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 September 30, 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 November 14, 2001, 33,402,040 shares of the Registrant's Common Stock,
$0.0001 par value, were outstanding.
SUPPORT.COM, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
INDEX
Page
----
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Operations for the three and nine months 4
ended September 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flows for the nine months 5
ended September 30, 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 6: Exhibits and Reports on Form 8-K 21
Signature 22
Exhibit Index 23
2
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents .................................................. $ 17,584 $ 11,756
Short term investments ..................................................... 12,048 39,757
Accounts receivable, net ................................................... 8,079 7,872
Other current assets ....................................................... 3,006 3,255
-------- --------
Total current assets ..................................................... 40,717 62,640
Property and equipment, net ................................................... 2,231 2,420
Purchased intangibles, net .................................................... 2,392 5,230
Other assets .................................................................. 323 282
-------- --------
$ 45,663 $ 70,572
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................................................... $ 1,706 $ 957
Accrued compensation ....................................................... 1,335 2,250
Other accrued liabilities .................................................. 2,841 5,094
Capital lease obligations, current portion ................................. 569 620
Deferred revenue ........................................................... 8,395 11,866
-------- --------
Total current liabilities ................................................ 14,846 20,787
Capital lease obligations, net of current portion ............................. 812 1,221
Other long term liabilities ................................................... 1,236 2,164
Deferred revenue - long-term portion .......................................... 869 241
Stockholders' equity:
Common stock .............................................................. 3 3
Additional paid-in capital ................................................. 108,888 108,558
Notes receivable from stockholders ......................................... (1,523) (2,051)
Deferred stock compensation ................................................ (2,535) (7,219)
Accumulated other comprehensive income ..................................... 138 --
Accumulated deficit ........................................................ (77,071) (53,132)
-------- --------
Stockholders' equity ..................................................... 27,900 46,159
-------- --------
$ 45,663 $ 70,572
======== ========
See accompanying notes.
3
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------ -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
License fees................................................ $ 5,069 $ 3,965 $ 15,997 $7,722
Services ................................................... 1,998 1,388 5,955 3,077
-------- -------- -------- ---------
Total revenues ........................................... 7,067 5,353 21,952 10,799
-------- -------- -------- ---------
Costs and expenses:
Cost of license fees ....................................... 131 1,113 500 1,196
Cost of services ........................................... 1,486 1,826 4,735 3,958
Amortization of purchased intangibles ...................... 598 94 2,214 94
Research and development ................................... 2,995 2,649 9,817 7,364
Sales and marketing ........................................ 7,101 5,970 21,723 15,387
General and administrative ................................. 1,346 1,246 4,715 2,830
Amortization of deferred stock compensation (1) ............ 870 2,767 3,554 9,215
-------- -------- -------- ---------
Total costs and expenses ................................. 14,527 15,665 47,258 40,044
-------- -------- -------- ---------
Loss from operations .......................................... ( 7,460) ( 10,312) (25,306) (29,245)
Interest income (expense) and other, net ...................... 255 755 1,367 818
-------- -------- -------- ---------
Net loss ...................................................... (7,205) (9,557) (23,939) ( 28,427)
Accretion on redeemable convertible preferred stock ........... -- (79) -- (885)
-------- -------- -------- ---------
Net loss attributable to common shareholders .................. $ (7,205) $ (9,636) $(23,939) $ (29,312)
======== ======== ========= =========
Basic and diluted net loss per share .......................... $ (0.23) $ (0.38) $ (0.77) $ (2.14)
======== ======== ======== =========
Shares used in computing basic and diluted net loss per share.. 31,316 25,279 30,891 13,712
======== ======== ======== =========
________________
(1) Amortization of deferred compensation relates to the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Cost of services ............................................. $ 38 $ 127 $ 155 $ 424
Research and development ..................................... 172 554 703 1,843
Sales and marketing .......................................... 314 985 1,282 3,280
General and administrative ................................... 346 1,101 1,414 3,668
------- ------- ------- -------
$ 870 $ 2,767 $ 3,554 $ 9,215
------- ------- ------- -------
See accompanying notes.
