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EX-32.1 - EX-32.1 - Mattersight Corpmatr-ex321_8.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                    TO                    

Commission File Number 0-27975

 

Mattersight Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

36-4304577

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

200 W. Madison Street

Suite 3100

Chicago, Illinois 60606

(Address of Principal Executive Offices) (Zip Code)

(877) 235-6925

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the registrant’s common stock outstanding as of April 28, 2017 was 32,685,522.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 


 

Part I. Financial Information

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not historical facts are “forward-looking statements” and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements, which may be identified by use of words such as “plan,” “may,” “might,” “believe,” “expect,” “intend,” “could,” “would,” “should,” and other words and terms of similar meaning, in connection with any discussion of our prospects, financial statements, business, financial condition, revenues, results of operations, or liquidity, involve risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In addition to other factors and matters contained or incorporated in this document, important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements include, without limitation, those noted under “Risk Factors” included in Part I Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, as well as the following:

 

Uncertainties associated with the attraction of, and the ability to execute contracts with, new clients, the continuation of existing, and execution of new, engagements with existing clients, the conversion of free pilots to paid subscription contracts, and the timing of related client commitments;

 

Reliance on a relatively small number of clients for a significant percentage of our revenue;

 

Risks involving the variability and predictability of the number, size, scope, cost, and duration of, and revenue from, client engagements;

 

Management of the other risks associated with complex client projects and new service offerings, including execution risk; and

 

Management of growth and development of, and introduction of, new service offerings.

We cannot guarantee any future results, levels of activity, performance, or achievements. The statements made in this Quarterly Report on Form 10-Q represent our views as of the date of this report, and it should not be assumed that the statements made in this report remain accurate as of any future date. Moreover, we assume no obligation to update forward-looking statements, except as may be required by law. In light of Regulation FD, it is our policy not to comment on earnings, financial guidance, or operations other than through press releases, publicly announced conference calls, or other means that will constitute public disclosure for purposes of Regulation FD.

 

 

 

 


 

Item 1. Financial Statements

MATTERSIGHT CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share and per share data)

 

 

 

March 31,

2017

 

 

December 31,

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,523

 

 

$

12,538

 

Receivables net of allowances of $308 and $311, respectively

 

 

9,565

 

 

 

8,508

 

Prepaid expenses

 

 

5,659

 

 

 

4,440

 

Other current assets

 

 

80

 

 

 

296

 

Total current assets

 

 

37,827

 

 

 

25,782

 

Equipment and leasehold improvements, net of accumulated depreciation and

   amortization of $21,151 and $19,748, respectively

 

 

10,810

 

 

 

9,576

 

Goodwill

 

 

972

 

 

 

972

 

Intangible assets, net of amortization of $3,940 and $3,820, respectively

 

 

3,138

 

 

 

3,201

 

Other long-term assets (includes $3,983 and $4,210 of restricted cash at March 31, 2017

   and December 31, 2016, respectively)

 

 

5,786

 

 

 

6,033

 

Total assets

 

$

58,533

 

 

$

45,564

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Short-term debt

 

$

2,740

 

 

$

738

 

Accounts payable

 

 

2,214

 

 

 

1,835

 

Accrued compensation and related costs

 

 

3,206

 

 

 

2,302

 

Unearned revenue

 

 

4,804

 

 

 

4,911

 

Capital leases

 

 

2,301

 

 

 

1,982

 

Other current liabilities

 

 

4,540

 

 

 

3,374

 

Total current liabilities

 

 

19,805

 

 

 

15,142

 

Long-term debt

 

 

19,089

 

 

 

20,839

 

Long-term unearned revenue

 

 

617

 

 

 

757

 

Long-term capital leases

 

 

2,069

 

 

 

1,602

 

Other long-term liabilities

 

 

5,771

 

 

 

5,945

 

Total liabilities

 

 

47,351

 

 

 

44,285

 

7% Series B convertible preferred stock, $0.01 par value; 5,000,000 shares authorized and

   designated; 1,637,948 and 1,637,948 shares issued and outstanding at March 31,

   2017 and December 31, 2016, respectively, with a liquidation preference of $11,131

   and $10,985, at March 31, 2017 and December 31, 2016, respectively

 

 

8,354

 

 

 

8,354

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 35,000,000 shares authorized; none issued

 

 

 

 

 

 

Common stock, $0.01 par value; 50,000,000 shares authorized; 32,733,943 and

   27,511,361 shares issued at March 31, 2017 and December 31, 2016,

   respectively; 32,459,995 and 26,622,706 shares outstanding at March 31, 2017

   and December 31, 2016, respectively

 

 

327

 

 

 

275

 

Additional paid-in capital

 

 

275,729

 

 

 

264,214

 

Accumulated deficit

 

 

(268,057

)

 

 

(263,062

)

Treasury stock, at cost, 273,948 and 888,655 shares at March 31, 2017 and

   December 31, 2016, respectively

 

 

(1,105

)

 

 

(4,455

)

Accumulated other comprehensive loss

 

 

(4,066

)

 

 

(4,047

)

Total stockholders’ equity (deficit)

 

 

2,828

 

 

 

(7,075

)

Total liabilities and stockholders’ equity

 

$

58,533

 

 

$

45,564

 

 

See accompanying notes to the Unaudited Consolidated Financial Statements.

