NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting
Policies
Nature of Operations
Support.com,
Inc. (“Support.com”, “the Company”,
“We” or “Our”), was incorporated in the
state of Delaware on December 3, 1997. Our common stock
trades on the Nasdaq Capital Market under the symbol
“SPRT.”
Support.com is a
leading provider of tech support and turnkey support center
services, producer of
SUPERAntiSpyware®
anti-malware products,
and the maker of Support.com
® software.
Our technology support
services programs help leading brands create new revenue streams
and deepen customer relationships.
We offer turnkey, outsourced support services for
service providers, retailers and technology companies. Our
technology support services programs are designed for both the
consumer and small and medium business (“SMB”) markets,
and include computer and mobile device set-up, security and
support, virus and malware removal, wireless network set-up, and
home security and automation system support. Our Support.com
Cloud
offering
is a
SaaS
solution for companies
to optimize support interactions with their customers using their
own- or third-party support personnel
. The solution
enables companies to
quickly resolve complex technology issues for their customers,
boosting agent productivity and dramatically improving the customer
experience.
Basis of Presentation
The
consolidated financial statements include the accounts of
Support.com and its wholly-owned foreign subsidiaries. All
intercompany transactions and balances have been
eliminated.
Foreign Currency Translation
The
functional currency of our foreign subsidiaries is generally the
local currency. Assets and liabilities of our wholly owned foreign
subsidiaries are translated from their respective functional
currencies at exchange rates in effect at the balance sheet date,
and revenues and expenses are translated at average exchange rates
prevailing during the year. Any material resulting translation
adjustments are reflected as a separate component of
stockholders’ equity in accumulated other comprehensive
income (loss). Realized foreign currency transaction gains (losses)
were not material during the years ended December 31, 2018 and
2017.
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. Periodically throughout the year, the Company
has maintained balances in various operating accounts in excess of
federally insured limits. 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 balance sheet. 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.
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. Our allowances are made based on a specific review
of all significant outstanding invoices. For those invoices not
specifically provided for, allowances 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.
The
following table summarizes the allowance for doubtful accounts as
of December 31, 2018 and 2017 (in thousands):
|
Balance at
Beginning of
Period
|
Adjustments to
Costs and
Expenses
|
|
|
Allowance
for doubtful accounts:
|
|
|
|
|
Year
ended December 31, 2017
|
$
19
|
$
34
|
$
(44
)
|
$
9
|
Year
ended December 31, 2018
|
$
9
|
$
24
|
$
(20
)
|
$
13
|
As
of December 31, 2018, Comcast and Cox Communications accounted for
approximately 71% and 20% of our total accounts receivable,
respectively. As of December 31, 2017, Comcast and Cox
Communications accounted for approximately 71% and 12% of our total
accounts receivable, respectively. No other customers accounted for
10% or more of our total accounts receivable as of December 31,
2018 and 2017.
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 consolidated statements of
operations.
Our
cash equivalents and short-term investments are classified as
investment, and are reported at fair value with unrealized
gains/losses included in accumulated other comprehensive loss
within stockholders’ equity on the consolidated balance
sheets and in the consolidated statements of comprehensive loss. We
view this investment portfolio as available for use in our current
operations, and therefore we present our marketable securities as
short-term assets.
We
monitor our investments for impairment on a quarterly basis and
determine whether a decline in fair value is other-than-temporary
by considering factors such as current economic and market
conditions, the credit rating of the security’s issuer, the
length of time an investment’s fair value has been below our
carrying value, the Company’s intent to sell the security and
the Company’s belief that it will not be required to sell the
security before the recovery of its amortized cost. If an
investment’s decline in fair value is deemed to be
other-than-temporary, we reduce its carrying value to its estimated
fair value, as determined based on quoted market prices or
liquidation values. Declines in value judged to be
other-than-temporary, if any, are recorded in operations as
incurred. At December 31, 2018, the Company evaluated its
unrealized losses on available-for-sale securities and determined
them to be temporary. We currently do not intend to sell securities
with unrealized losses, and we concluded that we will not be
required to sell these securities before the recovery of their
amortized cost basis.
At
December 31, 2018 and 2017, the estimated fair value of cash, cash
equivalents and investments was $49.6 million and $49.2 million,
respectively. The following is a summary of cash, cash
equivalents and investments at December 31, 2018 and 2017 (in
thousands):
|
For the
Year Ended December 31, 2018
|
|
|
|
|
|
Cash
|
$
8,391
|
$
—
|
$
—
|
$
8,391
|
Money
market fund
|
14,295
|
—
|
—
|
14,295
|
Certificates
of deposit
|
1,171
|
—
|
(1
)
|
1,170
|
Commercial
paper
|
3,986
|
—
|
(1
)
|
3,985
|
Corporate
notes and bonds
|
14,899
|
—
|
(66
)
|
14,833
|
U.S.
government agency securities
|
6,976
|
—
|
(1
)
|
6,975
|
|
$
49,718
|
$
—
|
$
(69
)
|
$
49,649
|
Classified
as:
|
|
|
|
|
Cash
and cash equivalents
|
$
25,182
|
$
—
|
$
—
|
$
25,182
|
Short-term
investments
|
24,536
|
—
|
(69
)
|
24,467
|
|
$
49,718
|
$
—
|
$
(69
)
|
$
49,649
|
|
For the
Year Ended December 31, 2017
|
|
|
|
|
|
Cash
|
$
7,408
|
$
—
|
$
—
|
$
7,408
|
Money
market fund
|
10,643
|
$
—
|
(1
)
|
10,642
|
Certificates
of deposit
|
1,207
|
—
|
(2
)
|
1,205
|
Commercial
paper
|
2,494
|
—
|
(1
)
|
2,493
|
Corporate
notes and bonds
|
22,846
|
—
|
(76
)
|
22,770
|
U.S.
government agency securities
|
4,719
|
—
|
(4
)
|
4,715
|
|
$
49,317
|
$
—
|
$
(84
)
|
$
49,233
|
Classified
as:
|
|
|
|
|
Cash
and cash equivalents
|
$
18,051
|
$
—
|
$
(1
)
|
$
18,050
|
Short-term
investments
|
31,266
|
—
|
(83
)
|
31,183
|
|
$
49,317
|
$
—
|
$
(84
)
|
$
49,233
|
The
following table summarizes the estimated fair value of our
available-for-sale securities classified by the stated maturity
date of the security (in thousands):
|
|
|
|
|
Due
within one year
|
$
20,874
|
$
22,228
|
Due
within two years
|
3,593
|
8,955
|
|
$
24,467
|
$
31,183
|
We
determined that the gross unrealized losses on our
available-for-sale investments as of December 31, 2018 are
temporary in nature. The fair value of our available-for-sale
securities at December 31, 2018 and 2017 reflects a net unrealized
loss of $68,000 and $84,000, respectively. There were no net
realized gains (losses) on available-for-sale securities in the
years ended December 31, 2018 and 2017. The cost of
securities sold is based on the specific identification
method.
