10-Q 1 sprt_10q.htm QUARTERLY REPORT Blueprint
 

UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
☒                    
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
                    
For the Quarterly Period Ended June 30, 2019
 
                    
OR
 
☐                    
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
                    
For the transition period from to
 
Commission File No. 000-30901
 
SUPPORT.COM, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
94-3282005
(State or Other Jurisdiction of
 Incorporation or Organization)
 
(I.R.S. Employer
 Identification No.)
 
1521 Concord Pike (US 202), Suite 301, Wilmington, DE 19803
 
(Address of Principal Executive Offices)
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (650) 556-9440
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer  ☐
 (Do not check if a smaller reporting company)
Smaller reporting company ☒
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒
 
On July 31, 2019, 18,968,750 shares of the Registrant’s Common Stock, $0.0001 par value, were outstanding.
 

 
 
 
SUPPORT.COM, INC.
 
FORM 10-Q
 
QUARTERLY PERIOD ENDED JUNE 30, 2019
 
INDEX
 
 
 
 
 
Page
Part I. Financial Information
 
 
Item 1.
 
Financial Statements (Unaudited)
 
3
 
 
Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018
 
3
 
 
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018
 
4
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018
 
5
 
 
Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018
 
6
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018
 
8
 
 
Notes to Condensed Consolidated Financial Statements
 
9
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
22
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
27
Item 4.
 
Controls and Procedures
 
28
 
 
 
 
 
Part II. Other Information
 
 
Item 1.
 
Legal Proceedings
 
29
Item 1A.
 
Risk Factors
 
30
Item 6.
 
Exhibits
 
43
Signature
 
 
 
44
Exhibit Index
 
45
 
 
 
 
 
 
 
 
2
 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
 
 SUPPORT.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
 
June 30,
2019
 
 
December 31,
2018
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $21,464 
 $25,182 
Short-term investments
  21,782 
  24,467 
Accounts receivable, net
  11,571 
  12,292 
Prepaid expenses and other current assets
  603
  999 
Total current assets
  55,420 
  62,940 
Property and equipment, net
  590 
  703 
Intangible assets
  250 
  250 
Right of use assets, net
  144 
  - 
Other assets
  712 
  707 
 
 
 
    
    
Total assets
 $57,116 
 $64,600 
 
 
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
Current liabilities:
    
    
    Accounts payable
 $456 
 $368 
Accrued compensation
  3,100 
  3,423 
Other accrued liabilities
  1,050 
  978 
Accrued legal settlement
  - 
  10,000 
Short-term lease liability
  138 
  - 
Short-term deferred revenue
  1,210 
  1,135 
Total current liabilities
  5,954 
  15,904 
Long-term lease liability
  7 
  - 
Other long-term liabilities
  808 
  800 
Total liabilities
  6,769 
  16,704 
Commitments and contingencies (Note 3)
    
    
Stockholders’ equity:
    
    
Common stock; par value $0.0001, 50,000,000 shares authorized; 19,451,664 issued and 18,968,750 outstanding at June 30, 2019 and 19,438,178 issued and 18,955,264 outstanding December 31, 2018
  2
  2
Additional paid-in capital
  268,963 
  268,794 
Treasury stock, at cost (482,914 shares at June 30, 2019 and December 31, 2018)
  (5,297)
  (5,297)
Accumulated other comprehensive loss
  (2,321)
  (2,507)
Accumulated deficit
  (211,000)
  (213,096)
Total stockholders’ equity
  50,347 
  47,896 
 
    
    
Total liabilities and stockholders’ equity
 $57,116 
 $64,600 
 
See accompanying notes.
 
