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10-Q
INCONTACT, INC. filed this Form 10-Q on 11/09/2016
Entire Document
 
saas-10q_20160930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2016

Commission File No. 1-33762

 

inContact, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

87-0528557

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

75 West Towne Ridge Parkway, Tower 1, Sandy, UT 84070

(Address of principal executive offices and Zip Code)

(801) 320-3200

(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 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 (§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 or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer

  Accelerated filer

  Non-accelerated filer

  Smaller reporting company

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding as of October 31, 2016

Common Stock, $0.0001 par value

 

62,622,908 shares

 

 

 

 

 

 

 


 

TABLE OF CONTENTS

ITEM NUMBER AND CAPTION

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

Page

Item 1.

 

Financial Statements

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 (unaudited)

 

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)

 

4

Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2016 (unaudited)

 

5

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)

 

6

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

Item 2.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

Item 4.

 

 

Controls and Procedures

 

32

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

 

 

Legal Proceedings

 

33

 

Item 1A.

 

 

Risk Factors

 

33

 

Item 2.

 

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

35

Item 6.

 

 

Exhibits

 

36

 

Signatures

 

37

 

 

 

2


 

INCONTACT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS—(Unaudited)

(in thousands, except per share data)

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

40,873

 

 

$

29,050

 

Restricted cash

 

-

 

 

 

81

 

Investments

 

38,299

 

 

 

75,109

 

Accounts and other receivables, net of allowance for uncollectible accounts of $2,140

   and $2,555, respectively

 

40,940

 

 

 

37,185

 

Other current assets

 

10,883

 

 

 

9,243

 

Total current assets

 

130,995

 

 

 

150,668

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

53,336

 

 

 

42,569

 

Intangible assets, net

 

27,021

 

 

 

19,232

 

Goodwill

 

49,016

 

 

 

39,247

 

Other assets

 

3,866

 

 

 

2,421

 

Total assets

$

264,234

 

 

$

254,137

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade accounts payable

$

13,748

 

 

$

11,607

 

Accrued liabilities

 

12,221

 

 

 

12,828

 

Accrued commissions

 

5,187

 

 

 

4,615

 

Current portion of deferred revenue

 

14,254

 

 

 

11,530

 

Total current liabilities

 

45,410

 

 

 

40,580

 

 

 

 

 

 

 

 

 

Deferred revenue

 

7,567

 

 

 

6,082

 

Deferred rent and lease incentive obligation

 

6,657

 

 

 

3

 

Deferred tax liability, net

 

466

 

 

 

230

 

Long-term debt

 

85,215

 

 

 

81,985

 

Total liabilities

 

145,315

 

 

 

128,880

 

Commitments and contingencies (see Note 10)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 100,000 shares authorized; 62,612 and 61,826

   shares issued and outstanding as of September 30, 2016 and December 31, 2015,

   respectively

 

6

 

 

 

6

 

Additional paid-in capital

 

264,616

 

 

 

253,986

 

Accumulated deficit

 

(145,702

)

 

 

(128,654

)

Accumulated other comprehensive loss

 

(1

)

 

 

(81

)

Total stockholders' equity

 

118,919

 

 

 

125,257

 

Total liabilities and stockholders' equity

$

264,234

 

 

$

254,137

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

3


 

INCONTACT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE LOSS

(Unaudited)

(in thousands, except per share data)

 

 

Three Months

 

 

Nine Months

 

 

Ended September 30,

 

 

Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software

$

44,222

 

 

$

36,709

 

 

$

128,130

 

 

$

103,227

 

Network connectivity

 

22,796

 

 

 

19,369

 

 

 

65,073

 

 

 

57,260

 

Total net revenue

 

67,018

 

 

 

56,078

 

 

 

193,203

 

 

 

160,487

 

Costs of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software

 

18,534

 

 

 

14,815

 

 

 

52,473

 

 

 

42,872

 

Network connectivity

 

12,805

 

 

 

12,278

 

 

 

39,727

 

