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 ~~SEPTEMBER~~MARCH 3031, ~~2017~~2018

☐	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.

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 ~~October~~May 251, ~~2017~~2018 was 3233,~~731~~220,~~950~~445.

TABLE OF CONTENTS

		Page
Part I. Financial Information
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1216
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	1722
Item 4.	Controls and Procedures	1722
Part II. Other Information
Item 1.	Legal Proceedings	1924
Item 1A.	Risk Factors	1924
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2026
Item 6.	Exhibits	2127
Signatures		2228

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). A reader can identify these forward-looking statements, because they are not limited to historical fact or they use words such as “scheduled,” “will,” “anticipate,” “project,” “estimate,” “forecast,” “goal,” “objective,” “committed,” “intend,” “continue,” “plan,” “may,” “might,” “believe,” “expect,” “intend,” “could,” “would,” “should,” or “will likely result,” and other similar expressions, and terms of similar meaning, in connection with any discussion of our prospects, financial statements, business, financial condition, revenues, results of operations, or liquidity, involving 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 this Quarterly Report on Form 10-Q and included in Part I Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017, 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;

• Cyber-attacks or other privacy or data security incidents, and failure to comply with privacy and data security regulations; ~~and~~

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

•

The potential failure to satisfy conditions to the completion of the proposed Merger (defined below) due to the failure to receive a sufficient number of tendered shares in the tender offer; and

•

The proposed Merger may not be completed on the timeframe expected or at all.

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)

	September 30, 2017			December 31, 2016
	March 31, 2018			December 31, 2017
ASSETS
Current Assets:
Cash and cash equivalents	$	78,~~951~~681		$	129,~~538~~044
Receivables net of allowances of $39 and $311, at September 30, 2017 and December 31, 2016, respectively		7,298			8,508
Receivables net of allowances of $42 and $41, at March 31, 2018 and December 31, 2017, respectively		8,612			6,565
Prepaid expenses		6,~~197~~352			45,~~440~~805
Other current assets		~~149~~60			~~296~~65
Total current assets		2123,~~595~~705			2521,~~782~~479
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $23,781 and $19,748, at September 30, 2017 and December 31, 2016, respectively		9,720			9,576
Equipment and leasehold improvements, net of accumulated depreciation and amortization of $25,841 and $24,955, at March 31, 2018 and December 31, 2017, respectively		7,499			8,572
Goodwill		972			972
Intangible assets, net of amortization of $4,214 and $3,820, respectively		3,041			3,201
Intangible assets, net of amortization of $4,487 and $4,357, respectively		2,899			2,952
Other long-term assets (includes $2,975 and $4,210 of restricted cash, at September 30, 2017 and December 31, 2016, respectively)		6,721			6,033
Other long-term assets (includes $2,475 and $2,675 in restricted cash, at March 31, 2018 and December 31, 2017, respectively)		5,885			5,960
Total assets	$	4240,~~049~~960		$	4539,~~564~~935
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term debt	$	9096		$	~~738~~93
Accounts payable		1,~~970~~788			1,~~835~~474
Accrued compensation and related costs		3,~~414~~568			23,~~302~~312
Unearned revenue		58,~~071~~200			43,~~911~~032
Capital leases		21,~~145~~701			1,~~982~~967
Other current liabilities		34,~~275~~223			3,~~374~~399
Total current liabilities		1519,~~965~~576			1513,~~142~~277
Long-term debt		1513,~~081~~030			2017,~~839~~056
Long-term unearned revenue		~~706~~1,039			~~757~~914
Long-term capital leases		~~1,559~~866			1,~~602~~190
Other long-term liabilities		6,~~754~~606			56,~~945~~475
Total liabilities		4041,~~065~~117			4438,~~285~~912
7% Series B convertible preferred stock, $0.01 par value; 5,000,000 shares authorized and designated; 1,637,786 and 1,637,948 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively, with a liquidation preference of $11,422 and $10,985, at September 30, 2017 and December 31, 2016, respectively		8,353			8,354
7% Series B convertible preferred stock, $0.01 par value; 5,000,000 shares authorized and designated; 1,637,786 and 1,637,786 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively, with a liquidation preference of $11,714 and $11,568, at March 31, 2018 and December 31, 2017, respectively		8,353			8,353
Stockholders’ Equity:
Preferred stock, $0.01 par value; 35,000,000 shares authorized; none issued		—			—
Preferred stock, $0.01 par value; 35,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.01 par value; 50,000,000 shares authorized; 32,789,806 and 27,511,361 shares issued at September 30, 2017 and December 31, 2016, respectively; 32,731,950 and 26,622,706 shares outstanding at September 30, 2017 and December 31, 2016, respectively		328			275
Common stock, $0.01 par value; 50,000,000 shares authorized; 33,307,647 and 33,083,180 shares issued at March 31, 2018 and December 31, 2017, respectively; 33,220,445 and 33,039,713 shares outstanding at March 31, 2018 and December 31, 2017, respectively		333			331
Additional paid-in capital		~~275~~277,~~398~~000			~~264~~275,~~214~~963
Accumulated deficit		(~~277~~281,~~876~~556	)		(~~263~~279,~~062~~425	)
Treasury stock, at cost, 57,856 and 888,655 shares at September 30, 2017 and December 31, 2016, respectively		(145	)		(4,455	)
Treasury stock, at cost, 87,202 and 43,467 shares at March 31, 2018 and December 31, 2017, respectively		(205	)		(117	)
Accumulated other comprehensive loss		(4,~~074~~082	)		(4,~~047~~082	)
Total stockholders’ equity (deficit)		(6,369	)		(7,075	)
Total stockholders’ deficit		(8,510	)		(7,330	)
Total liabilities and stockholders’ equity	$	4240,~~049~~960		$	4539,~~564~~935

See accompanying notes to the Unaudited Consolidated Financial Statements.

MATTERSIGHT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share data)

	Quarter Ended						~~Nine Months Ended~~
	September 30,			September 30,			September 30,			September 30,
	March 31,			March 31,
	2017			2016			2017			2016
	2018			2017
Revenue:
Subscription revenue	$	1012,~~639~~986		$	910,~~574~~343		$	~~30,925~~		$	~~27,297~~
Other revenue		~~705~~728			~~838~~616			~~1,936~~			~~2,242~~
Total revenue		1113,~~344~~714			10,~~412~~959			~~32,861~~			~~29,539~~
Operating expenses:
Cost of subscription revenue		2,366			2,781			7,576			7,840
Total cost of revenue, exclusive of depreciation and amortization		3,926			3,439
Cost of other revenue		753			662			2,295			2,044
Product development		3,441			3,321
Total cost of revenue, exclusive of depreciation and amortization		3,119			3,443			9,871			9,884
Sales and marketing		3,508			3,450
Product development		3,288			2,988			10,195			9,588
General and administrative		3,403			3,295
Sales and marketing		3,070			4,625			9,538			13,452
Depreciation and amortization		1,427			1,545
General and administrative		2,915			2,912			9,325			8,950
Total operating expenses		15,705			15,050
Depreciation and amortization		1,603			1,477			4,874			4,295
Operating loss		(1,991	)		(4,091	)
Total operating expenses		13,995			15,445			43,803			46,169
Non-operating income (expense):
Operating loss		(2,651	)		(5,033	)		(10,942	)		(16,630	)
Interest and other borrowing costs		(266	)		(969	)
Non-operating income (expense):
Change in fair value of warrant liability		110			97
Interest and other borrowing costs		(334	)		(860	)		(2,353	)		(1,291	)
Other non-operating income		1			10
Loss on early extinguishment of debt		—			—			(1,834	)		—
Total non-operating expense		(155	)		(862	)
Change in fair value of warrant liability		(52	)		58			308			58
Loss before income taxes		(2,146	)		(4,953	)
Other non-operating income		13			8			54			31
Income tax benefit		15			1
Total non-operating income (expense)		(373	)		(794	)		(3,825	)		(1,202	)
Net loss		(2,131	)		(4,952	)
Loss before income taxes		(3,024	)		(5,827	)		(14,767	)		(17,832	)
Dividends related to 7% Series B convertible preferred stock		(146	)		(146	)
Income tax benefit (provision)		8			(11	)		(4	)		(27	)
Net loss available to common stockholders	$	(2,277	)	$	(5,098	)
Net loss		(3,016	)		(5,838	)		(14,771	)		(17,859	)
Per share of common stock:
Dividends related to 7% Series B convertible preferred stock		(146	)		(147	)		(438	)		(440	)
Basic net loss available to common stockholders	$	(0.07	)	$	(0.19	)
Net loss available to common stockholders	$	(3,162	)	$	(5,985	)	$	(15,209	)	$	(18,299	)
Diluted net loss available to common stockholders	$	(0.07	)	$	(0.19	)
Per share of common stock:
Shares used to calculate basic net loss per share		31,747			27,423
Basic net loss available to common stockholders	$	(0.10	)	$	(0.24	)	$	(0.51	)	$	(0.73	)
Shares used to calculate diluted net loss per share		31,747			27,423
Diluted net loss available to common stockholders	$	(0.10	)	$	(0.24	)	$	(0.51	)	$	(0.73	)
Stock-based compensation expense is included in individual line items above:
Shares used to calculate basic net loss per share		31,463			25,244			30,074			25,156
Total cost of revenue	$	175		$	81
Shares used to calculate diluted net loss per share		31,463			25,244			30,074			25,156
Product development		351			134
Stock-based compensation expense is included in individual line items above:
Sales and marketing		184			123
Total cost of revenue	$	39		$	112		$	276		$	298
General and administrative		570			354
Product development		164			194			493			863
Sales and marketing		95			482			218			1,415
General and administrative		376			463			1,137			1,718

See accompanying notes to the Unaudited Consolidated Financial Statements.

MATTERSIGHT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited and in thousands)

	Quarter Ended						~~Nine Months Ended~~
	September 30,			September 30,			September 30,			September 30,
	March 31,			March 31,
	2017			2016			2017			2016
	2018			2017
Net loss	$	(32,~~016~~131	)	$	(54,~~838~~952	)	$	~~(14,771~~	)	$	~~(17,859~~	)
Other comprehensive loss:
Effect of foreign currency translation		(1—	)		(1019	)		~~(27~~	)		~~(17~~	)
Comprehensive net loss	$	(32,~~017~~131	)	$	(54,~~848~~971	)	$	~~(14,798~~	)	$	~~(17,876~~	)

See accompanying notes to the Unaudited Consolidated Financial Statements.

