-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SJtpYHgacjywTI2aJMbG6n+YKdZeSoAF14dDGgPLiaxN7g4GDUCW9ReDYKeT7oL/ xd2yTvGRbQk1ere/boVZmQ== 0001021408-01-501059.txt : 20010516 0001021408-01-501059.hdr.sgml : 20010516 ACCESSION NUMBER: 0001021408-01-501059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPPORT COM INC CENTRAL INDEX KEY: 0001104855 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 943282005 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-30901 FILM NUMBER: 1637422 BUSINESS ADDRESS: STREET 1: 575 BROADWAY CITY: REDWOOD STATE: CA ZIP: 94063 BUSINESS PHONE: 6502334539 MAIL ADDRESS: STREET 1: 575 BROADWAY CITY: REDWOOD STATE: CA ZIP: 94063 10-Q 1 d10q.txt FORM 10-Q FOR THE PERIOD ENDED 3/31/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 [_] 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 (I.R.S. Employer Identification No.) Incorporation or Organization) 575 Broadway Redwood City, CA 94063 ---------------------- (Address of Principal Executive Offices) 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 X No _____. --- On May 15, 2001, 33,369,972 shares of the Registrant's Common Stock, $0.0001 par value, were outstanding. SUPPORT.COM, INC. FORM 10-Q QUARTERLY PERIOD ENDED MARCH 31, 2001 INDEX
Page ---- Part I: Financial Information Item 1: Financial Statements (Unaudited) Condensed Consolidated Balance Sheets at March 31, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the Three Months 4 ended March 31, 2001 and 2000 Condensed Consolidated Statements of Cash Flows for the Three Months 5 ended March 31, 2001 and 2000 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and 9 Results of Operations Item 3: Quantitative and Qualitative Disclosures About Market Risk 20 Part II: Other Information Item 2: Changes in Securities and Use of Proceeds 21 Item 6: Exhibits and Reports on Form 8-K 21 Signature 22 Exhibit Index 23
2 PART 1. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS SUPPORT.COM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
March 31, December 31, 2001 2000 ---- ---- (unaudited) Assets Current assets: Cash and cash equivalents.......................................... $ 23,190 $ 11,756 Short term investments............................................. 21,956 39,757 Accounts receivable, net........................................... 9,667 7,872 Other current assets............................................... 3,632 3,255 --------- --------- Total current assets.............................................. 58,445 62,640 Property and equipment, net......................................... 2,680 2,420 Purchased intangibles, net.......................................... 4,068 5,230 Other assets........................................................ 320 282 --------- --------- $ 65,513 $ 70,572 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable................................................... $ 3,693 $ 957 Accrued compensation............................................... 1,658 2,250 Other accrued liabilities.......................................... 4,164 5,094 Capital lease obligations, current portion......................... 620 620 Deferred revenue................................................... 12,187 11,866 --------- --------- Total current liabilities......................................... 22,322 20,787 Capital lease obligations, net of current portion................... 1,070 1,221 Other long term liabilities......................................... 1,608 2,164 Deferred revenue - long-term portion................................ -- 241 Stockholders' equity: Common stock....................................................... 3 3 Additional paid-in capital......................................... 109,798 108,558 Notes receivable from stockholders................................. (1,951) (2,051) Deferred stock compensation........................................ (6,075) (7,219) Other stockholder's equity......................................... 54 -- Accumulated deficit................................................ (61,316) (53,132) --------- --------- Stockholders' equity.............................................. 40,513 46,159 --------- --------- $ 65,513 $ 70,572 ========= =========
See accompanying notes. 3 SUPPORT.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts; unaudited)
Three Months Ended March 31, --------- 2001 2000 ---- ---- Revenue: License fees......................................................... $ 6,494 $ 1,322 Services............................................................. 2,110 550 -------- ------- Net revenue......................................................... 8,604 1,872 -------- ------- Costs and expenses: Cost of license fees................................................. 230 36 Cost of services..................................................... 1,848 882 Amortization of purchased intangibles................................ 850 -- Research and development............................................. 3,439 1,647 Sales and marketing.................................................. 7,400 4,114 General and administrative........................................... 1,505 751 Amortization of deferred stock compensation (1)...................... 1,454 3,715 -------- ------- Total costs and expenses............................................ 16,726 11,145 -------- ------- Loss from operations.................................................. (8,122) (9,273) Interest income (expense) and other, net.............................. (62) 60 -------- ------- Net loss.............................................................. (8,184) (9,213) Accretion on redeemable convertible preferred stock................... -- (402) -------- ------- Net loss attributable to common shareholders.......................... $ (8,184) $(9,615) ======== ======= Basic and diluted net loss per share.................................. $ (0.27) $ (1.14) ======== ======= Shares used in computing basic and diluted net loss per share......... 30,438 8,442 ======== =======
______________________ (1) Amortization of deferred stock compensation relates to the following:
Three Months Ended March 31, --------- 2001 2000 ---- ---- Cost of services..................................................... $ 64 $ 163 Research and development............................................. 288 728 Sales and marketing.................................................. 525 1,327 General and administrative........................................... 577 1,497 -------- ------- $ 1,454 $ 3,715 -------- -------
