N
OTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
Note 1. Significant Accounting Policies
Basis of Presentation
The
accompanying unaudited interim condensed consolidated financial
statements include the accounts of Support.com, Inc. (the
“Company”, “Support.com”, “We”
or “Our”) and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated. The
condensed consolidated balance sheet as of March 31, 2019 and the
consolidated statements of operations and comprehensive income
(loss) for the three months ended March 31, 2019 and 2018 and the
consolidated statements of cash flows for the three months ended
March 31, 2019 and 2018 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, 2018 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, 2018, filed
with the SEC on March 8, 2019.
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.
Leases
On
January 1, 2019, we adopted Accounting Standards Update No.
2016-02, Leases (Topic 842) (ASU 2016-02), as amended,
which supersedes the lease accounting guidance under Topic 840, and
generally requires lessees to recognize operating and financing
lease liabilities and corresponding right-of-use (ROU) assets on
the balance sheet and to provide enhanced disclosures surrounding
the amount, timing and uncertainty of cash flows arising from
leasing arrangements. We adopted the new guidance using the
modified retrospective transition approach by applying the new
standard to all leases existing at the date of initial application
and not restating comparative periods. The most significant impact
was the recognition of ROU assets and lease liabilities for
operating leases, while our accounting for finance leases remained
substantially unchanged. See Note 7 — Leases in the notes to
the condensed consolidated financial statements included in Part I,
Item 1, of this Quarterly Report on Form 10-Q for additional
information regarding the adoption.
We
determine if an arrangement is a lease at inception. Operating
leases are included in operating lease right-of-use
(“ROU”) assets and short- and long-term lease
liabilities in our consolidated balance sheets. Finance leases are
included in property and equipment, other current liabilities, and
other long-term liabilities in our consolidated balance sheets. As
of adoption of ASC 842 and as of January 1, 2019, the Company was
not party to finance lease arrangements.
ROU
assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and
liabilities are recognized at commencement date based on the
present value of lease payments over the lease term. As most of our
leases do not provide an implicit rate, we use our incremental
borrowing rate based on the information available at commencement
date in determining the present value of lease payments. We use the
implicit rate when readily determinable. The operating lease ROU
asset also includes any lease payments made and excludes lease
incentives. Our lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will
exercise that option. Lease expense for lease payments is
recognized on a straight-line basis over the lease
term.
Under
the available practical expedient, we account for the lease and
non-lease components as a single lease component.
There
have been no other changes to the accounting policies except the
Leases, 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.
Revenue Recognition
Disaggregation of Revenue
We
generate revenue from the sale of services and sale of software
fees for end-user software products provided through direct
customer downloads and through the sale of these end-user software
products via partners. The following table depicts the
disaggregation of revenue (in thousands) according to revenue type
and is consistent with how we evaluate our financial
performance:
|
|
|
|
Revenue from
Contracts with Customers:
|
|
|
Services
|
$
16,864
|
$
15,200
|
Software and
other
|
1,200
|
1,322
|
Total
revenue
|
$
18,064
|
$
16,522
|
Services Revenue
Services
revenue is comprised primarily of fees for technology support
services. Our service programs are designed for both the consumer
and SMB markets, and include computer and mobile device set-up,
security and support, virus and malware removal and wireless
network set-up, and automation system onboarding and
support.
We
offer technology services to consumers and SMBs, primarily through
our partners (which include communications providers, retailers,
technology companies and others) and to a lesser degree directly
through our website at www.support.com. We transact with customers
via reseller programs, referral programs and direct transactions.
In reseller programs, the partner generally executes the financial
transactions with the customer and pays a fee to us which we
recognize as revenue when the service is delivered. In referral
programs, we transact with the customer directly and pay a referral
fee to the referring party. Referral fees are generally expensed in
the period in which revenues are recognized. In such referral
programs, since we are the primary obligor and bear substantially
all risks associated with the transaction, we record the gross
amount of revenue. In direct transactions, we sell directly to the
customer at the retail price.
