<PAGE>
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, 2000
[_] 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 _______ No X. (1)
---
(1) The registrant has been subject to the filing requirements of the Securities
Exchange Act of 1934 since the effective date of its Registration Statement on
Form S-1 (July 18, 2000) and has filed all required reports since the effective
date.
On November 13, 2000, 33,241,684 shares of the Registrant's Common Stock,
$0.0001 par value, were outstanding.
<PAGE>
SUPPORT.COM, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 1999 and September 30, 2000 3
Condensed Consolidated Statements of Operations for the three and nine months 4
ended September 30, 1999 and 2000
Condensed Consolidated Statements of Cash Flows for the nine months 5
ended September 30, 1999 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 21
Part II: Other Information
Item 2: Changes in Securities and Use of Proceeds 22
Item 6: Exhibits and Reports on Form 8-K 23
Signature 24
Exhibit Index 25
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SUPPORT.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................................................... $ 38,357 $ 4,023
Short term investments........................................................ 20,635 8,466
Accounts receivable, net...................................................... 6,838 3,450
Other current assets.......................................................... 1,438 618
-------- --------
Total current assets....................................................... 67,268 16,557
Property and equipment, net..................................................... 2,423 881
Purchase intangibles, net....................................................... 6,706 --
Other assets.................................................................... 375 254
-------- --------
$ 76,772 $ 17,692
======== ========
Liabilities and Stockholders' Equity (Net Capital Deficiency)
Current liabilities:
Accounts payable.............................................................. $ 733 $ 1,227
Accrued compensation.......................................................... 1,102 451
Other accrued liabilities..................................................... 8,205 494
Notes payable, current portion................................................ -- 921
Capital lease obligations, current portion.................................... 622 274
Deferred revenue.............................................................. 9,333 2,712
-------- --------
Total current liabilities.................................................. 19,995 6,079
Notes payable, net of current portion........................................... -- 1,478
Capital lease obligations, net of current portion............................... 1,499 799
Other long term liabilities..................................................... 2,164 --
Deferred revenue - long-term portion............................................ -- 360
Commitments
Redeemable convertible preferred stock........................................ -- 21,449
Stockholders' equity (net capital deficiency):
Convertible preferred stock................................................... -- 1
Common stock.................................................................. 3 1
Additional paid-in capital.................................................... 112,723 20,016
Notes receivable from stockholders............................................ (2,501) (1,450)
Deferred stock compensation................................................... (12,420) (14,777)
Accumulated deficit........................................................... (44,691) (16,264)
-------- --------
Stockholders' equity (net capital deficiency)................................. 53,114 12,473
-------- --------
$ 76,772 $ 17,692
======== ========
</TABLE>
See accompanying notes.
3
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SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
License fees....................................................... $ 3,965 $ 628 $ 7,722 $ 1,430
Services........................................................... 1,388 154 3,077 179
--------- ------- --------- --------
Net revenue..................................................... 5,353 782 10,799 1,609
--------- ------- --------- --------
Costs and expenses:
Cost of license fees............................................... 1,113 2 1,196 3
Cost of services................................................... 1,826 240 3,958 441
Amortization of purchased intangibles.............................. 94 -- 94 --
Research and development........................................... 2,649 771 7,364 1,501
Sales and marketing................................................ 5,970 2,245 15,387 4,581
General and administrative.......................................... 1,246 477 2,830 972
Amortization of deferred stock compensation (1)..................... 2,767 1,400 9,215 1,698
--------- ------- --------- --------
Total costs and expenses........................................ 15,665 5,135 40,044 9,196
--------- ------- --------- --------
Loss from operations................................................. (10,312) (4,353) (29,245) (7,587)
Interest income and other income, net................................ 755 88 818 68
--------- ------- --------- --------
Net loss............................................................. (9,557) (4,265) (28,427) (7,519)
Accretion on redeemable convertible preferred stock.................. (79) (405) (885) (660)
--------- ------- --------- --------
Net loss attributable to common shareholders......................... $ (9,636) $(4,670) $ (29,312) $ (8,179)
========= ======= ========= ========
Basic and diluted net loss per share................................. $ (0.38) $ (0.70) $ (2.14) $ (1.26)
========= ======= ========= ========
Shares used in computing basic and diluted net loss per share........ 25,279 6,691 13,712 6,503
========= ======= ========= ========
Pro forma basic and diluted net loss per share....................... $ (0.34) $ (1.13)
========= =========
Shares used in computing pro forma basic and diluted
net lost per share............................................. 28,322 25,051
========= =========
</TABLE>
_________________
(1) Amortization of deferred compensation relates to the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of services.............................................. $ 127 $ 21 $ 424 $ 25
Research and development...................................... 554 273 1,843 332
Sales and marketing........................................... 985 441 3,280 535
General and administrative.................................... 1,101 665 3,668 806
------ ------ ------ ------
$2,767 $1,400 $9,215 $1,698
------ ------ ------ ------
</TABLE>
See accompanying notes.
