NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note One — Basis of Presentation
The accompanying interim consolidated financial statements include Mattersight Corporation and its subsidiaries (collectively, Mattersight or the company). The accompanying interim consolidated financial statements have been prepared without audit. Certain notes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the accompanying consolidated financial statements include all normal recurring adjustments considered necessary to present fairly the financial position of the company at March 31, 2018 and December 31, 2017 and the results of operations and cash flows for the periods indicated. Quarterly results are not necessarily indicative of results for any subsequent period.
On January 1, 2018, the company adopted ASU 2014-09: Revenue from Contracts with Customers (Topic 606). This update sets forth a new five-step revenue recognition model that replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed. The underlying principle of the new standard is that an organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services.
The company adopted using the modified retrospective transition method and there were no material adjustments to beginning retained deficits. Changes in the current period as a result of adopting the ASU relate to billings for certain non-cancelable contracts. The following table reconciles the balances as presented for the three months ended March 31, 2018 to the balances prior to the adjustments made to implement the new revenue recognition standard for the same period:
(In millions)
|
|
As Presented
|
|
|
Impact of New Revenue Standard
|
|
|
Previous Revenue Standard
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net of allowances
|
|
$
|
8.6
|
|
|
$
|
0.5
|
|
|
$
|
8.1
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned revenue
|
|
|
8.2
|
|
|
|
0.4
|
|
|
|
7.8
|
|
Long-term unearned revenue
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
0.9
|
|
On January 1, 2018, the company adopted ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard was adopted with no impact to the financial statements.
On January 1, 2018, the company condensed the costs of revenue items to present cost of revenue as a single line item. Cost of other revenue was determined to be immaterial to the financial statements.
There was no change to the expense classification and the current period is comparable to the prior period.
On April 25, 2018, the company entered into an Agreement and Plan of Merger with NICE Systems, Inc., a Delaware corporation (“Parent”), NICE Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Acquisition Sub”), and, solely for the purposes of Section 8.16 of the Merger Agreement, NICE Ltd., a company organized under the laws of the State of Israel (“Guarantor”) (the “Merger Agreement”) under which the company would be acquired by and merged into a wholly-owned subsidiary of NICE (See Note Fourteen — Subsequent Events).
The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in Mattersight’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (SEC) on March 12, 2018.
Note Two — Recent Accounting Pronouncements
In July 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-11—Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
to address narrow issues identified as a result of the complexity associated with applying generally accepted accounting principles for
5
certain financial instruments with characteristics of liabilities and equity. Part I of the update cha
nges the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. Part II of the update re-characterizes the indefinite deferral of certain provisions of Topic 480 that now are presented as pen
ding content in the codification, to a scope exception. Part II does not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The company is currently evaluatin
g the impact of this update on its consolidated financial statements.
In January 2017, FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, simplifying the test for goodwill impairment. This ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this update, goodwill impairment will be measured as the amount by which a reporting unit’s carrying value exceeds its fair value.
An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is needed. This ASU is effective for reporting periods beginning after December 15, 2019 and interim periods within those annual periods. The company is evaluating the standard and does not expect a change in value of goodwill when the standard is adopted.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. This update broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The update is effective for annual periods beginning after December 15, 2019. The company is currently evaluating the impact of this update on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update is intended to improve financial reporting of leasing transactions. The ASU will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. This update is effective for periods beginning after December 15, 2018. The company is currently evaluating the impact of this update on its consolidated financial statements. Certain operating leases the company is party to are expected to be recognized as assets and liabilities as a result of adopting this standard.
Note Three — Revenue Recognition
Revenue is derived primarily from subscription services and professional services. Revenue is recognized upon transfer of control of these services to customers in an amount that reflects the consideration the company expects to receive in exchange for those services.
Subscription Revenue
Subscription revenue consists of revenue from Mattersight’s Behavioral Analytics service offerings, including predictive behavioral routing, performance management, quality assurance, predictive analytics, and marketing managed services revenue derived from the performance of services on a continual basis.