 
3
 
 
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
     Services
 $15,508 
 $16,220 
 $32,372 
 $31,420 
     Software and other
  1,188 
  1,248 
  2,388 
  2,570 
          Total revenue
  16,696 
  17,468 
  34,760 
  33,990 
 
 
 
    
Cost of revenue:
    
    
    
    
     Cost of services
  12,686 
  14,462 
  26,484 
  28,573 
     Cost of software and other
  38 
  46 
  92 
  101 
          Total cost of revenue
  12,724 
  14,508 
  26,576 
  28,674 
Gross profit
  3,972 
  2,960 
  8,184 
  5,316 
 
 
 
    
Operating expenses:
    
    
    
    
     Research and development
  915 
  681 
  1,664 
  1,392 
     Sales and marketing
  438 
  409 
  830 
  959 
     General and administrative
  2,090 
  1,677 
  3,986 
  3,823 
          Total operating expenses
  3,443 
  2,767 
  6,480 
  6,174 
Income (loss) from operations
  529 
  193 
  1,704 
  (858)
Interest income and other, net
  255 
  230 
  551 
  435 
Income (loss) before income taxes
  784 
  423 
  2,255 
  (423)
Income tax provision (benefit)
  131 
  27 
  159 
  (53)
Net income (loss)
 $653 
 $396 
 $2,096 
 $(370)
 
 
 
    
Basic and diluted earnings (loss) per share:
    
    
    
    
        Net income (loss)
 $0.03 
 $0.02 
 $0.11 
 $(0.02)
 
    
    
    
    
Shares used in computing basic net earnings (loss) per share
  18,962 
  18,765 
  18,959
  18,751 
Shares used in computing diluted net earnings (loss) per share
  19,018 
  18,947 
  19,010
  18,751 
 
See accompanying notes.
 
 
4
 
 
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 $653 
 $396 
 $2,096 
 $(370)
 
    
    
    
    
Other comprehensive income (loss):
    
    
    
    
    Change in foreign currency translation adjustment
  6 
  (189)
  105 
  (279)
Change in net unrealized gain (loss) on investments
  31 
  37 
  81 
  (19)
Other comprehensive income (loss)
  37 
  (152)
  186 
  (298)
 
    
    
    
    
Comprehensive income (loss)
 $690 
 $244 
 $2,282 
 $(668)
 
See accompanying notes.

 
5
 
 
 SUPPORT.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(Unaudited)
 
 
 
Common Stock  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares  
 
 
Amount  
 
 
 
Additional
Paid-In
Capital
 
 
 
Treasury
Stock
 
 
Accumulated
Other
Comprehensive
Loss
 
 
 
Accumulated
Deficit
 
 
 
Total
Stockholders’
Shares
 
Balances at March 31, 2018
  18,728,912 
 $2 
 $268,233 
 $(5,297)
 $(2,254)
 $(204,762)
 $55,922 
Net loss
   
   
   
   
   
  396 
  396 
Other comprehensive loss
   
   
   
   
  (152)
   
  (152)
Issuance of common stock upon exercise of stock options for cash and releases of RSUs
  55,095 
    
  102 
    
    
    
  102 
Issuance of common stock under employee stock purchase plan
  15,435 
    
  34 
    
    
    
  34 
Stock-based compensation expense
    
   
  108 
    
   
   
  108 
Balances at June 30, 2018
  18,799,442 
 $2 
 $268,477 
 $(5,297)
 $(2,406)
 $(204,366)
 $56,410 
 
Balances at March 31, 2019
  18,955,264 
 $2 
 $268,846 
 $(5,297)
 $(2,358)
 $(211,653)
 $49,540 
Net income
   
   
   
   
   
  653 
  653 
Other comprehensive income
   
   
   
   
  37 
   
  37 
Issuance of common stock under employee stock purchase plan
  13,486 
    
  27 
    
    
    
  27 
Stock-based compensation expense
    
   
  90 
    
   
   
  90 
Balances at June 30, 2019
  18,968,750 
 $2 
 $268,963 
 $(5,297)
 $(2,321)
 $(211,000)
 $50,347 
 
 
 
6
 
 
SUPPORT.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(Unaudited)
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Additional
Paid-In
Capital
 
 
Treasury
Stock
 
 
Accumulated
Other
Comprehensive
Loss
 
 
Accumulated
Deficit
 
 
Total
Stockholders’
Shares
 
Balances at December 31, 2017
  18,728,912 
 $2 
 $267,857 
 $(5,297)
 $(2,108)
 $(203,996)
 $56,458 
Net loss
   