4
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SUPPORT.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Operating Activities
Net loss.................................................................................... $ (28,427) $(7,519)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................................. 985 147
Amortization of deferred stock compensation................................................ 9,215 1,698
Amortization of purchased intangibles...................................................... 94 --
Other...................................................................................... 80 203
Changes in assets and liabilities:
Accounts receivable, net................................................................ (3,388) (1,510)
Prepaids and other current assets....................................................... (820) (169)
Accounts payable........................................................................ (494) 11
Accrued compensation.................................................................... 651 386
Other accrued liabilities............................................................... 3,075 220
Deferred revenue........................................................................ 6,261 1,615
----------- -------
Net cash used in operating activities................................................. (12,768) (4,918)
----------- -------
Investing Activities
Purchases of property and equipment........................................................ (1,105) (54)
Proceeds from sale of equipment............................................................ -- 99
Other assets............................................................................... (121) (144)
Purchases of short-term investments........................................................ (13,169) (1,967)
Sales of short-term investments............................................................ 1,000 --
----------- -------
Net cash used in investing activities................................................. (13,395) (2,066)
----------- -------
Financing Activities
Proceeds from notes payable................................................................ -- 2,000
Proceeds from sale-leaseback............................................................... -- 183
Proceeds from issuance of preferred stock, net............................................. -- 15,140
Proceeds from initial public offering, net of issuance costs............................... 61,777 --
Proceeds from other issuances of common stock, net of repurchases.......................... 1, 493 50
Repayment of notes payable................................................................. (2,399) --
Principal payments under capital lease obligations......................................... (374) (4)
----------- -------
Net cash provided by financing activities............................................. 60,497 17,369
----------- -------
Net increase in cash and cash equivalents.................................................... 34,334 10,385
Cash and cash equivalents at beginning of period............................................. 4,023 2,807
----------- -------
Cash and cash equivalents at end of period................................................... $ 38,357 $13,192
=========== =======
</TABLE>
See accompanying notes.
5
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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, 2000 and the statements of operations for the
three and nine months ended September 30, 2000 and 1999 and cash flows for the
nine months ended September 30, 2000 and 1999 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, 1999 is derived from audited financial
statements as of that date. These financial statements should be read with the
financial statements and related notes included in the Company's final
prospectus filed with the Securities and Exchange Commission on July 19, 2000.
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
and determinable and revenue is recognized ratably over the service period of
the agreement commencing in the period in which the first payment is due.
Revenue from perpetual license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no obligations remain,
the fee is fixed and determinable and collectibility is probable. License
revenue from arrangements with resellers is recognized upon delivery limited by
guaranteed minimum amounts due under the arrangement and sell through activity.
Services revenue is primarily comprised of revenue from professional services,
such as consulting services, maintenance and support. Consulting services
include a range of services including installation, implementation and building
of interfaces for the customer's specific application.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue.
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. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletin No. 98, ordinary shares and convertible preferred shares
issued or granted for nominal consideration prior to the anticipated effective
date of Support.com's initial public offering must be included in the
calculation of basic and diluted net loss per share as if they had been
outstanding for all periods presented. To date, Support.com has not had any
issuances or grants for nominal consideration.
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. Pro forma basic and diluted net loss per common
share, as presented in the consolidated statements of operations, has been
computed for the three and nine-
6
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month periods ended September 30, 2000 and 1999 as described above, and also
gives effect to the conversion of the convertible preferred stock (using the if-
converted method) from the original date of issuance.
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 7,576,687 and
7,905,104 shares, prior to the application of the treasury stock method, for the
three and nine months ended September 30, 2000. Such shares have been excluded
because they are antidilutive for all periods presented.
