UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the Quarterly Period Ended March 31, 2019
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OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from to
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Commission File No. 000-30901
SUPPORT.COM, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
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94-3282005
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(I.R.S.
Employer
Identification
No.)
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1521 Concord Pike (US 202), Suite 301, Wilmington, DE
19803
(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 ☒ No ☐
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 definitions of “large
accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☐
(Do
not check if a smaller reporting company)
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Smaller
reporting company ☒
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Emerging growth company
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☐
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If an emerging growth company, indicate by check mark if the
Registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
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 ☒ No
☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act.): Yes ☐ No
☒
On
April 30, 2019, 18,955,264 shares of the Registrant’s Common
Stock, $0.0001 par value, were outstanding.
SUPPORT.COM, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2019
INDEX
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Page
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Part I. Financial Information
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4
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4
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5
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6
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7
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8
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9
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22
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26
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27
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Part II. Other Information
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28
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29
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44
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45
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46
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
(UNAUDITED)
SUPPORT.COM,
INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(in thousands, except share and per share data)
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ASSETS
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Current
assets:
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Cash and cash
equivalents
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$29,584
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$25,182
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Short-term
investments
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18,404
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24,467
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Accounts
receivable, net
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14,871
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12,292
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Prepaid expenses
and other current assets
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958
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999
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Total current
assets
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63,817
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62,940
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Property and
equipment, net
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637
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703
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Intangible
assets
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250
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250
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Right of use
assets, net
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186
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-
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Other
assets
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708
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707
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Total
assets
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$65,598
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$64,600
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$356
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$368
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Accrued
compensation
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2,389
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3,423
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Other accrued
liabilities
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1,009
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978
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Accrued legal
settlement
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10,000
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10,000
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Short-term lease
liability
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175
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-
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Short-term deferred
revenue
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1,315
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1,135
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Total current
liabilities
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15,244
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15,904
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Long-term lease
liability
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13
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-
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Other long-term
liabilities
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801
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800
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Total
liabilities
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16,058
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16,704
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Commitments and
contingencies (Note 3)
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Stockholders’
equity:
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Common stock; par
value $0.0001, 50,000,000 shares authorized; 19,438,178 issued and
18,955,264 outstanding at March 31, 2019 and December 31,
2018
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2
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2
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Additional paid-in
capital
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268,846
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268,794
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Treasury stock, at
cost (482,914 shares at March 31, 2019 and December 31,
2018)
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(5,297)
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(5,297)
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Accumulated other
comprehensive loss
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(2,358)
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(2,507)
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Accumulated
deficit
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(211,653)
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(213,096)
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Total
stockholders’ equity
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49,540
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47,896
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Total
liabilities and stockholders’ equity
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$65,598
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$64,600
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See
accompanying notes.
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
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Three Months
Ended
March
31,
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Revenue:
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Services
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$16,864
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$15,200
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Software and
other
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1,200
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1,322
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Total
revenue
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18,064
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16,522
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Cost of
revenue:
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Cost of
services
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13,798
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14,111
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Cost of software
and other
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54
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55
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Total cost of
revenue
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13,852
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14,166
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Gross
profit
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4,212
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2,356
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Operating
expenses:
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Research and
development
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749
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711
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Sales and
marketing
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392
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550
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General and
administrative
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1,896
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2,146
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Total operating
expenses
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3,037
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3,407
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Income (loss) from
operations
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1,175
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(1,051)
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Interest income and
other, net
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296
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205
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Income (loss)
before income taxes
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1,471
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(846)
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Income tax
(benefit) provision
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28
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(80)
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Net income
(loss)
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$1,443
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$(766)
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Basic and diluted
earnings per share:
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Net income
(loss)
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$0.08
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$(0.04)
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Shares used in
computing basic net income (loss) per share
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18,955
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18,729
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Shares used in
computing diluted net income (loss) per share
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19,004
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18,729
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See
accompanying notes.
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
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Three Months
Ended
March
31,
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Net income
(loss)
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$1,443
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$(766)
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Other comprehensive
income (loss):
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Change in foreign
currency translation adjustment
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99
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(90)
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Change in net
unrealized gain (loss) on investments
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50
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(56)
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Other comprehensive
income (loss)
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149
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(146)
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Comprehensive
income (loss)
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$1,592
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$(912)
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See
accompanying notes.
SUPPORT.COM,
INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
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Additional
Paid-In
Capital
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Accumulated
Other
Comprehensive
Loss
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Total
Stockholders’
Shares
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Balances at December 31,
2017
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18,728,912
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$2
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$267,857
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$(5,297)
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$(2,108)
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$(203,996)
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$56,458
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Net loss
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—
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—
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—
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—
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—
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(766)
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(766)
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Other comprehensive
loss
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—
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—
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—
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—
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(146)
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—
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(146)
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Stock-based compensation
expense
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—
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376
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—
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—
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376
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Balances at March 31,
2018
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18,728,912
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$2
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$268,233
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$(5,297)
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$(2,254)
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$(204,762)
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$55,922
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Balances at December 31,
2018
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18,955,264
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$2
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$268,794
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$(5,297)
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$(2,507)
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$(213,096)
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$47,896
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Net income
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—
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—
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—
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—
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—
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1,443
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1,443
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Other comprehensive
income
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—
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—
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—
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—
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149
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—
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149
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Stock-based compensation
expense
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—
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52
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—
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—
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52
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Balances at March 31,
2019
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18,955,264
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$2
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$268,846
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$(5,297)
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$(2,358)
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$(211,653)
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$49,540
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See
accompanying notes.
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Three Months
Ended
March
31,
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Operating
Activities:
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Net income
(loss)
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$1,443
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$(766)
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Adjustments to
reconcile net income (loss) to net cash used in operating
activities:
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Depreciation
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75
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159
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Amortization of
premiums and discounts on investments
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37
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18
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Stock-based
compensation
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52
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376
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Changes in assets
and liabilities:
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Accounts
receivable, net
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(2,579)
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236
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Prepaid expenses
and other current assets
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50
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(157)
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Other long-term
assets
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72
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150
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Accounts
payable
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(11)
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(193)
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Accrued
compensation
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(1,028)
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(718)
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Accrued expense and
other current liabilities
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37
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27
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Other long-term
liabilities
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-
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(143)
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Deferred
revenue
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180
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(338)
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Net cash used in
operating activities
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(1,672)
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(1,349)
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Investing
Activities:
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Purchases of
property and equipment
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(9)
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(174)
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Purchases of
investments
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(3,570)
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(2,481)
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Maturities of
investments
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9,645
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5,694
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Net cash provided
by investing activities
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6,066
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3,039
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Effect of exchange
rate changes on cash and cash equivalents
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8
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(65)
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Net increase in
cash and cash equivalents
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4,402
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1,625
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Cash and cash
equivalents at beginning of period
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25,182
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18,050
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Cash and cash
equivalents at end of period
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$29,584
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$19,675
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Supplemental
schedule of cash flow information:
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Income taxes
paid
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$-
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$47
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See
accompanying notes.
SUPPORT.COM, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
Note 1. Significant Accounting Policies
Basis of Presentation
The
accompanying unaudited interim condensed consolidated financial
statements include the accounts of Support.com, Inc. (the
“Company”, “Support.com”, “We”
or “Our”) and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated. The
condensed consolidated balance sheet as of March 31, 2019 and the
consolidated statements of operations and comprehensive income
(loss) for the three months ended March 31, 2019 and 2018 and the
consolidated statements of cash flows for the three months ended
March 31, 2019 and 2018 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, 2018 is derived from audited financial statements as of that
date. These financial
statements have been prepared based upon Securities and Exchange
Commission (“SEC”) rules that permit reduced disclosure
for interim periods. For a more complete discussion of significant
accounting policies and certain other information, these
unaudited interim condensed consolidated financial statements
should be read in conjunction 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, 2018, filed
with the SEC on March 8, 2019.
Use of Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles 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, assumptions
used to estimate self-insurance accruals, the valuation and
recognition of investments, 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.
Leases
On
January 1, 2019, we adopted Accounting Standards Update No.
2016-02, Leases (Topic 842) (ASU 2016-02), as amended,
which supersedes the lease accounting guidance under Topic 840, and
generally requires lessees to recognize operating and financing
lease liabilities and corresponding right-of-use (ROU) assets on
the balance sheet and to provide enhanced disclosures surrounding
the amount, timing and uncertainty of cash flows arising from
leasing arrangements. We adopted the new guidance using the
modified retrospective transition approach by applying the new
standard to all leases existing at the date of initial application
and not restating comparative periods. The most significant impact
was the recognition of ROU assets and lease liabilities for
operating leases, while our accounting for finance leases remained
substantially unchanged. See Note 7 — Leases in the notes to
the condensed consolidated financial statements included in Part I,
Item 1, of this Quarterly Report on Form 10-Q for additional
information regarding the adoption.
We
determine if an arrangement is a lease at inception. Operating
leases are included in operating lease right-of-use
(“ROU”) assets and short- and long-term lease
liabilities in our consolidated balance sheets. Finance leases are
included in property and equipment, other current liabilities, and
other long-term liabilities in our consolidated balance sheets. As
of adoption of ASC 842 and as of January 1, 2019, the Company was
not party to finance lease arrangements.
ROU
assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and
liabilities are recognized at commencement date based on the
present value of lease payments over the lease term. As most of our
leases do not provide an implicit rate, we use our incremental
borrowing rate based on the information available at commencement
date in determining the present value of lease payments. We use the
implicit rate when readily determinable. The operating lease ROU
asset also includes any lease payments made and excludes lease
incentives. Our lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will
exercise that option. Lease expense for lease payments is
recognized on a straight-line basis over the lease
term.
Under
the available practical expedient, we account for the lease and
non-lease components as a single lease component.
There
have been no other changes to the accounting policies except the
Leases, which are disclosed in our most recent Annual Report on
Form 10-K. The accompanying unaudited Condensed Consolidated
Financial Statements we present in this report have been prepared
in accordance with our policies.
Revenue Recognition
Disaggregation of Revenue
We
generate revenue from the sale of services and sale of software
fees for end-user software products provided through direct
customer downloads and through the sale of these end-user software
products via partners. The following table depicts the
disaggregation of revenue (in thousands) according to revenue type
and is consistent with how we evaluate our financial
performance:
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Revenue from
Contracts with Customers:
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Services
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$16,864
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$15,200
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Software and
other
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1,200
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1,322
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Total
revenue
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$18,064
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$16,522
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Services Revenue
Services
revenue is comprised primarily of fees for technology support
services. Our service programs are designed for both the consumer
and SMB markets, and include computer and mobile device set-up,
security and support, virus and malware removal and wireless
network set-up, and automation system onboarding and
support.
We
offer technology services to consumers and SMBs, primarily through
our partners (which include communications providers, retailers,
technology companies and others) and to a lesser degree directly
through our website at www.support.com. We transact with customers
via reseller programs, referral programs and direct transactions.
In reseller programs, the partner generally executes the financial
transactions with the customer and pays a fee to us which we
recognize as revenue when the service is delivered. In referral
programs, we transact with the customer 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 referral
programs, since we are the primary obligor 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.
The
technology services described above include four types of
offerings:
●
Hourly-Based
Services - In connection with the provisions of certain services
programs, fees are calculated based on contracted hourly rates with
partners. For these programs, we recognize revenue as services are
performed, based on billable hours of work delivered by our
technology specialists. These services programs also include
performance standards, which may result in incentives or penalties,
which are recognized as earned or incurred.
●
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.
●
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.
The
following table represent deferred revenue activity for the three
months ended March 31, 2019 (in thousands):
Changes in
deferred revenues were as
follows:
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Balance
as of December 31, 2018
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$1,135
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Deferred revenue
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751
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Recognition of unearned
revenue
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(571)
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Balance
as of March 31, 2019
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$1,315
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Partners are
generally invoiced monthly. Fees from customers 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 customers under certain circumstances, including
inability to resolve certain support issues. For our partnerships,
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 not been material.
Services revenue
also includes fees from licensing of Support.com cloud-based
software. In such arrangements, customers receive a right to use
our Support.com Cloud applications in their own support
organizations. We license our cloud based software using a
software-as-a-service
(“SaaS”) model under which customers cannot take
possession of the technology and pay us on a per-user or usage
basis during the term of the arrangement. In addition, services
revenue includes fees from implementation services of our
cloud-based software. Currently, revenues from implementation
services are recognized ratably over the customer life which is
estimated as the term of the arrangement once the Support.com Cloud
services are made available to customers. We generally charge for
these services on a time and material basis. As of March 31, 2019,
revenues from implementation services are di minimus.
Software and Other Revenue
Software and other
revenue is comprised primarily of fees for end-user software
products provided through direct customer downloads and through the
sale of these end-user software products via partners. Our software
is sold to customers as a perpetual license or as a fixed period
subscription. We offer when-and-if-available software upgrades to
our end-user products. Management has determined that these
upgrades are not distinct, as the upgrades are an input into a
combined output. In addition, Management has determined that the
frequency and timing of the when-and-if-available upgrades are
unpredictable and therefore we recognize revenue consistent with
the sale of the perpetual license or subscription. We 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 the majority of our
end-user software products.
For
certain end-user software 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 end-user software 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 control transfers to
our partners.
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.
