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
provides technical support solutions for both businesses and
consumers, delivering the expertise, tools, and software solutions
to support all the devices in the connected home and business.
Support.com’s tech support solutions cover the lifecycle of
the connected device, including setup, troubleshooting,
connectivity and interoperability problems, learning to use new
features, and even pre-sales questions such as device
compatibility. Functioning as a partner to large enterprise and
retailer customers, Support.com offers OEMs, MSOs/ISPs, retailers,
and other enterprise customers customized, turnkey support
programs--including pre-sale and post-sale support--with a
comprehensive, integrated approach covering all connected devices.
Through TechSolutions, Support.com provides its technical expertise
direct to consumers and small businesses with affordable, 24/7
access to expert tech support via phone, chat, virtual house calls,
or step-by-step DIY guides. TechSolutions’ fully-integrated,
seamless tech support experience combines live agents, available
via phone or chat, with a robust library of free, DIY self-support
tools, called Guided Paths, which offer step-by-step instructions
and tutorials for thousands of tech problems.
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.
Impact of Disease Outbreak
On
March 11, 2020, the World Health Organization declared the outbreak
of a respiratory disease caused by a new coronavirus as a
“pandemic”. First identified in late 2019 and known now
as COVID-19, the outbreak has impacted thousands of individuals
worldwide. In response, many countries have implemented measures to
combat the outbreak which have impacted global business operations.
As of the date of issuance of the financial statements, the
Company’s operations have not been significantly impacted,
however, the Company continues to monitor the situation. No
impairments were recorded as of the balance sheet date as no
triggering events or changes in circumstances had occurred as of
year-end; however, due to significant uncertainty surrounding the
situation, management's judgment regarding this could change in the
future. In addition, while the Company’s results of
operations, cash flows and financial condition could be negatively
impacted, the extent of the impact cannot be reasonably estimated
at this time.
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, 2019 and
2018.
Use of Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. The accounting estimates that require
management’s most significant, difficult and subjective
judgments include accounting for revenue recognition, assumptions
used to estimate self-insurance and litigation accruals, the
valuation of investments, the assessment of recoverability of
intangible assets and their estimated useful lives, the valuations
and recognition of stock-based compensation and the recognition and
measurement of current and deferred income tax assets and
liabilities. Actual results could differ materially from these
estimates.
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, 2019 and 2018 (in thousands):
|
|
Balance at
Beginning of
Period
|
Adjustments to
Costs and
Expenses
|
|
|
|
Allowance
for doubtful accounts:
|
|
|
|
|
|
Year
ended December 31, 2018
|
$9
|
$24
|
$(20)
|
$13
|
|
Year
ended December 31, 2019
|
$13
|
$40
|
$(25)
|
$28
|
As
of December 31, 2019, Comcast and Cox Communications accounted for
approximately 59% and 33% of our total accounts receivable,
respectively. As of December 31, 2018, Comcast and Cox
Communications accounted for approximately 71% and 20% of our total
accounts receivable, respectively. No other customers accounted for
10% or more of our total accounts receivable as of December 31,
2019 and 2018.
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 income
(loss). We view this investment portfolio as available for use in
our current operations, and therefore we present our marketable
securities as short-term assets.
We
monitor our investments for impairment on a quarterly basis and
determine whether a decline in fair value is other-than-temporary
by considering factors such as current economic and market
conditions, the credit rating of the security’s issuer, the
length of time an investment’s fair value has been below our
carrying value, the Company’s intent to sell the security and
the Company’s belief that it will not be required to sell the
security before the recovery of its amortized cost. If an
investment’s decline in fair value is deemed to be
other-than-temporary, we reduce its carrying value to its estimated
fair value, as determined based on quoted market prices or
liquidation values. Declines in value judged to be
other-than-temporary, if any, are recorded in operations as
incurred. At December 31, 2019, the Company evaluated its
unrealized losses on security investments 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, 2019 and 2018, the estimated fair value of cash, cash
equivalents and investments was $26.4 million and $49.6 million,
respectively. The following is a summary of cash, cash
equivalents and investments at December 31, 2019 and 2018 (in
thousands):
|
|
For the Year Ended December 31, 2019
|
|
|
|
|
|
|
|
Cash
|
$7,814
|
$—
|
$—
|
$7,814
|
|
Money
market fund
|
1,137
|
—
|
—
|
1,137
|
|
Certificates
of deposit
|
475
|
—
|
—
|
475
|
|
Commercial
paper
|
6,912
|
—
|
(1)
|
6,911
|
|
Corporate
notes and bonds
|
7,922
|
15
|
(4)
|
7,933
|
|
U.S.