 

1


 

MATTERSIGHT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share data)

 

 

 

Quarter Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

Subscription revenue

 

$

10,343

 

 

$

9,222

 

Other revenue

 

 

616

 

 

 

831

 

Total revenue

 

 

10,959

 

 

 

10,053

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of subscription revenue

 

 

2,718

 

 

 

2,480

 

Cost of other revenue

 

 

721

 

 

 

766

 

Total cost of revenue, exclusive of depreciation and amortization

 

 

3,439

 

 

 

3,246

 

Product development

 

 

3,321

 

 

 

3,250

 

Sales and marketing

 

 

3,450

 

 

 

4,630

 

General and administrative

 

 

3,295

 

 

 

3,167

 

Depreciation and amortization

 

 

1,545

 

 

 

1,400

 

Total operating expenses

 

 

15,050

 

 

 

15,693

 

Operating loss

 

 

(4,091

)

 

 

(5,640

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

Interest and other borrowing costs

 

 

(969

)

 

 

(181

)

Change in fair value of warrant liability

 

 

97

 

 

 

 

Other non-operating income

 

 

10

 

 

 

10

 

Total non-operating income (expense)

 

 

(862

)

 

 

(171

)

Loss before income taxes

 

 

(4,953

)

 

 

(5,811

)

Income tax benefit (provision)

 

 

1

 

 

 

(10

)

Net loss

 

 

(4,952

)

 

 

(5,821

)

Dividends related to 7% Series B convertible preferred stock

 

 

(146

)

 

 

(143

)

Net loss available to common stockholders

 

$

(5,098

)

 

$

(5,964

)

Per share of common stock:

 

 

 

 

 

 

 

 

Basic net loss available to common stockholders

 

$

(0.19

)

 

$

(0.24

)

Diluted net loss available to common stockholders

 

$

(0.19

)

 

$

(0.24

)

Shares used to calculate basic net loss per share

 

 

27,423

 

 

 

25,064

 

Shares used to calculate diluted net loss per share

 

 

27,423

 

 

 

25,064

 

Stock-based compensation expense is included in individual line items above:

 

 

 

 

 

 

 

 

Total cost of revenue

 

$

81

 

 

$

74

 

Product development

 

 

134

 

 

 

329

 

Sales and marketing

 

 

123

 

 

 

479

 

General and administrative

 

 

354

 

 

 

743

 

 

See accompanying notes to the Unaudited Consolidated Financial Statements.

 

 

2


 

MATTERSIGHT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited and in thousands)

 

 

 

Quarter Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net loss

 

$

(4,952

)

 

$

(5,821

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Effect of foreign currency translation

 

 

(19

)

 

 

(3

)

Comprehensive net loss

 

$

(4,971

)

 

$

(5,824

)

 

See accompanying notes to the Unaudited Consolidated Financial Statements.

 

 

3


 

MATTERSIGHT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

 

 

Quarter Ended

 

 

 

March 31,

2017

 

 

March 31,

2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,952

)

 

$

(5,821

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,545

 

 

 

1,400

 

Stock-based compensation

 

 

692

 

 

 

1,625

 

Discount accretion and other debt-related costs

 

 

271

 

 

 

Provision for uncollectible accounts

 

 

(3

)

 

 

33

 

Change in fair value of warrant liability

 

 

(97

)

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(1,054

)

 

 

(2,279

)

Prepaid expenses

 

 

(246

)

 

 

(574

)

Other current assets

 

 

214

 

 

 

5

 

Other long-term assets

 

 

19

 

 

 

232

 

Accounts payable

 

 

(142

)

 

 

(73

)

Accrued compensation and related costs

 

 

904

 

 

 

513

 

Unearned revenue

 

 

(247

)

 

 

(735

)

Other current liabilities

 

 

38

 

 

 

55

 

Other long-term liabilities

 

 

(130

)

 

 

246

 

Total adjustments

 

 

1,764

 

 

 

448

 

Net cash used in operating activities

 

 

(3,188

)

 

 

(5,373

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(659

)

 

 

(339

)

Investment in intangible assets

 

 

 

 

(228

)

Net cash used in investing activities

 

 

(659

)

 

 

(567

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from term loan

 

 

 

 

6,000

 

Repayments of other borrowings

 

 

(219

)

 

 

 

Proceeds from issuance of common stock, net of costs

 

 

14,904

 

 

 

 

Cash paid to satisfy tax withholding upon vesting of employee stock awards

 

 

(537

)

 

 

(134

)

Principal payments on capital lease obligations

 

 

(592

)

 

 

(322

)

Proceeds from employee stock purchase plan

 

 

68

 

 

 

37

 

Proceeds from line of credit

 

 

 

 

9,200

 

7% Series B convertible preferred stock dividend

 

 

 

 

(3

)

Proceeds from exercise of stock options

 

 

 

 

277

 

Fees paid for issuance of term loan

 

 

 

 

(60

)

Net cash provided by financing activities

 

 

13,624

 

 

 

14,995

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(19

)

 

 

(1

)

Increase in total cash

 

 

9,758

 

 

 

9,054

 

Cash and cash equivalents

 

 

12,538

 

 

 

15,407

 

Restricted cash (included in Other long-term assets)

 

 

4,210

 

 

 

Total cash, beginning of period

 

 

16,748

 

 

 

15,407

 

Cash and cash equivalents

 

 

22,523

 

 

 

24,461

 

Restricted cash (included in Other long-term assets)

 

 

3,983

 

 

 

Total cash, end of period

 

$

26,506

 

 

$

24,461

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Capital lease obligations incurred

 

$

1,378

 

 

$

958

 

Capital equipment purchased on credit

 

 

1,378

 

 

 

958

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

532

 

 

$

103

 

 

See accompanying notes to the Unaudited Consolidated Financial Statements.

