10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission File No. 000-30901 SUPPORT.COM, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 94-3282005 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 575 Broadway Redwood City, CA 94063 ---------------------- (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (650) 556-9440 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 X No ______. --- On November 14, 2001, 33,402,040 shares of the Registrant's Common Stock, $0.0001 par value, were outstanding. SUPPORT.COM, INC. FORM 10-Q QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 INDEX

Page ---- Part I: Financial Information Item 1: Financial Statements (Unaudited) Condensed Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the three and nine months 4 ended September 30, 2001 and 2000 Condensed Consolidated Statements of Cash Flows for the nine months 5 ended September 30, 2001 and 2000 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and 9 Results of Operations Item 3: Quantitative and Qualitative Disclosures About Market Risk 20 PART II: Other Information Item 6: Exhibits and Reports on Form 8-K 21 Signature 22 Exhibit Index 23

2 PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS SUPPORT.COM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)

September 30, December 31, 2001 2000 ---- ---- (unaudited) Assets Current assets: Cash and cash equivalents .................................................. $ 17,584 $ 11,756 Short term investments ..................................................... 12,048 39,757 Accounts receivable, net ................................................... 8,079 7,872 Other current assets ....................................................... 3,006 3,255 -------- -------- Total current assets ..................................................... 40,717 62,640 Property and equipment, net ................................................... 2,231 2,420 Purchased intangibles, net .................................................... 2,392 5,230 Other assets .................................................................. 323 282 -------- -------- $ 45,663 $ 70,572 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable ........................................................... $ 1,706 $ 957 Accrued compensation ....................................................... 1,335 2,250 Other accrued liabilities .................................................. 2,841 5,094 Capital lease obligations, current portion ................................. 569 620 Deferred revenue ........................................................... 8,395 11,866 -------- -------- Total current liabilities ................................................ 14,846 20,787 Capital lease obligations, net of current portion ............................. 812 1,221 Other long term liabilities ................................................... 1,236 2,164 Deferred revenue - long-term portion .......................................... 869 241 Stockholders' equity: Common stock .............................................................. 3 3 Additional paid-in capital ................................................. 108,888 108,558 Notes receivable from stockholders ......................................... (1,523) (2,051) Deferred stock compensation ................................................ (2,535) (7,219) Accumulated other comprehensive income ..................................... 138 -- Accumulated deficit ........................................................ (77,071) (53,132) -------- -------- Stockholders' equity ..................................................... 27,900 46,159 -------- -------- $ 45,663 $ 70,572 ======== ========

See accompanying notes. 3 SUPPORT.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts; unaudited)

Three Months Ended Nine Months Ended September 30, September 30, ------------ ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Revenues: License fees................................................ $ 5,069 $ 3,965 $ 15,997 $7,722 Services ................................................... 1,998 1,388 5,955 3,077 -------- -------- -------- --------- Total revenues ........................................... 7,067 5,353 21,952 10,799 -------- -------- -------- --------- Costs and expenses: Cost of license fees ....................................... 131 1,113 500 1,196 Cost of services ........................................... 1,486 1,826 4,735 3,958 Amortization of purchased intangibles ...................... 598 94 2,214 94 Research and development ................................... 2,995 2,649 9,817 7,364 Sales and marketing ........................................ 7,101 5,970 21,723 15,387 General and administrative ................................. 1,346 1,246 4,715 2,830 Amortization of deferred stock compensation (1) ............ 870 2,767 3,554 9,215 -------- -------- -------- --------- Total costs and expenses ................................. 14,527 15,665 47,258 40,044 -------- -------- -------- --------- Loss from operations .......................................... ( 7,460) ( 10,312) (25,306) (29,245) Interest income (expense) and other, net ...................... 255 755 1,367 818 -------- -------- -------- --------- Net loss ...................................................... (7,205) (9,557) (23,939) ( 28,427) Accretion on redeemable convertible preferred stock ........... -- (79) -- (885) -------- -------- -------- --------- Net loss attributable to common shareholders .................. $ (7,205) $ (9,636) $(23,939) $ (29,312) ======== ======== ========= ========= Basic and diluted net loss per share .......................... $ (0.23) $ (0.38) $ (0.77) $ (2.14) ======== ======== ======== ========= Shares used in computing basic and diluted net loss per share.. 31,316 25,279 30,891 13,712 ======== ======== ======== =========

________________ (1) Amortization of deferred compensation relates to the following:

Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Cost of services ............................................. $ 38 $ 127 $ 155 $ 424 Research and development ..................................... 172 554 703 1,843 Sales and marketing .......................................... 314 985 1,282 3,280 General and administrative ................................... 346 1,101 1,414 3,668 ------- ------- ------- ------- $ 870 $ 2,767 $ 3,554 $ 9,215 ------- ------- ------- -------

See accompanying notes. 4 SUPPORT.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