   
   
   
   
  (370)
  (370)
Other comprehensive loss
   
   
   
   
  (298)
   
  (298)
Issuance of common stock upon exercise of stock options for cash and releases of RSUs
  55,095 
    
  102 
    
    
    
  102 
Issuance of common stock under employee stock purchase plan
  15,435 
    
  34 
    
    
    
  34 
Stock-based compensation expense
    
   
  484 
    
   
   
  484 
Balances at June 30, 2018
  18,799,442 
 $2 
 $268,477 
 $(5,297)
 $(2,406)
 $(204,366)
 $56,410 
 
Balances at December 31, 2018
  18,955,264 
 $2 
 $268,794 
 $(5,297)
 $(2,507)
 $(213,096)
 $47,896 
Net income
   
   
   
   
   
  2,096 
  2,096 
Other comprehensive income
   
   
   
   
  186 
   
  186 
Issuance of common stock under employee stock purchase plan
  13,486 
    
  27 
    
    
    
  27 
Stock-based compensation expense
    
   
  142 
    
   
   
  142 
Balances at June 30, 2019
  18,968,750 
 $2 
 $268,963 
 $(5,297)
 $(2,321)
 $(211,000)
 $50,347 
 
See companying notes.
 
 
7
 
 
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
Operating Activities:
 
 
 
 
 
 
Net income (loss)$
  2,096 
 $(370)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation
  151
  318 
Amortization of premiums and discounts on investments
  75 
  18 
Stock-based compensation
  142 
  484 
Changes in assets and liabilities:
    
    
Accounts receivable, net
  721 
  (349)
Prepaid expenses and other current assets
  404 
  61 
Other long-term assets
  52 
  208 
Accounts payable
  88
  (25)
Accrued compensation
  (315)
  357 
Accrued legal settlement
  (10,000)
  - 
Other accrued liabilities
  79
  (200)
Other long-term liabilities
  7 
  (147)
Deferred revenue
  75 
  (569)
Net cash used in operating activities
  (6,425)
  (214)
 
    
    
Investing Activities:
    
    
    Purchases of property and equipment
  (38)
  (191)
    Purchases of investments
  (13,077)
  (13,510)
    Maturities of investments
  15,767 
  14,654 
Net cash provided by investing activities
  2,652 
  953 
 
    
    
Financing Activities:
    
    
Proceeds from employee stock purchase plan
  27 
  38 
Proceeds from exercise of stock options
  - 
  98 
Net cash provided by financing activities
  27 
  136 
Effect of exchange rate changes on cash and cash equivalents
  28 
  (221)
Net (decrease) increase in cash and cash equivalents
  (3,718)
  654 
Cash and cash equivalents at beginning of period
  25,182 
  18,050 
Cash and cash equivalents at end of period
 $21,464 
 $18,704 
 
    
    
Supplemental schedule of cash flow information:
  62 
    
Income taxes paid
 $72
 $62 
 
See accompanying notes.
 
 
8
 
 
SUPPORT.COM, INC.
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, 2019 and the consolidated statements of operations and comprehensive income (loss) for the three months ended June 30, 2019 and 2018 and the consolidated statements of cash flows for the six months ended June 30, 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.
 
 
9
 
 
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:
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Services
 $15,508 
 $16,220 
 $32,372 
 $31,420 
Software and other
  1,188 
  1,360 
  2,388 
  2,735 
             Total revenue
 $16,696 
 $17,468 
 $34,760 
 $33,990 
 
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.
 
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.
 
 
10
 
 
The following table represent deferred revenue activity for the three months ended June 30, 2019 (in thousands):
 
Balance as of March 31, 2019
 $1,315 
Deferred revenue
  487 
Recognition of unearned revenue
  (592)
Balance as of June 30, 2019
 $1,210 
 
    
Balance as of March 31, 2018
 $1,681 
Deferred revenue
  334 
Recognition of unearned revenue
  (565)
Balance as of June 30, 2018
 $1,450 
  
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 June 30, 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.
 
 
 
11
 
 
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 June 30, 2019 and December 31, 2018, the fair value of cash, cash equivalents and investments was $43.2 million and $49.6 million, respectively.
 