Revenue is recognized ratably over the subscription period as the services are performed for the client. Subscription periods generally range from one to three years after the go-live date or, in cases where the company contracts with a client for a short-term pilot of a Behavioral Analytics offering prior to committing to a longer subscription period, if any, the subscription or pilot periods generally range from three to twelve months after the go-live date. Contracts may be billed annually, quarterly, and monthly in advance.
Other Revenue
Other revenue consists of deployment revenue, professional services revenue and reimbursed expenses revenue.
Deployment revenue consists of planning, deployment, and training fees derived from Behavioral Analytics contracts. These fees, which are considered to be installation fees related to Behavioral Analytics subscription contracts, are deferred until the installation is complete and are then recognized over the applicable subscription or pilot period. Deployment fees are typically billed in advance and generally non-cancelable.
Professional services revenue primarily consists of fees charged to the company’s clients to provide post-deployment follow-on consulting services, which include custom data analysis, the implementation of enhancements, and training, as well as fees generated from the company’s operational consulting services. Professional services are performed for the company’s clients on a fixed-fee or time-and-materials basis. Revenue is recognized as the services are performed, with performance generally assessed on the ratio of actual hours incurred to-date compared with the total estimated hours over the entire term of the contract.
6
Reimbursed expenses revenue includes billable costs related to travel and other out-of-pocket expenses incurred while performing services for the
c
ompany’s clients. An equivalent amount of reimbursable expenses i
s included in total cost of other revenue.
Other Significant Judgements
Subscription and deployment contracts with customers are interdependent of each other and not capable of being distinct. As such they are accounted for together as one performance obligation.
For purposes of determining the transaction price, the company has elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the company from the customer. These include sales, use, value added and certain excise taxes.
A limited number of contracts with customers are sold with rebates or other credits. Additionally, some contracts allow for additional fees if a customer exceeds the baseline number of users during a billing period. These amounts are accounted for as variable consideration and estimated using the expected value approach.
Disaggregation of Revenue
The company’s service contracts primarily fall into one of two categories (i) predictive behavioral routing and (ii) other behavioral analytics. Predictive behavioral routing revenue is included in subscription revenue and other behavioral analytics revenue is included in both subscription and other revenue. The following table sets forth revenue by service category:
(In millions)
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Predictive behavioral routing
|
|
$
|
3.4
|
|
|
$
|
1.4
|
|
Other behavioral analytics
|
|
|
10.3
|
|
|
|
9.6
|
|
Total
|
|
$
|
13.7
|
|
|
$
|
11.0
|
|
Assets Recognized from Costs to Obtain and Fulfill a Contract with a Customer
Assets recognized for costs to obtain and fulfill a contract include sales commissions and deployment costs. These costs are deferred up to an amount not to exceed the amount of deferred deployment revenue and additional amounts that are recoverable based on the contractual arrangement. These costs are included in prepaid expenses and other long-term assets. Such costs are amortized over the subscription period. Costs in excess of the foregoing revenue amount are expensed in the period incurred. There were no impairment losses related to deferred contract costs in the reporting period.
The following table sets forth the activity in deferred sales commissions and deferred deployment costs.
(In millions)
|
|
Deferred Sales Commissions
|
|
|
Deferred Deployment Costs
|
|
Balance at January 1, 2018
|
|
$
|
1.1
|
|
|
$
|
3.1
|
|
Costs recognized as assets
|
|
|
0.3
|
|
|
|
0.5
|
|
Amortization of costs
|
|
|
(0.6)
|
|
|
|
(0.7)
|
|
Balance at March 31, 2018
|
|
$
|
0.8
|
|
|
$
|
2.9
|
|
Transaction Price Allocated to the Remaining Performance Obligations
As of March 31, 2018, of the contracts that have gone live or are in active deployments, approximately $65.6 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on approximately 56% of these remaining performance obligations over the next 12 months, with the remainder thereafter. Revenue from remaining performance obligations for other revenue was immaterial at March 31, 2018.