Nine Months Ended September 30, ------------- 2001 2000 ---- ---- (unaudited) Operating Activities Net loss ...................................................................... $ (23,939) $ (28,427) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................................... 1,790 985 Amortization of deferred stock compensation ................................. 3,554 9,215 Amortization of purchased intangibles ....................................... 2,214 94 Other ....................................................................... 81 80 Changes in assets and liabilities: Accounts receivable, net .................................................. (207) (3,388) Prepaids and other current assets ......................................... 249 (820) Accounts payable .......................................................... 749 (494) Accrued compensation ...................................................... (915) 651 Other accrued liabilities ................................................. (2,253) 3,075 Deferred revenue .......................................................... (2,843) 6,261 --------- -------- Net cash used in operating activities ................................... (21,520) (12,768) --------- -------- Investing Activities Purchases of property and equipment ........................................... (1,601) (1,105) Other assets .................................................................. (41) (121) Purchased intangibles ......................................................... (304) -- Purchases of short-term investments ........................................... (31,205) (13,169) Sales and maturities of short-term investments ................................ 58,914 1,000 --------- -------- Net cash provided by (used in) investing activities ..................... 25,763 (13,395) --------- -------- Financing Activities Proceeds from initial public offering, net of issuance costs .................. -- 61,777 Proceeds from other issuances of common stock, net of repurchases ............. 1,517 1,493 Repayment of notes receivable from shareholders ............................... 528 -- Principal payments under capital lease obligations ............................ (460) (374) Repayment of notes payable .................................................... -- (2,399) --------- -------- Net cash provided by financing activities ............................... 1,585 60,497 --------- -------- Net increase in cash and cash equivalents ....................................... 5,828 34,334 Cash and cash equivalents at beginning of period ................................ 11,756 4,023 --------- -------- Cash and cash equivalents at end of period ...................................... $ 17,584 $ 38,357 ========= ========

See accompanying notes. 5 SUPPORT.COM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (1) Significant Accounting Policies: Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of Support.com and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The balance sheet at September 30, 2001 and the statements of operations for the three and nine months ended September 30, 2001 and 2000 and cash flows for the nine months ended September 30, 2001 and 2000 are unaudited. In the opinion of management, these financial statements reflect all adjustments (consisting of normal reoccurring adjustments) that are necessary for a fair presentation of the results for and as of the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The condensed consolidated financial statement information as of December 31, 2000 is derived from audited financial statements as of that date. These financial statements should be read with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 30, 2001. Financial Instruments Estimated fair values of financial instruments are based on quoted market prices. The following is a summary of available-for-sale securities (in thousands) at September 30, 2001: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Cash ............................ $ 2,344 $ -- $ -- $ 2,344 Money market funds .............. 15,240 -- -- 15,240 Federal agencies ................ 11,965 83 -- 12,048 ------- ------- ------- ------- $29,549 $ 83 $ -- $29,632 ======= ======= ======= ======= Classified as: Cash and cash equivalents ....... $17,584 -- -- $17,584 Short-Term Investments .......... 11,965 83 -- 12,048 ------- ------- ------- ------- $29,549 $ 83 $ -- $29,632 ======= ======= ======= ======= Revenue Recognition License revenue is comprised of fees for term and perpetual licenses of Support.com's software by corporate customers and resellers. Term licenses are sold with maintenance for which Support.com does not have vendor specific objective evidence (VSOE) to determine fair value as maintenance is not priced or offered separately in term licensing arrangements. Support.com therefore recognizes maintenance revenue and the term license fees over the service period of the arrangement. License revenue also includes maintenance for term licenses. If any portion of the fee for a term license with maintenance is payable in excess of 12 months from the date of the agreement, as is the case with the majority of our term license arrangements, the fee is considered to not be fixed or determinable and revenue is recognized ratably over the service period of the agreement commencing in the month in which the first payment is due. Revenue from perpetual license fees is recognized when persuasive evidence of an arrangement exists, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fee is fixed or determinable and collectibility is probable. License revenue from arrangements with resellers is recognized upon delivery limited by guaranteed minimum amounts due under the arrangement or sell through activity. 6 Services revenue is primarily comprised of revenue from professional services, such as consulting services and training and also includes maintenance under perpetual license arrangements. Net Loss Per Common Share Basic and diluted net loss per share are presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), for all periods presented. Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Had Support.com been in a net income position, diluted earnings per share would have included the shares used in the computation of basic net loss per share as well as the impact of common shares outstanding subject to repurchase and outstanding options and warrants to purchase an additional 7,845,782 and 8,197,833 shares, prior to the application of the treasury stock method, for the three and nine months ended September 30, 2001. Such shares have been excluded because they are antidilutive for all periods presented. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data): Three months ended Nine months ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net loss attributable to common shareholders ...................... $ (7,205) $(9,636) $(23,939) $(29,312) ========= ======== ========= ======== Basic and diluted: Weighted-average shares of common stock outstanding ............ 33,417 29,677 33,344 18,460 Less: Weighted-average shares subject to repurchase ............ (2,101) (4,398) (2,453) (4,748) -------- ------- -------- -------- Shares used in computing basic and diluted net loss per share ........................................................ 