Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the Quarterly Period Ended March 31, 2020
OR
☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the transition period from to
Commission File No. 000-30901
SUPPORT.COM, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
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94-3282005
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(State
or Other Jurisdiction of Incorporation or
Organization)
|
|
(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 ☐
|
Accelerated
filer ☐
|
Non-accelerated
filer ☐
|
Smaller
reporting company ☒
|
Emerging growth company ☐
|
|
(Do not check if a
smaller reporting company)
|
|
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, 2020, 19,053,854 shares of the Registrant’s Common
Stock, $0.0001 par value, were outstanding.
SUPPORT.COM, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2020
INDEX
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Page
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Part I. Financial Information
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3
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3
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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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25
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30
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30
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Part II. Other Information
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31
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32
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43
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44
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45
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2
ITEM 1. FINANCIAL STATEMENTS
(UNAUDITED)
SUPPORT.COM,
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
March
31,
2020
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December
31,
2019
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|
(Unaudited)
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ASSETS
|
|
|
Current
assets:
|
|
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Cash and cash
equivalents
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$15,141
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$10,087
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Short-term
investments
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13,275
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16,327
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Accounts
receivable, net
|
8,071
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9,398
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Prepaid expenses
and other current assets
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853
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728
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Total current
assets
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37,340
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36,540
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Property and
equipment, net
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462
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533
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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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178
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-
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Other
assets
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624
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717
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Total
assets
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$38,854
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$38,040
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
|
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Accounts
payable
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$710
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227
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Accrued
compensation
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2,005
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1,610
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Other accrued
liabilities
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615
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1,001
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Short-term lease
liability
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171
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-
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Short-term deferred
revenue
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1,137
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1,193
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Total current
liabilities
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4,638
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4,081
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Other long-term
liabilities
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783
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792
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Total
liabilities
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5,421
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4,873
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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; 19,536,768 issued and
19,053,854 outstanding at March 31, 2020 and December 31,
2019
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2
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2
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Additional paid-in
capital
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250,206
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250,092
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Treasury stock, at
cost (482,914 shares at March 31, 2020 and December 31,
2019)
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(5,297)
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(5,297)
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Accumulated other
comprehensive loss
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(2,592)
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(2,380)
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Accumulated
deficit
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(208,886)
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(209,250)
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Total
stockholders’ equity
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33,433
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33,167
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Total
liabilities and stockholders’ equity
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$38,854
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$38,040
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See
accompanying notes.
3
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
|
Three Months
Ended
March
31,
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2020
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2019
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Revenue:
|
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Services
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$11,511
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$16,864
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Software and
other
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438
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1,200
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Total
revenue
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11,949
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18,064
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Cost of
revenue:
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Cost of
services
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7,685
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13,798
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Cost of software
and other
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29
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54
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Total cost of
revenue
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7,714
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13,852
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Gross
profit
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4,235
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4,212
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Operating
expenses:
|
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Engineering and
IT
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1,040
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749
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Sales and
marketing
|
813
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392
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General and
administrative
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2,053
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1,896
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|
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Total operating
expenses
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3,906
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3,037
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Income from
operations
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329
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1,175
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Interest income and
other, net
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84
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296
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Income before
income taxes
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413
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1,471
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Income tax
provision
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49
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28
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Net
income
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$364
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$1,443
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Basic and diluted
earnings per share:
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Net
income
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$0.02
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$0.08
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Shares used in
computing basic net income per share
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19,054
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18,955
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Shares used in
computing diluted net income per share
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19,233
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19,004
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See
accompanying notes.
4
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
|
Three Months
Ended
March
31,
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|
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2020
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2019
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Net
income
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$364
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$1,443
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Other comprehensive
income (loss):
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Change in foreign
currency translation adjustment
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(211)
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90
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Change in net
unrealized gain (loss) on investments
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(1)
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50
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Other comprehensive
income (loss)
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(212)
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149
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|
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Comprehensive
income
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$152
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$1,592
|
See
accompanying notes.
