NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Note One — Description of Business
Mattersight Corporation and its subsidiaries (collectively, Mattersight or the company) is a leader in behavioral analytics and a pioneer in personality-based software products. Using a stack of innovative, patented applications, including predictive behavioral routing, performance management, quality assurance, and predictive analytics (collectively, Behavioral Analytics), Mattersight analyzes and predicts customer behavior based on the language exchanged between agents and customers during brand interactions. These insights are then used to facilitate more effective and effortless customer conversations, which, in turn, drive increased customer satisfaction and retention, employee engagement, and operating efficiency. Mattersight’s analytics are based on millions of proprietary algorithms and the application of unique behavioral models. Mattersight’s solutions have influenced hundreds of millions of shorter, more satisfying customer interactions for leading companies in the healthcare, insurance, financial services, technology, telecommunications, cable, utilities, education, hospitality, and government industries.
The company’s multi-channel technology captures the unstructured data of voice interactions (conversations), related customer and employee data, and employee desktop activity, and applies millions of proprietary algorithms against those interactions. Each interaction contains hundreds of attributes that get scored and ultimately detect patterns of behavior or business process that provide the transparency and predictability necessary to enhance revenue, improve the customer experience, improve efficiency, and predict and navigate outcomes. Adaptive across industries, programs, and industry-specific processes, the Company’s Behavioral Analytics offerings enable its clients to drive measurable economic benefit through the improvement of contact center performance, customer satisfaction and retention, fraud reduction, and streamlined back office operations. Specifically, through its Behavioral Analytics offerings, Mattersight helps its clients:
|
•
|
Identify optimal customer/employee behavioral pairing for call routing;
|
|
•
|
Identify and understand customer personality;
|
|
•
|
Automatically measure customer satisfaction and agent performance on every analyzed call;
|
|
•
|
Improve rapport between agent and customer;
|
|
•
|
Reduce call handle times while improving customer satisfaction;
|
|
•
|
Identify opportunities to improve self-service applications;
|
|
•
|
Improve cross-sell and up-sell success rates;
|
|
•
|
Improve the efficiency and effectiveness of collection efforts;
|
|
•
|
Measure and improve supervisor effectiveness and coaching;
|
|
•
|
Improve agent effectiveness by analyzing key attributes of desktop usage;
|
|
•
|
Predict likelihood of customer attrition;
|
|
•
|
Predict customer satisfaction and Net Promoter Scores
®
without customer surveys;
|
|
•
|
Predict likelihood of debt repayment;
|
|
•
|
Predict likelihood of a sale or cross-sell; and
|
|
•
|
Identify fraudulent callers and improve authentication processes.
|
Mattersight’s mission is to help brands have more effective and effortless conversations with their customers. Using a suite of innovative personality-based software applications, Mattersight can analyze and predict customer behavior based on the language exchanged during service and sales interactions. The company operates a highly scalable, flexible, and adaptive application platform to enable clients to implement and operate these applications.
32
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Note Two — Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Mattersight and all of its subsidiaries. All significant intercompany transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those amounts.
Basis of Presentation
On April 1, 2017, the company adopted Accounting Standards Update (
ASU) No
2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses the presentation and classification of cash flows related to specific transactions. Upon adoption, the company updated the statement of cash flow for all periods presented. Certain amounts on the statement of cash flows for December 31, 2016 were reclassified in compliance with this ASU.
On January 1, 2017, the company adopted ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires that a statement of cash flows explain the change in the total of cash, cash equivalents and restricted cash.
Certain amounts on the statement of cash flows for December 31, 2016 and 2015 were reclassified in compliance with this ASU.
On January 1, 2017, the company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update is intended to simplify the accounting for share-based payment transactions, including the income tax impacts, classification of awards as either equity or liabilities, and presentation on the statement of cash flows. Under ASU 2016-09, the company has elected to account for forfeitures as they occur rather than on an estimated basis. The standard was adopted using a modified retrospective approach which had an immaterial impact on the accumulated deficit balance on January 1, 2017.
On January 1, 2017, the company adopted ASU No. 2015-17, Income Taxes (Topic 740). This update simplifies the presentation of deferred income taxes and requires that deferred income tax liabilities and assets be classified as noncurrent in a classified balance sheet. Upon adoption, all deferred tax assets and liabilities were classified as long term.
On January 1, 2017, to better align expenses, the company changed the caption on the Consolidated Statements of Operations from Research and development to Product development. The company believes the revised presentation provides a clearer understanding of the business expenses in this caption. There was no change to the expense classification and the current period is comparable to the prior period.
Revenue Recognition
Subscription Revenue
Subscription revenue consists of revenue derived 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.
Subscription revenue is based on a number of factors, such as the number of users to whom the Company provides one or more of its Behavioral Analytics offerings, the type and number of Behavioral Analytics offerings deployed to the client, and in some cases, the number of hours of calls analyzed during the relevant month of the subscription period. 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. This revenue is recognized over the applicable subscription period, as the service is performed for the client.
33
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
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. Installation costs incurred are deferred up to an amount not to exceed the amount of deferred installation 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.
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.
Reimbursed expenses revenue includes billable costs related to travel and other out-of-pocket expenses incurred while performing services for the Company’s clients. An equivalent amount of reimbursable expenses is included in total cost of other revenue.
Total Cost of Revenue, Exclusive of Depreciation and Amortization
Total cost of revenue primarily consists of labor costs, including salaries, fringe benefits, and incentive compensation, royalties, and other client-related third-party outside services. Total cost of revenue excludes depreciation and amortization.
If the Company’s estimates indicate that a contract loss will occur, then a loss provision is recorded in the period in which the loss first becomes probable and can be reasonably estimated.
Product Development
Product development expenses consist primarily of salaries, incentive compensation, commissions, and employee benefits for product development personnel. The personnel costs included in this item are net of any labor costs directly related to the generation of revenue, which are represented in total cost of revenue.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, incentive compensation, commissions, and employee benefits for business development, account management, and marketing.
General and Administrative
General and administrative expenses consist primarily of salaries, incentive compensation, and employee benefits for administrative personnel, as well as facilities costs, a provision for uncollectible amounts, and costs for the Company’s corporate technology infrastructure and applications.
Loss Per Common Share
The per common share basic net loss available to holders of the Company’s Common Stock, par value $0.01 per share (Common Stock), has been computed by dividing the net loss available to holders of Common Stock for each period presented by the weighted average shares outstanding. The per common share diluted loss available to holders of Common Stock has been computed by dividing the net loss available to holders of Common Stock by the weighted average shares outstanding plus the dilutive effect of Common Stock equivalents, which is primarily related to our 7% Series B Convertible Preferred Stock (Series B Stock), using the treasury stock method. In periods in which there was a loss, the dilutive effect of Common Stock equivalents is not included in the diluted loss per share calculation as it was antidilutive.