31,316 25,279 30,891 13,712 ========= ======== ========= ======== Basic and diluted net loss per share attributable to common stockholders ................................................. $ (0.23) $ (0.38) $ (0.77) $ (2.14) ========= ======== ========= ======== (2) Stockholders' Equity On July 19, 2000, Support.com completed an initial public offering of its common stock. All 4.9 million shares covered by Support.com's Registration Statement on Form S-1, including shares subject to an over-allotment option that was exercised, were sold by Support.com at a price of $14.00 per share. Net proceeds to the Company from the issuance of common stock in the initial public offering were approximately $61.8 million. (3) Purchased Intangibles On September 20, 2000, Support.com purchased source code and other related intellectual property rights from ePeople, Inc. (formerly known as NoWonder, Inc.) for $6.8 million. The purchase price was recorded as purchased intangibles and included as an other asset in the Company's consolidated balance sheet. The Company paid $3.4 million during the year ended December 31, 2000, and will pay an additional $3.4 million in equal quarterly installments through the quarter ended September 30, 2003. The purchased technology is being amortized on a straight-line basis over two years. Total amortization related to the purchased intangibles for the nine months ended September 30, 2001 was $2.2 million. 7 (4) Recently Issued Accounting Standards On January 1, 2001, we adopted Statement of Financial Reporting Standards No. 133, ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, requires that all derivative instruments be recorded on the balance sheet at their fair value. Change in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if so, the type of hedge transaction. The adoption of SFAS 133, as amended, did not have a material impact on our financial position or results of operations. In July 2001, the Financial Accounting Standards Board, or FASB, issued two statements as a result of its deliberations on the business combinations project, Statement of Financial Accounting Standards No. 141, or FAS 141, on Business Combinations and FAS 142 on Goodwill and Other Intangible Assets. FAS 141 will be effective for any business combinations initiated after June 30, 2001 and also includes the criteria for the recognition of intangible assets separately from goodwill. FAS 142 will be effective for fiscal years beginning after December 15, 2001 and will require that goodwill not be amortized, but rather be subject to an impairment test at least annually. Separately identified and recognized intangible assets resulting from business combinations completed before July 1, 2001 that do not meet the new criteria for separate recognition of intangible assets will be subsumed into goodwill upon adoption. In addition, the useful lives of recognized intangible assets acquired in transactions completed before July 1, 2001 will be reassessed and the remaining amortization periods adjusted accordingly. The adoption of FAS 141 and 142 is not expected to have a significant impact on our financial position at transition. (5) Comprehensive Loss Statement of Financial Accounting No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes standards for reporting and displaying comprehensive net income and its components in stockholders' equity. However, it has no impact on our net income as presented in our financial statements. SFAS 130 requires foreign currency translation adjustments and changes in the fair value of available-for-sale securities to be included in comprehensive income. The following are the components of comprehensive income (loss): (in thousands)

Three months ended Nine months ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net loss .................................................... $ (7,205) $ (9,557) $(23,939) $(28,427) ======== ======== ======== ======== Net unrealized gain (loss) on available-for-sale securities ............................................. 65 (3) 55 27 Translation adjustment gain (loss) .......................... 125 -- 6 -- Comprehensive income (loss) ................................. $ (7,015) $ (9,560) $(23,878) $(28,400) ======== ======== ======== ========

The components of accumulated other comprehensive income (loss) relate entirely to unrealized gains (losses) on available-for-sale securities and translation adjustment gain (loss) and are $138,000 at September 30, 2001 and $0 at September 30, 2000. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report on Form 10-Q contains forward-looking statements. These statements relate to our, and in some cases our customers', or alliance partners', future plans, objectives, expectations, intentions and financial performance, as well as statements as to expected net losses, expected cash flows, the adequacy of capital resources, growth in operations, the ability to compete and respond to technological change and the acceptance and performance of our products and services. In some cases, you can identify forward-looking statements because they use terms such as anticipates, believes, continue, could, estimates, expects, intends, may, plans, potential, predicts, should or will or the negative of those terms or other comparable words. These statements involve risks and uncertainties that may cause our actual results, activities or achievements to be materially different from those expressed or implied by these statements. These risks and uncertainties include those listed under Factors that May Affect Future Results and Management's Discussion and Analysis of Financial Condition and Results of Operations. Support.com expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this report to conform these statements to actual results or changes in our expectations or in events, conditions or circumstances on which any such statement is based. You should not place undue reliance on these forward-looking statements, which apply only as of the date hereof. Overview Support.com is a leading provider of support automation software. Support.com sells to corporate enterprises, service providers and personal computer and device manufacturers that utilize its software platform to increase the efficiency and effectiveness of their support operations, while improving user responsiveness and satisfaction. Support.com sells its products primarily in the United States and, to a lesser extent in Europe, Asia, and Latin America through its direct and indirect sales force and indirect sales channels. Substantially all of Support.com's revenues have come from the license of our software products and from related services. We license our software under term and perpetual licenses. Term license revenue is recognized ratably over the service period of the agreement. Term licenses typically have a duration of 36 months, with pre-payments generally made at the beginning of each 12 month period. We began licensing software under term arrangements in June 1999. A majority of the licenses executed to date have been term-based. RESULTS OF OPERATIONS The following table sets forth the results of operations for the three and nine months ended September 30, 2001 and 2000 expressed as a percentage of total revenue.

Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Revenue: License fees .................................... 72 % 74 % 73 % 72 % Services ........................................ 28 26 27 28 --- --- --- --- Net revenue ................................ 100 100 100 100 --- --- --- --- Costs and expenses: Cost of license fees ............................ 2 21 2 11 Cost of services ................................ 21 34 22 37 Amortization of purchased intangibles ........... 9 2 10 1 Research and development ........................ 42 49 45 68 Sales and marketing ............................. 101 112 99 143 General and administrative ...................... 19 23 21 26

9 Amortization of deferred stock compensation ... 12 52 16 85 ----- ----- ----- ----- Total costs and expenses ................. 206 293 215 371 Loss from operations ............................... (106) (193) (115) (271) Interest income and other income, net .............. 4 14 6 8 ----- ----- ----- ----- Loss before income taxes ........................... (102) (179) (109) (263) Provision for income taxes ......................... -- -- -- -- ----- ----- ----- ----- Net loss ........................................... (102)% (179)% (109)% (263)% ===== ===== ===== ===== Three and Nine Months Ended September 30, 2001 and 2000 Revenue Total revenue increased 32% to $7.1 million in the three months ended September 30, 2001 from $5.4 million in the three months ended September 30, 2000. Total revenue increased 103% to $22.0 million for the nine months ended September 30, 2001 as compared to $10.8 million for the same period in 2000. International revenue represented 19% and 21% of total revenue for the three and nine months ended September 30, 2001, compared with 16% and 11% for the three and nine months ended September 30, 2000. No single customer accounted for 10% or more of total revenue for the three and nine months ended September 30, 2001. License revenue License revenue increased to $5.1 million in the three months ended September 30, 2001 from $4.0 million in the three months ended September 30, 2000 and to $16.0 million for the nine months ended September 30, 2001 from $7.7 million for the nine months ended September 30, 2000. The increase in license revenue was due primarily to greater demand for and market acceptance of our software products, the continued success of our indirect sales channels, expansion of our product line and increased sales generated by our expanded sales force. Services revenue Service revenue increased to $2.0 million in the three months ended September 30, 2001 from $1.4 million in the three months ended September 30, 2000 and to $6.0 million for the nine months ended September 30, 2001 from $3.1 million for the nine months ended September 30, 2000. This increase was due primarily to increased maintenance revenue and increased implementation, training and consulting services performed. Cost of Revenue Cost of license revenue Cost of license revenue consists primarily of costs related to license fees paid to third parties under technology license arrangements, commissions paid to third parties and costs to distribute our software products and related documentation. Cost of license revenue decreased to $131,000 in the three months ended September 30, 2001 from $1.1 million in the three months ended September 30, 2000. Cost of license revenue for the nine months ended September 30, 2001 decreased to $500,000 compared to $1.2 million for the same period in 2000. This decrease was primarily due to a one-time quarterly license fee payment of $1.0 million paid to ePeople in the third quarter of 2000. Cost of services revenue Cost of services consists primarily of salaries and other expenses from our professional services, customer support and training organizations, related overhead expenses and payments made to third parties for consulting services. Cost of services revenue decreased to $1.5 million in the three months ended September 30, 2001 from $1.8 million 10 in the three months ended September 30, 2000. This decrease was primarily due to our focus on expense controls, including travel and consulting costs and to a lesser extent due to lower headcount. Cost of services revenue for the nine months ended September 30, 2001 increased to $4.7 million compared to $4.0 million for the same period in 2000. Amortization of Purchased Intangibles Amortization of purchased intangibles was $598,000 and $2.2 million for the three and nine months ended September 30, 2001 compared to $94,000 for both the three and nine months ended September 30, 2000. These increases were attributable to the amortization of purchased technology from the acquisition of source code and related intellectual property rights from ePeople, Inc in September 2000. We expect to amortize approximately $598,000 per quarter for the next four quarters related to this technology acquisition. Research and Development Expense Research and development expense consists primarily of payroll and consulting expenses and related costs for research and development personnel. Research and development expense increased to $3.0 million in the three months ended September 30, 2001 from $2.6 million in the three months ended September 30, 2000. Research and development expense for the nine months ended September 30, 2001 increased to $9.8 million as compared to $7.4 million for the same period in 2000. The increase was due primarily to an increase in the number of research and development personnel and an increase in consulting costs. This increase was necessary to support both expanded functionality of our support automation software and increases in our quality assurance and product publications operations. Sales and Marketing Expense Sales and marketing expense consists primarily of payroll expense, including salaries and commissions and related costs for sales and marketing personnel and promotional expenses, including public relations, advertising and trade shows. Sales and marketing expense increased to $7.1 million in the three months ended September 30, 2001 from $6.0 million in the three months ended September 30, 2000. Sales and marketing expense for the nine months ended September 30, 2001 increased to $21.7 million as compared to $15.4 million for the same period in 2000. The increase was due to a number of factors including an increase in the number of sales and marketing personnel, the opening of new sales offices in the United States, the establishment of foreign offices in Europe, Asia and Australia, commission expense associated with higher revenue and an increase in our allowance for bad debt. General and Administrative Expense General and administrative expense consists primarily of payroll expense and related costs of administrative personnel and professional fees for legal, accounting and other professional services. General and administrative expense increased to $1.3 million in the three months ended September 30, 2001 from $1.2 million in the three months ended September 30, 2000. General and administrative expense for the nine months ended September 30, 2001 increased to $4.7 million as compared to $2.8 million for the same period in 2000. This increase was due primarily to an increase in the number of general and administrative personnel and an increase in legal, accounting and other consulting costs incurred in connection