ITEM 1A. RISK FACTORS.
This
report contains forward-looking statements regarding our business
and expected future performance as well as assumptions underlying
or relating to such statements of expectation, all of which are
“forward looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We are subject to many risks and
uncertainties that may materially affect our business and future
performance and cause those forward-looking statements to be
inaccurate. Words such as “expects,”
“anticipates,” “intends,”
“plans,” “believes,”
“forecasts,” “estimates,”
“seeks,” “may result in,” “focused
on,” “continue to,” “on-going” and
similar expressions often identify forward-looking statements. In
this report, forward-looking statements include, without
limitation, statements regarding the following:
●
Our
expectations regarding revenues, cash flows, expenses, including
cost of revenue, sales and
marketing, research
and development efforts, and administrative expenses, and
profits;
●
Our
expectations regarding partners, renewal of contracts with these
partners and the anticipated timing and magnitude of revenue from
programs with these partners;
●
Our ability to
successfully license and grow revenue related to our consumer
software, Support.com technical support subscriptions, Guided
Paths® and our technology support service
offerings;
●
Our
expectations regarding sales of our end-user software products, and
our ability to source, develop and distribute enhanced versions of
these products;
●
The market appeal
and efficacy of our Guided Paths® self-help solution and
diagnostic tools;
●
Our ability to
expand and diversify our customer base;
●
Our ability to
attract and retain qualified management and employees;
●
Our ability to
hire, train, manage and retain customer support specialists in a
home-based model in quantities sufficient to meet forecast
requirements and in a cost-effective manner, and our ability to
continue to enhance the flexibility of our staffing
model;
●
Our ability to
adapt to changes in the market for customer support
services;
●
Our expectations
regarding unit volumes, pricing and other factors in the market for
computers and other technology devices, and the effects of such
factors on our business;
●
Our expectations
regarding the results of pending, threatened or future litigation;
and
●
Our expectations
regarding the results of pending, threatened or future government
investigations and audits, including, without limitation, those
investigations and audits described in Part II. Item 1. Legal
Proceedings of this report.
An
investment in our stock involves risk, and we caution investors
that forward-looking statements are only predictions based on our
current expectations about future events and are not guarantees of
future performance. We encourage you to read carefully all
information provided in this report and in our other filings with
the SEC before deciding to invest in our stock or to maintain or
change your investment. Forward-looking statements are based on
information as of the filing date of this report, and we undertake
no obligation to publicly revise or update any forward-looking
statement for any reason.
Because
forward-looking statements involve risks and uncertainties, there
are important factors that may cause actual results to differ
materially from our stated expectations. While a number of
these factors are described below, this list does not include all
risks that could affect our business or that could cause our stock
price to decline. If these or any other risks or uncertainties
materialize, or if our underlying assumptions prove to be
inaccurate, actual results could differ materially from past
results and from our expected future results, our operating results
and financial condition could be harmed and our stock price could
decline.
Our financial condition and results of operations may vary from
quarter to quarter, which may cause the price of our common shares
to decline.
Our quarterly
results of operations have fluctuated in the past and could do so
in the future. Because our results of operations are difficult to
predict, you should not rely on quarterly comparisons of our
results of operations as an indication of our future performance.