The following is a summary of cash, cash equivalents and investments at June 30, 2019 and December 31, 2018 (in thousands):
 
As of June 30, 2019
 
Amortized
Cost
 
 
Gross
Unrealized
Gains
 
 
Gross
Unrealized
Losses
 
 
Fair Value
 
Cash
 $7,961 
 $ 
 $ 
 $7,961 
Money market funds
  9,514 
   
   
  9,514 
Certificates of deposit
  471 
   
   
  471 
Commercial paper
  7,970 
   
  (2)
  7,968 
Corporate notes and bonds
  12,346 
  13 
   
  12,359 
U.S. government agency securities
  4,972 
  1 
   
  4,973 
 
 $43,234 
 $14 
 $(2)
 $43,246 
Classified as:
    
    
    
    
Cash and cash equivalents
 $21,466 
 $ 
 $(2)
 $21,464 
Short-term investments
  21,768 
  14 
   
  21,782 
 
 $43,234 
 $14 
 $(2)
 $43,246 
 
As of December 31, 2018
 
Amortized
Cost
 
 
Gross
Unrealized
Gains
 
 
Gross
Unrealized
Losses
 
 
Fair Value
 
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 
 
 
12
 
 
The following table summarizes the estimated fair value of our marketable securities classified by the stated maturity date of the security (in thousands):
 
 
 
June 30, 2019
 
 
December 31, 2018
 
Due within one year
 $17,176
 $20,874 
Due within two years
  4,606 
  3,593 
 
 $21,782
 $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 June 30, 2019 and December 31, 2018 (in thousands):
 
As of June 30, 2019
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Money market funds
 $9,514 
 $ 
 $ 
 $9,514 
Certificates of deposit
   
  471 
   
  471 
Commercial paper
   
  7,968 
   
  7,968 
Corporate notes and bonds
   
  12,359 
   
  12,359 
U.S. government agency securities
   
  4,973 
   
  4,973 
Total
 $9,514 
 $25,771 
 $ 
 $35,285 
 
As of December 31, 2018
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
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.
 
 
13
 
 
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, 2019, Comcast and Cox Communications accounted for 65% and 22%, respectively, of our total revenue. For the six months ended June 30, 2019, Comcast and Cox Communication accounted for 66% and 21%, respectively, of our total revenue. For the three months ended June 30, 2018, Comcast and Cox Communications accounted for 71% and 13%, respectively, 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. There were no other customers that accounted for 10% or more of total revenue for the three and six months ended June 30, 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 June 30, 2019, Comcast and Cox Communications accounted for 67% and 23%, respectively, of our total accounts receivable. As of June 30, 2018, Comcast and Cox Communications accounted for 74% and 14%, respectively, of our total accounts receivable. There were no other customers that accounted for 10% or more of our total accounts receivable as of June 30, 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 June 30, 2019 and December 31, 2018, respectively.
 
Self-Funded Health Insurance
 
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, 2019, the Company had approximately $466,000 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.
 
 
 
14
 
 
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
 
 
Total
 
Balance as of December 31, 2018
 $(2,438)
 $(69)
 $(2,507)
Current-period other comprehensive income 
  105
 
  81
 
  186
 
Balance as of June 30, 2019
 $(2,333)
 $12
 
 $(2,321)
 
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 income (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, 2019 and 2018. There were no stock option grants during the three months ended June 30, 2018.
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Stock Option Plan:
 
 
 
 
 
 
 
 
 
 
 
 
Risk-free interest rate
  1.7%
   
  1.7%
  2.4%
Expected term
  
3 years
 
   
  
3 years
 
  
3 years
 
Volatility
  34.7%
   
  34.7%
  41.3%
Expected dividend
  %
   
  %
  %
Weighted average fair value (per share)
 $0.56 
    
 $0.56 
 $0.84 
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Employee Stock Purchase Plan:
 
 
 
 
 
 
 
 
 
 
 
