NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Significant Accounting Policies
Basis of Presentation
The
accompanying unaudited interim condensed consolidated financial
statements include the accounts of Support.com, Inc. (the
“Company”,“Support.com”, “We”
or “Our”) and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated. The
condensed consolidated balance sheet as of June 30, 2018 and the
consolidated statements of operations and comprehensive loss for
the three and six months ended June 30, 2018 and 2017 and the
consolidated statements of cash flows for the six months ended June
30, 2018 and 2017 are unaudited. In the opinion of management,
these unaudited interim condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring
adjustments) that are necessary for a fair presentation of the
results for, and as of, the periods shown. The results of
operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period.
The condensed consolidated balance sheet information as of December
31, 2017 is derived from audited financial statements as of that
date.
These financial
statements have been prepared based upon Securities and Exchange
Commission (“SEC”) rules that permit reduced disclosure
for interim periods. For a more complete discussion of significant
accounting policies and certain other information,
these
unaudited interim condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2017, filed
with the SEC on March 22, 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 condensed consolidated financial statements
and accompanying notes. The accounting estimates that require
management’s most significant, difficult and subjective
judgments include accounting for revenue recognition, assumptions
used to estimate self-insurance accruals, the valuation and
recognition of investments, the assessment of recoverability of
intangible assets and their estimated useful lives, the valuations
and recognition of stock-based compensation and the recognition and
measurement of current and deferred income tax assets and
liabilities. Actual results could differ materially from these
estimates.
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.
There
have been no other changes to the accounting policies, which are
disclosed in our most recent Annual Report on Form 10-K. The
accompanying unaudited Condensed Consolidated Financial Statements
we present in this report have been prepared in accordance with our
policies.
Disaggregation of Revenue
We
generate revenue from the sale of services and sale of software
fees for end-user software products provided through direct
customer downloads and through the sale of these end-user software
products via partners. The following table depicts the
disaggregation of revenue (in thousands) according to revenue type
and is consistent with how we evaluate our financial
performance:
Revenue from Contracts with Customers:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
|
|
|
|
Services
|
$
16,220
|
$
13,147
|
$
31,420
|
$
26,062
|
Software and
other
|
1,248
|
1,360
|
2,570
|
2,735
|
Total revenue
|
$
17,468
|
$
14,507
|
$
33,990
|
$
28,797
|
We do
not believe that further disaggregation of revenue is necessary as
it would not depict information concerning the nature, amount,
timing and uncertainties of revenue and cash flows that are
affected by economic factors nor the financial performance
evaluations performed by our chief operating decision
maker.
Services Revenue
Services revenue is
comprised primarily of fees for technology support services. Our
service programs are designed for both the consumer and small and
medium business (“SMB”) markets, and include computer
and mobile device set-up, security and support, virus and malware
removal and wireless network set-up, and automation system
onboarding and support. All of our revenues are from contracts with
our customers. Our customers may generally cancel our contract,
without cause, upon written notice (typically ninety days). Our
service contracts do have defined terms, however due to the facts
stated above, our service contracts are recognized on a
month-to-month basis. When the service is provided to customers,
our performance obligation is typically satisfied.
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 we
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 three types of
offerings:
●
Hourly-Based
Services - In connection with the provisions of certain services
programs, fees are calculated based on contracted hourly rates with
partners. For these programs, we recognize revenue as services are
performed, based on billable hours of work delivered by our
technology specialists. These services programs also include
performance standards, which may result in incentives or penalties,
which are recognized when control transfers to our
partners.
●
Subscription-Based
Services - 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. Management has
determined control transfers ratably over the contract
period.
●
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 a contract
liability and is included in 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
three and six months ended June 30, 2018 and 2017, services
breakage revenue was less than 1% of our total revenue. The revenue
that the Company recognized from deferred revenue during the three
and six month periods ended June 30, 2018 was $0.5 million and $1.4
million, respectively.
Partners are
generally invoiced monthly and payments are typically due within 30
to 45 days. Fees from customers via referral programs and direct
transactions are generally paid with a credit card at the time of
sale. Revenue is recognized net of any applicable sales
tax.
We
generally provide a refund period on services, during which refunds
may be granted to customers under certain circumstances, including
inability to resolve certain support issues. For our partnerships,
the refund period varies by partner, but is generally between 5 and
14 days. For referral programs and direct transactions, the refund
period is generally 5 days. For all channels, we recognize revenue
net of refunds and cancellations during the period. Refunds and
cancellations have not been material.