MATTERSIGHT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

	Nine Months Ended
	Three Months Ended
	September 30, 2017			September 30, 2016
	March 31, 2018			March 31, 2017
Cash Flows from Operating Activities:
Net loss	$	(142,~~771~~131	)	$	(174,~~859~~952	)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		41,~~874~~427			41,~~295~~545
Stock-based compensation		21,~~124~~280			~~4,294~~692
Discount accretion and other debt-related costs		~~1,417~~20			~~173~~271
Provision for uncollectible accounts		591			25(3	)
Change in fair value of warrant liability		(~~308~~110	)		(5897	)
Changes in assets and liabilities:
Receivables		1(2,~~151~~048	)		(~~609~~1,054	)
Prepaid expenses		(~~1,261~~215	)		(~~1,448~~246	)
Other current assets		~~142~~5			~~(484~~214	)
Other long-term assets		(~~1,718~~25	)		~~969~~19
Accounts payable		(~~464~~94	)		~~287~~(142	)
Accrued compensation and related costs		~~1,112~~256			~~154~~904
Unearned revenue		~~109~~5,293			(~~4,787~~247	)
Other current liabilities		1,~~126~~152			~~1,471~~38
Other long-term liabilities		~~765~~(101	)		~~374~~(130	)
Total adjustments		96,~~128~~841			41,~~656~~764
Net cash used in operating activities		(5,643	)		(13,203	)
Net cash provided by (used in) operating activities		4,710			(3,188	)
Cash Flows from Investing Activities:
Capital expenditures		(~~2,668~~164	)		(~~2,364~~659	)
Investment in intangible assets		(~~209~~49	)		~~(857~~—	)
Net cash used in investing activities		(~~2,877~~213	)		(~~3,221~~659	)
Cash Flows from Financing Activities:
Proceeds from line of credit		194,~~900~~500			~~16,246~~—
Repayments of line of credit		(58,~~000~~500	)		~~(16,246~~—	)
Proceeds from term loan and other borrowings	—				28,880
Repayments of other borrowings		(202	)		(219	)
Repayments of term loan and other borrowings		(23,238	)		(6,030	)
Fees paid for debt amendment		(100	)		—
Debt prepayment costs		(692	)		(96	)
Proceeds from issuance of common stock, net of costs	—				14,904
Fees paid for issuance of debt		(206	)		(680	)
Cash paid to satisfy tax withholding upon vesting of employee stock awards		(206	)		(537	)
Proceeds from issuance of common stock, net of costs		14,737			—
Principal payments on capital lease obligations		(604	)		(592	)
Cash paid to satisfy tax withholding upon vesting of employee stock awards		(1,060	)		(328	)
Proceeds from employee stock purchase plan		52			68
Principal payments on capital lease obligations		(1,894	)		(1,727	)
Net cash (used in) provided by financing activities		(5,060	)		13,624
Proceeds from employee stock purchase plan		178			223
Effect of exchange rate changes on cash and cash equivalents		—			(19	)
7% Series B convertible preferred stock dividend	—				(3	)
(Decrease) increase in total cash		(563	)		9,758
Proceeds from exercise of stock options	—				236
Cash and cash equivalents		9,044			12,538
Net cash provided by financing activities		2,725			20,475
Restricted cash (included in Other long-term assets on the Consolidated Balance Sheets)		2,675			4,210
Effect of exchange rate changes on cash and cash equivalents		(27	)		(17	)
Total cash, beginning of period		11,719			16,748
(Decrease) increase in total cash		(5,822	)		4,034
Cash and cash equivalents		8,681			22,523
Cash and cash equivalents		12,538			15,407
Restricted cash (included in Other long-term assets on the Consolidated Balance Sheets)		2,475			3,983
Restricted cash (included in Other long-term assets on the Consolidated Balance Sheets)		4,210		—
Total cash, end of period	$	11,156		$	26,506
Total cash, beginning of period		16,748			15,407
Cash and cash equivalents		7,951			14,652
Restricted cash (included in Other long-term assets on the Consolidated Balance Sheets)		2,975			4,789
Total cash, end of period	$	10,926		$	19,441
Non-Cash Investing and Financing Activities:
Capital lease obligations incurred	$	~~2,014~~14		$	21,~~213~~378
Capital equipment purchased on credit		~~2,014~~14			21,~~213~~378
Issuance of warrant, at fair value		—			924
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	~~2,093~~283		$	~~758~~532

See accompanying notes to the Unaudited Consolidated Financial Statements.

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 ~~September 30~~March 31, ~~2017~~2018 and December 31, ~~2016~~2017 and the results of operations and cash flows for the periods indicated. Quarterly results are not necessarily indicative of results for any subsequent period.

On ~~April~~January 1, ~~2017~~2018, the company adopted ~~Accounting~~ASU ~~Standards~~2014-09: ~~Update~~Revenue from Contracts with Customers (~~ASU~~Topic 606). NoThis ~~2016~~update sets forth a new five-~~15,~~step ~~Statement~~revenue ofrecognition ~~Cash~~model ~~Flows~~that ~~(Topic~~replaces ~~230)~~the ~~Classification~~prior ofrevenue ~~Certain~~recognition ~~Cash~~guidance ~~Receipts~~in its entirety and ~~Cash~~is ~~Payments.~~intended ~~ASU~~to ~~2016~~eliminate numerous industry-15specific ~~addresses~~pieces of revenue recognition guidance that have historically existed. The underlying principle of the ~~presentation~~new ~~and~~standard ~~classification~~is that an organization will recognize revenue to depict the transfer of ~~cash~~promised ~~flows~~goods ~~related~~or services to ~~specific~~customers ~~transactions.~~in ~~Upon~~an ~~adoption,~~amount that reflects what it expects in exchange for the goods or services. The company ~~updated~~adopted using the ~~statement~~modified retrospective transition method and there were no material adjustments to beginning retained deficits. Changes in the current period as a result of ~~cash~~adopting ~~flow~~the ASU relate to billings for ~~all~~certain ~~periods~~non-cancelable ~~presented~~contracts. ~~Certain~~The ~~amounts~~following ontable reconciles the ~~statement~~balances ofas ~~cash~~presented ~~flows~~ for the ~~nine~~three months ended ~~September 30~~March 31, ~~2016~~2018 ~~were~~to ~~reclassified~~the inbalances ~~compliance~~prior ~~with~~to ~~this~~the ~~ASU.~~ adjustments made to implement the new revenue recognition standard for the same period:

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 the nine months ended September 30, 2016 were reclassified in compliance with this ASU.

(In millions)	As Presented		Impact of New Revenue Standard		Previous Revenue Standard
Assets
Receivables, net of allowances	$	8.6	$	0.5	$	8.1
Liabilities
Unearned revenue		8.2		0.4		7.8
Long-term unearned revenue		1.0		0.1		0.9

On January 1, ~~2017~~2018, the company adopted ASU No. ~~2016~~2017-09, ~~Improvements~~Compensation—Stock toCompensation ~~Employee Share-Based Payment Accounting~~ (Topic 718).: ~~This~~Scope ~~update~~of isModification ~~intended~~Accounting, towhich ~~simplify~~provides ~~the~~guidance ~~accounting~~about ~~for~~which ~~share-based~~changes ~~payment~~to ~~transactions, including~~ the ~~income~~terms ~~tax impacts, classification of awards as either equity~~ or ~~liabilities,~~conditions ~~and presentation on the statement~~ of ~~cash~~a ~~flows. Under ASU 2016~~share-~~19,~~based ~~the~~payment ~~company~~award ~~has~~require ~~elected~~an entity to ~~account~~apply ~~for~~modification ~~forfeitures~~accounting asin ~~they~~Topic ~~occur rather than on an estimated basis~~718. The standard was adopted ~~using~~with ano ~~modified retrospective approach which had an immaterial~~ impact onto the ~~accumulated~~financial ~~deficit balance on January 1, 2017~~statements.

On January 1, ~~2017~~2018, the company ~~adopted~~condensed ~~ASU~~the ~~No.~~costs ~~2015-17,~~of ~~Income~~revenue ~~Taxes~~items ~~(Topic~~to ~~740).~~present ~~This~~cost ~~update~~of ~~simplifies~~revenue ~~the~~as ~~presentation~~a ofsingle ~~deferred~~line ~~income~~item. ~~taxes~~Cost ~~and~~of ~~requires~~other ~~that~~revenue ~~deferred~~was ~~income~~determined ~~tax~~to ~~liabilities~~be ~~and~~immaterial ~~assets~~to bethe ~~classified~~financial asstatements. ~~noncurrent~~There inwas ano ~~classified~~change ~~balance~~to ~~sheet.~~the ~~Upon~~expense ~~adoption,~~classification ~~all~~and ~~deferred~~the ~~tax~~current ~~assets~~period ~~and~~is ~~liabilities~~comparable ~~were~~to ~~classified~~the asprior ~~long term~~period.

On ~~January~~April 25, 12018, ~~2017~~the company entered into an Agreement and Plan of Merger with NICE Systems, toInc., ~~better~~a ~~align~~Delaware ~~expenses~~corporation (“Parent”), ~~the~~NICE ~~company~~Acquisition ~~changed~~Sub, ~~the~~Inc., ~~caption~~a onDelaware ~~the~~corporation ~~Consolidated~~and ~~Statements~~wholly owned subsidiary of ~~Operations~~Parent ~~from~~(“Acquisition ~~Research~~Sub”), and, ~~development~~solely tofor ~~Product~~the ~~development.~~purposes ~~The~~of ~~company~~Section 8.16 ~~believes~~of the ~~revised~~Merger ~~presentation~~Agreement, ~~provides~~NICE Ltd., a ~~clearer~~company ~~understanding~~organized ofunder the ~~business~~laws ~~expenses~~of inthe ~~this~~State ~~caption.~~of ~~There~~Israel ~~was~~(“Guarantor”) no(the ~~change~~“Merger toAgreement”) under which the ~~expense~~company ~~classification~~would be acquired by and ~~the~~merged ~~current~~into ~~period~~a iswholly-owned ~~comparable~~subsidiary toof ~~the~~NICE ~~prior~~(See ~~period.~~Note Fourteen — Subsequent Events).

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in Mattersight’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 filed with the Securities and Exchange Commission (SEC) on March 1612, ~~2017~~2018.

Note Two — Recent Accounting Pronouncements

In July 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-11—Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception to address narrow issues identified as a result of the complexity associated with applying generally accepted accounting principles for 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.

Incertain ~~May~~financial ~~2017,~~instruments ~~the~~with ~~FASB~~characteristics ~~issued~~of ~~ASU~~liabilities Noand equity. ~~2017~~Part I of the update changes the classification analysis of certain equity-~~09,~~linked ~~Compensation—Stock~~financial ~~Compensation~~instruments (~~Topic~~or ~~718~~embedded features): ~~Scope~~with ofdown ~~Modification~~round ~~Accounting,~~features. ~~which~~Part ~~provides~~II ~~guidance~~of ~~about~~the ~~which~~update ~~changes~~re-characterizes to the ~~terms~~indefinite ordeferral ~~conditions~~of certain provisions of aTopic ~~share-based~~480 ~~payment~~that ~~award~~now ~~require~~are anpresented ~~entity~~as pending content in the codification, to ~~apply~~a ~~modification~~scope ~~accounting~~exception. inPart ~~Topic~~II ~~718~~does not have an accounting effect. This ASU is effective for ~~reporting~~fiscal ~~periods beginning after December 15~~years, ~~2017~~ and interim periods within those ~~annual~~fiscal ~~periods~~years, beginning after December 15, 2018. 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~~The ~~adoption~~company is ~~permitted~~evaluating ~~for~~the ~~interim~~standard orand ~~annual~~does ~~goodwill~~not ~~impairment~~expect ~~tests~~a ~~performed~~change onin ~~testing~~value ~~dates~~of ~~after~~goodwill ~~January~~when ~~1, 2017. The company is evaluating its option to adopt~~ the standard atis ~~its December 31, 2017 testing date~~adopted.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. This update broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The update is effective for annual periods beginning after December 15, 2019. The company is currently evaluating the impact of this update on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update is intended to improve financial reporting of leasing transactions. The ASU will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. This update is effective for periods beginning after December 15, 2018. The company is currently evaluating the impact of this update on its consolidated financial statements. Certain operating leases the company is party to are expected to be recognized as assets and liabilities as a result of adopting this standard.