The
following table sets forth the unrealized losses for the
Company’s available-for-sale investments as of December 31,
2018 and 2017 (in thousands):
As
of December 31, 2018
|
In Loss
Position
Less
Than 12 Months
|
In Loss
Position
More
Than 12 Months
|
|
Description
|
|
|
|
|
|
|
Certificates
of deposit
|
$
720
|
$
(1
)
|
$
—
|
$
—
|
$
719
|
$
(1
)
|
Corporate
notes and bonds
|
18,883
|
(67
)
|
—
|
—
|
18,816
|
(67
)
|
U.S.
government agency securities
|
6,976
|
(1
)
|
—
|
—
|
6,975
|
(1
)
|
Total
|
$
26,579
|
$
(69
)
|
$
—
|
$
—
|
$
26,510
|
$
(69
)
|
As of December 21, 2017
|
In Loss Position
Less Than 12 Months
|
In Loss Position
More Than 12 Months
|
|
Description
|
|
|
|
|
|
|
Certificates
of deposit
|
$
718
|
$
(2
)
|
$
—
|
$
—
|
$
718
|
$
(2
)
|
Corporate
notes and bonds
|
16,530
|
(32
)
|
6,947
|
(47
)
|
23,477
|
(79
)
|
U.S.
government agency securities
|
3,720
|
(3
)
|
998
|
—
|
4,718
|
(3
)
|
Total
|
$
20,968
|
$
(37
)
|
$
7,945
|
$
(47
)
|
$
28,913
|
$
(84
)
|
Property and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization which is determined using the straight-line method
over the estimated useful lives of two to five years for computer
equipment and software, three years for furniture and fixtures, and
the shorter of the estimated useful lives or the lease term for
leasehold improvements. Repairs and maintenance costs are expensed
as they are incurred.
Long-Lived Assets
We
record purchased identifiable intangible assets at fair value as
part of a business combination. Useful life is estimated as
the period over which the identifiable intangible assets are
expected to contribute directly or indirectly to the future cash
flows of the Company. As we do not believe that we can
reliably determine a pattern by which the economic benefits of
these identifiable intangible assets will be consumed, management
adopted straight-line amortization. The original cost is amortized
on a straight-line basis over the estimated useful life of each
identifiable intangible asset.
The
Company assesses its long-lived assets, which includes property and
equipment and identifiable intangible assets, for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment
loss would be recognized when the sum of the future net cash flows
expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. If our estimates
regarding future cash flows derived from such assets were to
change, we may record an impairment charge to the value of these
assets. Such impairment loss would be measured as the
difference between the carrying amount of the asset and its fair
value.
Revenue Recognition
On January 1, 2018, the Company adopted Financial
Accounting Standards Board ("FASB") Accounting Standards
Codification Topic 606, Revenue from Contracts with Customers
(“ASC 606"). As a result, the Company has changed its
accounting policy for revenue recognition and applied ASC 606 using
the modified retrospective method. Typically, this approach would
result in recognizing the cumulative effect of initially applying
ASC 606 as an adjustment to the opening retained earnings at
January 1, 2018,
while prior period
amounts are not adjusted and continue to be reported in accordance
with the Company's historic revenue recognition methodology under
ASC 605,
Revenue
Recognition
.
Based on our assessment of the
guidance in ASC 606, the Company did not have a material change in
financial position, results of operations, or cash flows and
therefore there is no cumulative impact recorded to opening
retained earnings. However, we have included additional qualitative
and quantitative disclosures about our revenues as is required
under the new revenue standard.
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:
Revenue from Contracts with Customers:
|
Twelve
months ended December 31,
|
|
|
|
Services
|
$
64,476
|
$
54,670
|
Software
and other
|
5,073
|
5,451
|
|
$
69,549
|
$
60,121
|
Under
Topic 606, revenue is recognized when control of the promised goods
or services is transferred to our customers, in an amount that
reflects the consideration we expect to be entitled to in exchange
for those goods or services.
We
determine revenue recognition through the following
steps:
●
identification
of the contract, or contracts, with a customer;
●
identification
of the performance obligations in the contract;
●
determination
of the transaction price;
●
allocation
of the transaction price to the performance obligations in the
contract; and
●
recognition
of revenue when, or as, we satisfy a performance
obligation.
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.
In
certain cases, we are paid for services that are sold but not yet
delivered. We initially record such balances as deferred revenue,
and recognize revenue when the service has been provided or, on the
non-subscription portion of these balances, when the likelihood of
the service being redeemed by the customer is remote
(“services breakage”). Based on our historical
redemption patterns for these relationships, we believe that the
likelihood of a service being delivered more than 90 days after
sale is remote. We therefore recognize non-subscription
deferred revenue balances older than 90 days as services revenue.
For the years ended December 31, 2018 and 2017, services breakage
revenue accounted for less than 1% of total services
revenue.
The following table represent deferred revenue activity for the
years ended December 31, 2018 and 2017 (in thousands):
Changes in deferred revenues were as
follows:
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
$
2,019
|
$
2,865
|
Deferred
revenue
|
1,120
|
1,764
|
Recognition
of unearned revenue
|
(2,004
)
|
(2,610
)
|
Balance,
end of period
|
$
1,135
|
$
2,019
|
Partners
are generally invoiced monthly. Fees from customers via referral
programs and direct transactions are generally paid with a credit
card at the time of sale. Revenue is recognized net of any
applicable sales tax.
We
generally provide a refund period on services, during which refunds
may be granted to customers under certain circumstances, including
inability to resolve certain support issues. For our partnerships,
the refund period varies by partner, but is generally between 5 and
14 days. For referral programs and direct transactions, the refund
period is generally 5 days. For all channels, we recognize revenue
net of refunds and cancellations during the period. Refunds and
cancellations have not been material.
Services
revenue also includes fees from licensing of our Support.com
cloud-based software. In such arrangements, customers receive
a right to use our Support.com Cloud in their own technology
support organizations. We license our cloud-based software using a
SaaS model under which customers cannot take possession of the
technology and pay us on a per-user 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 December 31, 2018, 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 our partners notify
us that the revenue has been earned.
Research and Development
Research
and development expenditures are charged to operations as they are
incurred.