5
SUPPORT.COM,
INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
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Common
Stock
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Shares
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Amount
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Additional
Paid-In
Capital
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Treasury
Stock
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Accumulated
Other
Comprehensive
Loss
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Accumulated
Deficit
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Total
Stockholders’
Shares
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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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$268,864
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$(5,297)
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$(2,358)
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$(211,653)
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$49,540
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Balances at
December 31, 2019
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19,053,854
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$2
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$250,092
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$(5,297)
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$(2,380)
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$(209,250)
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$33,167
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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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364
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364
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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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(212)
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—
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(212)
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Stock-based
compensation expense
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—
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114
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—
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—
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114
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Balances at March
31, 2020
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19,053,854
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$2
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$250,206
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$(5,297)
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$(2,592)
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$(208,886)
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$33,433
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See
accompanying notes.
6
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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2020
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2019
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Operating
Activities:
|
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Net
income
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$364
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$1,443
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Adjustments to
reconcile net income to net cash used in operating
activities:
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Depreciation
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72
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75
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Amortization of
premiums and discounts on investments
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23
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37
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Stock-based
compensation
|
114
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52
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Changes in assets
and liabilities:
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Accounts
receivable, net
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1,327
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(2,579)
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Prepaid expenses
and other current assets
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(143)
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50
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Other
assets
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(183)
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72
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Accounts
payable
|
432
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(11)
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Accrued
compensation
|
392
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(1,028)
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Other accrued
liabilities and lease liability
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(215)
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37
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Other long-term
liabilities
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(60)
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-
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Deferred
revenue
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(56)
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180
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Net cash provided
by (used in) operating activities
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2,067
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(1,672)
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Investing
Activities:
|
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Purchases of
property and equipment
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(1)
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(9)
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Purchases of
investments
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-
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(3,570)
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Maturities of
investments
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3,029
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9,645
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Net cash provided
by investing activities
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3,028
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6,066
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Effect of exchange
rate changes on cash and cash equivalents
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(41)
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8
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Net increase in
cash and cash equivalents
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5,054
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4,402
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Cash and cash
equivalents at beginning of period
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10,087
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25,182
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Cash and cash
equivalents at end of period
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$15,141
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$29,584
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Supplemental
schedule of cash flow information:
|
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Income taxes
paid
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$-
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$-
|
See
accompanying notes.
7
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 for
the three months ended March 31, 2020 and 2019 and the consolidated
statements of cash flows for the three months ended March 31, 2020
and 2019 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, 2019 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, 2019, filed
with the SEC on March 18, 2020.
Impact of Disease Outbreak
On
March 11, 2020, the World Health Organization declared the outbreak
of a respiratory disease caused by a new coronavirus as a
“pandemic”. First identified in late 2019 and known now
as COVID-19, the outbreak has impacted thousands of individuals
worldwide. In response, many countries have implemented measures to
combat the outbreak which have impacted global business operations.
As of the date of issuance of the financial statements, the
Company’s operations have not been significantly impacted,
however, the Company continues to monitor the situation. No
impairments were recorded as of the balance sheet date as no
triggering events or changes in circumstances had occurred as of
March 31, 2020; however, due to significant uncertainty surrounding
the situation, management's judgment regarding this could change in
the future. In addition, while the Company’s results of
operations, cash flows and financial condition could be negatively
impacted, the extent of the impact cannot be reasonably estimated
at this time.
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.
8
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:
|
Three Months
Ended
|
|
|
March
31,
|
|
Revenue
from Contracts with Customers:
|
2020
|
2019
|
Services
|
$11,511
|
$16,864
|
Software and
other
|
438
|
1,200
|
Total
revenue
|
$11,949
|
$18,064
|
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.
9
The
following table represent deferred revenue activity for the three
months ended March 31, 2020 and 2019 (in thousands):
|
March 31,
2020
|
March 31,
2019
|
|
|
|
Deferred
revenue - beginning of period
|
$1,193
|
1,135
|
Deferred
revenue
|
403
|
751
|
Recognition
of unearned revenue
|
(459)
|
(571)
|
Deferred
revenue - end of period
|
$1,137
|
$1,315
|
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.
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, 2020,
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.
We view this
investment portfolio as available for use in our current
operations, and therefore we present our marketable securities as
short-term assets
10
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, 2019, 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, 2020 and December 31, 2019, the fair value of
cash, cash equivalents and investments was $28.4 million and $26.4
million, respectively.