4
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
-------------
2001 2000
---- ----
(unaudited)
Operating Activities
Net loss ...................................................................... $ (23,939) $ (28,427)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 1,790 985
Amortization of deferred stock compensation ................................. 3,554 9,215
Amortization of purchased intangibles ....................................... 2,214 94
Other ....................................................................... 81 80
Changes in assets and liabilities:
Accounts receivable, net .................................................. (207) (3,388)
Prepaids and other current assets ......................................... 249 (820)
Accounts payable .......................................................... 749 (494)
Accrued compensation ...................................................... (915) 651
Other accrued liabilities ................................................. (2,253) 3,075
Deferred revenue .......................................................... (2,843) 6,261
--------- --------
Net cash used in operating activities ................................... (21,520) (12,768)
--------- --------
Investing Activities
Purchases of property and equipment ........................................... (1,601) (1,105)
Other assets .................................................................. (41) (121)
Purchased intangibles ......................................................... (304) --
Purchases of short-term investments ........................................... (31,205) (13,169)
Sales and maturities of short-term investments ................................ 58,914 1,000
--------- --------
Net cash provided by (used in) investing activities ..................... 25,763 (13,395)
--------- --------
Financing Activities
Proceeds from initial public offering, net of issuance costs .................. -- 61,777
Proceeds from other issuances of common stock, net of repurchases ............. 1,517 1,493
Repayment of notes receivable from shareholders ............................... 528 --
Principal payments under capital lease obligations ............................ (460) (374)
Repayment of notes payable .................................................... -- (2,399)
--------- --------
Net cash provided by financing activities ............................... 1,585 60,497
--------- --------
Net increase in cash and cash equivalents ....................................... 5,828 34,334
Cash and cash equivalents at beginning of period ................................ 11,756 4,023
--------- --------
Cash and cash equivalents at end of period ...................................... $ 17,584 $ 38,357
========= ========
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 September 30, 2001 and the statements of operations for the
three and nine months ended September 30, 2001 and 2000 and cash flows for the
nine months ended September 30, 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.
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 September 30, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Cash ............................ $ 2,344 $ -- $ -- $ 2,344
Money market funds .............. 15,240 -- -- 15,240
Federal agencies ................ 11,965 83 -- 12,048
------- ------- ------- -------
$29,549 $ 83 $ -- $29,632
======= ======= ======= =======
Classified as:
Cash and cash equivalents ....... $17,584 -- -- $17,584
Short-Term Investments .......... 11,965 83 -- 12,048
------- ------- ------- -------
$29,549 $ 83 $ -- $29,632
======= ======= ======= =======
Revenue Recognition
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.
6
Services revenue is primarily comprised of revenue from professional services,
such as consulting services and training and also includes maintenance under
perpetual license arrangements.
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 7,845,782 and
8,197,833 shares, prior to the application of the treasury stock method, for the
three and nine months ended September 30, 2001. 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 Nine months ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net loss attributable to common shareholders ...................... $ (7,205) $(9,636) $(23,939) $(29,312)
========= ======== ========= ========
Basic and diluted:
Weighted-average shares of common stock outstanding ............ 33,417 29,677 33,344 18,460
Less: Weighted-average shares subject to repurchase ............ (2,101) (4,398) (2,453) (4,748)
-------- ------- -------- --------
Shares used in computing basic and diluted net loss per
share ........................................................ 31,316 25,279 30,891 13,712
========= ======== ========= ========
Basic and diluted net loss per share attributable to common
stockholders ................................................. $ (0.23) $ (0.38) $ (0.77) $ (2.14)
========= ======== ========= ========
(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.
(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 $6.8 million. 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 through the quarter
ended September 30, 2003. The purchased technology is being amortized on a
straight-line basis over two years. Total amortization related to the purchased
intangibles for the nine months ended September 30, 2001 was $2.2 million.
7
(4) Recently Issued Accounting Standards
On January 1, 2001, we adopted Statement of Financial Reporting Standards No.
133, ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133, as amended, requires that all derivative instruments be
recorded on the balance sheet at their fair value. Change in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if so, the type of hedge transaction. The adoption of SFAS 133,
as amended, did not have a material impact on our financial position or results
of operations.
In July 2001, the Financial Accounting Standards Board, or FASB, issued two
statements as a result of its deliberations on the business combinations
project, Statement of Financial Accounting Standards No. 141, or FAS 141, on
Business Combinations and FAS 142 on Goodwill and Other Intangible Assets. FAS
141 will be effective for any business combinations initiated after June 30,
2001 and also includes the criteria for the recognition of intangible assets
separately from goodwill. FAS 142 will be effective for fiscal years beginning
after December 15, 2001 and will require that goodwill not be amortized, but
rather be subject to an impairment test at least annually. Separately identified
and recognized intangible assets resulting from business combinations completed
before July 1, 2001 that do not meet the new criteria for separate recognition
of intangible assets will be subsumed into goodwill upon adoption. In addition,
the useful lives of recognized intangible assets acquired in transactions
completed before July 1, 2001 will be reassessed and the remaining amortization
periods adjusted accordingly. The adoption of FAS 141 and 142 is not expected to
have a significant impact on our financial position at transition.
(5) Comprehensive Loss
Statement of Financial Accounting No. 130, "Reporting Comprehensive Income"
("SFAS 130") establishes standards for reporting and displaying comprehensive
net income and its components in stockholders' equity. However, it has no impact
on our net income as presented in our financial statements. SFAS 130 requires
foreign currency translation adjustments and changes in the fair value of
available-for-sale securities to be included in comprehensive income.
The following are the components of comprehensive income (loss): (in thousands)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net loss .................................................... $ (7,205) $ (9,557) $(23,939) $(28,427)
======== ======== ======== ========
Net unrealized gain (loss) on available-for-sale
securities ............................................. 65 (3) 55 27
Translation adjustment gain (loss) .......................... 125 -- 6 --
Comprehensive income (loss) ................................. $ (7,015) $ (9,560) $(23,878) $(28,400)
======== ======== ======== ========
The components of accumulated other comprehensive income (loss) relate entirely
to unrealized gains (losses) on available-for-sale securities and translation
adjustment gain (loss) and are $138,000 at September 30, 2001 and $0 at
September 30, 2000.
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 automation software. Support.com
sells to corporate enterprises, service providers and personal computer and
device 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 and indirect sales channels. Substantially
all of Support.com's revenues have come from the license of our software
products and from related services.
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 and nine
months ended September 30, 2001 and 2000 expressed as a percentage of total
revenue.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenue:
License fees .................................... 72 % 74 % 73 % 72 %
Services ........................................ 28 26 27 28
--- --- --- ---
Net revenue ................................ 100 100 100 100
--- --- --- ---
Costs and expenses:
Cost of license fees ............................ 2 21 2 11
Cost of services ................................ 21 34 22 37
Amortization of purchased intangibles ........... 9 2 10 1
Research and development ........................ 42 49 45 68
Sales and marketing ............................. 101 112 99 143
General and administrative ...................... 19 23 21 26
9
Amortization of deferred stock compensation ... 12 52 16 85
----- ----- ----- -----
Total costs and expenses ................. 206 293 215 371
Loss from operations ............................... (106) (193) (115) (271)
Interest income and other income, net .............. 4 14 6 8
----- ----- ----- -----
Loss before income taxes ........................... (102) (179) (109) (263)
Provision for income taxes ......................... -- -- -- --
----- ----- ----- -----
Net loss ........................................... (102)% (179)% (109)% (263)%
===== ===== ===== =====
Three and Nine Months Ended September 30, 2001 and 2000
Revenue
Total revenue increased 32% to $7.1 million in the three months ended September
30, 2001 from $5.4 million in the three months ended September 30, 2000. Total
revenue increased 103% to $22.0 million for the nine months ended September 30,
2001 as compared to $10.8 million for the same period in 2000.