Software Development Costs
Based
on our product development process, technological feasibility is
established on the completion of a working model. The Company
determined that technological feasibility is reached shortly before
the product is ready for general release and therefore development
costs incurred have been insignificant. Accordingly, we have
charged all such costs to research and development expense in the
period in which they were incurred.
Purchased Technology for Internal Use
We
capitalize costs related to software that we license and
incorporate into our product and service offerings or develop for
internal use.
Advertising Costs
Advertising
costs are recorded as sales and marketing expense in the period in
which they are incurred. Advertising expense was $18,000 and
$0.1 million for the years ended December 31, 2018 and 2017,
respectively.
Earnings (Loss) Per Share
Basic
earnings (loss) per share is computed using our net income (loss)
and the weighted average number of common shares outstanding during
the reporting period. Diluted earnings (loss) per share is
computed using our net income (loss) and the weighted average
number of common shares outstanding, including the effect of the
potential issuance of common stock such as stock issuable pursuant
to the exercise of stock options and vesting of restricted stock
units (“RSUs”) using the treasury stock method when
dilutive. We excluded outstanding weighted average stock
options of 0.8 million and 1.9 million for the years ended December
31, 2018 and 2017, respectively, from the calculation of
diluted earnings per common share because the exercise prices of
these stock options were greater than or equal to the average
market value of the common stock. These stock options could be
included in the calculation in the future if the average market
value of the common stock increases and is greater than the
exercise price of these stock options. Since we reported a
net loss for the years ended December 31, 2018 and 2017, 64,000 and
28,000 outstanding options and RSUs were also excluded from the
computation of diluted loss per share since their effect would have
been anti-dilutive.
The
following table sets forth the computation of basic and diluted net
earnings (loss) per share (in thousands, except per share
amounts):
|
|
|
|
|
|
$
(9,100
)
|
$
(1,526
)
|
Basic:
|
|
|
Weighted-average
shares of common stock outstanding
|
18,826
|
18,644
|
Shares
used in computing basic net loss per share
|
18,826
|
18,644
|
|
$
(0.48
)
|
$
(0.08
)
|
Diluted:
|
|
|
Weighted-average
shares of common stock outstanding
|
18,826
|
18,644
|
Add:
Common equivalent shares outstanding
|
—
|
—
|
Shares
used in computing diluted net loss per share
|
18,826
|
18,644
|
Diluted
net loss per share
|
$
(0.48
)
|
$
(0.08
)
|
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
Gains
(Losses)
on
Investments
|
|
Balance
as of December 31, 2017
|
$
(2,024
)
|
$
(84
)
|
$
(2,108
)
|
Current-period
other comprehensive gain (loss)
|
(414
)
|
15
|
(399
)
|
Balance
as of December 31, 2018
|
$
(2,438
)
|
$
(69
)
|
$
(2,507
)
|
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 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 income for each of the periods presented is not
significant.
Stock-Based Compensation
We apply the provisions of ASC 718,
Compensation -
Stock Compensation,
which
requires the measurement and recognition of compensation expense
for all stock-based payment awards, including grants of stock and
options to purchase stock, made to employees and directors based on
estimated fair values.
Determining Fair Value of Share-Based Payments
Valuation and Attribution Method: Stock-based
compensation expense for service-based stock options and employee
stock purchase plan (“ESPP”) is estimated at the date
of grant based on the fair value of awards using the
Black-Scholes-Merton
option pricing model. Stock-based
compensation expense for RSUs is estimated at the date of grant
based on the number of shares granted and the quoted price of the
Company’s common stock on the grant date. Stock options vest
on a graded schedule; however, we recognize the expense over the
requisite service period based on the straight-line method for
service-based stock options and the accelerated method for
market-based stock options, which is generally four years for stock
options, three years or four years for RSUs and six months for
ESPP, net of estimated forfeitures. These limitations require that
on any date the compensation cost recognized is at least equal to
the portion of the grant-date fair value of the award that is
vested at that date. The Company estimates pre-vesting forfeitures
at the time of grant by analyzing historical data and revises those
estimates in subsequent periods if actual forfeitures differ from
those estimates. The total expense recognized over the vesting
period will only be for those awards that ultimately
vest.
Risk-free
Interest Rate: We base our risk-free interest rate on the yield
currently available on U.S. Treasury zero coupon issues for the
expected term of the stock options.
Expected
Term: Our expected term represents the period that our stock
options are expected to be outstanding and is determined based on
historical experience of similar stock options considering the
contractual terms of the stock options, vesting schedules and
expectations of future employee behavior.
Expected
Volatility: Our expected volatility represents the amount by
which the stock price is expected to fluctuate throughout the
period that the stock option is outstanding. The expected
volatility is based on the historical volatility of the
Company’s stock.
Expected
Dividend: We use a dividend yield of zero, as we have never
paid cash dividends and do not expect to pay dividends in the
future.
The
fair value of our stock-based awards was estimated using the
following weighted average assumptions for the years ended December
31, 2018 and 2017:
|
|
Employee
Stock Purchase Plan
|
|
|
|
|
|
Risk-free
interest rate
|
2.43
%
|
1.71
%
|
2.31
%
|
0.5
%
|
Expected
term (in years)
|
3.0
|
3.0
|
0.5
|
0.5
|
Volatility
|
41.2
%
|
41.2
%
|
29.0
%
|
39.0
%
|
Expected
dividend
|
0
%
|
0
%
|
0
%
|
0
%
|
Weighted
average grant-date fair value
|
$
0.84
|
$
0.68
|
$
0.67
|
$
0.39
|
We
recorded the following stock-based compensation expense for the
fiscal years ended December 31, 2018 and 2017 (in
thousands):
|
For the
Year Ended December 31,
|
|
|
|
Stock-based compensation expense related to grants of:
|
|
|
Stock
options
|
$
395
|
$
144
|
ESPP
|
16
|
21
|
RSU
|
269
|
265
|
|
$
680
|
$
430
|
Stock-based compensation expense recognized in:
|
|
|
Cost
of service
|
$
63
|
$
109
|
Cost
of software and others
|
-
|
4
|
Research
and development
|
42
|
78
|
Sales
and marketing
|
54
|
59
|
General
and administrative
|
521
|
180
|
|
$
680
|
$
430
|
Cash
provided by (used in) from the issuance of common stock, net of
repurchase of common stock and cash settlement in stock split, was
$257,000 and $25,000 for the years ended December 31, 2018 and
2017, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and
operating losses and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
reversed or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the
consolidated statements of operations in the period that includes
the enactment date. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets, if it is more likely than
not, that such assets will not be realized. The Company’s
deferred tax asset and related valuation allowance increased by
$2.1 million to $46 million. As the deferred tax asset is
fully allowed for, this change had no impact on the Company’s
financial position or results of operations.