Services revenue
also includes fees from licensing of Support.com cloud-based
software. In such arrangements, customers receive a right to use
our Support.com Cloud applications in their own support
organizations. We license our cloud based software using a
software-as-a-service
(“SaaS”) model under which customers cannot take
possession of the technology and pay us on a per-user or usage
basis during the term of the arrangement. In addition, services
revenue includes fees from implementation services of our
cloud-based software. Currently, revenues from implementation
services are recognized ratably over the customer life which is
estimated as the term of the arrangement once the Support.com Cloud
services are made available to customers. We generally charge for
these services on a time and material basis. As of June 30, 2018,
revenues from implementation services are di minimus.
Software and Other Revenue
Software and other
revenue is comprised primarily of fees for end-user software
products provided through direct customer downloads and through the
sale of these end-user software products via partners. Our software
is sold to customers as a perpetual license or as a fixed period
subscription. We offer when-and-if-available software upgrades to
our end-user products. Management has determined that these
upgrades are not distinct, as the upgrades are an input into a
combined output. In addition, Management has determined that the
frequency and timing of the when-and-if-available upgrades are
unpredictable and therefore we recognize revenue consistent with
the sale of the perpetual license or subscription. We generally
control fulfillment, pricing, product requirements, and collection
risk and therefore we record the gross amount of revenue. We
provide a 30-day money back guarantee for the majority of our
end-user software products.
For
certain end-user software products, we sell perpetual licenses. We
provide a limited amount of free technical support to customers.
Since the cost of providing this free technical support is
insignificant and free product enhancements are minimal and
infrequent, we do not defer the recognition of revenue associated
with sales of these products.
For
certain of our end-user software products (principally
SUPERAntiSpyware), we sell licenses for a fixed subscription
period. We provide regular, significant updates over the
subscription period and therefore recognize revenue for these
products ratably over the subscription period.
Other
revenue consists primarily of revenue generated through partners
advertising to our customer base in various forms, including
toolbar advertising, email marketing, and free trial offers. We
recognize other revenue in the period in which control transfers to
our partners.
Cash, Cash Equivalents and Investments
All
liquid instruments with an original maturity at the date of
purchase of 90 days or less are classified as cash equivalents.
Cash equivalents and short-term investments consist primarily of
money market funds, certificates of deposit, commercial paper,
corporate and municipal bonds. Our interest income on cash, cash
equivalents and investments is recorded monthly and reported as
interest income and other in our condensed consolidated statements
of operations.
Our
cash equivalents and short-term investments in debt securities are
classified as available-for-sale, and are reported at fair value
with unrealized gains/losses included in accumulated other
comprehensive loss within stockholders’ equity on the
condensed consolidated balance sheets. We view our
available-for-sale 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 June 30, 2018, we evaluated our unrealized
gains/losses on available-for-sale securities and determined them
to be temporary. We currently do not intend to sell securities with
unrealized losses and we concluded that we will not be required to
sell these securities before the recovery of their amortized cost
basis.
At June 30, 2018
and December 31, 2017, the fair value of cash, cash equivalents and
investments was $48.8 million and $49.2 million,
respectively.
The
following is a summary of cash, cash equivalents and investments at
June 30, 2018 and December 31, 2017 (in thousands):
As of June 30,
2018
|
|
|
|
|
Cash
|
$
8,017
|
$
—
|
$
—
|
$
8,017
|
Money market
funds
|
4,946
|
—
|
—
|
4,946
|
Certificates of
deposit
|
1,188
|
—
|
(3
)
|
1,185
|
Commercial
paper
|
11,198
|
—
|
(3
)
|
11,195
|
Corporate notes and
bonds
|
18,540
|
—
|
(97
)
|
18,443
|
U.S. government
agency securities
|
4,976
|
—
|
(1
)
|
4,975
|
|
$
48,865
|
$
—
|
$
(104
)
|
$
48,761
|
Classified
as:
|
|
|
|
|
Cash and cash
equivalents
|
$
18,704
|
$
—
|
$
—
|
$
18,704
|
Short-term
investments
|
30,161
|
—
|
(104
)
|
30,057
|
|
$