7
Contract Balances
Certain contracts with customers allow for additional fees if a customer exceeds the baseline number of users during a billing period. These fees are recognized as contract assets and revenue in advance of the right to payment from customers. Substantially all fees recognized in advance of the right to payment were billed to customers by the end of the quarter ended March 31, 2018.
Customer contracts may be billed annually, quarterly, or monthly in advance and are recognized as contract liabilities until services are rendered. The following table sets forth the activity in contract liabilities:
(In millions)
|
|
Contract Liabilities
|
|
Balance January 1, 2018
|
|
$
|
3.9
|
|
Revenue recognized that was included in the
contract liability at the beginning of the period
|
|
|
(0.8
|
)
|
Increases due to billings, excluding amounts
recognized as revenue during the period
|
|
|
6.1
|
|
Net decrease (increase) due to changes in transaction
price as a result of revised estimates of variable
consideration
|
|
|
—
|
|
Balance March 31, 2018
|
|
$
|
9.2
|
|
There was no revenue adjustment in the current period as a result of changes in transaction price that relate to performance obligations satisfied during a prior period.
Note Four
—
Current Prepaid Expenses
Current prepaid expenses primarily consist of prepaid technology maintenance costs, deferred deployment costs, and prepaid commissions related to Behavioral Analytics contracts. These costs are recognized over the subscription periods of the respective contracts generally one to three years after the go-live date or, in cases where the company contracts with a client for a short-term pilot of a Behavioral Analytics offering prior to committing to a longer subscription period, if any, the subscription or pilot periods generally range from three to twelve months after the go-live date. Current prepaid expenses also includes prepaid marketing and insurance costs. These costs will be recognized within the next twelve months.
Current prepaid expenses consisted of the following:
(In millions)
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Prepaid technology maintenance costs
|
|
$
|
2.6
|
|
|
$
|
2.0
|
|
Deferred deployment costs
|
|
|
1.8
|
|
|
|
1.9
|
|
Prepaid commissions
|
|
|
0.7
|
|
|
|
1.1
|
|
Prepaid marketing
|
|
|
0.5
|
|
|
|
0.5
|
|
Prepaid insurance
|
|
|
0.4
|
|
|
|
0.1
|
|
Other
|
|
|
0.4
|
|
|
|
0.2
|
|
Total
|
|
$
|
6.4
|
|
|
$
|
5.8
|
|
8
Note Five
—
Other Long-Term Assets
Other long-term assets includes the long-term portion of restricted cash, prepaid technology and maintenance support, deferred deployment costs, and prepaid commissions related to Behavioral Analytics. Restricted cash represents cash used to collateralize certain letters of credit issued to support the company’s equipment leasing activities. Costs included in long-term assets will be recognized over the remaining term of the contracts beyond the first twelve months. Other long-term assets consisted of the following:
(In millions)
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Restricted cash
|
|
$
|
2.5
|
|
|
$
|
2.7
|
|
Prepaid technology and maintenance support
|
|
|
1.7
|
|
|
|
1.9
|
|
Deferred deployment costs
|
|
|
1.1
|
|
|
|
1.2
|
|
Prepaid commissions
|
|
|
0.1
|
|
|
|
—
|
|
Other
|
|
|
0.5
|
|
|
|
0.2
|
|
Total
|
|
$
|
5.9
|
|
|
$
|
6.0
|
|
Note Six — Other Current Liabilities
Other current liabilities consisted of the following:
(In millions)
|
|
March
31,
2018
|
|
|
December 31,
2017
|
|
Accrued vendor payable
|
|
$
|
2.1
|
|
|
$
|
1.9
|
|
Customer rebates and credits
|
|
|
0.6
|
|
|
|
0.3
|
|
Deferred rent liability
|
|
|
0.5
|
|
|
|
0.5
|
|
Sales tax liability
|
|
|
0.3
|
|
|
|
0.1
|
|
Warrant liability
|
|
|
0.3
|
|
|
|
0.4
|
|
Accrued legal payable
|
|
|
0.3
|
|
|
|
0.1
|
|
Other
|
|
|
0.1
|
|
|
|
0.1
|
|
Total
|
|
$
|
4.2
|
|
|
$
|
3.4
|
|
On August 1, 2016, the company issued a warrant to Hercules Capital, Inc. (Hercules) that gives Hercules the right to purchase shares of the company’s common stock at $3.50 per share. The warrant is exercisable for 357,142 shares of common stock and expires on August 1, 2023. The warrant is accounted for as a liability and carried at fair market value using the Black-Scholes model. Changes in the warrant’s fair market value are recognized in non-operating income (expense) in the consolidated statements of operations.