The
following is a summary of cash, cash equivalents and investments at
March 31, 2020 and December 31, 2019 (in thousands):
As of March 31,
2020
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
Cash
|
$9,823
|
$—
|
$—
|
$9,823
|
Money market
funds
|
5,318
|
—
|
—
|
5,318
|
Certificates of
deposit
|
438
|
—
|
—
|
438
|
Commercial
paper
|
2,797
|
1
|
—
|
2,798
|
Corporate notes and
bonds
|
8,812
|
4
|
(39)
|
8,777
|
U.S. government
agency securities
|
1,251
|
11
|
—
|
1,262
|
|
$28,439
|
$16
|
$(39)
|
$28,416
|
Classified
as:
|
|
|
|
|
Cash and cash
equivalents
|
$15,141
|
$—
|
$—
|
$15,141
|
Short-term
investments
|
13,298
|
16
|
(39)
|
13,275
|
|
$28,439
|
$16
|
$(39)
|
$28,416
|
11
As of December 31, 2019
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
Cash
|
$7,814
|
$—
|
$—
|
$7,814
|
Money market
funds
|
1,137
|
—
|
—
|
1,137
|
Certificates of
deposit
|
475
|
—
|
—
|
475
|
Commercial
paper
|
6,912
|
—
|
(1)
|
6,911
|
Corporate notes and
bonds
|
7,922
|
15
|
(4)
|
7,933
|
U.S. government
agency securities
|
2,145
|
—
|
(1)
|
2,144
|
|
$26,405
|
$15
|
$(6)
|
$26,414
|
Classified
as:
|
|
|
|
|
Cash and cash
equivalents
|
$10,087
|
$—
|
$—
|
$10,087
|
Short-term
investments
|
16,318
|
15
|
(6)
|
16,327
|
|
$26,405
|
$15
|
$(6)
|
$26,414
|
The
following table summarizes the estimated fair value of our
marketable securities classified by the stated maturity date of the
security (in thousands):
|
March
31,
2020
|
December
31,
2019
|
Due within one
year
|
$11,043
|
$12,754
|
Due within two
years
|
2,232
|
3,573
|
|
$13,275
|
$16,327
|
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.
12
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, 2020 and December 31, 2019 (in thousands):
As of March 31,
2020
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Money market
funds
|
$5,318
|
$—
|
$—
|
$5,318
|
Certificates of
deposit
|
—
|
438
|
—
|
438
|
Commercial
paper
|
—
|
2,798
|
—
|
2,798
|
Corporate notes and
bonds
|
—
|
8,777
|
—
|
8,777
|
U.S. government
agency securities
|
—
|
1,262
|
—
|
1,262
|
Total
|
$5,318
|
$13,275
|
$—
|
$18,593
|
As of December
31, 2019
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Money market
funds
|
$1,137
|
$—
|
$—
|
$1,137
|
Certificates of
deposit
|
—
|
475
|
—
|
475
|
Commercial
paper
|
—
|
6,911
|
—
|
6,911
|
Corporate notes and
bonds
|
—
|
7,933
|
—
|
7,933
|
U.S. government
agency securities
|
—
|
2,144
|
—
|
2,144
|
Total
|
$1,137
|
$17,463
|
$—
|
$18,600
|
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.
For the
three months ended March 31, 2020, Comcast and Cox Communications
accounted for 47% and 37%, respectively, of our total revenue. For
the three months ended March 31, 2019, Comcast and Cox
Communications accounted for 68% and 20%, 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, 2020
and 2019.
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, 2020, Comcast and Cox Communications
accounted for 48% and 38%, respectively, of our total accounts
receivable. As of December 31, 2019, Comcast and Cox Communications
accounted for 59% and 33%, 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, 2020 and
December 31, 2019.
13
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 $28,000 at both March 31, 2020 and December
31, 2019.
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,
2020, the Company had approximately $239,000 in reserve for its
self-funded health insurance program. As of December 31, 2019, the
Company had approximately $404,000 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
|
Total
|
Balance as of
December 31, 2019
|
$(2,389)
|
$9
|
$(2,380)
|
Current-period
other comprehensive (loss)
|
(211)
|
(1)
|
(212)
|
Balance as of March
31, 2020
|
$(2,600)
|
$8
|
$(2,592)
|
|
Foreign Currency
Translation Losses
|
Unrealized
Losses on Investments
|
Total
|
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.