The
technology services described above include four types of
offerings:
●
Hourly-Based
Services - In connection with the provisions of certain services
programs, fees are calculated based on contracted hourly rates with
partners. For these programs, we recognize revenue as services are
performed, based on billable hours of work delivered by our
technology specialists. These services programs also include
performance standards, which may result in incentives or penalties,
which are recognized as earned or incurred.
●
Subscriptions
- Customers purchase subscriptions or “service plans”
under which certain services are provided over a fixed subscription
period. Revenues for subscriptions are recognized ratably over the
respective subscription periods.
●
Incident-Based
Services - Customers purchase a discrete, one-time service. Revenue
recognition occurs at the time of service delivery. Fees paid for
services sold but not yet delivered are recorded as deferred
revenue and recognized at the time of service
delivery.
The
following table represent deferred revenue activity for the three
months ended March 31, 2019 (in thousands):
Changes in
deferred revenues were as
follows:
|
|
Balance
as of December 31, 2018
|
$
1,135
|
Deferred revenue
|
751
|
Recognition of unearned
revenue
|
(571
)
|
Balance
as of March 31, 2019
|
$
1,315
|
Partners are
generally invoiced monthly. Fees from customers via referral
programs and direct transactions are generally paid with a credit
card at the time of sale. Revenue is recognized net of any
applicable sales tax.
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 March 31, 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 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 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, 2018, the Company evaluated its
unrealized losses on marketable securities and determined them to
be temporary. We currently do not intend to sell securities with
unrealized losses, and we concluded that we will not be required to
sell these securities before the recovery of their amortized cost
basis. At March 31, 2019 and December 31, 2018, the fair value of
cash, cash equivalents and investments was $48.0 million and $49.6
million, respectively.
The
following is a summary of cash, cash equivalents and investments at
March 31, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
Cash
|
$
6,445
|
$
—
|
$
—
|
$
6,445
|
Money market
funds
|
22,211
|
—
|
—
|
22,211
|
Certificates of
deposit
|
463
|
—
|
—
|
463
|
Commercial
paper
|
2,426
|
—
|
(1
)
|
2,425
|
Corporate notes and
bonds
|
15,465
|
—
|
(19
)
|
15,446
|
U.S. government
agency securities
|
998
|
—
|
—
|
998
|
|
$
48,008
|
$
—
|
$
(20
)
|
$
47,988
|
Classified
as:
|
|
|
|
|
Cash and cash
equivalents
|
$
29,585
|
$
—
|
$
(1
)
|
$
29,584
|
Short-term
investments
|
18,423
|
—
|
(19
)
|
18,404
|
|
$
48,008
|
$
—
|
$
(20
)
|
$
47,988
|
|
|
|
|
|
Cash
|
$
8,391
|
$
—
|
$
—
|
$
8,391
|
Money market
funds
|
14,295
|
—
|
—
|
14,295
|
Certificates of
deposit
|
1,171
|
—
|
(1
)
|
1,170
|
Commercial
paper
|
3,986
|
—
|
(66
)
|
3,985
|
Corporate notes and
bonds
|
14,899
|
—
|
(1
)
|
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
|
$
12,812
|
$
20,874
|
Due within two
years
|
5,592
|
3,593
|
|
$
18,404
|
$
24,467
|
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
March 31, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
Money market
funds
|
$
22,211
|
$
—
|
$
—
|
$
22,211
|
Certificates of
deposit
|
—
|
463
|
—
|
463
|
Commercial
paper
|
—
|
2,425
|
—
|
2,425
|
Corporate notes and
bonds
|
—
|
15,446
|
—
|
15,446
|
U.S. government
agency securities
|
—
|
998
|
—
|
998
|
Total
|
$
22,211
|
$
19,332
|
$
—
|
$
41,543
|
|
|
|
|
|
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 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 March 31, 2019, Comcast and Cox Communications
accounted for 68% and 20%, respectively, of our total revenue. For
the three months ended March 31, 2018, Comcast and Cox
Communications accounted for 69% and 12%, respectively, of our
total revenue. There were no other customers that accounted for 10%
or more of total revenue for the three months ended March 31, 2019
and 2018.