Our
cash equivalents and short-term investments are classified as
investment, and are reported at fair value with unrealized
gains/losses included in accumulated other comprehensive loss
within stockholders’ equity on the consolidated balance
sheets and in the consolidated statements of comprehensive income
(loss). We view this investment portfolio as available for use in
our current operations, and therefore we present our marketable
securities as short-term assets.
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, the Company’s intent to sell the security and
the Company’s belief that it will not be required to sell the
security before the recovery of its 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 December 31, 2018, the Company evaluated its
unrealized losses on marketable 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 their amortized cost
basis. At March 31, 2019 and December 31, 2018, the fair value of
cash, cash equivalents and investments was $48.0 million and $49.6
million, respectively.
The
following is a summary of cash, cash equivalents and investments at
March 31, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
Cash
|
$6,445
|
$—
|
$—
|
$6,445
|
Money market
funds
|
22,211
|
—
|
—
|
22,211
|
Certificates of
deposit
|
463
|
—
|
—
|
463
|
Commercial
paper
|
2,426
|
—
|
(1)
|
2,425
|
Corporate notes and
bonds
|
15,465
|
—
|
(19)
|
15,446
|
U.S. government
agency securities
|
998
|
—
|
—
|
998
|
|
$48,008
|
$—
|
$(20)
|
$47,988
|
Classified
as:
|
|
|
|
|
Cash and cash
equivalents
|
$29,585
|
$—
|
$(1)
|
$29,584
|
Short-term
investments
|
18,423
|
—
|
(19)
|
18,404
|
|
$48,008
|
$—
|
$(20)
|
$47,988
|
|
|
|
|
|
Cash
|
$8,391
|
$—
|
$—
|
$8,391
|
Money market
funds
|
14,295
|
—
|
—
|
14,295
|
Certificates of
deposit
|
1,171
|
—
|
(1)
|
1,170
|
Commercial
paper
|
3,986
|
—
|
(66)
|
3,985
|
Corporate notes and
bonds
|
14,899
|
—
|
(1)
|
14,833
|
U.S. government
agency securities
|
6,976
|
—
|
(1)
|
6,975
|
|
$49,718
|
$—
|
$(69)
|
$49,649
|
Classified
as:
|
|
|
|
|
Cash and cash
equivalents
|
$25,182
|
$—
|
$—
|
$25,182
|
Short-term
investments
|
24,536
|
—
|
(69)
|
24,467
|
|
$49,718
|
$—
|
$(69)
|
$49,649
|
The
following table summarizes the estimated fair value of our
marketable securities classified by the stated maturity date of the
security (in thousands):
|
|
|
Due within one
year
|
$12,812
|
$20,874
|
Due within two
years
|
5,592
|
3,593
|
|
$18,404
|
$24,467
|
Fair Value Measurements
Accounting
Standards Codification (“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 according to 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.
●
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
March 31, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
Money market
funds
|
$22,211
|
$—
|
$—
|
$22,211
|
Certificates of
deposit
|
—
|
463
|
—
|
463
|
Commercial
paper
|
—
|
2,425
|
—
|
2,425
|
Corporate notes and
bonds
|
—
|
15,446
|
—
|
15,446
|
U.S. government
agency securities
|
—
|
998
|
—
|
998
|
Total
|
$22,211
|
$19,332
|
$—
|
$41,543
|
|
|
|
|
|
Money market
funds
|
$14,295
|
$—
|
$—
|
$14,295
|
Certificates of
deposit
|
—
|
1,170
|
—
|
1,170
|
Commercial
paper
|
—
|
3,985
|
—
|
3,985
|
Corporate notes and
bonds
|
—
|
14,833
|
—
|
14,833
|
U.S. government
agency securities
|
—
|
6,975
|
—
|
6,975
|
Total
|
$14,295
|
$26,963
|
$—
|
$41,258
|
For
short-term investments, 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. Our policy is to
recognize the transfer of financial instruments between levels at
the end of our quarterly reporting period.
Concentrations of Credit Risk
Financial
instruments that potentially subject us to concentrations of credit
risk consist principally of cash equivalents, investments and trade
accounts receivable. Our investment portfolio consists of
investment grade securities. Except for obligations of the United
States government and securities issued by agencies of the United
States government, we diversify our investments by limiting our
holdings with any individual issuer. We are exposed to credit risks
in the event of default by the issuers to the extent of the amount
recorded on the consolidated balance sheets. The credit risk in our
trade accounts receivable is substantially mitigated by our
evaluation of the customers’ financial conditions at the time
we enter into business and reasonably short payment
terms.
For the
three months ended March 31, 2019, Comcast and Cox Communications
accounted for 68% and 20%, respectively, of our total revenue. For
the three months ended March 31, 2018, Comcast and Cox
Communications accounted for 69% and 12%, respectively, of our
total revenue. There were no other customers that accounted for 10%
or more of total revenue for the three months ended March 31, 2019
and 2018.
The
credit risk in our trade accounts receivable is substantially
mitigated by our evaluation of the customers’ financial
conditions at the time we enter into business and reasonably short
payment terms. As of March 31, 2019, Comcast and Cox Communications
accounted for 75% and 18%, respectively, of our total accounts
receivable. As of December 31, 2018, Comcast and Cox Communications
accounted for 71% and 20%, respectively, of our total accounts
receivable. There were no other customers that accounted for 10% or
more of our total accounts receivable as of March 31, 2019 and
December 31, 2018.
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.
Reserves are made based on a specific review of all significant
outstanding invoices. For those invoices not specifically provided
for, reserves are recorded at differing rates, based on the age of
the receivable. In determining these rates, we analyze our
historical collection experience and current payment trends. The
determination of past-due accounts is based on contractual terms.
We had an allowance for
doubtful accounts of $7,000 and $13,000 at March 31, 2019 and
December 31, 2018, respectively.
Self-Funded Health Insurance
Effective January
1, 2015, the Company maintains a self-funded health insurance
program with a stop-loss umbrella policy with a third party insurer
to limit the maximum potential liability for medical claims. With
respect to this program, the Company considers historical and
projected medical utilization data when estimating its health
insurance program liability and related expense. As of March 31,
2019, the Company had approximately $501,000 in reserve for its
self-funded health insurance program. As of December 31, 2018, the
Company had approximately $585,000 in reserve for its self-funded
health insurance program. The reserve is included in “other
accrued liabilities” in the condensed consolidated balance
sheets.
The
Company regularly analyzes its reserves for incurred but not
reported claims and for reported but not paid claims related to its
self-funded insurance program. The Company believes its reserves
are adequate. However, significant judgment is involved in
assessing these reserves such as assessing historical paid claims,
average lags between the claims’ incurred date, reported
dates and paid dates, and the frequency and severity of claims.
There may be differences between actual settlement amounts and
recorded reserves and any resulting adjustments are included in
expense once a probable amount is known.
Accumulated Other Comprehensive Loss
The
components of accumulated other comprehensive loss, which relate
entirely to accumulated foreign currency translation losses
associated with our foreign subsidiaries and unrealized losses on
investments, consisted of the following (in
thousands):
|
Foreign Currency
Translation Losses
|
Unrealized
Losses on Investments
|
|
Balance as of
December 31, 2018
|
$(2,438)
|
$(69)
|
$(2,507)
|
Current-period
other comprehensive income
|
99
|
50
|
149
|
Balance as of March
31, 2019
|
$(2,339)
|
$(19)
|
$(2,358)
|
Realized
gains/losses on investments reclassified from accumulated other
comprehensive loss are reported as interest income and other, net
in our consolidated statements of operations.
The
amounts noted in the condensed consolidated statements of
comprehensive loss are shown before taking into account the related
income tax impact. The income tax effect allocated to each
component of other comprehensive loss for each of the periods
presented is not significant.
Stock-Based Compensation
We
apply the provisions of ASC 718, Compensation - 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.
The
fair value of our stock-based awards was estimated using the
following weighted average assumptions for the three months ended
March 31, 2019 and 2018:
|
|
Employee Stock
Purchase Plan
|
|
Three Months Ended
March 31,
|
|
|
2018
|
2019
|
|
Risk-free interest
rate
|
0%
|
2.4%
|
2.52%
|
0.5%
|
Expected term (in
years)
|
0.0
|
3.0
|
0.5
|
0.5
|
Volatility
|
0%
|
41.3%
|
25.5%
|
39.0%
|
Expected
dividend
|
0%
|
0%
|
0%
|
0%
|
Weighted average
grant-date fair value
|
$0.00
|
$0.84
|
$0.62
|
$0.39
|
(1)
There was no
options granted for the three months ended March 31,
2019.
We
recorded the following stock-based compensation expense for the
three months ended March 31, 2019 and 2018 (in
thousands):
|
Three Months
Ended
March
31,
|
Stock-based
compensation expense related to grants of:
|
|
|
Stock
options
|
$33
|
$288
|
Employee Stock
Purchase Plan (“ESPP”)
|
-
|
5
|
Restricted stock
units (“RSUs”)
|
19
|
83
|
|
$52
|
$376
|
Stock-based
compensation expense recognized in:
|
|
|
Cost of
service
|
$8
|
$21
|
Research and
development
|
7
|
14
|
Sales and
marketing
|
12
|
19
|
General and
administrative
|
25
|
322
|
|
$52
|
$376
|
Earnings (Loss) Per Share
Basic
earnings (loss) per share is computed using our net income (loss)
and the weighted average number of common shares outstanding during
the reporting period. Diluted earnings (loss) per share is computed
using our net income (loss) and the weighted average number of
common shares outstanding, including the effect of the potential
issuance of common stock such as stock issuable pursuant to the
exercise of stock options and warrants and vesting of RSUs using
the treasury stock method when dilutive.
For the
three months ended March 31, 2019 and 2018, diluted earnings per
share was computed using our net income and the weighted average
number of common shares outstanding, including the effect of the
potential issuance of common stock such as stock issuable pursuant
to the exercise of stock options and warrants and vesting of RSUs
using the treasury stock method.
The
following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$1,443
|
$(766)
|
|
|
|
Basic:
|
|
|
Weighted-average
shares of common stock outstanding
|
18,955
|
18,729
|
Shares used in
computing basic income (loss) per share
|
18,955
|
18,729
|
Basic earnings
(loss) per share
|
0.08
|
(0.04)
|
Diluted:
|
|
|
Weighted-average
shares of common stock outstanding
|
18,955
|
18,729
|
Add: Common
equivalent shares outstanding
|
49
|
-
|
Shares used in
computing diluted earnings (loss) per share
|
19,004
|
18,729
|
Diluted earnings
(loss) per share
|
$0.08
|
$(0.04)
|
The
following potential common shares outstanding were excluded from
the computation of diluted loss per share because including them
would have been antidilutive (in thousands):
|
Three Months
Ended
March
31,
|
|
2019
|
|
Stock
options
|
765
|
721
|
RSUs
|
78
|
69
|
Total common share
equivalents
|
843
|
790
|
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
partnerships, the
refund period varies by partner, but is generally between 5-14
days. For referral programs and direct transactions, the refund
period is generally 5 days. For the majority of our end-user
software products, we provide a 30-day money back guarantee.
For all 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 end-user software products infringe certain third-party
intellectual property rights. As of March 31, 2018, we have not
been required to make any payment resulting from infringement
claims asserted against our customers and have not recorded any
related accruals.
Recent Accounting Pronouncements
Accounting Standards Adopted in the Current Period
Lease Accounting
In
February 2016, the FASB issued ASU 2016-02, Leases (“ASU
2016-02”). This new standard establishes a right-of-use (ROU)
model that requires a lessee to record a ROU asset and a lease
liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or
operating, with classification affecting the pattern of expense
recognition in the income statement. ASU 2016-02 is effective for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early adoption is permitted. In
July 2018, the FASB issued ASU No. 2018-11 which provides an
alternative transition method that allows entities to apply the new
leases standard at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. The Company has adopted the
requirements of ASU 2016-02 on January 1, 2019, the first day of
fiscal year 2019, and using the option transition method. The
Company took advantage of the practical expedient options, which
allows an entity not to reassess whether any existing or expired
contracts contain leases. There was an increase in assets of
$230,000 and liabilities of $231,000 due to the recognition of the
required right-of-use asset and corresponding liability for all
lease obligations that are currently classified as operating leases
with the difference of $1,000 related to existing deferred rent
that reduced the ROU asset recorded. The standard did not have an
impact in our consolidated income statements.
For information regarding the impact of Topic 842
adoption, see Significant Accounting
Policies - Leases and Note
7— Leases.
New Accounting Standards to be adopted in Future
Periods
Intangible Assets
In
January 2017, the FASB issued Accounting Standards Update No.
2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment (ASU 2017-04), which
eliminates step two from the goodwill impairment test. Under ASU
2017-04, an entity should recognize an impairment charge for the
amount by which the carrying amount of a reporting unit exceeds its
fair value up to the amount of goodwill allocated to that reporting
unit. This guidance will be effective for us in the first quarter
of 2020 on a prospective basis, and early adoption is permitted. We
do not expect the standard to have a material impact on our
consolidated financial statements.
Note 2. Income Taxes
We
recorded an income tax provision (benefit) of $28,000 and $(80,000)
for the three months ended March 31, 2019 and 2018,
respectively. The income tax provision for interim periods is
determined using an estimate of the annual effective tax rate,
adjusted for discrete items, if any, that are taken into account in
the relevant period. Each quarter, the estimate of the annual
effective tax rate is updated, and if the estimated effective tax
rate changes, a cumulative adjustment is made. There is a potential
for volatility of the effective tax rate due to several factors,
including changes in the mix of the pre-tax income and the
jurisdictions to which it relates, changes in tax laws and
settlements with taxing authorities and foreign currency
fluctuations.