 

 

4


 

MATTERSIGHT CORPORATION

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, 2017 and December 31, 2016 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, 2017, the company adopted Accounting Standards Update (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. The company has updated its presentation of restricted cash in the statements of cash flow for all periods presented.     

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 2016-19, 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. As of March 31, 2017, all deferred tax assets and liabilities have been 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.

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, 2016 filed with the Securities and Exchange Commission (SEC) on March 16, 2017.

 

 

Note Two — Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (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 its option to adopt the standard at its December 31, 2017 testing date.

In August 2016, the FASB issued ASU No 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, which applies to all entities that are required to present a statement of cash flows under Topic 230. ASU 2016-15 addresses the presentation and classification of cash flows related to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for public business entities for periods beginning after December 15, 2017. The company is currently evaluating the impact of this update on its consolidated financial statements.

5


 

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.

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. Based on its preliminary assessment, the company generally does not expect a significant change in revenue recognition when ASU 2014-09 is adopted. The company will be putting additional processes and controls in place to enable compliance with ASU 2014-09’s disclosure requirements.

 

 

Note Three Current Prepaid Expenses

Current prepaid expenses primarily consist of deferred 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.  

Current prepaid expenses consisted of the following:

 

(In millions)

 

March 31,

2017

 

 

December 31,

2016

 

Deferred costs

 

$

1.8

 

 

$

1.7

 

Prepaid commissions

 

 

1.4

 

 

 

1.2

 

Prepaid equipment and software maintenance

 

 

1.1

 

 

 

1.4

 

Other

 

 

1.4

 

 

 

0.1

 

Total

 

$

5.7

 

 

$

4.4

 

 

 

Note Four Other Long-Term Assets

Other long-term assets includes the long-term portion of deferred costs, prepaid commissions related to Behavioral Analytics, and restricted cash.  Restricted cash represents cash used to collateralize certain letters of credit issued to support the company’s equipment leasing activities. These costs are recognized over the terms of the respective contracts, generally one to three years. 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,

2017

 

 

December 31,

2016

 

Restricted cash

 

$

4.0

 

 

$

4.2

 

Deferred costs

 

 

0.6

 

 

 

0.6

 

Other prepaid expenses

 

 

0.6

 

 

 

0.6

 

Prepaid commissions

 

 

0.5

 

 

 

0.5

 

Other

 

 

0.1

 

 

 

0.1

 

Total

 

$

5.8

 

 

$

6.0

 

 

 

6


 

Note Five — Other Current Liabilities

Other current liabilities consisted of the following:

 

(In millions)

 

March 31,

2017

 

 

December 31,

2016

 

Accrued vendor payable

 

$

2.8

 

 

$

1.9

 

Warrant liability

 

 

0.7

 

 

 

0.8

 

Deferred rent liability

 

 

0.5

 

 

 

0.4

 

Other

 

 

0.5

 

 

 

0.3

 

Total

 

$

4.5

 

 

$

3.4

 

 

On August 1, 2016, the company entered into a secured loan agreement with Hercules Capital, Inc., as agent and lender (Hercules). See Note Seven – Debt. Concurrent with the loan agreement, the company issued a warrant to Hercules that gives Hercules the right to purchase shares of the company’s common stock at $3.50 per share. Initially, the warrant is exercisable for 357,142 shares of common stock.  If the company borrows the entire third tranche of $5.0 million available under the loan agreement, the warrant will be exercisable for 428,570 shares of common stock. The warrant expires on August 1, 2023. The warrant is accounted for as a liability and carried at fair market value using the Black-Scholes model. Upon issuance, the Black-Scholes fair value was determined using a risk-free rate of 1.33%, expected volatility of 53% and an expected term of 7 years. The warrant liability is revalued on a quarterly basis. Changes in the warrant’s fair market value are recognized in non-operating income (expense) in the consolidated statements of operations.    

 

 

Note Six — 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 $7.6 million and $6.5 million at March 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.    

As of March 31, 2017, the future minimum lease payments due under capital leases are expected to be as follows: 

 

(In millions)

 

 

 

 

Year

 

Amount

 

Remainder of 2017

 

$

2.3

 

2018

 

 

2.1

 

2019

 

 

0.9

 

2020

 

 

0.1

 

Total minimum lease payments

 

$

5.4

 

Less: estimated executory costs

 

 

Net minimum lease payments

 

$

5.4

 

Other Less: amount representing interest

 

 

(1.0

)

Present value of minimum lease payments

 

$

4.4

 

 

 

Note Seven — Debt

On August 1, 2016, the company entered into a secured loan agreement with Hercules. The agreement, which matures on February 1, 2020, allows the company to borrow up to $30.0 million in three tranches. On August 1, 2016, the company borrowed $22.5 million.  The second tranche of up to $2.5 million will become available starting July 1, 2017 and continuing until September 15, 2017, contingent on the company meeting certain financial milestones. The third tranche of up to $5.0 million will become available starting September 15, 2017 and continuing until September 15, 2018, contingent on meeting certain financial milestones, a portion of which will be mutually determined by the company and Hercules and will be subject to approval by Hercules.