The
credit risk in our trade accounts receivable is substantially
mitigated by our evaluation of the customers’ financial
conditions at the time we enter into business and reasonably short
payment terms. As of March 31, 2019, Comcast and Cox Communications
accounted for 75% and 18%, respectively, of our total accounts
receivable. As of December 31, 2018, Comcast and Cox Communications
accounted for 71% and 20%, respectively, of our total accounts
receivable. There were no other customers that accounted for 10% or
more of our total accounts receivable as of March 31, 2019 and
December 31, 2018.
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 $7,000 and $13,000 at March 31, 2019 and
December 31, 2018, 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 March 31,
2019, the Company had approximately $501,000 in reserve for its
self-funded health insurance program. As of December 31, 2018, the
Company had approximately $585,000 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, 2018
|
$
(2,438
)
|
$
(69
)
|
$
(2,507
)
|
Current-period
other comprehensive income
|
99
|
50
|
149
|
Balance as of March
31, 2019
|
$
(2,339
)
|
$
(19
)
|
$
(2,358
)
|
Realized
gains/losses on investments reclassified from accumulated other
comprehensive loss are reported as interest income and other, net
in our consolidated statements of operations.
The
amounts noted in the condensed consolidated statements of
comprehensive loss are shown before taking into account the related
income tax impact. The income tax effect allocated to each
component of other comprehensive loss for each of the periods
presented is not significant.
Stock-Based Compensation
We
apply the provisions of ASC 718,
Compensation - Stock Compensation
,
which requires the measurement and recognition of compensation
expense for all stock-based payment awards, including grants of
stock, restricted stock awards and options to purchase stock, made
to employees and directors based on estimated fair
values.
The
fair value of our stock-based awards was estimated using the
following weighted average assumptions for the three months ended
March 31, 2019 and 2018:
|
|
Employee Stock
Purchase Plan
|
|
Three Months Ended
March 31,
|
|
|
2018
|
2019
|
|
Risk-free interest
rate
|
0
%
|
2.4
%
|
2.52
%
|
0.5
%
|
Expected term (in
years)
|
0.0
|
3.0
|
0.5
|
0.5
|
Volatility
|
0
%
|
41.3
%
|
25.5
%
|
39.0
%
|
Expected
dividend
|
0
%
|
0
%
|
0
%
|
0
%
|
Weighted average
grant-date fair value
|
$
0.00
|
$
0.84
|
$
0.62
|
$
0.39
|
(1)
There was no
options granted for the three months ended March 31,
2019.
We
recorded the following stock-based compensation expense for the
three months ended March 31, 2019 and 2018 (in
thousands):
|
Three Months
Ended
March
31,
|
Stock-based
compensation expense related to grants of:
|
|
|
Stock
options
|
$
33
|
$
288
|
Employee Stock
Purchase Plan (“ESPP”)
|
-
|
5
|
Restricted stock
units (“RSUs”)
|
19
|
83
|
|
$
52
|
$
376
|
Stock-based
compensation expense recognized in:
|
|
|
Cost of
service
|
$
8
|
$
21
|
Research and
development
|
7
|
14
|
Sales and
marketing
|
12
|
19
|
General and
administrative
|
25
|
322
|
|
$
52
|
$
376
|
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 March 31, 2019 and 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.
The
following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
1,443
|
$
(766
)
|
|
|
|
Basic:
|
|
|
Weighted-average
shares of common stock outstanding
|
18,955
|
18,729
|
Shares used in
computing basic income (loss) per share
|
18,955
|
18,729
|
Basic earnings
(loss) per share
|
0.08
|
(0.04
)
|
Diluted:
|
|
|
Weighted-average
shares of common stock outstanding
|
18,955
|
18,729
|
Add: Common
equivalent shares outstanding
|
49
|
-
|
Shares used in
computing diluted earnings (loss) per share
|
19,004
|
18,729
|
Diluted earnings
(loss) per share
|
$
0.08
|
$
(0.04
)
|
The
following potential common shares outstanding were excluded from
the computation of diluted loss per share because including them
would have been antidilutive (in thousands):
|
Three Months
Ended
March
31,
|
|
2019
|
|
Stock
options
|
765
|
721
|
RSUs
|
78
|
69
|
Total common share
equivalents
|
843
|
790
|
Warranties and Indemnifications
We
generally provide a refund period on sales, during which refunds
may be granted to consumers under certain circumstances, including
our inability to resolve certain support issues. For our
partnerships
, the
refund period varies by partner, but is generally between 5-14
days. For referral programs and direct transactions, the refund
period is generally 5 days.