The following table presents the calculation of basic and diluted and pro forma
basic and diluted net loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss attributable to common shareholders.................... $(9,636) $(4,670) $(29,312) $(8,179)
======= ======= ======== =======
Basic and diluted:
Weighted-average shares of common stock outstanding............ 29,677 6,868 18,460 6,616
Less: Weighted-average shares subject to repurchase............ (4,398) (177) (4,748) (113)
------- ------- -------- -------
Shares used in computing basic and diluted net loss per....... 25,279 6,691 13,712 6,503
share........................................................ ======= ======= ======== =======
Basic and diluted net loss per share............................ $ (0.38) $ (0.70) $ (2.14) $ (1.26)
======= ======= ======== =======
Pro forma:
Net loss....................................................... $(9,557) $(28,427)
======= ========
Shares used above.............................................. 25,279 13,712
Unaudited pro forma adjustment to reflect weighted effect
of assumed conversion of convertible preferred stock......... 3,043 11,339
------- --------
Shares used in computing pro forma basic and diluted net
loss per share............................................... 28,322 25,051
======= ========
Pro forma basic and diluted net loss per share................. $ (0.34) $ (1.13)
======= ========
</TABLE>
(2) Stockholders' Equity
In February 2000, the board of directors authorized 5,000,000 shares of
undesignated preferred stock, for which the board of directors is authorized to
fix the designation, powers, preferences and rights, and an increase in the
authorized number of shares of common stock to 150,000,000 shares.
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 overallotment option, were sold by
Support.com at a price of $14.00 per share, less an underwriting discount of
$0.98 per share. Net proceeds to the Company from all shares sold were
approximately $61.8 million. Upon the consummation of the initial public
offering, all of the then outstanding Series A, B, and C Preferred Stock
automatically converted into Common Stock.
(3) Source Code License Agreement
In March 2000, Support.com entered into an exclusive licensing agreement with
another party. Under this arrangement, Support.com was obligated to pay up to
$750,000 during the second quarter of 2000 for an evaluation license and for
training, integration services and engineering assistance which was included in
research and development expenses. In September 2000, the agreement was amended
to extend the 90 day right to purchase the source code to September 2003 and
Support.com was granted the ability to market and re-sell the technology on both
a stand alone basis and as an embedded technology in its current product
offering. For these rights, Support.com paid $1.0 million for the quarter ended
September 30, 2000, which was included in cost of license fees.
7
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On September 20, 2000, Support.com exercised its option to purchase the Talkback
source code and related intellectual property rights from ePeople, Inc.
(formerly known as NoWonder, Inc.). Support.com purchased the technology for
$6,800,000. An additional amount of $2,500,000 may be payable to ePeople based
upon future revenue related to the technology recognized by Support.com. The
purchase price for the technology of $6.8 million was recorded as purchased
intangibles and included as an other asset in the Company's consolidated balance
sheet. The purchased technology is being amortized on a straight-line basis over
two years.
(4) Recently Issued Accounting Standards
In September 1998, the FASB 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", or SAB 101. SAB
101 summarizes certain of the SEC Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company is currently evaluating the impact of SAB 101. The Company believes
their current practices comply with SAB 101; however, should the Company
determine that a change in accounting policy is necessary, such a change will be
made in the fourth quarter of 2000 and would result in a charge to results of
operations for the cumulative effect of the change. Financial statements for
prior periods would not be restated.
In May 2000, the Emerging Issues Task Force ("EITF") released Issue No. 00-2,
"Accounting for Web Site Development Costs". EITF Issue No. 00-2 establishes
standards for determining the capitalization or expensing of incurred costs
relating to the development of Internet web sites based upon the respective
stage of development. The Issue is effective for fiscal quarters beginning after
September 30, 2000 (including costs incurred for projects in process at the
beginning of the quarter of adoption). As the Company does not plan to adopt the
EITF by cumulative catch-up adjustment, the adoption will not have a material
effect on the financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, which contains rules designed
to clarify the application of APB 25. FIN 44 was effective as of July 1, 2000
and we adopted it at that time. The impact of adoption of FIN 44 was not
material to our operating results and financial position.
(5) Comprehensive Loss
Other comprehensive income (loss) includes certain changers in equity that are
excluded from net loss. For the three and nine month periods ending September
30, 1999 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
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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.