34
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Fair Value Measurements
Fair value is an exit price and establishes a three-tier valuation hierarchy for ranking the quality and reliability of the information used to determine fair values. The first tier, Level 1, uses quoted market prices in active markets for identical assets or liabilities. Level 2 uses inputs, other than quoted market prices for identical assets or liabilities in active markets, which are observable either directly or indirectly. Level 3 uses unobservable inputs in which there are little or no market data, and requires the entity to develop its own assumptions. 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments readily convertible into known amounts of cash (with original purchased maturities of three months or less) to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, which includes foreign bank accounts, and receivables. Cash and cash equivalents consist of money market funds and deposits with high credit quality financial institutions. At times, such deposits may be in excess of the Federal Deposit Insurance Corporation insurance limit. Accounts in the United States are insured by the Federal Deposit Insurance Corporation up to $250,000. At December 31, 2017, the Company had non-interest-bearing cash and interest-bearing money market balances in excess of federally insured limits by $11.2 million. The Company’s receivables are derived from billings to clients located primarily in the United States and are denominated in U.S. dollars.
Clients Accounting for 10% or More of Total Revenue:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United HealthCare Services, Inc.
|
|
|
28
|
%
|
|
|
33
|
%
|
|
|
31
|
%
|
CVS Caremark Corporation
|
|
|
16
|
%
|
|
|
15
|
%
|
|
|
13
|
%
|
TriWest Healthcare Alliance Corp
|
|
|
14
|
%
|
|
|
9
|
%
|
|
|
2
|
%
|
Progressive Casualty Insurance Company
|
|
|
8
|
%
|
|
|
11
|
%
|
|
|
15
|
%
|
Clients Accounting for 10% or More of Accounts Receivable:
|
|
2017
|
|
|
2016
|
|
|
United HealthCare Services, Inc.
|
|
|
29
|
%
|
|
|
41
|
%
|
|
CVS Caremark Corporation
|
|
|
13
|
%
|
|
|
27
|
%
|
|
Progressive Casualty Insurance Company
|
|
|
13
|
%
|
|
|
—
|
|
|
Equipment and Leasehold Improvements
Computers, software, furniture, and equipment are carried at cost and depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements are amortized over the lesser of the useful life or the lease term. The useful life for computers and software is between one and three years. For enterprise software applications where a longer useful life is deemed appropriate, five years is used. For furniture and equipment, a useful life of five years is used. Maintenance and repair costs are expensed as incurred. The cost and related accumulated depreciation of assets sold or disposed of are eliminated from the respective accounts and the resulting gain or loss is included in the statements of operations. The carrying value of equipment and leasehold improvements is only reviewed if a triggering event occurs to assess recoverability based on future undiscounted cash flows. An impairment loss, if any, would be measured as the excess of the carrying value over the fair value.
The Company accounts for software developed for internal use in accordance with the guidance provided under ASC Topic 350, Intangibles – Goodwill and Other
,
which addresses accounting for the costs of computer software developed or obtained for internal use. As such, costs incurred that relate to the planning and post-implementation phases of development are expensed. Costs incurred during the application development stage are capitalized and amortized over the asset’s estimated useful life, which is generally three to five years.
35
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The Company leases certain equipment using both capital leases and operating leases. Assets leased under capital leases are recorded at the lesser of the amount financed and present value of future lease payments and depreciated on a straight line
basis. All capital leases are for terms of twenty-four, thirty, or thirty-six months.
Goodwill
Goodwill is tested annually for impairment or more frequently if an event or circumstance indicates that an impairment loss may have been incurred.
In performing the annual impairment test, a qualitative assessment is performed to determine
whether the carrying amount exceeds the reporting unit’s fair value. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded. The Company currently operates in a single business segment or reporting unit.
In 2017, after completing its annual qualitative review, the company concluded that it was not more likely than not that the carrying value of our reporting unit exceeded its fair value. Accordingly, the company concluded that further quantitative analysis and testing was not required, and no goodwill impairment charge was required.
Intangible Assets
Intangible assets subject to amortization are assessed for impairment at least annually or when indicated by a change in economic or operational circumstances. The impairment assessment of these assets requires management to first compare the book value of the amortizing asset to undiscounted cash flows only if there are indicators of a change in circumstances. If the book value exceeds the undiscounted cash flows, management is then required to estimate the fair value of the assets and record an impairment loss for the excess of the carrying value over the fair value and annually challenge the useful lives.
Income Taxes
The Company uses an asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes are provided when tax laws and financial accounting standards differ with respect to the amount of income for the year, the basis of assets and liabilities and for tax loss carryforwards.
The Company has recorded income tax valuation allowances on its net deferred tax assets to account for the unpredictability surrounding the timing of realization of its U.S. and non-U.S. net deferred tax assets due to continuing operating losses. The valuation allowances may be reversed at a point in time when management determines realization of these tax assets has become more likely than not, based on a return to or achieving predictable levels of profitability.
The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Significant judgment is used to determine the likelihood of the benefit.
Unearned Revenue
Unearned revenue consists of billings or payments received in advance of revenue recognition for Behavioral Analytics contracts. Unearned revenue is recognized as revenue when the applicable recognition criteria are met.
Stockholders’ Equity
Stockholders’ equity includes Common Stock issued, additional paid-in capital, accumulated deficit, treasury stock, and accumulated other comprehensive loss. The 1.6 million shares of Series B Stock outstanding as of December 31, 2017 and 2016 are not classified as permanent equity or a liability in the accompanying balance sheets. These shares of Series B Stock are conditionally redeemable and do not meet the definition of a mandatorily redeemable financial instrument. The holders of Series B Stock have the ability to initiate a redemption upon the occurrence of certain events that are considered outside the Company’s control.
36
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Foreign Currency
Translation
The functional currencies for the Company’s foreign subsidiaries are their local currencies. All assets and liabilities of foreign subsidiaries are translated to U.S. dollars at end of period exchange rates. The resulting translation adjustments are recorded as a component of stockholders’ equity and comprehensive loss. Income and expense items are translated at average exchange rates prevailing during the period.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Determining fair value of stock-based awards at the grant date requires certain assumptions. The Company uses historical information as the primary basis for the selection of expected life, expected volatility, and expected dividend yield assumptions. The risk-free interest rate is selected based on the yields from U.S. Treasury Strips with a remaining term equal to the expected term of the options being valued.