For the majority of our end-user
software products,
we provide a
30-day money back guarantee.
For all channels, we recognize revenue net of refunds and
cancellations during the period. Refunds and cancellations have not
been material to date.
We
generally agree to indemnify our customers against legal claims
that our end-user software products infringe certain third-party
intellectual property rights. As of March 31, 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
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, the first day of
fiscal year 2019, and 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. There was an increase in assets of
$230,000 and liabilities of $231,000 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 the difference of $1,000 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
7— Leases.
New Accounting Standards to be adopted in Future
Periods
Intangible Assets
In
January 2017, the FASB issued Accounting Standards Update No.
2017-04,
Intangibles
—
Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment
(ASU 2017-04), which
eliminates step two from the goodwill impairment test. Under ASU
2017-04, an entity should recognize an impairment charge for the
amount by which the carrying amount of a reporting unit exceeds its
fair value up to the amount of goodwill allocated to that reporting
unit. This guidance will be effective for us in the first quarter
of 2020 on a prospective basis, and early adoption is permitted. We
do not expect the standard to have a material impact on our
consolidated financial statements.
Note 2. Income Taxes
We
recorded an income tax provision (benefit) of $28,000 and $(80,000)
for the three months ended March 31, 2019 and 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
March 31, 2019, our deferred tax assets are fully offset by a
valuation allowance except in those jurisdictions where it is
determined that a valuation allowance is not required.
ASC
740
, Income Taxes
, provides
for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the weight of available
evidence, which includes historical operating performance, reported
cumulative net losses since inception and difficulty in accurately
forecasting our future results, we provided a full valuation
allowance against our net U.S. deferred tax assets and a partial
valuation allowance against our foreign deferred tax assets.
We reassess the need for our valuation allowance on a quarterly
basis. If it is later determined that a portion or all of the
valuation allowance is not required, it generally will be a benefit
to the income tax provision in the period such determination is
made.
The
Company does not anticipate a material change in the total amount
or composition of its unrecognized tax benefits as of March 31,
2019.
Note 3. Commitments and Contingencies
Legal contingencies
Federal Trade Commission Consent Order.
As previously disclosed, on
December 20, 2016 the Federal Trade Commission (“FTC”)
issued a confidential Civil Investigative Demand, or CID, to the
Company requiring the Company to produce certain documents and
materials and to answer certain interrogatories relating to PC
Healthcheck, an obsolete software program that the Company
developed on behalf of a third party for their use with their
customers. The investigation relates to the Company providing
software like PC Healthcheck to third parties for their use prior
to December 31, 2016, when the Company was under management of the
previous Board and executive team. Since issuing the CID, the FTC
has sought additional written and testimonial evidence from the
Company. We have cooperated fully with the FTC’s
investigation and provided all requested information. In addition,
the Company has not used PC Healthcheck nor provided it to any
customers since December 2016.
On March 9, 2018, the FTC notified the
Company that the FTC was willing to engage in settlement
discussions. On November 6, 2018, the Company and the FTC
entered into a proposed Stipulation to Entry of Order for Permanent
Injunction and Monetary Judgment, or the Consent Order. The Consent
Order
was
approved by the
Commission
on
March 26, 2019 and entered by the U.S. District Court for the
Southern District of Florida on March 29, 2019. Entry of the
Consent Order by the Court has finally resolved the FTC’s
multi-year investigation of the Company.