See accompanying notes. 4 SUPPORT.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Three Months Ended March 31, --------- 2001 2000 ---- ---- (unaudited) Operating Activities Net loss........................................................................ $ (8,184) $ (9,213) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................................. 560 219 Amortization of deferred stock compensation................................... 1,454 3,715 Amortization of purchased intangibles.......................................... 850 -- Other.......................................................................... 460 147 Changes in assets and liabilities: Accounts receivable, net.................................................... (1,795) 703 Prepaid and other current assets............................................ (377) (924) Accounts payable............................................................ 2,736 107 Accrued compensation........................................................ (592) 83 Other accrued liabilities................................................... (1,177) 447 Deferred revenue............................................................ 80 3,260 -------- -------- Net cash used in operating activities..................................... (5,985) (1,456) -------- -------- Investing Activities Purchases of property and equipment............................................. (820) (178) Other assets.................................................................... (35) (5) Purchases of short-term investments............................................. (17,309) (5,915) Sales and maturities of short-term investments.................................. 34,464 8,431 -------- -------- Net cash provided by (used in) investing activities....................... 16,300 2,333 -------- -------- Financing Activities Proceeds from issuances of common stock, net of repurchases..................... 1,170 1,190 Repayment of shareholder notes.................................................. 100 -- Principal payments under capital lease obligations.............................. (151) (74) Repayment of notes payable...................................................... -- (193) -------- -------- Net cash provided by financing activities................................. 1,119 923 -------- -------- Net increase in cash and cash equivalents......................................... 11,434 1,800 Cash and cash equivalents at beginning of period.................................. 11,756 4,023 -------- -------- Cash and cash equivalents at end of period........................................ $ 23,190 $ 5,823 ======== ========
See accompanying notes. 5 SUPPORT.COM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (1) Significant Accounting Policies: Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of Support.com and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The balance sheet at March 31, 2001 and the statements of operations for the three months ended March 31, 2001 and 2000 and cash flows for the three months ended March 31, 2001 and 2000 are unaudited. In the opinion of management, these financial statements reflect all adjustments (consisting of normal reoccurring 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 financial statement information as of December 31, 2000 is derived from audited financial statements as of that date. These financial statements should be read with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 30, 2001. Certain prior period balances have been reclassified to conform to current period presentation. Financial Instruments Estimated fair values of financial instruments are based on quoted market prices. The following is a summary of available-for-sale securities (in thousands) at March 31, 2001:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cash............................................ $ 2,502 $ -- $ -- $ 2,502 Money market funds.............................. 18,593 -- -- 18,593 Commercial paper................................ 2,100 -- -- 2,100 Auction backed securities....................... 900 18 -- 918 Corporate bonds................................. 6,016 36 -- 6,052 Federal agencies................................ 13,917 -- -- 13,917 Municipal bonds................................. 1,064 -- -- 1,064 ----------- --------- ----------- ------------ $ 45,092 $ 54 $ -- $ 45,146 =========== ========= =========== ============ Classified as: Cash and cash equivalents....................... $ 23,190 -- -- $ 23,190 Short-term investments.......................... 21,902 54 -- 21,956 ----------- --------- ----------- ------------ $ 45,092 $ 54 $ -- $ 45,146 =========== ========= =========== ============
At March 31, 2001, Support.com held commercial paper of a utility company. During the quarter, the utility company had defaulted on the repayment of par value and filed for protection under Chapter 11 of the Bankruptcy Act. As a result, Support.com recognized an other than temporary impairment loss of $700,000 to reflect this investment at its stated fair value at March 31, 2001, which is recorded in interest income (expense) and other, net. During the second quarter of 2001, Support.com sold the investment at par value and will record a $700,000 realized gain on the investment during the quarter ended June 30, 2001. Revenue Recognition 6 License revenue is comprised of fees for term and perpetual licenses of Support.com's software by corporate customers and resellers. Term licenses are sold with maintenance for which Support.com does not have vendor specific objective evidence (VSOE) to determine fair value as maintenance is not priced or offered separately in term licensing arrangements. Support.com therefore recognizes maintenance revenue and the term license fees over the service period of the arrangement. License revenue also includes maintenance for term licenses. If any portion of the fee for a term license with maintenance is payable in excess of 12 months from the date of the agreement, as is the case with the majority of our term license arrangements, the fee is considered to not be fixed or determinable and revenue is recognized ratably over the service period of the agreement commencing in the month in which the first payment is due. Revenue from perpetual license fees is recognized when persuasive evidence of an arrangement exists, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fee is fixed or determinable and collectibility is probable. License revenue from arrangements with resellers is recognized upon delivery limited by guaranteed minimum amounts due under the arrangement or sell through activity. Services revenue is primarily comprised of revenue from professional services, such as consulting services and training and also includes maintenance under perpetual license arrangements. Consulting services include a range of services including installation, implementation and building of interfaces for the customer's specific application. Net Loss Per Common Share Basic and diluted net loss per share are presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), for all periods presented. Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Had Support.com been in a net income position, diluted earnings per share would have included the shares used in the computation of basic net loss per share as well as the impact of common shares outstanding subject to repurchase and outstanding options and warrants to purchase an additional 7,801,572 and 8,041,879 shares, prior to the application of the treasury stock method, for the three months ended March 31, 2001 and 2000. Such shares have been excluded because they are antidilutive for all periods presented. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):