As of
March 31, 2019, 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 partial
valuation allowance against our foreign deferred tax assets.
We reassess the need for our valuation allowance on a quarterly
basis. If it is later determined that a portion or all of the
valuation allowance is not required, it generally will be a benefit
to the income tax provision in the period such determination is
made.
The
Company does not anticipate a material change in the total amount
or composition of its unrecognized tax benefits as of March 31,
2019.
Note 3. Commitments and Contingencies
Legal contingencies
Federal Trade Commission Consent Order.
As previously disclosed, on
December 20, 2016 the Federal Trade Commission (“FTC”)
issued a confidential Civil Investigative Demand, or CID, to the
Company requiring the Company to produce certain documents and
materials and to answer certain interrogatories relating to PC
Healthcheck, an obsolete software program that the Company
developed on behalf of a third party for their use with their
customers. The investigation relates to the Company providing
software like PC Healthcheck to third parties for their use prior
to December 31, 2016, when the Company was under management of the
previous Board and executive team. Since issuing the CID, the FTC
has sought additional written and testimonial evidence from the
Company. We have cooperated fully with the FTC’s
investigation and provided all requested information. In addition,
the Company has not used PC Healthcheck nor provided it to any
customers since December 2016.
On March 9, 2018, the FTC notified the
Company that the FTC was willing to engage in settlement
discussions. On November 6, 2018, the Company and the FTC
entered into a proposed Stipulation to Entry of Order for Permanent
Injunction and Monetary Judgment, or the Consent Order. The Consent
Order was approved by the
Commission on
March 26, 2019 and entered by the U.S. District Court for the
Southern District of Florida on March 29, 2019. Entry of the
Consent Order by the Court has finally resolved the FTC’s
multi-year investigation of the Company.
Pursuant to the Consent Order, under which the Company neither
admitted nor denied the FTC’s allegations (except as to the
Court having jurisdiction over the matter), the FTC has agreed to
accept a payment of $10 million in settlement of the $35 million
judgement, subject to the factual accuracy of the information the
Company has provided as part of our financial representations. The
$10 million payment was made on April 1, 2019 and has been
recognized in operating expenses within the Company’s
consolidated statements of operations for the year ended December
31, 2018.
Additionally, pursuant to the Consent Order, the Company has agreed
to implement certain new procedures and enhance certain existing
procedures. For example, the Consent Order necessitates that the
Company cooperate with representatives of the Commission on
associated investigations if needed; imposes requirements on the
Company regarding obtaining acknowledgements of the Consent Order
and compliance certification, including record creation and
maintenance; and prohibits the Company from making
misrepresentations and misleading claims or providing the means for
others to make such claims regarding, among other things, detection
of security or performance issues on consumer’s Electronic
Devices. Electronic Devices include, but are not limited to, cell
phones, tablets and computers. The Company intends to monitor the
impact of the Consent Order regularly and, while the Company
currently does not expect the settlement to have a long-term and
materially adverse impact on its business, the Company’s
business may be negatively impacted as the Company adjusts to some
of the changes. If the Company is unable to comply with the Consent
Order, then this could result in a material and adverse impact to
the Company’s results of operations and financial
condition.
Other
Matters. On January
17, 2017 the Consumer Protection Division of the Office of Attorney
General, State of Washington (“Washington AG”), issued
a Civil Investigative Demand to the Company requiring the Company
to produce certain documents and materials and to answer certain
interrogatories relating to PC Healthcheck. The Washington AG has
not alleged a factual basis underlying the issuance of the
Civil Investigative Demand. On May 30, 2017, the Consumer
Protection Division of the Office of Attorney General, State of
Texas (“Texas AG”), issued a Civil Investigative Demand
to the Company requiring the Company to produce certain documents
and materials and to answer certain interrogatories relating to PC
Healthcheck. The Texas AG has not alleged a factual
basis underlying the issuance of the Civil Investigative Demand.
Accordingly, the Company has responded to both the Washington AG
Civil Investigative Demand and the Texas AG Civil Investigative
Demand. To date, the Company has not received any follow-up
communications from either state’s AG with respect to these
matters.
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 any pending claims of any type (alone or
combined) will materially affect our financial position, results of
operations or cash flows. The ultimate outcome of any litigation is
uncertain; however, any 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, Contingencies. 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
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. During the three months ended March 31, 2019, we
did not incur any costs as a result of such obligations. We have
not accrued any liabilities related to such obligations in the
condensed consolidated financial statements as of March 31, 2019
and December 31, 2018.
Note 4. Intangible Assets
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.
As of
March 31, 2019, all intangible assets have been fully amortized
with the exception of the indefinite-life intangibles.
Note 5. Other Accrued Liabilities
Other
accrued liabilities consist of the following (in
thousands):
|
|
|
Accrued
expenses
|
$430
|
$338
|
Self-insurance
accruals
|
501
|
585
|
Other accrued
liabilities
|
78
|
55
|
Total other accrued
liabilities
|
$1,009
|
$978
|
Note 6. Stockholder’s Equity
Stock Options
The
following table represents the stock option activity for the three
months ended March 31, 2019:
|
|
Weighted
Average
Exercise
Price
per
Share
|
Weighted
Average
Remaining
Contractual
Term (in
years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
Outstanding options
at December 31, 2018
|
803,320
|
$2.89
|
8.43
|
$54
|
Granted
|
—
|
—
|
|
|
Exercised
|
—
|
—
|
|
|
Forfeited
|
(26,750)
|
$2.71
|
|
|
Outstanding options
at March 31, 2019
|
776,570
|
$2.90
|
8.18
|
$-
|
Options vested and
expected to vest
|
764,988
|
$2.90
|
8.18
|
$-
|
Exercisable at
March 31, 2019
|
584,182
|
$3.08
|
8.09
|
$-
|
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 March 31, 2019.
This amount changes based on the fair market value of our stock.
Total fair value of options vested during the three months ended
March 31, 2019 and 2018 was both $29,000.
At
March 31, 2019, there was $128,000 of unrecognized compensation
cost related to existing options outstanding which is expected to
be recognized over a weighted average period of 1.5
years.
Employee Stock Purchase Plan
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 (the “Board”) and
stockholders approved an ESPP and reserved 333,333 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. During the three months ended March 31, 2019 and
2018, no shares were purchased under ESPP. As of March 31, 2019,
approximately 107,679 shares remain available for grant under the
ESPP.
Restricted Stock Units
The
following table represents RSU activity for the three months ended
March 31, 2019:
|
|
Weighted
Average
Grant-Date
Fair
Value
per
Share
|
Weighted
Average
Remaining
Contractual Term
(in years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
Outstanding RSUs at
December 31, 2018
|
96,230
|
$2.78
|
0.60
|
$227
|
Awarded
|
—
|
—
|
|
|
Released
|
—
|
—
|
|
|
Forfeited
|
(18,181)
|
—
|
|
|
Outstanding RSUs at
March 31, 2019
|
78,049
|
$2.27
|
0.35
|
$177
|
At
March 31, 2019, there was $52,000 of unrecognized compensation cost
related to RSUs which is expected to be recognized over a weighted
average period of 0.4 years.
Stock Repurchase Program
On
April 27, 2005, our Board authorized the repurchase of up to
666,666 outstanding shares of our common stock. As of March 31,
2019 the maximum number of shares remaining that can be repurchased
under this program was 602,467. The Company does not intend to
repurchase shares without further approval from its
Board.
Note 7. Leases
We
have entered into various non-cancelable operating lease agreements
for certain of our offices, and certain equipment. Our leases have
original lease periods expiring
between 2019 and 2020.
The
components of lease costs, lease term and discount rate are as
follows (in thousands except lease term and discount
rate):
|
Three
Months Ended
March 31,
2019
|
Operating
leases
|
|
Operating lease
right-of-use assets
|
$186
|
|
|
Operating lease
liabilities – short term
|
$175
|
Operating lease
liabilities – long-term
|
13
|
Total operating
lease liabilities
|
$188
|
Weighted Average
Remaining Lease Term
|
|
Operating
leases
|
|
Weighted Average
Discount Rate
|
|
Operating
leases
|
4.5%
|
The
following represents maturities of operating lease liabilities as
of March 31, 2019 (in thousands):
|
|
Reminder of
2019
|
$135
|
2020
|
58
|
Total undiscounted cash flows
|
193
|
Less imputed
interest
|
(5)
|
Present value of lease liabilities
|
$188
|
Supplemental cash flow information related to
leases are as follows (in thousands):
|
|
|
Three Months
Ended
|
|
March 31,
2019
|
Cash paid for amounts
included in the measurement of lease liabilities:
|
|
Operating cash flows from
operating leases
|
$44
|
Right-of-use assets obtained in exchange for lease
obligations:
|
|
Operating
leases
|
$0
|
Note 8. Subsequent Event
On
April 1, 2019, the Company made a cash payment of $10.0 million to
the FTC in settlement of the previously disclosed on-going
investigation. See Note 3. Commitments and Contingencies:
Legal
contingencies.
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, 2018.
The following discussion includes forward-looking statements.
Please see “Risk
Factors” in Item 1A of this Report for important
information to consider when evaluating these
statements.
Overview
Support.com is a leading provider of
tech support and turnkey support center services, producer
of SUPERAntiSpyware® anti-malware products, and the maker of
Support.com® software. Our technology support services
programs help leading brands create new revenue streams and deepen
customer relationships. We offer turnkey, outsourced support
services for service providers, retailers and technology companies.
Our technology support services programs are designed for both the
consumer and small and medium business (“SMB”) markets,
and include computer and mobile device set-up, security and
support, virus and malware removal, wireless network set-up, and
home security and automation system support. Our Support.com
Cloud offering
is a SaaS
solution for companies to
optimize support interactions with their customers using their own
or third party support personnel. The solution enables companies to quickly resolve
complex technology issues for their customers, boosting agent
productivity and dramatically improving the customer
experience.
Total
revenue for the first quarter of 2019 increased 9% year-over-year.
Revenue from services increased 11% year-over-year primarily due to increased billable hours of
Comcast and increased sales from Cox Communications. Revenue from
software and other decreased 9% year-over-year due to new
subscriptions and renewal being less than expirations of
subscriptions.
Cost of
services for the first quarter of 2019 decreased 2% year-over-year
primarily as a result of lower compensation costs. Cost of software
and other for the first quarter of 2019 was the same as the first
quarter of 2018. Total gross margin increased from 14% to 23%
year-over-year due to the increase in revenue and lower
compensation and related employee costs because of a decrease in
headcount along with lower technology costs.
Operating expenses
for the first quarter of 2019 decreased 11% from the same period in
2018, primarily driven by a decrease in salary
and employee related costs due to a decrease in headcount coupled
with overall spending controls as a result of our cost reduction
efforts initiated during 2018.
We
intend the following discussion of our financial condition and
results of operations to provide information that will assist in
understanding our consolidated financial statements, the changes in
certain key items in those consolidated financial statements from
quarter to quarter, and the primary factors that accounted for
those changes, as well as how certain accounting principles,
policies and estimates affect our consolidated financial
statements.
Critical
Accounting Policies and Estimates
In
preparing our interim condensed consolidated financial statements,
we make estimates, assumptions and judgments that can have a
significant impact on our net 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, 2018 have the greatest potential impact on our interim
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 except the accounting for leases during the three months
ended March 31, 2019. For information
regarding the impact of Topic 842 adoption,
see Significant
Accounting Policies - Leases and Note
7— Leases.
Critical Accounting Policies
In
preparing our consolidated financial statements in conformity with
generally accepted accounting principles in the United States, we
make assumptions, judgments and estimates that can have a
significant impact on our revenue and operating results, as well as
on the value of certain assets and liabilities on our consolidated
balance sheet. We base our assumptions, judgments and estimates on
historical experience and various other factors that we believe to
be reasonable under the circumstances. Actual results could differ
materially from these estimates under different assumptions or
conditions. On a regular basis we evaluate our assumptions,
judgments and estimates and make changes accordingly. We believe
that the assumptions, judgments and estimates involved in the
accounting for revenue recognition, fair value measurements,
purchase accounting in business combinations, self-insurance
accruals, accounting for intangible assets, stock-based
compensation and accounting for income taxes have the greatest
potential impact on our consolidated financial statements, so we
consider these to be our critical accounting policies. We discuss
below the critical accounting estimates associated with these
policies. For further information on the critical accounting
policies, see Note 1 of our Notes to Consolidated Financial
Statements.
Revenue Recognition
For
information regarding to the disaggregation of revenue, see Note 1
– Significant Accounting Policies, Revenue Recognition.
