We Invite Our Readers… Over — For Some Long Holiday Weekend Fun! [/SNARK]

We invite you gentle readers, to see if you can calculate, from this document — whether Mattersight is in compliance with its continued eligibility for lending covenants, here in near the middle of 2017. Or from the companies quarterly results. I looked. I cannot.

The relevant exhibit, to the Hercules lending packet, was never filed.

And management hasn’t disclosed the projections which drive the tests for whether Mattersight has met (or is able to meet, in the future) its covenants, under this Hercules Capital loan agreement.

How can this be?

Please help us out. Interps to SEC Reg S-K, Item 303 require:

…Where financial statements presented or incorporated by reference in the registration statement [Ed. Note: as they are, now — an S-3 is active] are required by § 210.4-08(e)(3) of Regulation S-X [ 17 CFR part 210] to include disclosure of restrictions on the ability of both consolidated and unconsolidated subsidiaries to transfer funds to the registrant in the form of cash dividends, loans or advances, the discussion of liquidity shall include a discussion of the nature and extent of such restrictions and the impact such restrictions have had and are expected to have on the ability of the parent company to meet its cash obligations….

And Item 2.04 of SEC Form 8-K requires this — under which the Hercules agreement was disclosed:

Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement.

(a) If a triggering event causing the increase or acceleration of a direct financial obligation of the registrant occurs and the consequences of the event, taking into account those described in paragraph (a)(4) of this Item 2.04, are material to the registrant, disclose the following information:

(1) the date of the triggering event and a brief description of the agreement or transaction under which the direct financial obligation was created and is increased or accelerated…

(2) a brief description of the triggering event;

(3) the amount of the direct financial obligation, as increased if applicable, and the terms of payment or acceleration that apply; and

(4) any other material obligations of the registrant that may arise, increase, be accelerated or become direct financial obligations as a result of the triggering event or the increase or acceleration of the direct financial obligation….

[I’ve updated the above, with more specific provisions of applicable SEC rules and black letter law, to make plain that the metrics — and the actual values — under the Hercules lending, are definitively MATERIAL — and thus must be promptly disclosed. Numerous case citations available.]

Knowing whether this cash-constrained company will be able to borrow from Hercules — at any rate, high or very high — in the fall of 2017, to meet its liquidity needs, is plainly a material fact. One the SEC has declared the investors are to know about, as soon as the company knows. And the company has clearly given Hercules its 2017 projections.

So — where are they? And… God forbid that the “street” expectations Bob mentions in comments are not as optimistic as what the company has told Hercules. More on that sort of arguable securities fraud — in a future post. [Who knows? Just like Trump’s tax forms, the fact that this exhibit is missing, causes quite a bit of reasonable concern, as to what is really going to happen, in about five weeks. And I’ll bet that Hercules doesn’t very often grant waivers — the way SVB used to, regularly. ]

Anyone? Bueller? … Bueller?!…

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3 thoughts on “We Invite Our Readers… Over — For Some Long Holiday Weekend Fun! [/SNARK]”

  1. I guess those “projections” are something that can only be viewed in a SCIF (sensitive compartmented information facility).

    I always found the Hercules deal interesting. MATR had been doing stock financing for a while, but to go into a formal long-term debt agreement with a company that focuses on distressed companies didn’t seem to be a useful signal to send to the market. At the time, MATR management postured that “debt financing was cheaper than equity financing at that time”. Huh? Money you have to pay back is cheaper than money you don’t have to pay back? I guess they were finding out about the sort of discounts investors would want to buy the common and in their egos rejected this out of hand.

    I wondered what Hercules was thinking when they extended this loan with a big up-front tranche with high rates (that I think should have been higher) to a company that hasn’t demonstrated any sort of ability to generate the cash-flow necessary to service AND retire such a loan. Yes, MATR can pay the interest charges, but they’re really doing it with borrowed money, not from positive cash flow. It’s as if they ran up the SVB credit card, then took out a Hercules credit card to pay off the SVB card, spend some more money and just make interest-only payments on the new card.

    The way the loan is structured, all/most assets of the company are pledged as security for the loan and a failure to generate the cash to pay interest or to retire the loan at the end of the term, likely puts Hercules in control of the company in a re-organization. This is, of course how these things work. Hercules get’s first dollar out, vendors get the next, preferred holders are third and common holders are left to catch the crumbs, if any are left. I’m not sure where management’s golden parachutes fit in all of this, though I’m sure it’s ahead of the common holders.

    Speculating on possible outcomes, what will Hercules do for a management team? Would they bring in a new crew that could make something of it? Or would they keep the same crew, put some lipstick on the pig (PR, corp name change, product name changes, etc) and then float a new offering recouping their costs and allow Conway and company new life, after giving them an appropriate share of the ownership to properly align their interests with those of the shareholders? I guess that would depend on the sort of relationship that exists between the powers-that-be at Hercules and the MATR management team and board of directors. Who knows?

  2. Back to “projections”. I suppose MATR and Hercules would say these are merely the projections MATR makes as part of their quarterly financial calls and that the Powerpoint deck they use serves as those “projections” supplied to Hercules, but the loan agreement definitely describes something being “provided” by MATR to Hercules. It seems that/those document/s needs to be identified.

  3. I don’t know how long it will take to sort out the projection documents issue, but to remind, the Hercules note (at current loan levels) requires MATR to pay back $8.3M in 2018, $9.2M in 2019, and $4.5M in 2020. When you add these amounts into the cash they’re going to burn, they’re going to have to raise a boatload of money.

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