Three months ended March 31, --------- 2001 2000 ---- ---- Net loss attributable to common shareholders..................... $ (8,184) $ (9,615) ======== ======== Basic and diluted: Weighted-average shares of common stock outstanding........... 33,254 13,066 Less: Weighted-average shares subject to repurchase........... (2,816) (4,624) -------- -------- Shares used in computing basic and diluted net loss per share....................................................... 30,438 8,442 ======== ======== Basic and diluted net loss per share attributable to common stockholders................................................ $ (0.27) $ (1.14) ======== ========
(2) Stockholders' Equity On July 19, 2000, Support.com completed an initial public offering of its common stock. All 4.9 million shares covered by Support.com's Registration Statement on Form S-1, including shares subject to an over-allotment option that was exercised, were sold by Support.com at a price of $14.00 per share. Net proceeds to the Company from the issuance of common stock in the initial public offering were approximately $61.8 million. 7 (3) Purchased Intangibles On September 20, 2000, Support.com purchased source code and other related intellectual property rights from ePeople, Inc. (formerly known as NoWonder, Inc.) for $6,800,000. An additional amount of $2,500,000 may be payable to ePeople based upon revenue recognized by Support.com related to the technology. The purchase price was recorded as purchased intangibles and included as an other asset in the Company's consolidated balance sheet. The Company paid $3.4 million during the year ended December 31, 2000, and will pay an additional $3.4 million in equal quarterly installments over the succeeding eleven quarters. The purchased technology is being amortized on a straight-line basis over two years. Total amortization related to the purchased intangibles for the period ended March 31, 2001 was $850,000. (4) Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which will be effective for the year ending December 31, 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. Support.com believes the adoption of SFAS 133 will not have a material effect on the financial statements, since it currently does not invest in derivative instruments and engage in hedging activities. (5) Comprehensive Loss Other comprehensive income (loss) includes certain changes in equity that are excluded from net loss. For the three months ended March 31, 2001 and 2000, Support.com has no material components of other comprehensive loss and, as a result, the comprehensive loss is the same as the net loss for all periods presented. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report on Form 10-Q contains forward-looking statements. These statements relate to our, and in some cases our customers; or alliance partners', future plans, objectives, expectations, intentions and financial performance, as well as statements as to expected net losses, expected cash flows, the adequacy of capital resources, growth in operations, the ability to compete and respond to technological change and the acceptance and performance of our products and services. In some cases, you can identify forward-looking statements because they use terms such as anticipates, believes, continue, could, estimates, expects, intends, may, plans, potential, predicts, should or will or the negative of those terms or other comparable words. These statements involve risks and uncertainties that may cause our actual results, activities or achievements to be materially different from those expressed or implied by these statements. These risks and uncertainties include those listed under Factors that May Affect Future Results and Management's Discussion and Analysis of Financial Condition and Results of Operations. Support.com expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this report to conform these statements to actual results or changes in our expectations or in events, conditions or circumstances on which any such statement is based. You should not place undue reliance on these forward-looking statements, which apply only as of the date hereof. Overview Support.com is a leading provider of support infrastructure software for digital businesses. Support.com sells to corporate enterprises, service providers and personal computer manufacturers that utilize its software platform to increase the efficiency and effectiveness of their support operations, while improving user responsiveness and satisfaction. Support.com sells its products primarily in the United States and, to a lesser extent in Europe, Asia, and Latin America through its direct and indirect sales force. Substantially all of Support.com's revenue has come from the license of our software products and from related services. We market our products through a combination of direct sales, resellers and support outsourcers. We license our software under term and perpetual licenses. Term license revenue is recognized ratably over the service period of the agreement. Term licenses typically have a duration of 36 months, with pre-payments generally made at the beginning of each 12 month period. We began licensing software under term arrangements in June 1999. A majority of the licenses executed to date have been term-based. RESULTS OF OPERATIONS The following table sets forth the results of operations for the three months ended March 31, 2001 and 2000 expressed as a percentage of total revenue. Three Months Ended March 31, --------- 2001 2000 ---- ---- Revenue: License fees.................................. 75% 71% Services...................................... 25 29 ---- ---- Net revenue.............................. 100 100 ---- ---- Costs and expenses: Cost of license fees.......................... 3 2 Cost of services.............................. 21 47 Amortization of purchased intangibles.......... 10 -- Research and development...................... 40 88 9 Sales and marketing........................... 86 220 General and administrative.................... 17 40 Amortization of deferred stock compensation... 17 198 ---- ---- Total costs and expenses................. 