Fluctuations in our results of operations may be due to a number of
factors, including, but not limited to, those listed below and
those identified throughout this “Risk Factors”
section:
●
The performance of
our partners, including the success of our partners in attracting
end users of our products, which can impact the amount of revenue
we derive from our partners;
●
Change,
or reduction in or discontinuance of our programs with
partners;
●
Cancellations,
rescheduling or deferrals of significant customer products or
service programs;
●
Our
reliance on a small number of partners for a substantial majority
of our revenue;
Our
ability to successfully license and grow revenue related to our SAS
software, Guided Paths®, Support.com Cloud and our service
offerings;
●
The timing of our
sales to our partners and our partners’ resale of our
products to end users and our ability to enter into new sales with
partners and renew existing programs with our
partners;
●
The availability
and cost-effectiveness of advertising placements for our software
products and services and our ability to respond to changes in the
advertising markets in which we participate;
●
The
efficiency and effectiveness of our technology
specialists;
●
Our
ability to effectively match staffing levels with service volumes
on a cost-effective basis;
●
Our
ability to manage contract labor;
●
Our ability to
hire, train, manage and retain our home-based customer support
specialists and enhance the flexibility of our staffing model in a
cost-effective fashion and in quantities sufficient to meet
forecast requirements;
●
Our
ability to manage costs under our self-funded health insurance
program;
●
Usage
rates on the subscriptions we offer;
●
Our
ability to maintain a competitive cost structure for our
organization;
●
The
rate of expansion of our offerings and our investments
therein;
●
Changes in the
markets for computers and other technology devices relating to unit
volume, pricing and other factors, including changes driven by
declines in sales of personal computers and the growing popularity
of tablets, and other mobile devices and the introduction of new
devices into the connected home;
●
Our ability to
adapt to our customers’ needs in a market space defined by
frequent technological change;
●
Severe
financial hardship or bankruptcy of one or more of our major
customers;
●
The
amount and timing of operating costs and capital expenditures in
our business;
●
Failure
to protect our intellectual property;
●
Diversion of
management’s attention from other business concerns,
incurrence of costs and disruption of our ongoing business
activities as a result of acquisitions or divestitures by
us;
●
Costs related to
the defense and settlement of litigation, which can also have an
additional adverse impact on us because of negative publicity,
diversion of management resources and other factors;
●
Costs related to
the defense and settlement of government investigations, requests
for information and audits, which can also have an additional
adverse impact on us because of negative publicity, diversion of
management resources and other factors, including, without
limitation, those audits, requests for information and
investigations described in Part II. Item 1. Legal Proceedings of
this report;
●
The
effects of any acquisitions, divestitures or significant
investments; and
●
Potential losses on
investments, or other losses from financial instruments we may hold
that are exposed to market risk.
Due to
fluctuations in our quarterly results of operations and other
factors, the price at which our common shares trades may be
volatile. Accordingly, you may not be able to resell your common
shares at or above the price you paid. In future periods, our stock
price could decline if, amongst other factors, our revenue or
operating results are below our estimates or the estimates or
expectations of securities analysts and investors.
Our sales are concentrated in a few large customers with whom we
have long-term agreements that have termination for convenience
provisions and no minimum purchase commitments. If we are unable to
increase the number of large customers in key markets, or if we
lose or experience a significant reduction in sales to these key
customers, if these key customers experience a significant decline
in market share, or if these customers experience significant
financial difficulties, our revenue may decrease substantially and
our results of operations and financial condition may be
harmed.
We
receive a significant amount of our revenue from a limited number
of customers. For the three and six months ended June 30, 2019, 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;
●
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 Item 3 Legal Proceedings of this
report.
If we
are unable to address these risks, our business, results of
operations and prospects could suffer.
We have been, are currently and may be in the future the subject of
governmental investigations relating to past products and services
and how those products and services were used by our third-party
partners. These investigations could harm our reputation, result in
additional fines and other payments and cause us to incur expenses
to respond and defend the company or our current and former
employees.
We have
been, are currently and may in the future be the subject of
governmental investigations relating to our past products and how
those products were used by our third-party partners. On November
6, 2018, we entered into a Stipulation to Entry of Order for
Permanent Injunction and Monetary Judgment, or the Consent Order,
with the Federal Trade Commission, or FTC, resolving a multi-year
FTC investigation 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. We were issued Civil Investigative
Demands from the Attorney General of the State of Washington and
the State of Texas related to the matters addressed in the FTC
investigation. As a result, we will continue to incur expenses in
responding to these inquiries.
These
governmental inquiries and the Consent Order with the FTC could
harm our reputation with customers and negatively impact our
ability to sell to existing customers or attract new customers. In
addition to the ongoing costs to respond to these inquiries, we
could be required to make additional payments to resolve these or
other governmental proceedings that may be brought in the future.