government agency securities
|
2,145
|
—
|
(1)
|
2,144
|
|
|
$26,405
|
$15
|
$(6)
|
$26,414
|
|
Classified
as:
|
|
|
|
|
|
Cash
and cash equivalents
|
$10,087
|
$—
|
$—
|
$10,087
|
|
Short-term
investments
|
16,318
|
15
|
(6)
|
16,327
|
|
|
$26,405
|
$15
|
$(6)
|
$26,414
|
|
|
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
|
The
following table summarizes the estimated fair value of our
marketable securities classified by the stated maturity date of the
security (in thousands):
|
|
|
|
|
|
|
|
Due
within one year
|
$12,754
|
$20,874
|
|
Due
within two years
|
3,573
|
3,593
|
|
|
$16,327
|
$24,467
|
We
determined that the gross unrealized losses on our security
investments as of December 31, 2019 are temporary in nature. The
fair value of our security investments at December 31, 2019 and
2018 reflects a net unrealized gain (loss) of $9,000 and $(69,000),
respectively. There was net realized gains of $2,000 and $0
on security investments in the years ended December 31, 2019 and
2018. The cost of securities sold is based on the specific
identification method.
The
following table sets forth the unrealized losses for the
Company’s security investments as of December 31, 2019 and
2018 (in thousands):
|
As of December 31, 2019
|
In Gain Position
Less Than 12 Months
|
In (Loss) Position
More Than 12 Months
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
$475
|
$—
|
$—
|
$—
|
$475
|
$—
|
|
Corporate
notes and bonds
|
10,120
|
15
|
4,714
|
(5)
|
14,834
|
10
|
|
U.S.
government agency securities
|
2,145
|
(1)
|
—
|
—
|
2,145
|
(1)
|
|
Total
|
$12,740
|
$14
|
$4,714
|
$(5)
|
$17,454
|
$9
|
|
As of December 31, 2018
|
In Loss Position
Less Than 12 Months
|
In Loss Position
More Than 12 Months
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
$1,171
|
$(1)
|
$—
|
$—
|
$1,171
|
$(1)
|
|
Corporate
notes and bonds
|
18,885
|
(67)
|
—
|
—
|
18,885
|
(67)
|
|
U.S.
government agency securities
|
6,976
|
(1)
|
—
|
—
|
6,976
|
(1)
|
|
Total
|
$27,032
|
$(69)
|
$—
|
$—
|
$27,032
|
$(69)
|
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 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
|
$59,545
|
$64,476
|
|
Software
and other
|
3,788
|
5,073
|
|
|
$63,333
|
$69,549
|
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 the following
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, 2019 and 2018, 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, 2019 and 2018 (in thousands):
|
Changes in
deferred revenues were as follows:
|
|
|
|
|
|
|
Balance, beginning of period
|
$1,135
|
$2,019
|
|
Deferred revenue
|
1,887
|
1,120
|
|
Recognition of unearned
revenue
|
(1,829)
|
(2,004)
|
|
Balance, end of period
|
$1,193
|
$1,135
|
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 and 2019, revenues
from implementation services are di minimus.
Software and Other Revenue
Software
and other revenue is comprised primarily of fees for end-user
software products provided through direct customer downloads and
through the sale of these end-user software products via partners.