 

 

36,072

 

Total costs of revenue

 

31,339

 

 

 

27,093

 

 

 

92,200

 

 

 

78,944

 

Gross profit

 

35,679

 

 

 

28,985

 

 

 

101,003

 

 

 

81,543

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

19,025

 

 

 

17,810

 

 

 

55,352

 

 

 

49,549

 

Research and development

 

9,268

 

 

 

7,328

 

 

 

27,097

 

 

 

21,021

 

General and administrative

 

12,377

 

 

 

7,750

 

 

 

32,326

 

 

 

25,699

 

Total operating expenses

 

40,670

 

 

 

32,888

 

 

 

114,775

 

 

 

96,269

 

Loss from operations

 

(4,991

)

 

 

(3,903

)

 

 

(13,772

)

 

 

(14,726

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,816

)

 

 

(1,738

)

 

 

(5,400

)

 

 

(3,940

)

Interest income

 

151

 

 

 

125

 

 

 

478

 

 

 

183

 

Other income (expense)

 

(105

)

 

 

1

 

 

 

(111

)

 

 

1

 

Total other income (expense)

 

(1,770

)

 

 

(1,612

)

 

 

(5,033

)

 

 

(3,756

)

Loss before income taxes

 

(6,761

)

 

 

(5,515

)

 

 

(18,805

)

 

 

(18,482

)

Income tax benefit (expense)

 

(100

)

 

 

(163

)

 

 

2,296

 

 

 

(474

)

Net loss

$

(6,861

)

 

$

(5,678

)

 

$

(16,509

)

 

$

(18,956

)

Other comprehensive loss, net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gain (loss) in

  available for sale investments

 

69

 

 

 

(15

)

 

 

80

 

 

 

(35

)

Comprehensive loss

$

(6,792

)

 

$

(5,693

)

 

$

(16,429

)

 

$

(18,991

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

(0.11

)

 

$

(0.09

)

 

$

(0.26

)

 

$

(0.31

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

62,977

 

 

 

61,688

 

 

 

62,631

 

 

 

61,407

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

4


 

INCONTACT, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY—(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury Stock

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Shares

 

 

Amount

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

Balance at December 31, 2015

 

 

61,826

 

 

$

6

 

 

$

253,986

 

 

 

-

 

 

$

-

 

 

$

(128,654

)

 

$

(81

)

 

$

125,257

 

Common stock received for

   settlement of taxes and

   forfeited restricted stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(153

)

 

 

(1,347

)

 

 

-

 

 

 

-

 

 

 

(1,347

)

Common stock issued for options

   exercised

 

 

412

 

 

 

-

 

 

 

2,791

 

 

 

118

 

 

 

1,068

 

 

 

(461

)

 

 

-

 

 

 

3,398

 

Common stock issued under the

   employee stock purchase plan

 

 

96

 

 

 

-

 

 

 

753

 

 

 

9

 

 

 

129

 

 

 

(56

)

 

 

-

 

 

 

826

 

Issuance of common stock for

   acquisition of a business

 

 

64

 

 

 

-

 

 

 

344

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

344

 

Stock-based compensation

 

 

 

 

 

 

-

 

 

 

6,870

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,870

 

Vesting of restricted stock units

 

 

214

 

 

 

-

 

 

 

(122

)

 

 

26

 

 

 

144

 

 

 

(22

)

 

 

-

 

 

 

-

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

80

 

 

 

80

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(16,509

)

 

 

-

 

 

 

(16,509

)

Balance at September 30, 2016

 

 

62,612

 

 

$

6

 

 

$

264,622

 

 

 

-

 

 

$

(6

)

 

$

(145,702

)

 

$

(1

)

 

$

118,919

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

5


 

INCONTACT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

 

Nine Months Ended September 30,

 

Cash flows from operating activities:

 

2016

 

 

 

2015

 

Net loss

$

(16,509

)

 

$

(18,956

)

Adjustments to reconcile net loss to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation of property and equipment