Stock Warrants
In accordance with ASC 480-10,
Distinguishing Liabilities from Equity
, the Company classified certain warrants to purchase Common Stock as liabilities that do not meet the requirements for classification as equity. Such liabilities are initially recorded at fair value with subsequent changes in fair value recorded as a component of gain or loss on warrant liability on the consolidated statements of operations in each reporting period. Fair value of the warrants was measured using a Black-Scholes model. See Note Eighteen—Fair Value Measurements.
Segments
The Company operates in a single business segment, focused primarily on Behavioral Analytics.
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 certain financial instruments with characteristics of liabilities and equity. Part I of the update changes 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 pending 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 evaluating the impact of this update on its consolidated financial statements.
In May 2017, the FASB issued 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. This ASU is effective for reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The company is currently evaluating 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. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The company is evaluating the standard and does not expect a change in value of goodwill when the standard is adopted
.
37
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
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 ev
aluating 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.
In May 2014, FASB issued 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. ASU 2014-09 provides alternative methods of initial adoption and is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. The company is continuing to assess the impact of adopting ASU 2014-09. The company has completed its assessment of material contracts and management does not expect a significant change in revenue recognition or operating cash flows when ASU 2014-09 is adopted. The accounting for the incremental costs of obtaining and fulfilling a contract is not expected to change, as the company already defers these costs and amortizes them over the anticipated period of benefit.
Additional processes and internal controls have been implemented to enable and maintain compliance with ASU 2014-09’s disclosure requirements. Some significant effects on the balance sheet are expected as a result of the guidance regarding contract balances. The company has elected to adopt the modified retrospective transition method.
The company expects the cumulative adjustment to beginning retained earnings as a result of adoption of ASU 2014-09 to be immaterial.
Note Three — Receivables
Receivables consist of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Amounts billed to clients
|
|
$
|
6.6
|
|
|
$
|
8.8
|
|
Allowances for doubtful accounts
|
|
|
—
|
|
|
|
0.3
|
|
Receivables, net
|
|
$
|
6.6
|
|
|
$
|
8.5
|
|
Amounts billed to clients represent fees and reimbursable project-related expenses. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its clients to make required payments and clients indicating their intention to dispute their obligation to pay for contractual services provided by us. If the financial condition of the Company’s clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Note Four — Current Prepaid Expenses
Current prepaid expenses primarily consist of deferred deployment costs, prepaid technology maintenance 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. Costs included in current prepaid expenses will be recognized within the next twelve months.
38
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Current prepaid expenses consisted of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Prepaid technology maintenance costs
|
|
$
|
2.0
|
|
|
$
|
0.8
|
|
Deferred deployment costs
|
|
|
1.9
|
|
|
|
1.7
|
|
Prepaid commissions
|
|
|
1.1
|
|
|
|
1.2
|
|
Other
|
|
|
0.8
|
|
|
|
0.7
|
|
Total
|
|
$
|
5.8
|
|
|
$
|
4.4
|
|
Note Five — Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Computers and software
|
|
$
|
28.8
|
|
|
$
|
24.3
|
|
Leasehold improvements
|
|
|
4.0
|
|
|
|
4.3
|
|
Furniture and equipment
|
|
|
0.8
|
|
|
|
0.7
|
|
Equipment and leasehold improvements, gross
|
|
|
33.6
|
|
|
|
29.3
|
|
Accumulated depreciation and amortization
|
|
|
(25.0
|
)
|
|
|
(19.7
|
)
|
Equipment and leasehold improvements, net
|
|
$
|
8.6
|
|
|
$
|
9.6
|
|
Depreciation and amortization expense was $5.8 million, $5.5 million, and $4.4 million, for 2017, 2016, and 2015, respectively. Assets acquired under capital leases were $2.1 million, $2.4 million, and $2.7 million, in 2017, 2016, and 2015, respectively. Depreciation and amortization expense on capital lease assets was $2.5 million, $2.0 million, and $2.2 million, in 2017, 2016, and 2015, respectively.
The carrying value of equipment and leasehold improvements is only reviewed if a triggering event occurs to assess recoverability based on future undiscounted cash flows. An impairment loss, if any, would be measured as the excess of the carrying value over the fair value. There was a triggering event as of December 31, 2017 and December 31, 2016; however no impairment was required to be recognized.
Note Six — Intangible Assets
Intangible assets reflect costs related to patent and trademark applications, marketing managed services customer relationships and the purchase of certain intellectual property rights. The costs related to patent and trademark applications and the purchase of certain intellectual property are amortized over 120 months. The other intangible assets are fully amortized. Currently, amortization expense of intangible assets is expected to be $0.4 million annually.
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Patents and trademarks
|
|
$
|
4.0
|
|
|
$
|
3.7
|
|
Intellectual property
|
|
|
3.3
|
|
|
|
3.3
|
|
Gross intangible assets
|
|
|
7.3
|
|
|
|
7.0
|
|
Accumulated amortization of intangible assets
|
|
|
(4.3
|
)
|
|
|
(3.8
|
)
|
Total
|
|
$
|
3.0
|
|
|
$
|
3.2
|
|
39
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Note Seven — 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:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Restricted cash
|
|
$
|
2.7
|
|
|
$
|
4.2
|
|
Prepaid technology and maintenance support
|
|
|
1.9
|
|
|
|
0.6
|
|
Deferred deployment costs
|
|
|
1.2
|
|
|
|
0.6
|
|
Prepaid commissions
|
|
|
—
|
|
|
|
0.5
|
|
Other
|
|
|
0.2
|
|
|
|
0.1
|
|
Total
|
|
$
|
6.0
|
|
|
$
|
6.0
|
|
Note Eight — Employee Benefit Plans
The Company’s U.S. employees are eligible to participate in the Mattersight Corporation 401(k) Plan (the Plan) on the first day of the month coinciding with or following their date of hire. The Plan allows employees to contribute up to 30% of their eligible compensation and up to 100% of their bonus compensation, subject to IRS statutory limits. For 2017, 2016 and 2015, the employer match contribution was $0.5 million, $0.5 million and $0.4 million, respectively.