14
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, 2020 and 2019:
|
Stock Option
Plan
|
|
|
Three Months
Ended March 31,
|
|
|
2020
|
2019
(1)
|
Risk-free interest
rate
|
0.60%
|
0%
|
Expected term (in
years)
|
3.13
|
0.0
|
Volatility
|
37.2%
|
0%
|
Expected
dividend
|
0%
|
0%
|
Weighted average
grant-date fair value
|
$0.15
|
$0.00
|
(1)
There were no
options granted for the three months ended March 31,
2019.
There
were no Employee Stock Purchase Plan (“ESPP”) purchases
for the three months ended March 31, 2020 and 2019.
We
recorded the following stock-based compensation expense for the
three months ended March 31, 2020 and 2019 (in
thousands):
|
Three Months
Ended
March
31,
|
|
|
2020
|
2019
|
Stock-based
compensation expense related to grants of:
|
|
|
Stock
options
|
$31
|
$33
|
Restricted stock
units (“RSUs”)
|
83
|
19
|
|
$114
|
$52
|
Stock-based
compensation expense recognized in:
|
|
|
Cost of
service
|
$5
|
$8
|
Engineering and
IT
|
2
|
7
|
Sales and
marketing
|
8
|
12
|
General and
administrative
|
99
|
25
|
|
$114
|
$52
|
15
Earnings Per Share
Basic
earnings per share is computed using our net income and the
weighted average number of common shares outstanding during the
reporting period. Diluted earnings per share is 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 when dilutive.
For the
three months ended March 31, 2020 and 2019, 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 per share (in thousands, except per share
amounts):
|
Three Months
|
|
|
Ended
|
|
|
March
31,
|
|
|
2020
|
2019
|
|
|
|
Net
income
|
$364
|
$1,443
|
|
|
|
Basic:
|
|
|
Weighted-average
shares of common stock outstanding
|
19,054
|
18,955
|
Shares used in
computing basic income per share
|
19,054
|
18,955
|
Basic earnings per
share
|
0.02
|
0.08
|
Diluted:
|
|
|
Weighted-average
shares of common stock outstanding
|
19,054
|
18,955
|
Add: Common
equivalent shares outstanding
|
179
|
49
|
Shares used in
computing diluted earnings per share
|
19,233
|
19,004
|
Diluted earnings
per share
|
$0.02
|
$0.08
|
16
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, 2020, we have not
been required to make any payment resulting from infringement
claims asserted against our customers and have not recorded any
related accruals.
Leases
We recognized
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
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.
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. We account
for the lease and non-lease components as a single lease
component.
Recent Accounting Pronouncements
Recent Accounting Standards Adopted in the Current
Period
Financial Instruments
In
January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Recognition and
Measurement of Financial Assets and Financial Liabilities
(Topic 825). ASU No.
2016-01 revises the classification and measurement of investments
in certain equity investments and the presentation of certain fair
value changes for certain financial liabilities measured at fair
value. ASU No. 2016-01 requires the change in fair value of many
equity investments to be recognized in net income. The Company
adopted ASU 2016-01 in its first quarter of 2018 utilizing the
modified retrospective transition method. Based on the composition
of the Company's investment portfolio, the adoption of ASU-2016-01
did not have a material impact on the consolidated financial
statments.
In August 2018, the FASB issued Accounting
Standard Update No. 2018-13, Changes to Disclosure
Requirements for Fair Value Measurements (Topic
820) (ASU 2018-13), which
improved the effectiveness of disclosure requirements for recurring
and nonrecurring fair value measurements. The standard removes,
modifies, and adds certain disclosure requirements. We adopted the
new standard effective January 1, 2019 and do not expect the
adoption of this guidance to have a material impact on its
consolidated financial statements.
New Accounting Standards to be adopted in Future
Periods
Financial Instruments
In June 2016, the FASB
issued ASU 2016-13, Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments.
The standard's main goal is to improve financial reporting by
requiring earlier recognition of credit losses on financing
receivables and other financial assets in scope. The effective date
for all public companies, except smaller reporting companies,
is fiscal
years beginning after December 15, 2019, including interim periods
within those fiscal years. The effective date for all other
entities is fiscal years beginning after December 15, 2022,
including interim periods within those fiscal years.