194 595 Loss from operations............................... (94) (495) Interest income (expense) and other, net........... (1) 3 ---- ---- Loss before income taxes........................... (95) (492) Provision for income taxes......................... -- -- ---- ---- Net loss........................................... (95)% (492)% ==== ==== Three Months Ended March 31, 2001 and 2000 Revenue Total revenue increased 360% to $8.6 million in the three months ended March 31, 2001 from $1.9 million in the three months ended March 31, 2000. International revenue represented 20% of total revenue for the three months ended March 31, 2001 compared with 9% for the three months ended March 31, 2000. One customer accounted for 12% of our total revenue for the three months ended March 31, 2001. No other single customer accounted for 10% or more of our total revenue in this period. License revenue License revenue increased to $6.5 million in the three months ended March 31, 2001 from $1.3 million in the three months ended March 31, 2000. The increase in license revenue was due primarily to greater demand for and market acceptance of our software products, the continued success of our indirect sales channels, expansion of our product line and increased sales generated by our expanded sales force. Services revenue Service revenue increased to $2.1 million in the three months ended March 31, 2001 from $550,000 in the three months ended March 31, 2000. This increase was due primarily to increased implementation and consulting services performed with increased license sales. Cost of Revenue Cost of license revenue Cost of license revenue consists primarily of costs related to license fees paid to third parties under technology license arrangements, commissions paid to third parties and costs to distribute our software products and related documentation. Cost of license revenue increased to $230,000 in the three months ended March 31, 2001 from $36,000 in the three months ended March 31, 2000. The increase was primarily due to an increase in license fees and royalty payments to third parties for technology within our products. Cost of services revenue Cost of services consists primarily of salaries and other expenses from our professional services, customer support and training organizations, related overhead expenses and payments made to third parties for consulting services. Cost of services revenue increased to $1.8 million in the three months ended March 31, 2001 from $882,000 in the three months ended March 31, 2000. This increase was primarily because of the growth in the number of employees 10 in our professional services, customer support and training organizations and to a lesser extent travel and consulting costs. Amortization of Purchased Intangibles Amortization of purchased intangibles was $850,000 for the three months ended March 31, 2001 compared to zero for three months ended March 31, 2000. This increase was attributable to the amortization of purchased technology from the acquisition of source code and related intellectual property rights from ePeople, Inc in September 2000. We expect to amortize approximately $850,000 per quarter for the next six quarters related to this technology acquisition. Research and Development Expense Research and development expense consists primarily of payroll and consulting expenses and related costs for research and development personnel. Research and development expense increased to $3.4 million in the three months ended March 31, 2001 from $1.6 million in the three months ended March 31, 2000. The increase was due primarily to an increase in the number of research and development personnel and an increase in consulting costs. This increase is necessary to support both expanded functionality of our eSupport software and increases in our quality assurance and product publications operations. Sales and Marketing Expense Sales and marketing expense consists primarily of payroll expense, including salaries and commissions and promotional expenses, including public relations, advertising and trade shows. Sales and marketing expense increased to $7.4 million in the three months ended March 31, 2001 from $4.1 million in the three months ended March 31, 2000. The increase was due to a number of factors including an increase in the number of sales and marketing personnel, the opening of new sales offices in the United States, the establishment of foreign offices in Europe and in Asia and commission expense associated with higher revenue. We expect sales and marketing expense to increase in absolute dollars as we hire additional sales and marketing personnel, continue to expand the reach of our sales force in domestic and international locations and execute broader marketing programs. General and Administrative Expense General and administrative expense consists primarily of payroll expense and related costs of our finance, legal, human resources, information systems and executive departments and professional fees for legal, accounting and other services. General and administrative expense increased to $1.5 million in the three months ended March 31, 2001 from $751,000 in the three months ended March 31, 2000. This increase was due primarily to an increase in the number of general and administrative personnel and an increase in legal, accounting and other consulting costs incurred in connection with supporting increased business activities and our operations as a public company. We expect general and administrative expense to increase as we continue to hire additional general and administrative personnel to support our operations as a public company and incur professional fees associated with defending and protecting our intellectual property. Amortization of Deferred Stock Compensation We amortized deferred compensation expense of approximately $1.5 million during the three months ended March 31, 2001 as compared to $3.7 million during the same period in 2000. This compensation expense relates to options awarded to individuals in all operating expense categories. Total remaining deferred compensation at March 31, 2001 of approximately $6.1 million is being amortized over the vesting periods of the options using a graded vesting method. The amortization of deferred compensation currently recorded is estimated to be $4.3 million for the entirety of fiscal year 2001 and $1.8 million in fiscal year 2002. Interest Income (Expense) and Other, Net Interest expense and other, net was $62,000 for the three months ended March 31, 2001, as compared to interest income, net of $60,000 in the same period in 2000. The decrease was primarily attributable to a write-down of 11 $700,000 associated with our investment in commercial paper of a utility company offset by interest income earned on our cash, cash equivalents and short-term investments. LIQUIDITY AND CAPITAL RESOURCES From our incorporation in December 1997 through July 2000, we financed our operations primarily through the private placement of our preferred stock, and to a lesser extent through revenue, bank borrowings and capital equipment lease financing. In July 2000, we completed our initial public offering from which we received net proceeds of approximately $61.8 million. Operating Activities We used $6.0 million in cash in operations in the three months ended March 31, 2001, an increase of $4.5 million over the $1.5 million used in the three months ended March 31, 2000. Amortization of deferred stock compensation and amortization of purchased intangibles, which is included in the net loss, but does not require the use of cash, amounted to $2.3 million for the three months ended March 31, 2001 compared to $3.7 million for the three months ended March 31, 2000. Net cash used in operations in the three month period was primarily the result of net losses and a $1.8 million increase in accounts receivable, offset by a $2.7 million increase in accounts payable, and a combined increase in accrued compensation and other accrued liabilities of $1.8 million. Investing Activities Net cash provided by investing activities was $16.3 million in the three months ended March 31, 2001, an increase of $14.0 million over the $2.3 million used in the comparable