48,865
|
$
—
|
$
(104
)
|
$
48,761
|
As of December
31, 2017
|
|
|
|
|
Cash
|
$
7,408
|
$
—
|
$
—
|
$
7,408
|
Money market
funds
|
10,643
|
—
|
(1
)
|
10,642
|
Certificates of
deposit
|
1,207
|
—
|
(1
)
|
1,206
|
Commercial
paper
|
2,494
|
—
|
(1
)
|
2,493
|
Corporate notes and
bonds
|
22,846
|
—
|
(77
)
|
22,769
|
U.S. government
agency securities
|
4,719
|
—
|
(4
)
|
4,715
|
|
$
49,317
|
$
—
|
$
(84
)
|
$
49,233
|
Classified
as:
|
|
|
|
|
Cash and cash
equivalents
|
$
18,051
|
$
—
|
$
(1
)
|
$
18,050
|
Short-term
investments
|
31,266
|
—
|
(83
)
|
31,183
|
|
$
49,317
|
$
—
|
$
(84
)
|
$
49,233
|
The
following table summarizes the estimated fair value of our
available-for-sale securities classified by the stated maturity
date of the security (in thousands):
|
|
|
Due within one
year
|
$
25,845
|
$
22,228
|
Due within two
years
|
4,212
|
8,955
|
|
$
30,057
|
$
31,183
|
Fair Value Measurements
Accounting
Standards Codification (“ASC”) 820,
Fair Value Measurements and
Disclosures,
defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles
and enhances disclosures about fair value measurements. Fair value
is defined under ASC 820 as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants
on the measurement date. Valuation techniques used to measure fair
value according to ASC 820 must maximize the use of observable
inputs and minimize the use of unobservable inputs. The standard
describes a fair value hierarchy based on three levels of inputs,
of which the first two are considered observable and the last
unobservable, that may be used to measure fair value, which are the
following:
●
Level 1 - Quoted
prices in active markets for identical assets or
liabilities.
●
Level 2 - Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
●
Level 3 -
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities.
In
accordance with ASC 820, the following table represents our fair
value hierarchy for our financial assets (cash equivalents and
investments) measured at fair value on a recurring basis as of June
30, 2018 and December 31, 2017 (in thousands):
As of June 30,
2018
|
|
|
|
|
Money market
funds
|
$
4,946
|
$
—
|
$
—
|
$
4,946
|
Certificates of
deposit
|
—
|
1,185
|
—
|
1,185
|
Commercial
paper
|
—
|
11,195
|
—
|
11,195
|
Corporate notes and
bonds
|
—
|
18,443
|
—
|
18,443
|
U.S. government
agency securities
|
—
|
4,975
|
—
|
4,975
|
Total
|
$
4,946
|
$
35,798
|
$
—
|
$
40,744
|
As of December
31, 2017
|
|
|
|
|
Money market
funds
|
$
10,642
|
$
—
|
$
—
|
$
10,642
|
Certificates of
deposit
|
—
|
1,206
|
—
|
1,206
|
Commercial
paper
|
—
|
2,493
|
—
|
2,493
|
Corporate notes and
bonds
|
—
|
22,769
|
—
|
22,769
|
U.S. government
agency securities
|
—
|
4,715
|
—
|
4,715
|
Total
|
$
10,642
|
$
31,183
|
$
—
|
$
41,825
|
For
short-term investments, measured at fair value using Level 2
inputs, we review trading activity and pricing for these
investments as of the measurement date. When sufficient quoted
pricing for identical securities is not available, we use market
pricing and other observable market inputs for similar securities
obtained from various third party data providers. These inputs
either represent quoted prices for similar assets in active markets
or have been derived from observable market data. Our policy is to
recognize the transfer of financial instruments between levels at
the end of our quarterly reporting period.
Concentrations of Credit Risk
Financial
instruments that potentially subject us to concentrations of credit
risk consist principally of cash equivalents, investments and trade
accounts receivable. Our investment portfolio consists of
investment grade securities. Except for obligations of the United
States government and securities issued by agencies of the United
States government, we diversify our investments by limiting our
holdings with any individual issuer. We are exposed to credit risks
in the event of default by the issuers to the extent of the amount
recorded on the consolidated balance sheets. The credit risk in our
trade accounts receivable is substantially mitigated by our
evaluation of the customers’ financial conditions at the time
we enter into business and reasonably short payment
terms.
For the
three months ended June 30, 2018, Comcast and Cox Communications
accounted for 71% and 13%, respectively, of our total revenue. For
the three months ended June 30, 2017, Comcast accounted for 62%, of
our total revenue. For the six months ended June 30, 2018, Comcast
and
Cox
Communications
accounted for 70% and
13%, respectively, of our total revenue. For the six months ended
June 30, 2017, Comcast accounted for 64% of our total revenue.
There were no other customers that accounted for 10% or more of
total revenue for the three and six months ended June 30, 2018 and
2017.