 
Risk-free interest rate
  2.43%
  2.09%
  2.43%
  2.09%
Expected term
 
0.5 years
 
 
0.5 years
 
 
0.5 years
 
 
0.5 years
 
Volatility
  32.98%
  32.55%
  32.98%
  32.55%
Expected dividend
  0%
  0%
  0%
  0%
Weighted average fair value (per share)
 $0.24 
 $0.72 
 $0.24 
 $0.72 
 
 
15
 
 
We recorded the following stock-based compensation expense for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense related to grants of:
 
 
 
 
 
 
 
 
 
Stock options
 $37
 $32 
 $70 
 $320 
Employee Stock Purchase Plan (“ESPP”)
  13 
  6 
  13 
  11 
Restricted Stock Units (“RSU”)
 40
  70 
 59
  153 
 
 $90 
 $108 
 $142 
 $484 
 
Stock-based compensation expense recognized in:
 
 
 
 
 
 
 
 
 
Cost of services
 $18 
 $17 
 $26 
 $38 
Cost of software and other
   
   
   
   
Research and development
  8 
  10 
  15 
  24 
Sales and marketing
  12 
  7 
  24 
  26 
General and administrative
  52 
  74 
  77 
  396 
 
 $90 
 $108 
 $142 
 $484 
 
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, 2019 and 2018 and for the six months ended June 30, 2019, diluted earnings per share was computed using our net income and the weighted average number of common shares outstanding, including the effect of the potential issuance of common stock such as stock issuable pursuant to the exercise of stock options and warrants and vesting of RSUs using the treasury stock method.  For the six months ended June 30, 2018, 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):

 
 
Three Months
 
 
Six Months
 
 
 
Ended
 
 
Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 $653 
 $396 
 $2,096 
 $(370)
 
    
    
    
    
Basic:
    
    
    
    
Weighted-average shares of common stock outstanding and used in computing basic income (loss) per share
  18,962 
  18,765 
  18,959
 
  18,751 
Basic earnings (loss) per share
  0.03 
  0.02 
  0.11 
  (0.02)
Diluted:
    
    
    
    
Weighted-average shares of common stock outstanding
  18,962 
  18,765 
  18,959
 
  18,751 
Add: Common equivalent shares outstanding
  56 
  182 
  51
 
  - 
Shares used in computing diluted earnings (loss) per share
  19,018 
  18,947 
  19,010
 
  18,751 
Diluted earnings (loss) per share
 $0.03 
 $0.02 
 $0.11 
 $(0.02)
 
 
16
 
 
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):
 
 
 
As of June 30,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Stock options
  819 
  871 
RSUs
  78 
  211 
 
  897 
  981 
 
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, 2019, 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. As of June 30, 2019, there was an increase in assets of $144,000 and liabilities of $145,000 since the adoption of the standard due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases with 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, IntangiblesGoodwill 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.
 
 
17
 
 
Note 2. Income Taxes
 
We recorded an income tax provision of $131,000 and $159,000 for the three and six months ended June 30, 2019, 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, 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 June 30, 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.
 
 
18
 
 
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.
 
The Company has received and may in the future receive additional requests for information, including subpoenas, from other governmental agencies relating to the subject matter of the Consent Order and the Civil Investigative Demands described above. The Company intends to cooperate with these information requests and is not aware of any other legal proceedings against the Company by governmental authorities at this time.
 
We are also subject to other routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business, potentially including assertions that we may be infringing patents or other intellectual property rights of others. We currently do not believe that the ultimate amount of liability, if any, for any pending claims of any type (alone or combined) will materially affect our financial position, results of operations or cash flows. The ultimate outcome of any litigation is uncertain; however, any unfavorable outcomes could have a material negative impact on our financial condition and operating results. Regardless of outcome, litigation can have an adverse impact on us because of defense costs, negative publicity, diversion of management resources and other factors.
Guarantees
 
We have identified guarantees in accordance with ASC 450, Contingencies. This guidance stipulates that an entity must recognize an initial liability for the fair value, or market value, of the obligation it assumes under the guarantee at the time it issues such a guarantee, and must disclose that information in its interim and annual financial statements. We have entered into various service level agreements with our partners, in which we may guarantee the maintenance of certain service level thresholds. Under some circumstances, if we do not meet these thresholds, we may be liable for certain financial costs. We evaluate costs for such guarantees under the provisions of ASC 450. We consider such factors as the degree of probability that we would be required to satisfy the liability associated with the guarantee and the ability to make a reasonable estimate of the resulting cost. During the three and six months ended June 30, 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 June 30, 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.
 