Note Nine — Other Current Liabilities
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Accrued vendor payable
|
|
$
|
1.9
|
|
|
$
|
1.9
|
|
Deferred rent liability
|
|
|
0.5
|
|
|
|
0.4
|
|
Warrant liability
|
|
|
0.4
|
|
|
|
0.8
|
|
Other
|
|
|
0.6
|
|
|
|
0.3
|
|
Total
|
|
$
|
3.4
|
|
|
$
|
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 Ten — Leases
Capital Leases
Assets under capital leases consist of computer hardware and related equipment. The gross amount of assets recorded under capital leases was $7.3 million and $6.5 million at December 31, 2017 and December 31, 2016, respectively. Depreciation expense related to assets under capital leases is included in depreciation and amortization expense on the consolidated statements of operations.
40
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
As of December 31,
2017, the future minimum lease payments due under capital leases are expected to be as follows
:
(In millions)
|
|
|
|
|
Year
|
|
Amount
|
|
2018
|
|
$
|
2.2
|
|
2019
|
|
|
1.1
|
|
2020
|
|
|
0.2
|
|
Total minimum lease payments
|
|
$
|
3.5
|
|
Less: estimated executory costs
|
|
|
—
|
|
Net minimum lease payments
|
|
$
|
3.5
|
|
Less: amount representing interest
|
|
|
(0.3
|
)
|
Present value of minimum lease payments
|
|
$
|
3.2
|
|
Assets acquired under capital leases included in equipment and leasehold improvements (see Note Five
—
Equipment and Leasehold Improvements):
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Computers and software
|
|
$
|
7.3
|
|
|
$
|
6.5
|
|
Accumulated depreciation and amortization
|
|
|
(4.1
|
)
|
|
|
(2.9
|
)
|
Computers and software, net
|
|
$
|
3.2
|
|
|
$
|
3.6
|
|
Operating Leases
The Company leases various office facilities under leases expiring at various dates through August 31, 2024. Additionally, the Company leases various property and office equipment under operating leases, generally under three year terms, expiring at various dates. Certain lease agreements contain escalating rent clauses, which require higher rent payments in future years. The Company expenses rent on a straight-line basis over the term of the lease, including any rent-free periods. In addition, the Company received certain leasehold improvement incentives, and recorded these incentives as deferred rent, which is amortized as a reduction of rent expense over the life of the lease. Net deferred rent on the consolidated balance sheet as of December 31, 2017, 2016, and 2015 was $2.4 million, $2.6 million, and $2.0 million, respectively. Rental expense for all operating leases approximated $1.5 million, $1.3 million, and $1.7 million, for 2017, 2016, and 2015, respectively.
In 2017, the Company extended its operating lease for the Edina facility. The initial lease began June 1, 2011 and terminates August 31, 2024. In 2016, the Company entered into an operating lease to relocate its Austin facility. The initial lease term, which became effective on April 1, 2016, terminates on August 31, 2023. In 2015, the Company entered into an operating lease to relocate its corporate headquarters to Chicago, Illinois. The initial lease term, which became effective on July 1, 2015, terminates on July 31, 2022. The leases include one five-year renewal option.
Future minimum rental commitments under non-cancelable operating leases with terms in excess of one year are as follows: (in millions)
Year
|
|
Amount
|
|
2018
|
|
$
|
0.9
|
|
2019
|
|
|
0.7
|
|
2020
|
|
|
0.6
|
|
2021
|
|
|
0.7
|
|
2022
|
|
|
0.8
|
|
Thereafter
|
|
|
0.5
|
|
Total minimum payments required
|
|
$
|
4.2
|
|
41
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Note Eleven — 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 4.50%, 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 June 29, 2017, the company drew $13.5 million on the revolving line of credit. The proceeds were used to repay the principal balance of $22.5 million under the company’s prior credit facility with Hercules. Upon repayment, the company terminated its loan agreement with Hercules.
The loss on the early extinguishment of Hercules debt totaled $1.8 million. It consisted of a prepayment charge of
$0.7 million
, acceleration of unaccreted debt discount of
$0.6 million
, and acceleration of unamortized deferred debt costs of $0.5 million.
The average outstanding balance on the revolving line of credit during for 2017 was $10.3 million. At December 31, 2017, $16.9 million remains outstanding on the revolving line of credit with the ability to draw an additional $1.8 million. There was also $0.7 million in letters of credit issued by CIBC against the line of credit. During January and February 2018, the company repaid $7.5 million of principal on the revolving line of credit.
Debt consisted of the following at December 31, 2017:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
CIBC loan due June 29, 2020, effective borrowing rate of 5.93% at December 31, 2017
|
|
$
|
16.9
|
|
|
$
|
—
|
|
Hercules loan effective rate of 14.50% at December 31, 2016
|
|
|
—
|
|
|
|
22.5
|
|
Furniture loan due May 2021, effective rate of 9.10%
|
|
|
0.1
|
|
|
|
0.1
|
|
Furniture loan due May 2021, effective rate of 9.55%
|
|
|
0.1
|
|
|
|
0.1
|
|
Furniture loan due July 2019, effective rate of 13.98%
|
|
|
0.1
|
|
|
|
0.1
|
|
Total debt
(1)
|
|
$
|
17.2
|
|
|
$
|
22.8
|
|
(1)
|
Total debt of $17.2 million at December 31, 2017 includes the current portion of the furniture loans of $0.1 million. As of December 31, 2016, short-term debt was $0.7 million, consisting of $0.6 million related to the current portion of the secured loan with Hercules and $0.1 million related to the current portion of the furniture loans
.
|
42
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Debt maturities were as
follows as of December 31, 2017:
(In millions)
|
|
|
|
|
Year
|
|
Amount
|
|
2018
|
|
$
|
0.1
|
|
2019
|
|
|
0.1
|
|
2020
|
|
|
16.9
|
|
2021
|
|
|
0.1
|
|
2022
|
|
|
—
|
|
Letters of Credit
The Company has standby letters of credit outstanding in the amount of $3.4 million at December 31, 2017. Letters of credit are expected to expire from 2018 through 2023.