7


 

The annual interest rate is equal to the greater of (i) 9.75% plus the prime rate minus 3.50% or (ii) 9.75%.  Additionally, the principal balance will bear compounding payment-in-kind interest at an annual rate of 2.15%. Monthly payments are interest only until December 1, 2017, subject to extension until March 1, 2018 or June 1, 2018 depending on whether certain financial milestones are met. After the interest-only period, principal and interest will be due in equal monthly payments. The company may prepay all, but not a portion, of the loan.  A prepayment charge of 3.0%, 2.0% or 1.0% of the outstanding balance would be due in year one, in year two, or after year two, respectively.

Initially, the agreement’s covenants require the company (i) to achieve at least 80% of its trailing 6 month projected subscription revenues and (ii) to maintain at least $7.5 million in unrestricted cash. After the company achieves two consecutive quarters of earnings before interest, taxes, and depreciation and amortization of at least $1.0 million, the minimum requirement for unrestricted cash will decrease to $6.0 million. The agreement is secured by substantially all of the company’s assets, including its intellectual property.

Prior to entering into the secured loan agreement with Hercules, the company was party to a credit facility and term loan with Silicon Valley Bank. The credit facility and term loan were terminated on August 1, 2016. The company used a portion of the proceeds from the Hercules secured loan agreement to repay its $6.0 million term loan with Silicon Valley Bank and to pay borrowing-related fees and expenses.  The company expects to use the remaining proceeds and any future borrowings under the Hercules secured loan agreement for general corporate purposes.

In 2016, the company entered into financing agreements to furnish its new facility in Austin, Texas.

 

Debt consisted of the following:

 

(In millions)

 

March 31,

2017

 

 

December 31,

2016

 

Hercules loan due February 1, 2020, effective

   rate of 14.57% and 14.50% at March 31, 2017 and

   December 31, 2016, respectively

 

$

22.5

 

 

$

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)

 

$

22.8

 

 

$

22.8

 

 

(1)

The current portion of the principal due was $2.7 million and $0.7 million at March 31, 2017 and December 31, 2016, respectively.

The balance of long-term debt in the consolidated balance sheet at March 31, 2017 includes $0.6 million of unamortized debt costs and $0.7 million of unaccreted debt discount offset by $0.3 million accrued principal-in-kind.

Debt maturities were as follows as of March 31, 2017:

 

(In millions)

 

 

 

 

Year

 

Amount

 

Remainder of 2017

 

$

0.7

 

2018

 

 

8.4

 

2019

 

 

9.2

 

2020

 

 

4.5

 

2021

 

 

Thereafter

 

 

 

 

 

 

8


 

Note Eight — Other Long-Term Liabilities

Other long-term liabilities consisted of the following:

 

(In millions)

 

March 31,

2017

 

 

December 31,

2016

 

7% Series B convertible preferred stock dividend payable

 

$

2.8

 

 

$

2.6

 

Deferred rent liability

 

 

2.2

 

 

 

2.2

 

Intellectual property purchase liability

 

 

0.6

 

 

 

0.8

 

Deferred tax liability

 

 

0.2

 

 

 

0.3

 

Total

 

$

5.8

 

 

$

5.9

 

 

 

Note Nine — 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.

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, 2017.

The Company’s products may be subject to sales tax in certain jurisdictions. If a taxing 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 less than $0.1 million at March 31, 2017.

 

 

Note Ten — Capital Stock

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 $14.9 million. Proceeds are being used for general corporate and working capital purposes.  Craig-Hallum Capital Group LLC, which acted as the sole placement agent for the offering, received a commission of $1.1 million, and will be 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.          

The Company’s ability to utilize its net operating losses (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

9


 

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 as of December 31, 2016 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 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, 2017 were as follows:

 

Description

 

Grant Date

 

Shares

 

 

Vesting Schedule

Grants to employees

 

1/23/2017

 

 

58,000

 

 

100% on January 31, 2017.

Grants to employees

 

2/8/2017

 

 

316,786

 

 

50% on February 28, 2019, then 6.25% quarterly thereafter.

Grants to employees

 

2/8/2017

 

 

60,595

 

 

100% on February 28, 2018.

Grants to employees

 

2/8/2017

 

 

305,000

 

 

One-twelfth beginning May 31, 2017, then quarterly thereafter.

Grants to employees

 

2/8/2017

 

 

21,592

 

 

25% on February 28, 2017, then 6.25% quarterly thereafter.

Grants to employees

 

2/8/2017

 

 

3,200

 

 

100% on February 8, 2017.

