UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q



(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2012

OR
 
o
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
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

900 Chesapeake Drive
Redwood City, CA 94063
(Address of Principal Executive Offices)
(Zip Code)

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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  o    No  x

On July 31, 2012, 48,855,375 shares of the Registrant’s Common Stock, $0.0001 par value, were outstanding.



 
 

 
 
SUPPORT.COM, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2012
INDEX
 
   
Page
Part I. Financial Information  
 
Item 1.
 
3
   
3
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011   4
   
5
   
6
   
7
Item 2.
 
22
Item 3.
 
27
Item 4.
 
28
 
Part II. Other Information
 
 
Item 1.
 
28
Item 1A.
  28
Item 4.
 
36
Item 6.
 
37
 
38
 
39
 
 
2

 
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUPPORT.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

   
June 30, 
2012
   
December 31, 
2011
 
   
(Unaudited)
      (1)  
ASSETS
             
Current assets:
             
Cash and cash equivalents
  $ 20,303     $ 22,159  
Short-term investments
    28,170       29,743  
Accounts receivable, net
    9,936       10,284  
Prepaid expenses and other current assets
    1,308       1,068  
Total current assets
    59,717       63,254  
Long-term investment
          1,111  
Property and equipment, net
    620       461  
Goodwill
    14,240       13,621  
Purchased technology, net
    102       143  
Intangible assets, net
    5,485       5,670  
Other assets
    884       736  
                 
Total assets
  $ 81,048     $ 84,996  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,145     $ 1,196  
Accrued compensation
    1,670       1,676  
Other accrued liabilities
    4,174       4,491  
Short-term deferred revenue
    5,354       4,723  
Total current liabilities
    12,343       12,086  
Long-term deferred revenue
    259       489  
Other long-term liabilities
    1,208       1,086  
Total Liabilities
    13,810       13,661  
                 
Commitments and contingencies (Note 4)
               
                 
Stockholders’ equity:
               
Common stock
    5       5  
Additional paid-in capital
    236,693       233,977  
Accumulated other comprehensive loss
    (1,498 )     (1,698 )
Accumulated deficit
    (167,962 )     (160,949 )
Total stockholders’ equity
    67,238       71,335  
                 
Total liabilities and stockholders’ equity
  $ 81,048     $ 84,996  


 
(1)
Derived from the December 31, 2011 audited Consolidated Financial Statements included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”) on March 9, 2012.

See accompanying notes.
 
 
3


SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

 
    Three Months Ended 
June 30,
   
Six Months Ended 
June 30,
 
      2012       2011       2012       2011  
                                 
Revenue:
                               
Services
  $ 13,744     $ 8,442     $ 27,509     $ 17,592  
Software and other
    3,569       5,012       7,392       8,892  
Total revenue
    17,313       13,454       34,901       26,484  
                                 
Cost of revenue:
                               
Cost of services
    9,591       6,601       19,881       13,418  
Cost of software and other
    360       433       830       837  
Total cost of revenue
    9,951       7,034       20,711       14,255  
                                 
Gross profit
    7,362       6,420       14,190       12,229  
                                 
Operating expenses:
                               
Research and development
    1,708       1,433       3,478       2,881  
Sales and marketing
    4,989       5,543       11,119       10,328  
General and administrative
    2,850       3,439       5,764       6,225  
Amortization of intangible assets and other
    391       122       758       205  
Total operating expenses
    9,938       10,537       21,119       19,639  
Loss from operations
    (2,576 )     (4,117 )     (6,929 )     (7,410 )
Interest income and other, net
    59       125       134       275  
Loss from continuing operations, before income taxes
    (2,517 )     (3,992 )     (6,795 )     (7,135 )
Income tax provision
    116       29       235       31  
Loss from continuing operations, after income taxes
    (2,633 )     (4,021 )     (7,030 )     (7,166 )
                                 
Income (loss) from discontinued operations, after income taxes
    (7 )     (18 )     17       (15 )
                                 
Net loss
  $ (2,640 )   $ (4,039 )   $ (7,013 )   $ (7,181 )
                                 
                                 
Basic and diluted earnings per share:
                               
Loss from continuing operations
  $ (0.05 )   $ (0.08 )   $ (0.14 )   $ (0.15 )
Income (loss) from discontinued operations
    (0.00 )     (0.00 )     0.00       (0.00 )
Basic and diluted net loss per share
  $ (0.05   $ (0.08 )   $ (0.14   $ (0.15 )
                                 
Shares used in computing basic and diluted net loss per share
    48,584       48,293       48,521       48,237  

See accompanying notes.

 
4


SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)
 
   
Three Months Ended 
June 30,
   
Six Months Ended 
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Comprehensive loss
  $ 2,634     $ 3,991     $ 6,813     $ 7,266  
 
See accompanying notes.
 
 
5

 
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

   
Six Months Ended 
June 30,
 
   
2012
   
2011
 
Operating Activities:
           
Net loss
  $ (7,013 )   $ (7,181 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
    268       207  
Amortization of premiums and discounts on investments
    295       860  
Amortization of purchased technology
    41       41  
Amortization of intangible assets and other
    758       205  
Stock-based compensation
    2,027       1,874  
Changes in assets and liabilities:
               
Accounts receivable, net
    499       (787 )
Prepaid expenses and other current assets
    (240 )     367  
Other long-term assets
    (143 )     (7 )
Accounts payable
    (51 )     121  
Accrued compensation
    (11 )     181  
Other accrued liabilities
    (429 )     411  
Other long-term liabilities
    126       59  
Deferred revenue
    352       1,146  
Net cash used in operating activities
    (3,521 )     (2,503 )
                 
Investing Activities:
               
Purchases of property and equipment
    (318 )     (183 )
Acquisition of business, net of cash acquired
    (1,327 )     (8,419 )
Purchases of investments
    (23,940 )     (34,285 )
Sales of investments
    2,400       10,998  
Maturities of investments
    24,220       22,946  
Net cash provided by (used in) investing activities
    1,035       (8,943 )
                 
Financing Activities:
               
Proceeds from issuances of common stock
    689       418  
Net cash provided by financing activities
    689       418  
Effect of exchange rate changes on cash and cash equivalents
    (59 )     8  
                 
Net decrease in cash and cash equivalents
    (1,856 )     (11,020 )
                 
Cash and cash equivalents at beginning of period
    22,159       18,561  
Cash and cash equivalents at end of period
  $ 20,303     $ 7,541  
                 
Supplemental schedule of cash flow information:
               
Income taxes paid
  $ 91     $ 35  

See accompanying notes.
 
 
6

 
SUPPORT.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Support.com, Inc. (the “Company” or “Support.com”, “we” or “us”) and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. The condensed consolidated balance sheet as of June 30, 2012 and the statements of operations for the three and six months ended June 30, 2012 and 2011 and statements of cash flows for the six months ended June 30, 2012 and 2011 are unaudited. In the opinion of management, these unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring 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 balance sheet information as of December 31, 2011 is derived from audited financial statements as of that date. These unaudited interim condensed consolidated financial statements should be read with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on March 9, 2012. 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The accounting estimates that require management’s most significant, difficult and subjective judgments include accounting for revenue recognition, the valuation and recognition of long-term investment, the assessment of recoverability of intangible assets and their estimated useful lives, the valuations and recognition of stock based compensation and the recognition and measurement of current and deferred income tax assets and liabilities. Actual results could differ materially from these estimates.