with supporting increased business activities and our operations as a public company. Amortization of Deferred Stock Compensation We amortized deferred compensation expense of approximately $870,000 and $3.6 million during the three and nine months ended September 30, 2001 as compared to $2.8 million and $9.2 million during the same periods in 2000. This compensation expense relates to options awarded to individuals in all operating expense categories. Interest Income (Expense) and Other, Net Interest income (expense) and other, net, decreased to $255,000 in the three months ended September 30, 2001 from $755,000 in the three months ended September 30, 2000. This decrease was primarily attributable to the reduction in 11 interest income earned on our cash, cash equivalents and investments due to a lower cash, cash equivalents and short term investments balance and a change to a more conservative investment policy. Interest income (expense) and other, net, increased to $1.4 million in the nine months ended September 30, 2001 as compared to $818,000 for the same period in 2000. The increase was primarily attributable to interest income earned on higher average cash, cash equivalents and short-term investments balances. LIQUIDITY AND CAPITAL RESOURCES From our incorporation in December 1997 to the date of our initial public offering, we have financed our operations through the private placement of our preferred stock, and to a lesser extent through revenue, bank borrowings and capital equipment lease financing. In July 2000, we completed our initial public offering from which we received net proceeds of approximately $61.8 million. Operating Activities We used $21.5 million in cash in operations in the nine months ended September 30, 2001, an increase of $8.8 million over the $12.8 million used in the nine months ended September 30, 2000. Amortization of deferred stock compensation and amortization of purchased intangibles and depreciation of fixed assets which is included in the net loss, but does not require the use of cash, amounted to $7.6 million for the nine months ended September 30, 2001 compared to $10.3 million for the nine months ended September 30, 2000. Net cash used in operations in the nine month period was primarily the result of net losses and a combined decrease in accrued compensation, other accrued liabilities, and deferred revenue of $6.0 million offset by a $749,000 increase in accounts payable. Investing Activities Net cash provided by investing activities was $25.8 million in the nine months ended September 30, 2001, an increase of $39.2 million over the $13.4 million used in the comparable period ended September 30, 2000. Net cash provided by investing activities for the nine months ended September 30, 2001, was primarily due to the sale and maturity of $58.9 million in short-term investments offset by $31.2 million in the purchase of short-term investments as the Company moved to a more conservative investment policy in 2001. Financing Activities Net cash provided by financing activities was $1.6 million for the nine months ended September 30, 2001 and $60.5 million for the nine months ended September 30, 2000. For the period ended September 30, 2001, cash provided by financing activities was attributable primarily to net proceeds from the purchase of common stock under the Employee Stock Purchase Plan and to a lesser extent the repayment of notes receivable from shareholders. For 2000, cash provided by financing activities was primarily attributable to the $61.8 million from the issuance of our common stock in our initial public offering on July 2000. 12 Commitments As of September 30, 2001, our principal commitments consisted of obligations outstanding under capital and operating leases. We anticipate requiring minimal additional space in the next 12 months. As of December 31, 2000, future lease commitments for our office facility were $1.1 million in 2001 and $21,000 in 2002. Additionally, we are required to pay ePeople approximately $309,000 per quarter through the quarter ended September 30, 2003, pursuant to a technology acquisition made during 2000. Working Capital and Capital Expenditure Requirements We believe that our existing cash balances will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We evaluate potential acquisitions of other businesses, products and technologies and may in the future require additional equity or debt financings to accomplish any potential acquisitions If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities. The sale of additional equity or convertible debt securities could result in more dilution to our stockholders. Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us. Factors that May Affect Future Results We have a history of losses and if we do not become profitable, we may not be able to continue to operate. We incurred net losses of approximately $77.1 million for the period from December 3, 1997 through September 30, 2001. We expect to continue to incur net losses in the foreseeable future. If we do not become profitable within the timeframe we predicted or expected by securities analysts or investors, the market price of our stock will likely decline. If we continue to incur net losses, we may not be able to increase our number of employees or our investment in capital equipment, sales, marketing and research and development programs. We do not know when or if we will become profitable. If we do achieve profitability, we may not sustain or increase profitability in the future and may not be able to continue to operate. Our quarterly results are difficult to predict and may fluctuate. If we do not meet quarterly financial expectations, our stock price would likely decline. Because of our limited operating history, our quarterly revenue and operating results are difficult to predict and may fluctuate from quarter to quarter. Our operating results in some quarters may fall below our predictions or the expectations of securities analysts or investors, which would likely cause the market price of our common stock to decline. Several factors are likely to cause fluctuations in our operating results, including: . demand for our support automation software; . the price and mix of products and services we or our competitors offer; . our ability to retain customers; and . the amount and timing of operating costs and capital expenditures relating to expansion of our business, infrastructure and marketing activities. 