The
credit risk in our trade accounts receivable is substantially
mitigated by our evaluation of the customers’ financial
conditions at the time we enter into business and reasonably short
payment terms. As of June 30, 2018, Comcast and Cox Communications
accounted for 74% and 14%, respectively, of our total accounts
receivable. As of December 31, 2017, Comcast and Cox Communications
accounted for 71% and 12% of our total accounts receivable,
respectively. There were no other customers that accounted for 10%
or more of our total accounts receivable as of June 30, 2018 and
December 31, 2017.
Trade Accounts Receivable and Allowance for Doubtful
Accounts
Trade
accounts receivable are recorded at the invoiced amount. We perform
evaluations of our customers’ financial condition and
generally do not require collateral. We make judgments as to our
ability to collect outstanding receivables and provide allowances
for a portion of receivables when collection becomes doubtful.
Reserves are made based on a specific review of all significant
outstanding invoices. For those invoices not specifically provided
for, reserves are recorded at differing rates, based on the age of
the receivable. In determining these rates, we analyze our
historical collection experience and current payment trends. The
determination of past-due accounts is based on contractual terms.
We had an allowance for
doubtful accounts of $32,000 and $9,000 at June 30, 2018 and
December 31, 2017, respectively.
Self-Funded Health Insurance
Effective January
1, 2015, the Company maintains a self-funded health insurance
program with a stop-loss umbrella policy with a third party insurer
to limit the maximum potential liability for medical claims. With
respect to this program, the Company considers historical and
projected medical utilization data when estimating its health
insurance program liability and related expense. As of June 30,
2018, the Company had approximately $610,000 in reserve for its
self-funded health insurance program. As of December 31, 2017, the
Company had approximately $679,000 in reserve for its self-funded
health insurance program. The reserve is included in “other
accrued liabilities” in the condensed consolidated balance
sheets.
The
Company regularly analyzes its reserves for incurred but not
reported claims and for reported but not paid claims related to its
self-funded insurance program. The Company believes its reserves
are adequate. However, significant judgment is involved in
assessing these reserves such as assessing historical paid claims,
average lags between the claims’ incurred date, reported
dates and paid dates, and the frequency and severity of claims.
There may be differences between actual settlement amounts and
recorded reserves and any resulting adjustments are included in
expense once a probable amount is known.
Accumulated Other Comprehensive Loss
The
components of accumulated other comprehensive loss, which relate
entirely to accumulated foreign currency translation losses
associated with our foreign subsidiaries and unrealized losses on
investments, consisted of the following (in
thousands):
|
Foreign
Currency Translation Losses
|
Unrealized
Losses on Investments
|
|
Balance as of
December 31, 2017
|
$
(2,024
)
|
$
(84
)
|
$
(2,108
)
|
Current-period
other comprehensive loss
|
(279
)
|
(19
)
|
(298
)
|
Balance as of June
30, 2018
|
$
(2,303
)
|
$
(103
)
|
$
(2,406
)
|
Realized
gains/losses on investments reclassified from accumulated other
comprehensive loss are reported as interest income and other, net
in our consolidated statements of operations.
The
amounts noted in the condensed consolidated statements of
comprehensive loss are shown before taking into account the related
income tax impact. The income tax effect allocated to each
component of other comprehensive loss for each of the periods
presented is not significant.
Stock-Based Compensation
We
apply the provisions of ASC 718,
Compensation - Stock Compensation
,
which requires the measurement and recognition of compensation
expense for all stock-based payment awards, including grants of
stock, restricted stock awards and options to purchase stock, made
to employees and directors based on estimated fair
values.
The
fair value of our stock-based awards was estimated using the
following weighted average assumptions for the three months and six
months ended June 30, 2018 and 2017.
There were no stock option grants during the three
months ended June 30, 2018.