RESULTS OF OPERATIONS
The
following table sets forth the results of operations for the three
months ended March 31, 2019 and 2018 expressed as a percentage of
total revenue:
|
Three Months Ended
March 31,
|
|
|
|
Revenue:
|
|
|
Services
|
93%
|
92%
|
Software and
other
|
7
|
8
|
|
|
|
Total
revenue
|
100
|
100
|
|
|
|
Cost of
revenue:
|
|
|
Cost of
services
|
76
|
85
|
Cost of software
and other
|
1
|
1
|
Total cost of
revenue
|
77
|
86
|
Gross
profit
|
23
|
14
|
Operating
expenses:
|
|
|
Research and
development
|
4
|
4
|
Sales and
marketing
|
2
|
3
|
General and
administrative
|
10
|
13
|
|
|
|
Total operating
expenses
|
16
|
20
|
|
|
|
Income (loss) from
operations
|
7
|
(6)
|
Interest income and
other, net
|
1
|
1
|
|
|
|
Income (loss) from
continuing operations, before income taxes
|
8
|
(5)
|
Income tax
provision
|
-
|
-
|
Net income
(loss)
|
8%
|
(5)%
|
Three Months Ended March 31, 2019 and 2018
REVENUE
|
|
|
|
|
|
|
|
In thousands,
except percentages
|
|
|
|
|
Services
|
$16,864
|
$15,200
|
$1,664
|
11%
|
Software and
other
|
1,200
|
1,322
|
(122)
|
(9)%
|
Total
revenue
|
$18,064
|
$16,522
|
$1,542
|
9%
|
Services. Services revenue consists primarily of
fees for customer support services generated from our
partners. We provide these services remotely, generally using
service delivery personnel who utilize our proprietary technology
to deliver the services. Services revenue is also comprised of
licensing of our Support.com Cloud applications. Services revenue
for the three months ended March 31, 2019 increased by $1.7 million
from the same period in 2018 mainly due to increase in billable
hours of Comcast and increase in sales from Cox Communications. For
the three months ended March 31, 2019, services revenue generated
from our partnerships was $16.2 million compared to $14.2 million
for the same period in 2018. Direct services revenue was $0.7
million for the three months ended March 31, 2019 compared to $1.0
million for the same period in 2018. As with any market that is
undergoing shifts, timing of downward pressures and growth
opportunities in our services programs are difficult to predict. We
are experiencing downward pressure with some of our services
programs as personal computer and certain retail markets are
subject to seasonal or other sector specific softness. However, we still see opportunity in
the market for growth with our service partners as a result of the
evolving support market trends.
Software
and other. Software
and other revenue is comprised primarily of fees for end-user
software products provided through direct customer downloads, and,
to a lesser extent, through the sale of these software products via
partners. Software and other revenue for the three months ended
March 31, 2019 decreased by $0.1 million, or 9%, from the same
period in 2018 due to new subscriptions being less than expirations
of subscriptions. For the three-month period ended March 31, 2019
and 2018, revenue from software and other generated from our direct
sales was $0.5 million and $0.6 million, respectively. Software and
other revenue generated from our partnerships was both $0.7
million for the three months ended March 31, 2019 and the three
months ended March 31, 2018.
COST OF REVENUE
|
|
|
|
|
|
|
|
In thousands,
except percentages
|
|
|
|
|
Cost of
services
|
$13,798
|
$14,111
|
$(313)
|
(2)%
|
Cost of software
and other
|
54
|
55
|
(1)
|
-
|
Total
cost of revenue
|
$13,852
|
$14,166
|
$(314)
|
(2)%
|
Cost of services. Cost of services consists primarily of
compensation costs and contractor expenses for people providing
services, technology and telecommunication expenses related to the
delivery of services and other personnel-related expenses in
service delivery. The decrease of $0.3 million in cost of services for the three
months ended March 31, 2019 compared to the same period in 2018 was
mainly driven by lower compensation expenses due to decrease in
hiring and lower technology cost due to renegotiated software
hosting costs.
Cost of software and other.
Cost of software and other
fees consists primarily of third-party royalty fees for our
end-user software products. Certain of these products were
developed using third-party research and development resources, and
the third party receives royalty payments on sales of products it
developed. The cost of software and other for the three months
ended March 31, 2019 were flat as compared with the year-ago
period.
OPERATING EXPENSES
|
|
|
|
|
|
|
|
In thousands,
except percentages
|
|
|
|
|
Research and
development
|
$749
|
$711
|
$38
|
5%
|
|
$392
|
$550
|
$(158)
|
(29)%
|
General and
administrative
|
$1,896
|
$2,146
|
$(250)
|
(12)%
|
Research and development. Research and development expense
consists primarily of compensation costs, third-party consulting
expenses and related overhead costs for research and development
personnel. Research and development costs are expensed as they are
incurred. Research and development costs for the three
months ended March 31, 2019 were relatively flat with the same
period a year ago with no significant changes in the components of
these amounts.
Sales and marketing. Sales and marketing expense consists
primarily of compensation costs of business development, program
management and marketing personnel, as well as expenses for lead
generation and promotional activities, including public relations,
web site design, advertising and marketing. The decrease of
$0.2 million in sales and marketing expense for the three months
ended March 31, 2019 compared to the same period in 2018 was
primarily due to a decrease in salary and employee related expenses
as a result of changes to management and department
personnel.
General and administrative.
General and administrative
expense consists primarily of compensation costs and related
overhead costs for administrative personnel and professional fees
for legal, accounting and other professional services. The
decrease of $0.3 million in general and administrative expense for
three months ended March 31, 2019 compared to the same period in
2018 was primarily due to a $0.3 million decrease in stock based
compensation because of the immediate vesting of a 300,000 option
shares granted during the three months ended March 31,
2018.
INTEREST INCOME AND OTHER, NET
|
|
|
|
|
|
|
|
In thousands,
except percentages
|
|
|
|
|
Interest and other,
net
|
$297
|
$205
|
$92
|
45%
|
Interest income and other, net.
Interest income and other, net consists primarily of interest
income on our cash, cash equivalents and short-term investments.
The increase in interest income and other, net of $0.1 million for
the three months ended March 31, 2019 and 2018 was primarily due to
higher yields on investments.
INCOME TAX PROVISION
|
|
|
|
|
|
|
|
In thousands,
except percentages
|
|
|
|
|
Income tax provision
(benefit)
|
$28
|
$(80)
|
$108
|
(135)%
|
Income tax (benefit) provision.
For the three months ended March 31, 2019, the income tax benefit
primarily consisted of foreign taxes. For the three months ended
March 31, 2018, the income tax provision primarily consisted of the
release of foreign unrecognized tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
Total
cash, cash equivalents and investments at March 31, 2019 and
December 31, 2018 were $48.0 million and $49.6 million, respectively.
The decrease in cash, cash equivalents and investments was
primarily due to the use of cash in operating activities as we
continue to invest in services and the Support.com Cloud product.
On April 1, 2019, the Company made a cash payment of $10.0 million
to the FTC in settlement of the previously disclosed on-going
investigation.
Operating Activities
Net
cash used in operating activities was $1.7 million and $1.4 million
for the three months ended March 31, 2019 and 2018, respectively.
Net cash used in operating activities primarily reflected the net
income (loss) for the period, adjusted for non-cash items such as
depreciation, amortization of premiums and discounts on
investments, amortization of right-of-use assets, stock-based
compensation expense and changes in operating assets and
liabilities. The sum of these non-cash items totaled $0.2 million
and $0.6 million for the three months ended March 31, 2019 and
2018, respectively. Net cash used in operating activities during
the three months ended March 31, 2019 was the result of a net
income of $1.4 million, non-cash items of $0.2 million, and
increase in accrued expense and other current liabilities of $0.4
million offset by $2.6 million increase in accounts receivable and
$1.1 million decrease in accrued compensation.
Investing Activities
Net
cash provided by investing activities was $6.1 million and $3.0
million for the three months ended March 31, 2019 and 2018,
respectively. For the three months ended March 31, 2019, net cash
provided by investing activities was primarily due to purchase of
marketable securities for $3.5 million offset by maturities of $9.6
million and. For the three months
ended March 31, 2018, net cash provided by investing activities was
primarily due to $0.2 million for purchases of property and
equipment and the purchase of marketable securities for $2.5
million offset by maturities of $5.7 million. We sold a
significant amount of marketable securities during the three months
ended March 31, 2018 in anticipation of the FTC settlement
payment.
Financing Activities
Net
cash used in financing activities was $0 for the three months ended
March 31, 2019 and 2018.
Working Capital and Capital Expenditure Requirements
At
March 31, 2019, we had stockholders’ equity of $49.5 million
and working capital of $48.6 million. On April 1, 2019, the Company
made a cash payment of $10.0 million to the FTC in settlement of
the previously disclosed on-going investigation. We believe that
our existing cash balances will be sufficient to meet our working
capital requirements, as well as our planned capital expenditures,
for at least the next 12 months.
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 current economic environment, however, could
limit our ability to raise capital by issuing new equity or debt
securities on acceptable terms, and lenders may be unwilling to
lend funds on acceptable terms that would be required to support
operations. The sale of additional equity or convertible debt
securities could result in dilution to our existing stockholders.
The issuance of debt securities would result in increased interest
expenses, and could impose new restrictive covenants that would
limit our operating flexibility.
We plan
to continue to make investments in our business during 2019. We
believe these investments are essential to creating sustainable
growth in our business in the future. Additionally, we may choose
to acquire other businesses or complimentary technologies to
enhance our product capabilities and such acquisitions would likely
require the use of cash.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest Rate and Market Risk
The
value and liquidity of the securities in which we invest could
deteriorate rapidly and the issuers of such securities could be
subject to credit rating downgrades. We actively monitor market
conditions and developments specific to the securities and security
classes in which we invest. While we believe we take prudent
measures to mitigate investment related risks, such risks cannot be
fully eliminated, as there are circumstances outside of our
control.
The
primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive
from our investments without significantly increasing risk. To
achieve this objective, we invest our excess cash in a variety of
securities, including U.S. government agency securities, corporate
notes and bonds, commercial paper and money market funds in debt
securities. These debt securities are classified as marketable
securities. Consequently, our marketable securities are recorded on
the consolidated balance sheets at fair value with unrealized gains
or losses reported as a separate component of accumulated other
comprehensive loss within stockholder’s equity. Our holdings
of the securities of any one issuer, except government agencies, do
not exceed 10% of our portfolio. We do not utilize derivative
financial instruments to manage our interest rate
risks.
As of
March 31, 2019, we held $18.4 million in short-term investments
(excluding cash and cash equivalents), which consisted primarily of
certificates of deposits, government debt securities, corporate
2.1% at March 31, 2019. A decline in interest rates over time would
reduce our interest income from our investments. We have limited
exposure to market risks from instruments that may impact our
balance sheets, statement of comprehensive income (loss), and
statement of cash flows. Such exposure is primarily due
to changing interest rates.
Impact of Foreign Currency Rate Changes
The
functional currencies of our international operating subsidiaries
are the local currencies. We translate the assets and liabilities
of our foreign subsidiaries at the exchange rates in effect on the
balance sheet date. We translate their income and expenses at the
average rates of exchange in effect during the period. We include
translation gains and losses in the stockholders’ equity
section of our consolidated balance sheets. We include net gains
and losses resulting from foreign exchange transactions in interest
income and other in our consolidated statements of operations.
Since we translate foreign currencies (primarily Canadian dollars
and Indian rupees) into U.S. dollars for a small portion of our
operations, currency fluctuations have had an immaterial impact on
our consolidated statements of operations. We have both revenue and
expenses that are denominated in foreign currencies. Neither a
weaker or stronger U.S. dollar environment would have a material
impact on our consolidated statement of operations. The historical
impact of currency fluctuations on our consolidated statements of
operations has generally been immaterial. As of March 31, 2019, we
did not engage in foreign currency hedging activities.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
We
maintain “disclosure controls and procedures,” as such
term is defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934 (the “Exchange Act”), that are designed to
ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that
disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance
that the objectives of the disclosure controls and procedures are
met. Our disclosure controls and procedures have been designed to
meet, and management believes they meet, reasonable assurance
standards. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure
controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Our
Chief Executive Officer and our Chief Financial Officer, after
evaluating the effectiveness of our “disclosure controls and
procedures” as of the end of the period covered by this
quarterly report, have concluded that our disclosure controls and
procedures are effective based on their evaluation of these
controls and procedures required by paragraph (b) of Exchange Act
Rules 13a-15 or 15d-15.
Changes in Internal Control over Financial Reporting
Beginning January 1, 2019, we implemented ASC
Topic 842, Leases. Although the adoption of the new accounting
standard did not have a material impact on our Condensed
Consolidated Statement of Operations or Condensed Consolidated
Statement of Cash Flows for the three-month period ended March 31,
2019, we did implement changes to our internal controls related to
the implementation of the lease accounting standard. These changes
included performing a comprehensive lease scoping analysis to
identify, disaggregate and evaluate each of our lease categories to
calculate ROU assets and lease liabilities values for our leases.
There were no changes that occurred during the three months ended
March 31, 2019 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
On December 20, 2016 the Federal Trade Commission
(“FTC”) issued a confidential Civil Investigative
Demand, or CID, to the Company requiring the Company to produce
certain documents and materials and to answer certain
interrogatories relating to PC Healthcheck, an obsolete software
program that the Company developed on behalf of a third party for
their use with their customers. The investigation relates to the
Company providing software like PC Healthcheck to third parties for
their use prior to December 31, 2016, when the Company was under
management of the previous Board and executive team. Since issuing
the CID, the FTC has sought additional written and testimonial
evidence from the Company. We have cooperated fully with the
FTC’s investigation and provided all requested information.
In addition, the Company has not used PC Healthcheck nor provided
it to any customers since December 2016.