Note 5. Other Accrued Liabilities
 
Other accrued liabilities consist of the following (in thousands):
 
 
 
June 30,
2019
 
 
December 31,
2018
 
Accrued expenses
 $397
 $338 
Income tax
  154
 1
Self-insurance accruals
  466 
  585 
Other accrued liabilities
 33
 
 54
 
Total other accrued liabilities
 $1,050
 
 $978
 
 
 
 
19
 
 
Note 6. Stockholder’s Equity
 
Stock Options
 
The following table represents the stock option activity for the six months ended June 30, 2019:
 
 
 
Number of
Shares
 
 
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
  60,000 
  2.14 
    
    
Exercised
   
   
    
    
Forfeited
  (44,195)
 $2.82 
    
    
Outstanding options at June 30, 2019
  819,125
 
 $2.84 
  8.24 
 $- 
Options vested and expected to vest
  819,125
 
 $2.84
 
  8.24
 
 $-
 
Exercisable at June 30, 2019
  614,941
 
 $3.03
 
  8.10
 
 $-
 
 
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, 2019. 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, 2019, and zero during the three and six months ended June 30, 2018. Total fair value of options vested was $27,000 and $56,000 during both three and six months ended June 30, 2019, respectively, and $24,000 and $53,000 during the three and six months ended June 30, 2018, respectively.
 
At June 30, 2019, there was $125,000 of unrecognized compensation cost related to existing options outstanding which is expected to be recognized over a weighted average period of 1.2 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, 2019, 13,486 shares were purchased under ESPP. As of June 30, 2019, approximately 66,175 shares remain available for grant under the ESPP.
 
 Restricted Stock Units
 
The following table represents RSU activity for the six months ended June 30, 2019:
 
 
 
Number of
Shares
 
 
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 June 30, 2019
  78,049 
 $2.27 
  0.10 
 $126 
 
 
20
 
 
At June 30, 2019, there was $16,000 of unrecognized compensation cost related to RSUs which is expected to be recognized over a weighted average period of 0.1 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, 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):
 
 
 
Six Months Ended June 30, 2019
 
Operating leases
 
 
 
Operating lease right-of-use assets
 $144
 
 
    
Operating lease liabilities – short term
 $138
 
Operating lease liabilities – long-term
  7
 
Total operating lease liabilities
 $145
 
 
Weighted Average Remaining Lease Term
 
 
 
Operating leases
  
0.9 years
 
Weighted Average Discount Rate
 
 
 
Operating leases
  4.5%
 
The following represents maturities of operating lease liabilities as of June 30, 2019 (in thousands):
 
 
 
Operating Leases
 
Reminder of 2019
 $90 
2020
  58 
Total undiscounted cash flows
  148 
Less imputed interest
  (3)
Present value of lease liabilities
 $145 
 
Supplemental cash flow information related to leases are as follows (in thousands):
 
 
 
Six Months Ended
June 30, 2019
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating
 $45 
 
Right-of-use assets obtained in exchange for lease obligations:
 
    
Operating
 $- 
 
   
 
21
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q (the “Report”) and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. The following discussion includes forward-looking statements. Please see “Risk Factors” in Item 1A of this Report for important information to consider when evaluating these statements.
 
Overview
 
Support.com is a leading provider of tech support and turnkey support center services, producer of SUPERAntiSpyware® anti-malware products, and the maker of Support.com® software. Our technology support services programs help leading brands create new revenue streams and deepen customer relationships. We offer turnkey, outsourced support services for service providers, retailers and technology companies. Our technology support services programs are designed for both the consumer and SMB Markets, and include computer and mobile device set-up, security and support, virus and malware removal, wireless network set-up, and home security and automation system support. Our Support.com Cloud offering is a SaaS solution for companies to optimize support interactions with their customers using their own or third party support personnel. The solution enables companies to quickly resolve complex technology issues for their customers, boosting agent productivity and dramatically improving the customer experience.
 