We do not
expect the standard to have a material impact on our consolidated
financial statements.
Income Taxes
In December 2019, the
FASB issued Accounting Standard Update No.
2019-12, Income
Taxes (Topic
740): Simplifying
the Accounting for Income Taxes (ASU 2019-12),
which simplifies the accounting for income taxes. This guidance
will be effective for us in the first quarter of 2021 on a
prospective basis, and early adoption is permitted. We are
currently evaluating the impact of the new guidance on our
consolidated financial statements.
17
Note 2. Income Taxes
We
recorded an income tax provision (benefit) of $49,000 and $28,000
for the three months ended March 31, 2020 and 2019,
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, 2020, 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,
2020.
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 was
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. 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.
18
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, 2020, 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, 2020
and December 31, 2019.
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, 2020, 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):
|
March
31,
2020
|
December
31,
2019
|
Accrued
expenses
|
$282
|
$443
|
Self-insurance
accruals
|
239
|
404
|
Lease
liabilities
|
-
|
68
|
Other accrued
liabilities
|
94
|
86
|
Total other accrued
liabilities
|
$615
|
$1,001
|
19
Note 6. Stockholder’s Equity
Stock Options
The
following table represents the stock option activity for the three
months ended March 31, 2020:
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
per
Share
|
Weighted
Average
Remaining
Contractual
Term (in
years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
Outstanding options
at December 31, 2019
|
816,185
|
$1.77
|
7.49
|
$16
|
Granted
|
754,000
|
1.35
|
|
|
Exercised
|
—
|
—
|
|
|
Forfeited
|
(40,616)
|
$1.40
|
|
|
Outstanding options
at March 31, 2020
|
1,529,569
|
$1.57
|
8.78
|
$16
|
Options vested and
expected to vest
|
1,529,569
|
$1.57
|
8.78
|
$16
|
Exercisable at
March 31, 2020
|
703,188
|
$1.85
|
7.59
|
$11
|
20
The
following table represents the stock option activity for the three
months ended March 31, 2019:
|
Number
of
Shares
|
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, 2020.
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, 2020 and 2019 was $46,000 and $29,000,
respectively.
At
March 31, 2020, there was $158,000 of unrecognized compensation
cost related to existing options outstanding which is expected to
be recognized over a weighted average period of 3.7
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, 2020 and
2019, no shares were purchased under ESPP. As of March 31, 2020,
approximately 104,071 shares remain available for grant under the
ESPP.
21
Restricted Stock Units
The
following table represents RSU activity for the three months ended
March 31, 2020:
|
Number
of
Shares
|
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, 2019
|
248,549
|
$1.62
|
0.60
|
$271
|
Awarded
|
—
|
—
|
|
|
Released
|
—
|
—
|
|
|
Forfeited
|
—
|
—
|
|
|
Outstanding RSUs at
March 31, 2020
|
248,549
|
$1.62
|
0.34
|
$271
|
The
following table represents RSU activity for the three months ended
March 31, 2019:
|
Number
of
Shares
|
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, 2020, there was $113,000 of unrecognized compensation
cost related to RSUs which is expected to be recognized over a
weighted average period of 0.3 years.
22
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,
2020 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. The Colorado and
Sunnyvale office leases were both renewed during the period and
will expire on January 31, 2021 and March 31, 2021,
respectively.
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,
2020
|
Three Months
Ended
March
31,
2019
|
Operating
leases
|
|
|
Operating lease
right-of-use assets
|
$178
|
$186
|
|
|
|
Operating lease
liabilities – short term
|
$171
|
$175
|
Operating lease
liabilities – long-term
|
7
|
13
|
Total operating
lease liabilities
|
$178
|
$188
|
Weighted Average
Remaining Lease Term
|
|
|
Operating
leases
|
1.1 years
|
1.1 years
|
Weighted Average
Discount Rate
|
|
|
Operating
leases
|
4.5%
|
4.5%
|
23
The
following represents maturities of operating lease liabilities as
of March 31, 2020 (in thousands):
|
Operating Leases
|
Reminder of
2020
|
$135
|
2020
|
45
|
2021
|
2
|
Total
undiscounted cash flows
|
182
|
Less imputed
interest
|
(4)
|
Present
value of lease liabilities
|
$178
|
Supplemental cash flow information related to leases are as
follows (in thousands):
|
Three Months Ended
March 31, 2020 |
Three Months
Ended
March 31,
2019
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
|
|
Operating cash
flows from operating leases
|
$45
|
$44
|
Right-of-use assets
obtained in exchange for lease obligations:
|
|
|
Operating
leases
|
$-
|
$-
|
24
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, 2019.