InNote ~~May~~Three ~~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. At this time, the company does not expect a significant change in revenue recognition or operating cash flows when ASU 2014-09 is adopted based on contracts reviewed to date. We expect to complete our review of all contracts by December 31, 2017. The company is still evaluating the accounting for the incremental costs of obtaining and fulfilling a contract. The company is working to put additional processes and internal controls in place to enable and maintain compliance with ASU 2014-09’s disclosure requirements. The company has elected to adopt the modified retrospective transition method. Recognition

~~Note Three~~Revenue —is ~~Current~~derived ~~Prepaid~~primarily ~~Expenses~~from subscription services and professional services. Revenue is recognized upon transfer of control of these services to customers in an amount that reflects the consideration the company expects to receive in exchange for those services.

~~Current~~Subscription 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. Revenue

~~Current~~Subscription ~~prepaid~~revenue ~~expenses~~consists ~~consisted~~ of revenue from Mattersight’s Behavioral Analytics service offerings, including predictive behavioral routing, performance management, quality assurance, predictive analytics, and marketing managed services revenue derived from the ~~following:~~performance of services on a continual basis.

(In millions)	September 30, 2017		December 31, 2016
Deferred deployment costs	$	2.0	$	1.7
Prepaid technology maintenance costs		2.0		0.8
Prepaid commissions		1.3		1.2
Other		0.9		0.7
Total	$	6.2	$	4.4

Revenue is recognized ratably over the subscription period as the services are performed for the client. Subscription periods generally range from one to three years after the go-live date or, in cases where the company contracts with a client for a short-term pilot of a Behavioral Analytics offering prior to committing to a longer subscription period, if any, the subscription or pilot periods generally range from three to twelve months after the go-live date. Contracts may be billed annually, quarterly, and monthly in advance.

Other Revenue

Other revenue consists of deployment revenue, professional services revenue and reimbursed expenses revenue.

Deployment revenue consists of planning, deployment, and training fees derived from Behavioral Analytics contracts. These fees, which are considered to be installation fees related to Behavioral Analytics subscription contracts, are deferred until the installation is complete and are then recognized over the applicable subscription or pilot period. Deployment fees are typically billed in advance and generally non-cancelable.

Professional services revenue primarily consists of fees charged to the company’s clients to provide post-deployment follow-on consulting services, which include custom data analysis, the implementation of enhancements, and training, as well as fees generated from the company’s operational consulting services. Professional services are performed for the company’s clients on a fixed-fee or time-and-materials basis. Revenue is recognized as the services are performed, with performance generally assessed on the ratio of actual hours incurred to-date compared with the total estimated hours over the entire term of the contract.

~~Note Four~~Reimbursed —expenses ~~Other~~revenue ~~Long~~includes billable costs related to travel and other out-~~Term~~of-pocket ~~Assets~~expenses incurred while performing services for the company’s clients. An equivalent amount of reimbursable expenses is included in total cost of other revenue.

Other ~~long-term~~Significant 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. 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:Judgements

(In millions)	September 30, 2017		December 31, 2016
Restricted cash	$	3.0	$	4.2
Prepaid technology and maintenance support		2.1		0.6
Deferred deployment costs		1.2		0.6
Prepaid commissions		0.3		0.5
Other		0.1		0.1
Total	$	6.7	$	6.0

Subscription and deployment contracts with customers are interdependent of each other and not capable of being distinct. As such they are accounted for together as one performance obligation.

~~Note Five~~For —purposes ~~Other~~of ~~Current~~determining ~~Liabilities~~the transaction price, the company has elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the company from the customer. These include sales, use, value added and certain excise taxes.

A limited number of contracts with customers are sold with rebates or other credits. Additionally, some contracts allow for additional fees if a customer exceeds the baseline number of users during a billing period. These amounts are accounted for as variable consideration and estimated using the expected value approach.

Disaggregation of Revenue

The company’s service contracts primarily fall into one of two categories (i) predictive behavioral routing and (ii) other behavioral analytics. Predictive behavioral routing revenue is included in subscription revenue and other behavioral analytics revenue is included in both subscription and other revenue. The following table sets forth revenue by service category:

(In millions)	March 31, 2018		March 31, 2017
Predictive behavioral routing	$	3.4	$	1.4
Other behavioral analytics		10.3		9.6
Total	$	13.7	$	11.0

Assets Recognized from Costs to Obtain and Fulfill a Contract with a Customer

Assets recognized for costs to obtain and fulfill a contract include sales commissions and deployment costs. These costs are deferred up to an amount not to exceed the amount of deferred deployment revenue and additional amounts that are recoverable based on the contractual arrangement. These costs are included in prepaid expenses and other long-term assets. Such costs are amortized over the subscription period. Costs in excess of the foregoing revenue amount are expensed in the period incurred. There were no impairment losses related to deferred contract costs in the reporting period.

The following table sets forth the activity in deferred sales commissions and deferred deployment costs.

(In millions)	Deferred Sales Commissions		Deferred Deployment Costs
Balance at January 1, 2018	$	1.1	$	3.1
Costs recognized as assets		0.3		0.5
Amortization of costs		(0.6)		(0.7)
Balance at March 31, 2018	$	0.8	$	2.9

Transaction Price Allocated to the Remaining Performance Obligations

As of March 31, 2018, of the contracts that have gone live or are in active deployments, approximately $65.6 million of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on approximately 56% of these remaining performance obligations over the next 12 months, with the remainder thereafter. Revenue from remaining performance obligations for other revenue was immaterial at March 31, 2018.

Contract Balances

Certain contracts with customers allow for additional fees if a customer exceeds the baseline number of users during a billing period. These fees are recognized as contract assets and revenue in advance of the right to payment from customers. Substantially all fees recognized in advance of the right to payment were billed to customers by the end of the quarter ended March 31, 2018.

Customer contracts may be billed annually, quarterly, or monthly in advance and are recognized as contract liabilities until services are rendered. The following table sets forth the activity in contract liabilities:

(In millions)	Contract Liabilities
Balance January 1, 2018	$	3.9
Revenue recognized that was included in the contract liability at the beginning of the period		(0.8	)
Increases due to billings, excluding amounts recognized as revenue during the period		6.1
Net decrease (increase) due to changes in transaction price as a result of revised estimates of variable consideration		—
Balance March 31, 2018	$	9.2

There was no revenue adjustment in the current period as a result of changes in transaction price that relate to performance obligations satisfied during a prior period.

Note Four — Current Prepaid Expenses

Current prepaid expenses primarily consist of prepaid technology maintenance costs, deferred deployment costs, and prepaid commissions related to Behavioral Analytics contracts. These costs are recognized over the subscription periods of the respective contracts generally one to three years after the go-live date or, in cases where the company contracts with a client for a short-term pilot of a Behavioral Analytics offering prior to committing to a longer subscription period, if any, the subscription or pilot periods generally range from three to twelve months after the go-live date. Current prepaid expenses also includes prepaid marketing and insurance costs. These costs will be recognized within the next twelve months.

Current prepaid expenses consisted of the following:

(In millions)	March 31, 2018		December 31, 2017
Prepaid technology maintenance costs	$	2.6	$	2.0
Deferred deployment costs		1.8		1.9
Prepaid commissions		0.7		1.1
Prepaid marketing		0.5		0.5
Prepaid insurance		0.4		0.1
Other		0.4		0.2
Total	$	6.4	$	5.8

Note Five — Other Long-Term Assets

Other long-term assets includes the long-term portion of restricted cash, prepaid technology and maintenance support, deferred deployment costs, and prepaid commissions related to Behavioral Analytics. Restricted cash represents cash used to collateralize certain letters of credit issued to support the company’s equipment leasing activities. Costs included in long-term assets will be recognized over the remaining term of the contracts beyond the first twelve months. Other long-term assets consisted of the following:

(In millions)	March 31, 2018		December 31, 2017
Restricted cash	$	2.5	$	2.7
Prepaid technology and maintenance support		1.7		1.9
Deferred deployment costs		1.1		1.2
Prepaid commissions		0.1		—
Other		0.5		0.2
Total	$	5.9	$	6.0

Note Six — Other Current Liabilities

Other current liabilities consisted of the following:

(In millions)	~~September~~March 3031, ~~2017~~2018		December 31, ~~2016~~2017
Accrued vendor payable	$	12.81	$	1.9
Warrant liability		0.5		0.8
Customer rebates and credits		0.6		0.3
Deferred rent liability		0.5		0.45
Other		0.5		0.3
Sales tax liability		0.3		0.1
Total	$	3.3	$	3.4
Warrant liability		0.3		0.4
Accrued legal payable		0.3		0.1
Other		0.1		0.1
Total	$	4.2	$	3.4

On August 1, 2016, the company issued a warrant to Hercules Capital, Inc. (Hercules) that gives Hercules the right to purchase shares of the company’s common stock at $3.50 per share. The warrant is exercisable for 357,142 shares of common stock and expires on August 1, 2023. The warrant is accounted for as a liability and carried at fair market value using the Black-Scholes model. Changes in the warrant’s fair market value are recognized in non-operating income (expense) in the consolidated statements of operations.

Note ~~Six~~Seven — Leases

Capital Leases

Assets under capital leases consist primarily of computer hardware and related equipment. The gross amount of assets recorded under capital leases was $76.78 million and $67.53 million at ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017, respectively. Depreciation expense related to assets under capital leases is included in depreciation and amortization expense on the consolidated statements of operations.

As of ~~September~~March 3031, ~~2017~~2018, the future minimum lease payments due under capital leases are expected to be as follows:

(In millions)
Year	Amount
Remainder of 2017	$	0.6
Remainder of 2018	$	1.5
2018		2.4
2019		1.1
2019		1.2
2020		0.2
Total minimum lease payments	$	4.4
2021	—
Less: amount representing interest		(0.7	)
Total minimum lease payments	$	2.8
Present value of minimum lease payments	$	3.7
Less: amount representing interest		(0.3	)
Present value of minimum lease payments	$	2.5

Note ~~Seven~~Eight — Debt

On June 29, 2017, the company entered into a loan agreement with CIBC Bank USA f/k/a The PrivateBank and Trust Company (CIBC). The loan agreement provides for a revolving line of credit to the company with a maximum credit limit of $20.0 million, which matures on June 29, 2020 (the credit facility). The credit facility is secured by a security interest in the company’s assets. The company, subject to certain limits and restrictions, may from time to time request the issuance of letters of credit under the loan agreement.