Revenue Recognition

For all transactions, we recognize revenue only when all of the following criteria are met:

Persuasive evidence of an arrangement exists;
Delivery has occurred;
Collection is considered probable; and
The fees are fixed or determinable.

We consider all arrangements with payment terms longer than 90 days not to be fixed or determinable. If the fee is considered not to be fixed or determinable, revenue is recognized as payment becomes due from the customer.

Services Revenue

Services revenue is comprised primarily of fees for technology support services, including the set-up, protection, optimization and repair of new and existing computers as well as other technology devices. We provide these services remotely, generally using work-from-home Personal Technology Experts who utilize our proprietary technology to deliver the services.

We offer services to consumers and small businesses, either through our channel partners (which include broadband service providers, retailers, technology companies and others) or directly via our website at www.support.com. We transact with customers via reseller programs, referral programs and direct transactions. In reseller programs, the channel partner generally executes the financial transactions with the consumer and pays a fee to us which we recognize as revenue when the service is delivered. In referral programs, we transact with the consumer directly and pay a referral fee to the referring party.  Referral fees are generally expensed in the period in which revenues are recognized. In such instances, since we are the transacting party and bear substantially all risks associated with the transaction, we record the gross amount of revenue. In direct transactions, we sell directly to the customer at the retail price.

 
7

 
Our services are of three types for revenue recognition purposes:

Incident-Based Services—Customers purchase a discrete, one-time service. Revenue recognition occurs at the time of service delivery. Fees paid for services sold but not yet delivered are recorded as deferred revenue and recognized at the time of service delivery.

Subscriptions—Customers purchase subscriptions or “service plans” under which certain services are provided over a fixed subscription period. Revenues for subscriptions are recognized ratably over the respective subscription periods.

Service Cards / Gift Cards—Customers purchase a service card or a gift card, which entitles the cardholder to redeem a certain service at a time of their choosing. For these sales, revenue is deferred until the card has been redeemed and the service has been provided.

In certain cases, we are paid for services that are sold but not yet delivered. We initially record such balances as deferred revenue, and recognize revenue when the service has been provided or, on the non-subscription portion of these balances, when the likelihood of the service being redeemed by the customer is remote (“services breakage”). Based on our historical redemption patterns for these relationships, we believe that the likelihood of a service being delivered more than 90 days after sale is remote. We therefore recognized non-subscription deferred revenue balances older than 90 days as services revenue. For the three and six months ended June 30, 2012 and 2011, services breakage revenue was immaterial, and accounted for approximately 1% of our total revenue.

Channel partners are generally invoiced monthly. Fees from consumers via referral programs and direct transactions are generally paid with a credit card at the time of sale. Revenue is recognized net of any applicable sales tax.

We generally provide a refund period on services, during which refunds may be granted to consumers under certain circumstances, including inability to resolve certain support issues. For our channel sales, the refund period varies by partner, but is generally between 5 and 14 days. For referral programs and direct transactions, the refund period is generally 5 days. For all channels, we recognize revenue net of refunds and cancellations during the period. Refunds and cancellations have been immaterial.

Software and Other Revenue

Software and other revenue is comprised primarily of fees for software products provided through direct customer downloads and, to a lesser extent, through the sale of this software via channel partners. Our software is sold to consumers as a perpetual license or as a fixed period subscription. We act as the primary obligor and generally control fulfillment, pricing, product requirements, and collection risk and therefore we record the gross amount of revenue. We provide a 30-day money back guarantee for our software products.

For certain products, we sell perpetual licenses. We provide a limited amount of free technical support to customers.  Since the cost of providing this free technical support is insignificant and free product enhancements are minimal and infrequent, we do not defer the recognition of revenue associated with sales of these products.

For certain of our products (principally SUPERAntiSpyware), we sell licenses for a fixed subscription period. We provide regular, significant updates over the subscription period and therefore recognize revenue for these products ratably over the subscription period.

Other revenue consists primarily of revenue generated through partners advertising to our customer base in various forms, including toolbar advertising, email marketing, and free trial offers. We recognize other revenue in the period in which our partners notify us that the revenue has been earned.

Cash, Cash Equivalents and Investments

All liquid instruments with an original maturity at the date of purchase of 90 days or less are classified as cash equivalents. Cash equivalents and short-term investments consist primarily of money market funds, certificates of deposit, commercial paper, corporate and municipal bonds. Our interest income on cash, cash equivalents and investments is recorded monthly and reported as interest income and other in our condensed consolidated statements of operations.

Long-term investment consisted of an auction-rate security (“ARS”). Our cash equivalents, short-term and long-term investments are classified as available-for-sale, and are reported at fair value with unrealized gains/losses (when deemed to be temporary) included in accumulated other comprehensive loss within stockholders’ equity in the condensed consolidated balance sheets. At June 30, 2012, we recorded net unrealized losses on our available-for-sale securities of $21,000.  At December 31, 2011, we recorded net unrealized losses of $311,000 on our available-for-sale securities, the majority of which was from the long-term investment in ARS. The cost of securities sold is based on the specific identification method.

 
8

 
We monitor our investments for impairment on a quarterly basis and determine whether a decline in fair value is other-than-temporary by considering factors such as current economic and market conditions, the credit rating of the security’s issuer, the length of time an investment’s fair value has been below our carrying value, our intent to sell the security and our belief that we will not be required to sell the security before the recovery of our amortized cost. If an investment’s decline in fair value is deemed to be other-than-temporary, we reduce its carrying value to its estimated fair value, as determined based on quoted market prices or liquidation values. Declines in value judged to be other-than temporary, if any, are recorded in operations as incurred. At June 30, 2012, we evaluated our unrealized gains/losses on available-for-sale securities and determined them to be temporary. We currently do not intend to sell securities with unrealized losses and we concluded that we will not be required to sell these securities before the recovery of our amortized cost basis.

The following is a summary of cash, cash equivalents and investments at June 30, 2012 and December 31, 2011 (in thousands):

  As of June 30, 2012
 
 
 
Amortized
 Cost
   
Gross
 Unrealized
 Gains
   
Gross
 Unrealized
 Losses
   
Fair Value
 
Cash
  $ 6,777     $     $     $ 6,777  
Money market funds
    13,526                   13,526  
Certificates of deposits
    1,880             (2 )     1,878  
Commercial paper
    3,299                   3,299  
Corporate bonds
    16,788             (15 )     16,773  
Corporate notes
    4,722             (4 )     4,718  
U.S. government agency securities
    1,502                   1,502  
    $ 48,494     $     $ (21 )   $ 48,473  
                                 
Classified as:
                               
                                 
Cash and cash equivalents
  $ 20,303     $     $     $ 20,303  
Short-term investments
    28,191             (21 )     28,170  
    $ 48,494     $     $ (21 )   $ 48,473  

 
9

 
 