Our software is sold to customers as a perpetual license or as a
fixed period subscription. We offer when-and-if-available software
upgrades to our end-user products. Management has determined that
these upgrades are not distinct, as the upgrades are an input into
a combined output. In addition, Management has determined that the
frequency and timing of the when-and-if-available upgrades are
unpredictable and therefore we recognize revenue consistent with
the sale of the perpetual license or subscription. We generally
control fulfillment, pricing, product requirements, and collection
risk and therefore we record the gross amount of revenue. We
provide a 30-day money back guarantee for the majority of our
end-user software products.
For
certain end-user software products, we sell perpetual
licenses. We provide a limited amount of free technical
support to customers. Since the cost of providing this free
technical support is insignificant and free product enhancements
are minimal and infrequent, we do not defer the recognition of
revenue associated with sales of these products.
For
certain of our end-user software products (principally
SUPERAntiSpyware), we sell licenses for a fixed subscription
period. We provide regular, significant updates over the
subscription period and therefore recognize revenue for these
products ratably over the subscription period.
Other
revenue consists primarily of revenue generated through partners
advertising to our customer base in various forms, including
toolbar advertising, email marketing, and free trial offers. We
recognize other revenue in the period in which our partners notify
us that the revenue has been earned.
Engineering and IT
Engineering
and IT 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 engineering and IT 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 $24,000 and
$18,000 for the years ended December 31, 2019 and 2018,
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 warrants and vesting of RSUs using
the treasury stock method when dilutive.
For
the year ended December 31, 2019, diluted earnings per share was
computed using our net income and the weighted average number of
common shares outstanding, including the effect of the potential
issuance of common stock such as stock issuable pursuant to the
exercise of stock options and warrants and vesting of RSUs using
the treasury stock method. For the year ended December 31,
2018, we were in a loss position, therefore all shares were
anti-dilutive.”
The
following table sets forth the computation of basic and diluted net
earnings (loss) per share (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
Net
income (loss)
|
$3,846
|
$(9,100)
|
|
Basic:
|
|
|
|
Weighted-average
shares of common stock outstanding
|
18,977
|
18,826
|
|
Shares
used in computing basic net income (loss) per share
|
18,977
|
18,826
|
|
Basic
net income (loss) per share
|
$0.20
|
$(0.48)
|
|
Diluted:
|
|
|
|
Weighted-average
shares of common stock outstanding
|
18,977
|
18,826
|
|
Add:
Common equivalent shares outstanding
|
49
|
—
|
|
Shares
used in computing diluted net loss per share
|
19,026
|
18,826
|
|
Diluted
net income (loss) per share
|
$0.20
|
$(0.48)
|
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
Gain (Loss)
|
Unrealized
Gain
(Loss) on
Investments
|
|
|
Balance
as of December 31, 2018
|
$(2,438)
|
$(69)
|
$(2,507)
|
|
Current-period
other comprehensive gain
|
49
|
78
|
127
|
|
Balance
as of December 31, 2019
|
$(2,389)
|
$9
|
$(2,380)
|
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: As a part of the board of directors’ ongoing
capital allocation review, on December 6, 2019 the board of
directors authorized and declared a special cash distribution of
$1.00 per share on each outstanding share of the Company’s
common stock. The record date for this distribution was December
17, 2019 and the payment date was December 26, 2019. Accordingly,
the Company paid $19.1 million to shareholders on December 26,
2019.