MANAGEMENTS'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
Overview
Support.com is a provider of eBusiness infrastructure software that automates,
personalizes and enhances user support over the Internet. Support.com's suite of
eSupport software products and services is designed to accelerate eBusiness
growth by increasing the efficiency and capabilities of support organizations
that would otherwise constrain expanding internet initiatives. 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. For the three months ended September 30, 2000, a majority of our
license revenue was term-based.
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the three and nine
months ended September 30, 2000 and 1999 expressed as a percentage of total
revenue.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
License fees.......................................... 74% 80% 72% 89%
Services.............................................. 26 20 28 11
----- ----- ----- -----
Net revenue........................................ 100 100 100 100
----- ----- ----- -----
Costs and expenses:
Cost of license fees.................................. 21 -- 11 --
Cost of services...................................... 34 31 37 28
Amortization of purchased intangibles................. 2 -- 1 --
Research and development.............................. 49 99 68 93
</TABLE>
9
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<TABLE>
<S> <C> <C> <C> <C>
Sales and marketing.................................. 112 287 143 285
General and administrative........................... 23 61 26 60
Amortization of deferred stock compensation.......... 52 179 85 106
----- ----- ----- -----
Total costs and expenses.......................... 293 657 371 572
Loss from operations................................... (193) (557) (271) (472)
Interest income and other income, net.................. 14 12 8 5
----- ----- ----- -----
Loss before income taxes............................... (179) (545) (263) (467)
Provision for income taxes............................. -- -- -- --
----- ----- ----- -----
Net loss............................................... (179)% (545)% (263)% (467)%
===== ===== ===== =====
</TABLE>
Three and Nine Months Ended September 30, 2000 and 1999
Revenue
Total revenue increased 585% to $5.4 million in the three months ended September
30, 2000 from $782,000 in the three months ended September 30, 1999. Total
revenue increased 571% to $10.8 million for the nine months ended September 30,
2000 as compared to $1.6 million for the same period in 1999.
International revenue represented 16% and 11% of total revenue for the three and
nine months ended September 30, 2000, compared with 1% for both the three and
nine months ended September 30, 1999.
One customer accounted for 15% and 16% of our total revenue for the three and
nine months ended September 30, 2000. No other single customer accounted for 10%
or more of our total revenue in these periods.
License revenue
License revenue increased to $4.0 million in the three months ended September
30, 2000 from $628,000 in the three months ended September 30, 1999 and to $7.7
million for the nine months ended September 30, 2000 from $1.4 million for the
nine months ended September 30, 1999. The increase in license revenue was due
primarily to increased market acceptance of our products, expansion of our
product line and the release of Version 4 of our software and increased sales
generated by our expanded sales force.
Services revenue
Service revenue increased to $1.4 million in the three months ended September
30, 2000 from $154,000 in the three months ended September 30, 1999 and to $3.1
million for the nine months ended September 30, 2000 from $179,000 for the nine
months ended September 30, 1999. This increase was due primarily to increased
implementation and consulting services performed for our expanded customer base,
growth in number and size of existing contracts and increase in headcount in our
professional services organization which generates increased billable consulting
hours.
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 and to distribute our
software products and related documentation. Cost of license revenue increased
to $1.1 million in the three months ended September 30, 2000 from $2,000 in the
three months ended September 30, 1999. Cost of license revenue for the nine
months ended September 30, 2000 increased to $1.2 million compared to $3,000 for
the same period in 1999. The increase was primarily due to a quarterly license
fee of $1.0 million paid in the third quarter pursuant to our arrangement with
ePeople. As a result of our purchase of the technology which we were previously
licensing from ePeople, the payment of the quarterly license fee has ceased.
Excluding the impact of the fee paid to ePeople in the quarter ended September
30, 2000, we expect cost of license revenue to grow in absolute dollars as we
continue to license third party technologies.
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Cost of services revenue
Cost of services consists primarily of salaries and other expenses from our
customer support organization, 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 September 30, 2000 from $240,000 in the
three months ended September 30, 1999. Cost of services revenue for the nine
months ended September 30, 2000 increased to $4.0 million compared to $441,000
for the same period in 1999. This increase was primarily because of the growth
in the number of employees in our customer support and professional services
organizations and to a lesser extent travel and consulting costs. We expect to
continue to invest heavily in customer support, professional services,
consulting and training and expect cost of services revenue to increase in
absolute dollars.