Note Twelve — Other Long-Term Liabilities
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
7% Series B convertible preferred stock dividend payable
|
|
$
|
3.2
|
|
|
$
|
2.6
|
|
Deferred rent liability
|
|
|
1.9
|
|
|
|
2.2
|
|
Technology service liability
|
|
|
1.2
|
|
|
|
—
|
|
Deferred income tax liability
|
|
|
0.2
|
|
|
|
0.3
|
|
Intellectual property purchase liability
|
|
|
—
|
|
|
|
0.8
|
|
Total
|
|
$
|
6.5
|
|
|
$
|
5.9
|
|
Note Thirteen — Income Taxes
Loss before income taxes consisted of the following:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
(16.4
|
)
|
|
$
|
(20.9
|
)
|
|
$
|
(15.5
|
)
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.1
|
)
|
Total
|
|
$
|
(16.4
|
)
|
|
$
|
(20.9
|
)
|
|
$
|
(15.6
|
)
|
The income tax benefit (provision) consists of the following:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total current
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
0.1
|
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total deferred
|
|
|
0.1
|
|
|
|
—
|
|
|
|
—
|
|
Income tax benefit (provision)
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
43
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Total income tax benefit differed from the amount computed by applying the federal statutory income tax rate due to the following:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Valuation allowance
|
|
$
|
25.7
|
|
|
$
|
(7.7
|
)
|
|
$
|
(4.9
|
)
|
Federal tax benefit, at statutory rate
|
|
|
5.7
|
|
|
|
7.2
|
|
|
|
5.5
|
|
Stock-based compensation
|
|
|
3.1
|
|
|
|
—
|
|
|
|
—
|
|
Deferrals
|
|
|
0.7
|
|
|
|
—
|
|
|
|
—
|
|
State tax benefit, net of federal benefit
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.4
|
|
Tax reform(1)
|
|
|
(32.2
|
)
|
|
|
—
|
|
|
|
—
|
|
Expiration of state NOLs
|
|
|
(1.7
|
)
|
|
|
—
|
|
|
|
—
|
|
Expiration of vested stock options
|
|
|
(1.4
|
)
|
|
|
—
|
|
|
|
—
|
|
Nondeductible expenses
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
Other
|
|
|
—
|
|
|
|
0.1
|
|
|
|
(1.1
|
)
|
Income tax benefit (provision)
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
(1)
|
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) was signed into law. The Company has completed its accounting for tax reform under the Tax Cuts and Jobs Act as of December 31, 2017. This act includes, among other items, a permanent reduction to the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, and requires immediate taxation of accumulated, unremitted non-U.S.
earnings. We did not recognize a liability for the tax on accumulated unremitted non-U.S. earnings because we have an accumulated foreign loss.
At December 31, 2017, we recognized a tax benefit of $0.1 million from revaluing U.S. net deferred tax liabilities.
|
The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Significant judgment is used to determine the likelihood of the benefit.
A reconciliation of the gross amounts of unrecognized tax benefits at the beginning and end of the year are as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
12.7
|
|
|
$
|
12.7
|
|
|
$
|
12.7
|
|
Additions based on tax positions related to the current year
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Additions for tax positions of prior years
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Reductions for tax positions of prior years
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Reductions for tax positions as a result of lapse of statute
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at end of year
|
|
$
|
12.7
|
|
|
$
|
12.7
|
|
|
$
|
12.7
|
|
Due to the Company’s net operating loss carryforward position, these unrecognized tax benefits will not impact the Company’s effective tax rate, if recognized. Any change in the amount of unrecognized tax benefits within the next twelve months is not expected to result in a significant impact on the results of operations or the financial position of the Company.
Due to the Company’s net operating loss carryforward position, accrued interest and penalties associated with uncertain tax positions as of December 31, 2017 are not material. Interest and penalties associated with uncertain tax positions are recorded as part of income tax expense.
The statutes of limitation for the Company’s income tax returns after 2001 effectively remain open for examination by the IRS because the net operating loss carryforward from those years can be examined by the IRS for a period of three years after filing the tax return for the year the loss is used.
Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company and its subsidiaries may have various state and foreign income tax returns for immaterial jurisdictions in the process of examination throughout the reporting period.
44
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Deferred tax assets and liabilities comprised the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
53.9
|
|
|
$
|
75.2
|
|
Other accruals
|
|
|
4.0
|
|
|
|
8.8
|
|
Depreciation and amortization, including goodwill
|
|
|
0.7
|
|
|
|
0.8
|
|
Tax credit carryforward
|
|
|
0.5
|
|
|
|
0.5
|
|
Valuation allowance
|
|
|
(58.1
|
)
|
|
|
(83.8
|
)
|
Total deferred tax assets
|
|
|
1.0
|
|
|
|
1.5
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(1.1
|
)
|
|
|
(1.7
|
)
|
Total deferred tax liabilities
|
|
|
(1.1
|
)
|
|
|
(1.7
|
)
|
Net deferred tax liability
|
|
$
|
(0.1
|
)
|
|
$
|
(0.2
|
)
|
Deferred income taxes are not provided on certain undistributed earnings of foreign subsidiaries because such foreign subsidiaries are in an accumulated foreign loss position.
During 2002, the Company established a valuation allowance related to deferred tax assets for the U.S. This was in addition to the valuation allowance established in 2001 for non-U.S. deferred tax assets. The Company continues to provide a valuation allowance on significantly all domestic and foreign deferred tax assets as the Company has determined that it is more likely than not that the deferred tax assets in these jurisdictions will not be realized. As of December 31, 2017, net deferred tax assets of $58.1 million were fully offset by a valuation allowance. The Company’s U.S. federal net operating losses (NOLs) of $260.5 million and U.S. state NOLs of $108.9 million will expire beginning in 2022 and 2018, respectively. The Company’s non-U.S. NOLs of $0.8 million are subject to various expiration dates beginning in 2029. The Company also carries $0.5 million in research and development credit carryforwards that will expire beginning in 2020.
The Company’s ability to utilize its NOLs could become subject to significant limitations under Section 382 of the Internal Revenue Code if the Company were to undergo an ownership change. An ownership change would occur if the stockholders who own or have owned, directly or indirectly, 5% or more of the Company’s Common Stock or are otherwise treated as 5% stockholders under Section 382 and the regulations promulgated thereunder, increase their aggregate percentage ownership of the Company’s stock by more than 50 percentage points over the lowest percentage of the stock owned by these stockholders at any time during the testing period, which is generally the three-year period preceding the potential ownership change. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carryforwards. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carryforwards. The Company has undergone a Section 382 analysis and does not believe there is currently a limitation on the use of NOLs under Section 382; however, due to ongoing ownership changes, the Company may be subject to significant limitations in the future. If a change in ownership is deemed to have occurred during the past three years, then it may be possible that the Company’s NOL carryforward could be subject to limitation under Section 382 for tax return purposes. However, since its NOL carryforward is fully reserved with a valuation allowance, there would be no impact for financial statement purposes from a Section 382 limitation.
Note Fourteen — Litigation and Other Contingencies
The Company is a party to various agreements, including all 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 infringement of intellectual property rights with respect to services, software, and other deliverables provided by the Company. 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.