The principal amount outstanding under the credit facility will accrue interest at a floating annual rate equal to 1 month, 2 month or 3 month LIBOR (as selected by the company) plus 45.50%, 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~~March 29, ~~2017~~2018, the company ~~drew~~amended ~~$13.5 million on~~ the ~~revolving~~loan ~~line~~agreement ofwith ~~credit~~CIBC. The ~~proceeds~~amendment ~~were~~changes ~~used to repay~~ the ~~principal~~quarterly ~~balance~~EBITDA oftargets ~~$22.5~~and ~~million~~increases ~~under~~ the ~~company’s~~applicable ~~prior~~margin ~~credit~~for ~~facility~~loans ~~with~~bearing ~~Hercules.~~interest ~~Upon~~at ~~repayment,~~LIBOR ~~the~~from ~~company~~4.50% ~~terminated~~to ~~its~~5.50% ~~loan~~and ~~agreement~~for ~~with~~loans ~~Hercules.~~bearing ~~The~~interest ~~loss~~at on the ~~early~~base ~~extinguishment~~rate offrom ~~Hercules debt totaled $~~1.875% ~~million~~to 2.75%. ItThe ~~consisted~~amendment ofincreases athe ~~prepayment~~company’s ~~charge~~minimum oftotal ~~$0.7~~revenue ~~million,~~thresholds ~~acceleration~~for ofthe ~~unaccreted~~first ~~debt~~and ~~discount~~second quarters of ~~$0.6~~2018 ~~million,~~by ~~and~~an ~~acceleration~~average of ~~unamortized~~approximately ~~deferred~~3% ~~debt~~each ~~costs~~quarter ofand ~~$0.5~~reduces ~~million.~~the ~~The~~applicable ~~average~~total ~~outstanding~~revenue ~~balance~~thresholds onfor ~~the~~each ~~revolving line~~ of ~~credit during~~ the third ~~quarter~~and offourth ~~2017~~quarters ~~was~~of ~~$9.8~~2018 ~~million.~~by Asan average of ~~September~~approximately ~~30,~~6% ~~2017,~~each ~~$14~~quarter.9 ~~million~~The ~~remains~~amendment ~~outstanding~~also onprovides ~~the~~CIBC ~~revolving line of credit~~ with the ability to ~~draw~~impose andiscretionary ~~additional~~reserves ~~$2.5~~against ~~million.~~the ~~There~~borrowing ~~was also $0~~base.7 ~~million~~The incompany ~~letters~~paid ~~of credit issued by~~ CIBC ~~against~~a ~~the~~non-refundable ~~line~~amendment fee of ~~credit. During October 2017, the company repaid~~ $5.0.1 million ~~of principal on the revolving line of credit~~.

The average outstanding balance on the revolving line of credit during the first quarter of 2018 was $9.2 million. In March 2018, CIBC established a reserve of $5.0 million against the revolving loan agreement, effectively reducing total availability to $15 million. CIBC has the ability to increase the reserves against the revolving loan availability at their discretion. As of March 31, 2018, $12.9 million remains outstanding on the revolving line of credit with the ability to draw an additional $0.5 million. The company has classified the CIBC debt as long term and does not expect CIBC to demand repayment within the next 12 months. There was also $1.6 million in letters of credit issued by CIBC against the line of credit. During April 2018, the company repaid $4.5 million of principal on the revolving line of credit. If the NICE transaction does not occur or is delayed, the Company would need to raise capital and negotiate modifications to the loan agreement and there is no assurance that the company would have access to additional external capital resources on acceptable terms.

On April 25, 2018, the company entered into a second amendment to the loan agreement with CIBC. The amendment excludes certain expenses incurred in connection with the merger from the calculation of adjusted EBITDA, and changes the adjusted EBITDA target for the second quarter of 2018. The amendment also requires the company to have liquidity as of the last day of each calendar month of at least $2.0 million (See Note Fourteen — Subsequent Events).

Debt consisted of the following:

(In millions)	~~September~~March 3031, ~~2017~~2018		December 31, ~~2016~~2017
CIBC loan due June 29, 2020, effective borrowing rate of 6.68% at September 30, 2017	$	14.9	$	—
CIBC loan due June 29, 2020, effective borrowing rate of 6.16% and 5.93% at March 31, 2018 and December 31, 2017	$	12.9	$	16.9
Hercules loan effective borrowing rate of 14.50% at December 31, 2016	—			22.5
Furniture loan due May 2021, effective borrowing rate of 9.10%		0.1		0.1
Furniture loan due May 2021, effective borrowing rate of 9.55%		0.1		0.1
Furniture loan due July 2019, effective borrowing rate of 13.98%		0.1		0.1
Furniture loan due July 2019, effective borrowing rate of 13.98%(1)	—			0.1
Total debt(1)	$	15.2	$	22.8
Total debt(2)	$	13.1	$	17.2

(1) ~~Total~~Less ~~debt~~than of $~~15.2 million at September 30, 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.

8(2) Total debt of $13.1 million at March 31, 2018 includes the current portion of furniture loans of $0.1 million and the long term portion of the CIBC loan of $12.9 million. Total debt of $17.2 million at December 31, 2017, respectively, includes the current portion of the furniture loans of $0.1 million and the long term portion of the CIBC loan of $16.9 million.

Note ~~Eight~~Nine — Other Long-Term Liabilities

Other long-term liabilities consisted of the following:

(In millions)	~~September~~March 3031, ~~2017~~2018		December 31, ~~2016~~2017
7% Series B convertible preferred stock dividends payable	$	3.14	$	23.62
Deferred rent liability		21.08		21.29
Technology service liability		1.42	—	1.2
Deferred income tax liability		0.2		0.32
Intellectual property purchase liability		0.1		0.8
Total	$	6.6	$	6.5
Total	$	6.8	$	5.9

Note ~~Nine~~Ten — Litigation and Other Contingencies

The company is a party to various agreements, including all its client contracts, under which it may be obligated to indemnify the other party with respect to certain matters, including, but not limited to, indemnification against third-party claims of (i) infringement of intellectual property rights with respect to services, software, and other deliverables provided by the company, and (ii) failure to comply with various data security and privacy regulations. These obligations may be subject to various limitations on the remedies available to the other party, including, without limitation, limits on the amounts recoverable and the time during which claims may be made, and may be supported by indemnities given to the company by applicable third parties. Payment by the company under these indemnification clauses is generally subject to the other party making a claim that is subject to challenge by the company. Historically, the company has not been obligated to pay any claim for indemnification under its agreements, and management is not aware of future indemnification payments that it would be obligated to make.

Under its by-laws, subject to certain exceptions, the company has agreed to indemnify its corporate officers and directors for certain events or occurrences while the officer or director is, or was, serving at its request in such capacity or in certain related capacities. The company has separate indemnification agreements with each of its corporate officers and directors that requires it, subject to certain exceptions, to indemnify them to the fullest extent authorized or permitted by its by-laws and the Delaware General Corporation Law. The maximum potential amount of future payments the company could be required to make under these indemnification agreements is unlimited; however, the company has a director and officer liability insurance policy that limits its exposure and enables it to recover a portion of any amounts paid under these indemnification agreements. As a result of its insurance policy coverage, the company believes the estimated fair value of these indemnification agreements is minimal. The company had no liabilities recorded for these agreements as of ~~September~~March 3031, ~~2017~~2018.

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 September 30, 2017.11

~~Note Ten~~The —company’s ~~Capital~~products ~~Stock~~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 $0.3 million at March 31, 2018.

~~On February~~Note ~~23,~~Eleven ~~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, working capital, and debt repayment purposes. CraigStock-~~Hallum~~Based ~~Capital~~Compensation 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.

~~The~~Restricted ~~company’s~~Stock 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

9Restricted stock awards are shares of common stock granted to an individual that vest over a period of time. During the vesting period, the holder of restricted stock receives all of the benefits of ownership (right to dividends, voting rights, etc.), other than the right to sell or otherwise transfer any interest in the stock. Restricted stock awards granted during the quarter ended March 31, 2018 were as follows:

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 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.

Description	Grant Date	Shares		Vesting Schedule
Grants to employees	2/14/2018		105,611	100% on February 28, 2019
Grants to employees	2/14/2018		164,250	50% on February 28, 2020, 6.25% quarterly thereafter
Total			269,861

~~Note Eleven~~Restricted —stock ~~Loss~~award ~~Per~~activity ~~Share~~was as follows for the quarter ended March 31, 2018:

	Shares			Weighted Average Price
Unvested balance at December 31, 2017		1,365,200		$	3.65
Granted		269,861		$	2.55
Vested		(291,093	)	$	3.91
Forfeited		(30,547	)	$	2.75
Unvested balance at March 31, 2018		1,313,421		$	3.39

Note Twelve — Loss Per Share

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

	Quarter Ended						~~Nine Months Ended~~
(In millions)	~~September~~March 3031, ~~2017~~2018			~~September~~March 3031, ~~2016~~2017			~~September 30, 2017~~			~~September 30, 2016~~
Net loss	$	(32.01	)	$	(5.80	)	$	~~(14.8~~	)	$	~~(17.9~~	)
Dividends related to 7% Series B convertible preferred stock(1)		(0.2	)		(0.21	)		~~(0.4~~	)		~~(0.4~~	)
Net loss available to common stockholders	$	(3.2.3	)	$	(65.01	)	$	~~(15.2~~	)	$	~~(18.3~~	)
Per share of common stock:
Basic/diluted net loss available to common stockholders	$	(0.1007	)	$	(0.2419	)	$	~~(0.51~~	)	$	~~(0.73~~	)
(In thousands)
Weighted average shares outstanding (basic and diluted)		31,~~463~~747			2527,~~244~~423			~~30,074~~			~~25,156~~
Anti-dilutive common stock equivalents(2)		1,~~449~~493			12,~~772~~200			~~1,590~~			~~1,691~~

(1) Dividends on 7% Series B convertible preferred stock (Series B stock) are cumulative and have been accrued from July 1, 2012 to September 30, 2017. Total accrued dividends were $3.1 million as of September 30, 2017. Dividends will continue to accrue until they are declared by the company’s board of directors. The company has not declared any Series B stock dividends in 2017 or 2016.12

(1)

Dividends on 7% Series B convertible preferred stock (Series B stock) are cumulative and have been accrued from July 1, 2012 to March 31, 2018. Total accrued dividends were $3.4 million as of March 31, 2018. Dividends will continue to accrue until they are declared by the company’s board of directors. The company has not declared any Series B stock dividends in 2018 or 2017.

(2)	In periods in which there was a loss, the effect of common stock equivalents, which is primarily related to the Series B stock, was not included in the diluted loss per share calculation as it was antidilutive.