Note Seven — Leases
Capital Leases
Assets under capital leases consist primarily of computer hardware and related equipment. The gross amount of assets recorded under capital leases was $6.8 million and $7.3 million at March 31, 2018 and December 31, 2017, respectively. Depreciation expense related to assets under capital leases is included in depreciation and amortization expense on the consolidated statements of operations.
As of March 31, 2018, the future minimum lease payments due under capital leases are expected to be as follows:
(In millions)
|
|
|
|
|
Year
|
|
Amount
|
|
Remainder of 2018
|
|
$
|
1.5
|
|
2019
|
|
|
1.1
|
|
2020
|
|
|
0.2
|
|
2021
|
|
—
|
|
Total minimum lease payments
|
|
$
|
2.8
|
|
Less: amount representing interest
|
|
|
(0.3
|
)
|
Present value of minimum lease payments
|
|
$
|
2.5
|
|
9
Note Eight — Debt
On June 29, 2017, the company entered into a loan agreement with CIBC Bank USA f/k/a The PrivateBank and Trust Company (CIBC). The loan agreement provides for a revolving line of credit to the company with a maximum credit limit of $20.0 million, which matures on
June 29, 2020 (the credit facility).
The credit facility
is secured by a security interest in the company’s assets.
The company, subject to certain limits and restrictions, may from time to time request the issuance of letters of credit under the loan agreement.
The principal amount outstanding under the credit facility will accrue interest at a floating annual rate equal to 1 month, 2 month or 3 month LIBOR (as selected by the company) plus 5.50%, payable monthly. In addition, the company will pay a non-use fee on the credit facility of 25 basis points (0.25%) per annum of the average unused portion of the credit facility. The amount the company may borrow under the credit facility is limited to five times the company’s monthly recurring revenue (as determined in accordance with the terms and conditions set forth in the loan agreement), multiplied by a dynamic churn factor that is based upon the ratio of recurring revenue retained in the prior twelve month period relative to the total amount of recurring revenue at the beginning of the period.
The loan agreement imposes various restrictions on the company, including usual and customary limitations on the ability of the company to incur debt and to grant liens upon its assets, increasing restrictions based on thresholds, prohibits certain consolidations, mergers, and sales and transfers of assets by the company and requires the company to comply with a trailing twelve months of total revenue and quarterly EBITDA (as adjusted in accordance with the loan agreement) targets. The loan agreement includes usual and customary events of default (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default, payment of all amounts payable under the loan agreement may be accelerated and/or the lender’s commitments may be terminated. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the loan agreement will automatically become immediately due and payable, and the lender’s commitments will automatically terminate.
On March 29, 2018, the company amended the loan agreement with CIBC. The amendment changes the quarterly EBITDA targets and increases the applicable margin for loans bearing interest at LIBOR from 4.50% to 5.50% and for loans bearing interest at the base rate from 1.75% to 2.75%. The amendment increases the company’s minimum total revenue thresholds for the first and second quarters of 2018 by an average of approximately 3% each quarter and reduces the applicable total revenue thresholds for each of the third and fourth quarters of 2018 by an average of approximately 6% each quarter. The amendment also provides CIBC with the ability to impose discretionary reserves against the borrowing base. The company paid CIBC a non-refundable amendment fee of $0.1 million.