The
fair value of our stock-based awards was estimated using the
following weighted average assumptions for the years ended December
31, 2019 and 2018:
|
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
1.67%
|
2.43%
|
2.01%
|
2.31%
|
|
Expected
term (in years)
|
3.1
|
3.0
|
0.5
|
0.5
|
|
Volatility
|
35.6%
|
41.2%
|
42.4%
|
29.0%
|
|
Expected
dividend
|
0%
|
0%
|
0%
|
0%
|
|
Weighted
average grant-date fair value
|
$0.52
|
$0.84
|
$0.43
|
$0.67
|
We
recorded the following stock-based compensation expense for the
fiscal years ended December 31, 2019 and 2018 (in
thousands):
|
|
For the Year Ended December 31,
|
|
|
|
|
|
Stock-based compensation expense related to grants of:
|
|
|
|
Stock
options
|
$130
|
$395
|
|
ESPP
|
19
|
16
|
|
RSU
|
155
|
269
|
|
|
$304
|
$680
|
|
Stock-based compensation expense recognized in:
|
|
|
|
Cost
of service
|
$40
|
$63
|
|
Engineering
and IT
|
25
|
42
|
|
Sales
and marketing
|
38
|
54
|
|
General
and administrative
|
201
|
521
|
|
|
$304
|
$680
|
Cash
provided by (used in) from the payment of dividend, issuance of
common stock, net of repurchase of common stock, was $(19,006,000)
and $257,000 for the years ended December 31, 2019 and 2018,
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 decreased by
$438K 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, 2019 and 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, 2019 and 2018
(in thousands):
|
As of December 31, 2019
|
|
|
|
|
|
Money
market funds
|
$1,137
|
$—
|
$—
|
$1,137
|
|
Certificates
of deposit
|
—
|
475
|
—
|
475
|
|
Commercial
paper
|
—
|
6,911
|
—
|
6,911
|
|
Corporate
notes and bonds
|
—
|
7,933
|
—
|
7,933
|
|
U.S.
government agency securities
|
—
|
2,144
|
—
|
2,144
|
|
Total
|
$1,137
|
$17,463
|
$—
|
$18,600
|
|
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
|
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. No transfers were made between level 1, level 2 and
level 3 for the years ended December 31, 2019 and
2018.
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, 2019 and
2018.
For
the year ended December 31, 2019, Comcast and Cox Communications
accounted for approximately 63% and 25%, respectively, of our total
revenue. For the year ended December 31, 2018, Comcast and Cox
Communications accounted for approximately 69% and 15%,
respectively, 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
|
$532
|
$702
|
|
Philippines
|
1
|
1
|
|
Total
|
$533
|
$703
|
Recent Accounting Pronouncements
Recent Accounting Standards Adopted in the Current
Period
Lease Accounting
In
February 2016, the FASB issued ASU 2016-02, Leases (“ASU
2016-02”). This new standard establishes a right-of-use (ROU)
model that requires a lessee to record a ROU asset and a lease
liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or
operating, with classification affecting the pattern of expense
recognition in the income statement. ASU 2016-02 is effective for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early adoption is permitted. In
July 2018, the FASB issued ASU No. 2018-11 which provides an
alternative transition method that allows entities to apply the new
leases standard at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. The Company has adopted the
requirements of ASU 2016-02 on January 1, 2019 using the option
transition method. The Company took advantage of the practical
expedient options, which allows an entity not to reassess whether
any existing or expired contracts contain leases. As of December
31, 2019, there was an increase in assets of $68,000 and
liabilities of $68,000 since the adoption of the standard due to
the recognition of the required right-of-use asset and
corresponding liability for all lease obligations that are
currently classified as operating leases with a minimal difference
related to existing deferred rent that reduced the ROU asset
recorded. The standard did not have an impact in our consolidated
income statements.
For information regarding the impact of Topic 842
adoption, see Significant Accounting
Policies - Leases and Note
8— Leases.
Fixed Assets
In August 2018,
the FASB issued Accounting Standard Update No. 2018-15, Customer’s Accounting
for Implementation Costs Incurred in a Cloud Computing Arrangement
That Is a Service Contract simplifies the Process for Accounting for Cloud
Computing Expenses. The guidance states that
implementation costs should be amortized over the term of the
associated cloud computing arrangement service on a straight-line
basis. In addition, it states that the usage rate (number of
transactions, users, data throughput) should not be used as a basis
for amortization. This guidance will be effective
after December 15, 2019, and early adoption is
permitted. The Company adopted the guidance as of December 31,
2019. As of December 31, 2019,
the Company capitalized $74,000 of cloud implementation costs as
part of software in Property and Equipment in the consolidated
balance sheets and is amortizing it over 3 years on a straight-line
basis.