As of December 31, 2011  
 
Amortized
 Cost
   
Gross
 Unrealized
 Gains
   
Gross
 Unrealized
 Losses
   
Fair Value
 
Cash
  $ 6,461     $     $     $ 6,461  
Money market funds
    15,698                   15,698  
Certificates of deposits
    480                   480  
Commercial paper
    6,295             (6 )     6,289  
Corporate bonds
    13,726       1       (14 )     13,713  
Corporate notes
    1,557             (2 )     1,555  
U.S. government agency securities
    7,707             (1 )     7,706  
Auction-rate security
    1,400             (289 )     1,111  
    $ 53,324     $ 1     $ (312 )   $ 53,013  
                                 
Classified as:
                               
                                 
Cash and cash equivalents
  $ 22,159     $     $     $ 22,159  
Short-term investments
    29,765       1       (23 )     29,743  
Long-term investment
    1,400             (289 )     1,111  
    $ 53,324     $ 1     $ (312 )   $ 53,013  
 
The following table summarizes the estimated fair value of our available-for-sale securities classified by the stated maturity date of the security (in thousands):
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Due within one year
  $ 24,747     $ 29,503  
Due within two years
    3,423       240  
Due after three years
          1,111  
    $ 28,170     $ 30,854  

At December 31, 2011, we had an investment in AAA-rated ARS with a state student loan authority with an estimated fair value of $1.1 million.  The student loans made by this authority are substantially guaranteed by the federal government through the Federal Family Education Loan Program (FFELP). The ARS is a long-term floating rate bond tied to short-term interest rates. After the initial issuance of the security, the interest rate on the security is reset periodically, at intervals established at the time of issuance (e.g., every seven days, twenty-eight days, thirty-five days, or every six months), based on market demand, if the auctions are successful. ARS are bought and sold in the marketplace through a competitive bidding process often referred to as a “Dutch auction.” If there is insufficient interest in the securities at the time of an auction, the auction may not be completed and the ARS then pays a default interest rate.  Following such a failed auction, we could not access our funds that were invested in the corresponding ARS until a future auction of these investments was successful, new buyers expressed interest in purchasing these securities between reset dates, issuers established a different form of financing to replace these securities or final payments become due according to contractual maturities.  At June 30, 2012, we had no investments in ARS because our long-term investment in ARS was settled at par for cash in May 2012.

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

 
Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
 
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
10

 
 
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
In accordance with ASC 820, the following table represents our fair value hierarchy for our financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 (in thousands):
 
 As of June 30, 2012
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Money market funds
  $ 13,526     $     $     $ 13,526  
Certificates of deposits
    1,878                   1,878  
Commercial paper
          3,299             3,299  
Corporate bonds
          16,773             16,773  
Corporate notes
          4,718             4,718  
U.S. government agency securities
          1,502             1,502  
Total
  $ 15,404     $ 26,292     $     $ 41,696  
 
 As of December 31, 2011
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Money market funds
  $ 15,698     $     $     $ 15,698  
Certificates of deposits
    480                   480  
Commercial paper
          6,289             6,289  
Corporate bonds
          13,713             13,713  
Corporate notes
          1,555             1,555  
U.S. government agency securities
          7,706             7,706  
Auction-rate security
                1,111       1,111  
Total
  $ 16,178     $ 29,263     $ 1,111     $ 46,552  
 
For marketable securities, measured at fair value using Level 2 inputs, we review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third party data providers.  These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data. There have been no transfers between Level 1 and Level 2 measurements during the three and six months ended June 30, 2012 and 2011, respectively.

Level 3 asset consisted of an ARS with a state student loan authority. We classified our holding as a long-term asset due to the failure of the auction and the underlying maturity of this security.  The fair value for our ARS as of December 31, 2011 was estimated by management and based on a discounted cash flow valuation that takes into account a number of factors including the estimated weighted average remaining term (WART) of the underlying securities, the expected return, and the discount rate. The WART was estimated based on servicing reports and expectations regarding redemptions. The expected return was calculated based on the last twelve months’ average for the 91 day T-bill plus a spread. This rate was the typical default rate for ARS held by us. The discount rate was calculated using the 3-month LIBOR rate plus adjustments for the security type.  As of June 30, 2012, we had no level 3 assets due to the settlement at par of our long-term investment for cash in May 2012.

 
11

 
The following table provides a summary of changes in fair value of our Level 3 financial asset as of June 30, 2012 and 2011 (in thousands):
 
     Three Months Ended June 30,
   
2012
Auction-Rate
Security
   
2011
Auction-Rate Security
             
Beginning balance at March 31
  $ 1,225     $ 2,598  
Transfer into Level 3
           
Sales
    (1,400 )      
Total gains/(losses):
               
Included in interest income and other, net
           
Included in other comprehensive loss
    175       61  
Ending balance at June 30
  $     $ 2,659  
 
 
    Six Months Ended June 30,
   
2012
Auction-Rate
Security
   
2011
Auction-Rate Security
             
Beginning balance at December 31
  $ 1,111     $ 2,667  
Transfer into Level 3
           
Sales
    (1,400 )      
Total gains/(losses):
               
Included in interest income and other, net
           
Included in other comprehensive loss
    289       (8)  
Ending balance at June 30
  $     $ 2,659  

Concentrations of Credit Risk

For the three months ended June 30, 2012, Comcast, Office Max, Staples and Office Depot accounted for 35%, 12%, 12% and 11%, respectively, of our total revenue. No other customers accounted for 10% or more of total revenue. For the three months ended June 30, 2011, Office Depot and Staples accounted for 24% and 16%, respectively, of our total revenue. No other customers accounted for 10% or more of total revenue.  For the six months ended June 30, 2012, Comcast, Office Depot, Office Max and Staples accounted for 31%, 14%, 13% and 11%, respectively, of our total revenue.  There were no other customers that accounted for 10% or more of total revenue.  For the six months ended June 30, 2011, Office Depot and Staples accounted for 27% and 18%, respectively, of our total revenue.  There were no other customers that accounted for 10% or more of total revenue.

The credit risk in our trade accounts receivable is mitigated by our credit evaluation process and reasonably short payment terms. As of June 30, 2012, Comcast, Staples and Office Max accounted for 49%, 15% and 11% of our total accounts receivable, respectively, and no other customers represented greater than 10% of our total accounts receivable. As of December 31, 2011, Comcast, Staples, Office Depot and Office Max accounted for 41%, 17%, 15% and 13% of our total accounts receivable, respectively. No other customers represented greater than 10% or over of our total accounts receivable.

Trade Accounts Receivable and Allowance for Doubtful Accounts 

Trade accounts receivable are recorded at the invoiced amount. We perform evaluations of our customers’ financial condition and generally do not require collateral. We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically provided for, provisions are recorded at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical collection experience and current payment trends. The determination of past-due accounts is based on contractual terms. At June 30, 2012 and December 31, 2011, we had an allowance for doubtful accounts of zero and $20,000, respectively.
 
Property and Equipment
 
Property and equipment is stated at cost, less accumulated depreciation which is determined using the straight-line method over the estimated useful lives of 2 years for computer equipment and software, 3 years for furniture and fixtures, and the shorter of the estimated useful lives or the lease term for leasehold improvements. Repairs and maintenance costs are expensed as incurred.  As of June 30, 2012, we capitalized $144,000 of cost incurred associated with our new headquarters facility in Redwood City, California.