The average outstanding balance on the revolving line of credit during the first quarter of 2018 was $9.2 million. In March 2018, CIBC established a reserve of $5.0 million against the revolving loan agreement, effectively reducing total availability to $15 million. CIBC has the ability to increase the reserves against the revolving loan availability at their discretion. As of March 31, 2018, $12.9 million remains outstanding on the revolving line of credit with the ability to draw an additional $0.5 million. The company has classified the CIBC debt as long term and does not expect CIBC to demand repayment within the next 12 months. There was also $1.6 million in letters of credit issued by CIBC against the line of credit. During April 2018, the company repaid $4.5 million of principal on the revolving line of credit.
If the NICE transaction does not occur or is delayed,
the Company would need to raise capital and negotiate modifications to the loan agreement and
there is
no assurance that the company would have access to additional external capital resources on acceptable terms.
On April 25, 2018, the company entered into a second amendment to the loan agreement with CIBC. The amendment excludes certain expenses incurred in connection with the merger from the calculation of adjusted EBITDA, and changes the adjusted EBITDA target for the second quarter of 2018. The amendment also requires the company to have liquidity as of the last day of each calendar month of at least $2.0 million (
See Note Fourteen — Subsequent Events)
.
10
Debt consisted of the following:
(In millions)
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
CIBC loan due June 29, 2020, effective borrowing rate of
6.16% and 5.93% at March 31, 2018 and December
31, 2017
|
|
$
|
12.9
|
|
|
$
|
16.9
|
|
Furniture loan due May 2021, effective borrowing rate of
9.10%
|
|
|
0.1
|
|
|
|
0.1
|
|
Furniture loan due May 2021, effective borrowing rate of
9.55%
|
|
|
0.1
|
|
|
|
0.1
|
|
Furniture loan due July 2019, effective borrowing rate of
13.98%
(
1)
|
|
—
|
|
|
|
0.1
|
|
Total debt
(2)
|
|
$
|
13.1
|
|
|
$
|
17.2
|
|
(1)
|
Less than $0.1 million.
|
(2)
|
Total debt of $13.1 million at March 31, 2018 includes the current portion of furniture loans of $0.1 million and the long term portion of the CIBC loan of $12.9 million. Total debt of $17.2 million at December 31, 2017, respectively, includes the current portion of the furniture loans of $0.1 million and the long term portion of the CIBC loan of $16.9 million.
|
Note Nine — Other Long-Term Liabilities
Other long-term liabilities consisted of the following:
(In millions)
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
7% Series B convertible preferred stock dividends payable
|
|
$
|
3.4
|
|
|
$
|
3.2
|
|
Deferred rent liability
|
|
|
1.8
|
|
|
|
1.9
|
|
Technology service liability
|
|
|
1.2
|
|
|
|
1.2
|
|
Deferred income tax liability
|
|
|
0.2
|
|
|
|
0.2
|
|
Total
|
|
$
|
6.6
|
|
|
$
|
6.5
|
|
Note Ten — Litigation and Other Contingencies
The company is a party to various agreements, including all its client contracts, under which it may be obligated to indemnify the other party with respect to certain matters, including, but not limited to, indemnification against third-party claims of (i) infringement of intellectual property rights with respect to services, software, and other deliverables provided by the company, and (ii) failure to comply with various data security and privacy regulations. These obligations may be subject to various limitations on the remedies available to the other party, including, without limitation, limits on the amounts recoverable and the time during which claims may be made, and may be supported by indemnities given to the company by applicable third parties. Payment by the company under these indemnification clauses is generally subject to the other party making a claim that is subject to challenge by the company. Historically, the company has not been obligated to pay any claim for indemnification under its agreements, and management is not aware of future indemnification payments that it would be obligated to make.
Under its by-laws, subject to certain exceptions, the company has agreed to indemnify its corporate officers and directors for certain events or occurrences while the officer or director is, or was, serving at its request in such capacity or in certain related capacities. The company has separate indemnification agreements with each of its corporate officers and directors that requires it, subject to certain exceptions, to indemnify them to the fullest extent authorized or permitted by its by-laws and the Delaware General Corporation Law. The maximum potential amount of future payments the company could be required to make under these indemnification agreements is unlimited; however, the company has a director and officer liability insurance policy that limits its exposure and enables it to recover a portion of any amounts paid under these indemnification agreements. As a result of its insurance policy coverage, the company believes the estimated fair value of these indemnification agreements is minimal. The company had no liabilities recorded for these agreements as of March 31, 2018.
