at a torrid 72 percent annual clip from 2010 to 2016, making this unit, by its five-year mark, the biggest contributor to the company’s sales and income. In a stroke of good fortune, the unit’s growth accelerated just as revenue from Synchronoss’ original business line, mobile phone activation, started to taper off. To that end, cloud services made for a handy marketing point in Synchronoss’ presentations to brokerage analysts and money managers.

Throughout quarterly conference calls in 2016, former Chief Financial Officer Karen Rosenberger painted an increasingly rosy picture of the cloud services unit’s annual sales estimates: In May during the first-quarter call, she projected an annual revenue spike of about 27 percent, to as high as $390 million to $400 million. By the third-quarter call in November she forecast annual growth of 32 percent, anticipating sales of $408 million to $411 million.

So Synchronos investors, who in December had incurred $850 million of debt to purchase money-losing Intralinks, were probably completely shocked by the release of the 2016 10-K in February, with cloud services sales measuring just $389.9 million, below May’s initial guidance and well under November’s estimate.

To add insult to injury, the $74 million in increased sales–proudly trumpeted in the year-end conference call as proof of cloud services’ rapid expansion–merely amounts to corporate doublespeak; it’s an object lesson in how a company can meet all its financial reporting requirements yet still make investors bust their humps to find out what’s really going on.

Synchronoss is an aggressive acquirer of other companies and business lines, and with the sales from these purchased businesses folded into its own totals, showing growth is easy.

But at this moment in time investors would be wise to examine organic revenue — that is, sales derived from Synchronoss’ existing businesses but excluding revenue from acquisitions and other one-time accounting adjustments made the previous year.

In order to calculate this, disregard the $25.82 million in revenue reclassified from the mobile phone activation unit as cloud services revenue and instead consider it a one-time, noncash adjustment. Additionally, Synchronoss made a good-sized cloud services acquisition last March, paying $124.5 million for Openwave Messaging, so ignore the $42.5 million in revenue contributed from that. (Openwave’s roughly 10 months’ worth of revenue proved to be a boon for the company, amounting to almost nine percent of 2016’s total sales, despite CEO Stephen Waldis’ warning to analysts in May that its contribution would be minimal.)

Then there is a $9.2 million payment from Sequential Technology International Holdings for a “non-exclusive perpetual license agreement.” It’s fair to say that this entry is a rare bird for financial sleuths — something that looks initially odd and, upon further inspection, turns out to be even more problematic.

Sequential Technology International played a central role in the Southern Investigative Reporting Foundation’s Feb. 24 investigation after it purchased Synchronoss’ mobile phone activation unit on unusually favorable terms. Synchronoss failed to disclose numerous and long-standing connections between its CEO, Stephen Waldis, and Sequential Technology International’s parent company, Omniglobe International, a one-time related party that still does most of its business with Synchronoss.

While accounting standards afford auditors latitude in determining what can be recognized as revenue, permitting a $9.2 million noncash IOU from Sequential (a newly created company that already had an $83 million debt to Synchronoss) to count as revenue on Dec. 22, just days before the fiscal year’s end, is highly unusual. Moreover, the payment is not disclosed anywhere but the 10-K and not even mentioned in a separate Dec. 22 filing discussing the transaction’s terms.

(The license payment simply adds to the circus-like atmosphere surrounding the activation unit’s sale. In addition to having a $146 million bargain purchase price, the deal has involved precious little cash up front. It’s oddly a two-stage sale, as 70 percent of the unit was sold on Dec. 6 and the rest of the transaction is set to take place later this year. Sequential Technology International is also paying Synchronoss $32 million over three years in what it calls a transaction support agreement.)

What remains for Synochronoss after these items are subtracted is about $312.3 million in organic revenue for the cloud services unit, a mere $2.3 million increase over the prior year’s tally —  a sharp refutation of management’s assurances of continued growth. To the contrary, despite the company having spent hundreds of millions of dollars on building the cloud services unit over the past six years, it really isn’t growing at all.

          (Source: Synchronoss 2016 10-K)

For its part, Synchronoss is sticking to its guns and arguing to investors, including at a presentation at a March 6 Raymond James conference, that its cloud services unit is expanding. In response to a question about the unit’s growth, Daniel Harlan Ives, senior vice president of finance and business development, suggested that calculations indicate the unit’s revenue to be $368 million, implying a 15.6 percent sales increase for the year.

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The releasing of the 2016 10-K was hardly the first time Synchronoss’ investors have been force-fed some baffling disclosures about the cloud services unit’s economic health: Opaque transactions in the fourth quarter of 2015 as well as in the last moments of the third quarter of 2016 have made virtually no economic sense.