Note ~~Twelve~~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:

	September 30, 2017
	March 31, 2018
(In millions)	Carrying value		Level 1		Level 2		Level 3
Cash and cash equivalents - money market fund	$	0.8	$	0.8	$	—	$	—
Warrant liability	$	0.3		—		—	$	0.3
Warrant liability		0.5		—		—		0.5
	December 31, 2017
	December 31, 2016
	Carrying value		Level 1		Level 2		Level 3
Cash and cash equivalents - money market fund	$	120.15	$	120.15	$	—	$	—
Warrant liability		0.84		—		—		0.84

The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximated their fair values as of ~~September~~March 3031, ~~2017~~2018 due to the short-term nature of these instruments.

The company determined the fair value of the liability for the warrant issued to Hercules, considered a Level 3 liability, using the Black-Scholes model. At ~~September~~March 3031, ~~2017~~2018, management used a risk free rate of 2.0258%, expected volatility of 53%, and an expected term of 5.8434 years. Significant increases or decreases in any of these inputs in isolation would result in a significantly different fair value (See Note 5Six – Other Current Liabilities).

The fair value of long-term debt was estimated to be $1513.10 million at ~~September~~March 3031, ~~2017~~2018.

There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 during the ~~third~~first quarter of ~~2017~~2018. There were no assets or liabilities valued at fair value on a nonrecurring basis during the first ~~nine~~quarter ~~months~~ of ~~2017~~2018.

11Note Fourteen — Subsequent Events

On April 25, 2018, the company entered into an Agreement and Plan of Merger with NICE Systems, Inc., a Delaware corporation (“Parent”), NICE Acquisition Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Acquisition Sub”), and, solely for the purposes of Section 8.16 of the Merger Agreement, NICE Ltd., a company organized under the laws of the State of Israel (“Guarantor”) (the “Merger Agreement”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Acquisition Sub agreed to commence a cash tender offer (the “Offer”) to acquire all of the shares of the company’s common stock (“Common Stock”) and the company’s 7% Series B Convertible Preferred Stock (“Preferred Stock”) for a purchase price of (i) $2.70 per share of Common Stock, net to the holder thereof in cash (the “Common Offer Price”) and (ii) $7.80 per share of Preferred Stock, plus accrued and unpaid dividends payable thereon, if any, as of immediately prior to the Effective Time (as defined in the Merger Agreement), net to the holder thereof in cash (the “Preferred Offer Price”), each without interest.

The consummation of the Offer will be conditioned on (i) the number of shares of outstanding Common Stock and Preferred Stock being validly tendered and not withdrawn from the Offer, (when considered together with all other company shares, if any, otherwise beneficially owned by Parent and Acquisition Sub) representing a majority of the outstanding shares of company capital stock, voting together as a single-class on an as-if converted to common stock basis (ii) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in the United States (“HSR Act”), (iii) obtaining clearance of the Offer and Merger (as defined below) from the Committee on Foreign Investment in the United States (“CFIUS”),

(iii) receipt by the company of consents to the Offer and Merger from specified company customers and (iv) other customary conditions. The Offer is not subject to a financing condition.

Following the consummation of the Offer, the Merger Agreement provides that Acquisition Sub will be merged with and into the company (the “Merger”) and the company will become a wholly owned subsidiary of Parent, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law without any additional stockholder approvals. In the Merger, each outstanding share of Common Stock and Preferred Stock (other than shares owned by Parent, Acquisition Sub or the company, or any of their respective wholly owned subsidiaries, shares held by the company in the company’s treasury or shares with respect to which appraisal rights are properly exercised under Delaware law) will be converted into the right to receive an amount in cash equal to the Common Offer Price or Preferred Offer Price, as applicable.

In connection with the Merger, all outstanding vested and unvested options to purchase Common Stock under the company’s 1999 Stock Incentive Plan, as amended (each such option, a “Company Option”) will be cancelled and converted into the right to receive, in exchange for the cancellation of each such Company Option, an amount in cash, without interest and less applicable tax withholdings, equal to (i) the Common Offer Price, less the per share exercise price of such Company Option, multiplied by (ii) the total number of shares of the Company’s Common Stock issuable upon exercise in full of such Company Option (the “Company Option Consideration”). If the per share exercise price of any Company Option is equal to or greater than the Common Offer Price, such Company Option will be cancelled without cash payment.

In connection with the Merger, (i) each vested company restricted stock award outstanding, and each unvested company restricted stock award outstanding under the Company Stock Plan (each, a “Restricted Stock Award” and collectively, the “Restricted Stock Awards”) held by a holder holding less, in the aggregate, than 2,000 shares of Common Stock subject to such Restricted Stock Awards, will be cancelled and converted into a right to receive an amount in cash, without interest, equal to (x) the amount of the Common Offer Price multiplied by (y) the total number of shares of Common Stock subject to such award and (ii) with respect to each unvested Restricted Stock Award held by a holder holding, in the aggregate, 2,000 or more shares of Common Stock subject to such unvested Restricted Stock Awards (x) 2,000 shares of Common Stock subject to such unvested Restricted Stock Awards shall be cancelled and converted into the right to receive cash in an amount per share equal to the Common Offer Price and (y) the remaining shares subject to such unvested Restricted Stock Awards shall be assumed by Parent and converted into shares of restricted Guarantor American Depositary Shares (as defined in the Merger Agreement) (collectively, the “Restricted Stock Award Consideration”).

The Merger Agreement contains customary representations, warranties and covenants of the parties. The company has agreed to refrain from engaging in certain activities until the effective time of the Merger. In addition, pursuant to the terms of the Merger Agreement, the Company agreed not to solicit or support any alternative acquisition proposals, subject to customary exceptions for the company to respond to and support unsolicited proposals in the exercise of its fiduciary duties of the board of directors of the company. The company will be obligated to pay a termination fee of $4.454 million to Parent in certain circumstances following termination of the Merger Agreement.

Concurrently with the execution of the Merger Agreement, each of the members of the company’s board of directors and the executive officers of the company, as well as certain stockholders of the company affiliated with members of the board of directors, each in their respective capacities as stockholders of the company, entered into a Tender and Support Agreement with Parent and Acquisition Sub (the “Support Agreement”), pursuant to which the signatories have agreed, among other things, to tender their respective shares of Common Stock (including those owned through the exercise or settlement of Company Options or Company Restricted Stock Awards) and Preferred Stock into the Offer and, during the period from the date of such Support Agreement through the earlier of (i) the date upon which the Merger Agreement is validly terminated and (ii) the effective time of the Merger, to not vote any of their securities in favor of any alternative acquisition proposals.

The company expects to close the Merger in the second half of 2018, subject to the satisfaction or waiver of the applicable closing conditions.

For more information related to the Merger Agreement and Support Agreement, please refer to our Current Report on Form 8-K filed with the SEC on April 26, 2018. The foregoing descriptions of the Merger Agreement and Support Agreement are each qualified in their entirety by reference to the full text of the Merger Agreement and Support Agreement, attached as Exhibit 2.1 and Exhibit 99.1, respectively, to our Current Report on Form 8-K filed with the SEC on April 26, 2018.

the full text of the second amendment attached as Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on April 26, 2018.

In connection with the Merger Agreement, the company also amended the employment contract of David Gustafson, its Chief Operating Officer. Pursuant to the terms of the amendment, Mr. Gustafson’s salary and annual target bonus were adjusted. The employment agreement amendment is effective only upon and subject to the closing. For more information related to the amendment, please refer to our Current Report on Form 8-K filed with the SEC on April 26, 2018. The foregoing description of the second amendment is qualified in its entirety by reference to the full text of the amendment attached as Exhibit 10.4 to our Current Report on Form 8-K filed with the SEC on April 26, 2018.

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~~2017.

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.

12On April 25, 2018, the company entered into an Agreement and Plan of Merger with Parent, Acquisition Sub and, solely for purposes of Section 8.16 thereof, Guarantor. Pursuant to the terms of the Merger Agreement, Acquisition Sub will commence the Offer to acquire all of the shares Common Stock and Preferred Stock for the Common Offer Price and Preferred Offer Price, as applicable, each without interest. The consummation of the Offer will be conditioned on (i) the number of shares of outstanding

Common Stock and Preferred Stock being validly tendered and not withdrawn from the Offer, (when considered together with all other company shares, if any, otherwise beneficially owned by Parent and Acquisition Sub) representing a majority of the outstanding shares of company capital stock, voting together as a single-class on an as-if converted to common stock basis (ii) expiration or termination of the applicable waiting period under the HSR Act, (iii) obtaining clearance of the Offer and Merger from CFIUS, (iii) receipt by the company of consents to the Offer and Merger from specified company customers and (iv) other customary conditions. The Offer is not subject to a financing condition.

Following the consummation of the Offer, subject to customary conditions, the Merger will also be consummated. In the Merger, each outstanding share of Common Stock and Preferred Stock (other than shares owned by Parent, Acquisition Sub or the company, or any of their respective wholly owned subsidiaries, shares held by the company in the company’s treasury or shares with respect to which appraisal rights are properly exercised under Delaware law) will be converted into the right to receive an amount in cash equal to the Common Offer Price or Preferred Offer Price, as applicable, without interest, less any applicable withholding taxes.

In connection with the Merger, all outstanding Company Options will be cancelled and converted into the right to receive, in exchange for the cancellation of each such Company Option, the Company Option Consideration. If the per share exercise price of any Company Option is equal to or greater than the Common Offer Price, such Company Option will be cancelled without cash payment. In connection with the Merger, (i) each Restricted Stock Award held by a holder holding less, in the aggregate, than 2,000 shares of Common Stock subject to such Restricted Stock Awards, will be cancelled and converted into a right to receive an amount in cash, without interest, equal to (x) the amount of the Common Offer Price multiplied by (y) the total number of shares of Common Stock subject to such award and (ii) with respect to each unvested Restricted Stock Award held by a holder holding, in the aggregate, 2,000 or more shares of Common Stock subject to such unvested Restricted Stock Awards (x) 2,000 shares of Common Stock subject to such unvested Restricted Stock Awards shall be cancelled and converted into the right to receive cash in an amount per share equal to the Common Offer Price and (y) the remaining shares subject to such unvested Restricted Stock Awards shall be assumed by Parent and converted into the Restricted Stock Award Consideration.

We expect to close the Merger in the second half of 2018, subject to the satisfaction or waiver of the applicable closing conditions. However, we have prepared this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the forward-looking statements contained in this report as if we were going to remain an independent company. If the Merger is consummated, many of the forward-looking statements contained in this report would no longer be applicable.

For more information related to the Merger Agreement, please refer to our Current Report on Form 8-K filed with the SEC on April 26, 2018. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement attached as Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on April 26, 2018.