On March 9, 2018, the FTC notified the
Company that the FTC was willing to engage in settlement
discussions. On November 6, 2018, the Company and the FTC
entered into a proposed Stipulation to Entry of Order for Permanent
Injunction and Monetary Judgment, or the Consent Order. The Consent
Order was approved
by the Commission on March 26, 2019 and entered by the U.S.
District Court for the Southern District of Florida on March 29,
2019. Entry of the Consent Order by the Court has finally resolved
the FTC’s multi-year investigation of this
matter.
Pursuant to the Consent Order, under which the Company neither
admitted nor denied the FTC’s allegations (except as to the
Court having jurisdiction over the matter), the FTC has agreed to
accept a payment of $10 million in settlement of the $35 million
judgement, subject to the factual accuracy of the information the
Company has provided as part of our financial representations. The
$10 million payment was made on April 1, 2019 and has been
recognized in operating expenses within the Company’s
consolidated statements of operations for the year ended December
31, 2018.
Additionally, pursuant to the Consent Order, the Company has agreed
to implement certain new procedures and enhance certain existing
procedures. For example, the Consent Order necessitates that the
Company cooperate with representatives of the Commission on
associated investigations if needed; imposes requirementson the
Company regarding obtaining acknowledgements of the Consent Order
and compliance certification, including record creation and
maintenance; and prohibits the Company from making
misrepresentations and misleading claims or providing the means for
others to make such claims regarding, among other things, detection
of security or performance issues on consumer’s Electronic
Devices. Electronic Devices include, but are not limited to, cell
phones, tablets and computers. The Company intends to monitor the
impact of the Consent Order regularly and, while the Company
currently does not expect the settlement to have a long-term and
materially adverse impact on its business, the Company’s
business may be negatively impacted as the Company adjusts to some
of the changes. If the Company is unable to comply with the Consent
Order, then this could result in a material and adverse impact to
the Company’s results of operations and financial
condition.
Other Proceedings
On
October 11, 2016 the Wage and Hour Division of the U.S. Department
of Labor (“DOL”) notified the Company that it would be
conducting an audit of the Company relating to compliance with the
Fair Labor Standards Act (“FLSA”). The DOL
indicated that the focus of the audit is directed to compliance
with overtime requirements related to our customer support
specialists who work from home providing customer support
services. The audit commenced on October 20, 2016 and was
resolved by settlement agreement on January 18, 2018.
Pursuant to the settlement agreement, as of December 31, 2017, the
Company accrued $30,000 in back wages and related liquidated
damages to some of our current and former employees. These payments
were completed during the quarter ended March 31,
2018.
On January 17, 2017 the Consumer Protection Division of the Office
of Attorney General, State of Washington (“Washington
AG”), issued a Civil Investigative Demand to the Company
requiring the Company to produce certain documents and materials
and to answer certain interrogatories relating to PC Healthcheck.
The Washington AG has not alleged a factual basis underlying the
issuance of the Civil Investigative Demand. On May 30, 2017, the
Consumer Protection Division of the Office of Attorney General,
State of Texas (“Texas AG”), issued a Civil
Investigative Demand to the Company requiring the Company to
produce certain documents and materials and to answer certain
interrogatories relating to PC Healthcheck. The Texas AG has
not alleged a factual basis underlying the issuance of the Civil
Investigative Demand. The Company is in the process of responding
to these Civil Investigative Demands and is cooperating with the
Washington AG and Texas AG with respect to these
matters.
The
Company has received and may in the future receive additional
requests for information, including subpoenas, from other
governmental agencies relating to the subject matter of the Consent
Order and the Civil Investigative Demands described above. The
Company intends to cooperate with these information requests and is
not aware of any other legal proceedings against the Company by
governmental authorities at this time.
ITEM 1A. RISK FACTORS.
This
report contains forward-looking statements regarding our business
and expected future performance as well as assumptions underlying
or relating to such statements of expectation, all of which are
“forward looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We are subject to many risks and
uncertainties that may materially affect our business and future
performance and cause those forward-looking statements to be
inaccurate. Words such as “expects,”
“anticipates,” “intends,”
“plans,” “believes,”
“forecasts,” “estimates,”
“seeks,” “may result in,” “focused
on,” “continue to,” “on-going” and
similar expressions often identify forward-looking statements. In
this report, forward-looking statements include, without
limitation, statements regarding the following:
●
Our expectations
regarding revenues, cash flows, expenses, including cost of
revenue, sales and marketing, research
and development efforts, and administrative expenses, and
profits;
●
Our
expectations regarding partners, renewal of contracts with these
partners and the anticipated timing and magnitude of revenue from
programs with these partners;
●
Our
ability to successfully license and grow revenue related to our
consumer software, Support.com technical support subscriptions,
Guided Paths® and our technology support service
offerings;
●
Our
expectations regarding sales of our end-user software products, and
our ability to source, develop and distribute enhanced versions of
these products;
●
The market appeal
and efficacy of our Guided Paths® self-help solution and
diagnostic tools;
●
Our ability to
expand and diversify our customer base;
●
Our ability to
attract and retain qualified management and employees;
●
Our ability to
hire, train, manage and retain customer support specialists in a
home-based model in quantities sufficient to meet forecast
requirements and in a cost-effective manner, and our ability to
continue to enhance the flexibility of our staffing
model;
●
Our ability to
adapt to changes in the market for customer support
services;
●
Our expectations
regarding unit volumes, pricing and other factors in the market for
computers and other technology devices, and the effects of such
factors on our business;
●
Our expectations
regarding the results of pending, threatened or future litigation;
and
●
Our expectations
regarding the results of pending, threatened or future government
investigations and audits, including, without limitation, those
investigations and audits described in Part II. Item 1. Legal
Proceedings of this report.
An
investment in our stock involves risk, and we caution investors
that forward-looking statements are only predictions based on our
current expectations about future events and are not guarantees of
future performance. We encourage you to read carefully all
information provided in this report and in our other filings with
the SEC before deciding to invest in our stock or to maintain or
change your investment. Forward-looking statements are based on
information as of the filing date of this report, and we undertake
no obligation to publicly revise or update any forward-looking
statement for any reason.
Because
forward-looking statements involve risks and uncertainties, there
are important factors that may cause actual results to differ
materially from our stated expectations. While a number of
these factors are described below, this list does not include all
risks that could affect our business or that could cause our stock
price to decline. If these or any other risks or uncertainties
materialize, or if our underlying assumptions prove to be
inaccurate, actual results could differ materially from past
results and from our expected future results, our operating results
and financial condition could be harmed and our stock price could
decline.
Our financial condition and results of operations may vary from
quarter to quarter, which may cause the price of our common shares
to decline.
Our
quarterly results of operations have fluctuated in the past and
could do so in the future. Because our results of operations are
difficult to predict, you should not rely on quarterly comparisons
of our results of operations as an indication of our future
performance. Fluctuations in our results of operations may be due
to a number of factors, including, but not limited to, those listed
below and those identified throughout this “Risk
Factors” section:
●
The performance of
our partners, including the success of our partners in attracting
end users of our products, which can impact the amount of revenue
we derive from our partners;
●
Change,
or reduction in or discontinuance of our programs with
partners;
●
Cancellations,
rescheduling or deferrals of significant customer products or
service programs;
●
Our
reliance on a small number of partners for a substantial majority
of our revenue;
●
Our ability to
successfully license and grow revenue related to our SAS software,
Guided Paths®, Support.com Cloud and our service
offerings;
●
The
timing of our sales to our partners and our partners’ resale
of our products to end users and our ability to enter into new
sales with partners and renew existing programs with our
partners;
●
The availability
and cost-effectiveness of advertising placements for our software
products and services and our ability to respond to changes in the
advertising markets in which we participate;
●
The
efficiency and effectiveness of our technology
specialists;
●
Our
ability to effectively match staffing levels with service volumes
on a cost-effective basis;
●
Our
ability to manage contract labor;
●
Our ability to
hire, train, manage and retain our home-based customer support
specialists and enhance the flexibility of our staffing model in a
cost-effective fashion and in quantities sufficient to meet
forecast requirements;
●
Our
ability to manage costs under our self-funded health insurance
program;
●
Usage
rates on the subscriptions we offer;
●
Our
ability to maintain a competitive cost structure for our
organization;
●
The
rate of expansion of our offerings and our investments
therein;
●
Changes in the
markets for computers and other technology devices relating to unit
volume, pricing and other factors, including changes driven by
declines in sales of personal computers and the growing popularity
of tablets, and other mobile devices and the introduction of new
devices into the connected home;
●
Our ability to
adapt to our customers’ needs in a market space defined by
frequent technological change;
●
Severe
financial hardship or bankruptcy of one or more of our major
customers;
●
The
amount and timing of operating costs and capital expenditures in
our business;
●
Failure
to protect our intellectual property;
●
Diversion of
management’s attention from other business concerns,
incurrence of costs and disruption of our ongoing business
activities as a result of acquisitions or divestitures by
us;
●
Costs related to
the defense and settlement of litigation, which can also have an
additional adverse impact on us because of negative publicity,
diversion of management resources and other factors;
●
Costs related to
the defense and settlement of government investigations, requests
for information and audits, which can also have an additional
adverse impact on us because of negative publicity, diversion of
management resources and other factors, including, without
limitation, those audits, requests for information and
investigations described in Part II. Item 1. Legal Proceedings of
this report;
●
The
effects of any acquisitions, divestitures or significant
investments; and
●
Potential losses on
investments, or other losses from financial instruments we may hold
that are exposed to market risk.
Due to
fluctuations in our quarterly results of operations and other
factors, the price at which our common shares trades may be
volatile. Accordingly, you may not be able to resell your common
shares at or above the price you paid. In future periods, our stock
price could decline if, amongst other factors, our revenue or
operating results are below our estimates or the estimates or
expectations of securities analysts and investors.
Our sales are concentrated in a few large customers with whom we
have long-term agreements that have termination for convenience
provisions and no minimum purchase commitments. If we are unable to
increase the number of large customers in key markets, or if we
lose or experience a significant reduction in sales to these key
customers, if these key customers experience a significant decline
in market share, or if these customers experience significant
financial difficulties, our revenue may decrease substantially and
our results of operations and financial condition may be
harmed.
We
receive a significant amount of our revenue from a limited number
of customers. For the three months March 31, 2019, Comcast and Cox
Communications accounted for 68% and 20% of our total revenue,
respectively. We have long-term agreements that have
termination for convenience provisions and no minimum purchase
commitments in place with Comcast or Cox Communications. As a
result, the amount of revenue we derive from these customers can
vary significantly, and they may terminate our relationship with
them with no advance notice. In the past, sales to our largest
customers have fluctuated significantly from period to period and
year to year and will likely continue to fluctuate in the future.
The loss of these or other
significant relationships, the change of the terms or terminations
of our arrangements with any of these customers, the reduction or
discontinuance of programs with any of these customers, or the
failure of any of these customers to achieve their targets has in
the past adversely affected, and could in the future adversely
affect our business. For example, our partners may decide to use
other vendors in the provision of their business and may
periodically place these types of services out for bid. Our
competitors, many of whom have significantly more resources than we
do, may offer more favorable bids for the same business compared to
what we offer; and as a result, we may lose, or face a decline in
the business we do with these significant
customers.
Generally, the agreements with our partners do not require them to
conduct any minimum amount of business with us, and therefore they
have decided in the past and could decide at any time in the future
to reduce or eliminate their programs or the use of our products
and/or services in such programs. They may also enter into
multi-sourcing arrangements with other vendors for services
previously provided exclusively by us. In addition, our top
customers’ purchasing power has, in some cases, given them
the ability to make greater demands on us with regard to pricing
and contractual terms in general. We expect this trend to continue,
which may adversely affect our business and, should we fail to
comply with such terms, might also result in substantial liability
that could harm our business, financial condition and results of
operations. Further, we may not successfully obtain new partners or
customers. There is also the risk that, our established programs
with these and other partners may take longer than we expect to
produce revenue or may not produce revenue at all, and the revenue
produced may not be profitable if the costs of performing under the
program are greater than anticipated or the program terminates
before up-front investments can be recouped. One or more of our key
partners may also choose not to renew their relationship with us,
discontinue certain products or programs, offer them only on a
limited basis or devote insufficient time and attention to
promoting them to their customers. Some of our key partners may
prefer not to work with us due to our past or present involvement
in any legal or administrative proceedings. Overall, the loss of
any of our large customers or a significant reduction in sales we
make to them could have a material adverse effect on our operating
results and financial condition.
Our business is based on a relatively new and evolving business
model.
We are
executing a plan to grow our business by providing customer support
services, creating a robust, timely and innovative library of
Guided Path® self-support tools, licensing our Support.com
Cloud application, and providing end-user consumer software
products. We may not be able to offer these services and software
products successfully. Our customer support specialists are
generally home-based, which requires a high degree of coordination
and quality control of employees working from diverse and remote
locations. We expect to invest cash generated from our existing
business to support our growth initiatives. Our investments, which
typically are made in advance of revenue, may not yield increased
revenue to offset these expenses. As a result of these factors, the
future revenue and income potential of our business is uncertain.