45
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Under its By-Laws, subject to certain exceptions, the Company has agreed to indemnify its corporate officers and director
s for certain events or occurrences while the corporate 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 directors and corporate o
fficers 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 December 31, 2017.
The Company’s products may be subject to sales tax in certain jurisdictions. If a taxing authority were to successfully assert that we have not properly collected sales or other transaction taxes, or if sales or other transaction tax laws or the interpretation thereof were to change, and we were unable to enforce the terms of our contracts with customers that give us the right to reimbursement for assessed sales taxes, we 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 $0.1 million at December 31, 2017.
Note Fifteen — Capital Stock and Series B Stock
Under the terms of its Certificate of Incorporation, as amended, the Company’s authorized capital stock consists of (i) 50,000,000 shares of Common Stock, and (ii) 40,000,000 shares of preferred stock (Preferred Stock). Under the terms of the Certificate of Designations of 7% Series B Convertible Preferred Stock, the Company designated 5,000,000 shares of the 40,000,000 shares of Preferred Stock as its Series B Stock. 1,637,786 and 1,637,948 shares of Series B Stock were issued and outstanding as of December 31, 2017 and December 31, 2016, respectively.
On February 23, 2017, the company entered into a definitive purchase agreement for the sale of 5,328,187 shares of its common stock to certain investors and certain officers and directors in a private placement. Under the terms of the agreement, the company raised approximately $16.0 million in gross proceeds by selling 5,228,187 shares to certain investors at a price of $3.00 per share and by selling 100,000 shares to certain officers and directors (including certain of their affiliates) at a price of $3.45 per share. The shares represented approximately 20% of the issued and outstanding shares of common stock immediately prior to the issuance.
On March 1, 2017, the company received aggregate gross proceeds, net of fees, of $14.8 million. Proceeds are being used for general corporate, working capital, and debt repayment purposes. Craig-Hallum Capital Group LLC, which acted as the sole placement agent for the offering,
received a commission of
$1.1 million
, and was reimbursed for its out-of-pocket expenses
. The company’s registration statement on Form S-3 (File No. 333-217290) was filed with the SEC on April 13, 2017 and declared effective by the SEC on April 26, 2017.
On July 22, 2015, the Company signed a definitive Common Stock Purchase Agreement (the 2015 Purchase Agreement) to raise approximately $16.2 million in gross proceeds in a registered direct offering. Under the terms of the 2015 Purchase Agreement, the Company sold 2,728,712 shares of Common Stock (the Shares). Of the aggregate 2,728,712 Shares, 2,563,238 were sold to certain investors at a price of $5.93 per share and 165,474 were sold to certain officers and directors (including certain of their affiliates) at a price of $6.11 per share. The Shares represented approximately 12% of the issued and outstanding shares of Common Stock immediately prior to the execution of the 2015 Purchase Agreement. The offering closed on July 23, 2015. The aggregate proceeds that the Company received from the offering, net of fees, were approximately $15.9 million. Proceeds from the offering are being used for general corporate and working capital purposes. Craig-Hallum Capital Group LLC, which acted as the Company’s financial advisor for the offering, received a fee of $0.2 million. The Shares were sold pursuant to a prospectus supplement dated as of July 22, 2015, in connection with a takedown from the Company’s effective shelf registration statement on Form S-3 (File No. 333-202744), which was filed with the SEC on March 13, 2015 and declared effective by the SEC on April 8, 2015.
The Series B Stock accrues dividends at a rate of 7% per annum, is entitled to a preference upon liquidation, and is convertible on a one-for-one basis into shares of Common Stock, subject to adjustment for stock splits, stock dividends, and similar actions. The Series B Stock generally votes on a one-for-one basis with the Common Stock, subject to adjustment for certain actions and specified matters as to which the Series B Stock is entitled to a separate class vote.
Note Sixteen — Stock-Based Compensation
The Company has two stock-based compensation plans: the Mattersight Corporation 1999 Stock Incentive Plan (the 1999 Plan) and the Mattersight Corporation Employee Stock Purchase Plan (the ESPP).
46
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Under the 1999 Plan, awards of restricted stock, salary replacement, commissions, stock options, and stock appreciation rights may be granted to directors,
officers, employees, consultants, independent contractors, and agents of the Company and its subsidiaries. Awards granted under the 1999 Plan are made at the discretion of the Compensation Committee of the Company’s Board of Directors (the Compensation Co
mmittee). If shares or options awarded under the 1999 Plan are not issued due to cancellation of unvested or unexercised options or shares, then those shares or options again become available for issuance under the 1999 Plan. Under the 1999 Plan, on the fi
rst day of each year, the aggregate number of shares available for issuance under the 1999 Plan is automatically increased by an amount equal to 5% of the total number of shares of Common Stock that are outstanding. At the 2008 Annual Meeting of Stockholde
rs, stockholders approved the amendment and restatement of the 1999 Plan to increase the number of shares available for issuance under the 1999 Plan by 1,500,000. Stockholders approved at the 2017 Annual Meeting, to increase the number of shares available
for issuance under the ESPP by 250,000.
Stock-based compensation expense was $2.9 million, $5.3 million, and $5.4 million, for 2017, 2016, and 2015, respectively. The Company recognizes stock compensation expense ratably over the vesting period. The Company does not recognize the windfall tax benefit related to the excess tax deduction because the Company currently does not anticipate realizing the tax savings associated with this deduction. See Note Thirteen—Income Taxes.
As of December 31, 2017, there were a total of 3,331,957 shares of Common Stock available for future grants under the 1999 Plan and from treasury stock. The Company’s Common Stock is traded on the NASDAQ Global Market under the symbol MATR.
Restricted Stock
Restricted stock awards are shares of Common Stock granted to an individual that do not immediately vest but rather vest over a period of time. During the vesting period, the holder of granted 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. In addition to the Annual Grant (as defined under the section titled Stock Options below), each non-employee director receives 10,000 shares of restricted stock annually, the day after the Company’s annual stockholders’ meeting, which vest 25% at the end of the month in which awarded and the remaining balance vests over the following three quarters.