Total revenue for the second quarter of 2019 decreased 4% year-over-year. Revenue from services decreased 4% year-over-year primarily due to decreased billable hours of Comcast offset by increased sales from other customers. Revenue from software and other decreased 5% year-over-year due to new subscriptions and renewal being less than expirations of subscriptions.
 
Cost of services for the second quarter of 2019 decreased 12% year-over-year primarily as a result of lower compensation costs while cost of software and other for the second quarter of 2019 decreased 17% year-over-year. . Total gross margin increased from 17% to 24% year-over-year due to lower compensation and related employee costs largely due to a decrease in headcount along with lower technology costs.
 
Operating expenses for the second quarter of 2019 increased 24% from the same period in 2018, primarily driven by an increase in salary and employee related costs due to an increase in headcount coupled with an increase in legal fees.
 
We intend the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those consolidated financial statements from quarter to quarter, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.
 
 Critical Accounting Policies and Estimates
 
In preparing our interim condensed consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 have the greatest potential impact on our interim condensed consolidated financial statements, so we consider them to be our critical accounting policies and estimates. There have been no significant changes in these critical accounting policies and estimates except the accounting for leases during the six months ended June 30, 2019. For information regarding the impact of Topic 842 adoption, see Significant Accounting Policies - Leases and Note 7— Leases.
 
 
 
22
 
 
Critical Accounting Policies
 
In preparing our consolidated financial statements in conformity with generally accepted accounting principles in the United States, we make assumptions, judgments and estimates that can have a significant impact on our revenue and operating results, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, fair value measurements, purchase accounting in business combinations, self-insurance accruals, accounting for intangible assets, stock-based compensation and accounting for income taxes have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. For further information on the critical accounting policies, see Note 1 of our Notes to Consolidated Financial Statements.
 
Revenue Recognition
 
For information regarding to the disaggregation of revenue, see Note 1 – Significant Accounting Policies, Revenue Recognition.
 
RESULTS OF OPERATIONS
 
The following table sets forth the results of operations for the three and six months ended June 30, 2019 and 2018 expressed as a percentage of total revenue:
 
 
 
Three Months
 
 
Six Months
 
 
 
Ended
 
 
Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
      Services
  93%
  93%
  93%
  92%
      Software and other
  7 
  7 
  7 
  8 
            Total revenue
  100 
  100 
  100 
  100 
 
    
    
    
    
Costs of revenue:
    
    
    
    
Cost of services
  75 
  82 
  75 
  83 
Cost of software and other
  1 
  1 
  1 
  1 
     Total cost of revenue
  76 
  83 
  76 
  84 
Gross profit
  24 
  17 
  24 
  16 
Operating expenses:
    
    
    
    
Research and development
  5 
  4 
  6 
  4 
Sales and marketing
  3 
  2 
  2 
  3 
General and administrative
  13 
  10 
  11 
  11 
             Total operating expenses
  21 
  16 
  19 
  18 
 
    
    
    
    
Income (loss) from operations
  3 
  1 
  5 
  (2)
Interest and other income, net
  2 
  1 
  2 
  1 
 
    
    
    
    
Income (loss) from continuing operations, before income taxes
  5 
  2 
  7 
  (1)
 
    
    
    
    
Income tax provision
  1 
   
  1 
   
 
    
    
    
    
Net income (loss)
  4%
  2%
  6%
  (1)%
 
 
23
 
 
Three and Six Months Ended June 30, 2019 and 2018
 
REVENUE
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019 
 
 
2018 
 
 
$ Change 
 
 
% Change 
 
 
2019 
 
 
2018 
 
 
$ Change 
 
 
% change 
 
Services
 $15,508 
 $16,220 
 $(712)
  (4)%
 $32,372 
 $31,420 
 $952 
  3%
Software and other
  1,188 
  1,248 
  (60)
  (5)%
  2,388 
  2,570 
  (182)
  (7)%
Total revenue
 $16,696 
 $17,468 
 $(772)
  (4)%
 $34,760 
 $33,990 
 $770 
  2%
 