 

9,961

 

 

 

7,601

 

Amortization of software development costs

 

6,289

 

 

 

4,876

 

Amortization of intangible assets

 

3,837

 

 

 

3,776

 

Amortization of deferred debt issuance costs

 

290

 

 

 

391

 

Stock-based compensation

 

6,870

 

 

 

6,510

 

Loss on disposal of property and equipment

 

1,444

 

 

 

148

 

Interest accretion

 

2,940

 

 

 

1,843

 

Amortization of investment premium

 

670

 

 

 

148

 

Deferred income taxes

 

(2,429

)

 

 

-

 

Changes in operating assets and liabilities, net of business acquisitions:

 

 

 

 

 

 

 

Accounts and other receivables, net

 

(3,657

)

 

 

(11,564

)

Other current assets

 

(1,577

)

 

 

(2,109

)

Other non-current assets

 

(1,445

)

 

 

11

 

Trade accounts payable

 

1,647

 

 

 

2,467

 

Accrued liabilities

 

(990

)

 

 

1,021

 

Accrued commissions

 

572

 

 

 

787

 

Deferred rent and lease incentive obligation

 

6,988

 

 

 

-

 

Other long-term liabilities

 

-

 

 

 

(220

)

Deferred revenue

 

3,954

 

 

 

4,246

 

Net cash provided by operating activities

 

18,855

 

 

 

976

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Decrease in restricted cash

 

81

 

 

 

-

 

Sales and maturities of available for sale investments

 

67,089

 

 

 

13,716

 

Purchases of available for sale investments

 

(30,868

)

 

 

(89,879

)

Capitalized software development costs

 

(10,924

)

 

 

(7,457

)

Purchases of property and equipment

 

(16,841

)

 

 

(10,162

)

Business acquisitions, net of cash acquired

 

(18,446

)

 

 

-

 

Payments made on deposits

 

-

 

 

 

(19

)

Net cash used in investing activities

 

(9,909

)

 

 

(93,801

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of options

 

3,398

 

 

 

2,603

 

Proceeds from sale of stock under employee stock purchase plan

 

826

 

 

 

1,249

 

Principal payments under debt and capital lease obligations

 

-

 

 

 

(11,824

)

Purchase of treasury stock

 

(1,347

)

 

 

(643

)

Payments under revolving credit agreement

 

-

 

 

 

(11,000

)

Proceeds from issuance of convertible notes, net

 

-

 

 

 

111,190

 

Net cash provided by financing activities

 

2,877

 

 

 

91,575

 

Net (decrease) increase in cash and cash equivalents

 

11,823

 

 

 

(1,250

)

Cash and cash equivalents at the beginning of the period

 

29,050

 

 

 

32,414

 

Cash and cash equivalents at the end of the period

$

40,873

 

 

$

31,164

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

Payments due for property and equipment included in trade accounts payable

$

760

 

 

$

472

 

Unrealized gains (losses) on available for sale investments, net

$

80

 

 

$

(34

)

Issuance of common stock for acquisition of a business

$

344

 

 

$

-

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

6


 

INCONTACT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

inContact, Inc. (“inContact,” “we,” “us,” “our,” or the “Company”) is incorporated in the state of Delaware.  We provide cloud contact center software solutions through our inContact® Customer Interaction Cloud, an advanced contact handling and performance management software application. Our services also provide a variety of connectivity options for carrying inbound calls and linking agents to our inContact applications. We provide customers the ability to monitor agent effectiveness through our user survey tools and the ability to efficiently monitor their agent needs. We are also an aggregator and provider of network connectivity services. We contract with a number of third party providers for the right to resell the various telecommunication services and products they provide, and then offer all of these services to the customers. These services and products allow customers to buy only the network connectivity services they need, combine those services in a customized enhanced contact center package, receive one bill for those services, and call a single point of contact if a service problem or billing issue arises.

 

Proposed Merger by NICE-Systems Ltd.