New Accounting Standards to be adopted in Future
Periods
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
2020 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.
In August 2018, the FASB issued Accounting
Standard Update No. 2018-13, Changes to Disclosure
Requirements for Fair Value Measurements (Topic
820) (ASU 2018-13), which
improved the effectiveness of disclosure requirements for recurring
and nonrecurring fair value measurements. The standard removes,
modifies, and adds certain disclosure requirements. We will adopt
the new standard effective January 1, 2020 and do not expect the
adoption of this guidance to have a material impact on its
consolidated financial statements.
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.
Income Taxes
In December 2019, the
FASB issued Accounting Standard Update No.
2019-12, Income
Taxes (Topic
740): Simplifying
the Accounting for Income Taxes (ASU 2019-12),
which simplifies the accounting for income taxes. This guidance
will be effective for us in the first quarter of 2021 on a
prospective basis, and early adoption is permitted. We are
currently evaluating the impact of the new guidance on our
consolidated financial statements.
Note 2. Property and Equipment
Property
and equipment are stated at cost, less accumulated depreciation,
and consist of the following as of December 31, 2019 and 2018 (in
thousands):
|
|
|
|
|
|
|
|
Computer
equipment and software
|
$7,233
|
$7,143
|
|
Furniture
and office equipment
|
142
|
142
|
|
Leasehold
improvements
|
348
|
348
|
|
Construction
in progress
|
32
|
—
|
|
|
7,755
|
7,633
|
|
Accumulated
depreciation
|
(7,222)
|
(6,930)
|
|
|
$533
|
$703
|
Depreciation
expense was $294,000 and $638,000 for the years ended December 31,
2019 and 2018, respectively.
Note 3. Intangible Assets
Amortization
expense related to intangible assets was $0 for the years ended
December 31, 2019 and 2018, 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, 2019, 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 $512,000 and $401,000 for the years ended December 31, 2019 and
2018, respectively.
As
of December 31, 2019, minimum payments due under all non-cancelable
lease agreements were as follows (in thousands):
|
Years ending December 31,
|
|
|
2020
|
$274
|
|
2021
|
107
|
|
Total
minimum lease and principal payments
|
$381
|
Legal contingencies
Federal Trade Commission
Consent Order. As previously
disclosed, on December 20, 2016 the Federal Trade Commission
(“FTC”) issued a confidential Civil Investigative
Demand, or CID, to the Company requiring the Company to produce
certain documents and materials and to answer certain
interrogatories relating to PC Healthcheck, an obsolete software
program that the Company developed on behalf of a third party for
their use with their customers. The investigation relates to the
Company providing software like PC Healthcheck to third parties for
their use prior to December 31, 2016, when the Company was under
management of the previous Board and executive team. Since issuing
the CID, the FTC has sought additional written and testimonial
evidence from the Company. We have cooperated fully with the
FTC’s investigation and provided all requested information.
In addition, the Company has not used PC Healthcheck nor provided
it to any customers since December 2016.
On March 9, 2018, the FTC notified the Company that the FTC was
willing to engage in settlement discussions. On November 6,
2018, the Company and the FTC entered into a proposed Stipulation
to Entry of Order for Permanent Injunction and Monetary Judgment,
or the Consent Order. The Consent Order was approved by the
Commission on March 26, 2019 and entered by the U.S. District
Court for the Southern District of Florida on March 29, 2019. Entry
of the Consent Order by the Court has finally resolved the
FTC’s multi-year investigation of the Company.
Pursuant to the Consent Order, under which the Company neither
admitted nor denied the FTC’s allegations (except as to the
Court having jurisdiction over the matter), the FTC has agreed to
accept a payment of $10 million in settlement of the $35 million
judgement, subject to the factual accuracy of the information the
Company has provided as part of our financial representations. The
$10 million payment was made on April 1, 2019 and has been
recognized in operating expenses within the Company’s
consolidated statements of operations for the year ended December
31, 2018.