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
|
|
|
|
Stock
Option Plan:
|
|
|
|
|
Risk-free interest
rate
|
—
|
—
|
2.4
%
|
1.43
%
|
Expected
term
|
—
|
—
|
|
|
Volatility
|
—
|
—
|
41.3
%
|
46.21
%
|
Expected
dividend
|
—
|
—
|
—
%
|
0
%
|
Weighted average
fair value (per share)
|
—
|
—
|
$
0.84
|
$
0.96
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
|
|
|
|
Employee
Stock Purchase Plan:
|
|
|
|
|
Risk-free interest
rate
|
2.09
%
|
1.02
%
|
2.09
%
|
1.02
%
|
Expected
term
|
|
|
|
|
Volatility
|
32.55
%
|
33.66
%
|
32.55
%
|
33.66
%
|
Expected
dividend
|
0
%
|
0
%
|
0
%
|
0
%
|
Weighted average
fair value (per share)
|
$
0.72
|
$
0.59
|
$
0.72
|
$
0.59
|
We
recorded the following stock-based compensation expense for the
three and six months ended June 30, 2018 and 2017 (in
thousands):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense related to grants of:
|
|
|
|
Stock
options
|
$
32
|
$
45
|
$
320
|
$
59
|
Employee Stock
Purchase Plan (“ESPP”)
|
6
|
5
|
11
|
11
|
Restricted Stock
Units (“RSU”)
|
70
|
127
|
153
|
197
|
|
$
108
|
$
177
|
$
484
|
$
267
|
|
|
|
|
|
Stock-based compensation expense recognized in:
|
|
|
|
Cost of
services
|
$
17
|
$
22
|
$
38
|
$
64
|
Cost of software
and other
|
—
|
—
|
—
|
3
|
Research and
development
|
10
|
39
|
24
|
80
|
Sales and
marketing
|
7
|
15
|
26
|
22
|
General and
administrative
|
74
|
101
|
396
|
98
|
|
$
108
|
$
177
|
$
484
|
$
267
|
Earnings (Loss) Per Share
Basic
earnings (loss) per share is computed using our net income (loss)
and the weighted average number of common shares outstanding during
the reporting period. Diluted earnings (loss) per share is computed
using our net income (loss) and the weighted average number of
common shares outstanding, including the effect of the potential
issuance of common stock such as stock issuable pursuant to the
exercise of stock options and warrants and vesting of RSUs using
the treasury stock method when dilutive. For the three months ended
June 30, 2018, diluted earnings per share was computed using our
net income and the weighted average number of common shares
outstanding, including the effect of the potential issuance of
common stock such as stock issuable pursuant to the exercise of
stock options and warrants and vesting of RSUs using the treasury
stock method. For the six months ended June 30, 2018 and the
three and six months ended June 30, 2017, we were in a loss
position, therefore all shares were
anti-dilutive.”
The
following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
396
|
$
(165
)
|
$
(370
)
|
$
(1,451
)
|
|
|
|
|
|
Basic:
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
18,765
|
18,591
|
18,751
|
18,574
|
Shares used in
computing basic loss per share
|
18,765
|
18,591
|
18,751
|
18,574
|
Basic earnings
(loss) per share
|
0.02
|
(0.01
)
|
(0.02
)
|
(0.08
)
|
Diluted:
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
18,765
|
18,591
|
18,751
|
18,574
|
Add: Common
equivalent shares outstanding
|
182
|
-
|
-
|
-
|
Shares used in
computing diluted earnings (loss) per share
|
18,947
|
18,591
|
18,751
|
18,574
|
Diluted earnings
(loss) per share
|
$
0.02
|
$
(0.01
)
|
$
(0.02
)
|
$
(0.08
)
|
The
following potential common shares outstanding were excluded from
the computation of diluted earnings (loss) per share because
including them would have been antidilutive (in
thousands):
|
|
|
|
|
|
|
|
Stock
options
|
871
|
532
|
RSUs
|
110
|
211
|
|
981
|
743
|
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 June 30, 2018, we have not been
required to make any payment resulting from infringement claims
asserted against our customers and have not recorded any related
accruals.
Recent Accounting Pronouncements
Accounting Standards Adopted in the Current Period
Revenue Recognition
We have
implemented all new accounting pronouncements that are in effect
and that management believes would materially affect our financial
statements.
In May
2014, the Financial Accounting Standards Board (the
“FASB”) issued ASU No. 2014-09,
Revenue from Contracts with Customers
,
updated by ASU No. 2015-14
Deferral of the Effective Date
(a.k.a.
ASC 606), which provides a single comprehensive model for entities
to use in accounting for revenue arising from contracts with
customers and will supersede most current revenue recognition
guidance. The standard was effective for public entities for annual
and interim periods beginning after December 15, 2017. Our revenue
is primarily generated when we deliver the service to the customers
over time. We completed our analysis during 2017 and there is no
material change to our financial position, results of operations,
and cash flows as a result of the implementation of ACS 606. We
adopted ASC 606 on a modified retrospective basis effective on
January 1, 2018. Although there is no material impact, we have
expanded disclosures in our notes to our condensed consolidated
financial statements related to revenue recognition under the new
standard. We have implemented changes to our accounting policies
and practices, business processes, systems, and controls to support
the new revenue recognition and disclosure
requirements.