Total

 

 

 

 

765,173

 

 

 

 

Restricted stock award activity was as follows for the quarter ended March 31, 2017:

 

 

 

Shares

 

 

Weighted

Average

Price

 

Unvested balance at December 31, 2016

 

 

1,183,753

 

 

$

4.87

 

Granted

 

 

765,173

 

 

$

3.54

 

Vested

 

 

(485,802

)

 

$

3.62

 

Forfeited

 

 

(128,322

)

 

$

5.09

 

Unvested balance at March 31, 2017

 

 

1,334,802

 

 

$

4.10

 

 

 

 

Note Twelve — Loss Per Share

The following table presents the loss per share calculation for the periods presented:

 

 

 

Quarter Ended

 

(In millions)

 

March 31,

2017

 

 

March 31,

2016

 

Net loss

 

$

(5.0

)

 

$

(5.8

)

Dividends related to 7% Series B convertible preferred stock(1)

 

 

(0.1

)

 

 

(0.2

)

Net loss available to common stockholders

 

$

(5.1

)

 

$

(6.0

)

Per share of common stock:

 

 

 

 

 

 

 

 

Basic/diluted net loss available to common stockholders

 

$

(0.19

)

 

$

(0.24

)

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

Weighted average shares outstanding (basic and diluted)

 

 

27,423

 

 

 

25,064

 

Anti-dilutive common stock equivalents(2)

 

 

2,200

 

 

 

1,832

 

 

(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, 2017. The total accrued dividends are $2.8 million as of March 31, 2017, which will continue to be accrued until

10


 

they are declared by the company’s board of directors. Dividends related to Series B stock were accrued but not paid during 2017 or 2016.   

(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, 2017

 

(In millions)

 

Carrying value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash and cash equivalents -  money market fund

 

$

22.0

 

 

$

22.0

 

 

$

 

 

$

 

Warrant liability

 

 

0.7

 

 

 

 

 

 

 

 

 

0.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximated their fair values as of March 31, 2017 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, 2017, management used a risk free rate of 2.12%, expected volatility of 53%, and an expected term of 6.34 years. Initially, the warrant is exercisable for 357,142 shares of common stock.  If the company borrows the entire third tranche of $5.0 million available under the Hercules secured loan agreement, the warrant will be exercisable for 428,570 shares of common stock (See Note 5 – Other Current Liabilities). As of March 31, 2017, a probability of 0% was assigned to a draw of the third tranche. Significant increases or decreases in any of these inputs in isolation would result in a significantly different fair value.

 

Fair values for assets and liabilities that are only disclosed and not recorded consist of long-term debt. The fair value of long-term debt was estimated to be $22.8 million at March 31, 2017.

There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 during the first quarter of 2017. There were no assets or liabilities valued at fair value on a nonrecurring basis during the first quarter of 2017.

 

 

11


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is provided as a supplement to, and should be read in conjunction with, the accompanying unaudited consolidated financial statements and notes in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016.

Background

Mattersight Corporation and its subsidiaries (collectively, we, us, or ours) 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), we analyze and predict 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. Our analytics are based on millions of proprietary algorithms and the application of unique behavioral models. Our 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.

Our 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, our Behavioral Analytics offerings enable our 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 our Behavioral Analytics offerings, we help 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.

Our mission is to help brands have more effective and effortless conversations with their customers. Using a suite of innovative personality-based software applications, we can analyze and predict customer behavior based on the language exchanged during service and sales interactions. We operate a highly scalable, flexible, and adaptive application platform to enable clients to implement and operate these applications.

12


 

Business Metrics

We regularly review our business metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections, and make strategic decisions.

ACV Bookings.  We estimate annual contract value (ACV) of bookings as equal to the projected subscription and other billings for new customer contracts executed in the quarter, realized growth on existing customer accounts beyond the original booking, and committed future growth. We regularly review ACV bookings on a rolling four quarter basis and also review the percentage of ACV bookings generated by new customers. We use this to measure the effectiveness of our sales and marketing investments and as an indicator of potential future billings.  

Backlog.  We calculate backlog as the ACV of bookings for which we have not yet deployed our services to the customer.  We use this to measure the average time to deploy our bookings and as an indicator of potential future billings.

Gross Margin.  We calculate gross margin as the difference between our total revenue and the total cost of revenue, divided by total revenue, expressed as a percentage. We use this to measure the efficiency of our service delivery organization.

Performance Highlights

The following table presents our key metrics for the periods presented:

 

 

 

Quarter Ended

 

(Dollars in millions)

 

March 31,

2017

 

 

March 31,

2016

 

ACV bookings

 

$

3.5

 

 

$

5.4

 

Rolling four quarters ACV bookings

 

$

19.0

 

 

$

25.1

 

Backlog

 

$

14.5

 

 

$

17.9

 

Gross margin

 

 

69

%

 

 

68

%

 

Business Outlook

Based on research from third-party analysts, we believe the call center industry is ripe for disruption and innovation. We believe what the call center was designed to accomplish and how it was measured are parts of an outdated mode of business that is disconnected from the needs of today’s consumer. In fact, research from the Corporate Executive Board suggests that any call center interaction is four times more likely to drive customer disloyalty than increased loyalty. Given a rise in self-service, these interactions are only becoming more complex and fraught with greater risk.