International revenue represented 19% and 21% of total revenue for the three and
nine months ended September 30, 2001, compared with 16% and 11% for the three
and nine months ended September 30, 2000.
No single customer accounted for 10% or more of total revenue for the three and
nine months ended September 30, 2001.
License revenue
License revenue increased to $5.1 million in the three months ended September
30, 2001 from $4.0 million in the three months ended September 30, 2000 and to
$16.0 million for the nine months ended September 30, 2001 from $7.7 million for
the nine months ended September 30, 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 $2.0 million in the three months ended September
30, 2001 from $1.4 million in the three months ended September 30, 2000 and to
$6.0 million for the nine months ended September 30, 2001 from $3.1 million for
the nine months ended September 30, 2000. This increase was due primarily to
increased maintenance revenue and increased implementation, training and
consulting services performed.
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 decreased to $131,000 in the three months
ended September 30, 2001 from $1.1 million in the three months ended September
30, 2000. Cost of license revenue for the nine months ended September 30, 2001
decreased to $500,000 compared to $1.2 million for the same period in 2000. This
decrease was primarily due to a one-time quarterly license fee payment of $1.0
million paid to ePeople in the third quarter of 2000.
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 decreased to $1.5 million in the three months ended
September 30, 2001 from $1.8 million
10
in the three months ended September 30, 2000. This decrease was primarily due to
our focus on expense controls, including travel and consulting costs and to a
lesser extent due to lower headcount. Cost of services revenue for the nine
months ended September 30, 2001 increased to $4.7 million compared to $4.0
million for the same period in 2000.
Amortization of Purchased Intangibles
Amortization of purchased intangibles was $598,000 and $2.2 million for the
three and nine months ended September 30, 2001 compared to $94,000 for both the
three and nine months ended September 30, 2000. These increases were
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 $598,000 per quarter for the
next four 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 $3.0 million in the three months ended
September 30, 2001 from $2.6 million in the three months ended September 30,
2000. Research and development expense for the nine months ended September 30,
2001 increased to $9.8 million as compared to $7.4 million for the same period
in 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 was
necessary to support both expanded functionality of our support automation
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 related costs for sales and marketing personnel and
promotional expenses, including public relations, advertising and trade shows.
Sales and marketing expense increased to $7.1 million in the three months ended
September 30, 2001 from $6.0 million in the three months ended September 30,
2000. Sales and marketing expense for the nine months ended September 30, 2001
increased to $21.7 million as compared to $15.4 million for the same period in
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, Asia and
Australia, commission expense associated with higher revenue and an increase in
our allowance for bad debt.
General and Administrative Expense
General and administrative expense consists primarily of payroll expense and
related costs of administrative personnel and professional fees for legal,
accounting and other professional services. General and administrative expense
increased to $1.3 million in the three months ended September 30, 2001 from $1.2
million in the three months ended September 30, 2000. General and administrative
expense for the nine months ended September 30, 2001 increased to $4.7 million
as compared to $2.8 million for the same period in 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.
Amortization of Deferred Stock Compensation
We amortized deferred compensation expense of approximately $870,000 and $3.6
million during the three and nine months ended September 30, 2001 as compared to
$2.8 million and $9.2 million during the same periods in 2000. This compensation
expense relates to options awarded to individuals in all operating expense
categories.
Interest Income (Expense) and Other, Net
Interest income (expense) and other, net, decreased to $255,000 in the three
months ended September 30, 2001 from $755,000 in the three months ended
September 30, 2000. This decrease was primarily attributable to the reduction in
11
interest income earned on our cash, cash equivalents and investments due to a
lower cash, cash equivalents and short term investments balance and a change to
a more conservative investment policy. Interest income (expense) and other, net,
increased to $1.4 million in the nine months ended September 30, 2001 as
compared to $818,000 for the same period in 2000. The increase was primarily
attributable to interest income earned on higher average cash, cash equivalents
and short-term investments balances.
LIQUIDITY AND CAPITAL RESOURCES
From our incorporation in December 1997 to the date of our initial public
offering, we have financed our operations 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 $21.5 million in cash in operations in the nine months ended September
30, 2001, an increase of $8.8 million over the $12.8 million used in the nine
months ended September 30, 2000. Amortization of deferred stock compensation and
amortization of purchased intangibles and depreciation of fixed assets which is
included in the net loss, but does not require the use of cash, amounted to $7.6
million for the nine months ended September 30, 2001 compared to $10.3 million
for the nine months ended September 30, 2000. Net cash used in operations in the
nine month period was primarily the result of net losses and a combined decrease
in accrued compensation, other accrued liabilities, and deferred revenue of $6.0
million offset by a $749,000 increase in accounts payable.
Investing Activities
Net cash provided by investing activities was $25.8 million in the nine months
ended September 30, 2001, an increase of $39.2 million over the $13.4 million
used in the comparable period ended September 30, 2000. Net cash provided by
investing activities for the nine months ended September 30, 2001, was primarily
due to the sale and maturity of $58.9 million in short-term investments offset
by $31.2 million in the purchase of short-term investments as the Company moved
to a more conservative investment policy in 2001.
Financing Activities
Net cash provided by financing activities was $1.6 million for the nine months
ended September 30, 2001 and $60.5 million for the nine months ended September
30, 2000. For the period ended September 30, 2001, cash provided by financing
activities was attributable primarily to net proceeds from the purchase of
common stock under the Employee Stock Purchase Plan and to a lesser extent the
repayment of notes receivable from shareholders. For 2000, cash provided by
financing activities was primarily attributable to the $61.8 million from the
issuance of our common stock in our initial public offering on July 2000.
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Commitments
As of September 30, 2001, our principal commitments consisted of obligations
outstanding under capital and operating leases. We anticipate requiring minimal
additional space in the next 12 months. As of December 31, 2000, future lease
commitments for our office facility were $1.1 million in 2001 and $21,000 in
2002. Additionally, we are required to pay ePeople approximately $309,000 per
quarter through the quarter ended September 30, 2003, pursuant to a technology
acquisition made during 2000.
Working Capital and Capital Expenditure Requirements
We believe that 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.
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 $77.1 million for the period from
December 3, 1997 through September 30, 2001. We expect to continue to incur net
losses in the foreseeable 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 automation 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.
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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 automation software. We license our support automation 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.
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 September 30, 2001, no single customer accounted for 10% or
more of our total revenue. 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 automation 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.
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 automation 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.
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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 automation 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.
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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 automation software.
If we fail to maintain, establish or successfully implement strategic alliances,
our ability to achieve market acceptance of our automation 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
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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 automation 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;
. dependence on local vendors; and
. the effects of the terrorist attacks in the United Stats and the
effects of the war on terrorism and any related conflicts or similar
events worldwide.
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.
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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
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. 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 support automation 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.
We may experience a decrease in market demand due to the slowing economy in the
United States which has been further stymied by the recent outbreak of
terrorism, war and social and political instability.
Economic growth has slowed significantly, and some analysts believe the United
States economy will experience a recession. In addition, the recent terrorists
attacks in the United States may further add to the decline in the United States
economy. The war on terrorism, along with the effects of the terrorist attack
and other similar events, could have contributed to the further slowdown of the
already slumping market demand for goods and services, including support
automation software. If the economy continues to decline as a result of the
recent economic, political and social turmoil, or if there are further
terrorist attacks in the United States or elsewhere, we may experience decreases
in the demand for our products and services, which may harm our operating
results.
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.
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ITEM 3: QUANTITATIVE AND QUALITATIVE 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, 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; and
. money market funds or deposits 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 September 30, 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 government debt securities maturing in less than
eighteen months.
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibits attached hereto which is incorporated herein by reference
(b) Reports on Form 8-K:
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended September 30, 2001.
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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.
November 14, 2001 SUPPORT.COM, INC.
By /s/ Brian Beattie
-----------------
Brian Beattie
Senior Vice President of Finance and Administration
and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
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EXHIBIT INDEX TO SUPPORT.COM, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 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.
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