Financial Instruments
In January 2016,
The FASB issued ASU No.
2016-01,
Financial Instruments -
Recognition and Measurement of Financial Assets and Financial
Liabilities
(Topic
825)
. ASU No. 2016-01 revises the classification and
measurement of investments in certain equity investments and the
presentation of certain fair value changes for certain financial
liabilities measured at fair value. ASU No. 2016-01 requires the
change in fair value of many equity investments to be recognized in
net income.
The Company adopted ASU
2016-01 in its first quarter of 2018 utilizing the modified
retrospective transition method. Based on the composition of the
Company’s investment portfolio, the adoption of ASU 2016-01
did not have a material impact on its consolidated financial
statements.
Income Taxes
In
March 2018, the Company adopted Accounting Standards Update No.
2018-05 – Income Taxes (Topic 740): Amendments to SEC
Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which
updates the income tax accounting in U.S. GAAP to reflect the
Securities and Exchange Commission (“SEC”) interpretive
guidance released on December 22, 2017, when the Tax Cuts and Jobs
Act was signed into law.
New Accounting Standards to be adopted in Future
Periods
Restricted cash
In November 2016, the FASB issued ASU No.
2016-18,
Statement of Cash Flows
(Topic 230): Restricted Cash
(“ASU 2016-18”), which enhances and clarifies the
guidance on the classification and presentation of restricted cash
in the statement of cash flows. The Company will adopt ASU 2016-18
in its first quarter of 2019 utilizing the retrospective transition
method. Currently, the Company’s restricted cash balance is
not significant.
Lease Accounting
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842),
which provides guidance for accounting
for leases. Under ASU 2016-02, the Company will be required to
recognize the assets and liabilities for the rights and obligations
created by leased assets. ASU 2016-02 is effective for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2018. We are currently evaluating the impact of
the adoption of ASU 2016-02 on our consolidated financial
statements. While we have not yet quantified the impact, we
anticipate that adoption of ASU 2016-02 will have an impact to the
financial statement presentation of right of use asset, lease
liability, amortization expense, and lease
expense.
Comprehensive Income
In
February 2018, the FASB issued ASU 2018-02,
Income Statement-Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income,
which allows companies to reclassify standard tax
effects resulting from the 2017 Tax Cuts and Jobs Act (the Tax
Act), from accumulated other comprehensive income to retained
earnings
. This standard is effective for fiscal years
beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted for any interim period
after issuance of the ASU.
The new
standard is effective for us beginning January 1, 2019, with early
adoption permitted. We are currently evaluating the timing of
adopting this guidance but do not expect such adoption to have a
material impact on our consolidated financial statements and the
related disclosures.
Note 2. Income Taxes
We
recorded an income tax provision (benefit) of $27,000 and ($53,000)
for the three and six months ended June 30, 2018,
respectively. The income tax provision for interim periods is
determined using an estimate of the annual effective tax rate,
adjusted for discrete items, if any, that are taken into account in
the relevant period. Each quarter, the estimate of the annual
effective tax rate is updated, and if the estimated effective tax
rate changes, a cumulative adjustment is made. There is a
potential for volatility of the effective tax rate due to several
factors, including changes in the mix of the pre-tax income and the
jurisdictions to which it relates, changes in tax laws and
settlements with taxing authorities and foreign currency
fluctuations.
As of
June 30, 2018, our deferred tax assets are fully offset by a
valuation allowance except in those jurisdictions where it is
determined that a valuation allowance is not required. ASC
740
, Income Taxes
, provides
for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the weight of available
evidence, which includes historical operating performance, reported
cumulative net losses since inception and difficulty in accurately
forecasting our future results, we provided a full valuation
allowance against our net U.S. deferred tax assets and a partial
valuation allowance against our foreign deferred tax assets.
We reassess the need for our valuation allowance on a quarterly
basis. If it is later determined that a portion or all of the
valuation allowance is not required, it generally will be a benefit
to the income tax provision in the period such determination is
made.
The
Company does not anticipate a material change in the total amount
or composition of its unrecognized tax benefits as of June 30,
2018.