13 Our quarterly results depend on the size of a small number of orders, so the delay or loss of any single large order during a quarterly period, and especially an order for a perpetual license rather than a term license, could harm that quarter's results and cause our stock price to decline. Our operating results could suffer if any large orders are delayed or cancelled in any future period. Each quarter, we derive a significant portion of our license revenue from a small number of relatively large orders for the licensing of our support automation software. We license our support automation software under perpetual and term licenses. Perpetual licenses typically result in our recognition of a larger amount of revenue in the quarter in which the license is granted as compared with term licenses. Revenue from a perpetual license is generally recognized upon delivery of a product. Revenue from a term license is recognized on a monthly basis over the agreement term, which is typically three years. We expect that we will continue to depend upon a small number of large orders for a significant portion of our license revenue. Because a small number of customers has historically accounted for and may in future periods account for substantial portions of our revenue, our revenue could decline because of delays of customer orders or the failure of existing customers to renew licenses. For the period ended September 30, 2001, no single customer accounted for 10% or more of our total revenue. Because we have a small number of customers and a few customers are likely to continue to account for a significant portion of our revenue, our revenue could decline because of the loss or delay of a single customer order or the failure of an existing customer to renew its term license. We may not obtain additional customers. The failure to obtain additional customers, the loss or delay of customer orders and the failure of existing customers to renew licenses will harm our operating results. We must achieve broad adoption and acceptance of our support automation products and services or we will not increase our market share or grow our business. We must achieve broad market acceptance and adoption of our products and services or our business and operating results will suffer. Specifically, we must encourage our customers to transition from using traditional support methods. To accomplish this, we must: . continually improve the performance, features and reliability of our products and services to address changing industry standards and customer needs; and . develop integration with other support-related technologies. Our product innovations may not achieve the market penetration or price stability necessary for profitability. If we fail to develop, in a timely manner, new or enhanced versions of our support automation software or to provide new products and services that achieve rapid and broad market acceptance or price stability, we may not become profitable. We may fail to identify new product and service opportunities successfully. Our existing products will become obsolete if we fail to introduce new products or product enhancements that meet new customer demands, support new standards or integrate with new or upgraded versions of packaged applications. We may have little or no control over the factors that might influence market acceptance of our products and services. These factors include: . the willingness of enterprises to transition to automated support and eSupport and . acceptance of competitors' automated support or eSupport solutions. 14 Our software may not operate with the hardware and software platforms that are used by our customers now or in the future, and as a result our business and operating results may suffer. We currently serve a customer base with a wide variety of constantly changing hardware, packaged software applications and networking platforms. If there is widespread adoption of other operating system environments, and if we fail to release versions of our support automation software that are compatible with these other operating systems, our business and operating results will suffer. Our future success also depends on: . our ability to integrate our product with multiple platforms and to modify our product as new versions of packaged applications are introduced; . the number of different operating systems and databases that our product can work with; and . our management of software being developed by third parties for our customers or for use with our product. We rely on third-party technologies and our inability to use or integrate third-party technologies could delay product or service development. We intend to continue to license technologies from third parties, including applications used in our research and development activities and technologies, which are integrated into our products and services. Our inability to obtain or integrate any of these licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. These technologies may not continue to be available to us on commercially reasonable terms or at all. We may fail to successfully integrate any licensed technology into our products or services. This would harm our business and operating results. Third-party licenses also expose us to increased risks that include: . risks of product malfunction after new technology is integrated; . the diversion of resources from the development of our own proprietary technology; and . our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs. We may engage in future acquisitions or investments that could dilute our existing stockholders, or cause us to incur significant expenses. We may acquire or invest in complementary businesses, technologies or products. If we are unable to use or integrate any newly acquired entities or technologies effectively or profitably, our operating results could suffer. Acquisitions by us could also result in large and immediate write-offs, incurrence of debt and contingent liabilities or amortization of expenses related to goodwill and other intangibles, which could harm our operating results. Additional funds to finance any acquisitions may not be available on terms that are favorable to us, or at all, and, in the case of equity financings, may dilute our stockholders. Our recent growth has placed a strain on our management systems, network infrastructure and resources and our failure to manage growth could harm our ability to provide adequate levels of service to our customers, disrupt our operations and delay execution of our business plan. Our rapid expansion in our personnel, facilities, systems and infrastructure has placed, and we expect that it will continue to place, a significant strain on our management controls, network infrastructure and financial resources. Our failure to manage growth could harm our ability to provide adequate levels of customer service, delay execution of our business plan or disrupt our operations. We may continue to expand, including expansion outside the San Francisco Bay Area. 15 We may lose the services of our key personnel, which in turn would harm the market's perception of our business. Our success will depend on the skills, experience and performance of our senior management, engineering, sales, marketing and other key personnel. The loss of the services of any of our senior management or other key personnel, including our chief executive officer, Radha R. Basu, our chief financial officer, Brian Beattie, our chief technical officer, Scott W. Dale, and our chief software officer, Cadir B. Lee, could harm the market's perception of our business and our ability to achieve our business goals. Our failure to establish and expand strategic alliances would harm our ability to achieve market acceptance of our support automation software. If we fail to maintain, establish or successfully implement strategic alliances, our ability to achieve market acceptance of our automation software will suffer and our business and operating results will be harmed. Specifically, we must establish and extend existing distribution alliances with specialized technology and services firms such as support outsourcers. We must also establish and extend existing solutions alliances with leading providers of complementary support