Restricted stock award activity was as follows for the years presented:
|
|
Shares
|
|
|
Weighted
Average
Price
|
|
Nonvested balance at December 31, 2014
|
|
|
556,194
|
|
|
$
|
5.76
|
|
Granted
|
|
|
825,120
|
|
|
$
|
6.78
|
|
Vested
|
|
|
(493,270
|
)
|
|
$
|
6.18
|
|
Forfeited
|
|
|
(53,819
|
)
|
|
$
|
6.15
|
|
Nonvested balance at December 31, 2015
|
|
|
834,225
|
|
|
$
|
6.49
|
|
Granted
|
|
|
950,340
|
|
|
$
|
3.89
|
|
Vested
|
|
|
(380,218
|
)
|
|
$
|
5.34
|
|
Forfeited
|
|
|
(220,594
|
)
|
|
$
|
5.98
|
|
Nonvested balance at December 31, 2016
|
|
|
1,183,753
|
|
|
$
|
4.87
|
|
Granted
|
|
|
1,530,192
|
|
|
$
|
3.30
|
|
Vested
|
|
|
(1,163,992
|
)
|
|
$
|
4.20
|
|
Forfeited
|
|
|
(184,753
|
)
|
|
$
|
4.98
|
|
Nonvested balance at December 31, 2017
|
|
|
1,365,200
|
|
|
$
|
3.65
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Total fair value of restricted stock awards vested
|
|
$
|
3.8
|
|
|
$
|
1.6
|
|
|
$
|
3.3
|
|
Compensation expense related to restricted stock awards
|
|
$
|
2.3
|
|
|
$
|
4.0
|
|
|
$
|
2.3
|
|
As of December 31, 2017, there remains $3.5 million of unrecognized compensation expense related to restricted stock awards. These costs are expected to be recognized over a weighted average period of 1.7 years. Under ASU No. 2016-09, in 2017 the Company elected to no longer apply a forfeiture rate but to account for forfeitures as incurred. The Company estimated the forfeiture rate at 3% for 2016 and 2015.
47
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Stock Options
Stock option awards may be in the form of incentive or non-qualified options. Stock options are granted with an exercise price per share equal to the fair market value of a share of the common stock on the date of grant, and have a maximum term of 10 years. The stock option terms are set by the Compensation Committee and generally become exercisable over a period of four years. The vesting can begin in equal monthly or quarterly increments over the vesting period.
Each non-employee director, upon commencing service, receives a non-qualified stock option to purchase 50,000 shares of Common Stock that vests ratably over a period of 48 months. Additionally, each non-employee director receives a non-qualified stock option to purchase 10,000 shares of Common Stock, granted annually the day after the Company’s annual stockholders’ meeting (the Annual Grant). Stock options granted to non-employee directors have an exercise price per share equal to the fair market value of a share of Common Stock on the grant date, and are exercisable for up to 10 years.
Option activity was as follows for the years presented:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Fair Value
of Option
Grants
|
|
Outstanding as of December 31, 2014
|
|
|
2,636,596
|
|
|
$
|
7.42
|
|
|
|
6.8
|
|
|
|
|
|
Exercisable as of December 31, 2014
|
|
|
1,582,165
|
|
|
$
|
8.70
|
|
|
|
5.6
|
|
|
|
|
|
Granted
|
|
|
222,625
|
|
|
$
|
6.57
|
|
|
|
|
|
|
$
|
3.55
|
|
Exercised
|
|
|
(59,638
|
)
|
|
$
|
4.76
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(192,166
|
)
|
|
$
|
7.47
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
2,607,417
|
|
|
$
|
7.41
|
|
|
|
6.0
|
|
|
|
|
|
Exercisable as of December 31, 2015
|
|
|
1,967,825
|
|
|
$
|
7.97
|
|
|
|
5.2
|
|
|
|
|
|
Outstanding intrinsic value at December 31, 2015
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable intrinsic value at December 31, 2015
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
115,000
|
|
|
$
|
3.82
|
|
|
|
|
|
|
$
|
1.85
|
|
Exercised
|
|
|
(56,250
|
)
|
|
$
|
4.20
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(74,026
|
)
|
|
$
|
6.13
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
2,592,141
|
|
|
$
|
7.36
|
|
|
|
4.9
|
|
|
|
|
|
Exercisable as of December 31, 2016
|
|
|
2,282,476
|
|
|
$
|
7.61
|
|
|
|
4.5
|
|
|
|
|
|
Outstanding intrinsic value at December 31, 2016
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable intrinsic value at December 31, 2016
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
60,000
|
|
|
$
|
2.55
|
|
|
|
|
|
|
$
|
1.27
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(576,740
|
)
|
|
$
|
11.15
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
|
|
2,075,401
|
|
|
$
|
6.16
|
|
|
|
4.4
|
|
|
|
|
|
Exercisable as of December 31, 2017
|
|
|
2,006,878
|
|
|
$
|
6.21
|
|
|
|
4.3
|
|
|
|
|
|
Outstanding intrinsic value at December 31, 2017
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable intrinsic value at December 31, 2017
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Compensation expense related to option awards
|
|
$
|
0.5
|
|
|
$
|
1.1
|
|
|
$
|
1.7
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Total fair value of stock options vested
|
|
$
|
0.6
|
|
|
$
|
1.1
|
|
|
$
|
1.7
|
|
Intrinsic value of stock options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
0.1
|
|
Proceeds received from option exercises
|
|
|
—
|
|
|
|
0.2
|
|
|
|
0.3
|
|
48
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
As of December 31, 2017, there remained $0.2
million of unrecognized compensation expense related to stock options. These costs are expected to be recognized over a weighted average period of 1.1 years. The Company did not apply a forfeiture rate in 2016 or 2015 as
the impact was negligible
.
The following table summarizes the stock options granted during 2017, 2016, and 2015 by range of exercise price:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Options granted
|
|
|
60,000
|
|
|
|
115,000
|
|
|
|
222,625
|
|
Range of exercise price
|
|
$
|
2.55
|
|
|
$3.57 - $4.40
|
|
|
$6.13 - $6.90
|
|
The vesting schedule for options granted is one of the following: (1) vesting 6.25% quarterly, with the balance vesting ratably over the following 15 quarters, (2) vesting 25% at the end of the month in which awarded and the remaining balance vesting over the following 12 quarters (3) vesting 25% at the end of the month in which awarded and the remaining balance vesting over the following 3 quarters.
The fair value for options granted during 2017, 2016, and 2015 was estimated on the date of grant using a Black Scholes option-pricing model. The Company used the following weighted average assumptions:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rates
|
|
|
1.52
|
%
|
|
|
0.81
|
%
|
|
|
1.03
|
%
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
54
|
%
|
|
|
54
|
%
|
|
|
58
|
%
|
Expected lives
|
|
5.5 years
|
|
|
5.5 years
|
|
|
6.0 years
|
|
Historical Company information is the primary basis for the selection of expected life, expected volatility, and expected dividend yield assumptions. The risk-free interest rate is selected based on the yields from U.S. Treasury Strips with a remaining term equal to the expected term of the options being valued.