11
The company’s products may be subject to sales tax in certain jurisdictions. If a taxin
g authority were to successfully assert that the company has not properly collected sales or other transaction taxes, or if sales or other transaction tax laws or the interpretation thereof were to change, and the company was unable to enforce the terms of
its contracts with customers that give it the right to reimbursement for assessed sales taxes, the company could incur tax liabilities in amounts that could be material. The company has considered the changing nature of tax laws, the terms of its customer
contracts and its recent audit experience in assessing its exposure to possible and probable sales tax liabilities. Based on its assessment, the company has recorded a sales tax liability of $0.
3
million at March 31, 2018.
Note Eleven — Stock-Based Compensation
Restricted Stock
Restricted stock awards are shares of common stock granted to an individual that vest over a period of time. During the vesting period, the holder of restricted stock receives all of the benefits of ownership (right to dividends, voting rights, etc.), other than the right to sell or otherwise transfer any interest in the stock. Restricted stock awards granted during the quarter ended March 31, 2018 were as follows:
Description
|
|
Grant Date
|
|
Shares
|
|
|
Vesting Schedule
|
Grants to employees
|
|
2/14/2018
|
|
|
105,611
|
|
|
100% on February 28, 2019
|
Grants to employees
|
|
2/14/2018
|
|
|
164,250
|
|
|
50% on February 28, 2020, 6.25% quarterly thereafter
|
Total
|
|
|
|
|
269,861
|
|
|
|
Restricted stock award activity was as follows for the quarter ended March 31, 2018:
|
|
Shares
|
|
|
Weighted
Average
Price
|
|
Unvested balance at December 31, 2017
|
|
|
1,365,200
|
|
|
$
|
3.65
|
|
Granted
|
|
|
269,861
|
|
|
$
|
2.55
|
|
Vested
|
|
|
(291,093
|
)
|
|
$
|
3.91
|
|
Forfeited
|
|
|
(30,547
|
)
|
|
$
|
2.75
|
|
Unvested balance at March 31, 2018
|
|
|
1,313,421
|
|
|
$
|
3.39
|
|
Note Twelve — Loss Per Share
The following table presents the loss per share calculation for the periods presented:
|
|
Quarter Ended
|
|
(In millions)
|
|
March
31,
2018
|
|
|
March 31,
2017
|
|
Net loss
|
|
$
|
(2.1
|
)
|
|
$
|
(5.0
|
)
|
Dividends related to 7% Series B
convertible preferred stock
(1)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Net loss available to common
stockholders
|
|
$
|
(2.3
|
)
|
|
$
|
(5.1
|
)
|
Per share of common stock:
|
|
|
|
|
|
|
|
|
Basic/diluted net loss available to
common stockholders
|
|
$
|
(0.07
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
(basic and diluted)
|
|
|
31,747
|
|
|
|
27,423
|
|
Anti-dilutive common stock
equivalents
(2)
|
|
|
1,493
|
|
|
|
2,200
|
|
12
(1)
|
Dividends on 7% Series B convertible preferred stock (Series B stock) are cumulative and have been accrued from July 1, 2012 to March 31, 2018. Total accrued dividends were $3.4 million as of March 31, 2018. Dividends will continue to accrue until they are declared by the company’s board of directors. The company has not declared any Series B stock dividends in 2018 or 2017.
|
(2)
|
In periods in which there was a loss, the effect of common stock equivalents, which is primarily related to the Series B stock, was not included in the diluted loss per share
calculation as it was antidilutive.
|
Note Thirteen
—
Fair Value Measurements
The company uses a three-level classification hierarchy of fair value measurements to report certain assets and liabilities at fair value. The first tier, Level 1, uses quoted market prices in active markets for identical assets or liabilities. Level 2 uses observable market data, such as quoted market prices for similar assets and liabilities in active markets, or inputs other than quoted prices that are directly observable. Level 3 uses entity-specific inputs or unobservable inputs that are derived and cannot be corroborated by market data. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table presents financial instruments measured at fair value measured on a recurring basis:
|
|
March 31, 2018
|
|
(In millions)
|
|
Carrying value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrant liability
|
|
$
|
0.3
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Carrying value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents - money market fund
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Warrant liability
|
|
|
0.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.4
|
|
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximated their fair values as of March 31, 2018 due to the short-term nature of these instruments.