technologies, including call center or help desk management companies, knowledge management companies and systems management firms. Our products depend on and work with products containing complex software and if our products fail to perform properly due to errors or similar problems in the software, we may need to spend resources to correct the errors or compensate for losses from these errors and our reputation could be harmed. Our products depend on complex software, both internally developed and licensed from third parties. Also, our customers may use our products with other companies' products which also contain complex software. Complex software often contains errors. These errors could result in: . delays in product shipments; . unexpected expenses and diversion of resources to identify the source of errors or to correct errors; . damage to our reputation; . lost sales; . product liability claims; and . product returns. Our system security is important to our customers and we may need to spend significant resources to protect against or correct problems caused by security breaches. A fundamental requirement for online communications, transactions and support is the secure transmission of confidential information. Third parties may attempt to breach our security or that of our customers. We may be liable to our customers for any breach in security and any breach could harm our business and reputation. Also, computers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other resources to further protect against security breaches or to correct problems caused by any breach. We may face claims of invasion of privacy or inappropriate disclosure, use or loss of our customers' information and any liability imposed could harm our reputation and cause us to lose customers. Our software contains features which may allow us or our customers to control, monitor or collect information from computers running the software without notice to the computing users. Therefore we may face claims about invasion 16 of privacy or inappropriate disclosure, use or loss of this information. Any imposition of liability could harm our operating results. Our sales cycle can be lengthy and if revenue forecasted for a particular quarter is not realized in that quarter, significant expenses incurred may not be offset by corresponding sales. Our sales cycle for our support automation software can range from one week to nine months or more and may vary substantially from customer to customer. While our customers are evaluating our products and services, we may incur substantial sales and marketing expenses and spend significant management effort. Any delay in completing sales in a particular quarter could cause our operating results to be below expectations. We have limited experience in international operations and if our revenue from international operations does not exceed the expense of establishing and maintaining our international operations, our business could suffer. We intend to expand further into international markets. We have limited experience in international operations and may not be able to compete effectively in international markets. If we do not generate enough revenue from international operations to offset the expense of these operations, our business could suffer. Risks we face in conducting business internationally include: . difficulties and costs of staffing and managing international operations; . differing technology standards; . longer sales cycles and collection periods; . changes in currency exchange rates and controls; . dependence on local vendors; and . the effects of the terrorist attacks in the United Stats and the effects of the war on terrorism and any related conflicts or similar events worldwide. Any system failure that causes an interruption in our customers' ability to use our products or services or a decrease in their performance could harm our relationships with our customers and result in reduced revenue. Our software may depend on the uninterrupted operation of our internal and outsourced communications and computer systems. These systems are vulnerable to damage or interruption from computer viruses, human error, natural disasters and intentional acts of vandalism and similar events. We have no formal disaster recovery plan and business interruption insurance may not be enough to compensate us for losses that occur. These problems could interrupt our customers' ability to use our eSupport products or services which could harm our reputation and cause us to lose customers and revenue. We may not obtain sufficient patent protection, and this could harm our competitive position and increase our expenses which would harm our business. Our success and ability to compete depend to a significant degree upon the protection of our software and other proprietary technology. It is possible that: . our pending patent applications may not be issued; . competitors may independently develop similar technologies or design around any of our patents; . patents issued to us may not be broad enough to protect our proprietary rights; and . our issued patents could be successfully challenged. 17 We rely upon trademarks, copyrights and trade secrets to protect our proprietary rights and if these rights are not sufficiently protected, it could harm our ability to compete and to generate revenue. We also rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and grow our business could suffer if these rights are not adequately protected. Our proprietary rights may not be adequately protected because: . laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and . policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of this unauthorized use. Also, the laws of other countries in which we market our products may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for them, which would harm our competitive position and market share. We may face intellectual property infringement claims that could be costly to defend and result in our loss of significant rights. Other parties may assert intellectual property infringement claims against us and our products may infringe the intellectual property rights of third parties. For example, Previo, Inc. has filed a patent infringement lawsuit against us. Defending this lawsuit may be time-consuming, costly and may divert management's attention. This lawsuit is at an early stage and its outcome may not be favorable to us. In addition, if we do not prevail in such litigation, we could be forced to pay significant damages or amounts in settlement. Intellectual property litigation is expensive and time-consuming and could divert management's attention from our business. If there is a successful claim of infringement, we may be required to develop non-infringing technology or enter into royalty or license agreements which may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business. Our products may infringe issued patents that may relate to our products. Also, patent applications may have been filed by third parties which relate to our software products. We must compete successfully in the eSupport market or we will lose market share and our business will fail. The market for our products is intensely competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. Competitive pressures could reduce our market share or require us to reduce the price of products and services and therefore our gross margin, which could harm our business and operating results. Our integrated software solution competes against various vendors' software products designed to accomplish specific elements of a complete eSupport solution. For example, in the market for automated development of support solutions, we compete with companies such as Serena Software, Inc. In the market for automated delivery of support solutions, we compete with Motive Communications, Inc. We may encounter competition from companies such as: . customer communications software companies; . question and answer companies; . customer relationship management solution providers; . consolidated service desk solution vendors; . Internet infrastructure companies; and 18 . operating systems providers. Our potential competitors may have longer operating histories, significantly greater financial, technical, and other resources or greater name recognition than we do. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Because our support automation software is designed to support businesses operating over the Internet, our success depends on the continued growth and levels of performance of Internet usage. Because a majority of our products are designed to support businesses operating over the Internet, the success of our business will depend on the continued improvement of the Internet as a convenient means of consumer interaction and commerce, as well as an efficient medium for the delivery and distribution of information by enterprises to their employees and extended enterprise. Because global commerce on the Internet and the online exchange of information is evolving, we cannot predict whether the Internet will continue to be a viable commercial marketplace. We may experience a decrease in market demand due to the slowing economy in the United States which has been further stymied by the recent outbreak of terrorism, war and social and political instability. Economic growth has slowed significantly, and some analysts believe the United States economy will experience a recession. In addition, the recent terrorists attacks in the United States may further add to the decline in the United States economy. The war on terrorism, along with the effects of the terrorist attack and other similar events, could have contributed to the further slowdown of the already slumping market demand for goods and services, including support automation software. If the economy continues to decline as a result of the recent economic, political and social turmoil, or if there are further terrorist attacks in the United States or elsewhere, we may experience decreases in the demand for our products and services, which may harm our operating results. Governmental regulation and legal changes could impair the growth of the Internet and decrease demand for our products or increase our cost of doing business. The laws and regulations that govern our business change rapidly. Any change in laws and regulations could impair the growth of the Internet and could reduce demand for our products, subject us to liability or increase our cost of doing business. The United States government and the governments of states and foreign countries have attempted to regulate activities on the Internet and the distribution of software. Also, in 1998, Congress passed the Internet Freedom Act, which imposes a three-year moratorium on state and local taxes on Internet-based transactions. Failure to renew this moratorium would allow states to impose taxes on e-commerce. This might harm our business directly and indirectly by harming the businesses of our customers, potential customers and the parties to our business alliances. The applicability to the Internet of existing laws governing issues is uncertain and may take years to resolve. Evolving areas of law that are relevant to our business include privacy laws, intellectual property laws, proposed encryption laws, content regulation and sales and use tax laws and regulations. We may experience power blackouts and higher electricity prices as a result of California's current energy crisis, which could disrupt our operations and increase our expenses. California is in the midst of an energy crisis that could disrupt our operations and increase our expenses. We rely on the major Northern California public utility, Pacific Gas & Electric Company, or PG&E, to supply electric power to our headquarters in Northern California. Due to problems associated with the de-regulation of the power industry in California and shortages in wholesale electricity supplies, customers of PG&E have been faced with increased electricity prices, power shortages and, in some cases, rolling blackouts. If blackouts interrupt our power supply, we may be temporarily unable to continue to operate our central computer, hardware and support systems. Any such interruption in our ability to continue our operations could delay our ability to develop or provide our products and support services, which could damage our reputation and result in lost revenue, either of which could substantially harm our business and results of operations. 19 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Qualitative and Quantitative Disclosures about Market Risk We develop products in the United States and market and sell in North America, South American, Asia and Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Because of the nature of our short-term investments, we have concluded that there is no material market risk exposure. Our investment policy requires us to invest funds in excess of operating requirements in: . obligations of the U.S. government and its agencies; . investment grade state and local government obligations; and . money market funds or deposits issued or guaranteed by U.S. and non-U.S. commercial banks, meeting credit rating and net worth requirements with maturities of less than two years. At September 30, 2001, our cash and cash equivalents consisted primarily of money market funds held by large institutions in the U.S. and our short-term investments were invested in government debt securities maturing in less than eighteen months. 20 PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibits attached hereto which is incorporated herein by reference (b) Reports on Form 8-K: No reports on Form 8-K were filed with the Securities and Exchange Commission during the three months ended September 30, 2001. 21 SIGNATURE 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. November 14, 2001 SUPPORT.COM, INC. By /s/ Brian Beattie ----------------- Brian Beattie Senior Vice President of Finance and Administration and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) 22 EXHIBIT INDEX TO SUPPORT.COM, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001 Exhibit Number Description -------------- ----------- 3.1* Amended and Restated Certificate of Incorporation. 3.2* Amended and Restated Bylaws. 4.1** Form of Common Stock Certificate. * Incorporated by reference from Exhibits 3.1 and 3.2 of Registrant's Registration Statement on Form S-1 (File No. 333-30674) filed with the Securities and Exchange Commission on February 18, 2000. ** Incorporated by reference from Exhibit 4.1 of Amendment No. 3 to Registrant's Registration Statement on Form S-1 (File No. 333-30674) filed with the Securities and Exchange Commission on April 26, 2000. 23