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	~~Quarter Ended~~
(Dollars in millions)	March 31, 2018	~~March 31, 2017~~			March 31, 2017	~~June 30, 2017~~			~~September 30, 2017~~
ACV bookings	$	$1.7	~~3.5~~		$	$3.5	~~2.5~~		$	~~5.2~~
Rolling four quarters ACV bookings	$	$12.2	~~19.0~~		$	$19.0	~~17.1~~		$	~~17.6~~
Backlog	$	$3.5	~~14.5~~		$	$14.5	~~13.1~~		$	~~14.6~~
Gross margin		71	69%	%		69	69%	%		73	%
		Quarter Ended
(Dollars in millions)		March 31, 2016				June 30, 2016			September 30, 2016
ACV bookings		$	5.4			$	4.4		$	4.7
Rolling four quarters ACV bookings		$	25.1			$	23.7		$	21.5
Backlog		$	17.9			$	23.1		$	19.2
Gross margin			68	%			65	%		67	%

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.

Results of Operations

	Quarter Ended							~~Nine Months Ended~~
(Dollars in millions)	~~Sept.~~March 3031, ~~2017~~2018		~~Sept.~~March 3031, ~~2016~~2017		Change			~~Sept. 30, 2017~~		~~Sept. 30, 2016~~		~~Change~~
Total revenue	$	1113.37	$	1011.40		925	%	$	~~32.9~~	$	~~29.5~~		11	%
Total cost of revenue, exclusive of depreciation and amortization		3.19		3.4		(914	)%		~~9.9~~		~~9.9~~	—
Other operating expenses		1011.98		1211.06		(91	)%		~~33.9~~		~~36.3~~		(6	)%
Operating loss		2.70		54.01		(4751	)%		~~10.9~~		~~16.6~~		~~(34~~	)%
Non-operating expenses		0.42		0.89		(5382	)%		~~3.8~~		~~1.2~~		~~218~~	%
Net loss		32.01		5.80		(4857	)%		~~14.8~~		~~17.9~~		~~(17~~	)%

Revenue

Total revenue increased by $0.9 million in the third quarter and by $3.3 million in the first nine months of 2017 compared with the same periods in 2016. Subscription revenue in the third quarter increased by $1.1 million and in the first nine months of 2017 by $3.6 million compared with the same periods in 2016. The increase in the third quarter of 2017 was primarily due to $0.7 million from growth within existing client contracts and $0.8 million from new client contracts, partially offset by a decrease of $0.4 million from terminating contracts. The increase in the first nine months of 2017 was primarily due to $3.5 million from growth within existing client contracts and $1.5 million from new client contracts, partially offset by a decrease of $1.4 million from terminating contracts.

	Quarter Ended
(Dollars in millions)	March 31, 2018		March 31, 2017		Change
Subscription revenue	$	13.0	$	10.4		26	%
Other revenue		0.7		0.6		18	%
Total	$	13.7	$	11.0		25	%

WeTotal ~~received~~revenue aincreased ~~substantial~~by ~~portion~~$2.7 ofmillion ~~our~~in ~~revenue~~the ~~from~~first aquarter ~~limited~~of ~~number~~2018 ofcompared ~~clients.~~with ~~Higher~~the ~~concentration~~same ofperiod in 2017. Subscription revenue ~~with~~in athe ~~single~~first ~~client~~quarter orof a2018 ~~limited~~increased ~~group~~by of$2.6 ~~clients~~million ~~creates~~compared ~~increased~~with ~~revenue~~the ~~risk~~same ifperiod ~~one~~in of2017. ~~these~~The ~~clients~~table ~~significantly~~below ~~reduces~~details ~~its~~the ~~demand~~increase ~~for~~in ~~our~~subscription ~~services~~revenue.

Subscription Contracts

	Quarter Ended
(Dollars in millions)	March 31, 2018			% of Revenue
Due to growth from existing clients	$	2.0			19	%
Due to new client acquisitions		0.8			8	%
Due to termination of contracts		(0.2	)		(2	)%
Total	$	2.6			26	%

We received a substantial portion of our revenue from a limited number of clients. 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. Since the end of 2017, subscription contracts accounting for approximately 75% of the revenue earned from United Healthcare in 2017 either expired or were terminated by the customer.

Highest Revenue Generating Clients:

	Quarter Ended						~~Nine Months Ended~~
	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
	March. 31,			March. 31,
(% of total revenue)	2017			2016			2017			2016
	2018			2017
Top 5 Clients		71	%		76	%		74	%		73	%
	(% of total revenue)
Top 10 Clients		88	%		90	%		88	%		89	%
Top 5 Clients		63	%		77	%
Top 10 Clients		85	%		91	%

Clients Accounting for 10% or More of Total Revenue:

	Quarter Ended						~~Nine Months Ended~~
	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
	March. 31,			March. 31,
(% of total revenue)	2017			2016			2017			2016
	2018			2017
United HealthCare Services, Inc.		27	%		35	%		29	%		33	%
	(% of total revenue)
CVS Caremark Corporation		1718	%		1517	%		17	%		15	%
TriWest Healthcare Alliance Corp		14	%		9	%		15	%		8	%
United HealthCare Services, Inc.		18	%		33	%
Progressive Casualty Insurance Company		8	%		13	%		9	%		13	%
TriWest Healthcare Alliance Corp		11	%		15	%

Total Cost of Revenue, Exclusive of Depreciation and Amortization

Total costs of revenue consisted of $2.4 million of subscription revenue costs and $0.8 million of other revenue costs in the third quarter; and $7.6 million of subscription revenue costs and $2.3 million of other revenue costs in the first nine months of 2017. Cost of subscription revenue was $2.4 million, or 22% of subscription revenue, in third quarter, when compared with $2.8 million, or 29% of subscription revenue, in the same period in 2016. The decrease in cost of subscription revenue in the third quarter was primarily due to an increase in deferrals for deployments as well as a decrease in maintenance costs. Cost of subscription revenue was $7.6 million, or 24% of subscription revenue, in the first nine months of 2017, when compared with $7.8 million, or 29% of subscription revenue, in the same period in 2016. The decrease in cost of subscription revenue in the first nine months of 2017 was primarily due to a decrease in maintenance costs, partially offset by incremental personnel costs.

Quarter Ended March 31, 2018

Quarter Ended March 31, 2017

Period to Period Change

(Dollars in millions)

Amount

% of

Revenue

Amount

% of

Revenue

Amount

Cost of revenue

3.9

3.4

0.5

Total cost of revenue increased in the first quarter of 2018 when compared to the same period in 2017. The increase is attributable to an increase in compensation costs and net deployment costs. An increase in headcount resulted in additional

compensation costs of $0.1 million. In the first quarter of 2018 less ongoing deployment projects led to a $0.2 million decrease in deferred deployments. More go-lives between the first quarters ended in 2017 and 2018 resulted in an increase in amortization of deployment costs of $0.2 million.

The decrease in cost of revenue as a percentage of revenue can primarily be attributed to a changing product mix weighted more towards our personality-based routing (PBR) contracts. PBR contracts have lower deployment costs, shorter implementation times, and require less ongoing support than our traditional behavioral analytics product. This allows us to more efficiently deploy the product and begin generating revenue. There were ten PBR contracts that went live from the end of the first quarter of 2017 to the end of the first quarter of 2018. PBR revenue for the first quarter of 2018 and 2017 approximated $3.4 million and $1.4 million, respectively.

Cost of revenue as a percentage of revenue fluctuates due to (1) changes in product mix towards more traditional products and (2) the level of deployments in process, which affects the amount of deployment costs deferred.

Other Operating Expenses

Other operating expenses include product development, sales and marketing, general and administrative, and depreciation and amortization.

	Quarter Ended							Nine Months Ended
(Dollars in millions)	Sept. 30, 2017		Sept. 30, 2016		Change			Sept. 30, 2017		Sept. 30, 2016		Change
Product development	$	3.3	$	3.0		10	%	$	10.2	$	9.6		6	%
Sales and marketing		3.1		4.6		(34	)%		9.5		13.4	(29		)%
General and administrative		2.9		2.9		—			9.3		9.0		4	%
Depreciation and amortization		1.6		1.5		9	%		4.9		4.3		14	%
Other Operating expenses		10.9		12.0		(9	)%		33.9		36.3		(6)	%

Other operating expenses increased $0.2 million in the first quarter of 2018 when compared with the same period in 2017. The table below highlights the impact of key events in the quarter.

Other operating expenses decreased due to decreases in sales and marketing expenses, partially offset by increases in product development, general and administrative, and depreciation and amortization expense.

	Quarter Ended March 31, 2018
(Dollars in millions)	Amount of change			% of total expense
Professional services expenses	$	0.3			2	%
Technology maintenance and support		0.2			2	%
Technology depreciation costs		(0.1	)		(1	)%
Reduction of third-party marketing services		(0.1	)		(1	)%
Reduction in travel expenses		(0.1	)		(1	)%
Total	$	0.2			1	%

~~Product~~Increases ~~development expenses increased~~ in ~~the~~professional ~~third~~services ~~quarter~~expense ~~and~~associated inwith ~~the~~legal ~~first~~fees ~~nine~~contributed ~~months~~to ofthe ~~2017~~increase when compared ~~with~~to the ~~same~~first ~~periods~~quarter in ~~2016~~2017, as awell ~~result~~as ofincreases ~~higher~~in ~~hardware~~technology ~~and~~support ~~software~~costs ~~maintenance~~for ~~costs~~new ~~associated~~service ~~with~~contracts. ~~increased~~These ~~investments~~increases were offset by decreases in ~~technology~~third ~~for~~party ~~customer~~marketing ~~deployments~~services and travel expenses due to active cost savings efforts.

~~Sales~~In ~~and~~the ~~marketing~~second ~~expenses~~quarter ~~consist primarily~~ of ~~salaries~~2018, ~~incentive~~we ~~compensation,~~expect ~~commissions,~~to ~~and~~incur ~~employee~~significant ~~benefits~~expenses for ~~business~~professional ~~development,~~services ~~account~~related ~~management~~to the proposed Merger, ~~and~~which ~~marketing.~~we ~~Sales~~will ~~and~~incur ~~marketing~~even ~~expenses~~if ~~decreased~~the byMerger $1is not consummated.6 ~~million~~This inincrease ~~the~~will ~~third~~cause ~~quarter~~general and byadministrative ~~$3.9~~expenses ~~million~~ in the ~~first~~second ~~nine~~quarter ~~months~~ of ~~2017~~2018 ~~compared~~to ~~with~~significantly ~~the~~increase ~~same periods~~ in ~~2016.~~absolute ~~The~~dollars ~~decreases~~and ~~are~~as ~~primarily due to~~ a ~~reduction~~percentage inof ~~headcount~~revenue.

General and administrative expenses increased in the first nine months of 2017 compared with the same period in 2016. The increase in expense is due to relocation expenses associated with the new Austin office location.

Depreciation and amortization increased by $0.1 million in the third quarter and by $0.6 million in the first nine months of 2017 compared with the same periods in 2016. The increase is primarily as a result of increased investments in technology equipment for customer deployments.