The company determined the fair value of the liability for the warrant issued to Hercules, considered a Level 3 liability, using the Black-Scholes model. At March 31, 2018, management used a risk free rate of 2.58%, expected volatility of 53%, and an expected term of 5.34 years. Significant increases or decreases in any of these inputs in isolation would result in a significantly different fair value (See Note Six – Other Current Liabilities).
The fair value of long-term debt was estimated to be $13.0 million at March 31, 2018.
There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 during the first quarter of 2018. There were no assets or liabilities valued at fair value on a nonrecurring basis during the first quarter of 2018.
Note Fourteen
—
Subsequent Events
On April 25, 2018, the company entered into an Agreement and Plan of Merger
with NICE Systems, Inc., a Delaware corporation (“Parent”), NICE Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Acquisition Sub”), and, solely for the purposes of Section 8.16 of the Merger Agreement, NICE Ltd., a company organized under the laws of the State of Israel (“Guarantor”) (the “Merger Agreement”).
Pursuant to the Merger Agreement, and upon the
terms and subject to the conditions thereof, Acquisition Sub
agreed to commence a cash tender offer (the “Offer”)
to acquire all of the shares of the company’s common stock (“Common Stock”)
and the company’s 7% Series B Convertible Preferred Stock (“Preferred Stock”)
for a purchase price of (i) $2.70 per share of Common Stock, net to the holder thereof
in cash (the “Common Offer Price”)
and (ii) $7.80 per share of Preferred Stock, plus accrued and unpaid dividends payable thereon, if any, as of immediately prior to the Effective Time (as defined in the Merger Agreement), net to the holder thereof in cash (the “Preferred Offer Price”), each without interest.
The consummation of the Offer will be conditioned on (i) the number of shares of outstanding Common Stock and Preferred Stock being validly tendered and not withdrawn from the Offer, (when considered together with all other company shares, if any, otherwise beneficially owned by Parent and Acquisition Sub) representing a majority of the outstanding shares of company capital stock, voting together as a single-class on an as-if converted to common stock basis (ii) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in the United States (“HSR Act”), (iii) obtaining clearance of the Offer and Merger (as defined below) from the Committee on Foreign Investment in the United States (“CFIUS”),
13
(iii) receipt by the company of consents to the Offer and Merger from specified comp
any customers and (iv) other customary conditions. The Offer is not subject to a financing condition.
Following the consummation of the Offer, the Merger Agreement provides that Acquisition Sub will be merged with and into the company (the “Merger”) and the company will become a wholly owned subsidiary of Parent, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law without any additional stockholder approvals. In the Merger, each outstanding share of Common Stock and Preferred Stock (other than shares owned by Parent, Acquisition Sub or the company, or any of their respective wholly owned subsidiaries, shares held by the company in the company’s treasury or shares with respect to which appraisal rights are properly exercised under Delaware law) will be converted into the right to receive an amount in cash equal to the Common Offer Price or Preferred Offer Price, as applicable.
In connection with the Merger, all outstanding vested and unvested options to purchase Common Stock under the company’s 1999 Stock Incentive Plan, as amended (each such option, a “Company Option”) will be cancelled and converted into the right to receive, in exchange for the cancellation of each such Company Option, an amount in cash, without interest and less applicable tax withholdings, equal to (i) the Common Offer Price, less the per share exercise price of such Company Option, multiplied by (ii) the total number of shares of the Company’s Common Stock issuable upon exercise in full of such Company Option (the “Company Option Consideration”). If the per share exercise price of any Company Option is equal to or greater than the Common Offer Price, such Company Option will be cancelled without cash payment.