Amortization of Purchased Intangibles
For both the three and nine months ended September 30, 2000, amortization of
purchased intangibles was $94,000 compared to $0 for both the three and nine
months ended September 30, 1999. This increase was attributable to the
amortization of purchased intangibles related to the purchase of Talkback source
code and related intellectual property rights from ePeople, Inc. (formerly known
as NoWonder, Inc.).
Research and Development Expense
Research and development expense consists primarily of payroll expenses and
related costs for research and development personnel. Research and development
expense increased to $2.6 million in the three months ended September 30, 2000
from $771,000 in the three months ended September 30, 1999. Research and
development expense for the nine months ended September 30, 2000 increased to
$7.4 million as compared to $1.5 million for the same period in 1999. The
increase was primarily due to an increase in the number of research and
development personnel and an increase in consulting costs incurred in connection
with the localization of our product into six new languages. This increase is
necessary to support both expanded functionality of our eSupport software suite
and increases in our quality assurance and product publications operations. We
currently believe our investment in research and development will increase
during the remainder of fiscal year 2000.
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 $6.0 million in the three months ended
September 30, 2000 from $2.2 million in the three months ended September 30,
1999. Sales and marketing expense for the nine months ended September 30, 2000
increased to $15.4 million as compared to $4.6 million for the same period in
1999. 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,
commission expense associated with higher revenue, and expenses incurred in
connection with the hosting of our first User Forum, trade shows and additional
marketing programs. We expect sales and marketing expense to increase in
absolute dollars as we hire additional sales and marketing personnel and
increase spending on marketing programs.
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 $1.2 million in the three months ended September 30, 2000 from
$477,000 in the three months ended September 30, 1999. General and
administrative expense for the nine months ended September 30, 2000 increased to
$2.8 million as compared to $972,000 for the same period in 1999. This increase
was primarily due 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 business activities including our initial public
offering. 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.
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Amortization of Deferred Stock Compensation
We recorded deferred stock compensation of approximately $7.8 million in fiscal
year 2000, representing the difference between the exercise prices of options
granted to acquire certain shares of common stock during fiscal year 1999 and
2000 and the deemed fair value for financial reporting purposes of our common
stock on their respective grant dates. We amortized deferred compensation
expense of approximately $2.8 million and $9.2 million during the three and nine
months ended September 30, 2000 as compared to $1.4 million and $1.7 million
during the same periods in 1999. This compensation expense relates to options
awarded to individuals in all operating expense categories. Total remaining
deferred compensation at September 30, 2000 of approximately $12.4 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 $11.2 million for the entirety of fiscal year 2000, $5.9 million
in fiscal year 2001, $3.1 million in fiscal year 2002 and $1.4 million in fiscal
year 2003.
Interest Income (Expense) and Other Income, Net
Interest income and other income, net, was $755,000 and $818,000 in the three
and nine months ended September 30, 2000, as compared to $88,000 and $68,000 in
the same periods in 1999. The increase was primarily attributable to the
interest income earned on our cash, cash equivalents and investments as a result
of the funds raised in our initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
Since our incorporation in December 1997, we have 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 $12.8 million in cash in operations in the nine months ended September
30, 2000, an increase of $7.9 million over the $4.9 million used in the nine
months ended September 30, 1999. 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 $9.3 million for the nine months
ended September 30, 2000 compared to $1.7 million for the nine months ended
September 30, 1999. Net cash used in operations in the nine month period was
primarily the result of net losses and a $3.4 million increase in accounts
receivable, offset by a $6.3 million increase in deferred revenue, and a
combined increase in accrued compensation and other accrued liabilities of $3.7
million.
Investing Activities
Net cash used in investing activities was $13.4 million in the nine months ended
September 30, 2000, an increase of $11.3 million over the $2.1 million used in
the comparable period ended September 30, 2000. Net cash used in investing
activities for the nine months ended September 30, 2000, was primarily due to
the purchase of $13.2 million in short-term investments offset by $1.0 million
in the sale of short-term investments.
Financing Activities
Net cash provided by financing activities was $60.5 million for the nine months
ended September 30, 2000 and $17.4 million for the nine months ended September
30, 1999. 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 19, 2000. In 1999, cash provided by financing
activities included $15.1 million in proceeds from the issuance of preferred
stock. In 1999, we had both a secured and subordinated debt facility with a
single lender under which we
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were entitled to borrow up to $2.5 million. We repaid the remaining principle
balance of $2.0 million under the secured and subordinated debt facility in our
current quarter ended September 30, 2000.