In some cases, we may not be the subject of an investigation, but
we may be required to expend resources, including time from our
management team, to address information requests or to indemnify
individual current or former employees who may become involved in
governmental proceedings or also be requested to provide
information. These historical proceedings, our ongoing matters and
any inquiries or proceedings that arise in the future could have a
material adverse effect on our operations, financial results and
our stock price.
We have been named as a party to legal proceedings, including
governmental proceedings, in the past and may be named in
additional ones in the future, which could subject us to liability,
require us to indemnify our customers or employees, require us to
obtain or renew licenses, require us to stop selling our products,
services and/or programs, or force us to redesign our products,
services and/or programs.
We have
been named as a party to several lawsuits, government inquiries or
investigations and other legal proceedings (referred to as
“litigation”), and we may be named in additional ones
in the future. Please see “Part II, Item 1. Legal
Proceedings” for a more detailed description of material
litigation matters in which we are currently engaged. Any potential
litigation also could force us to do one or more of the
following:
●
stop
selling, offering for sale, making, having made or exporting
products, services and/or programs;
●
limit
or restrict the type of work that employees involved in such
litigation may perform for us;
●
pay
substantial damages and/or license fees and/or royalties to the
party bringing the claim that could adversely impact our liquidity
or operating results; and
●
attempt
to redesign those products, services and/or programs that contain
the allegedly problematic component.
Under
certain circumstances, we have contractual and other legal
obligations to indemnify and to incur legal expenses for current
and former directors and officers. Additionally, from time to time,
we have agreed to indemnify or reimburse select customers or end
customers for a number of potential claims. For example, we
recently received notice from a customer, 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 research and development
activities, which could have a material adverse effect on our
financial results. In addition, if we fail to develop and maintain
competitive features, deliver high-quality products and satisfy
existing customers, our Support.com offerings could fail to grow.
Disruptions in infrastructure operations could impair our ability
to deliver Support.com offerings to customers, thereby affecting
our reputation with existing and prospective customers and possibly
resulting in monetary penalties or financial losses.
Our end-user software revenues are dependent on online traffic
patterns and the availability and cost of online advertising in
certain key placements.
Some of
our consumer end-user software revenue stream is obtained through
advertising placements in certain key online media placements. From
time to time a trend or a change in a key advertising placement
will impact us, decreasing traffic or significantly increasing the
cost or effectiveness of online advertising and therefore
compromising our ability to purchase a desired volume and placement
of advertisements at profitable rates. If such a change were to
continue to occur, as it did in 2013 and on several occasions in
the past, we may be unable to attract desired amounts of traffic,
our costs for advertising may further increase beyond our forecasts
and our software revenues may further decrease. As a result, our
operating results would be negatively impacted.
We operate in a highly competitive industry, with intense price
competition, which may intensify as our competitors expand their
operations.
The
industry in which we operate is highly competitive and includes
numerous small companies capable of competing effectively in our
markets on a local basis, as well as several large companies that
possess substantially greater financial resources than we do.
Contracts are traditionally awarded on the basis of competitive
bids or direct negotiations with customers.
The
competitive factors in our markets include, amongst others, are
product and service quality and availability, responsiveness,
experience, technology, equipment quality, reputation for retaining
highly-skilled agents and price. The competitive environment has
intensified as mergers among industry partners have reduced the
number of available customers and mergers amongst our competitors
have created larger companies for us to compete against. Some of
our current and potential competitors have greater resources,
longer histories, more customers, and/or greater brand recognition.
They may secure better terms from vendors, adopt more aggressive
pricing, and devote more resources to technology, infrastructure,
fulfillment, and marketing.
Competition may
intensify, including with the development of new business models
and the entry of new and well-funded competitors, and as our
competitors enter into business combinations or alliances and
established companies in other markets expand to become competitive
with our business. Furthermore, we cannot be sure that our
competitors will not develop competing products, systems, services
or technologies that gain market acceptance in advance of our
products, systems, services or technologies, or that our
competitors will not develop new products, systems, services or
technologies that cause our existing products, systems, services or
technologies to become non-competitive or obsolete, which may
adversely affect our results of operations through the potential
reduction of sales and profits.