Additionally, pursuant to the Consent Order, the Company has agreed
to implement certain new procedures and enhance certain existing
procedures. For example, the Consent Order necessitates that the
Company cooperate with representatives of the Commission on
associated investigations if needed; imposes requirements on the
Company regarding obtaining acknowledgements of the Consent Order
and compliance certification, including record creation and
maintenance; and prohibits the Company from making
misrepresentations and misleading claims or providing the means for
others to make such claims regarding, among other things, detection
of security or performance issues on consumer’s Electronic
Devices. Electronic Devices include, but are not limited to, cell
phones, tablets and computers. The Company intends to monitor the
impact of the Consent Order regularly and, while the Company
currently does not expect the settlement to have a long-term and
materially adverse impact on its business, the Company’s
business may be negatively impacted as the Company adjusts to some
of the changes. If the Company is unable to comply with the Consent
Order, then this could result in a material and adverse impact to
the Company’s results of operations and financial
condition.
Other
Matters. The
Company has received and may in the future receive additional
requests for information, including subpoenas, from other
governmental agencies relating to the subject matter of the Consent
Order and the Civil Investigative Demands described above. The
Company intends to cooperate with these information requests and is
not aware of any other legal proceedings against the Company by
governmental authorities at this time.
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,
2019 and 2018, respectively. We have not accrued any liabilities
related to such obligations in the consolidated financial
statements as of December 31, 2019 and 2018.
Note 5. Other Accrued and Other Long-Term Liabilities
Other
accrued liabilities consist of the following (in
thousands):
|
|
|
|
|
|
|
|
Accrued
expenses
|
$443
|
$338
|
|
Self-insurance
accruals
|
404
|
585
|
|
Lease
liabilities
|
68
|
-
|
|
Other
accrued liabilities
|
86
|
55
|
|
Total
other accrued liabilities
|
$1,001
|
$978
|
Other
long-term liabilities consist of the following (in
thousands):
|
|
|
|
|
|
|
|
Long-term
income tax payable
|
$783
|
$545
|
|
FIN48
long-term income tax payable
|
-
|
253
|
|
Other
long-term liabilities
|
9
|
2
|
|
Total
other long-term liabilities
|
$792
|
$800
|
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 May
19, 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, 2019, there were approximately 1.8 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, 2019,
there were approximately 366,000 shares available for
grant.
Stock Options
The
following tables represent stock option activity for the years
ended December 31, 2019 and 2018:
|
|
|
Weighted
Average
Exercise Price
per Share
|
Weighted
Average
Remaining
Contractual
Term (in years)
|
Aggregate
Intrinsic Value
(in thousands)
|
|
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
|
|
Granted
|
90,000
|
$0.94
|
|
|
|
Exercised
|
-
|
$-
|
|
|
|
Forfeited
|
(77,135)
|
$1.97
|
|
|
|
Outstanding
options at December 31, 2019
|
816,185
|
$1.77
|
7.49
|
$16
|
|
Options
vested and expected to vest
|
816,185
|
$1.77
|
7.49
|
$16
|
|
Exercisable
at December 31, 2019
|
698,879
|
$1.88
|
7.34
|
$7
|
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
|
|
|
|
|
|
|
$0.56 - $1.14
|
90,000
|
9.41
|
$0.94
|
|
$1.29-$1.29
|
271,234
|
7.17
|
$1.29
|
|
$1.51-$1.56
|
90,232
|
5.27
|
$1.52
|
|
$1.74-$1.74
|
300,000
|
8.15
|
$1.74
|
|
$1.88-$12.44
|
56,723
|
6.57
|
$3.96
|
|
$12.50-$16.67
|
7,996
|
3.61
|
$15.88
|
|
|
816,185
|
|
|
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, 2019 and 2018. 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 $0 and
$27,000 for the years ended December 31, 2019 and 2018,
respectively. The total fair value of options vested during 2019
and 2018 was $53,000 and $22,000, respectively.