Through our product offerings, we seek to provide our clients with personality-based software applications that mitigate the complexity and reduce the risk of these call center interactions. According to Gartner, Inc., there were six million call center seats in North America in 2015, and less than 1% of this market is penetrated by personality-based software applications. We believe that we are uniquely positioned to capitalize on this opportunity. Our strategy to increase revenue and capture market share includes the following elements:

 

Drive new bookings growth and increase operating leverage;

 

Leverage a “land and expand” model, focused on personality-based routing as the catalyst for new client acquisition;

 

Cross-sell coaching, quality assurance, and analytic products after delivering a routing solution;

 

Continue to invest in innovative linguistic models and behavioral science;

 

Expand our sales and marketing capacity; and

 

Test the applicability of our proprietary personality-based software applications with clients outside of the call center industry.

Our personality-based software applications, which have been developed through substantial investment over the past decade, are deeply embedded into our clients’ infrastructure and workflows. Our long-term client relationships are made up largely of multi-year contracts with high contract renewal rates. Our aspiration is that our “land and expand” model, focused on our routing product, will continue to accelerate the acquisition of new clients.

13


 

Results of Operations

 

 

 

Quarter Ended

 

(Dollars in millions)

 

2017

 

 

2016

 

 

Change

 

Total revenue

 

$

11.0

 

 

$

10.1

 

 

 

9

%

Total cost of revenue, exclusive of depreciation and

   amortization

 

 

3.4

 

 

 

3.2

 

 

 

6

%

Other operating expenses

 

 

11.6

 

 

 

12.4

 

 

 

-7

%

Operating loss

 

 

4.1

 

 

 

5.6

 

 

 

-27

%

Non-operating expenses

 

 

0.9

 

 

 

0.2

 

 

 

404

%

Net loss

 

 

5.0

 

 

 

5.8

 

 

 

-15

%

 

First Quarter of 2017 Compared with First Quarter of 2016

Revenue

Total revenue increased by $0.9 million, or 9%, in the first quarter of 2017 when compared with the same period in 2016. The increase consisted of a $1.1 million increase in subscription revenue offset by a $0.2 million decrease in other revenue. Subscription revenue increased primarily due to $1.1 million from growth within existing client contracts and $0.4 million from new client contracts, partially offset by a decrease of $0.4 million from terminating contracts. Other revenue decreased primarily due to reduced recognition of deployment fees. Deployment fees are deferred and recognized over the contract’s subscription period beginning on the go-live date. If a contract terminates early, remaining deferred deployment revenue is recognized upon termination.

Our top five clients accounted for 77% of total revenue in 2017 and 71% of total revenue in 2016. Our top ten clients accounted for 91% of total revenue in 2017 and 89% of total revenue in 2016. In both the first quarter of 2017 and 2016, three clients each accounted for 10% or more of total revenue. In 2017, United HealthCare Services, Inc., CVS Caremark Corporation, and Tri-West accounted for 33%, 17%, and 15% of total revenue, respectively. In 2016, United HealthCare Services, Inc., CVS Caremark Corporation, and Progressive Casualty Insurance Company accounted for 33%, 15%, and 12% of total revenue, respectively. Higher concentration of revenue with a single client or a limited group of clients creates increased revenue risk if one of these clients significantly reduces its demand for our services.

Total Cost of Revenue, Exclusive of Depreciation and Amortization

Total costs of revenue consisted of $2.7 million of subscription revenue costs and $0.7 million of other revenue costs in the first quarter of 2017. Cost of subscription revenue was $2.7 million, or 26% of subscription revenue, in 2017, when compared with $2.5 million, or 27% of subscription revenue, in 2016. The $0.2 million increase in cost was primarily due to incremental personnel costs.

Other Operating Expenses

Other operating expenses include product development, sales and marketing, general and administrative, and depreciation and amortization. Other operating expenses decreased in the first quarter of 2017 when compared with the same period in 2016 primarily as a result of a $1.2 million decrease in sales and marketing expenses.

Sales and marketing expenses consist primarily of salaries, incentive compensation, commissions, and employee benefits for business development, account management, and marketing. Sales and marketing expenses decreased $1.2 million in the first quarter of 2017 when compared with the same period in 2016. The decrease was primarily due to a reduction in headcount.

Depreciation and amortization increased $0.1 million in the first quarter of 2017 when compared with the same period in 2016. The rise in expense resulted primarily from increased investments in technology.

Non-Operating Expenses

Non-operating expenses consist primarily of interest and other borrowing costs, changes in the fair value of the warrant liability and other non-operating income.

Interest and other borrowing costs increased $0.8 million in the first quarter of 2017 when compared with the same period in 2016, primarily as a result of interest on the term loan with Hercules Capital, Inc. (Hercules) which originated on August 1, 2016.

14


 

Income Tax Provision

Net deferred tax assets consist primarily of U.S. and non-U.S. net operating losses. Due to uncertainty in predicting when we will achieve the profitability required to utilize our operating losses, we have recognized a valuation allowance for the full amount of our net deferred tax assets.

The income tax benefit (provision) was less than $0.1 million in the first quarter in both 2017 and 2016, respectively. As of March 31, 2017 and 2016, total net deferred tax assets of approximately $85.5 million and $77.8 million, respectively, were fully offset by a valuation allowance.