Our business is highly dependent upon our brand recognition and
reputation, and the failure to maintain or enhance our brand
recognition or reputation would likely have a material adverse
effect on our business.
Our
brand recognition and reputation are critical aspects of our
business. We believe that maintaining and further enhancing our
brand as well as our reputation will be critical to retaining
existing customers and attracting new customers. We also believe
that the importance of our brand recognition and reputation will
continue to increase as competition in our markets continues to
develop. Our success in this area will be dependent on a wide range
of factors, some of which are out of our control, including the
following:
●
the efficacy of our
marketing efforts;
●
our ability to
retain existing and obtain new customers and strategic
partners;
●
the quality and
perceived value of our services;
●
actions of our
competitors, our strategic partners, and other third
parties;
●
positive or
negative publicity, including material on the
Internet;
●
regulatory and
other governmental related developments; and
●
litigation related
developments.
If we
implement new marketing and advertising strategies, we may utilize
marketing and advertising channels with significantly higher costs
than our current channels, which in turn could adversely affect our
operating results. Implementing new marketing and advertising
strategies also would increase the risk of devoting significant
capital and other resources to endeavors that do not prove to be
cost effective. Further, we also may incur marketing and
advertising expenses significantly in advance of the time we
anticipate recognizing revenue associated with such expenses, and
our marketing and advertising expenditures may not generate
sufficient levels of brand awareness or result in increased
revenue. Even if our marketing and advertising expenses result in
increased revenue, the increase might not offset our related
expenditures. If we are unable to maintain our marketing and
advertising channels on cost-effective terms or replace or
supplement existing marketing and advertising channels with
similarly or more effective channels, our marketing and advertising
expenses could increase substantially, our customer base could be
adversely affected, and our business, operating results, financial
condition, and reputation could suffer.
Furthermore,
negative publicity, whether or not justified, relating to events or
activities attributed to us, our employees, our strategic partners,
our affiliates, or others associated with any of these parties, may
tarnish our reputation and reduce the value of our brands. Damage
to our reputation and loss of brand equity may reduce demand for
our products and services and have an adverse effect on our
business, operating results, and financial condition. Moreover, any
attempts to rebuild our reputation and restore the value of our
brands may be costly and time consuming, and such efforts may not
ultimately be successful.
Our success depends upon our ability to attract, develop and retain
highly qualified employees while also controlling our labor costs
in a competitive labor market.
Our customers
expect a high level of customer service and product knowledge from
our employees. To meet the needs and expectations of our customers,
we must attract, develop and retain a large number of highly
qualified employees while at the same time control labor costs. Our
ability to control labor costs is subject to numerous external
factors, including prevailing wage rates and health and other
insurance costs, as well as the impact of legislation or
regulations governing labor relations, minimum wage, or healthcare
benefits. An inability to provide wages and/or benefits that are
competitive within the markets in which we operate could adversely
affect our ability to retain and attract employees. Likewise,
changes in market compensation rates may adversely affect our labor
costs. In addition, we compete with other retail businesses for
many of our employees in hourly positions, and we invest
significant resources in training and motivating them to maintain a
high level of job satisfaction. These positions have historically
had high turnover rates, which can lead to increased training and
retention costs, particularly in a competitive labor market.
Effective succession planning is also important to our long-term
success. Failure to ensure effective transfer of knowledge and
smooth transitions involving key employees and executive management
could hinder our strategic planning and execution. There is no
assurance that we will be able to attract or retain highly
qualified employees in the future. As such, our ability to develop
and deliver successful products and services may be adversely
affected.
Our business would be adversely affected by the departure of
existing members of our senior management team.
Our
business would be adversely affected by the departure of existing
members of our senior management team. Our success depends, in
large part, on the continued contributions of our senior management
team. Effective succession planning is also important for our
long-term success. Failure to ensure effective transfers of
knowledge and smooth transitions involving senior management could
hinder our strategic planning and execution. We do not currently
maintain key person life insurance covering our senior management.
The loss of any of our senior management could harm our ability to
implement our business strategy and respond to the rapidly changing
market conditions in which we operate.