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 December 31, 2018, we were not
required to make any payment resulting from infringement claims
asserted against our customers and have not recorded any related
accruals.
Fair Value Measurements
ASC 820,
Fair Value Measurements and
Disclosures,
defines fair
value, establishes a framework for measuring fair value under
generally accepted accounting principles and enhances disclosures
about fair value measurements. Fair value is defined under ASC 820
as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.
Valuation techniques used to measure fair value ASC 820 must
maximize the use of observable inputs and minimize the use of
unobservable inputs. The standard describes a fair value hierarchy
based on three levels of inputs, of which the first two are
considered observable and the last unobservable, that may be used
to measure fair value, which are the following:
●
Level
1 - Quoted prices in active markets for identical assets or
liabilities.
●
Level
2 - Inputs other than Level 1 that are observable, either directly
or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
●
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.
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 December 31, 2018 and 2017
(in thousands):
As
of December 31, 2018
|
|
|
|
|
Money
market funds
|
$
14,295
|
$
—
|
$
—
|
$
14,295
|
Certificates
of deposit
|
—
|
1,170
|
—
|
1,170
|
Commercial
paper
|
—
|
3,985
|
—
|
3,985
|
Corporate
notes and bonds
|
—
|
14,833
|
—
|
14,833
|
U.S.
government agency securities
|
—
|
6,975
|
—
|
6,975
|
Total
|
$
14,295
|
$
26,963
|
$
—
|
$
41,258
|
As
of December 31, 2017
|
|
|
|
|
Money
market funds
|
$
10,642
|
$
—
|
$
—
|
$
10,642
|
Certificates
of deposit
|
—
|
1,206
|
—
|
1,206
|
Commercial
paper
|
—
|
2,493
|
—
|
2,493
|
Corporate
notes and bonds
|
—
|
22,769
|
—
|
22,769
|
U.S.
government agency securities
|
—
|
4,715
|
—
|
4,715
|
Total
|
$
10,642
|
$
31,183
|
$
—
|
$
41,825
|
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 that the end of our quarterly reporting period determines
when transfers of financial instruments between levels are
recognized.
Segment Information
The
Company reports its operations as a single operating segment and
has a single reporting unit. Our Chief Operating Decision Maker
(“CODM”), our Chief Executive Officer, manages our
operations on a consolidated basis for purposes of allocating
resources. When evaluating performance and allocating resources,
the CODM reviews financial information presented on a consolidated
basis.
Revenue
from customers located outside the United States was less than 1%
of total for the years ended December 31, 2018 and
2017.
For
the year ended December 31, 2018, Comcast and Cox Communications
accounted for approximately 69% and 15%, respectively, of our total
revenue. For the year ended December 31, 2017, Comcast accounted
for approximately 65% of our total revenue. There were no other
customers that accounted for 10% or more of our total revenue in
any of the periods presented.
Long-lived
assets are attributed to the geographic location in which they are
located. We include in long-lived assets all tangible
assets. Long-lived assets by geographic areas are as follows
(in thousands):
|
|
|
|
|
United
States
|
$
702
|
$
1,132
|
India
|
-
|
-
|
Philippines
|
1
|
1
|
Total
|
$
703
|
$
1,133
|
Recent Accounting Pronouncements
Accounting Standards Adopted in the Current Period
Revenue Recognition
We have
implemented all new accounting pronouncements that are in effect
and that management believes would materially affect our financial
statements.
In May
2014, the Financial Accounting Standards Board (the
“FASB”) issued ASU No. 2014-09,
Revenue from Contracts with Customers
,
updated by ASU No. 2015-14
Deferral of the Effective Date
(a.k.a.
ASC 606), which provides a single comprehensive model for entities
to use in accounting for revenue arising from contracts with
customers and will supersede most current revenue recognition
guidance. The standard was effective for public entities for annual
and interim periods beginning after December 15, 2017. Our revenue
is primarily generated when we deliver the service to the customers
over time. We completed our analysis during 2017 and there was no
material change to our financial position, results of operations,
and cash flows as a result of the implementation of ACS 606. We
adopted ASC 606 on a modified retrospective basis effective on
January 1, 2018. Although there is no material impact, we have
expanded disclosures in our notes to our consolidated financial
statements related to revenue recognition under the new standard.
We have implemented changes to our accounting policies and
practices, business processes, systems, and controls to support the
new revenue recognition and disclosure requirements
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 its
consolidated financial statements.
Income Taxes
In
March 2018, the Company adopted Accounting Standards Update No.
2018-05 – Income Taxes (Topic 740): Amendments to SEC
Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which
updates the income tax accounting in U.S. GAAP to reflect the
Securities and Exchange Commission (“SEC”) interpretive
guidance released on December 22, 2017, when the Tax Cuts and Jobs
Act was signed into law.
New Accounting Standards to be adopted in Future
Periods
Intangible Assets
In January 2017, the FASB issued Accounting
Standards Update No. 2017-04,
Intangibles
—
Goodwill and Other (Topic
350): Simplifying the Test for Goodwill
Impairment
(ASU 2017-04),
which eliminates step two from the goodwill impairment test. Under
ASU 2017-04, an entity should recognize an impairment charge for
the amount by which the carrying amount of a reporting unit exceeds
its fair value up to the amount of goodwill allocated to that
reporting unit. This guidance will be effective for us in the first
quarter of 2020 on a prospective basis, and early adoption is
permitted. We do not expect the standard to have a material impact
on our consolidated financial statements.
Lease Accounting
In
February 2016, the FASB issued an ASU amending the accounting for
leases. The new guidance requires the recognition of lease assets
and liabilities for operating leases with terms of more than 12
months, in addition to those currently recorded, on our
consolidated balance sheets. Presentation of leases within the
consolidated statements of operations and consolidated statements
of cash flows will be generally consistent with the current lease
accounting guidance. The ASU is effective for reporting periods
beginning after December 15, 2018, with early adoption permitted.
We will adopt this ASU on January 1, 2019. This adoption approach
will result in a balance sheet presentation that will not be
comparable to the prior period in the first year of adoption. We
are in the process of finalizing the impact on the amounts to be
recognized as total right-of-use assets and total lease liabilities
on our consolidated balance sheet beginning in 2019. Other than
this disclosure, we do not expect the new standard to have a
material impact on our remaining consolidated financial
statements.
Comprehensive Income
In February 2018, the FASB issued ASU
2018-02,
Income Statement-Reporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive
Income,
which allows
companies to reclassify standard tax effects resulting from the
2017 Tax Cuts and Jobs Act (the Tax Act), from accumulated other
comprehensive income to retained earnings. This standard is
effective for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. Early adoption is
permitted for any interim period after issuance of the ASU. The new
standard is effective for us beginning January 1, 2019, with early
adoption permitted. We are currently evaluating the adoption of
this guidance but do not expect such adoption to have a material
impact on our consolidated financial statements and the related
disclosures.