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, Inc. is a full-spectrum leader in outsourced call
center and direct-to-consumer and small business technical support
solutions. With more than 20 years of providing high quality
technical support services to consumers and small businesses
through white-labeled partnerships or direct solutions, Support.com
has the expertise, tools and software solutions to troubleshoot and
maintain all the devices in the connected home and business. The
company's skilled U.S.-based live agents and rich self-support
tools troubleshoot thousands of technical support issues consumers
and small businesses face on an ongoing basis. Support.com delivers
high quality, turnkey technical support solutions, software and
digital support experiences that enable customers to get the most
out of their technology.
Total
revenue for the first quarter of 2020 decreased 34% from the first
quarter of 2019. Revenue from services decreased 32% from the first
quarter of 2019 primarily due to a
decrease in billable hours of our largest customer somewhat offset
by an increase in revenues of other major customers. Revenue from
software and other decreased 64% from the first quarter of
2019 due to lower new subscriptions
and renewals.
Cost of
services for the first quarter of 2020 decreased 44% from the first
quarter of 2019which was primarily attributable to
lower compensation costs as headcount decreased commensurate with
the lower revenues. Cost of software and other for the first
quarter of 2020 decreased 46% from the first quarter of 2019. Total
gross margin increased from 23% to 35% from the first quarter of
2019.
Operating expenses
for the first quarter of 2020 increased 29% from the same period in
2019, primarily driven by increases in advertising expense,
consulting services, legal fees, stock based compensation and
temporary help.
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, 2019 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 financial instrument during the
three months ended March 31, 2020.
25
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, 2020 and 2019 expressed as a percentage of
total revenue:
|
Three Months
Ended March
31,
|
|
|
2020
|
2019
|
Revenue:
|
|
|
Services
|
96%
|
93%
|
Software and
other
|
4
|
7
|
|
|
|
Total
revenue
|
100
|
100
|
|
|
|
Cost of
revenue:
|
|
|
Cost of
services
|
64
|
76
|
Cost of software
and other
|
1
|
1
|
Total cost of
revenue
|
65
|
77
|
Gross
profit
|
35
|
23
|
Operating
expenses:
|
|
|
Engineering and
IT
|
9
|
4
|
Sales and
marketing
|
7
|
2
|
General and
administrative
|
17
|
10
|
|
|
|
Total operating
expenses
|
33
|
16
|
|
|
|
Income from
operations
|
2
|
7
|
Interest income and
other, net
|
1
|
1
|
|
|
|
Income from
operations, before income taxes
|
3
|
8
|
Income tax
provision
|
1
|
-
|
Net
income
|
2%
|
8%
|
26
REVENUE
|
Three Months
Ended
|
|
|
|
|
March
31,
|
$
|
%
|
|
In thousands,
except percentages
|
2020
|
2019
|
Change
|
Change
|
Services
|
$11,511
|
$16,864
|
$(5,353)
|
(32)%
|
Software and
other
|
438
|
1,200
|
(762)
|
(63)%
|
Total
revenue
|
$11,949
|
$18,064
|
$(6,115)
|
(34)%
|
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, 2020 decreased by $5.4
million, or 32% from the same period in 2019 mainly due to decrease
in billable hours of Comcast offset by an increase in sales from
Cox Communications. For the three months ended March 31, 2020,
services revenue generated from our partnerships was $11.0 million
compared to $16.2 million for the same period in 2019. Direct
services revenue was $0.5 million for the three months ended March
31, 2020 compared to $0.7 million for the same period in 2019. 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, 2020 decreased by $0.8 million, or 64%, from the same
period in 2019 due to new subscriptions being less than expirations
of subscriptions. For the three-month period ended March 31, 2020
and 2019, revenue from software and other generated from our direct
sales was $0.4 million and $0.5 million, respectively. Software and
other revenue generated from our partnerships was $38,000 and $0.7
million for the three months ended March 31, 2020 and the three
months ended March 31, 2019.