If we fail to attract, train and manage our consumer support
specialists in a manner that meets forecast requirements and
provides an adequate level of support for our customers, our
reputation and financial performance could be harmed.
Our
business depends in part on our ability to attract, manage and
retain our customer support specialists and other support
personnel. If we are unable to attract, train and manage in a
cost-effective manner adequate numbers of competent specialists and
other support personnel to be available as service volumes vary,
particularly as we seek to expand the 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.
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.
We may pursue investments, joint ventures and dispositions, which
could adversely affect our results of operations.
We may
invest in businesses that offer complementary products, services
and technologies, augment our market coverage, or enhance our
technological capabilities. We may also enter into strategic
alliances or joint ventures to achieve these goals. We may not be
able to identify suitable investment, alliance, or joint venture
opportunities, or to consummate any such transactions. In addition,
our original estimates and assumptions used in assessing any
transaction may be inaccurate and we may not realize the expected
financial or strategic benefits of any such
transaction.
We may
also seek to divest or wind down portions of our business, either
acquired or otherwise, each of which could materially affect our
cash flows and results of operations. Any future dispositions we
may make could involve risks and uncertainties, including our
ability to sell such businesses on terms acceptable to us, or at
all. In addition, any such dispositions could result in disruption
to other parts of our business, potential
loss of employees or
customers, or exposure to unanticipated liabilities or ongoing
obligations to us following any such dispositions. For example, in
connection with such dispositions, we may agree to provide certain
indemnities to the purchaser, which may result in additional
expenses and may adversely affect our financial condition and
results of operations. In addition, dispositions may include the
transfer of technology and/or the licensing of certain IP rights to
third-party purchasers, which could limit our ability to utilize
such IP rights or assert these rights against such third-party
purchasers or other third parties.
Our indemnification obligations and limitations of our director and
officer liability insurance may have a material adverse effect on
our financial condition, results of operations and cash
flows.
Under
Delaware law, our Articles of Incorporation and Amended and
Restated Bylaws and indemnification agreements to which we are a
party, we have an obligation to indemnify, or we have otherwise
agreed to indemnify, certain of our current and former directors,
officers and/or employees with respect to past, current and future
investigations and litigation. For example, we have incurred
indemnification expenses in connection with the FTC investigation
completed in March 2019 and other pending government
investigations. In connection with some of these pending matters,
we are required to, or we have otherwise agreed to, advance, and
have advanced, legal fees and related expenses to certain of our
current and former directors, officers and employees, and expect to
continue to do so while these matters are pending. Indemnification
obligations may not be “covered matters” under our
directors’ and officers’ liability insurance, or there
may be insufficient coverage available. Further, in the event the
directors and officers are ultimately determined not to be entitled
to indemnification, we may not be able to recover any amounts we
previously advanced to them. We cannot provide any assurances that
future indemnification claims, including the cost of fees,
penalties or other expenses, will not exceed the limits of our
insurance policies, that such claims are covered by the terms of
our insurance policies or that our insurance carrier will be able
to cover our claims. Additionally, to the extent there is coverage
of these claims, the insurers also may seek to deny or limit
coverage in some or all of these matters. Furthermore, the insurers
could become insolvent and unable to fulfill their obligation to
defend, pay or reimburse us for insured claims. Accordingly, we
cannot be sure that claims will not arise that are in excess of the
limits of our insurance or that are not covered by the terms of our
insurance policy. Due to these coverage limitations, we may incur
significant unreimbursed costs to satisfy our indemnification
obligations, which may have a material adverse effect on our
financial condition, results of operations or cash
flows.
Our provision for income taxes is subject to volatility and could
be adversely affected by a number of factors.