Note 2. Property and Equipment
Property
and equipment are stated at cost, less accumulated depreciation,
and consist of the following as of December 31, 2018 and 2017 (in
thousands):
|
|
|
|
|
Computer
equipment and software
|
$
7,143
|
$
6,935
|
Furniture
and office equipment
|
142
|
142
|
Leasehold
improvements
|
348
|
348
|
Construction
in progress
|
—
|
—
|
|
7,633
|
7,425
|
Accumulated
depreciation
|
(6,930
)
|
(6,292
|
|
$
703
|
$
1,133
|
Depreciation
expense was $638,000 and $628,000 for the years ended December 31,
2018 and 2017, respectively.
Note 3. Intangible Assets
Amortization
expense related to intangible assets was $0 and $16,000 for the
years ended December 31, 2018and 2017, respectively.
In
December 2006, we acquired the use of a toll-free telephone number
for cash consideration of $250,000. This asset has an indefinite
useful life. The intangible asset is tested for impairment annually
or more often if events or changes in circumstances indicate that
the carrying value may not be recoverable.
As
of December 31, 2018, all intangible assets have been fully
amortized with the exception of the indefinite-life
intangibles.
Note 4. Commitments and Contingencies
Lease commitments
Sunnyvale office lease.
On March 23, 2018, we entered into a
two-year lease agreement with an effective date of April 1, 2018
for our Sunnyvale facility, covering approximately 6,283 square
feet with the monthly rent of $14,000. The lease is scheduled
to expire on March 31, 2020.
Other facility leases.
We lease our facilities under
non-cancelable operating lease agreements, which expire at various
dates through December 2020.
Total
facility rent expense pursuant to all operating lease agreements
was $401,000 and $567,000 for the years ended December 31, 2018 and
2017, respectively.
As
of December 31, 2018, minimum payments due under all non-cancelable
lease agreements were as follows (in thousands):
Years
ending December 31,
|
|
2019
|
$
273
|
2020
|
158
|
2021
|
70
|
Total
minimum lease and principal payments
|
$
501
|
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 is expected to be approved
by the Commission and lodged with the U.S. District Court for the
Southern District of Florida. Upon final entry by the Court, the
Consent Order resolves 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 will
be made within seven (7) days of the entry of the Consent Order in
the Southern District of Florida and is recognized in operating
expenses within the Company’s consolidated statements of
operations for the year ended December 31,
2018.
Additionally, pursuant to the Consent Order, the Company has agreed
to implement certain new procedures and enhance certain existing
procedures. For example, the Consent Order necessitates that the
Company cooperate with representatives of the Commission on
associated investigations if needed; imposes requirements on the
Company regarding obtaining acknowledgements of the Consent Order
and compliance certification, including record creation and
maintenance; and prohibits the Company from making
misrepresentations and misleading claims or providing the means for
others to make such claims regarding, among other things, detection
of security or performance issues on consumer’s Electronic
Devices. Electronic Devices include, but are not limited to, cell
phones, tablets and computers. The Company intends to monitor the
impact of the Consent Order regularly and, while the Company
currently does not expect the settlement to have a long-term and
materially adverse impact on its business, the Company’s
business may be negatively impacted as the Company adjusts to some
of the changes. If the Company is unable to comply with the Consent
Order, then this could result in a material and adverse impact to
the Company’s results of operations and financial
condition.
Other
Matters.
On January 17, 2017 the
Consumer Protection Division of the Office of Attorney General,
State of Washington (“Washington AG”), issued a Civil
Investigative Demand to the Company requiring the Company to
produce certain documents and materials and to answer certain
interrogatories relating to PC Healthcheck. The Washington AG has
not alleged a factual basis underlying the issuance of the
Civil Investigative Demand. On May 30, 2017, the Consumer
Protection Division of the Office of Attorney General, State of
Texas (“Texas AG”), issued a Civil Investigative Demand
to the Company requiring the Company to produce certain documents
and materials and to answer certain interrogatories relating to PC
Healthcheck.
The Texas AG
has not alleged a factual basis underlying the issuance of the
Civil Investigative Demand. Accordingly, the Company has responded
to both the Washington AG Civil Investigative Demand and the Texas
AG Civil Investigative Demand. To date, the Company has not
received any follow-up communications from either state’s AG
with respect to these matters.
We
are also subject to other routine legal proceedings, as well as
demands, claims and threatened litigation, that arise in the normal
course of our business, potentially including assertions that we
may be infringing patents or other intellectual property rights of
others. We currently do not believe that the ultimate amount of
liability, if any, for any pending claims of any type (alone or
combined) will materially affect our financial position, results of
operations or cash flows. The ultimate outcome of any litigation is
uncertain; however, any unfavorable outcomes could have a material
negative impact on our financial condition and operating results.
Regardless of outcome, litigation can have an adverse impact on us
because of defense costs, negative publicity, diversion of
management resources and other factors.
Guarantees
We have identified guarantees in accordance with
ASC 450,
Contingencies
.
This guidance stipulates that an entity must recognize an initial
liability for the fair value, or market value, of the obligation it
assumes under the guarantee at the time it issues such a guarantee,
and must disclose that information in its interim and annual
financial statements. We have entered into various service level
agreements with our partners, in which we may guarantee the
maintenance of certain service level thresholds. Under some
circumstances, if we do not meet these thresholds, we may be liable
for certain financial costs. We evaluate costs for such guarantees
under the provisions of ASC 450. We consider such factors as the
degree of probability that we would be required to satisfy the
liability associated with the guarantee and the ability to make a
reasonable estimate of the resulting cost. We incurred zero costs
as a result of such obligations during the years ended December 31,
2018 and 2017, respectively. We have not accrued any liabilities
related to such obligations in the consolidated financial
statements as of December 31, 2018 and 2017.