Note 3. Commitments and Contingencies
Legal contingencies
On
October 11, 2016 the Wage and Hour Division of the U.S. Department
of Labor (“DOL”) notified the Company that it would be
conducting an audit of the Company relating to compliance with the
Fair Labor Standards Act (“FLSA”). The DOL indicated
that the focus of the audit is directed to compliance with overtime
requirements related to our technology specialists who work from
home providing technical support services. The audit commenced on
October 20, 2016 and was resolved by settlement agreement on
January 18, 2018. Pursuant to the settlement agreement, as of
December 31, 2017, the Company accrued $30,000 in back wages and
related liquidated damages to some of our current and former
employees. These payments were completed during the quarter ended
March 31, 2018.
On December 20, 2016 the Federal Trade Commission
(“FTC”) issued a 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, a software program provided by the Company to certain
third parties prior to December 31, 2016. Since issuing the CID,
the FTC has sought additional written and testimonial evidence from
the Company. The Company has cooperated with the
investigation from its inception and provided all of the requested
information. On March 9, 2018, the FTC notified the Company
that the FTC was willing to engage in settlement discussions.
At this time it is difficult to predict the timing, and the likely
outcome, of these matters. The possible outcomes
include, but are not limited to, the filing by the FTC of a
contested civil complaint and further discussions leading to a
settlement which would likely include a monetary payment and
injunctive and other relief. If discussions with the FTC do
not progress to a mutually agreeable outcome, it is likely that
litigation will ensue. Although we are confident in our legal
position, litigation outcomes by their very nature are difficult to
predict and there can be no assurance of a particular
outcome. Accordingly, the Company is actively pursuing
settlement discussions directly with the FTC, but is also
continuing to assess the likelihood of future litigation and
related expenses. The outcome of these matters with the FTC,
whether by mutual resolution or through litigation, could have a
material adverse impact on the Company’s business operations,
its results of operations or its financial condition. The
Company is currently unable to estimate a range of potential loss,
if any, and has not accrued any amounts with respect to any
potential monetary payments relating to this matter. Legal costs
associated with this action may be material and will be expensed as
incurred.
On January 17, 2017 the Consumer Protection Division of the Office
of Attorney General, State of Washington (“Washington
AG”), issued a Civil Investigative Demand to the Company
requiring the Company to produce certain documents and materials
and to answer certain interrogatories relating to PC Healthcheck.
The Washington AG has not alleged a factual basis underlying
the issuance of the Civil Investigative Demand. On May 30,
2017, the Consumer Protection Division of the Office of Attorney
General, State of Texas (“Texas AG”), issued a Civil
Investigative Demand to the Company requiring the Company to
produce certain documents and materials and to answer certain
interrogatories relating to PC Healthcheck. The Texas AG has
not alleged a factual basis underlying the issuance of the
Civil Investigative Demand. The Company is in the process of
responding to these Civil Investigative Demands and cooperating
with the FTC, Washington AG and Texas AG with respect to these
matters.
We are
also subject to other routine legal proceedings, as well as
demands, claims and threatened litigation, that arise in the normal
course of our business, potentially including assertions that we
may be infringing patents or other intellectual property rights of
others. We currently do not believe that the ultimate amount of
liability, if any, for any pending claims of any type (alone or
combined) will materially affect our financial position, results of
operations or cash flows. The ultimate outcome of any litigation is
uncertain, however, any unfavorable outcomes could have a material
negative impact on our financial condition and operating results.
Regardless of outcome, litigation can have an adverse impact on us
because of defense costs, negative publicity, diversion of
management resources and other factors.
Lease Commitments
Headquarters office lease.
On March 23,
2018, we entered into a two-year lease agreement with an effective
date of April 1, 2018 for our headquarters office facility,
covering approximately 6,283 square feet and located in Sunnyvale,
California with the monthly rent of $14,000. The lease is
scheduled to expire on March 31, 2020.
Total
facility rent expense pursuant to all operating lease agreements
was $176,000 and $244,000 for the three and six months ended June
30, 2018
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 financialstatements. We
have entered into various service level agreements with our
partners, in which we may guarantee the maintenance of certain
service level thresholds. Under some circumstances, if we do not
meet these thresholds, we may be liable for certain financial
costs. We evaluate costs for such guarantees under the provisions
of ASC 450. We consider such factors as the degree of probability
that we would be required to satisfy the liability associated with
the guarantee and the ability to make a reasonable estimate of the
resulting cost. During the three and six months ended June 30,
2018, we did not incur any costs as a result of such obligations.
We have not accrued any liabilities related to such obligations in
the condensed consolidated financial statements as of June 30, 2018
and December 31, 2017.