Our
overall tax provisions and accruals are affected by a number of
factors, including any potential reorganization or restructuring of
our businesses, including tangible and intangible assets, the
resulting tax effects of differing tax rates in different state
jurisdictions, changes in transfer pricing rules or methods of
applying these rules, and changes in tax laws in various
jurisdictions. While we believe our tax estimates are reasonable,
there is no assurance that the final determination of our income
tax liability will not be materially different than what is
reflected in our income tax provisions and accruals. Significant
judgment is required to determine the recognition and measurement
of tax liabilities prescribed in the relevant accounting guidance
for uncertainty in income taxes. The accounting guidance for
uncertainty in income taxes applies to all income tax positions,
which, if resolved unfavorably, could adversely impact our
provision for income taxes and our payment obligation with respect
to any such taxes.
Our systems collect, access, use, and store personal customer
information and enable customer transactions, which poses security
risks, requires us to invest significant resources to prevent or
correct problems that may be caused by security breaches, and may
harm our business.
A
fundamental requirement for online communications, transactions and
support is the secure collection, storage and transmission of
confidential information. Our systems collect and store
confidential and personal information of our individual customers
as well as our partners and their customers’ users, including
personally identifiable information and payment card information,
and our employees and contractors may access and use that
information in the course of providing services. In addition, we
collect and retain personal information of our employees in the
ordinary course of our business. We and our third-party contractors
use commercially available technologies to secure this information.
Despite these measures, parties may attempt to breach the security
of our data or that of our customers. In addition, errors in the
storage or transmission of data could breach the security of that
information. We may be liable to our customers for any breach in
security 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.
Privacy concerns and laws or other domestic or foreign regulations
may require us to incur significant costs and may reduce the
effectiveness of our solutions, and our failure to comply with
those laws or regulations may harm our business and cause us to
lose customers.
Our
software and services contain features that allow our technology
specialists and other personnel to access, control, monitor, and
collect information from computers and other devices.
Federal, state and foreign government bodies and agencies, however,
have adopted or are considering adopting laws and regulations
restricting or otherwise regulating the collection, use and
disclosure of personal information obtained from consumers and
individuals. Those regulations could require costly compliance
measures, could reduce the efficiency of our operations, or could
require us to modify or cease to provide our systems or services.
Liability for violation of, costs of compliance with, and other
burdens imposed by such laws and regulations may limit the use and
adoption of our services and reduce overall demand for them. Even
the perception of privacy concerns, whether or not valid, may harm
our reputation and inhibit adoption of our solutions by current and
future customers. In addition, we may face claims about
invasion of privacy or inappropriate disclosure, use, storage, or
loss of information obtained from our customers. Any imposition of
liability could harm our reputation, cause us to lose customers and
cause our operating results to suffer.
We rely on third-party technologies in providing certain of our
software and services. Our inability to use, retain or integrate
third-party technologies and relationships could delay service or
software development and could harm our business.
We
license technologies from third parties, which are integrated into
our services, technology and end user software. Our use of
commercial technologies licensed on a non-exclusive basis from
third parties poses certain risks. Some of the third-party
technologies we license may be provided under “open
source” licenses, which may have terms that require us to
make generally available our modifications or derivative works
based on such open source code. Our inability to obtain or
integrate third-party technologies with our own technology could
delay service development until equivalent compatible technology
can be identified, licensed and integrated. These third-party
technologies may not continue to be available to us on commercially
reasonable terms or at all. If our relationship with third
parties were to deteriorate, or if such third parties were unable
to develop innovative and saleable products, or component features
of our products, we could be forced to identify a new developer and
our future revenue could suffer. We may fail to successfully
integrate any licensed technology into our services or software, or
maintain it through our own development work, which would harm our
business and operating results.
Our business operates in regulated industries.
Our
current and anticipated service offerings operate in industries,
such as home security, that are subject to various federal, state,
provincial and local laws and regulations in the markets in which
we operate. In certain jurisdictions, we may be required to
obtain licenses or permits in order to comply with standards
governing employee selection and training and to meet certain
standards or licensing requirements in the conduct of our
business. The loss of such licenses or permits or the
imposition of conditions to the granting or retention of such
licenses or permits could have a material adverse effect on
us.
Changes
in laws or regulations could require us to change the way we
operate or to utilize resources to maintain compliance, which could
increase costs or otherwise disrupt operations. In addition,
failure to comply with any applicable laws or regulations could
result in substantial fines or revocation of our operating permits
and licenses for us or our partners. If laws and regulations were
to change, or if we or our products and services were deemed not to
comply with them, our business, financial condition, results of
operations and cash flows could be materially and adversely
affected.