Note 5. Other Accrued Liabilities
Other
accrued liabilities consist of the following (in
thousands):
|
|
|
|
|
Accrued
expenses
|
$
338
|
$
462
|
Self-insurance
accruals
|
585
|
679
|
Other
accrued liabilities
|
55
|
189
|
Total
other accrued liabilities
|
$
978
|
$
1,330
|
Note 6. Stockholders’ Equity
Equity Compensation Plan
We
adopted the amended and restated 2010 Equity and Performance
Incentive Plan (the “2010 Plan”), effective as of
February 8, 2010. Under the 2010 Plan, the number of shares
of Common Stock that may be issued will not exceed in the aggregate
1,666,666 shares of Common Stock plus the number of shares of
Common Stock relating to prior awards under the 2000 Omnibus Equity
Incentive Plan that expire, are forfeited or are cancelled after
the adoption of the 2010 Plan, subject to adjustment as provided in
the 2010 Plan. Pursuant to an approval from the Company’s
shareholders, the number of shares of Common Stock that may be
issued under the 2010 Plan was increased by 750,000 shares of
Common Stock in May 2013 and 333,333 shares in June 2016. No
grants will be made under the 2010 Plan after the tenth anniversary
of its effective date. Under our 2010 Plan, as of December
31, 2018, there were approximately 2.1 million shares available for
grant.
We
adopted the 2014 Inducement Award Plan (the “Inducement
Plan”), effective as of May 13, 2014. Under the
Inducement Plan, the number of shares of Common Stock that may be
issued will not exceed in the aggregate 666,666 shares of Common
Stock. Under our Inducement Plan, as of December 31, 2018,
there were approximately 456,000 shares available for
grant.
Stock Options
The
following tables represent stock option activity for the years
ended December 31, 2018 and 2017:
|
|
Weighted
Average
Exercise
Price
per
Share
|
Weighted
Average
Remaining
Contractual
Term (in
years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
Outstanding
options at December 31, 2016
|
1,381,843
|
$
14.85
|
4.95
|
$
0
|
Granted
|
430,500
|
$
2.291
|
|
|
Exercised
|
(0
)
|
$
-
|
|
|
Forfeited
|
(1,080,153
)
|
$
5.90
|
|
|
Outstanding
options at December 31, 2017
|
732,190
|
$
3.72
|
8.17
|
$
56
|
Granted
|
330,000
|
$
2.75
|
|
|
Exercised
|
(75,022
)
|
$
2.46
|
|
|
Forfeited
|
(183,848
)
|
$
6.14
|
|
|
Outstanding
options at December 31, 2018
|
803,320
|
$
2.89
|
8.43
|
$
54
|
Options
vested and expected to vest
|
786,829
|
$
2.90
|
8.43
|
$
51
|
Exercisable
at December 31, 2018
|
556,487
|
$
3.12
|
8.31
|
$
20
|
A
summary of additional information related to the options
outstanding as of December 31, 2018 under the 2010 and 2014 Plans
are as follows:
Option
Plans Range of Exercise Prices
|
Number
of Outstanding Options
|
Weighted
Average Remaining Contractual Life
|
Weighted
Average Exercise Price
|
|
|
|
|
$
2.29 - $2.29
|
315,330
|
8.52
|
$
2.29
|
$
2.51-$2.52
|
88,105
|
7.37
|
$
2.51
|
$
2.56-$2.57
|
29,208
|
7.45
|
$
2.56
|
$
2.74-$2.74
|
300,000
|
9.15
|
$
2.74
|
$
2.88-$13.44
|
61,549
|
7.06
|
$
6.29
|
$
13.50-$17.67
|
9,128
|
4.62
|
$
16.78
|
|
803,320
|
|
|
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 December 31, 2018
and 2017. This amount will change based on the fair market value of
our stock. The total aggregate intrinsic value of options exercised
under our stock option plans was $27,000 and $0 for the years ended
December 31, 2018 and 2017, respectively. The total fair value of
options vested during 2018 and 2017 was $22,000 and $32,000,
respectively.
At
December 31, 2018, there was $165,000 of unrecognized compensation
cost related to stock options which is expected to be recognized
over a weighted average period of 1.6 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 and stockholders approved a new
Employee Stock Purchase Plan and reserved 1,000,000 shares of our
common stock for issuance effective as of May 15, 2011. The ESPP
continues in effect for ten (10) years from its effective date
unless terminated earlier by the Company. The ESPP consists of
six-month offering periods during which employees may enroll in the
plan. The purchase price on each purchase date shall not
be less than eighty-five percent (85%) of the lesser of (a) the
fair market value of a share of stock on the offering date of the
offering period, or (b) the fair market value of a share of stock
on the purchase date.
A
total of 31,387 shares and 28,018 shares were issued under the ESPP
during the years ended December 31, 2018 and 2017,
respectively.
As
of December 31, 2018, approximately 78,847 shares remain available
for grant under the ESPP.
Restricted Stock Units
The
following table represents RSU activity for the years ended
December 31, 2018 and 2017:
|
|
Weighted
Average Grant-Date Fair Valueper Share
|
Weighted
Average Remaining Contractual Term
(in
years)
|
Aggregate
Intrinsic Value (in thousands)
|
Outstanding
RSUs at December 31, 2016
|
351,921
|
$
4.59
|
1.06
|
$
908
|
Awarded
|
102,880
|
$
2.43
|
|
|
Released
|
(153,714
)
|
$
3.45
|
|
|
Forfeited
|
(164,758
)
|
$
5.78
|
|
|
Outstanding
RSUs at December 31, 2017
|
136,329
|
$
2.80
|
0.80
|
$
329
|
Awarded
|
90,905
|
$
2.75
|
|
|
Released
|
(119,943
)
|
$
2.79
|
|
|
Forfeited
|
(11,061
)
|
$
2.67
|
|
|
Outstanding
RSUs at December 31, 2018
|
96,230
|
$
2.78
|
0.60
|
$
227
|
At
December 31, 2018, there was $116,000 of unrecognized compensation
cost related to RSUs which is expected to be recognized over a
weighted average period of 0.6 years.
Stock Repurchase Program
On
April 27, 2005, our Board of Directors authorized the repurchase of
up to 666,666 outstanding shares of our common stock. As of
December 31, 2018, 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 a pre-approval from
its Board of Directors.
Stockholder Rights Agreement and Tax Benefits Preservation
Plan
Our
Board adopted the Section 382 Tax Benefits Preservation Plan in an
effort to diminish the risk that the Company’s ability to
utilize its net operating loss carryovers (collectively, the
“NOLs”) to reduce potential future federal income tax
obligations may become substantially limited. Under the Internal
Revenue Code of 1986, as amended (the “Code”), and the
regulations promulgated thereunder by the U.S. Treasury Department,
these NOLs may be “carried forward” in certain
circumstances to offset any current and future taxable income and
thus reduce federal income tax liability, subject to certain
requirements and restrictions. However, if the Company experiences
an “ownership change,” within the meaning of Section
382 of the Code (“Section 382”), its ability to utilize
the NOLs may be substantially limited, and the timing of the usage
of the NOLs could be substantially delayed, which could therefore
significantly impair the value of those assets. Section 382 and the
Treasury regulations thereunder make the Company’s commercial
risk from a Section 382 limitation triggering event particularly
acute given the relative size of its current cash on hand to its
market capitalization. As applied to the Company’s current
cash position and current market capitalization, if the Company was
to currently experience an ownership change, it would be subject to
Section 382’s “non-business asset” limitation
which would result in the Company permanently losing all $141
million of its NOLs.