Any evaluation of our business and our prospects must be considered
in light of these factors and the risks and uncertainties often
encountered by companies in our stage of development. Some of these
risks and uncertainties relate to our ability to do the
following:
●
Maintain our
current relationships and service programs, and develop new
relationships, with service partners, subscriptions, and licensees
of our Support.com technical support offering on acceptable terms
or at all;
●
Reach prospective
customers for our software products in a cost-effective
fashion;
●
Reduce our
dependence on a limited number of partners for a substantial
majority of our revenue;
●
Successfully
license and grow revenue related to our consumer software,
Support.com technical support subscriptions, Guided Paths® and
our technology support service offerings;
●
Manage our
employees and contract labor efficiently and
effectively;
●
Maintain gross and
operating margins;
●
Match staffing
levels with demand for services and forecast
requirements;
●
Obtain bonuses and
avoid penalties in contractual arrangements;
●
Operate
successfully in a time-based pricing model;
●
Operate effectively
in the SMB market;
●
Successfully
introduce new, and adapt our existing, services and products for
consumers and businesses;
●
Respond effectively
to changes in the market for customer support
services;
●
Realize benefits of
any acquisitions we make;
●
Adapt to changes in
the markets we serve;
●
Adapt to changes in
our industry, including consolidation;
●
Respond to
government regulations relating to our current and future
business;
●
Manage and respond
to present, threatened, and future litigation; and
●
Manage and respond
to present, threatened or future government investigations and
audits, including, without limitation, those audits and
investigations described in Part II, Item I, Legal Proceedings of
this report.
If we
are unable to address these risks, our business, results of
operations and prospects could suffer.
We have been, are currently and may be in the future the subject of
governmental investigations relating to past products and services
and how those products and services were used by our third-party
partners. These investigations could harm our reputation, result in
additional fines and other payments and cause us to incur expenses
to respond and defend the company or our current and former
employees.
We have
been, are currently and may in the future be the subject of
governmental investigations relating to our past products and how
those products were used by our third-party partners. On November
6, 2018, we entered into a Stipulation to Entry of Order for
Permanent Injunction and Monetary Judgment, or the Consent Order,
with the Federal Trade Commission, or FTC, resolving a multi-year
FTC investigation relatingto PC Healthcheck, an obsolete software
program that we developed on behalf of a third party for their use
with their customers. As part of the Consent Order, we agreed to
pay $10 million and to implement certain new procedures and enhance
certain existing procedures. We were issued Civil Investigative
Demands from the Attorney General of the State of Washington and
the State of Texas related to the matters addressed in the FTC
investigation. As a result, we will continue to incur expenses in
responding to these inquiries.
These
governmental inquiries and the Consent Order with the FTC could
harm our reputation with customers and negatively impact our
ability to sell to existing customers or attract new customers. In
addition to the ongoing costs to respond to these inquiries, we
could be required to make additional payments to resolve these or
other governmental proceedings that may be brought in the future.
In some cases, we may not be the subject of an investigation, but
we may be required to expend resources, including time from our
management team, to address information requests or to indemnify
individual current or former employees who may become involved in
governmental proceedings or also be requested to provide
information. These historical proceedings, our ongoing matters and
any inquiries or proceedings that arise in the future could have a
material adverse effect on our operations, financial results and
our stock price.
We have been named as a party to legal proceedings, including
governmental proceedings, in the past and may be named in
additional ones in the future, which could subject us to liability,
require us to indemnify our customers or employees, require us to
obtain or renew licenses, require us to stop selling our products,
services and/or programs, or force us to redesign our products,
services and/or programs.
We have
been named as a party to several lawsuits, government inquiries or
investigations and other legal proceedings (referred to as
“litigation”), and we may be named in additional ones
in the future. Please see “Part II, Item 1. Legal
Proceedings” for a more detailed description of material
litigation matters in which we are currently engaged. Any potential
litigation also could force us to do one or more of the
following:
●
stop selling, offering for sale, making, having made or exporting
products, services and/or programs;
●
limit or restrict the type of work that employees involved in such
litigation may perform for us;
●
pay substantial damages and/or license fees and/or royalties to the
party bringing the claim that could adversely impact our liquidity
or operating results; and
●
attempt to redesign those products, services and/or programs that
contain the allegedly problematic component.
Under
certain circumstances, we have contractual and other legal
obligations to indemnify and to incur legal expenses for current
and former directors and officers. Additionally, from time to time,
we have agreed to indemnify or reimburse select customers or end
customers for a number of potential claims. For example, we
recently received notice from a customer that it may seek
reimbursement from us in order to reimburse its customers related
to their use of a software product. If we are required to make a
significant payment under any of our indemnification obligations,
including those to our customers and/or on behalf of our former or
current employees, could have a material adverse effect on our
business and the trading price for our securities. Litigation may
be time consuming, expensive, and disruptive to normal business
operations, and the outcome of litigation is difficult to predict.
The ultimate outcome of litigation could have a material adverse
effect on our business and the trading price for our securities.
Furthermore, litigation, regardless of the outcome, may result in
significant expenditures, diversion of our management’s time
and attention from the operation of our business and damage to our
reputation or relationship with third parties, which could
materially and adversely affect our business, financial condition,
results of operations, cash flows and stock price.
Our product and service offerings are in their early stages and
failure to market, sell and develop the offerings effectively and
competitively could result in a lack of growth.
A
number of competitive offerings exist in the market, providing
various features that may overlap with our Support.com offerings
today or in the future. Some competitors in these markets far
exceed our spending on sales and marketing activities and benefit
from greater existing brand awareness, channel relationships and
existing customer relationships. We may not be able to reach the
market effectively and adequately or convey our differentiation as
needed to grow our customer base. To reach our target market
effectively, we may be required to continue to invest substantial
resources in sales and marketing and research and development
activities, which could have a material adverse effect on our
financial results. In addition, if we fail to develop and maintain
competitive features, deliver high-quality products and satisfy
existing customers, our Support.com offerings could fail to grow.
Disruptions in infrastructure operations could impair our ability
to deliver Support.com offerings to customers, thereby affecting
our reputation with existing and prospective customers and possibly
resulting in monetary penalties or financial losses.
Our end-user software revenues are dependent on online traffic
patterns and the availability and cost of online advertising in
certain key placements.
Some of
our consumer end-user software revenue stream is obtained through
advertising placements in certain key online media placements. From
time to time a trend or a change in a key advertising placement
will impact us, decreasing traffic or significantly increasing the
cost or effectiveness of online advertising and therefore
compromising our ability to purchase a desired volume and placement
of advertisements at profitable rates. If such a change were to
continue to occur, as it did in 2013 and on several occasions in
the past, we may be unable to attract desired amounts of traffic,
our costs for advertising may further increase beyond our forecasts
and our software revenues may further decrease. As a result, our
operating results would be negatively impacted.
We operate in a highly competitive industry, with intense price
competition, which may intensify as our competitors expand their
operations.
The
industry in which we operate is highly competitive and includes
numerous small companies capable of competing effectively in our
markets on a local basis, as well as several large companies that
possess substantially greater financial resources than we do.
Contracts are traditionally awarded on the basis of competitive
bids or direct negotiations with customers.
The
competitive factors in our markets include, amongst others, are
product and service quality and availability, responsiveness,
experience, technology, equipment quality, reputation for retaining
highly-skilled agents and price. The competitive environment has
intensified as mergers among industry partners have reduced the
number of available customers and mergers amongst our competitors
have created larger companies for us to compete against. Some of
our current and potential competitors have greater resources,
longer histories, more customers, and/or greater brand recognition.
They may secure better terms from vendors, adopt more aggressive
pricing, and devote more resources to technology, infrastructure,
fulfillment, and marketing.
Competition
may intensify, including with the development of new business
models and the entry of new and well-funded competitors, and as our
competitors enter into business combinations or alliances and
established companies in other markets expand to become competitive
with our business. Furthermore, we cannot be sure that our
competitors will not develop competing products, systems, services
or technologies that gain market acceptance in advance of our
products, systems, services or technologies, or that our
competitors will not develop new products, systems, services or
technologies that cause our existing products, systems, services or
technologies to become non-competitive or obsolete, which may
adversely affect our results of operations through the potential
reduction of sales and profits
Our business is highly dependent upon our brand recognition and
reputation, and the failure to maintain or enhance our brand
recognition or reputation would likely have a material adverse
effect on our business.
Our
brand recognition and reputation are critical aspects of our
business. We believe that maintaining and further enhancing our
brand as well as our reputation will be critical to retaining
existing customers and attracting new customers. We also believe
that the importance of our brand recognition and reputation will
continue to increase as competition in our markets continues to
develop. Our success in this area will be dependent on a wide range
of factors, some of which are out of our control, including the
following:
●
the efficacy of our
marketing efforts;
●
our ability to
retain existing and obtain new customers and strategic
partners;
●
the quality and
perceived value of our services;
●
actions of our
competitors, our strategic partners, and other third
parties;
●
positive or
negative publicity, including material on the
Internet;
●
regulatory and
other governmental related developments; and
●
litigation related
developments.
If we
implement new marketing and advertising strategies, we may utilize
marketing and advertising channels with significantly higher costs
than our current channels, which in turn could adversely affect our
operating results. Implementing new marketing and advertising
strategies also would increase the risk of devoting significant
capital and other resources to endeavors that do not prove to be
cost effective. Further, we also may incur marketing and
advertising expenses significantly in advance of the time we
anticipate recognizing revenue associated with such expenses, and
our marketing and advertising expenditures may not generate
sufficient levels of brand awareness or result in increased
revenue. Even if our marketing and advertising expenses result in
increased revenue, the increase might not offset our related
expenditures. If we are unable to maintain our marketing and
advertising channels on cost-effective terms or replace or
supplement existing marketing and advertising channels with
similarly or more effective channels, our marketing and advertising
expenses could increase substantially, our customer base could be
adversely affected, and our business, operating results, financial
condition, and reputation could suffer.
Furthermore,
negative publicity, whether or not justified, relating to events or
activities attributed to us, our employees, our strategic partners,
our affiliates, or others associated with any of these parties, may
tarnish our reputation and reduce the value of our brands. Damage
to our reputation and loss of brand equity may reduce demand for
our products and services and have an adverse effect on our
business, operating results, and financial condition. Moreover, any
attempts to rebuild our reputation and restore the value of our
brands may be costly and time consuming, and such efforts may not
ultimately be successful.
Our success depends upon our ability to attract, develop and retain
highly qualified employees while also controlling our labor costs
in a competitive labor market.
Our customers expect a high level of customer service and product
knowledge from our employees. To meet the needs and expectations of
our customers, we must attract, develop and retain a large number
of highly qualified employees while at the same time control labor
costs. Our ability to control labor costs is subject to numerous
external factors, including prevailing wage rates and health and
other insurance costs, as well as the impact of legislation or
regulations governing labor relations, minimum wage, or healthcare
benefits. An inability to provide wages and/or benefits that are
competitive within the markets in which we operate could adversely
affect our ability to retain and attract employees. Likewise,
changes in market compensation rates may adversely affect our labor
costs. In addition, we compete with other retail businesses for
many of our employees in hourly positions, and we invest
significant resources in training and motivating them to maintain a
high level of job satisfaction. These positions have historically
had high turnover rates, which can lead to increased training and
retention costs, particularly in a competitive labor market.
Effective succession planning is also important to our long-term
success. Failure to ensure effective transfer of knowledge and
smooth transitions involving key employees and executive management
could hinder our strategic planning and execution. There is no
assurance that we will be able to attract or retain highly
qualified employees in the future. As such, our ability to develop
and deliver successful products and services may be adversely
affected.
Our business would be adversely affected by the departure of
existing members of our senior management team.
Our
business would be adversely affected by the departure of existing
members of our senior management team. Our success depends, in
large part, on the continued contributions of our senior management
team. Effective succession planning is also important for our
long-term success. Failure to ensure effective transfers of
knowledge and smooth transitions involving senior management could
hinder our strategic planning and execution. We do not currently
maintain key person life insurance covering our senior management.
The loss of any of our senior management could harm our ability to
implement our business strategy and respond to the rapidly changing
market conditions in which we operate.
If we fail to attract, train and manage our consumer support
specialists in a manner that meets forecast requirements and
provides an adequate level of support for our customers, our
reputation and financial performance could be harmed.
Our
business depends in part on our ability to attract, manage and
retain our customer support specialists and other support
personnel. If we are unable to attract, train and manage in a
cost-effective manner adequate numbers of competent specialists and
other support personnel to be available as service volumes vary,
particularly as we seek to expand the breadthand flexibility of our
staffing model, our service levels could decline, which could harm
our reputation, result in financial losses under contract terms,
cause us to lose customers and partners, and otherwise adversely
affect our financial performance. Our ability to meet our need for
support personnel while controlling our labor costs is subject to
numerous external factors, including the level of demand for our
products and services, the availability of a sufficient number of
qualified persons in the workforce, unemployment levels, prevailing
wage rates, changing demographics, health and other insurance
costs, including managing costs under our self-funded health
insurance program which can vary substantially each reporting
period, and the cost of compliance with labor and wage laws and
regulations. In the case of programs with time-based pricing
models, the impact of failing to attract, train and manage such
personnel could directly and adversely affect our revenue and
profitability. Although our servicedelivery and communications
infrastructure enables us to monitor and manage customer support
specialists remotely, because they are typically home-based and
geographically dispersed, we could experience difficulties meeting
services levels and effectively managing the costs, performance and
compliance of these customer support specialists and other support
personnel. Any problems we encounter in effectively
attracting,
managing
and retaining our customer support specialists and other support
personnel could seriously jeopardize our service delivery
operations and our financial results.
Changes in the market for computers and other consumer electronics
and in the technology support services market could adversely
affect our business.