Liquidity and Capital Resources

 

Sources and Uses of Cash  

Our principal capital requirements are to fund working capital needs, capital expenditures for Behavioral Analytics and infrastructure requirements, and other revenue generation and growth investments. Our principal capital resources consisted of cash and cash equivalents of $22.5 million and $12.5 million at March 31, 2017 and December 31, 2016, respectively.

Net cash used in operating activities decreased by $2.2 million in the first quarter of 2017 when compared with the same period in 2016. The decrease in net cash used in operating activities was largely attributable to an increase in revenue from new customers and lower sales and marketing expenses resulting from a reduction in headcount. Cash used in investing activities was flat in comparison with 2016. Net cash provided by financing activities decreased by $1.4 million. During the first quarter of 2017, we received net cash proceeds of $14.9 million, net of fees from the sale of 5,328,187 shares of common stock pursuant to a private placement of common stock. During the first quarter of 2016, net cash proceeds of $15.0 million were primarily attributable to proceeds of $15.2 million, from our amended credit facility with Silicon Valley Bank, which included (i) $9.2 million from our line of credit and (ii) $6.0 million from our term loan.

Historically, we have not paid cash dividends on our common stock, and we do not expect to do so in the future. Our 7% Series B convertible preferred stock (Series B stock) accrues dividends at a rate of 7% per year, payable semi-annually in January and July if declared by our board of directors. If not declared, unpaid dividends are cumulative and accrue at the rate of 7% per year. The board of directors has not declared a dividend payment on the Series B stock, which has been accrued, from July 1, 2012 through March 31, 2017 (the aggregate amount of these dividends was approximately $2.8 million). Payment of future dividends on the Series B stock will be determined by the board of directors based on our business outlook and macroeconomic conditions and is subject to approval by Hercules under the terms of our secured loan agreement. The amount of each dividend accrual will be decreased by any conversions of the Series B stock into common stock, as such conversions require us to pay accrued but unpaid dividends at the time of conversion. Conversions of Series B stock are at the option of the holder.

Liquidity

As of March 31, 2017, our near-term capital resources consisted of our current cash balance, together with anticipated future cash flows, financing from capital leases, and borrowing capacity (see Credit Facility below). Our balance of cash and cash equivalents was $22.5 million as of March 31, 2017. Restricted cash of $4.0 million was used as collateral for letters of credit issued to support our equipment leasing activities.

We anticipate that our current unrestricted cash resources, together with operating revenue, capital lease financing, and borrowing capacity, should be sufficient to satisfy our short-term working capital and capital expenditure needs for the next twelve months. Management will continue to assess opportunities to maximize cash resources by actively managing our cost structure and closely monitoring the collection of our accounts receivable. If, however, our operating activities, capital expenditure requirements, or net cash needs differ materially from current expectations due to uncertainties surrounding the current capital market, credit and general economic conditions, competition, or the termination of a large client contract, then there is no assurance that we would have access to additional external capital resources on acceptable terms.

Credit Facility

On August 1, 2016, we entered into a secured loan agreement with Hercules under which we may borrow up to $30.0 million in three tranches.  On August 1, 2016, we borrowed the first tranche of $22.5 million and paid a facility charge of $250,000.  The second tranche of up to $2.5 million is available beginning July 1, 2017 and continuing until September 15, 2017, provided that specified conditions are satisfied, including that we have achieved at least 85% of projected bookings and revenues for the six month period ending June 30, 2017.  The third tranche of up to $5.0 million is available beginning on September 15, 2017 and continuing until September 15, 2018, provided that specified conditions are satisfied, including that we have achieved (i) at least 85% of projected

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bookings and revenues for the six month period ending June 30, 2017 and (ii) additional performance milestones that Hercules and we mutually agree upon.  There is $50,000 facility charge we must pay if we borrow the third tranche.  Our obligations under the secured loan agreement are secured by a security interest in substantially all of our assets, including our intellectual property.

The per annum interest rate for any outstanding loans under the Hercules secured loan agreement is the greater of (i) 9.75% plus the prime rate as reported in The Wall Street Journal minus 3.50%, and (ii) 9.75%, computed on a daily basis.  In addition to the interest accrued pursuant to the foregoing interest rate, the principal balance of any outstanding loans under the secured loan agreement will bear payment-in-kind interest at a rate of 2.15% per annum, computed on a daily basis, and such amount will be added to the outstanding principal balance outstanding on the loans.  Monthly payments under the secured loan agreement are interest only until December 1, 2017 (which may be extended to March 1, 2018 if specified conditions are met, including that we have achieved at least 80% of projected revenue for the quarter ending September 30, 2017, and to June 1, 2018 if specified conditions are met, including that we have achieved at least 80% of projected revenue for the quarter ending December 31, 2017) followed by 30 equal monthly payments of principal and interest; provided that any outstanding principal and all accrued but unpaid interest will be due and payable on February 1, 2020.  We may elect to prepay prior to maturity all, but not less than all, of the outstanding amounts under the secured loan agreement, including interest.  If we elect to prepay the outstanding amounts under the secured loan agreement prior to maturity, a prepayment charge of 3.0%, 2.0%, or 1.0% of the then outstanding principal balance (including any accrued payment-in-kind interest added as principal) also will be due, depending upon whether we prepay in year one, in year two, or after year two of the closing date, respectively.  In addition, we will be required to prepay all such outstanding amounts and such prepayment charge upon the occurrence of a change in control.