At
December 31, 2019, there was $0 of unrecognized compensation cost
related to stock options which is expected to be recognized over a
weighted average period of 0.7 years.
Employee Stock Purchase Plan
In
the second quarter of 2011, to advance the interests of the Company
and its stockholders by providing an incentive to attract, retain
and reward eligible employees and by motivating such persons to
contribute to the growth and profitability of the Company, the
Company’s Board of Directors 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 25,866 shares and 28,018 shares were issued under the ESPP
during the years ended December 31, 2019 and 2018,
respectively.
As
of December 31, 2019, approximately 104,071 shares remain available
for grant under the ESPP.
Restricted Stock Units
The
following table represents RSU activity for the years ended
December 31, 2019 and 2018:
|
|
|
Weighted Average Grant-Date Fair Value per Share
|
Weighted Average Remaining Contractual Term
(in years)
|
Aggregate Intrinsic Value (in thousands)
|
|
Outstanding
RSUs at December 31, 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
|
|
Awarded
|
243,348
|
$1.39
|
|
|
|
Released
|
(72,724)
|
$2.06
|
|
|
|
Forfeited
|
(18,305)
|
$2.75
|
|
|
|
Outstanding RSUs at December 31, 2019
|
248,549
|
$1.62
|
0.60
|
$227
|
At
December 31, 2018, there was $112,000 of unrecognized compensation
cost related to RSUs which is expected to be recognized over a
weighted average period of 0.6 years.
Cash Dividend
As
a part of the board of directors’ ongoing capital allocation
review, on December 6, 2019 the board of directors authorized and
declared a special cash distribution of $1.00 per share on each
outstanding share of the Company’s common stock. The record
date for this distribution was December 17, 2019 and the payment
date was December 26, 2019. Accordingly, the Company paid $19.1
million to shareholders on December 26, 2019.
In
connection with the special cash distribution of $1.00 per share,
the exercise price on all outstanding options as of December 27,
2019 was reduced by $1.00 as permitted under the 2010 and 2014
Plans which includes an antidilution feature designed to equalize
the fair value of options as a result of a transaction such as this
special distribution. This adjustment did not affect the fair
value, vesting conditions or classification of the outstanding
options.
Stock 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 $151.1
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 income (loss) before income taxes are as follows
(in thousands):
|
|
|
|
|
|
|
|
United
States
|
$3,634
|
$(9,458)
|
|
Foreign
|
366
|
357
|
|
Total
|
$4,000
|
$(9,101)
|
The
provision (benefit) for income taxes from continuing operations
consisted of the following (in thousands):
|
|
|
|
Current:
|
|
|
|
Federal
|
$—
|
$—
|
|
State
|
16
|
8
|
|
Foreign
|
118
|
(38)
|
|
Total
Current
|
$134
|
$(30)
|
|
Deferred
|
|
|
|
Federal
|
$—
|
$—
|
|
State
|
—
|
—
|
|
Foreign
|
20
|
29
|
|
Total
Deferred
|
$20
|
$29
|
|
Provision
(benefit) for income taxes
|
$154
|
$(1)
|
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
|
$835
|
$(1,911)
|
|
State
taxes
|
16
|
8
|
|
Permanent
differences/other
|
(13)
|
65
|
|
Stock-based
compensation
|
23
|
81
|
|
Federal
valuation allowance (used) provided
|
(707)
|
1,756
|
|
Provision
(benefit) for income taxes
|
$154
|
$(1)
|
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
|
$78
|
$66
|
|
Accruals
and reserves
|
92
|
2,673
|
|
Stock
options
|
197
|
179
|
|
Net
operating loss carryforwards
|
38,335
|
35,522
|
|
Federal
and state credits
|
3,461
|
3,461
|
|
Foreign
credits
|
159
|
152
|
|
Intangible
assets
|
1,789
|
2,139
|
|
Research
and development expense
|
1,858
|
2,224
|
|
Gross
deferred tax assets
|
45,969
|
46,416
|
|
Valuation
allowance
|
(45,846)
|
(46,283)
|
|
Total
deferred tax assets
|
123
|
133
|
|
Deferred
Tax Liabilities (1)
|
(551)
|
(543)
|
|
Net
deferred liabilities
|
$(428)
|
$(410)
|
(1)
Of this amount,
$534,000 relates to the Indian subsidiaries unremitted earnings
deferred tax liability.