Reductions in unit
volumes of sales for computers and other devices we support, or in
the prices of such equipment, could adversely affect our business.
We offer both services that are attached to the sales of new
computers and other devices, and services designed to fix existing
computers and other devices. Declines in the unit volumes sold of
these devices or declines in the pricing of such devices could
adversely affect demand for our services or our revenue mix, either
of which would harm our operating results. Further, we do not
support all types of computers and devices, meaning that we must
select and focus on certain operating systems and technology
standards for computers, tablets, smart phones, and other devices.
We may not be successful in supporting new devices in the connected
home and “Internet of Things,” and consumers and SMBs
may prefer equipment we do not support, which may decrease the
market for our services and products if customers migrate away from
platforms we support. In addition, the structures and pricing
models for programs in the technology support services market may
change in ways that reduce our revenues and our
margins.
Disruptions in our information technology and service delivery
infrastructure and operations could impair the delivery of our
services and harm our business.
We
depend on the continuing operation of our information technology
and communication systems and those of our third-party service
providers. Any interruption or failure of our internal or external
systems could prevent us or our service providers from accepting
orders and delivering services, or cause company and consumer data
to be unintentionally lost, destroyed or disclosed. Our continuing
efforts to upgrade and enhance the security and reliability of our
information technology and communications infrastructure could be
very costly, and we may have to expend significant resources to
remedy problems such as a security breach or service interruption.
Interruptions in our services resulting from labor disputes,
telephone or Internet failures, power or service outages, natural
disasters or other events, or a security breach could reduce our
revenue, increase our costs, cause customers and partners and
licensees to fail to renew or to terminate their use of our
offerings, and harm our reputation and our ability to attract new
customers.
Costs related to software or other errors in our products could
have a material adverse effect on us.
From
time to time, we may experience software defects, bugs and other
errors associated with the introduction and/or use of our complex
software products. Despite our testing procedures, errors may occur
in new products or releases after commencement of commercial
deployments in the future. Such errors could result
in:
●
Loss of or delay in
market acceptance of our products;
●
Material recall and
replacement costs;
●
Delay in revenue
recognition or loss of revenue;
●
The diversion of
the attention of our engineering personnel from product development
efforts;
●
Our having to
defend against litigation related to defective products;
and
●
Damage to our
reputation in the industry that could adversely affect our
relationships with our customers.
In
addition, the process of identifying a software error in software
products that have been widely distributed may be lengthy and
require significant resources. We may have difficulty identifying
the end customers of the defective products in the field, which may
cause us to incur significant replacement costs, contract damage
claims from our customers and further reputational harm. For
example, we recently received notice from a customer that it may
seek reimbursement from us in order to reimburse its customers
related to their use of a software product. Any of these problems
could materially and adversely affect our results of operations.
Despite our best efforts, security vulnerabilities may exist with
respect to our products. Mitigation techniques designed to address
such security vulnerabilities, including software and firmware
updates or other preventative measures, may not operate as intended
or effectively resolve such vulnerabilities. Software and firmware
updates and/or other mitigation efforts may result in performance
issues, system instability, data loss or corruption, unpredictable
system behavior, or the theft of data by third parties, any of
which could significantly harm our business and
reputation.
We may engage in the acquisition of other companies, joint ventures
and strategic alliances outside of our current line of business,
which may have an adverse material effect on our existing
business.
We may
engage in the acquisition of other companies, joint ventures and
strategic alliances outside of our current line of business to
design and develop new technologies and products, to strengthen
competitiveness by scaling up and to expand our existing business
line into new regions. Such transactions, especially in new lines
of business, inherently involve risk due to the difficulties in
integrating operations, technologies, products and personnel.
Integration issues are complex, time-consuming and expensive and,
without proper planning and implementation, may adversely affect
our existing business. Furthermore, we may incur significant
acquisition, administrative and other costs in connection with
these transactions, including costs related to integration or
restructuring of acquired businesses. There can be no assurance
that these transactions will be beneficial to our business or
financial condition. Even assuming these transactions are
beneficial, there can be no assurance that we will be able to
successfully integrate the new business lines acquired or achieve
all or any of the initial objectives of these
transactions.
We may make acquisitions that deplete our resources and do not
prove successful.
We have
made acquisitions in the past and may make additional acquisitions
in the future. Our management may not be able to effectively
implement our acquisition program and internal growth strategy
simultaneously. The integration of acquisitions involves a number
of risks and presents financial, managerial and operational
challenges. We may have difficulty, and may incur unanticipated
expenses related to, integrating management and personnel from
these acquired entities with our management and personnel. Our
failure to identify, consummate or integrate suitable acquisitions
could adversely affect our business and results of operations. We
cannot readily predict the timing, size or success of our future
acquisitions. Even successful acquisitions could have the effect of
reducing our cash balances.
We may pursue investments, joint ventures and dispositions, which
could adversely affect our results of operations.
We may
invest in businesses that offer complementary products, services
and technologies, augment our market coverage, or enhance our
technological capabilities. We may also enter into strategic
alliances or joint ventures to achieve these goals. We may not be
able to identify suitable investment, alliance, or joint venture
opportunities, or to consummate any such transactions. In addition,
our original estimates and assumptions used in assessing any
transaction may be inaccurate and we may not realize the expected
financial or strategic benefits of any such
transaction.
We may
also seek to divest or wind down portions of our business, either
acquired or otherwise, each of which could materially affect our
cash flows and results of operations. Any future dispositions we
may make could involve risks and uncertainties, including our
ability to sell such businesses on terms acceptable to us, or at
all. In addition, any such dispositions could result in disruption
to other parts of our business, potential loss of employees or
customers, or exposure to unanticipated liabilities or ongoing
obligations to us following any such dispositions. For example, in
connection with such dispositions, we may agree to provide certain
indemnities to the purchaser, which may result in additional
expenses and may adversely affect our financial condition and
results of operations. In addition, dispositions may include the
transfer of technology and/or the licensing of certain IP rights to
third-party purchasers, which could limit our ability to utilize
such IP rights or assert these rights against such third-party
purchasers or other third parties.
Our indemnification obligations and limitations of our director and
officer liability insurance may have a material adverse effect on
our financial condition, results of operations and cash
flows.
Under
Delaware law, our Articles of Incorporation and Amended and
Restated Bylaws and indemnification agreements to which we are a
party, we have an obligation to indemnify, or we have otherwise
agreed to indemnify, certain of our current and former directors,
officers and/or employees with respect to past, current and future
investigations and litigation. For example, we have incurred
indemnification expenses in connection with the FTC investigation
completed in March 2019 and other pending government
investigations. In connection with some of these pending matters,
we are required to, or we have otherwise agreed to, advance, and
have advanced, legal fees and related expenses to certain of our
current and former directors, officers and employees, and expect to
continue to do so while these matters are pending. Indemnification
obligations may not be “covered matters” under our
directors’ and officers’ liability insurance, or there
may be insufficient coverage available. Further, in the event the
directors and officers are ultimately determined not to be entitled
to indemnification, we may not be able to recover any amounts we
previously advanced to them. We cannot provide any assurances that
future indemnification claims, including the cost of fees,
penalties or other expenses, will not exceed the limits of our
insurance policies, that such claims are covered by the terms of
our insurance policies or that our insurance carrier will be able
to cover our claims. Additionally, to the extent there is coverage
of these claims, the insurers also may seek to deny or limit
coverage in some or all of these matters. Furthermore, the insurers
could become insolvent and unable to fulfill their obligation to
defend, pay or reimburse us for insured claims. Accordingly, we
cannot be sure that claims will not arise that are in excess of the
limits of our insurance or that are not covered by the terms of our
insurance policy. Due to these coverage limitations, we may incur
significant unreimbursed costs to satisfy our indemnification
obligations, which may have a material adverse effect on our
financial condition, results of operations or cash
flows.
Our provision for income taxes is subject to volatility and could
be adversely affected by a number of factors.
Our
overall tax provisions and accruals are affected by a number of
factors, including any potential reorganization or restructuring of
our businesses, including tangible and intangible assets, the
resulting tax effects of differing tax rates in different state
jurisdictions, changes in transfer pricing rules or methods of
applying these rules, and changes in tax laws in various
jurisdictions. While we believe our tax estimates are reasonable,
there is no assurance that the final determination of our income
tax liability will not be materially different than what is
reflected in our income tax provisions and accruals. Significant
judgment is required to determine the recognition and measurement
of tax liabilities prescribed in the relevant accounting guidance
for uncertainty in income taxes. The accounting guidance for
uncertainty in income taxes applies to all income tax positions,
which, if resolved unfavorably, could adversely impact our
provision for income taxes and our payment obligation with respect
to any such taxes.
Our systems collect, access, use, and store personal customer
information and enable customer transactions, which poses security
risks, requires us to invest significant resources to prevent or
correct problems that may be caused by security breaches, and may
harm our business.
A
fundamental requirement for online communications, transactions and
support is the secure collection, storage and transmission of
confidential information. Our systems collect and store
confidential and personal information of our individual customers
as well as our partners and their customers’ users, including
personally identifiable information and payment card information,
and our employees and contractors may access and use that
information in the course of providing services. In addition, we
collect and retain personal information of our employees in the
ordinary course of our business. We and our third-party contractors
use commercially available technologies to secure this information.
Despite these measures, parties may attempt to breach the security
of our data or that of our customers. In addition, errors in the
storage or transmission of data could breach the security of that
information. We may be liable to our customers for any breach in
security andany breach could subject us to governmental or
administrative proceedings or monetary penalties, damage our
relationships with partners and 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 comply with mandatory
privacy and security standards required by law, industry standard,
or contract, and to further protect against security breaches or to
correct problems caused by any security breach.
A breach of our security systems may have a material adverse effect
on our business.
Our
security systems are designed to maintain the physical security of
our facilities and protect our customers’ and
employees’ confidential information, as well as our own
proprietary information. However, we are also dependent on a number
of third-party cloud-based and other service providers of critical
corporate infrastructure services relating to, among other things,
human resources, electronic communication services and certain
finance functions, and we are, of necessity, dependent on the
security systems of these providers. Accidental or willful security
breaches or other unauthorized access by third parties or our
employees or contractors of our facilities, our information systems
or the systems of our cloud-based or other service providers, or
the existence of computer viruses or malware in our or their data
or software could expose us to a risk of information loss and
misappropriation of proprietary and confidential information,
including information relating to our products or customers and the
personal information of our employees. In addition, we have, from
time to time, also been subject to unauthorized network intrusions
and malware on our own IT networks. Any theft or misuse of
confidential, personal or proprietary information as a result of
such activities could result in, among other things, unfavorable
publicity, damage to our reputation, loss of our trade secrets and
other competitive information, difficulty in marketing our
products, allegations by our customers that we have not performed
our contractual obligations, litigation by affected parties and
possible financial obligations for liabilities and damages related
to the theft or misuse of such information, as well as fines and
other sanctions resulting from any related breaches of data privacy
regulations, any of which could have a material adverse effect on
our reputation, business, profitability and financial condition.
Since the techniques used to obtain unauthorized access or to
sabotage systems change frequently and are often not recognized
until launched against a target, we may be unable to anticipate
these techniques or to implement adequate preventative
measures.
Data privacy regulations are expanding and compliance with, and any
violations of, these regulations may cause us to incur significant
expenses.
Privacy
legislation, enforcement and policy activity in this area are
expanding rapidly in many jurisdictions and creating a complex
regulatory compliance environment. Costs to comply with and
implement these privacy-related and data protection measures could
be significant. In addition, even our inadvertent failure to comply
with federal, state or international privacy-related or data
protection laws and regulations could result in proceedings against
us by governmental entities or others, and substantial fines and
damages. The theft, loss or misuse of personal data collected,
used, stored or transferred by us to run our business could result
in significantly increased business and security costs or costs
related to defending legal claims.
We are exposed to risks associated with payment card and payment
fraud and with payment card processing.
Certain
of our customers use payment cards to pay for our services and
products. We may suffer losses as a result of orders placed with
fraudulent payment cards or other payment data. Our failure to
detect or control payment fraud could have an adverse effect on our
results of operations. We are also subject to payment card
association operating standards and requirements, as in effect from
time to time. Compliance with those standards requires us to invest
in network and systems infrastructure and processes. Failure to
comply with these rules or requirements may subject us to fines,
potential contractual liabilities, and other costs, resulting in
harm to our business and results of operations.
Privacy concerns and laws or other domestic or foreign regulations
may require us to incur significant costs and may reduce the
effectiveness of our solutions, and our failure to comply with
those laws or regulations may harm our business and cause us to
lose customers.
Our
software and services contain features that allow our technology
specialists and other personnel to access, control, monitor, and
collect information from computers and other devices.
Federal, state and foreign government bodies and agencies, however,
have adopted or are considering adopting laws and regulations
restricting or otherwise regulating the collection, use and
disclosure of personal information obtained from consumers and
individuals. Those regulations could require costly compliance
measures, could reduce the efficiency of our operations, or could
require us to modify or cease to provide our systems or services.
Liability for violation of, costs of compliance with, and other
burdens imposed by such laws and regulations may limit the use and
adoption of our services and reduce overall demand for them. Even
the perception of privacy concerns, whether or not valid, may harm
our reputation and inhibit adoption of our solutions by current and
future customers. In addition, we may face claims about
invasion of privacy or inappropriate disclosure, use, storage, or
loss of information obtained from our customers. Any imposition of
liability could harm our reputation, cause us to lose customers and
cause our operating results to suffer.