Pursuant to the Consent Order, under which the Company neither
admitted nor denied the FTC’s allegations (except as to the
Court having jurisdiction over the matter), the FTC has agreed to
accept a payment of $10 million in settlement of the $35 million
judgement, subject to the factual accuracy of the information the
Company has provided as part of our financial representations. The
$10 million payment was made on April 1, 2019 and 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.
On January
17, 2017 the Consumer Protection Division of the Office of Attorney
General, State of Washington (“Washington AG”), issued
a Civil Investigative Demand to the Company requiring the Company
to produce certain documents and materials and to answer certain
interrogatories relating to PC Healthcheck. The Washington AG has
not alleged a factual basis underlying the issuance of the
Civil Investigative Demand. On May 30, 2017, the Consumer
Protection Division of the Office of Attorney General, State of
Texas (“Texas AG”), issued a Civil Investigative Demand
to the Company requiring the Company to produce certain documents
and materials and to answer certain interrogatories relating to PC
Healthcheck.
The Texas AG has not alleged a factual
basis underlying the issuance of the Civil Investigative Demand.
Accordingly, the Company has responded to both the Washington AG
Civil Investigative Demand and the Texas AG Civil Investigative
Demand. To date, the Company has not received any follow-up
communications from either state’s AG with respect to these
matters.
We are
also subject to other routine legal proceedings, as well as
demands, claims and threatened litigation, that arise in the normal
course of our business, potentially including assertions that we
may be infringing patents or other intellectual property rights of
others. We currently do not believe that the ultimate amount of
liability, if any, for any pending claims of any type (alone or
combined) will materially affect our financial position, results of
operations or cash flows. The ultimate outcome of any litigation is
uncertain; however, any unfavorable outcomes could have a material
negative impact on our financial condition and operating results.
Regardless of outcome, litigation can have an adverse impact on us
because of defense costs, negative publicity, diversion of
management resources and other factors.
Guarantees
We have
identified guarantees in accordance with ASC 450,
Contingencies
. This guidance stipulates
that an entity must recognize an initial liability for the fair
value, or market value, of the obligation it assumes under the
guarantee at the time it issues such a guarantee, and must disclose
that information in its interim and annual financial statements. We
have entered into various service level agreements with our
partners, in which we may guarantee the maintenance of certain
service level thresholds. Under some circumstances, if we do not
meet these thresholds, we may be liable for certain financial
costs. We evaluate costs for such guarantees under the provisions
of ASC 450. We consider such factors as the degree of probability
that we would be required to satisfy the liability associated with
the guarantee and the ability to make a reasonable estimate of the
resulting cost. During the three months ended March 31, 2019, we
did not incur any costs as a result of such obligations. We have
not accrued any liabilities related to such obligations in the
condensed consolidated financial statements as of March 31, 2019
and December 31, 2018.
Note 4. Intangible Assets
In
December 2006, we acquired the use of a toll-free telephone number
for cash consideration of $250,000. This asset has an indefinite
useful life.
As of
March 31, 2019, all intangible assets have been fully amortized
with the exception of the indefinite-life intangibles.
Note 5. Other Accrued Liabilities
Other
accrued liabilities consist of the following (in
thousands):
|
|
|
Accrued
expenses
|
$
430
|
$
338
|
Self-insurance
accruals
|
501
|
585
|
Other accrued
liabilities
|
78
|
55
|
Total other accrued
liabilities
|
$
1,009
|
$
978
|
Note 6. Stockholder’s Equity
Stock Options
The
following table represents the stock option activity for the three
months ended March 31, 2019:
|
|
Weighted
Average
Exercise
Price
per
Share
|
Weighted
Average
Remaining
Contractual
Term (in
years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
Outstanding options
at December 31, 2018
|
803,320
|
$
2.89
|
8.43
|
$
54
|
Granted
|
—
|
—
|
|
|
Exercised
|
—
|
—
|
|
|
Forfeited
|
(26,750
)
|
$
2.71
|
|
|
Outstanding options
at March 31, 2019
|
776,570
|
$
2.90
|
8.18
|
$
-
|
Options vested and
expected to vest
|
764,988
|
$
2.90
|
8.18
|
$
-
|
Exercisable at
March 31, 2019
|
584,182
|
$
3.08
|
8.09
|
$
-
|
The
aggregate intrinsic value in the table above represents the total
pre-tax intrinsic value that would have been received by the option
holders had they all exercised their options on March 31, 2019.