 
12

 
Business Combinations - Purchase Accounting
 
Under the purchase method of accounting, we allocate the purchase price of acquired companies to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values.  We record the excess of purchase price over the aggregate fair values of the tangible and identifiable intangible assets as goodwill.  We determine the fair values of assets acquired and liabilities assumed.  These valuations require us to make significant estimates and assumptions, especially with respect to intangible assets.  Such estimates include assumptions regarding future revenue streams, market performance, customer base, and various vendor relationships.  We estimate the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expenses.  We estimate the future cash flows to be derived from such assets, and these estimates are used to determine the fair value of the assets.  If any of these estimates change, depreciation or amortization expenses could be changed and/or the value of our intangible assets could be impaired.
 
Purchased Technology and Internal Use Software
 
We capitalize costs related to software that we license and incorporate into our product and service offerings or develop for internal use. In July 2009, we licensed source code for technology associated with remote computer access in the amount of $350,000. We recorded amortization expense related to this technology of $20,000 and $41,000 for the three and six months ended June 30, 2012 and 2011, respectively. In addition, as of June 30, 2012, we are carrying $70,000 of capitalized costs incurred in connection with the development of software for internal use. This software is not yet implemented. We will amortize this cost over the useful life of this software once it is placed into service.

Accounting for Goodwill and Other Intangible Assets
 
We assess the impairment of goodwill annually or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. We perform our annual impairment test each year on September 30. An impairment loss would be recognized if the fair value of the reporting unit is less than the carrying value of the reporting unit’s net assets on the date of the evaluation. An estimated discounted cash flow from a reporting unit is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by our management. Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to the business model or changes in operating performance. If our estimates were to change, our assessment of goodwill impairment could change and could result in write-downs of goodwill, which would be reflected by charges to our operating results for any period presented.

We assess the impairment of identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss would be recognized when the sum of the future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. If our estimates regarding future cash flows derived from such assets were to change, we may record an impairment to the value of these assets. Such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value.

Stock-Based Compensation

We apply the provisions of ASC 718, Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based payment awards, including grants of stock, restricted stock awards and options to purchase stock, made to employees and directors based on estimated fair values.
 
 
13

 
For the three and six months ended June 30, 2012, options to acquire 94,000 shares and 401,000 shares, of our common stock were granted.  For the three and six months ended June 30, 2011, options to acquire 150,000 shares and 1,171,000 shares, of our common stock were granted.  The fair value of our stock options granted to employees and employee stock purchases for the three and six months ended June 30, 2012 and 2011 was estimated using the following assumptions:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Stock Option Plan:
                       
Risk-free interest rate
    0.6 %     1.0 %     0.6 %     1.6 %
Expected term
 
3.7 years
   
3.6 years
   
3.6 years
   
3.6 years
 
Volatility
    58.6 %     56.7 %     57.8 %     61.0 %
Expected dividend
    0 %     0 %     0 %     0 %
Weighted average fair value (per share)
  $ 1.29     $ 1.92     $ 1.05     $ 2.69  

In the second quarter of 2011, to advance the interests of the Company and its stockholders by providing an incentive to attract, retain and reward eligible employees and by motivating such persons to contribute to the growth and profitability of the Company, the Company’s Board of Directors and stockholders approved an Employee Stock Purchase Plan and reserved 1,000,000 shares of our common stock for issuance effective as of May 15, 2011. The ESPP continues in effect for ten (10) years from its effective date unless terminated earlier by the Company. The ESPP consists of six-month offering periods during which employees may enroll in the plan.  The purchase price on each purchase date shall not be less than eighty-five percent (85%) of the lesser of (a) the fair market value of a share of stock on the offering date of the offering period or (b) the fair market value of a share of stock on the purchase date.  The fair value of our ESPP for the three and six months ended June 30, 2012 and 2011 was estimated using the following assumptions:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
     
2011
 
Employee Stock Purchase Plan:
                         
Risk-free interest rate
    0.2 %     0.1 %     0.2  
%
    0.1 %
Expected term
 
0.5 years
   
0.5 years
   
0.5 years
     
0.5 years
 
Volatility
    71.7 %     45.9 %     71.7  
%
    45.9 %
Expected dividend
    0 %     0 %     0  
%
    0 %
Weighted average fair value (per share)
  $ 0.98     $ 1.20     $ 0.98       $ 1.20  
 
On May 23, 2012, the Board of Directors of the Company approved, based on recommendations of the Compensation Committee, a grant of 98,363 restricted stock units (“RSU”) to non-employee directors based on a fair market value of $2.82 per share which represents the closing price of the Company’s common stock on the NASDAQ Global Select Market on May 23, 2012.  These RSUs vest upon the first anniversary of the grant date.

We recorded the following stock-based compensation expense for the three and six months ended June 30, 2012 and 2011 (in thousands):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Stock option compensation expense recognized in:
                   
Cost of services
  $ 81     $ 50     $ 166     $ 105  
Cost of software and other
    10       5       21       5  
Research and development
    278       180       562       341  
Sales and marketing
    137       149       273       301  
General and administrative
    479       677       944       1,114  
    $ 985     $ 1,061     $ 1, 966     $ 1,866  
                                 
 
ESPP compensation expense recognized in:
                   
Cost of services
  $ 11     $ 4     $ 19     $ 4  
Research and development
    3       2       6       2  
Sales and marketing
    1       1       3       1  
General and administrative
    3       1       4       1  
    $ 18     $ 8     $ 32     $ 8  
 
RSU expense recognized in:
               
General and administrative
  $ 29     $     $ 29     $  
                                 
Stock-based compensation expense included in total costs and expenses
                         
    $ 1,032     $ 1,069     $ 2,027     $ 1,874  
 
 
14

 
The following table represents stock option activity for the six months ended June 30, 2012:
 
   
Number of 
Shares
   
Weighted 
Average 
Exercise Price
   
Weighted 
Average 
Remaining 
Contractual 
Term (years)
   
Aggregate 
Intrinsic Value 
(in ‘000’s)
 
                         
Outstanding options at the beginning of the period
    10,789,590     $ 2.99       4.25     $ 8  
                                 
Granted
    401,150       3.00                  
                                 
Exercised
    (254,306 )     2.32                  
                                 
Forfeited
    (350,438 )     3.88                  
                                 
Outstanding options at the end of the period
    10,585,996     $ 2.98       3.81     $ 6,688  
                                 
Options vested and expected to vest
    10,483,001     $ 2.97       3.79     6,636  
                                 
Outstanding and exercisable at the end of the period
    6,906,095     $ 2.89       2.97     $ 4,418  
 
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that would have been received by the option holders had they all exercised their options on June 30, 2012, respectively. This amount changes based on the fair market value of our stock. During the three and six months ended June 30, 2012, the aggregate intrinsic value of options exercised under our stock option plans were $116,000 and $206,000, respectively.  During the three and six months ended June 30, 2011, the aggregate intrinsic value of options exercised under our stock option plans were $272,000 and $600,000. Total fair value of options vested during the three and six months ended June 30, 2012 was $1.0 million and $2.0 million, respectively.  Total fair value of options vested during the three and six months ended June 30, 2011 was $1.1 million and $1.9 million, respectively.