We rely on third-party technologies in providing certain of our
software and services. Our inability to use, retain or integrate
third-party technologies and relationships could delay service or
software development and could harm our business.
We
license technologies from third parties, which are integrated into
our services, technology and end user software. Our use of
commercial technologies licensed on a non-exclusive basis from
third parties poses certain risks. Some of the third-party
technologies we license may be provided under “open
source” licenses, which may have terms that require us to
make generally available our modifications or derivative works
based on such open source code. Our inability to obtain or
integrate third-party technologies with our own technology could
delay service development until equivalent compatible technology
can be identified, licensed and integrated. These third-party
technologies may not continue to be available to us on commercially
reasonable terms or at all. If our relationship with third
parties were to deteriorate, or if such third parties were unable
to develop innovative and saleable products, or component features
of our products, we could be forced to identify a new developer and
our future revenue could suffer. We may fail to successfully
integrate any licensed technology into our services or software, or
maintain it through our own development work, which would harm our
business and operating results.
Our business operates in regulated industries.
Our
current and anticipated service offerings operate in industries,
such as home security, that are subject to various federal, state,
provincial and local laws and regulations in the markets in which
we operate. In certain jurisdictions, we may be required to
obtain licenses or permits in order to comply with standards
governing employee selection and training and to meet certain
standards or licensing requirements in the conduct of our
business. The loss of such licenses or permits or the
imposition of conditions to the granting or retention of such
licenses or permits could have a material adverse effect on
us.
Changes
in laws or regulations could require us to change the way we
operate or to utilize resources to maintain compliance, which could
increase costs or otherwise disrupt operations. In addition,
failure to comply with any applicable laws or regulations could
result in substantial fines or revocation of our operating permits
and licenses for us or our partners. If laws and regulations were
to change, or if we or our products and services were deemed not to
comply with them, our business, financial condition, results of
operations and cash flows could be materially and adversely
affected.
If our services are used to commit fraud or other similar
intentional or illegal acts, we may incur significant liabilities,
our services may be perceived as not secure and customers may
curtail or stop using our services.
Certain
software and services we provide, including our Support.com Cloud
applications, enable remote access to and control of third-party
computer systems and devices. We generally are not able to
control how such access may be used or misused by licensees of our
software offerings or our employees. If our software is used by our
employees or others to commit fraud or other illegal acts,
including, but not limited to, violating data privacy laws,
proliferating computer files that contain a virus or other harmful
elements, interfering or disrupting third-party networks,
infringing any third party’s copyright, patent, trademark,
trade secret or other rights, transmitting any unlawful, harassing,
libelous, abusive, threatening, vulgar, obscene or otherwise
objectionable material, or committing unauthorized access to
computers, devices, or protected information, third parties may
seek to hold us legally liable. As a result, defending such
claims could be expensive and time-consuming regardless of the
merits, and we could incur significant liability or be required to
undertake expensive preventive or remedial actions. As a
result, our operating results may suffer and our reputation may be
damaged.
We may face intellectual property infringement claims that could be
costly to defend and result in our loss of significant
rights.
Our
business relies on the use and licensing of technology. Other
parties may assert intellectual property infringement claims
against us or our customers, and our products may infringe the
intellectual property rights of third parties. For example,
our products may infringe patents issued to third parties. In
addition, as is increasingly common in the technology sector, we
may be confronted with the aggressive enforcement of patents by
companies whose primary business activity is to acquire patents for
the purpose of offensively asserting them against other
companies. From time to time, we have received allegations or
claims of intellectual property infringement, and we may receive
more claims in the future. We may also be required to pursue
litigation to protect our intellectual property rights or defend
against allegations of infringement. Intellectual property
litigation is expensive and time-consuming and could divert
management’s attention from our business. The outcome of any
litigation is uncertain and could significantly impact our
financial results. 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 proprietary rights
on a timely basis would harm our business.
If we are unable to protect or enforce our intellectual property
rights, or we lose our ability to utilize the intellectual property
of others, our business could be adversely affected.
Our
success depends, in part, upon our ability to obtain intellectual
property protection for our proprietary processes, software and
other solutions. We rely upon confidentiality policies,
nondisclosure and other contractual arrangements, and patent, trade
secret, copyright and trademark laws to protect our intellectual
property rights. These laws are subject to change at any time and
could further limit our ability to obtain or maintain intellectual
property protection. There is uncertainty concerning the scope of
patent and other intellectual property protection for software and
business methods, which are fields in which we rely on intellectual
property laws to protect our rights. Even where we obtain
intellectual property protection, our intellectual property rights
may not prevent or deter competitors, former employees, or other
third parties from reverse engineering our solutions or software.
Further, the steps we take in this regard might not be adequate to
prevent or deter infringement or other misappropriation of our
intellectual property by competitors, former employees or other
third parties, and we may not be able to detect unauthorized use
of, or take appropriate and timely steps to enforce, our
intellectual property rights. Enforcing our rights might also
require considerable time, money and oversight, and we may not be
successful. Further, we rely on third-party software in providing
some of our services and solutions. If we lose our ability to
continue using any such software for any reason, including because
it is found to infringe the rights of others, we will need to
obtain substitute software or find alternative means of obtaining
the technology necessary to continue to provide our solutions. Our
inability to replace such software, or to replace such software in
a timely or cost-effective manner, could materially adversely
affect our results of operations
We may face class actions and similar claims that could be costly
to defend or settle and result in negative publicity and diversion
of management resources.
Our
business involves direct sale and licensing of services and
software to consumers and SMBs, and we typically include customary
indemnification provisions in favor of our partners in our
agreements for the distribution of our services and software.
As a result, we can be subject to consumer litigation and legal
proceedings related to our services and software, including
putative class action claims and similar legal actions, including,
but not limited to, consumer litigation and legal proceedings that
may arise related to the FTC and DOL investigations described in
Note 3 Legal Proceedings in this report. We can also be subject to employee
litigation and legal proceedings related to our employment
practices attempted on a class or representative basis. Such
litigation can be expensive and time-consuming regardless of the
merits of any action and could divert management’s attention
from our business. The cost of defense can be large as can
any settlement or judgment in an action. The outcome of any
litigation is uncertain and could significantly impact our
financial 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.
We must comply with a variety of existing and future laws and
regulations that could impose substantial costs on us and may
adversely impact our business.
We are
subject to a variety of laws and regulations, which may differ
among jurisdictions, affecting our operations in areas including,
but not limited to: intellectual property ownership and
infringement; tax; anti-corruption such as the Foreign Corrupt
Practices Act and the UK Bribery Act; foreign exchange controls and
cash repatriation restrictions; data privacy requirements such as
the European Economic Area Privacy Regulation, the General Data
Protection Regulation (“GDPR”); competition; Consent
Order terms (for example, the recent Consent Order we entered into
with the FTC); advertising; employment; product regulations; health
and safety requirements; and consumer laws. If we fail to continue
to comply with these regulations, we may be unable to provide
products or services to certain customers, or we may incur
penalties or fines. We are unable to predict the outcome or effects
of any of these potential actions or any other legislative or
regulatory proposals on our business. Any changes to the legal and
regulatory framework applicable to our businesses could have an
adverse impact on the results of our operations. Although our
management systems are designed to maintain compliance, if we
violate or fail to comply with any laws or regulations, applicable
consent orders or decrees, a range of consequences could result,
including fines, sales limitations, criminal and civil liabilities
or other sanctions. The costs of complying with these laws
(including the costs of any investigations, auditing and
monitoring) could adversely affect our current or future
business.
Delaware law and our certificate of incorporation and bylaws
contain anti-takeover provisions, and our Board adopted a Section
382 Tax Benefits Preservation Plan, any of which could delay or
discourage takeover attempts that some stockholders may consider
favorable.
Delaware law and
our certificate of incorporation and amended and restated bylaws
contain certain provisions, any of which could render more
difficult, or discourage a merger, tender offer, or assumption of
control of the Company that is not approved by our Board of
Directors that some stockholders may consider favorable. In
addition, on April 20, 2016, our Board acted to preserve the
potential benefits of our NOLs from being limited pursuant to
Section 382 of the Code by adopting a Section 382 Tax Benefits
Preservation Plan (the “Section 382 Tax Benefits Preservation
Plan”). The principal reason our Board adopted the Section
382 Tax Benefits Preservation Plan is that we believe that the NOLs
are a potentially valuable asset and the Board believes it is in
the Company’s best interests to attempt to protect this asset
by preventing the imposition of limitations on their use. While the
Section 382 Tax Benefits Preservation Plan is not principally
intended to prevent a takeover, it does have a potential
anti-takeover effect because an “acquiring person”
thereunder may be diluted upon the occurrence of a triggering
event. Accordingly, the overall effects of the Section 382 Tax
Benefits Preservation Plan may be to render more difficult, or
discourage a merger, tender offer, or assumption of control by a
substantial holder of our securities.
Our ability to use net operating loss carryforwards to offset
future taxable income for U.S. federal income tax purposes may be
limited.
We have
a federal net operating loss (NOL) carryforwards that are available
to offset future taxable income. We may recognize additional NOLs
in the future. Section 382 of the Internal Revenue Code of
1986, as amended (the Code) imposes an annual limitation on the
amount of taxable income that may be offset by a corporation's NOLs
if the corporation experiences an “ownership change” as
defined in Section 382 of the Code. An ownership change
occurs when our “five-percent shareholders” (as defined
in Section 382 of the Code) collectively increase their
ownership in the Company by more than 50 percentage points (by
value) over a rolling three-year period. Additionally, various
states have similar limitations on the use of state NOLs following
an ownership change.
If an
ownership change occurs, the amount of the taxable income for any
post-change year that may be offset by a pre-change loss is subject
to an annual limitation that is cumulative to the extent it is not
all utilized in a year. This limitation is derived by multiplying
the fair market value of our stock as of the ownership change by
the applicable federal long-term tax-exempt rate. To the extent
that a company has a net unrealized built-in gain at the time of an
ownership change, which is realized or deemed recognized during the
five-year period following the ownership change, there is an
increase in the annual limitation for each of the first five-years
that is cumulative to the extent it is not all utilized in a year.
If an ownership change should occur in the future, our ability to
use the NOL to offset future taxable income will be subject to an
annual limitation and will depend on the amount of taxable income
generated by us in future periods. There is no assurance that we
will be able to fully utilize the NOL and we may be required to
record an additional valuation allowance related to the amount of
the NOL that may not be realized, which could impact our result of
operations.
As noted, we
believe that these NOL carryforwards are a valuable asset for
us. Consequently, we have a Section 382 Tax Benefits
Preservation Plan in place, to protect our NOLs during the
effective period of the rights plan. Although the Tax
Benefits Preservation Plan is intended to reduce the likelihood of
an “ownership change” that could adversely affect us,
there is no assurance that the restrictions on transferability in
the rights plan will prevent all transfers that could result in
such an “ownership change”. The Tax Benefits
Preservation Plan could make it more difficult for a third party to
acquire, or could discourage a third party from acquiring, our
Company or a large block of our common stock. A third party
that acquires 4.9% or more of our common stock could suffer
substantial dilution of its ownership interest under the terms of
the Tax Benefits Preservation Plan through the issuance of common
stock or common stock equivalents to all stockholders other than
the acquiring person. The foregoing provisions may adversely affect
the marketability of our common stock by discouraging potential
investors from acquiring our stock. In addition, these
provisions could delay or frustrate the removal of incumbent
directors and could make more difficult a merger, tender offer or
proxy contest involving us, or impede an attempt to acquire a
significant or controlling interest in us, even if such events
might be beneficial to us and our stockholders
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Chief
Executive Officer Section 302 Certification.
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Chief
Financial Officer Section 302 Certification.
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Statement
of the Chief Executive Officer under 18 U.S.C.
§ 1350(1)
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Statement
of the Chief Financial Officer under 18 U.S.C.
§ 1350(1)
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(1) The
certifications filed as Exhibits 32.1 and 32.2 are not deemed
“filed” for purposes of Section 18 of the Securities
Exchange Act of 1934 and are not to be incorporated by reference
into any filing of the Company under the Securities Exchange Act of
1933 or the Securities Exchange Act of 1934, whether made before or
after the date hereof irrespective of any general incorporation by
reference language contained in any such filing, except to the
extent that the registrant specifically incorporates it by
reference.
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.
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SUPPORT.COM,
INC.
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May 13,
2019 |
By:
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/s/
Richard A. Bloom
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Richard A. Bloom |
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President and Chief Executive Officer |
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EXHIBIT INDEX TO
SUPPORT.COM, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019
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Chief
Executive Officer Section 302 Certification
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Principal
Financial Officer Section 302 Certification
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Statement
of the Chief Executive Officer under 18 U.S.C. § 1350
(1)
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Statement
of the Chief Financial Officer under 18 U.S.C. § 1350
(1)
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(1)
The certifications
filed as Exhibits 32.1 and 32.2 are not deemed “filed”
for purposes of Section 18 of the Securities Exchange Act of 1934
and are not to be incorporated by reference into any filing of the
Company under the Securities Exchange Act of 1933 or the Securities
Exchange Act of 1934, whether made before or after the date hereof
irrespective of any general incorporation by reference language
contained in any such filing, except to the extent that the
registrant specifically incorporates it by reference.
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