period ended March 31, 2000. Net cash provided by investing activities for the three months ended March 31, 2001, was primarily due to the purchase of $17.3 million in short-term investments offset by $34.5 million in the sale and maturity of short-term investments. Financing Activities Net cash provided by financing activities was $1.1 million for the three months ended March 31, 2001 and $923,000 for the three months ended March 31, 2000. For the period ended March 31, 2001, cash provided by financing activities was attributable primarily to net proceeds from the purchase of common stock under the Employee Stock Purchase Plan. Commitments As of March 31, 2001, our principal commitments consisted of obligations outstanding under capital and operating leases. Although we have no material commitments for capital expenditures, we anticipate a slight increase in our capital expenditures consistent with our anticipated growth in operations, infrastructure and personnel. As of December 31, 2000, future lease commitments for our office facility were $1.1 million in 2001 and $21,000 in 2002. We expect to require additional space to meet our needs in the next 12 months. Additionally, we are required to pay ePeople approximately $309,000 per quarter for the next 10 quarters pursuant to a technology acquisition made during 2000. Working Capital and Capital Expenditure Requirements We believe that the net proceeds from the sale of common stock in our initial public offering and our existing cash balances will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We evaluate potential acquisitions of other businesses, products and technologies and may in the future require additional equity or debt financings to accomplish any potential acquisitions. If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities. The sale of additional equity or convertible debt securities could result in more dilution to our stockholders. Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us. 12 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which will be effective for the year ending December 31, 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. Support.com believes the adoption of SFAS 133 will not have a material effect on the financial statements, since it currently does not invest in derivative instruments and engage in hedging activities. Factors that May Affect Future Results We have a history of losses and if we do not become profitable, we may not be able to continue to operate. We incurred net losses of approximately $61.3 million for the period from December 3, 1997 through March 31, 2001. We expect to continue to incur net losses in the future. If we do not become profitable within the timeframe we predicted or expected by securities analysts or investors, the market price of our stock will likely decline. If we continue to incur net losses, we may not be able to increase our number of employees or our investment in capital equipment, sales, marketing and research and development programs. We do not know when or if we will become profitable. If we do achieve profitability, we may not sustain or increase profitability in the future and may not be able to continue to operate. Our quarterly results are difficult to predict and may fluctuate. If we do not meet quarterly financial expectations, our stock price would likely decline. Because of our limited operating history, our quarterly revenue and operating results are difficult to predict and may fluctuate from quarter to quarter. Our operating results in some quarters may fall below our predictions or the expectations of securities analysts or investors, which would likely cause the market price of our common stock to decline. Several factors are likely to cause fluctuations in our operating results, including: . demand for our support infrastructure software; . the price and mix of products and services we or our competitors offer; . our ability to retain customers; and . the amount and timing of operating costs and capital expenditures relating to expansion of our business, infrastructure and marketing activities. Our quarterly results depend on the size of a small number of orders, so the delay or loss of any single large order during a quarterly period, and especially an order for a perpetual license rather than a term license, could harm that quarter's results and cause our stock price to decline. Our operating results could suffer if any large orders are delayed or cancelled in any future period. Each quarter, we derive a significant portion of our license revenue from a small number of relatively large orders for the licensing of our support infrastructure software. We license our support infrastructure software under perpetual and term licenses. Perpetual licenses typically result in our recognition of a larger amount of revenue in the quarter in which the license is granted as compared with term licenses. Revenue from a perpetual license is generally recognized upon delivery of a product. Revenue from a term license is recognized on a monthly basis over the agreement term, which is typically three years. We expect that we will continue to depend upon a small number of large orders for a significant portion of our license revenue. 13 Because a small number of customers has historically accounted for and may in future periods account for substantial portions of our revenue, our revenue could decline because of delays of customer orders or the failure of existing customers to renew licenses. For the period ended March 31, 2001, one customer accounted for 12% of our total revenue. No other single customer accounted for 10% or more of our total revenue for the period ended March 31, 2001. Because we have a small number of customers and a few customers are likely to continue to account for a significant portion of our revenue, our revenue could decline because of the loss or delay of a single customer order or the failure of an existing customer to renew its term license. We may not obtain additional customers. The failure to obtain additional customers, the loss or delay of customer orders and the failure of existing customers to renew licenses will harm our operating results. We must achieve broad adoption and acceptance of our support infrastructure products and services or we will not increase our market share or grow our business. We must achieve broad market acceptance and adoption of our products and services or our business and operating results will suffer. Specifically, we must encourage our customers to transition from using traditional support methods. To accomplish this, we must: . continually improve the performance, features and reliability of our products and services to address changing industry standards and customer needs; and . develop integration with other support-related technologies. We must attract and retain qualified personnel, which is particularly difficult for us because we are headquartered in the San Francisco Bay Area, where competition for personnel can be extremely intense. If we fail to retain and recruit the necessary personnel, our ability to develop new products and services and to provide acceptable levels