On May 17, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with NICE-Systems Ltd., a company organized under the laws of the State of Israel (“Parent” or “NICE”), and Victory Merger Sub Inc. (“Merger Sub”), a wholly owned indirect subsidiary of NICE, providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned indirect subsidiary of NICE.

In the Merger, each issued and outstanding share of our common stock will be cancelled and extinguished and automatically converted into the right to receive cash in an amount equal to $14.00, without interest thereon.  Each outstanding and vested restricted stock unit or option to purchase Company’s common stock will be cancelled and extinguished and automatically converted into the right to receive an amount in cash equal to $14.00 per share less, in the case of options, the exercise price per share underlying such option.  Each outstanding and unvested restricted stock unit, share or restricted stock and option to purchase Company stock or other right to purchase or receive Company stock will be converted into an option to purchase or right to purchase or receive American Depositary Shares of Parent, with the same vesting schedule of such equity award continuing after the Merger, subject to existing vesting conditions and the exercise price of options adjusted in accordance with applicable tax law.

The transaction has received approval by the Company’s stockholders and is subject to certain regulatory approvals and other customary closing conditions.  The Merger Agreement contains certain termination rights for each of the Parent, Merger Sub and the Company and provides certain circumstances as described in the Merger Agreement under which we may be required to pay NICE a termination fee of $34.1 million.  

See Note 8, “Long-Term Debt and Capital Lease Obligations” for discussion of the treatment of the Company’s 2.5% Convertible Senior Notes due 2022 in connection with the pending acquisition of inContact by NICE.

The transaction is expected to close by December 31, 2016.  The pending acquisition of inContact by NICE does not impact the basis of presentation in the accompanying financial statements. Following completion of the Merger, the Company will become a wholly-owned subsidiary of NICE, the Company’s common stock will be delisted from The NASDAQ Stock Market and deregistered under the Securities Exchange Act of 1934, as amended, and as such, the Company will no longer file periodic reports with the SEC.

In connection with the proposed Merger, we have incurred certain costs related to professional services, regulatory fees and employee-related expenses.

 

 

Basis of Presentation

These unaudited Condensed Consolidated Financial Statements of inContact and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP, so long as the statements are not misleading. In the opinion of management, these financial statements and accompanying notes contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position and results of operations for the periods presented herein. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated audited financial

7


 

statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 4, 2016. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016. Our significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements in the 2015 Annual Report on Form 10-K and changes, if any, are included below.

 

 

Revenue Recognition

Revenue is recognized when all of the following four criteria are met: (1) persuasive evidence of an arrangement exists, (2) the fee is fixed or determinable, (3) collection is reasonably assured, and (4) delivery has occurred or services have been rendered. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.

Our revenue is reported and recognized based on the type of services provided to the customer as follows:

Software Revenue.  Software revenue includes two main sources of revenue:

(1) Software delivery and support of our inContact cloud software solutions that are provided on a monthly subscription basis and associated professional services. Because our customers purchasing software and support services on a monthly recurring basis do not have the right to take possession of the software, we consider these arrangements to be service contracts and are not within the scope of Industry Topic 985, Software.  We generally bill monthly recurring subscription charges in arrears and recognize these charges in the period in which they are earned. In addition to the monthly recurring revenue, revenue is also received on a non-recurring basis for professional services or on a recurring basis related to improving a customer’s contact center efficiency and effectiveness as it relates to utilization of the inContact cloud software solutions.

For subscription service contracts with multiple elements (hosted software, training, installation and long distance services), we follow the guidance provided in Accounting Standards Codification (“ASC”) 605-25, Revenue Recognition for Multiple Element Arrangements. In addition to the monthly recurring subscription revenue, we also derive revenue on a non-recurring basis for professional services included in implementing or improving a customer’s inContact cloud software solutions experience. Because our professional services, such as training and implementation, are not considered to have standalone value, we defer revenue for upfront fees received for professional services in multiple element arrangements and recognize such fees as revenue over the estimated life of the customer. Fees for network connectivity services in multiple element arrangements within the inContact cloud software solutions are based on usage and recognize as revenue in the same manner as fees for telecommunication services discussed in the “Network Connectivity Services Revenue” below.