Commitments
As of September 30, 2000, our principal commitments consisted of obligations
outstanding under capital and operating leases. Although we have no material
commitments for capital expenditures, we anticipate a substantial increase in
our capital expenditures consistent with our anticipated growth in operations,
infrastructure and personnel. As of December 31, 1999, future lease commitments
for our office facility were $1.3 million in 2000 and $850,000 in 2001. We
expect to require additional space to meet our needs in the next 12 months.
Adequate space may not be available on commercially reasonable terms.
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. Except for the ePeople Talkback technology, we have no present
understandings, commitments or agreements for any acquisition of other
businesses, products and technologies. For the ePeople Talkback technology, we
will be required to make a payment totaling $3.4 million during the fourth
quarter of fiscal year 2000 and 11 equal quarterly payments thereafter for the
remaining purchase price of the technology. An additional amount of $2.5 million
may also become due based upon future sales activity. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Financial
Instruments and for Hedging Activities, which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133 is effective for all fiscal quarters for fiscal
years beginning after September 15, 2000 and is not anticipated to have a
significant impact on our operating results or financial condition when adopted.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB 101. SAB
101 summarizes some of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. We are
evaluating the impact of SAB 101. We believe our current practices comply with
SAB 101. However if we determine that a change in our accounting policy is
necessary, this change will be made in the fourth quarter of 2000 and would
result in a charge to results of operations for the cumulative effect of the
change. This amount, if recognized, would be recorded as deferred revenue and
recognized as revenue in future periods. Financial statements for prior periods
would not be restated.
In May 2000, the Emerging Issues Task Force released issue No. 00-2, Accounting
for Web Site Development Costs. Issue No. 00-2 establishes standards for
determining the capitalization or expensing of costs incurred for the
development of Internet web sites based upon the stage of development. Issue No.
00-2 is effective for fiscal quarters beginning after September 30, 2000,
including costs incurred for projects in process at the beginning of the quarter
of adoption. As we do not plan to adopt issue No. 00-2 by cumulative catch-up
adjustment, the adoption will not have a material effect on the financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, which contains rules designed
to clarify the application of APB 25. FIN 44 was effective as of July
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1, 2000 and we adopted it at that time. The impact of adoption of FIN 44 was not
material to our operating results and financial position.
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 $44.7 million for the period from
December 3, 1997, through September 30, 2000. We expect to continue to incur
substantial net losses in the future. If we do not become profitable within the
timeframe 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.
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 changes 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 other 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 various 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
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 law, intellectual property laws,
proposed encryption laws, content regulation and sales and use tax laws and
regulations.
Our stock price may be volatile.
The price at which our common stock will trade after this offering is likely to
be highly volatile and may fluctuate substantially because of:
. actual or anticipated fluctuations in our operating results,
. changes in or our failure to meet securities analysts' expectations,
. conditions and trends in the Internet and other technology industries and
. fluctuations in stock market price and volume, which are particularly
common among securities of software and Internet-oriented companies.
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 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 eSupport infrastructure software;
. the price and mix of products and services we or our competitors offer;
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. 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 eSupport infrastructure software. We license our eSupport 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.
Because a small number of customers has accounted for and may continue to
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 third quarter of 2000, one customer accounted for 15% of our total
revenue. No other single customer accounted for 10% or more of our total revenue
for the third quarter of 2000. 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 eSupport 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 is 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 currently plan to substantially increase our number of
employees over the next 12 months. Competition for these personnel is 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.
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If we fail to develop, in a timely manner, new or enhanced versions of our
eSupport 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.
Our eSupport 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. With the
exception of our Support Portal, our eSupport infrastructure software is
currently available only on Microsoft Windows operating systems. If there is
widespread adoption of other operating system environments, or if we fail to
release versions of our eSupport 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. Future
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.
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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 expect further significant expansion, 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.
We have recently hired a number of new senior management personnel and their
failure to integrate effectively may interfere with our operations.