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.
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 SAB 118, 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 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 was $2.67 million. Under the Tax Cuts
and Jobs Act of 2017, all foreign subsidiaries’ accumulated
earnings through December 31, 2019 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
$534,000 as of December 31, 2019.
The
net valuation allowance decreased and increased by approximately
$0.4 million and $2.1 million during the years ended December 31,
2019 and 2018, respectively. As of December 31, 2019, the Company
had Federal and state net operating loss carryforwards of
approximately $151.1 million and $91.2 million, respectively. The
Federal net operating loss and credit carryforwards will expire at
various dates beginning in 2020 through 2039, if not utilized. The
state net operating loss carryforwards will expire at various dates
beginning in 2020 through 2039, if not utilized.
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
|
$2,117
|
$2,229
|
|
Increase
related to prior year tax positions
|
4
|
—
|
|
Decrease
related to prior year tax positions
|
—
|
(20)
|
|
Settlements
with tax authorities
|
—
|
(92)
|
|
Balance
at end of year
|
$2,121
|
$2,117
|
The
Company’s total amounts of unrecognized tax benefits that, if
recognized, that would affect its tax rate are $0.1 million and
$0.1 million as of December 31, 2019 and 2018,
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 $113,000 accrued for payment of
interest and penalties related to unrecognized tax benefits as of
December 31, 2019. The Company had $110,000 accrued for
payment of interest and penalties related to unrecognized tax
benefit as of December 31, 2018.
As
of December 31, 2019, 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, 2019, the ASC
740-10 reserve for India transfer pricing totals $250,000.
The Company’s tax position related to India has not changed
in 2019 aside from an additional $3,000 increase to the reserve
representing accrued interest.
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.
Note 8. Leases
We
have entered into various non-cancelable operating lease agreements
for certain of our offices, and certain equipment. Our leases have
original lease periods expiring
between 2019 and 2020.
The
components of lease costs, lease term and discount rate are as
follows (in thousands except lease term and discount
rate):
|
|
For the Year ended
December 31,
2019
|
|
Operating leases
|
|
|
Operating
lease right-of-use assets
|
$68
|
|
|
|
|
Operating
lease liabilities – short term
|
$61
|
|
Operating
lease liabilities – long-term
|
7
|
|
Total
operating lease liabilities
|
$68
|
|
Weighted
Average Remaining Lease Term
|
|
|
Operating
leases
|
0.4 years
|
|
Weighted
Average Discount Rate
|
|
|
Operating
leases
|
4.5%
|
The
following represents maturities of operating lease liabilities as
of December 31, 2019 (in thousands):
|
|
|
|
2020
|
$62
|
|
2021
|
5
|
|
2022
|
3
|
|
Total
undiscounted cash flows
|
70
|
|
Less
imputed interest
|
(2)
|
|
Present
value of lease liabilities
|
$68
|
Supplemental
cash flow information related to leases are as follows (in
thousands):
|
Cash paid for amounts included in the measurement
of lease liabilities:
|
For the Year
Ended
December 31,
2019
|
|
Operating
cash flows from operating leases
|
$181
|
|
Right-of-use
assets obtained in exchange for lease obligations:
|
|
|
Operating
leases
|
$-
|
The
Company recorded the operating lease liabilities under other
accrued liabilities on the consolidated balance sheet as of
December 31, 2019.