Non-Operating Expenses

Non-operating expenses consist primarily of interest and other borrowing costs, ~~loss on early extinguishment of debt,~~ changes in the fair value of the warrant liability and other non-operating income. Non-operating expenses decreased by $0.47 million in the ~~third~~first quarter ~~and increased by $2.6 million in the first nine months~~ of ~~2017~~2018 compared with the same ~~periods~~period in ~~2016~~2017.

Interest and other borrowing costs decreased by $0.5 million in the third quarter and increased by $1.1 million in the first nine months of 2017 compared with the same periods in 2016. The decrease in the third quarter of 2017 is a result of the termination of the Hercules debt at the end of the second quarter of 2017, lower debt subsequent to that termination and more favorable financing terms on the new revolving debt agreement with CIBC Bank USA f/k/a The PrivateBank and Trust Company (CIBC). The increase in the first nine months of 2017 is a result of the interest expense on the Hercules debt for six months and on the CIBC debt for three months.

	Quarter Ended
(Dollars in millions)	March 31, 2018			March 31, 2017
Weighted average borrowings outstanding	$	9.2		$	22.5
Average cost of borrowing (annualized) ⁽¹⁾		6.16	%		14.96	%

15(1) Average cost of borrowings includes interest, discount accretion and debt issuance costs. Commitment fees on line of credit agreements, one-time termination fees, and capital lease interest is not included in the average cost of borrowings.

~~The~~Interest ~~loss~~and onother ~~the~~borrowing ~~early~~costs ~~extinguishment~~decreased ofby ~~Hercules debt totaled~~ $10.87 million atin ~~June~~the ~~29,~~first ~~2017.~~quarter Itof ~~consisted~~2018 ofcompared awith ~~prepayment~~the ~~charge~~same ofperiod $0in 2017.7 ~~million,~~The ~~acceleration~~decrease ofis ~~unaccreted~~a ~~debt~~result ~~discount~~ of ~~$0.6~~lower ~~million,~~debt and ~~acceleration~~more offavorable ~~unamortized~~financing ~~deferred~~terms on the revolving debt ~~costs~~agreement ofwith $0CIBC Bank USA (CIBC).~~5 million.~~

~~Income Tax Provision~~20

~~Net~~Income ~~deferred~~Tax ~~tax~~(Provision) 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. As of September 30, 2017 and 2016, total net deferred tax assets of approximately $89.0 million and $82.0 million, respectively, were fully offset by a valuation allowance.Benefit

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. As of March 31, 2018 and 2017, total net deferred tax assets of approximately $58.6 million and $85.5 million, respectively, were fully offset by a valuation allowance.

Liquidity and Capital Resources

Sources and Uses of Cash

Our principal cash requirements are to fund working capital needs, investments in Behavioral Analytics technology and infrastructure, and other revenue-generating and growth investments. Cash and cash equivalents were $8.07 million and $129.50 million at ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017, respectively.

Net cash used in operating activities decreased by $7.69 million in the first ~~nine~~quarter ~~months~~ of ~~2017~~2018 when compared with the same period in ~~2016~~2017. ~~This~~The decrease was ~~largely~~primarily ~~attributable~~due to: ~~growth~~(i) ina ~~customer~~$2.8 ~~base~~million ~~and a~~ decrease in ~~operating~~net ~~expenses~~loss, inwhich ~~2017.~~was ~~The~~largely attributable to growth in customer base ~~resulted~~and in(ii) an ~~additional~~increase ~~$3.6 million~~ in ~~earned revenue. Cash provided by collections on accounts receivable improved by $1.8 million and~~ unearned revenue ~~increased~~of by $45.95 million ~~when~~due ~~compared with the first nine months of 2016. Lower headcount in the sales and marketing department contributed~~ to ~~the~~customers’ ~~decreased~~annual ~~net~~prepayments ~~loss~~for ~~and net cash used in operating activities~~services. Cash used in investing activities decreased by $0.34 million in ~~the~~2018 ~~first nine months of 2017~~ when compared with ~~the~~2017 ~~same period in 2016~~ due to ~~lower~~fewer ~~patent~~fixed ~~activity~~asset purchases. Net cash ~~provided~~used byin financing activities decreased by $1718.87 million in ~~the~~2018 ~~first nine months of 2017~~ when compared with ~~the same period in 2016~~2017, primarily as a result of $2314.8 million ~~of cash used to repay in full the principal balance and accrued and unpaid interest outstanding under the term loan with Hercules~~, ~~partially offset by~~ net ~~$14.9 million~~ of ~~proceeds drawn on our credit line with CIBC (see Credit Facility below) and $14.7 million, net of~~ fees received from the sale of 5,328,187 shares of common stock pursuant to a private placement of common stock in the first quarter of 2017, as well as a net repayment of $4.0 million.

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 ~~September~~March 3031, ~~2017~~2018 (the aggregate amount of these dividends was approximately $3.14 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 may not exceed $0.2 million in the aggregate in any calendar year, as per our loan agreement with CIBC. 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 ~~September~~March 3031, ~~2017~~2018, 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). 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 June 29, 2017, we entered into the loan agreement with CIBC. The loan agreement provides for a revolving line of credit to us 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. We, subject to certain limits and restrictions, may from time to time request the issuance of letters of credit under the loan agreement.

16The 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 us) plus 5.50%, payable monthly. In addition, we 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 we may borrow under the credit facility is limited to five times our 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 ~~principal~~loan ~~amount~~agreement ~~outstanding~~imposes ~~under~~various ~~the~~restrictions ~~credit~~on ~~facility~~us, ~~will~~including ~~accrue~~usual ~~interest~~and atcustomary alimitations ~~floating~~on ~~annual~~our ~~rate~~ability ~~equal~~ to 1incur ~~month,~~debt 2and ~~month~~to orgrant 3liens ~~month~~upon ~~LIBOR~~our ~~(as~~assets, ~~selected~~increasing byrestrictions ~~us)~~based ~~plus~~on ~~4.50%~~thresholds, ~~payable~~prohibits ~~monthly.~~certain Inconsolidations, ~~addition~~mergers, weand ~~will~~sales ~~pay~~and atransfers ~~non-use~~of ~~fee~~assets onby ~~the~~us ~~credit~~and ~~facility~~requires ofus 25to ~~basis~~comply ~~points~~with ~~(0.25%)~~a ~~per~~trailing ~~annum~~twelve ofmonths ~~the average unused portion~~ of ~~the~~total ~~credit~~revenue ~~facility. The~~and ~~amount~~quarterly weEBITDA ~~may borrow under the credit facility is limited to five times our monthly recurring revenue~~ (as ~~determined~~adjusted in accordance with the ~~terms and conditions set forth in the~~ loan agreement), ~~multiplied~~targets. byThe aloan ~~dynamic~~agreement ~~churn~~includes ~~factor~~usual ~~that~~and iscustomary ~~based~~events ~~upon the ratio~~ of ~~recurring~~default ~~revenue~~(with ~~retained~~customary ~~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 us, including usual and customary limitations on our ability to incur debt and to grant liens upon our assets, prohibits certain consolidations, mergers, and sales and transfers of assets by us and requires us to comply with total revenue and 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. 21

~~Prior~~grace toperiods, ~~entering~~as ~~into~~applicable) ~~the~~and ~~loan~~provides ~~agreement with CIBC~~that, weupon ~~were~~the ~~party~~occurrence toof aan ~~loan~~event ~~agreement~~of ~~with Hercules. On June 29~~default, ~~2017,~~payment weof ~~drew~~all ~~$13.5~~amounts ~~million~~payable onunder the ~~credit~~loan ~~facility~~agreement tomay ~~repay~~be accelerated and/or the ~~principal~~lender’s ~~balance~~commitments ofmay ~~$22.5 million,~~be $0terminated.7 ~~million~~In ~~of prepayment charges~~addition, ~~and~~upon ~~$0.6~~the ~~million~~occurrence of ~~accrued~~certain ~~and~~insolvency ~~unpaid~~or ~~interest~~bankruptcy ~~under~~related ~~our~~events ~~prior~~of ~~credit~~default, ~~facility~~all ~~with~~amounts ~~Hercules.~~payable ~~Upon~~under ~~effectiveness of~~ the loan agreement ~~and~~will ~~repayment~~automatically ofbecome ~~the~~immediately ~~Hercules~~due ~~credit~~and ~~facility~~payable, weand ~~terminated~~the ~~our~~lender’s ~~loan~~commitments ~~agreement~~will ~~with~~automatically ~~Hercules~~terminate.

On March 29, 2018, we amended the loan agreement with CIBC. The amendment adjusts our quarterly EBITDA targets and increases the applicable margin for loans bearing interest at LIBOR from 4.50% to 5.50% and for loans bearing interest at the base rate from 1.75% to 2.75%. The amendment increases our minimum total revenue thresholds for the first and second quarters of 2018 by an average of approximately 3% each quarter and reduces the applicable total revenue thresholds for each of the third and fourth quarters of 2018 by an average of approximately 6% each quarter. The amendment also provides CIBC with the ability to impose discretionary reserves against the borrowing base. CIBC subsequently imposed a reserve of $5.0 million, effectively reducing total availability to $15 million. CIBC has the ability to increase the reserves against the revolving loan availability at their discretion. We classified the CIBC debt as long term and we do not expect CIBC to demand repayment within the next 12 months. We paid CIBC a non-refundable amendment fee of $0.1 million. As of April 2018, we have repaid $4.5 million of principal on the revolving line of credit. If the NICE transaction does not occur or is delayed, we would need to raise capital and negotiate modifications to our loan agreement and there is no assurance that we would have access to additional external capital resources on acceptable terms.

Capital Lease Obligations

We are a party to capital lease agreements with leasing companies to fund our ongoing equipment requirements. Capital lease obligations were $32.75 million as of ~~September~~March 3031, ~~2017~~2018 and $3.62 million as of December 31, ~~2016~~2017. We expect to incur new capital lease obligations of approximately $31.09 million for ~~2017~~2018 as we continue to expand our investment in the infrastructure for Behavioral Analytics. Certain ~~leases are collateralized by $3.4 million in~~ letters of credit are secured by $32.05 million of restricted cash.

Accounts Receivable Customer Concentration

As of ~~September~~March 3031, ~~2017~~2018, ~~two~~three clients, ~~CVS Caremark Corporation and~~ United HealthCare Services, Inc., Progressive Casualty Insurance Company, and Macy’s accounted for 4518%, 13% and 3013% of total gross accounts receivable, respectively. Of these amounts, we have collected 7355% from ~~CVS~~United ~~Caremark~~HealthCare ~~Corporation~~Services, ~~and~~Inc., 5293% from ~~United~~Progressive ~~HealthCare~~Casualty ~~Services,~~Insurance ~~Inc.,~~Company and 53% from Macy’s through ~~October~~May 317, ~~2017~~2018. Of the total ~~September~~March 3031, ~~2017~~2018 gross accounts receivable, we have collected 5263% as of ~~October~~May 317, ~~2017~~2018. 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 revolving line of credit and other borrowings, capital leases, and cash and cash equivalents. Interest on the loan agreement with CIBC is currently based on ~~the~~a floating annual rate equal to 1 month, 2 month or 3 month LIBOR rate (as selected by ~~the company~~us) plus 45.50%, payable monthly. ~~Since~~A ~~the LIBOR 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 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 September 30, 2017, our disclosure controls and procedures were effective.