In the third quarter of 2016, Synchronoss announced earnings of 68 cents per share, at the higher end of analysts’ guidance of 65 cents to 69 cents per share. In a brief aside, CFO Karen Rosenberger referenced a $25 million licensing fee from Verizon Wireless that materialized in the last days of the third quarter.

What was the backstory for that $25 million fee? It was not immediately apparent during the third quarter earnings call with analysts, when Waldis cited a nondisclosure agreement as a reason for not providing much detail about the deal. Nor did it become evident in subsequent company filings. Even analysts at investment management firms that own Synchronoss shares have told the Southern Investigative Reporting Foundation they haven’t been given a clear answer.

Given Synchronoss’ managers are not shy about promoting its prospects, their silence on this transaction is telling.

The most obvious benefit of signing that $25 million contract was it allowed Synchronoss’ third quarter 2016 revenue and income levels to compare favorably with those of the second quarter of 2016 and the third quarter of 2015, metrics that are important to many brokerage analysts.

Perhaps the most striking thing about the Verizon Wireless contract from an accounting perspective, however, is the fact Synchronoss’ gross margins didn’t really change. Ordinarily a license payment boosts revenue with a minimal effect on the cost of goods sold. But in the third quarter of 2016 the gross margins declined in comparison with the same period in 2015.

Regardless, analysts and investors appear to have not considered that without Synchronoss’ signing a large contract in the last days of the third quarter, its results would have been abysmal.

                 (Source: Synchronoss’ third-quarter 2016 10-Q)

To investors concerned about earnings quality, the joint ventures that Synchronoss struck with Goldman Sachs and Verizon during 2015’s fourth quarter should also raise the alarm. As was true for the Verizon “licensing fee” above, details are scarce in the company’s filings and liberally coated with legal jargon.

One clue buried deep in the 2015 10-K is a footnote about “net income attributable to non-controlling interests” of $20.3 million from Synchronoss’ “new ventures with Verizon and Goldman Sachs.”

On the last day of 2015 Synchronoss signed a joint venture with Verizon, called Zentry LLC, that required Synchronoss to enter into a “non-exclusive perpetual license agreement” for $23 million. Synchronoss owns a 67 percent stake of the venture, which cost $48 million up front. (To be sure, this Verizon transaction is separate from the licensing fee deal in last year’s third quarter.)

Even less detail is provided about the Goldman Sachs venture, SNCR LLC; Synchronoss was required to take out a $20 million line of credit for it.

Whatever benefits the joint ventures had for Synchronoss in 2015 sure didn’t work out in 2016. According to the 2016 10-K, the “net income attributable to non-controlling interests” line is spilling red ink, amounting to a loss of slightly less than $11.6 million.

While there may well be more to Synchronoss’ joint venture story, from the little information that is available, the math is awful for shareholders: A little more than $20 million in profit in 2015 required the outlay of multiples of that amount. And the once touted joint ventures are now posting some sizable losses.

Every company strikes a bad deal now and then but this appears to be Synchronoss’ desperate financial engineering to generate short-term license fees.

There’s a noteworthy footnote to concerns over Synchronoss’ accounting and it has to do with executive stock sales: over the past two years, the company’s three most senior executives, ex-CEO Waldis, ex-CFO Rosenberger and President and Chief Operating Officer Robert Garcia have made a great deal of sales, either in terms of outright dollar value or the size of their holdings. (Both Waldis and Rosenberger left unexpectedly as part of the Intralinks merger; Waldis remains on the board of directors as its executive chairman.)

All three executives have made the sales as part of “10b5-1 plans,” a Securities and Exchange Commission rule designed to allow corporate insiders such as senior management or directors, with access to material non-public information, to sell or purchase a specified number of shares based on plans communicated to a broker several months prior.

Waldis, for example, since the beginning of last year, sold 329,769 shares for a little over $10.61 million; 2015 was also an active year for him, selling 202,713 shares for $8.94 million.

Rosenberger, whose trading activity had long been limited to modestly-sized size sales (often indicative of raising money for the tax liability related to options vesting), began aggressively selling on December 27, selling 24,023 shares for just over $940,000. With 32,846 shares left, as of April 1 she will have not to disclose her sales.

Garcia, like Rosenberger, had not been very active with respect to his Synchronoss stake but he also began selling with fervor at the end of last year, selling 66,055 shares since December 28, worth $2.38 million, through March 22. He has 77,000 shares remaining.

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Daniel Harlan Ives, Synchronoss’ media- and investor-relations representative, declined to comment on questions submitted by the Southern Investigative Reporting Foundation, citing the company’s self-imposed quiet period in the weeks leading up to the quarter’s end. Spokesmen for Goldman Sachs and Verizon didn’t return calls seeking comment.