If our services are used to commit fraud or other similar
intentional or illegal acts, we may incur significant liabilities,
our services may be perceived as not secure and customers may
curtail or stop using our services.
Certain
software and services we provide, including our Support.com Cloud
applications, enable remote access to and control of third-party
computer systems and devices. We generally are not able to
control how such access may be used or misused by licensees of our
software offerings or our employees. If our software is used by our
employees or others to commit fraud or other illegal acts,
including, but not limited to, violating data privacy laws,
proliferating computer files that contain a virus or other harmful
elements, interfering or disrupting third-party networks,
infringing any third party’s copyright, patent, trademark,
trade secret or other rights, transmitting any unlawful, harassing,
libelous, abusive, threatening, vulgar, obscene or otherwise
objectionable material, or committing unauthorized access to
computers, devices, or protected information, third parties may
seek to hold us legally liable. As a result, defending such
claims could be expensive and time-consuming regardless of the
merits, and we could incur significant liability or be required to
undertake expensive preventive or remedial actions. As a
result, our operating results may suffer and our reputation may be
damaged.
We may face intellectual property infringement claims that could be
costly to defend and result in our loss of significant
rights.
Our
business relies on the use and licensing of technology. Other
parties may assert intellectual property infringement claims
against us or our customers, and our products may infringe the
intellectual property rights of third parties. For example,
our products may infringe patents issued to third parties. In
addition, as is increasingly common in the technology sector, we
may be confronted with the aggressive enforcement of patents by
companies whose primary business activity is to acquire patents for
the purpose of offensively asserting them against other
companies. From time to time, we have received allegations or
claims of intellectual property infringement, and we may receive
more claims in the future. We may also be required to pursue
litigation to protect our intellectual property rights or defend
against allegations of infringement. Intellectual property
litigation is expensive and time-consuming and could divert
management’s attention from our business. The outcome of any
litigation is uncertain and could significantly impact our
financial results. If there is a successful claim of
infringement, we may be required to develop non-infringing
technology or enter into royalty or license agreements which may
not be available on acceptable terms, if at all. Our failure to
develop non-infringing technologies or license proprietary rights
on a timely basis would harm our business.
If we are unable to protect or enforce our intellectual property
rights, or we lose our ability to utilize the intellectual property
of others, our business could be adversely affected.
Our
success depends, in part, upon our ability to obtain intellectual
property protection for our proprietary processes, software and
other solutions. We rely upon confidentiality policies,
nondisclosure and other contractual arrangements, and patent, trade
secret, copyright and trademark laws to protect our intellectual
property rights. These laws are subject to change at any time and
could further limit our ability to obtain or maintain intellectual
property protection. There is uncertainty concerning the scope of
patent and other intellectual property protection for software and
business methods, which are fields in which we rely on intellectual
property laws to protect our rights. Even where we obtain
intellectual property protection, our intellectual property rights
may not prevent or deter competitors, former employees, or other
third parties from reverse engineering our solutions or software.
Further, the steps we take in this regard might not be adequate to
prevent or deter infringement or other misappropriation of our
intellectual property by competitors, former employees or other
third parties, and we may not be able to detect unauthorized use
of, or take appropriate and timely steps to enforce, our
intellectual property rights. Enforcing our rights might also
require considerable time, money and oversight, and we may not be
successful. Further, we rely on third-party software in providing
some of our services and solutions. If we lose our ability to
continue using any such software for any reason, including because
it is found to infringe the rights of others, we will need to
obtain substitute software or find alternative means of obtaining
the technology necessary to continue to provide our solutions. Our
inability to replace such software, or to replace such software in
a timely or cost-effective manner, could materially adversely
affect our results of operations
We may face class actions and similar claims that could be costly
to defend or settle and result in negative publicity and diversion
of management resources.