Note 4. Intangible Assets
The
Company amortizes intangible assets, which consist of purchased
technologies that have estimated useful lives ranging from 1 to 6
years, using the straight-line method when the consumption pattern
of the asset is not apparent. The Company reviews such assets for
impairment whenever an impairment indicator exists and continually
monitors events and changes in circumstances that could indicate
carrying amounts of the intangible assets may not be recoverable.
When such events or changes in circumstances occur, the Company
assesses recoverability by determining whether the carrying value
of such assets exceed the estimates of future undiscounted future
cash flows expected to be generated by such assets. Should
impairment exist, the impairment loss would be measured based on
the excess carrying value of the asset over the asset’s
estimated fair value. There was no impairment of intangible assets
recorded for the six months ended June 30, 2018.
Amortization of
intangible assets and other for the three and six months ended June
30, 2018 was $0. Amortization of intangible assets and other for
the three and six months ended June 30, 2017 was $6,000 and
$16,000, respectively.
The
following table summarizes the components of intangible assets (in
thousands):
|
Indefinite
Life Intangibles
|
As of June 30,
2018
|
|
Gross carrying
value
|
$
250
|
Accumulated
amortization
|
—
|
|
$
250
|
As of December 31,
2017
|
|
Gross carrying
value
|
$
250
|
Accumulated
amortization
|
—
|
Net carrying
value
|
$
250
|
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.
Note 5. Other Accrued Liabilities
Other
accrued liabilities consist of the following (in
thousands):
|
|
|
Accrued
expenses
|
$
383
|
$
462
|
Self-insurance
accruals
|
610
|
679
|
Customer
deposits
|
12
|
-
|
Other accrued
liabilities
|
136
|
189
|
Total other accrued
liabilities
|
$
1,141
|
$
1,330
|
Note 6. Stockholder’s Equity
Stock Options
The
following table represents the stock option activity for the six
months ended June 30, 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
|
$
3.02
|
8.17
|
$
56
|
Granted
|
300,000
|
$
2.74
|
|
|
Exercised
|
(39,606
)
|
$
2.47
|
|
|
Forfeited
|
(121,183
)
|
$
6.39
|
|
|
Outstanding options
at June 30, 2018
|
871,401
|
$
3.07
|
8.61
|
$
280
|
Options vested and
expected to vest
|
841,730
|
$
3.10
|
8.59
|
$
264
|
Exercisable at June
30, 2018
|
528,744
|
$
3.55
|
8.39
|
$
102
|
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 June 30, 2018. This
amount changes based on the fair market value of our stock.
The aggregate intrinsic value of
options exercised under our stock option plans was zero during the
three and six months ended June 30, 2018, and zero during the three
and six months ended June 30, 2017. Total fair value of options
vested was $24,000 and $53,000 during both three and six months
ended June 30, 2018, respectively, and $49,000 and $132,000 during
the three and six months ended June 30, 2017,
respectively.
At June
30, 2018, there was $227,000 of unrecognized compensation cost
related to existing options outstanding which is expected to be
recognized over a weighted average period of 2.2
years.
Employee Stock Purchase Plan
In the
second quarter of 2011, to advance the interests of the Company and
its stockholders by providing an incentive to attract, retain and
reward eligible employees and by motivating such persons to
contribute to the growth and profitability of the Company, the
Company’s Board of Directors (the “Board”) and
stockholders approved an ESPP and reserved 333,333 shares of our
common stock for issuance effective as of May 15, 2011. The ESPP
continues in effect for ten (10) years from its effective date
unless terminated earlier by the Company. The ESPP consists of
six-month offering periods during which employees may enroll in the
plan. The purchase price on each purchase date shall not be less
than eighty-five percent (85%) of the lesser of (a) the fair market
value of a share of stock on the offering date of the offering
period or (b) the fair market value of a share of stock on the
purchase date. During the six months ended June 30, 2018, 15,435
shares were purchased under ESPP.
Restricted Stock Units
The
following table represents RSU activity for the six months ended
June 30, 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
|
—
|
—
|
|
|
Released
|
(15,627
)
|
—
|
|
|
Forfeited
|
(11,115
)
|
—
|
|
|
Outstanding RSUs at
June 30, 2018
|
109,587
|
$
2.60
|
0.13
|
$
312
|
At June
30, 2018, there was $39,000 of unrecognized compensation cost
related to RSUs which is expected to be recognized over a weighted
average period of 0.14 years.
Stock Repurchase Program
On
April 27, 2005, our Board authorized the repurchase of up to
666,666 outstanding shares of our common stock. As of June 30, 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 further approval from its
Board.