At June 30, 2012, there was $4.5 million of unrecognized compensation cost related to existing options outstanding, which is expected to be recognized over a weighted average period of 1.7 years.

Net Loss Per Share

Basic net loss per share is computed using our net loss and the weighted average number of common shares outstanding during the reporting period. Diluted net loss per share is computed using our net loss and the weighted average number of common shares outstanding, including the effect from the potential common shares from outstanding stock options, restricted stock units, the employee stock purchase plan by using the treasury stock method. For the three and six months ended June 30, 2012, 943,000 and 836,000, respectively, outstanding options and restricted stock units were excluded from the computation of diluted net loss per share since their effect would have been anti-dilutive.  For the three and six months ended June 30, 2011, 2.2 million and 2.5 million, respectively, outstanding options were excluded from the computation of diluted net loss per share since their effect would have been anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):
 
   
Three Months
   
Six Months
 
   
Ended
   
Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net Loss
  $ (2,640 )   (4,039 )   $ (7,013 )   (7,181
                                 
Shares used in computing basic and diluted net loss per share
    48,584       48,293       48,521       48,237  
                                 
Basic and diluted net loss per share
  $ (0.05 )   (0.08 )   $ (0.14 )   (0.15
 
 
15


Warranties and Indemnifications

We generally provide a refund period on sales, during which refunds may be granted to consumers under certain circumstances, including our inability to resolve certain support issues. For our channel sales, the refund period varies by channel partner, but is generally between 5 and 14 days. For our software products, we provide a 30-day money back guarantee. For referral programs and direct transactions, the refund period is generally 5 days. For all sales channels, we recognize revenue net of refunds and cancellations during the period. Refunds and cancellations have not been material to date.

We generally agree to indemnify our customers against legal claims that our software products infringe certain third party intellectual property rights. As of June 30, 2012 and 2011, we have not been required to make any payment resulting from infringement claims asserted against our customers and have not recorded any related reserves.

Recent Accounting Pronouncements
 
In May 2011, the FASB issued ASU No. 2011-04—Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 was effective for the Company in its first quarter of fiscal 2012. The adoption of ASU 2011-04 had no significant impact on our consolidated financial statements.
 
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities.  This update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  ASU No. 2011-11 will be effective for annual reporting periods beginning on or after January 1, 2013.  The Company does not expect that this update will have any significant impact on its financial position.

Note 2. Warrants

On October 25, 2010, we entered into a Support Services Agreement (the “Customer Agreement”) with Comcast Cable Communications Management, LLC (“Comcast”) under which Support.com provides technology support services to customers of Comcast in exchange for fees. In connection with the Customer Agreement, Support.com and Comcast entered into a Warrant Agreement, under which Support.com agreed to issue to Comcast warrants to purchase up to 975,000 shares of Support.com common stock in the future in the event that Comcast meets specified sales milestones under the Customer Agreement. Each warrant, if issued, will have an exercise price per share of $4.9498 and a term of three years from issuance. On September 27, 2011, the Company and Comcast amended the Warrant Agreement to extend the expiration date for the performance milestones while maintaining the previously agreed revenue thresholds. The warrants will be valued as they are earned, and the resulting value will be recorded as a charge against revenue in the period in which the performance milestone is met and the warrant is earned. As of June 30, 2012, none of the performance milestones have been met, and therefore no warrants have been issued. Consequently, the Company has not recorded any warrant-related charges against its revenue for any period through June 30, 2012.

Note 3.  Income Taxes

We recorded an income tax provision of $116,000 and $235,000 for the three and six months ended June 30, 2012 and $29,000 and $31,000 for the three and six months ended June 30, 2011, respectively.  The provision for income taxes includes estimates of current taxes due in domestic and foreign jurisdictions.  This provision reflects tax expense associated with state income tax, foreign taxes, and tax expense related to the recording of a deferred tax liability that results from the amortization for income tax purposes of acquisition-related goodwill.
 
Goodwill recorded as part of a business combination is deductible for tax purposes and only recorded as a book charge if it is impaired. A deferred tax liability is recorded as the tax deduction is realized, which will not be reversed unless and until the goodwill is disposed of or impaired.  We will continue to record an income tax expense related to the amortization of goodwill as a discrete item each quarter unless and until such impairment occurs.
 
 
16

 
As of June 30, 2012, our deferred tax assets are fully offset by a valuation allowance except in those jurisdictions where it is determined that a valuation allowance is not required. ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our future results, we provided a full valuation allowance against our net U.S. deferred tax assets and a full valuation allowance against certain foreign deferred tax assets. We reassess the need for our valuation allowance on a quarterly basis. If it is later determined that a portion of the valuation allowance should be reversed it generally will be a benefit to the income tax provision.

Note 4. Commitments and Contingencies
 
Tax contingencies
 
We are required to make periodic filings in the jurisdictions where we are deemed to have a presence for tax purposes. We have undergone audits in the past and have paid assessments arising from these audits. Our India entity was issued notices of income tax assessment pertaining to the 2004-2005, 2005-2006, 2006-2007 and 2007-2008 fiscal years. The notices claimed that the transfer price used in our inter-company agreements with our India entity was too low, and that the price should be increased. We believe our current transfer pricing position is more likely than not to be sustained. We believe that this will be resolved through the normal judicial appeal process used in India, and have submitted our case to the court.
 
We may be subject to other income tax assessments in the future. We evaluate estimated expenses that could arise from those assessments in accordance with ASC 740. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate on the amount of expenses. We record the estimated liability amount of those assessments that meet the definition of an uncertain tax position under ASC 740.

Legal contingencies
 
On February 7, 2012, a lawsuit seeking class-action certification was filed against the Company in the United States District Court for the Northern District of California, No. 12-CV-00609, alleging that the design of one the Company’s software products and the method of promotion to consumers constitute fraudulent inducement, breach of contract, breach of express and implied warranties, and unjust enrichment. On the same day the same plaintiffs’ law firm filed another action in the United States District Court for the Southern District of New York, No. 12-CV-0963, involving similar allegations against a subsidiary of the Company and one of the Company’s channel partners who distributes our software products, and that channel partner has requested indemnification under contract terms with the Company. The law firm representing the plaintiffs in both cases has filed unrelated class actions in the past year against a number of major software providers with similar allegations about those providers’ products. On June 18, 2012, the Company entered into a settlement which remains subject to final court approval. Under the terms of the settlement, the Company would offer a one-time cash payment, which is covered by the Company’s insurance provider, to qualified class-action members. In addition, the Company would offer a limited free subscription to one of its software products. In accordance with ASC 450, Contingencies, we have estimated and recorded a charge against earnings in general and administrative expense of $57,000 associated with the limited free software subscription. The Company denies any wrongdoing or liability and entered into the settlement to minimize the costs of defense.