Over the last 15 months, we have hired a number of new officers, including our
chief executive officer, Radha R. Basu, and our chief financial officer, Brian
M. Beattie. These individuals, who have worked together for only a short period
of time, must spend a significant amount of time learning our business model and
management system while performing their regular duties. The integration of new
personnel could disrupt our ongoing operations.
Because we do not have long-term employment agreements with most of our key
personnel, we may lose their services, 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. We do
not have long-term employment agreements with many of our key employees. 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 our strategic alliances would harm our
ability to achieve market acceptance of our eSupport infrastructure software.
If we fail to maintain, establish or successfully implement strategic
alliances, our ability to achieve market acceptance of our eSupport
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 eSupport 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 eSupport 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;
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. 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 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 eSupport 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 eSupport products or services or a decrease in their performance could harm
our relationships with our customers and result in reduced revenue.
Our eSupport software depends 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
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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 four 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 patent could be successfully challenged.
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 and 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.
We have received a letter claiming trademark infringement for the use of
eSupport. We have responded that we believe eSupport to be a generic term
commonly used throughout the industry.
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 it, 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.
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 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
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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
. 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 changes 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 other 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 various 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
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 law, intellectual property laws,
proposed encryption laws, content regulation and sales and use tax laws and
regulations.
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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, 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 September 30, 2000, our cash and cash equivalents consisted primarily of
demand deposits and 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 in less than eighteen months.
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PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Upon the closing of our initial public offering on July 24, 2000, all of the
then outstanding shares of Series A Preferred Stock, Series B Preferred Stock,
and Series C Preferred Stock were automatically converted on a share-for-share
basis into shares of our Common Stock. Following that conversion, Support.com
filed an Amended and Restated Certificate of Incorporation that reflects the
deletion of provisions relating to those series of preferred stock.
(c) Sales of Unregistered Securities
During the three months ended September 30, 2000, we issued and sold the
following unregistered securities:
1. We granted options to purchase 387,365 shares of common stock to
employees, directors and consultants under our stock plans at exercise prices of
$9.00 per share.
2. We issued 89,423 shares of common stock pursuant to the exercise of
stock options at exercise prices ranging from $0.90 to $9.00 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.
(d) Use of Proceeds from Sales of Registered Securities.
On July 24, 2000, we completed the sale of a total of 4,887,500 shares of our
common stock, par value $0.0001 per share, at a price of $14.00 per share in a
firm commitment underwritten public offering. The offering was effected pursuant
to a Registration Statement on Form S-1 (File No. 333-30674), which the
Securities and Exchange Commission declared effective on July 18, 2000. Credit
Suisse First Boston, Chase Securities Inc., Bear, Stearns & Co. Inc. and Wit
SoundView Corporation were the lead underwriters for the offering.
Of the $68,425,000 in aggregate proceeds raised by us in the offering:
1. approximately $4.8 million was paid to the underwriters in connection with
the underwriting discount;
2. approximately $1.8 million was paid by us in connection with offering
expenses, printing fees, listing fees, filing fees, accounting fees and
legal fees.
3. aprroximately $2.0 million was paid by us to retire notes payable to one
financial institution.
4. approximately $6.8 million will be paid by us for the ePeople Talkback
technology.
5. the remainder of the proceeds from the offering has been invested in short-
term, interest-bearing, investment grade securities.
We intend to use the net proceeds for general corporate purposes, including
working capital. We may also use a portion of the net proceeds to acquire
additional businesses, products and technologies that we believe will complement
our business. We do not have more specific plans for the net proceeds from this
offering. The amounts and timing of any expenditures will vary depending on the
amount of cash generated by our operations, competitive and technological
developments and the rate of growth, if any, of our business. We will retain
broad discretion in the allocation of the net proceeds from this offering.
22
<PAGE>
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 September 30, 2000, the Registrant filed the
following reports on Form 8-K:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Date Filed Date of Report Item Number Financial Statements
Required
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 22, 2000 September 20, 2000 2. Acquisition or None
Disposition of Assets-
Acquisition of
Technology from
ePeople, Inc.
7. Financial
Statements and
Exhibits- press
release announcing
acquisition of
technology from
ePeople, Inc.
---------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
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 13, 2000 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)
24
<PAGE>
EXHIBIT INDEX TO SUPPORT.COM, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
Exhibit Number Description
-------------- -----------
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1** Form of Common Stock Certificate.
27.1 Financial Data Schedule for Support.com, Inc.
* 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.
25