The
Section 382 Tax Benefits Preservation Plan is intended to act as a
deterrent to any person or group acquiring beneficial ownership of
4.99% or more of the outstanding Common Stock without the approval
of the Board (such person, an “Acquiring Person”). A
person who acquires, without the approval of the Board, beneficial
ownership (other than as a result of repurchases of stock by the
Company, dividends or distributions by the Company or certain
inadvertent actions by stockholders) of 4.99% or more of the
outstanding Common Stock (including any ownership interest held by
that person's Affiliates and Associates as defined under the
Section 382 Tax Benefits Preservation Plan) could be subject to
significant dilution. Stockholders who beneficially own 4.99%
or more of the outstanding Common Stock prior to the first public
announcement by the Company of the Board’s adoption of the
Section 382 Tax Benefits Preservation Plan will not trigger the
Section 382 Tax Benefits Preservation Plan so long as they do not
acquire beneficial ownership of additional shares of the Common
Stock (other than pursuant to a dividend or distribution paid or
made by the Company on the outstanding shares of Common Stock or
pursuant to a split or subdivision of the outstanding shares of
Common Stock) at a time when they still beneficially own 4.99% or
more of such stock. In addition, the Board retains the sole
discretion to exempt any person or group from the penalties imposed
by the Section 382 Tax Benefits Preservation Plan.
In
the event that a person becomes an Acquiring Person, each holder of
a Right, other than Rights that are or, under certain
circumstances, were beneficially owned by the Acquiring Person
(which will thereupon become void), will thereafter have the right
to receive upon exercise of a Right and payment of the Purchase
Price, and subject to the terms, provisions and conditions of the
Section 382 Tax Benefits Preservation Plan, a number of shares of
the Common Stock having a market value of two times the Purchase
Price.
Note 7. Income Taxes
The
components of our loss before income taxes are as follows (in
thousands):
|
|
|
|
|
United
States
|
$
(9,458
)
|
$
(1,541
)
|
Foreign
|
357
|
619
|
Total
|
$
(9,101
)
|
$
(922
)
|
The
provision (benefit) for income taxes from continuing operations
consisted of the following (in thousands):
|
|
Current:
|
|
|
Federal
|
$
—
|
$
(79
)
|
State
|
8
|
13
|
Foreign
|
(38
)
|
85
|
Total
Current
|
$
(30
)
|
$
19
|
Deferred
|
|
|
Federal
|
$
—
|
$
—
|
State
|
—
|
—
|
Foreign
|
29
|
585
|
|
$
29
|
$
585
|
Provision
(benefit) for income taxes
|
$
(1
)
|
$
604
|
The
reconciliation of the Federal statutory income tax rate to our
effective income tax rate is as follows (in
thousands):
|
|
|
|
|
Provision
at Federal statutory rate
|
$
(1,911
)
|
$
(322
)
|
State
taxes
|
8
|
13
|
Permanent
differences/other
|
65
|
581
|
Tax
Cuts and Jobs Act of 2017 Rate Change
|
—
|
22,714
|
Stock-based
compensation
|
81
|
365
|
Federal
valuation allowance (used) provided
|
1,756
|
(22,747
)
|
Provision
(benefit) for income taxes
|
$
(1
)
|
$
604
|
Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of our deferred tax assets
and liabilities are as follows (in thousands):
|
|
|
|
|
Deferred
Tax Assets
|
|
|
Fixed
assets
|
$
66
|
$
64
|
Accruals
and reserves
|
2,673
|
147
|
Stock
options
|
179
|
196
|
Net
operating loss carryforwards
|
35,522
|
35,254
|
Federal
and state credits
|
3,461
|
3,461
|
Foreign
credits
|
152
|
165
|
Intangible
assets
|
2,139
|
2,442
|
Research
and development expense
|
2,224
|
2,542
|
Gross
deferred tax assets
|
46,416
|
44,271
|
|
(46,283
)
|
(44,100
)
|
Total
deferred tax assets
|
133
|
171
|
Deferred
Tax Liabilities (1)
|
(543
)
|
(543
)
|
Net
deferred tax asset/liabilities
|
(410
)
|
(372
)
|
(1)
The
543,000 deferred tax liabilites is the only tax related to the
Indian subsidiaries remittance would be dividend distribution
tax.
ASC 740,
Income
Taxes
, provides for the
recognition of deferred tax assets if realization of such assets is
more likely than not to occur. Based on management’s review
of both the positive and negative evidence, which includes our
historical operating performance, reported cumulative net losses
since inception and difficulty in accurately forecasting its
results, the Company has concluded that it is not more likely than
not that the Company will be able to realize all the
Company’s U.S. deferred tax assets. Therefore, the
Company has provided a full valuation allowance against its U.S.
deferred tax assets.
Based
on management’s review of both positive and negative
evidence, which includes the historical operating performance of
our Canadian subsidiary, the Company has concluded that it is more
likely than not that the Company will be able to realize a portion
of the Company’s Canadian deferred tax assets.
Therefore, the Company has a partial valuation allowance on
Canadian deferred tax assets. There is no valuation allowance
against the Company’s Indian deferred tax assets. The
Company reassesses the need for its valuation allowance on a
quarterly basis.
Based
on management’s review discussed above, the realization of
deferred tax assets is dependent on improvements over present
levels of pre-tax income. Until the Company is consistently
profitable in the U.S., it will not realize its deferred tax
assets.
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax
Act”) was signed into law making significant changes to the
Internal Revenue Code. Changes include, but are not limited to, a
corporate tax rate decrease from 35% to 21% effective for tax years
beginning after December 31, 2017, the transition of U.S
international taxation from a worldwide tax system to a territorial
system, and a one-time transition tax on the mandatory deemed
repatriation of cumulative foreign earnings as of December 31,
2017. The Company has calculated its best estimate of the impact of
the Tax Act in its year end income tax provision in accordance with
its understanding of the Tax Act and guidance available as of the
date of this filing. The Company has evaluated these changes and,
as a result of the decrease in tax rate, has recorded a provisional
decrease to net deferred tax assets of $22.7 million with a
corresponding decrease to valuation allowance.