(2) Perpetual product and services revenues are primarily derived from the sale of licenses to our Workforce Optimization on-premise software products and services.  For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when all revenue recognition criteria are met.

Many of our customers purchase a combination of software, service, hardware, post contract customer support (“PCS”) and hosting.  For software and software related multiple element arrangements that fall within the scope of  the software revenue guidance in Topic 985,  Software, we allocate revenue to the delivered elements of the arrangement using the residual method, whereby revenue is allocated to the undelivered elements based on vendor-specific objective evidence of fair value (“VSOE”) of the undelivered elements with the remaining arrangement fee allocated to the delivered elements and is recognized as revenue assuming all other revenue recognition criteria are met.  If we are unable to establish VSOE for the undelivered elements of the arrangement, including PCS, revenue recognition is deferred for the entire arrangement until all elements of the arrangement are delivered.  PCS provided to our customers includes technical software support services and unspecified software upgrades to customers on a when-and-if available basis.  PCS revenue is recognized ratably over the term of the maintenance period, which is typically 15 months.  When PCS is included within a multiple element arrangement, we utilize the bell-shaped curve approach to establish VSOE for the PCS. Under the bell-shaped curve approach of establishing VSOE, we perform a VSOE compliance test on a quarterly basis to ensure that a substantial majority of our actual PCS renewals are within a sufficiently narrow range.

Product revenue from customers who purchase our products for resale is generally recognized when such products are released (on a “sell-through” basis). Periodically we review our reseller arrangements as our business and products change.

Network Connectivity Service Revenue.  Network Connectivity Services revenue is derived from network connectivity, such as dedicated transport, switched long distance and data services. These services are provided over our network or through third party network connectivity providers. Our network is the backbone of our subscription software and allows us to provide the all-in-one inContact cloud software solutions. Revenue for network connectivity usage is derived based on customer specific rate plans and the customer’s call usage and is recognized in the period the call is initiated. Customers are also billed monthly charges in arrears and revenue is recognized for such charges over the billing period. If the billing period spans more than one month, earned but unbilled revenues are recognized as revenue for incurred usage to date.              

8


 

Long-term Debt

We record debt issuance costs as a direct deduction from the carrying amount of our long-term borrowings, as well as costs incurred for subsequent modification of debt, incurred in connection with our long-term borrowings and credit facilities. We amortize these costs as an adjustment to interest expense over the remaining contractual life of the associated long-term borrowing or credit facility using the effective interest method for term loans and convertible debt borrowings, and the straight-line method for revolving credit facilities. When unscheduled principal payments are made, we adjust the amortization of our deferred debt-related costs to reflect the expected remaining terms of the borrowing.

 

Operating Leases

Rent expense and lease incentives, including landlord construction allowances, are recognized on a straight-line basis over the lease term, commencing generally on the date the Company takes possession of the leased property. The unamortized portion of deferred rent is included in deferred rent and lease incentive obligation.

 

Self-Funded Health Insurance

 

In September 2016, the Company elected to partially self-fund its health insurance plan.  The Company contracts with a third-party broker to facilitate, administer the plan and obtain individual and aggregate stop-loss insurance policies.  The Company estimates its exposure for claims incurred but not paid at the end of each reporting period and uses historical claims data supplied by the Company’s broker to estimate its self-funded insurance liability. To reduce its risk related to high dollar claims, the Company maintains individual and aggregate stop-loss insurance policies.

