Private Bank Re-Fi: No Added Flexibility, Here… UGLY

Frankly, my hurried post from last night, by train — and then quickly-edited while we waited for dessert — at a nice restaurant dinner, with my now grown sons (just into town, for the holiday weekend), is… a bit of a mess. But I wanted to get some word out, and quickly.

Forgive me for that.

Even so, I will let it stand.

Here are my more refined thoughts, on the documents disclosed after hours last evening, to the SEC — as I watch the luminous but clear dawn emerge — of Saturday, on Fourth of July Weekend 2017:

(1) Hercules played its cards well. It is a near certainty that we are seeing this take-out of Hercules’ lendings (plus maximum cash pre-payment gravy!), right on the quarter end — precisely because Hercules knew Messrs. Conway and Mullen were going to miss internal, undisclosed projections for Q2 2017. [More on the undisclosed part, of those lending covenants, in a future post.]

(2) So Hercules extracted its $4 million in cash, for making a line available for a little under a year — took its event risk off the table — and walked away.

(3) Hercules was likely able to do so, because as we’ve pointed out, it had Mr. Conway over a barrel — and any additional lendings were always subject to revenue covenants he likely could not meet. And likely… didn’t.

(4) We should not think of the new re-fi/lending as a “bank” lending in any traditional sense (despite the word bank in the name). The line is already overdrawn, and until we see the “Churn”, EBITDA (GAAP Losses actually) and Revenue figures for Q2 2017 (come mid August — which in turn will drive whether more money may be borrowed), we won’t know whether new equity will be sought by the company in September, or December of 2017. But the company likely STILL needs MORE new equity.

(5) It seems highly likely that this new lender has Mattersight over essentially the same barrel that Silicon Valley Bank in 2015-16 (and then Hercules 2016-17) had it over, in each of the past three summers.

(6) Given the lower nominal rate recited (at least for less than overdrawn amounts, should the company get back under limit), I must wonder… is this re-fi lending guaranteed by some affiliated shareholder(s) — ones with very deep pockets?

(7) If so, who are the guarantors? Mattersight will have to disclose them, in short order.

(8) If there are no guarantors, despite the documents providing for them, then some form of a going private transaction may be in the offing — and a take-out (this time, for the Private Bank), may loom in Q4 2017.

(9) Once again — this solves nothing — save the very near term liquidity crises. UGLY. I’ll note that it shows many word processing signs of being hastily drafted, and has been buried… into a long holiday weekend, with no fancy presser — from either party.

Finally, I will note — as Bob did quietly, in comments two posts ago, that executive management has now taken out aggregated amounts in cash salary and bonuses — essentially equal to the shareholders’ accumulated deficit over the period this has been a public company (coming up on 18 years).

That’s no business model at all. So I expect an ugly Q2 2017 results call, come mid-August. You should too.

9 thoughts on “Private Bank Re-Fi: No Added Flexibility, Here… UGLY”

  1. Ending the Hercules deal incurs an unanticipated cash expenditure. Q2 is going to be looking pretty ugly. I don’t think the earnings guidance for Q2 and beyond provided by the “analysts” is going to hold up. My estimates might need to be updated to the downside.

    Is there no one in the State of Illinois that has competent management skills?

  2. It’s the modern way of finance in Illinois! Get a new credit card to pay off the old one, or just get a new card to pay the interest on the old one. What’s MATR’s credit score? Should MATR’s financial failings affect the credit scores of its management team?

  3. Keep in mind, replacing Hercules doesn’t mean they won’t need more money from somewhere else. A continued fall in the stock price should play into the hands of the private equity folks, though I suspect if they leave the current management team in place, they should be placed on 5-day psychiatric hold.

    1. I’m thinking unless they have a record breaking Q2 up their sleeve, we see another down round by October…

      1. If they spent 4 million to get out of the Hercules arrangement that’s going to be a nasty mark on the Q2 financials. Add that to what is unlikely to be a bang-up quarter and the stock could take a significant hit. If it’s $2.70 now, and they book $10 million in losses (inclusive of the four million fee to Hercules) I’d be surprised if the stock stayed above two dollars per share. Any new money would come at a discount as we’ve mentioned in the past but driving down the stock price would certainly be very convenient to the moneyed interests in a going private event.

      2. Right! And the prepayment charges cannot be excluded from the calculation of the EBITDA (loss) target covenant with Private Bank, as to Q2 results… I completely agree that the late 2017 equity will be an ugly down round — unless there is a going private type buyer out there… crazy!

  4. To recap, from Private Bank, they get $20M, spend $24M, reducing unrestricted cash by $4m. Also, they’re likely to burn another $4M as a result of “normal” business in Q2, resulting in a total free cash drop of $8M, from $22.5M to $14.5M. Factor in another $4M burn in Q2 to head them towards $10.5M at end of Q3. As the smoke will continue rise from MATR HQ, more cash burn in Q4 gets them pointed directly at $6-7M in free cash at end of the year.

    They’ll most definitely need to get a cash injection no later than September. We’ll see how creative they are about it. Here are the options I see:

    1-Outside sources seem expensive, and a 25%+ discount on common stock market price will be expensive, and may not be available as they might not be able to offer downside protection for investors even at that discount. At Friday’s close of $2.55/sh, you’re looking at a discounted $1.90/sh. I’d expect Friday’s new/filings will push the stock down to $2/sh with a continued trajectory to $1.50/sh at end of Q3. Who knows? There’s a lot of stupid money out there.

    2-Bail-ins seem popular about the world these days, perhaps they’ll go to the employees? 10% cut for staff below VP level and 25% cut for VP and above, in exchange for stock? Averaging it out, they could get 15% or about $10M in reduced costs, slowing the cash burn. This doesn’t solve the big problem of the overall failure of the business model.

    3-Bail-ins aren’t just for employees, in the distant past of ELOY/MATR history, they did a “rights offering”, where they issued “rights” to each common share giving the holder a “right” to purchase a share of new convertible preferred stock with with a liquidation preference and annual dividend. The big institutional investors many of whom own existing preferred might agree to it. The retail investor won’t bite on it and will see their common stock value crammed down to 25 cents per share or so. Subsequently, MATR would go through a reverse split (perhaps 20-1) to bring the price of common back up. (Yay! A $5 dollar stock again!). MATR would still have more than the minimum number of shares outstanding required to stay listed on NASDAQ..

    4-A private-equity deal from a new player taking it private would take about $150M with today’s common share price. It would be made much easier if the stock price conveniently tanked to the 75 cents per share range. Perhaps they’d discuss with the largest few current investors about being part of the syndicate. Even then, the investors would want to see how MATR could start generating positive cash flow for the acquirer. If they kept the current management team in place, Conway and company identified $10M in cost savings and gave them new equity awards to ensure they were “properly”motivated. Perhaps they would also do an employee bail-in as part of the new arrangement.

    Of course, in this 4th scenario, magically finding $15M-$20M cost savings in conjunction with a take-out and management equity protection, I suspect they’d have to prepare for shareholder lawsuits wondering why management didn’t take appropriate steps before and only did so once their personal downside was protected. I’m not sure how they would afford it.

    I’d look for option 3 to be the preferred path (no pun intended). Option 2 could be used in conjunction with it or a few months after it, too.

    However, this is a downward spiral I don’t see stopping. Management is likely to have been and will continue to be distracted by the annual money chase, diverting their attention away from making the business successful (if they/it ever could). Nothing will change until Conway and Coxe are removed from the equation.

    At some point, you just run out of other people’s money.

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