We are also subject to other routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business, potentially including assertions that we may be infringing patents or other intellectual property rights of others. We currently do not believe that the ultimate amount of liability, if any, for such routine legal proceedings (alone or combined) will materially affect our financial position, results of operations or cash flows. The ultimate outcome of any litigation is uncertain, however, and unfavorable outcomes could have a material negative impact on our financial condition and operating results. Regardless of outcome, litigation can have an adverse impact on us because of defense costs, negative publicity, diversion of management resources and other factors.

Guarantees
 
We have identified guarantees in accordance with ASC 450. This guidance stipulates that an entity must recognize an initial liability for the fair value, or market value, of the obligation it assumes under the guarantee at the time it issues such a guarantee, and must disclose that information in its interim and annual financial statements. We have entered into various service level agreements with our channel partners, in which we may guarantee the maintenance of certain service level thresholds. Under some circumstances, if we do not meet these thresholds, we may be liable for certain financial costs. We evaluate costs for such guarantees under the provisions of ASC 450. We consider such factors as the degree of probability that we would be required to satisfy the liability associated with the guarantee and the ability to make a reasonable estimate of the resulting cost. To date, we incurred costs of less than 1% of revenue as a result of any such obligations and have not accrued any liabilities related to such obligations in the condensed consolidated financial statements as of June 30, 2012 and December 31, 2011.

 
17

 
Note 5. Restructuring Obligations and Other Charges

In the second quarter of 2012, we initiated a phased reduction in our sales agent workforce.  These selling activities were transitioned to either partner sales centers or third-party sales specialists.  We reduced our workforce by 190 employees, or approximately 15% of our total employee headcount by the end of second quarter of 2012.  All of the affected employees were terminated by June 30, 2012.  As a result, we recorded a restructuring charge of $142,000 in sales and marketing expense and $30,000 in general and administrative expense. The restructuring charge was primarily comprised of employee termination costs and professional services.  As of June 30, 2012, the remaining balance related to this restructuring obligation was $55,000, which we expect to pay in the third quarter of 2012.

In the third quarter of 2009, we ceased using a portion of our headquarters office in order to align our facilities usage with our current size.  As a result, we impaired approximately 46% of our Redwood City facility.  We recorded a restructuring charge of approximately $1.3 million in general and administrative expense, which related to the facility impairment.  As of June 30, 2012, the remaining balance on this restructuring obligation was $30,000, which we expect to pay through July 2012.

The following table summarizes activity associated with the restructuring and related expenses incurred as of June 30, 2012 (in thousands):
 
   
Severance(1)
   
Facilities(2)
   
Total
 
Restructuring obligations, December 31, 2011   $ 2     $ 208     $ 210  
Restructuring costs incurred in 2012
    172             172  
Cash payments
    (119 )     (178 )     (297 )
Restructuring obligations, June 30, 2012
  $ 55     $ 30     $ 85  

 
(1)
Severance costs include those expenses related to severance pay and related employee benefit obligations.
 
 
(2)
Facilities costs include obligations under non-cancelable leases for facilities that we no longer occupy, as well as penalties associated with early terminations of leases and disposal of fixed assets. No sublease income has been included because subleasing is not permitted under the terms of our lease.
 
Note 6. Other Accrued Liabilities
 
Other accrued liabilities consist of the following (in thousands):
 
 
   
June 30, 2012
   
December 31, 2011
 
Accrued expenses
  $ 3,054     $ 2,910  
Restructuring expenses
    85       210  
Customer deposits
    759       1,160  
Other accrued liabilities
    276       211  
Total other accrued liabilities
  $ 4,174     $ 4,491  
 
Note 7. Business Combination
 
RightHand IT Corporation

On January 13, 2012, we executed an Asset Purchase Agreement to acquire certain assets and assume certain liabilities of RightHand IT Corporation (“RHIT”), a managed service provider for small business located in Louisville, Colorado.  No stock was acquired as part of the transaction. The acquisition deepens our small business expertise and enables us to grow our business by providing services to small business customers.

 
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We engaged an independent third-party appraisal firm to assist in determining the fair value of assets acquired and liabilities assumed from the transaction.  Such a valuation requires management to make significant estimates, especially with respect to intangible assets.  These estimates are based on historical experience and information obtained from the management of the acquired company.  We placed value on RHIT’s existing customer relationships, as well as non-compete agreements signed by certain key employees.  The purchase price for RHIT exceeded the fair value of RHIT’s net tangible and intangible assets acquired.  As a result, we have recorded goodwill in connection with this transaction.  This goodwill is deductible for tax purposes.

We paid a total of $1.4 million in cash including $300,000 held in escrow against payment of a milestone-based earn-out.  The earn-out consists of two criteria-based milestones that must be met by specific dates through 2012.  The probability-weighted fair value of the $300,000 payment was $277,000.  As a result, we recorded the $23,000 difference between the $300,000 escrow cash payment and $277,000 fair value as other current assets on our consolidated balance sheet.  Following our periodic re-evaluation of the probability of milestone achievements, the remaining value of the other current asset on our consolidated balance sheet has been reduced from the $23,000 originally recorded to $18,000 at June 30, 2012.  The probability of milestone achievement will be re-measured quarterly and any changes in the estimated fair value will be recorded in amortization of intangible assets and other in the consolidated statements of operations.  For the three and six months ended June 30, 2012, we recorded $5,000 in amortization of intangible assets and other related to the milestone-based earn-out. We expect the balance of this asset to decline as we near the completion dates of future milestones and re-evaluate the probability of these milestone achievements.

The tangible and identifiable intangible assets acquired and liabilities assumed, and resulting goodwill are summarized below.  The financial information presented includes purchase accounting adjustments to the tangible and intangible assets:

   
Amount
 (in thousands)
    Amortization
 Period
Accounts receivable
  $ 151    
Prepaid expenses and other current assets
    46    
Total current assets
    197    
Property and equipment, net
    108    
Other assets
    28    
Acquired assets
    333    
           
Other accrued liabilities
    (106 )  
Short-term deferred revenue
    (49 )  
Assumed liabilities
    (155 )  
           
Net assets assumed
    178    
           
Identifiable intangible assets:
         
Non-compete
    70   36 months
Customer base
    460   60 months
           
Goodwill
    619    
Total purchase consideration
    1,327    
Other current asset
    23    
Total cash consideration
  $ 1,350    
 
The operating results of RHIT have been included in our accompanying condensed consolidated statements of operations from January 14, 2012, the day following acquisition.  Pro-forma results of operations have not been presented because the acquisition was not material to our results of operations.  In addition to the $1.4 million cash consideration, we incurred acquisition-related expenditures of approximately $33,000 through June 30, 2012, which were expensed in the periods in which they were incurred in accordance with ASC 805, Business Combinations. These expenses were recorded in general and administrative expense in our condensed consolidated statements of operations.

 
19

 
SUPERAntiSpyware

On June 15, 2011, we executed an Asset Purchase Agreement to acquire certain assets and assume certain liabilities of SUPERAntiSpyware (“SAS”), a sole proprietorship located in Eugene, Oregon.  No stock was acquired as part of the transaction.  SAS provides software tools to detect and remove spyware, adware, rootkits, Trojans, worms, parasites, dialers, and other types of malware.   The acquisition increases the number and type of software products we provide to our customers, enables us to grow our direct business by marketing existing services to SAS software customers, and broadens the product suite we can offer to our channel partners.