COST OF REVENUE
|
Three Months
Ended
|
|
|
|
|
March
31,
|
$
|
%
|
|
In thousands,
except percentages
|
2020
|
2019
|
Change
|
Change
|
Cost of
services
|
$7,685
|
$13,798
|
$(6.113)
|
(44)%
|
Cost of software
and other
|
29
|
54
|
(25)
|
(46)%
|
Total
cost of revenue
|
$7,714
|
$13,852
|
$(6,138)
|
(44)%
|
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 $6.1 million in cost of services for the three
months ended March 31, 2020 compared to the same period in 2019 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, 2020 were flat as compared with the year-ago
period.
27
OPERATING EXPENSES
|
Three Months
Ended
|
|
|
|
|
March
31,
|
$
|
%
|
|
In thousands,
except percentages
|
2020
|
2019
|
Change
|
Change
|
Engineering and
IT
|
$1,040
|
$749
|
$291
|
39%
|
Sales and
marketing
|
$813
|
$392
|
$421
|
107%
|
General and
administrative
|
$2,053
|
$1,896
|
$157
|
8%
|
Engineering and IT. Engineering and IT expense consists
primarily of compensation costs, third-party consulting expenses
and related overhead costs for engineering and IT personnel and are
expensed as they are incurred. Engineering and IT costs for
the three months ended March 31, 2020 increased $0.3 million
primarily due to higher consulting fees.
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 increase of
$0.4 million in sales and marketing expense for the three months
ended March 31, 2020 compared to the same period in 2019 was
primarily due to $0.2 million increase in advertising expense, $0.1
million increase in consulting fees and $0.1 million increase in
salary and employee related expenses.
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
general and administrative expense for three months ended March 31,
2020 compared to the same period in 2019 increased by $0.2 million
is primarily due to $0.1 million increase in temporary help, $0.1
million increase in stock based compensation due to an additional
754,000 shares granted in March 2020, $0.1 million increase in
legal fees and other increases in software and year-end related
activities, offset by a $0.1 million decrease in consulting and
recruiting charges.
INTEREST INCOME AND OTHER, NET
|
Three Months
Ended
|
|
|
|
|
March
31,
|
$
|
%
|
|
In thousands,
except percentages
|
2020
|
2019
|
Change
|
Change
|
Interest and other,
net
|
$84
|
$296
|
$(212)
|
(72)%
|
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 decrease in interest income and
other, net of $0.2 million for the three months ended March 31,
2020 and 2019 was primarily due to lower cash and cash equivalents
and short-term investments in banks after the $10 million payment
to the FTC in April 2019 and the $19.1 million cash dividend paid
in December, 2019 coupled with lower yields on investments, and
$0.1 million related to international VAT
charges.
INCOME TAX PROVISION
|
Three Months
Ended
|
|
|
|
|
March
31,
|
$
|
%
|
|
In thousands,
except percentages
|
2020
|
2019
|
Change
|
Change
|
Income tax
provision
|
$49
|
$28
|
$21
|
75%
|
Income tax provision. For the
three months ended March 31, 2020, the income tax provision
primarily consisted of foreign taxes.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
was enacted on March 27, 2020. It contains several provisions that
may have financial statement effects. Key Aspects of the CARES Act
include the following:
●
Repealed
the 80% taxable income limitation for 2018, 2019 and 2020. Also
allows those years to be carried back up to five years
●
Allows
corporations to claim 100% of AMT credits in 2019. It also
provides for an election to take the entire refundable credit
amount in 2018
●
Section
163(j) ATI limit raised from 30% to 50% for businesses
●
Technical
corrections to TCJA for Qualified Improvement Property
(“QIP”). Designates as 15-year property for
depreciation purposes, which makes QIP a category eligible for 100%
bonus depreciation
The CARES Act is not expected have a material impact to Income
Taxes in the Company's financial statements.
28
LIQUIDITY AND CAPITAL RESOURCES
Total
cash, cash equivalents and investments at March 31, 2020 and
December 31, 2019 were $28.4 million and $26.4 million, respectively.