Services. Services revenue consists primarily of fees for customer support services generated from our partners.  We provide these services remotely, generally using service delivery personnel who utilize our proprietary technology to deliver the services. Services revenue is also comprised of licensing of our Support.com Cloud applications. Services revenue for the three months ended June 30, 2019 decreased by $0.7 million from the same period in 2018 mainly due to a decrease in billable hours of Comcast offset by increase in sales from other customers. Services revenue for the six months ended June 30, 2019 increased by $1.0 million from the same period in 2018 mainly due to a significant increase in revenues from one of our major customers offset by lower billable hours and lower overall revenues from other customers. For the three and six months ended June 30, 2019, services revenue generated from our partnerships was $14.8 million and $31.0 million compared to $15.3 million and $29.5 million for the same period in 2018. Direct services revenue was $0.7 million and $1.4 million for the three and six months ended June 30, 2019 compared to 0.9 million and $1.9 million for the same period in 2018. As with any market that is undergoing shifts, timing of downward pressures and growth opportunities in our services programs are difficult to predict. We are experiencing downward pressure with some of our services programs as personal computer and certain retail markets are subject to seasonal or other sector specific softness. However, we still see opportunity in the market for growth with our service partners as a result of the evolving support market trends.
 
Software and other. Software and other revenue is comprised primarily of fees for end-user software products provided through direct customer downloads, and, to a lesser extent, through the sale of these software products via partners. Software and other revenue for the three and six months ended June 30, 2019 decreased by $60,000 and $0.2 million, or (5%) and (7%), respectively, from the same periods in 2018. due to new subscriptions being less than expirations of subscriptions. For the three-month periods ended June 30, 2019 and 2018, revenue from software and other generated from our direct sales was and $0.5 million and $0.6 million, respectively, and software and other revenue generated from our partnerships was $0.7 million for both periods. For the six-month periods ended June 30, 2019 and 2018, revenue from software and other generated from our direct sales was $1.0 million and $1.2 million, respectively, and software and other revenue generated from our partnerships was $1.4 million for both periods.
 
COST OF REVENUE
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
In thousands, except percentages
 
2019
 
 
2018
 
 
$ Change
 
 
% Change
 
 
2019
 
 
2018
 
 
$ Change
 
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services
 $12,686 
 $14,462 
 $(1,776)
  (12)%
 $26,484 
 $28,573 
 $(2,089)
  (7)%
Cost of software and other
  38 
  46 
  (8)
  (17)%
  92 
  101 
  (9)
  (9)%
Total cost of revenue
 $12,724 
 $14,508 
 $(1,784)
  (12)%
 $26,576 
 $28,674 
 $(2,098)
  (7)%
 
Cost of services. Cost of services consists primarily of compensation costs and contractor expenses for people providing services, technology and telecommunication expenses related to the delivery of services and other personnel-related expenses in service delivery. The decrease of $1.8 million in cost of services for the three months ended June 30, 2019 compared to the same period in 2018 was mainly driven by lower compensation expenses due to decrease in hiring because of decrease in billable hours from Comcast. The decrease of $2.1 million in cost of services for the six months ended June 30, 2019 compared to the same period in 2018 was due to a decrease in compensation costs and related benefits of $1.8 million and lower depreciation expense of $0.2 million due to the fully depreciation of a significant asset during the six months ended June 30, 2019 than the same period in 2018.
 
 
24
 
 
Cost of software and other. Cost of software and other fees consists primarily of third-party royalty fees for our end-user software products. Certain of these products were developed using third-party research and development resources, and the third party receives royalty payments on sales of products it developed. The cost of software and other for the three and six months ended June 30, 2019 were flat as compared with the year-ago periods.
 
OPERATING EXPENSES
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
In thousands, except percentages
 
2019
 
 
2018
 
 
$ Change
 
 
% Change
 
 
2019
 
 
2018
 
 
$ Change
 
 
% Change