We engaged an independent third-party appraisal firm to assist in determining the fair value of assets acquired and liabilities assumed from the transaction.  Such a valuation requires management to make significant estimates, especially with respect to intangible assets.  These estimates are based on historical experience and information obtained from the management of the acquired company.  We placed value on SAS’s technology, trade name and existing customer relationships, as well as non-compete agreements signed by certain key employees.  The purchase price for SAS exceeded the fair value of SAS’s net tangible and intangible assets acquired.  As a result, we have recorded goodwill in connection with this transaction.  This goodwill is deductible for tax purposes.

We paid a total of $8.5 million in cash including $1.0 million held in escrow against payment of a milestone-based earn-out.  The earn-out consists of four criteria-based milestones that must be met by specific dates over the 18-month period following the acquisition date.  The probability-weighted fair value of the $1.0 million payment is $919,000.  As a result, we recorded the $81,000 difference between $1.0 million escrow cash payment and $919,000 fair value as other current assets on our consolidated balance sheets.  Following our periodic re-evaluation of the probability of milestone achievements, the remaining value of the other current asset on our consolidated balance sheets has been reduced from the $81,000 originally recorded to $37,500 at June 30, 2012.  The probability of milestone achievement is re-measured quarterly and any changes in the estimated fair value are recorded in amortization of intangible assets and other in the consolidated statements of operations. For the three and six months ended June 30, 2012, we recorded $25,000 and $38,000, respectively, in amortization of intangible assets and other related to the milestone-based earn-out. We expect the balance of this asset to decline as we near the completion dates of future milestones and re-evaluate the probability of these milestone achievements.

The tangible and identifiable intangible assets acquired and liabilities assumed, and resulting goodwill are summarized below.  The financial information presented includes purchase accounting adjustments to the tangible and intangible assets:

   
Amount
 (in thousands)
 
Amortization
 Period
Accounts receivable
  $ 5    
Prepaid expenses
    6    
Accrued liabilities
    (1 )  
Deferred revenue
    (491 )  
Net liabilities assumed
    (481 )  
           
Identifiable intangible assets:
         
Technology
    4,910  
66 months
Trade/product name
    310  
66 months
Non-compete
    160  
72 months
Customer base
    80  
30 months
           
Goodwill
    3,440    
Total purchase consideration
    8,419    
Other current asset
    81    
Total cash consideration
  $ 8,500    

The operating results of SAS have been included in our accompanying condensed consolidated statements of operations from June 16, 2011, the day following acquisition.  Pro-forma results of operations have not been presented because the acquisition was not material to our results of operations.  In addition to the $8.5 million cash consideration, we incurred acquisition-related expenditures of approximately $363,000 as of December 31, 2011, which were expensed in the period in which they were incurred in accordance with ASC 805.  These expenses were recorded in general and administrative expense in our condensed consolidated statements of operations.
 
 
20

 
Note 8.  Intangible Assets
 
Amortization expense and other related to intangible assets for the three months ended June 30, 2012 and 2011 was $391,000 and $122,000, respectively.  Amortization expense and other related to intangible assets for the six months ended June 30, 2012 and 2011 was $758,000 and $205,000, respectively.
 
The following table summarizes the components of intangible assets (in thousands):
 
   
Non-
compete
   
Partner
Relationships
   
Customer
Base
   
Technology
 Rights
   
Tradenames
   
Indefinite
Life
Intangibles
   
Total
 
As of June 30, 2012
                                         
Gross carrying value
  $ 594     $ 145     $ 641     $ 5,330     $ 760     $ 250     $ 7,720  
Accumulated amortization
    (383 )     (128 )     (172 )     (1,202 )     (350 )           (2,235 )
Net carrying value
  $ 211     $ 17     $ 469     $ 4,128     $ 410     $ 250     $ 5,485  
 
As of December 31, 2011
                                                       
Gross carrying value
  $ 523     $ 145     $ 181     $ 5,330     $ 760     $ 250     $ 7,189  
Accumulated amortization
    (335 )     (108 )     (109 )     (702 )     (265 )           (1,519 )
Net carrying value
  $ 188     $ 37     $ 72     $ 4,628     $ 495     $ 250     $ 5,670  
 
In December 2006, we acquired the use of a toll-free telephone number for cash consideration of $250,000.  This asset has an indefinite useful life.  The intangible asset is tested for impairment annually or more often if events or changes in circumstances indicate that the carrying value may not be recoverable.
 
The estimated future amortization expense of intangible assets, with the exception of the indefinite-life intangible assets as of June 30, 2012 is as follows (in thousands):
 
Fiscal Year
 
Amount
 
2012 (July-December)
  $ 710  
2013
    1,321  
2014
    1,091  
2015
    1,069  
2016
    1,028  
2017
    16  
Total
  $ 5,235  
         
Weighted average remaining useful life
 
4.2 years
 
 
The following table summarizes the components of purchased technology (in thousands):
 
   
As of June 30,
   
As of December 31,
 
   
2012
   
2011
 
Purchased technology
  $ 350     $ 350  
Accumulated amortization
    (248 )     (207 )
Total purchased technology, net
  $ 102     $ 143  
 
 
21

 
The estimated future amortization expense of purchased technology as of June 30, 2012 is as follows (in thousands):
 
Fiscal Year
 
Amount
 
2012 (July-December)
  $ 42  
2013
    60  
Total
  $ 102  
         
Weighted average remaining useful life
 
1.3 years
 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q (the “Report”) and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011. The following discussion includes forward-looking statements. Please see “Risk Factors” in Item 1A of Part II of this Report for important information to consider when evaluating these statements.

Overview

Support.com is a provider of cloud-based technology services and software for consumers and small businesses.

Our technology services and software products help install, set up, connect, secure, repair and optimize personal computers, printers, tablets, smartphones, digital cameras, gaming devices, music players, servers, networks, and other technology. We offer one-time and subscription services, and perpetual as well as subscription period licenses of our software products.

Our Personal Technology Experts (“PTEs”) deliver our services to customers online and by telephone, leveraging our proprietary cloud-based technology platform. They generally work from their homes rather than in brick and mortar facilities. Our software products include tools designed to address some of the most common technology issues including computer maintenance, optimization and security.

We market our services through channel partners and directly. Our channel partners include broadband service providers, retailers, technology companies and others. We market our software products directly, principally online, and through channel partners.  We offer free trial versions of our software products to encourage customers to experience the products before buying, and to encourage customers to upgrade to premium versions for which we charge license fees. Our sales and marketing efforts principally target North American customers.

Our total revenue for the second quarter of 2012 grew 29% year-over-year. Revenue from services grew 63% year-over-year. The increase in services revenue over the prior year was due to growth in our channel programs, primarily expansion of the Comcast program. Revenue from software and other declined 29% year-over-year due to changes in the online advertising markets in which we participate..

Cost of services for the second quarter of 2012 grew 45% year-over-year as we added delivery agents to support anticipated revenue growth. Services gross margin improved from 22% to 30% year-over-year primarily as a result of improved operational processes and refinements to service delivery methodology. Cost of software and other for the second quarter of 2012 declined 17% year-over-year due to reduced sales of our software products. Gross margin was 43% in the second quarter of 2012 and 48% for the same period in 2011. The decrease in gross margin was driven by lower percentage of revenue from software and other in the revenue mix, offset by improvements in services margin.