Employee Stock Purchase Plan
The ESPP is intended to qualify as an employee stock purchase plan under section 423 of the Internal Revenue Code. We adopted the ESPP in 1999 and amended and restated the ESPP in May 2007 and February 2016. Under the ESPP, eligible employees are permitted to purchase shares of Common Stock at below-market prices. The purchase period opens on the first day and ends on the last business day of each calendar quarter. As of December 31, 2017, there remains 234,389 shares available for issuance under ESPP. The shares of Common Stock issued in respect of employee purchases under the ESPP during 2017, 2016, and 2015, were as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Shares of common stock issued
|
|
|
101,393
|
|
|
|
88,282
|
|
|
|
41,026
|
|
Expense related to ESPP (in thousands)
|
|
$
|
92
|
|
|
$
|
95
|
|
|
$
|
61
|
|
The fair value for ESPP purchases during 2017, 2016, and 2015, was estimated using a Black Scholes model. The Company used the following weighted average assumptions:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rates
|
|
|
0.86
|
%
|
|
|
0.25
|
%
|
|
|
0.01
|
%
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
53
|
%
|
|
|
48
|
%
|
|
|
37
|
%
|
Expected lives
|
|
0.25 years
|
|
|
0.25 years
|
|
|
0.25 years
|
|
49
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
Note
S
even
teen
— Loss Per Share
The following table sets forth the loss per share calculation for the periods presented:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
|
$
|
(16.3
|
)
|
|
$
|
(21.0
|
)
|
|
$
|
(15.7
|
)
|
Dividends related to Series B convertible preferred
stock
(1)
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
Net loss available to common stockholders
|
|
$
|
(16.9
|
)
|
|
$
|
(21.6
|
)
|
|
$
|
(16.3
|
)
|
Per share of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic/diluted net loss available to common stockholders
|
|
$
|
(0.56
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(0.70
|
)
|
Weighted average shares outstanding (basic and diluted)
(in millions)
|
|
|
30.45
|
|
|
|
25.21
|
|
|
|
23.26
|
|
Currently anti-dilutive common stock equivalents
(2)
(in millions)
|
|
|
1.56
|
|
|
|
1.73
|
|
|
|
2.21
|
|
(1)
|
Dividends on 7% Series B convertible preferred stock (Series B stock) are cumulative and have been accrued from July 1, 2012 to December 31, 2017. The total accrued dividends are $3.2 million as of December 31, 2017, which will continue to be accrued until they are declared by the board of directors.
Dividends related to Series B convertible preferred stock were accrued but not paid during 2017, 2016 and 2015
.
|
(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 Eighteen — 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:
|
|
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
|
|
|
|
December 31, 2016
|
|
|
|
Carrying
value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents - money market fund
|
|
$
|
12.1
|
|
|
$
|
12.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Warrant liability
|
|
|
0.8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.8
|
|
50
MATTERSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
The following table represents the activity in the Company’s Level 3 warrants during the years ended:
(In millions)
|
|
Amount
|
|
Level 3 warrants, ending balance at December 31, 2014
|
|
$
|
0.4
|
|
Change in fair value of warrant liability
|
|
|
—
|
|
Warrant exercise
|
|
|
(0.4
|
)
|
Level 3 warrants, ending balance at December 31, 2015
|
|
|
—
|
|
Addition - Hercules warrants, initial fair value
|
|
|
0.9
|
|
Change in fair value of warrant liability
|
|
|
(0.1
|
)
|
Level 3 warrants, ending balance at December 31, 2016
|
|
|
0.8
|
|
Change in fair value of warrant liability
|
|
|
(0.4
|
)
|
Level 3 warrants, ending balance at December 31, 2017
|
|
$
|
0.4
|
|
The carrying values of other cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximated their fair values as of December 31, 2017 and December 31, 2016 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 December 31, 2017, management used a risk free rate of
2.24%, expected volatility of 53%, and an expected term of 5.59 years. Significant increases or decreases in any of these inputs in isolation would result in a significantly different fair value (see Note Nine –Other Current Liabilities).
The fair value of long-term debt was estimated to be $17.1 million at December 31, 2017.
There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 during 2017. There were no assets or liabilities valued at fair value on a nonrecurring basis during 2017.
Note Nineteen — Quarterly Data (Unaudited)
|
|
2017
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Year
|
|
Total revenue
|
|
$
|
11.0
|
|
|
$
|
10.6
|
|
|
$
|
11.3
|
|
|
$
|
13.6
|
|
|
$
|
46.5
|
|
Gross margin
|
|
$
|
7.5
|
|
|
$
|
7.2
|
|
|
$
|
8.2
|
|
|
$
|
10.1
|
|
|
$
|
33.0
|
|
Operating loss
|
|
$
|
(4.0
|
)
|
|
$
|
(4.2
|
)
|
|
$
|
(2.7
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(12.2
|
)
|
Loss before income taxes
|
|
$
|
(4.9
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
(16.4
|
)
|
Net loss available to common stockholders
|
|
$
|
(5.1
|
)
|
|
$
|
(6.9
|
)
|
|
$
|
(3.2
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
(16.9
|
)
|
Per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss available to common stockholders
|
|
$
|
(0.19
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.56
|
)
|
Diluted net loss available to common stockholders
|
|
$
|
(0.19
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.56
|
)
|
|
|
2016
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Year
|
|
Total revenue
|
|
$
|
10.0
|
|
|
$
|
9.1
|
|
|
$
|
10.4
|
|
|
$
|
12.6
|
|
|
$
|
42.1
|
|
Gross margin
|
|
$
|
6.8
|
|
|
$
|
5.9
|
|
|
$
|
7.0
|
|
|
$
|
8.6
|
|
|
$
|
28.3
|
|
Operating loss
|
|
$
|
(5.6
|
)
|
|
$
|
(6.0
|
)
|
|
$
|
(5.0
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
(18.8
|
)
|
Loss before income taxes
|
|
$
|
(5.8
|
)
|
|
$
|
(6.2
|
)
|
|
$
|
(5.8
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
(20.9
|
)
|
Net loss available to common stockholders
|
|
$
|
(6.0
|
)
|
|
$
|
(6.3
|
)
|
|
$
|
(6.0
|
)
|
|
$
|
(3.3
|
)
|
|
$
|
(21.6
|
)
|
Per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss available to common stockholders
|
|
$
|
(0.24
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.86
|
)
|
Diluted net loss available to common stockholders
|
|
$
|
(0.24
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.86
|
)
|
51