1722

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, 2018, 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 ~~third~~first quarter of ~~2017~~2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

1823

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~~2017):

• We have not realized an operating profit in ~~seventeen~~eighteen 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, including any perceived vulnerability therein 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.

1924

~~There~~Other than as set forth below under “Risks Related to Our Proposed Merger”, 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~~2017.

Risks Related to Our Proposed Merger

Our proposed Merger may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could adversely affect our business and the market price of our common stock.

The consummation of the transactions contemplated by the Merger Agreement is subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement. We expect to close the Merger in the second half of 2018, subject to the satisfaction or waiver of these conditions. If the Merger is delayed or otherwise not consummated within the contemplated time periods or at all, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following:

•

If the Merger is not completed, and no other party is willing and able to acquire us at the Common Offer Price or higher, on terms acceptable to us, the share price of our common stock is likely to decline, particularly to the extent that the current market price reflects a market assumption that the proposed Merger will be completed;

•

We have incurred, and will continue to incur, significant expenses for professional services related to the proposed Merger, for which we will have received little or no benefit if the Merger is not completed. Many of these fees and costs will be payable even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the transaction;

•

A failed Merger may result in negative publicity and/or give a negative impression of us among our customers or in the investment community or business community generally; and

•

If the Merger Agreement is terminated under certain circumstances, we may be required to pay Parent a termination fee of $4.454 million.

The announcement and pendency of Parent’s proposed acquisition of us pursuant to the Offer and subsequent Merger could adversely affect our business, financial condition and results of operations.

The announcement and pendency of the Offer and Merger could disrupt our business in the following ways, among others:

•

Third parties may determine to delay or defer purchase decisions with regard to our products or services or terminate and/or attempt to renegotiate their relationships with us as a result of the Offer and Merger, whether pursuant to the terms of their existing agreements with us or otherwise;

•

The diversion of significant management and employee time and resources towards the completion of the Offer and the Merger and the unavoidable disruption to our relationships with employees, customers and other business partners may detract from our ability to grow revenues and minimize cost;

•

The impairment of our ability to attract and retain key personnel;

•

The restrictions on the conduct of our business prior to the completion of the Merger, which prevents us from taking specified actions without the prior consent of Parent, which we might otherwise take in absence of the Merger Agreement; and

•

We may be unable to respond effectively to competitive pressures, industry developments and future opportunities.

Any of the above matters could adversely affect our stock price or harm our financial condition, results of operations or business prospects.

Our executive officers and directors may have interests that are different from, or in addition to, those of our stockholders generally.

Our executive officers and directors may have interests in the Offer and Merger that are different from, or are in addition to, those of our stockholders generally. These interests include direct or indirect ownership of our Common Stock, Preferred Stock, Company Options, and Restricted Stock Awards, and the receipt of change in control or other severance payments and employment offers in connection with the proposed transactions.

The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire our company prior to the completion of the Offer and the Merger.

The Merger Agreement contains provisions that make it difficult for us to entertain a third-party proposal to acquire us. These provisions include our agreement not to solicit or initiate any discussions with third parties regarding proposals for our acquisition, as well as restrictions on our ability to respond to such proposals, subject to fulfillment of certain fiduciary requirements of our board of directors. The Merger Agreement also contains certain termination rights, including, under certain circumstances, a requirement for us to pay to Parent a termination fee of $4.454 million.

These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition of our company, even one that may be deemed of greater value to our stockholders than the Offer and the Merger. Furthermore, even if a third party elects to propose an acquisition, our obligation to pay a termination fee may result in that third party’s offering of a lower value to our stockholders than such third party might otherwise have offered.

Lawsuits may be filed against us and the members of our board of directors arising out of our acquisition by Parent, which may delay or prevent the proposed transaction.

Putative stockholder class action complaints and other lawsuits may be filed against us, our board of directors, Parent and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain and we may not be successful in defending against any such future claims. Lawsuits, that may be filed against us could delay or prevent our acquisition by Parent, divert the attention of our management and employees from our day-to-day business and otherwise adversely affect us financially.

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 ~~third~~first quarter of ~~2017~~2018. 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 Purchased (1)		Average Price Paid Per Share
July 1, 2017 – July 31, 2017		753	$	2.90
January 1, 2018 – January 31, 2018		—	$	—
August 1, 2017 – August 31, 2017		35,974	$	2.35
February 1, 2018 – February 28, 2018		87,519	$	2.36
September 1, 2017 – September 30, 2017		—
March 1, 2018 – March 31, 2018		28	$	2.15
Total		3687,~~727~~547	$	2.36

(1)	The shares reflected in this column were purchased in order to satisfy tax withholding obligations related to the vesting of restricted stock awards issued pursuant to our 1999 Stock Incentive Plan.

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Item 6. Exhibits

2.1		Agreement and Plan of Merger by and among NICE Systems, Inc., NICE Acquisition Sub, Inc., Mattersight Corporation, and, solely for purposes of Section 8.16 thereof, NICE Ltd., dated as of April 25, 2018. (Certain schedules and annexes referenced in the Agreement and Plan of Merger have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or annex will be furnished as a supplement to the U.S. Securities and Exchange Commission upon request) (incorporated by reference to Exhibit 2.1 to Mattersight Corporation’s Current Report on Form 8-K (File No. 000-27975) as filed with the Securities and Exchange Commission on April 26, 2018).
3.1.1		Certificate of Incorporation of Mattersight Corporation, as amended (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to Mattersight Corporation’s Registration Statement on Form S-1 (File No. 333-94293) as filed with the Securities and Exchange Commission on February 1, 2000).
3.1.2		Certificate of Amendment to Mattersight Corporation’s Certificate of Incorporation effective December 19, 2001 (incorporated by reference to Exhibit 3.3 to Mattersight Corporation’s Annual Report on Form 10-K (File No. 000-27975) as filed with the Securities and Exchange Commission on March 28, 2002).
3.1.3		Certificate of Amendment to Mattersight Corporation’s Certificate of Incorporation effective December 19, 2001 (incorporated by reference to Exhibit 3.4 to Mattersight Corporation’s Annual Report on Form 10-K (File No. 000-27975) as filed with the Securities and Exchange Commission on March 28, 2002).
3.1.4		Certificate of Amendment to Mattersight Corporation’s Certificate of Incorporation effective May 31, 2011 (incorporated by reference to Exhibit 3.1 to Mattersight Corporation’s Current Report on Form 8-K (File No. 000-27975) as filed with the Securities and Exchange Commission on May 31, 2011).
3.2.1		~~By-Laws~~Amended and Restated Bylaws of Mattersight Corporation (incorporated by reference to Exhibit 3.~~2 to Amendment No.~~ 1 to Mattersight Corporation’s ~~Registration~~Current ~~Statement~~Report on Form S8-1K (File No. ~~333~~000-~~94293~~27975) as filed with the Securities and Exchange Commission on ~~February~~April 126, ~~2000~~2018).
3.2.2		Amendment to By-Laws of Mattersight Corporation (incorporated by reference to Exhibit 3.1 to Mattersight Corporation’s Current Report on Form 8-K (File No. 000-27975) as filed with the Securities and Exchange Commission on November 16, 2007).
4.1		Reference is made to Exhibits 3.1.1, 3.1.2, 3.1.3, 3.1.4, 3.2.1 and 3.2.2 hereof.
4.2		Certificate of Designations of 7% Series B Convertible Preferred Stock of Mattersight Corporation, filed December 19, 2001 (incorporated by reference to Exhibit 3.6 to Mattersight Corporation’s Annual Report on Form 10-K (File No. 000-27975) as filed with the Securities and Exchange Commission on March 28, 2002).
10.1		Amendment to Loan and Security Agreement, dated March 29, 2018, between Mattersight Corporation and CIBC BANK USA (formerly known as The PrivateBank and Trust Company) (incorporated by reference to Exhibit 10.2 to Mattersight Corporation’s Current Report on Form 8-K (File No. 000-27975) as filed with the Securities and Exchange Commission on March 29, 2018).
10.2		Second Amendment to Loan and Security Agreement, dated April 25, 2018, between Mattersight Corporation and CIBC BANK USA (formerly known as The PrivateBank and Trust Company) (incorporated by reference to Exhibit 10.3 to Mattersight Corporation’s Current Report on Form 8-K (File No. 000-27975) as filed with the Securities and Exchange Commission on April 26, 2018).
10.3+		Amendment to Employment Agreement, dated as of April 25, 2018, by and among David Gustafson, Mattersight Corporation, and NICE Systems, Inc. (incorporated by reference to Exhibit 10.4 to Mattersight Corporation’s Current Report on Form 8-K (File No. 000-27975) as filed with the Securities and Exchange Commission on April 26, 2018).
**31.1		Certification of Kelly D. Conway under Section 302 of the Sarbanes-Oxley Act of 2002.
**31.2		Certification of David B. Mullen under Section 302 of the Sarbanes-Oxley Act of 2002.
**32.1		Certification of Kelly D. Conway and David B. Mullen under Section 906 of the Sarbanes-Oxley Act of 2002.
**101		The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 are formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) Consolidated Statements of Operations for the quarter ended and nine months ended September 30, 2017 and September 30, 2016, (iii) Consolidated Statements of Comprehensive Loss for the quarter ended and nine months ended September 30, 2017 and September 30, 2016, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and September 30, 2016, and (v) Notes to the Unaudited Consolidated Financial Statements.
99.1		Form of Tender and Support Agreement, by and among NICE Systems, Inc., NICE Acquisition Sub, Inc. and certain directors, executive officers, and other stockholders of Mattersight Corporation, dated as of April 25, 2018 (incorporated by reference to Exhibit 99.2 to Mattersight Corporation’s Current Report on Form 8-K (File No. 000-27975) as filed with the Securities and Exchange Commission on April 26, 2018).
**101		The following materials from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 are formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, (ii) Consolidated Statements of Operations for the quarter ended March 31, 2018 and March 31, 2017, (iii) Consolidated Statements of Comprehensive Loss for the quarter ended March 31, 2018 and March 31, 2017, (iv) Consolidated Statements of Cash Flows for the quarter ended March 31, 2018 and March 31, 2017, and (v) Notes to the Unaudited Consolidated Financial Statements.

**	Filed herewith.

21+ Indicates management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on ~~November~~May 79, ~~2017~~2018.

MATTERSIGHT CORPORATION

By		/s/ DAVID B. MULLEN
		David B. Mullen
		Senior Vice President and Chief Financial Officer
		(Duly authorized signatory and
		Principal Financial Officer)

By		/s/ ROSE CAMMARATA
		Rose Cammarata
		Vice President and Controller
		(Duly authorized signatory and
		Principal Accounting Officer)

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