The increase 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.
Operating Activities
Net
cash provided by (used in) operating activities was $2.1 million
and $(1.7) million for the three months ended March 31, 2020 and
2019, respectively. Net cash provided by (used in) operating
activities primarily reflected the net income 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.
Net
cash used in operating activities during the three months ended
March 31, 2020 was the result of a net income of $0.4 million,
non-cash items of $0.2 million, and changes in operating assets and
liabilities of $1.4 million. 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
changes in operating assets and liabilities of $(3.3)
million.
Investing
Activities
Net
cash provided by investing activities was $3.0 million and $6.1
million for the three months ended March 31, 2020 and 2019,
respectively. For the three months ended March 31, 2020, net cash
provided by investing activities was primarily due to the
maturities of investments of $3.0 million. For the three months
ended March 31, 2019, net cash provided by investing activities was
primarily due to maturities of investments of $9.6 million offset
by the purchase of marketable securities of $3.5
million.
Financing Activities
Net
cash used in financing activities was $0 for the three months ended
March 31, 2020 and 2019.
Working Capital and Capital Expenditure Requirements
At
March 31, 2020, we had stockholders’ equity of $33.4 million
and working capital of $32.7 million. 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 2020. 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.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company,” as defined in Rule
12b-2 of the Exchange Act, we are not required to provide the
information called for by this Item.
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
There were no changes that occurred during the
three months ended March 31, 2020 that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
30
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 was
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 Proceedings
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.
31
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,
engineering and IT 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. Many of the following risks and uncertainties
are, and will be, exacerbated by the COVID-19 pandemic and any
worsening of the global business and economic environment as a
result. 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.
32
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;
●
Public health or
safety concerns, medical epidemics or pandemics, such as COVID-19,
and other natural- or man-made disasters;
●
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 and annual 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.
33
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 ended March 31, 2020, two
customers accounted for over 80% of our total revenue. We have
long-term agreements that have termination for convenience
provisions and no minimum purchase or billable hour commitments in
place with our two major customers. 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 or billable hours 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 shorten our billable hours and use other vendors in the
provision of their business and/or 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;
●
Adapt to changes
in the market due to public health concerns, medical epidemics or
pandemics, such as COVID-19, and other natural- or man-made
disasters;
●
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 1 Legal Proceedings of
this report.
If we
are unable to address these risks, our business, results of
operations and prospects could suffer.
34
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 relating to 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.
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, AOL (acquired by Verizon
Communications), 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 engineering and IT 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.
35
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.
36
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 breadth and 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 service delivery 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.
37
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, AOL (acquired
by Verizon Communications), 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.
38
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 stock price is subject to volatility.
Our
stock price has experienced substantial price volatility in the
past and may continue to do so in the future. Further, our
business, the technology industry and the stock market as a whole
have experienced extreme stock price and volume fluctuations that
have affected stock prices in ways that may have been unrelated to
corporate operating performance. We believe our stock price should
reflect expectations of future growth and profitability. If we fail
to meet expectations related to future growth, profitability,
potential future dividends or share repurchases, or other market
expectations, our stock price may decline significantly, which
could have a material adverse impact on the confidence of our
investors and employee retention.
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.
39
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 and any 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.
40
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 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.
41
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
Part II. Item 1. 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”) and the California
Consumer Privacy Act (“CCPA”); 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 August 21, 2019, 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 merger, tender offer, or assumption of control by a
substantial holder of our securities.
42
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.
ITEM 6. EXHIBITS
|
Amendment to the Standard Office
Lease dated February13, 2018 between Jo-El Associates as Lessor and
Support.com Inc. as Lessee, effective April 1,
2020.
|
|
|
Chief Executive Officer Section 302
Certification
|
|
|
Principal Financial Officer Section
302 Certification
|
|
|
Statement of the Chief Executive
Officer under 18 U.S.C. § 1350 (1)
|
|
|
Statement of the Chief Financial
Officer under 18 U.S.C. § 1350 (1)
|
(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.
43
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
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SUPPORT.COM,
INC.
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Date: May 12,
2020
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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, 2020
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Amendment to the Standard Office
Lease dated February13, 2018 between Jo-El Associates as Lessor and
Support.com Inc. as Lessee, effective April 1,
2020.
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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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