Our
business involves direct sale and licensing of services and
software to consumers and SMBs, and we typically include customary
indemnification provisions in favor of our partners in our
agreements for the distribution of our services and software.
As a result, we can be subject to consumer litigation and legal
proceedings related to our services and software, including
putative class action claims and similar legal actions, including,
but not limited to, consumer litigation and legal proceedings that
may arise related to the FTC and DOL investigations described in
Note 3 Legal Proceedings in this report.
We can also be subject to employee
litigation and legal proceedings related to our employment
practices attempted on a class or representative basis.
Such
litigation can be expensive and time-consuming regardless of the
merits of any action and could divert management’s attention
from our business. The cost of defense can be large as can
any settlement or judgment in an action. The outcome of any
litigation is uncertain and could significantly impact our
financial results. Regardless of outcome, litigation can have an
adverse impact on us because of defense costs, negative publicity,
diversion of management resources and other factors.
We must comply with a variety of existing and future laws and
regulations that could impose substantial costs on us and may
adversely impact our business.
We are
subject to a variety of laws and regulations, which may differ
among jurisdictions, affecting our operations in areas including,
but not limited to: intellectual property ownership and
infringement; tax; anti-corruption such as the Foreign Corrupt
Practices Act and the UK Bribery Act; foreign exchange controls and
cash repatriation restrictions; data privacy requirements such as
the European Economic Area Privacy Regulation, the General Data
Protection Regulation (“GDPR”); competition; Consent
Order terms (for example, the recent Consent Order we entered into
with the FTC); advertising; employment; product regulations; health
and safety requirements; and consumer laws. If we fail to continue
to comply with these regulations, we may be unable to provide
products or services to certain customers, or we may incur
penalties or fines. We are unable to predict the outcome or effects
of any of these potential actions or any other legislative or
regulatory proposals on our business. Any changes to the legal and
regulatory framework applicable to our businesses could have an
adverse impact on the results of our operations. Although our
management systems are designed to maintain compliance, if we
violate or fail to comply with any laws or regulations, applicable
consent orders or decrees, a range of consequences could result,
including fines, sales limitations, criminal and civil liabilities
or other sanctions. The costs of complying with these laws
(including the costs of any investigations, auditing and
monitoring) could adversely affect our current or future
business.
Delaware law and
our certificate of incorporation and bylaws contain anti-takeover
provisions, 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.
Accordingly, the overall effect may be to render more difficult, or
discourage merger, tender offer, or assumption of control by a
substantial holder of our securities.
Our ability to use net operating loss carryforwards to offset
future taxable income for U.S. federal income tax purposes may be
limited.
We have
a federal net operating loss (NOL) carryforwards that are available
to offset future taxable income. We may recognize additional NOLs
in the future. Section 382 of the Internal Revenue Code of
1986, as amended (the Code) imposes an annual limitation on the
amount of taxable income that may be offset by a corporation's NOLs
if the corporation experiences an “ownership change” as
defined in Section 382 of the Code. An ownership change
occurs when our “five-percent shareholders” (as defined
in Section 382 of the Code) collectively increase their
ownership in the Company by more than 50 percentage points (by
value) over a rolling three-year period. Additionally, various
states have similar limitations on the use of state NOLs following
an ownership change.
If an
ownership change occurs, the amount of the taxable income for any
post-change year that may be offset by a pre-change loss is subject
to an annual limitation that is cumulative to the extent it is not
all utilized in a year. This limitation is derived by multiplying
the fair market value of our stock as of the ownership change by
the applicable federal long-term tax-exempt rate. To the extent
that a company has a net unrealized built-in gain at the time of an
ownership change, which is realized or deemed recognized during the
five-year period following the ownership change, there is an
increase in the annual limitation for each of the first five-years
that is cumulative to the extent it is not all utilized in a year.
If an ownership change should occur in the future, our ability to
use the NOL to offset future taxable income will be subject to an
annual limitation and will depend on the amount of taxable income
generated by us in future periods. There is no assurance that we
will be able to fully utilize the NOL and we may be required to
record an additional valuation allowance related to the amount of
the NOL that may not be realized, which could impact our result of
operations.
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.