Due
to the complexities involved in accounting for the recently enacted
Tax Act, the U.S. Securities and Exchange Commission’s Staff
Accounting Bulletin (“SAB”) 118 requires that the
Company include in its financial statements a reasonable estimate
of the impact of the Tax Act on earnings to the extent such
estimate has been determined. Pursuant to the SAB118, the
Company is allowed a measurement period of up to one year after the
enactment date of the Tax Act to finalize the recording of the
related tax impacts. December 22, 2018 marked the end of the
measurement period for purposes of SAB 118. As such, the Company
has completed the analysis relating to the Act currently available
which resulted in no additional SAB 118 tax effect in the fourth
quarter of 2018 for the year ended December 31, 2018.
Beginning
in 2018, the Tax Act provides a 100% deduction for dividends
received from 10-percent owned foreign corporations by U.S.
corporate shareholders, subject to a one-year holding period.
Although dividend income is now exempt from U.S. federal tax in the
hands of the U.S. corporate shareholders, companies must still
apply the guidance of ASC 740-30-25-18 to account for the tax
consequences of outside basis differences and other tax impacts of
their investments in non-U.S. subsidiaries. Deferred income taxes
have not been provided on the cumulative undistributed earnings of
foreign subsidiaries except for a change in assertion at December
31, 2017 for Support.com India Private Ltd. The amount of
cumulative undistributed Indian subsidiary’s earnings at
December 31, 2017 for which the Company is changing its assertion
under ASC 740-30-25 is $2.67 million. Under the Tax Cuts and Jobs
Act of 2017, all foreign subsidiaries’ accumulated earnings
through December 31, 2017 has been included in U.S. taxable income.
As such, the only tax related to the Indian subsidiary remittance
would be a dividend distribution tax of $543,000.
The
Transition Tax on unrepatriated foreign earnings is a tax on
previously untaxed accumulated and current earnings and profits
(“E&P”) of the Company’s foreign
subsidiaries. To determine the amount of the Transition Tax, the
Company must determine, among other factors, the amount of
post-1986 E&P of its foreign subsidiaries, as well as the
amount of non-U.S. income taxes paid on such earnings. The Company
was able to make a reasonable estimate of its previously untaxed
accumulated and current earnings and profits and has concluded that
such amount is an accumulated deficit; therefore, no Transition Tax
results.
The
net valuation allowance increased and decreased by approximately
$2.1 million and $18.0 million during the years ended December 31,
2018 and 2017, respectively. As of December 31, 2018, the Company
had Federal and state net operating loss carryforwards of
approximately $143.4 million and $70.5 million, respectively. The
Federal net operating loss and credit carryforwards will expire at
various dates beginning in 2020 through 2037, if not utilized. The
state net operating loss carryforwards will expire at various dates
beginning in 2018 through 2037, if not utilized. As a result of the
adoption of ASU 2016-09 in fiscal 2017, the Company recorded a
cumulative effect adjustment to increase deferred tax assets and a
corresponding increase to valuation allowance from stock-based
compensation which had not been previously recognized. As such
there was no cumulative effect to retained earnings adjustment
required.
The
Company also had Federal and state research and development credit
carryforwards of approximately $2.8 million and $2.4 million,
respectively. The federal credits expire in varying amounts between
2020 and 2031. The state research and development credit
carryforwards do not have an expiration date.
Utilization
of net operating loss carryforwards and credits may be subject to
substantial annual limitation or could be lost due to the ownership
change limitations provided by the Internal Revenue Code of 1986,
as amended and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before
utilization.
ASC
740-10 clarifies the accounting for uncertainties in income taxes
by prescribing guidance for the recognition, de-recognition and
measurement in financial statements of income tax positions taken
in previously filed tax returns or tax positions expected to be
taken in tax returns, including a decision whether to file or not
to file in a particular jurisdiction. ASC 740-10 requires the
disclosure of any liability created for unrecognized tax
benefits. The application of ASC 740-10 may also affect the
tax bases of assets and liabilities and therefore may change or
create deferred tax liabilities or assets.
A
reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows (in thousands):
|
|
|
|
|
Balance
at beginning of year
|
$
2,229
|
$
2,285
|
Increase
related to prior year tax positions
|
—
|
26
|
Decrease
related to prior year tax positions
|
(20
)
|
—
|
Increase
related to current year tax positions
|
—
|
—
|
Settlements
with tax authorities
|
(92
)
|
(82
)
|
Decrease
related to lapse of statute of limitations
|
—
|
—
|
|
$
2,117
|
$
2,229
|
The
Company’s total amounts of unrecognized tax benefits that, if
recognized, that would affect its tax rate are $0.1 million and
$0.2 million as of December 31, 2018 and 2017,
respectively.
The
Company’s policy is to include interest and penalties related
to unrecognized tax benefits within its provision for (benefit
from) income taxes. The Company had $140,000 accrued for payment of
interest and penalties related to unrecognized tax benefits as of
December 31, 2018. The Company had $158,000 accrued for
payment of interest and penalties related to unrecognized tax
benefit as of December 31, 2017.
As
of December 31, 2018, it is reasonably possible that the
balance of unrecognized tax benefits could significantly change
within the next twelve months. However, an estimate of the range of
reasonably possible adjustments cannot be made at this
time.
The
Company files federal, state and foreign income tax returns in
jurisdictions with varying statutes of limitations. Due to its net
operating loss carryforwards, the Company’s income tax
returns generally remain subject to examination by federal and most
state authorities. In our foreign jurisdictions, the 2009 through
2018 tax years remain subject to examination by their respective
tax authorities.
We
are required to make periodic filings in the jurisdictions where we
are deemed to have a presence for tax purposes. We have undergone
audits in the past and have paid assessments arising from these
audits. Our India entity was issued notices of income tax
assessment pertaining to the 2004-2009 fiscal years. The
notices claimed that the transfer price used in our inter-company
agreements resulted in understated income in our Indian entity.
During the fourth quarter of 2014, the Company re-evaluated the
probability of its tax position and recorded an ASC 740-10 reserve
related to India transfer pricing. As of December 31, 2018, the ASC
740-10 reserve for India transfer pricing totals $253,000.
The Company’s tax position related to India has not changed
in 2018 aside from an additional $3,000 increase to the reserve
representing accrued interest. Separately, the Company
settled its Advanced Pricing Agreement with the Indian tax
authorities on July 25, 2017. As a result of this settlement, the
Company no longer records an ASC 740-10 reserve related to the
APA.
We may be subject to other income tax assessments
in the future. We evaluate estimated expenses that could
arise from those assessments in accordance with ASC
740-10
.
We consider such factors as the degree of
probability of an unfavorable outcome and the ability to make a
reasonable estimate on the amount of expenses. We record the
estimated liability amount of those assessments that meet the
definition of an uncertain tax position under ASC
740-10.