In connection with the Merger, (i) each vested company restricted stock award outstanding, and each unvested company restricted stock award outstanding under the Company Stock Plan (each, a “Restricted Stock Award” and collectively, the “Restricted Stock Awards”) held by a holder holding less, in the aggregate, than 2,000 shares of Common Stock subject to such Restricted Stock Awards, will be cancelled and converted into a right to receive an amount in cash, without interest, equal to (x) the amount of the Common Offer Price multiplied by (y) the total number of shares of Common Stock subject to such award and (ii) with respect to each unvested Restricted Stock Award held by a holder holding, in the aggregate, 2,000 or more shares of Common Stock subject to such unvested Restricted Stock Awards (x) 2,000 shares of Common Stock subject to such unvested Restricted Stock Awards shall be cancelled and converted into the right to receive cash in an amount per share equal to the Common Offer Price and (y) the remaining shares subject to such unvested Restricted Stock Awards shall be assumed by Parent and converted into shares of restricted Guarantor American Depositary Shares (as defined in the Merger Agreement) (collectively, the “Restricted Stock Award Consideration”).
The Merger Agreement contains customary representations, warranties and covenants of the parties. The company has agreed to refrain from engaging in certain activities until the effective time of the Merger. In addition, pursuant to the terms of the Merger Agreement, the Company agreed not to solicit or support any alternative acquisition proposals, subject to customary exceptions for the company to respond to and support unsolicited proposals in the exercise of its fiduciary duties of the board of directors of the company. The company will be obligated to pay a termination fee of $4.454 million to Parent in certain circumstances following termination of the Merger Agreement.
Concurrently with the execution of the Merger Agreement, each of the members of the company’s board of directors and the executive officers of the company, as well as certain stockholders of the company affiliated with members of the board of directors, each in their respective capacities as stockholders of the company, entered into a Tender and Support Agreement with Parent and Acquisition Sub (the “Support Agreement”), pursuant to which the signatories have agreed, among other things, to tender their respective shares of Common Stock (including those owned through the exercise or settlement of Company Options or Company Restricted Stock Awards) and Preferred Stock into the Offer and, during the period from the date of such Support Agreement through the earlier of (i) the date upon which the Merger Agreement is validly terminated and (ii) the effective time of the Merger, to not vote any of their securities in favor of any alternative acquisition proposals.
The company expects to close the Merger in the second half of 2018, subject to the satisfaction or waiver of the applicable closing conditions.
For more information related to the Merger Agreement and Support Agreement, please refer to our Current Report on Form 8-K filed with the SEC on April 26, 2018. The foregoing descriptions of the Merger Agreement and Support Agreement are each qualified in their entirety by reference to the full text of the Merger Agreement and Support Agreement, attached as Exhibit 2.1 and Exhibit 99.1, respectively, to our Current Report on Form 8-K filed with the SEC on April 26, 2018.
On April 25, 2018, the company entered into a second amendment to the loan agreement with CIBC. The amendment excludes certain expenses incurred in connection with the merger from the calculation of adjusted EBITDA, and changes the adjusted EBITDA target for the second quarter of 2018. The amendment also
requires the company to have liquidity as of the last day of each calendar month of at least $2.0 million. For more information related to the second amendment, please refer to our Current Report on Form 8-K filed with the SEC on April 26, 2018. The foregoing description of the second amendment is qualified in its entirety by reference to
14
the full text of the second amendment attached as Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on April 26, 2018.
In connection with the Merger Agreement, the company also amended the employment contract of David Gustafson, its Chief Operating Officer. Pursuant to the terms of the amendment, Mr. Gustafson’s salary and annual target bonus were adjusted. The employment agreement amendment is effective onl
y upon and subject to the closing. For more information related to the amendment, please refer to our Current Report on Form 8-K filed with the SEC on April 26, 2018. The foregoing description of the second amendment is qualified in its entirety by reference to the full text of the amendment attached as Exhibit 10.4 to our Current Report on Form 8-K filed with the SEC on April 26, 2018
.
15