of customer service could suffer. We may seek to increase our number of employees over the next 12 months. Competition for these personnel can be intense, especially in the San Francisco Bay Area. We have had difficulty hiring qualified personnel as quickly as we have desired. Specifically, we may be unable to hire a sufficient number of qualified support, training and engineering professionals. If we hire employees from our competitors, these competitors may claim that we have engaged in unfair hiring practices. We could incur substantial costs in defending ourselves against any of these claims, regardless of their merits. Our product innovations may not achieve the market penetration or price stability necessary for profitability. If we fail to develop, in a timely manner, new or enhanced versions of our support infrastructure software or to provide new products and services that achieve rapid and broad market acceptance or price stability, we may not become profitable. We may fail to identify new product and service opportunities successfully. Our existing products will become obsolete if we fail to introduce new products or product enhancements that meet new customer demands, support new standards or integrate with new or upgraded versions of packaged applications. We may have little or no control over the factors that might influence market acceptance of our products and services. These factors include: . the willingness of enterprises to transition to automated support and eSupport and . acceptance of competitors' automated support or eSupport solutions. 14 Our software may not operate with the hardware and software platforms that are used by our customers now or in the future, and as a result our business and operating results may suffer. We currently serve a customer base with a wide variety of constantly changing hardware, packaged software applications and networking platforms. If there is widespread adoption of other operating system environments, and if we fail to release versions of our support infrastructure software that are compatible with these other operating systems, our business and operating results will suffer. Our future success also depends on: . our ability to integrate our product with multiple platforms and to modify our product as new versions of packaged applications are introduced; . the number of different operating systems and databases that our product can work with; and . our management of software being developed by third parties for our customers or for use with our product. We rely on third-party technologies and our inability to use or integrate third-party technologies could delay product or service development. We intend to continue to license technologies from third parties, including applications used in our research and development activities and technologies, which are integrated into our products and services. Our inability to obtain or integrate any of these licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. These technologies may not continue to be available to us on commercially reasonable terms or at all. We may fail to successfully integrate any licensed technology into our products or services. This would harm our business and operating results. Third-party licenses also expose us to increased risks that include: . risks of product malfunction after new technology is integrated; . the diversion of resources from the development of our own proprietary technology; and . our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs. We may engage in future acquisitions or investments that could dilute our existing stockholders, or cause us to incur significant expenses. We may acquire or invest in complementary businesses, technologies or products. If we are unable to use or integrate any newly acquired entities or technologies effectively or profitably, our operating results could suffer. Acquisitions by us could also result in large and immediate write-offs, incurrence of debt and contingent liabilities or amortization of expenses related to goodwill and other intangibles, which could harm our operating results. Additional funds to finance any acquisitions may not be available on terms that are favorable to us, or at all, and, in the case of equity financings, may dilute our stockholders. Our recent growth has placed a strain on our management systems, network infrastructure and resources and our failure to manage growth could harm our ability to provide adequate levels of service to our customers, disrupt our operations and delay execution of our business plan. Our rapid expansion in our personnel, facilities, systems and infrastructure has placed, and we expect that it will continue to place, a significant strain on our management controls, network infrastructure and financial resources. Our failure to manage growth could harm our ability to provide adequate levels of customer service, delay execution of our business plan or disrupt our operations. We may continue to expand, including expansion outside the San Francisco Bay Area. We will need to obtain additional office space before the end of 2001, and if we fail to obtain sufficient space, our business operations will be disrupted. 15 We may lose the services of our key personnel, which in turn would harm the market's perception of our business. Our success will depend on the skills, experience and performance of our senior management, engineering, sales, marketing and other key personnel. The loss of the services of any of our senior management or other key personnel, including our chief executive officer, Radha R. Basu, our chief financial officer, Brian Beattie, our chief technical officer, Scott W. Dale, and our chief software officer, Cadir B. Lee, could harm the market's perception of our business and our ability to achieve our business goals. Our failure to establish and expand strategic alliances would harm our ability to achieve market acceptance of our support infrastructure software. If we fail to maintain, establish or successfully implement strategic alliances, our ability to achieve market acceptance of our infrastructure software will suffer and our business and operating results will be harmed. Specifically, we must establish and extend existing distribution alliances with specialized technology and services firms such as support outsourcers. We must also establish and extend existing solutions alliances with leading providers of complementary support technologies, including call center or help desk management companies, knowledge management companies and systems management firms. Our products depend on and work with products containing complex software and if our products fail to perform properly due to errors or similar problems in the software, we may need to spend resources to correct the errors or compensate for losses from these errors and our reputation could be harmed. Our products depend on complex software, both internally developed and licensed from third parties. Also, our customers may use our products with other companies' products which also contain complex software. Complex software often contains errors. These errors could result in: . delays in product