This amount changes based on the fair market value of our stock.
Total fair value of options vested during the three months ended
March 31, 2019 and 2018 was both $29,000.
At
March 31, 2019, there was $128,000 of unrecognized compensation
cost related to existing options outstanding which is expected to
be recognized over a weighted average period of 1.5
years.
Employee Stock Purchase Plan
In the
second quarter of 2011, to advance the interests of the Company and
its stockholders by providing an incentive to attract, retain and
reward eligible employees and by motivating such persons to
contribute to the growth and profitability of the Company, the
Company’s Board of Directors (the “Board”) and
stockholders approved an ESPP and reserved 333,333 shares of our
common stock for issuance effective as of May 15, 2011. The ESPP
continues in effect for ten (10) years from its effective date
unless terminated earlier by the Company. The ESPP consists of
six-month offering periods during which employees may enroll in the
plan. The purchase price on each purchase date shall not be less
than eighty-five percent (85%) of the lesser of (a) the fair market
value of a share of stock on the offering date of the offering
period or (b) the fair market value of a share of stock on the
purchase date. During the three months ended March 31, 2019 and
2018, no shares were purchased under ESPP. As of March 31, 2019,
approximately 107,679 shares remain available for grant under the
ESPP.
Restricted Stock Units
The
following table represents RSU activity for the three months ended
March 31, 2019:
|
|
Weighted
Average
Grant-Date
Fair
Value
per
Share
|
Weighted
Average
Remaining
Contractual Term
(in years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
Outstanding RSUs at
December 31, 2018
|
96,230
|
$
2.78
|
0.60
|
$
227
|
Awarded
|
—
|
—
|
|
|
Released
|
—
|
—
|
|
|
Forfeited
|
(18,181
)
|
—
|
|
|
Outstanding RSUs at
March 31, 2019
|
78,049
|
$
2.27
|
0.35
|
$
177
|
At
March 31, 2019, there was $52,000 of unrecognized compensation cost
related to RSUs which is expected to be recognized over a weighted
average period of 0.4 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 March 31,
2019 the maximum number of shares remaining that can be repurchased
under this program was 602,467. The Company does not intend to
repurchase shares without further approval from its
Board.
Note 7. Leases
We
have entered into various non-cancelable operating lease agreements
for certain of our offices, and certain equipment. 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):
|
Three
Months Ended
March 31,
2019
|
Operating
leases
|
|
Operating lease
right-of-use assets
|
$
186
|
|
|
Operating lease
liabilities – short term
|
$
175
|
Operating lease
liabilities – long-term
|
13
|
Total operating
lease liabilities
|
$
188
|
Weighted Average
Remaining Lease Term
|
|
Operating
leases
|
|
Weighted Average
Discount Rate
|
|
Operating
leases
|
4.5
%
|
The
following represents maturities of operating lease liabilities as
of March 31, 2019 (in thousands):
|
|
Reminder of
2019
|
$
135
|
2020
|
58
|
Total undiscounted cash flows
|
193
|
Less imputed
interest
|
(5
)
|
Present value of lease liabilities
|
$
188
|
Supplemental cash flow information related to
leases are as follows (in thousands):
|
|
|
Three Months
Ended
|
|
March 31,
2019
|
Cash paid for amounts
included in the measurement of lease liabilities:
|
|
Operating cash flows from
operating leases
|
$
44
|
Right-of-use assets obtained in exchange for lease
obligations:
|
|
Operating
leases
|
$
0
|
Note 8. Subsequent Event
On
April 1, 2019, the Company made a cash payment of $10.0 million to
the FTC in settlement of the previously disclosed on-going
investigation. See Note 3. Commitments and Contingencies:
Legal
contingencies
.