Prior to entering into the secured loan agreement with Hercules, we were party to a credit facility and term loan with Silicon Valley Bank. The credit facility and term loan were terminated on August 1, 2016. We used a portion of the proceeds from the initial borrowings under the Hercules secured loan agreement to repay our term loan with Silicon Valley Bank and to pay borrowing-related fees and expenses.  We expect to use the remaining proceeds and any future borrowings under the Hercules secured loan agreement with Hercules for general corporate purposes.

Capital Lease Obligations

We are a party to capital lease agreements with leasing companies to fund our ongoing equipment requirements. Capital lease obligations were $4.4 million as of March 31, 2017 and $3.6 million as of December 31, 2016. We expect to incur new capital lease obligations of between $2.6 million to $3.1 million for 2017 as we continue to expand our investment in the infrastructure for Behavioral Analytics.  

Accounts Receivable Customer Concentration

As of March 31, 2017, two clients, United HealthCare Services, Inc., and CVS Caremark Corporation, accounted for 36% and 23% of total gross accounts receivable, respectively. Of these amounts, we have collected 31% from United HealthCare Services, Inc., and 2% from CVS Pharmacy, Inc., through May 8, 2017. Of the total March 31, 2017 gross accounts receivable, we have collected 28% as of May 8, 2017. Because we have a high percentage of our revenue dependent on a relatively small number of clients, delayed payments by a few of our larger clients could result in a reduction of our available cash.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Historically, we have not experienced material fluctuations in our results of operations due to foreign currency exchange rate changes. We do not currently engage, nor is there any plan to engage, in hedging foreign currency risk.

We also have interest rate risk with respect to changes in variable interest rates on our term loan and other borrowings, capital leases, and cash and cash equivalents. Interest on the secured loan agreement with Hercules is currently based on the greater of (i) 9.75% plus the prime rate minus 3.50%, or (ii) 9.75%. Since the prime rate varies in accordance with prevailing market conditions, a change in interest rate impacts the interest and other borrowing costs and cash flows.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has performed an evaluation of our disclosure controls and procedures that are defined in Rule 13a-15 of the Exchange Act as of the end of the period covered by this report. This evaluation included consideration of the controls, processes, and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and

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communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of March 31, 2017, our disclosure controls and procedures were effective.

Our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the first quarter of 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

 

 

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Part II. Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There are a number of risks and uncertainties that could adversely affect our business and our overall financial performance. In addition to the matters discussed elsewhere in this Quarterly Report on Form 10-Q, we believe the more significant of such risks and uncertainties include the following (for a description of the risk factors, see Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2016):

 

We have not realized an operating profit in seventeen years and there is no guarantee that we will realize an operating profit in the foreseeable future.

 

Our financial results are subject to significant fluctuations because of many factors, any of which could adversely affect our stock price.

 

We depend on a limited number of clients for a significant portion of our revenue, and the loss of a significant client or a substantial decline in the size or scope of deployments for a significant client, could have a material adverse effect on our business.

 

We depend on good relations with our clients, and any harm to these good relations may materially and adversely affect our business and our ability to compete effectively.

 

We must maintain our reputation and expand our name recognition to remain competitive.

 

Our industry is very competitive and, if we fail to compete successfully, our market share and business will be adversely affected.

 

We must keep pace with the rapid rate of innovation in our industry in order to build our business.

 

Because our services and solutions are sophisticated, we must devote significant time and effort to our sales and installation processes, with significant risk of loss if we are not successful.

 

A breach of security, disruption or failure of our information technology systems or those of our third-party service providers could adversely impact our business, financial condition and results of operations.

 

The unauthorized disclosure of the confidential customer data that we maintain could result in a significant loss of business and subject us to substantial liability.

 

Our financial results could be adversely affected by economic and political conditions and the effects of these conditions on our clients’ businesses and levels of business activity.

 

We rely heavily on our senior management team for the success of our business.

 

Our ability to recruit talented professionals and retain our existing professionals is critical to the success of our business.

 

We have a limited ability to protect our intellectual property rights, which are important to our success and competitive position.

 

Others could claim that our services, products, or solutions infringe upon their intellectual property rights or violate contractual protections.

 

Increasing government regulation could cause us to lose clients or impair our business.

 

It may be difficult for us to access debt or equity markets to meet our financial needs.

 

The market price of our common stock is likely to be volatile and could subject us to litigation.

 

Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains and you may never receive a return on your investment.

 

Our operating results may be negatively affected if we are required to collect sales tax or other transaction taxes on all or a portion of sales in jurisdictions where we are currently not collecting and reporting tax.

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There have been no material changes in these risk factors from those described in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchase of Equity Securities

The following table provides information relating to our purchase of shares of common stock in the first quarter of 2017. All of these purchases reflect shares withheld to satisfy tax withholding obligations related to vesting of restricted stock. We have not adopted a common stock repurchase plan or program.

 

Period

 

Total Number

of Shares

Purcha