shipments; . unexpected expenses and diversion of resources to identify the source of errors or to correct errors; . damage to our reputation; . lost sales; . product liability claims; and . product returns. Our system security is important to our customers and we may need to spend significant resources to protect against or correct problems caused by security breaches. A fundamental requirement for online communications, transactions and support is the secure transmission of confidential information. Third parties may attempt to breach our security or that of our customers. We may be liable to our customers for any breach in security and any breach could harm our business and reputation. Also, computers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We may be required to expend significant capital and other resources to further protect against security breaches or to correct problems caused by any breach. We may face claims of invasion of privacy or inappropriate disclosure, use or loss of our customers' information and any liability imposed could harm our reputation and cause us to lose customers. Our software contains features which may allow us or our customers to control, monitor or collect information from computers running the software without notice to the computing users. Therefore we may face claims about invasion 16 of privacy or inappropriate disclosure, use or loss of this information. Any imposition of liability could harm our operating results. Our sales cycle can be lengthy and if revenue forecasted for a particular quarter is not realized in that quarter, significant expenses incurred may not be offset by corresponding sales. Our sales cycle for our support infrastructure software can range from one week to nine months or more and may vary substantially from customer to customer. While our customers are evaluating our products and services, we may incur substantial sales and marketing expenses and spend significant management effort. Any delay in completing sales in a particular quarter could cause our operating results to be below expectations. We have limited experience in international operations and if our revenue from international operations does not exceed the expense of establishing and maintaining our international operations, our business could suffer. We intend to expand further into international markets. We have limited experience in international operations and may not be able to compete effectively in international markets. If we do not generate enough revenue from international operations to offset the expense of these operations, our business could suffer. Risks we face in conducting business internationally include: . difficulties and costs of staffing and managing international operations; . differing technology standards; . longer sales cycles and collection periods; . changes in currency exchange rates and controls; and . dependence on local vendors. Any system failure that causes an interruption in our customers' ability to use our products or services or a decrease in their performance could harm our relationships with our customers and result in reduced revenue. Our software may depend on the uninterrupted operation of our internal and outsourced communications and computer systems. These systems are vulnerable to damage or interruption from computer viruses, human error, natural disasters and intentional acts of vandalism and similar events. We have no formal disaster recovery plan and business interruption insurance may not be enough to compensate us for losses that occur. These problems could interrupt our customers' ability to use our eSupport products or services which could harm our reputation and cause us to lose customers and revenue. We may not obtain sufficient patent protection, and this could harm our competitive position and increase our expenses which would harm our business. Our success and ability to compete depend to a significant degree upon the protection of our software and other proprietary technology. It is possible that: . our pending patent applications may not be issued; . competitors may independently develop similar technologies or design around any of our patents; . patents issued to us may not be broad enough to protect our proprietary rights; and . our issued patents could be successfully challenged. 17 We rely upon trademarks, copyrights and trade secrets to protect our proprietary rights and if these rights are not sufficiently protected, it could harm our ability to compete and to generate revenue. We also rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and grow our business could suffer if these rights are not adequately protected. Our proprietary rights may not be adequately protected because: . laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and . policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of this unauthorized use. Also, the laws of other countries in which we market our products may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for them, which would harm our competitive position and market share. We may face intellectual property infringement claims that could be costly to defend and result in our loss of significant rights. Other parties may assert intellectual property infringement claims against us and our products may infringe the intellectual property rights of third parties. For example, Previo, Inc. has filed a patent infringement lawsuit against us. Defending this lawsuit may be time-consuming, costly and may divert management's attention. This lawsuit is at an early stage and its outcome may not be favorable to us. In addition, if we do not prevail in such litigation, we could be forced to pay significant damages or amounts in settlement. Intellectual property litigation is expensive and time-consuming and could divert management's attention from our business. If there is a successful claim of infringement, we may be required to develop non-infringing technology or enter into royalty or license agreements which may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business. Our products may infringe issued patents that may relate to our products. Also, patent applications may have been filed by third parties which relate to our software products. We must compete successfully in the eSupport market or we will lose market share and our business will fail. The market for our products is intensely competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. Competitive pressures could reduce our market share or require us to reduce the price of products and services and therefore our gross margin, which could harm our business and operating results. Our integrated software solution competes against various vendors' software products designed to accomplish specific elements of a complete eSupport solution. For example, in the market for automated development of support solutions, we compete with companies such as Serena Software, Inc. In the market for automated delivery of support solutions, we compete with Motive Communications, Inc. We may encounter competition from companies such as: . customer communications software companies; . question and answer companies; . customer relationship management solution providers; . consolidated service desk solution vendors; . Internet infrastructure companies; and 18 . operating systems providers. Our potential competitors may have longer operating histories, significantly greater financial, technical, and other resources or greater name recognition than we do. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Because our eSupport infrastructure software is designed to support businesses operating over the Internet, our success depends on the continued growth and levels of performance of Internet usage. Because a majority of our products are designed to support businesses operating over the Internet, the success of our business will depend on the continued improvement of the Internet as a convenient means of consumer interaction and commerce, as well as an efficient medium for the delivery and distribution of information by enterprises to their employees and extended enterprise. Because global commerce on the Internet and the online exchange of information is evolving, we cannot predict whether the Internet will continue to be a viable commercial marketplace. Governmental regulation and legal changes could impair the growth of the Internet and decrease demand for our products or increase our cost of doing business. The laws and regulations that govern our business change rapidly. Any change in laws and regulations could impair the growth of the Internet and could reduce demand for our products, subject us to liability or increase our cost of doing business. The United States government and the governments of states and foreign countries have attempted to regulate activities on the Internet and the distribution of software. Also, in 1998, Congress passed the Internet Freedom Act, which imposes a three-year moratorium on state and local taxes on Internet-based transactions. Failure to renew this moratorium would allow states to impose taxes on e-commerce. This might harm our business directly and indirectly by harming the businesses of our customers, potential customers and the parties to our business alliances. The applicability to the Internet of existing laws governing issues is uncertain and may take years to resolve. Evolving areas of law that are relevant to our business include privacy laws, intellectual property laws, proposed encryption laws, content regulation and sales and use tax laws and regulations. We may experience power blackouts and higher electricity prices as a result of California's current energy crisis, which could disrupt our operations and increase our expenses. California is in the midst of an energy crisis that could disrupt our operations and increase our expenses. We rely on the major Northern California public utility, Pacific Gas & Electric Company, or PG&E, to supply electric power to our headquarters in Northern California. Due to problems associated with the de-regulation of the power industry in California and shortages in wholesale electricity supplies, customers of PG&E have been faced with increased electricity prices, power shortages and, in some cases, rolling blackouts. If blackouts interrupt our power supply, we may be temporarily unable to continue to operate our central computer, hardware and support systems. Any such interruption in our ability to continue our operations could delay our ability to develop or provide our products and support services, which could damage our reputation and result in lost revenue, either of which could substantially harm our business and results of operations. 19 ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Qualitative and Quantitative Disclosures about Market Risk We develop products in the United States and market and sell in North America, South American, Asia and Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Because of the nature of our short-term investments other than the write down of $700,000 related to our short-term debt investment in a public utility, we have concluded that there is no material market risk exposure. Our investment policy requires us to invest funds in excess of operating requirements in: . obligations of the U.S. government and its agencies; . investment grade state and local government obligations; . securities of U.S. corporations rated A1 or AA by Standard and Poors or the Moody's equivalent; and . money market funds, deposits or notes issued or guaranteed by U.S. and non-U.S. commercial banks, meeting credit rating and net worth requirements with maturities of less than two years. At March 31, 2001, our cash and cash equivalents consisted primarily of money market funds held by large institutions in the U.S. and our short-term investments were invested in corporate and government debt securities maturing or resetting in less than eighteen months. 20 PART II: OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (c) Sales of Unregistered Securities During the three months ended March 31, 2001, we issued and sold the following unregistered securities: 1. We issued 95,791 shares of common stock pursuant to the exercise of stock options at exercise prices ranging from $0.10 to $7.00 per share. The sales of the above securities were considered to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions under compensatory benefit plans and contracts relating to compensation provided under Rule 701. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in these transactions. All recipients had adequate access, through their relationship with the Registrant, to information about the Registrant. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibit Index attached hereto, which is incorporated herein by reference (b) Reports on Form 8-K: During the quarter ended March 31, 2001, the Registrant filed the following reports on Form 8-K:
---------------------------------------------------------------------------------------------------- Date Filed Date of Report Item Number Financial Statements Required ---------------------------------------------------------------------------------------------------- January 17, 2001 January 17, 2001 5. Other events None ----------------------------------------------------------------------------------------------------
21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. May 15, 2001 By /s/ Brian Beattie ------------------------------------ Brian Beattie Senior Vice President of Finance and Administration and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) 22 EXHIBIT INDEX TO SUPPORT.COM, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 Exhibit Number Description - -------------- ----------- 3.1* Amended and Restated Certificate of Incorporation. 3.2* Amended and Restated Bylaws. 4.1** Form of Common Stock Certificate. * Incorporated by reference from Exhibits 3.1 and 3.2 of Registrant's Registration Statement on Form S-1 (File No. 333-30674) filed with the Securities and Exchange Commission on February 18, 2000. ** Incorporated by reference from Exhibit 4.1 of Amendment No. 3 to Registrant's Registration Statement on Form S-1 (File No. 333-30674) filed with the Securities and Exchange Commission on April 26, 2000. 23 -----END PRIVACY-ENHANCED MESSAGE-----