 

 

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” The guidance in the ASU supersedes existing revenue recognition guidance and the core principle behind ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for delivering those goods and services. This model involves a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction prices to the performance obligations in the contract and recognizing revenue when (or as) the entity satisfies the performance obligations. In July 2015, the FASB ratified a one-year delay in the effective date of ASU 2014-09, which makes the effective date for the Company the first quarter of 2018. The ASU allows two methods of adoption; a full retrospective approach where three years of financial information are presented in accordance with the new standard, and a modified retrospective approach where the ASU is applied to the most current period presented in the financial statements with a cumulative effect recognized as of the date of initial application. This update could impact the timing and amounts of revenue recognized. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendment provides clarifying guidance in certain narrow areas and adds some practical expedients. We are currently evaluating which transition approach to use and assessing the impact of adopting the new revenue standard on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” that amends the principal versus agent guidance in ASU 2014-09. The guidance in this ASU clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. Additional guidance is also provided about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for the Company is the first quarter of fiscal 2018.  We are currently assessing the impact the updated standard will have on our consolidated financial statements and related disclosures.

 

In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” that amends the revenue guidance in ASU 2014-09 on identifying performance obligations and accounting for licenses of intellectual property. The update allows an entity to exclude immaterial promised good and services from the assessment of performance obligations and also permits certain treatment of shipping and handling costs related to providing goods and services to a customer.  Additionally, this ASU provides guidance on determining if promised goods or services are separately identifiable or whether the promise is to transfer a combined item to which promised goods and/or services are inputs.  This ASU includes implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time).  The effective date of the standard for the Company will coincide with ASU 2014-09 during the first quarter 2018. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

9


 

 

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Liabilities.” This pronouncement will change the income statement impact of equity investments held by an entity, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments.  This ASU is effective in fiscal years beginning after December 15, 2017 and early adoption of some provisions are permitted. The Company is currently assessing the impact of this new standard on our consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires recognition on the balance sheet of assets and liabilities related to the rights and obligations created by leases with a term of more than 12 months.  Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease will depend on its classification as a finance or operating lease.  However, the new guidance differs from current GAAP in that it requires both types of leases to be recognized on the balance sheet.  Related disclosures will include both qualitative and quantitative requirements to help investors better understand the amounts recorded in the financial statements. This ASU is effective in fiscal years beginning after December 15, 2018 and early adoption is permitted.  The Company is currently assessing the impact of this new standard on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The objective of this update is to simplify several aspects of accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  This update is effective in fiscal years beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13: Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update adds to U.S. GAAP a current expected credit loss impairment model that is based on expected losses rather than incurred losses, requiring consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. This update is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments.   This ASU is effective in fiscal years beginning after December 15, 2019 and early adoption is permitted after December 15, 2018.  The Company is currently evaluating the impact of this update on the consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory.  This update requires that income tax consequences are recognized on an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard is effective in fiscal year beginning after December 15, 2017 and early adoption is permitted.  The Company is currently evaluating the impact of this update on the consolidated financial statements and related disclosures.

We reviewed all other recently issued accounting standards to determine their effects, if any, on the consolidated financial statements.  Based on that review, we believe that none of these standards will have a significant effect on current or future results of operations.

 

 

NOTE 2. BASIC AND DILUTED NET LOSS PER COMMON SHARE

Basic earnings per common share is computed by dividing the net loss applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing the net loss by the sum of the weighted-average number of common shares outstanding plus the weighted average common stock equivalents, which would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding options, unvested restricted stock awards, and potential shares from Convertible Notes. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury method.

10


 

As a result of incurring a net loss for the three and nine months ended September 30, 2016 and 2015, no potentially dilutive securities are included in the calculation of diluted earnings per share because such effect would be anti-dilutive. The following table summarizes potentially dilutive securities, using the above security classifications (in thousands):  

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

Stock options

 

 

2,418

 

 

 

2,765

 

Restricted stock awards

 

 

1,727

 

 

 

1,317

 

Potential shares from Convertible Notes

 

 

8,082

 

 

 

8,082

 

Total potentially dilutive shares

 

 

12,226

 

 

 

12,164

 

 

 

NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The accounting guidance for fair value measurements defines fair value, establishes a market-based framework or hierarchy for measuring fair value and expands disclosures about fair value measurements. The guidance is applicable whenever assets and liabilities are measured and included in the Condensed Consolidated Financial Statements at fair value. The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs.  The fair value hierarchy prioritizes the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; benchmark yields, reported trades, broker/dealer quotes, inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

Assets Measured at Fair Value on a Recurring Basis:

The following table summarizes our investments measured at fair value on a recurring basis using the above input categories. As of September 30, 2016 and December 31, 2015, we did not hold any Level 3 assets, and our Level 1 and Level 2 holdings were as follows (in thousands):  

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

28,382

 

 

$

-

 

 

$

28,382

 

 

$

4,071

 

 

$

-

 

 

$

4,071

 

Commercial paper

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

999

 

 

 

999

 

Total cash equivalents

 

 

28,382

 

 

 

-

 

 

 

28,382

 

 

 

4,071

 

 

 

999

 

 

 

5,070

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

-

 

 

 

17,852

 

 

 

17,852

 

 

 

-

 

 

 

27,846

 

 

 

27,846

 

Corporate debt securities

 

 

-

 

 

 

17,936

 

 

 

17,936

 

 

 

-

 

 

 

45,830

 

 

 

45,830

 

Municipal bonds

 

 

-

 

 

 

2,511

 

 

 

2,511

 

 

 

-

 

 

 

1,433

 

 

 

1,433

 

Total investments

 

 

-

 

 

 

38,299

 

 

 

38,299

 

 

 

-

 

 

 

75,109

 

 

 

75,109

 

Total assets measured at fair

   value

 

$

28,382

 

 

$

38,299

 

 

$

66,681

 

 

$

4,071

 

 

$

76,108

 

 

$

80,179

 

 

Fair Value Measurements

Money Market Funds – We value our money market funds using quoted active market prices for such funds.

Commercial paper, Corporate debt securities, and Municipal bonds – The fair value of these securities are estimated using observable market prices for identical securities that may be traded in less-active markets, if available. When observable market prices for

11


 

identical securities are not available, we value these securities using non-binding market price quotes from brokers which we review for reasonableness using observable market data; quoted prices for similar instruments; or pricing models, such as a discounted cash flows.

Other Financial Instruments

The carrying amounts of cash and cash equivalents (other than investments recorded on a fair value basis disclosed above), accounts and other receivables, and trade accounts payable approximate fair value because of the immediate or short-term maturities of these financial instruments.

The fair value of the Convertible Notes is considered to be a Level 2 measurement because it is based on a recent bid price quote for the Convertible Notes, reflecting activity in a less than active market. The carrying value and estimated fair value of our Convertible Notes are as follows (in thousands):

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

Carrying Value

 

 

Estimated Fair Value

 

 

Carrying Value

 

 

Estimated Fair Value

 

Convertible notes

 

$

85,215

 

 

$

138,792

 

 

$

81,985

 

 

$

108,330

 

 

 

NOTE 4. INVESTMENTS – AVAILABLE FOR SALE

Our investments generally consist of money market funds, commercial paper, corporate debt securities and municipal bonds.  All of our investments have original maturities (maturity at the purchase date) of less than 12 months.  Investments with original maturities of three months or less are classified as cash equivalents.

We classify our investments as available for sale at the time of purchase and we reevaluate such classification as of each balance sheet date.  These short-term investments are carried at fair value with unrealized gains or losses classified as a component of accumulated other comprehensive income (loss).  Amortization of premiums and accretion of discounts to maturity are computed under the effective interest method and is included in interest income.  Interest on securities is included in interest income when earned.  Realized gains and losses on the sale of investments are determined using the specific identification method and recorded in "Other income (expense)” in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Our investments as of September 30, 2016 and December 31, 2015 were as follows (in thousands):

 

 

September 30, 2016

 

 

Amortized Cost

 

 

Net Unrealized Gains (Losses)

 

 

Fair Value/Net Carrying Value

 

 

Cash and Cash Equivalents

 

 