Second quarter operating expenses decreased by 6% year-over-year, driven by lower marketing spend related to our software products, offset by the addition of sales agents required to support certain channel programs prior to the reduction in sales agent workforce completed by the end of the second quarter of 2012.

In the second quarter of 2012, we entered into a sublease and master landlord consent agreement for an office facility located in Redwood City, California which will serve as our new corporate headquarters.

We intend the following discussion of our financial condition and results of operations to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our financial statements.

 
22

 
Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 have the greatest potential impact on our condensed consolidated financial statements, so we consider them to be our critical accounting policies and estimates.  There have been no significant changes in these critical accounting policies and estimates during the three and six months ending June 30, 2012.

RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three and six months ended June 30, 2012 and 2011 expressed as a percentage of total revenue.

   
Three Months
   
Six Months
 
   
Ended
   
Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue:
                       
Services
    79 %     63 %     79 %     66 %
Software and other
    21       37       21       34  
Total revenue
    100       100       100       100  
                                 
Costs of revenue:
                               
Cost of services
    55       49       57       51  
Cost of software and other
    2       3       2       3  
Total cost of revenue
    57       52       59       54  
                                 
Gross profit
    43       48       41       46  
Operating expenses:
                               
Research and development
    10       11       10       11  
Sales and marketing
    29       41       32       39  
General and administrative
    16       26       17       24  
Amortization of intangible assets and other
    2       1       2       1  
Total operating expenses
    57       79       61       75  
                                 
Loss from operations
    (14 )     (31 )     (20 )     (29 )
                                 
Interest and other income, net
    0       1       0       1  
                                 
Loss from continuing operations, before income taxes
    (14 )     (30 )     (20 )     (28 )
                                 
Income tax provision
    1       0       1       0  
                                 
Loss from continuing operations, after income taxes
    (15 )     (30 )     (21 )     (28 )
                                 
Income (loss) from discontinued operations, after income taxes
    (0 )     (0 )     0       (0 )
Net loss
    (15 )%     (30 ) %     (21 )%     (28 )%

 
23


REVENUE

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
In thousands, except percentages
2012
 
2011
 
$  
Change
   
Change
 
2012
 
2011
 
$  
Change
   
Change
 
                                     
Services
  $ 13,744     $ 8,442     $ 5,302       63 %   $ 27,509     $ 17,592     $ 9,917       56 %
Software and other
    3,569       5,012       (1,443 )     (29 ) %     7,392       8,892       (1,500 )     (17 ) %
Total revenue
  $ 17,313     $ 13,454     $ 3,859       29 %   $ 34,901     $ 26,484     $ 8,417       32 %
 
Services revenue consists primarily of fees for technology services.  We provide these services remotely, generally using work-from-home Personal Technology Experts and contractors who utilize our proprietary technology to deliver the services.  Services revenue for the three months ended June 30, 2012 increased by $5.3 million from the same period in 2011.  The increase was due to growth in our channel programs, primarily expansion of the Comcast program.  For the three months ended June 30, 2012, services revenue generated from our channel partnerships was $12.8 million compared to $7.7 million for the same period in 2011.  Direct services revenue was $1.0 million for the three months ended June 30, 2012 compared to $0.8 million for the same period in 2011.  Services revenue for the six months ended June 30, 2012 increased by $9.9 million from the same period in 2011.  The increase was due to growth in our channel programs, primarily expansion of the Comcast program.  For the six months ended June 30, 2012, services revenue generated from our channel partnerships was $25.7 million compared to $16.2 million for the same period in 2011.  For the six months ended June 30, 2012, direct services revenue was $1.8 million compared to $1.4 million for the same period in 2011.

Software and other revenue is comprised primarily of fees for software products provided through direct consumer downloads and, to a lesser extent, through the sale of this software via channel partners. Software and other revenue for the three months ended June 30, 2012 decreased by $1.4 million from the same period in 2011 due to changes in the online advertising markets in which we participate.  For the three months ended June 30, 2012 and 2011, software revenue generated from our channel partnerships remained relatively consistent at $1.4 million while software revenue from direct sales was $2.1 million for the three months ended June 30, 2012, compared to $3.7 million from the same period in 2011.   Software and other revenue for the six months ended June 30, 2012 decreased by $1.5 million compared to same period in 2011 due to changes in the online advertising markets in which we participate.  For the six months ended June 30, 2012, software and other revenue generated from our channel partnerships was $2.9 million compared to $2.3 million from the same period in 2011 while software revenue from direct sales was $4.5 million compared to $6.6 million for the same period in 2011.

COSTS AND EXPENSES

Costs of Revenue

   
Three Months Ended June 30,
 
Six Months Ended June 30,
 
In thousands, except percentages
 
2012
 
2011
 
$  
Change
 
Change
 
2012
 
2011
 
$  
Change
Change
 
                                 
Cost of services
  $
9,591
 
$6,601
  $
2,990
 
45
%
$19,881
  $
13,418
 
$6,463
48
%
Cost of software and other
   
360
 
433
   
(73)
 
(17)
%
830
   
837
 
(7)
(1)
%
Total cost of revenue
  $
9,951
 
$7,034
  $
2,917
 
41
%
$20,711
  $
14,255
 
$6,456
45
%

Cost of services consists primarily of salary–related and contractor expenses for personnel providing services, technology and telecommunication expenses related to the delivery of services and other personnel-related expenses in service delivery. The increase of $3.0 million in cost of services for the three months ended June 30, 2012 compared to the same quarter of 2011 was mainly driven by $2.7 million of costs associated with higher number of service delivery personnel added to support the growth of our programs, as well as a corresponding increase of $0.3 million in direct technology costs to support this growing workforce.  The increase of $6.5 million in cost of services for the six months ended June 30, 2012 compared to the same period in 2011 was primarily due to $5.8 million of costs associated with higher number of service delivery personnel for growing service revenue, as well as a corresponding increase of $0.6 million in direct technology costs to support this growing workforce.
 
Cost of software and other consists primarily of third-party royalty fees for our software products.  Certain products were developed using third-party research and development resources, and this third-party receives royalty payments on sales of products it developed.  The decrease in cost of software and other for the three months ended June 30, 2012 compared to the same period in 2011 was primarily due to reduced sales of our software products.  For the six months ended June 30, 2012 and 2011, cost of software and other remained relatively consistent.
 
 
24

 
Operating Expenses

<
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
In thousands, except percentages
 
2012
   
2011
   
$  
Change
   
Change
   
2012
   
2011
   
$  
Change
   
Change
 
                                                 
Research and development
  $ 1,708     $ 1,433     $ 275       19 %   $ 3,478     $ 2,881     $ 597       21 %
Sales and marketing
  $ 4,989     $ 5,543     $ (554 )     (10 ) %   $ 11,119     $ 10,328     $ 791       8 %
General and administrative
  $ 2,850     $ 3,439     $ (589 )     (17 ) %   $ 5,764     $ 6,225