Investments

 

Commercial paper

$

17,852

 

 

$

-

 

 

$

17,852

 

 

$

-

 

 

$

17,852

 

Corporate debt securities

 

17,935

 

 

 

1

 

 

 

17,936

 

 

 

-

 

 

 

17,936

 

Money market funds

 

28,382

 

 

 

-

 

 

 

28,382

 

 

 

28,382

 

 

 

-

 

Municipal bonds

 

2,513

 

 

 

(2

)

 

 

2,511

 

 

 

-

 

 

 

2,511

 

Total

$

66,682

 

 

$

(1

)

 

$

66,681

 

 

$

28,382

 

 

$

38,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

Amortized Cost

 

 

Net Unrealized Gains (Losses)

 

 

Fair Value/Net Carrying Value

 

 

Cash and Cash Equivalents

 

 

Investments

 

Commercial paper

$

28,845

 

 

$

-

 

 

$

28,845

 

 

$

999

 

 

$

27,846

 

Corporate debt securities

 

45,911

 

 

 

(81

)

 

 

45,830

 

 

 

-

 

 

 

45,830

 

Money market funds

 

4,071

 

 

 

-

 

 

 

4,071

 

 

 

4,071

 

 

 

-

 

Municipal bonds

 

1,433

 

 

 

-

 

 

 

1,433

 

 

 

-

 

 

 

1,433

 

Total

$

80,260

 

 

$

(81

)

 

$

80,179

 

 

$

5,070

 

 

$

75,109

 

 

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As of September 30, 2016 all our investments had contractual maturities of less than one year.

At September 30, 2016 and December 31, 2015, we had $5,000 and $81,000 of gross unrealized losses on certain investments, respectively. We regularly review our investment portfolio to identify and evaluate investments that have indications of possible impairment that is other-than-temporary. Factors considered in determining whether a loss is temporary include:

 

the length of time and extent to which fair value has been lower than the cost basis;

 

the financial condition, credit quality and near-term prospects of the investee; and

 

whether it is more likely than not that the Company will be required to sell the security prior to recovery.

We believe that there were no investments held at September 30, 2016 that were other-than-temporarily impaired.  For the nine months ended September 30, 2016, proceeds from maturities of investments were $65.3 million for an immaterial realized gain, $1.0  million of these maturities were securities included in cash equivalents.  We sold $2.8 million of investments for the nine months ended September 30, 2016.

 

 

NOTE 5. ACQUISITIONS

AC2 Acquisition

On January 13, 2016, we acquired 100% of the outstanding shares of AC2 Solutions, Inc. (“AC2”), a Delaware corporation.  AC2 provides Workforce Optimization products and services to call centers.  inContact acquired AC2 for an aggregate purchase price of approximately $12.3 million, which was paid with cash in the amount of $12.0 million and 40,456 restricted shares of the Company’s common stock valued at $344,000.  An additional 505,700 restricted shares of our common stock were issued, but not included in the purchase considerations as the shares will vest as services are provided over a two year period.  The acquisition of AC2 was accounted for under the purchase method of accounting in accordance with ASC 805, Business Combinations. Under the purchase method of accounting, the total purchase price is allocated to the preliminary tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values, as determined by management. The total purchase price was allocated using information currently available. The purchase price allocation for the AC2 acquisition will be finalized during calendar year 2016. As a result, we may continue to adjust the preliminary estimated purchase price allocation after obtaining more information regarding asset valuations, liabilities assumed, and revision of preliminary estimates. The following is the total preliminary purchase price allocation on estimated purchase consideration based on information available as of September 30, 2016 (in thousands):

 

 

 

Amount

 

Assets acquired:

 

 

 

 

Cash and cash equivalents

 

$

78

 

Accounts receivable

 

 

100

 

Other current assets

 

 

63

 

Intangible assets

 

 

6,710

 

Goodwill

 

 

8,243

 

Total assets acquired

 

 

15,194

 

 

 

 

 

 

Liabilities assumed: