Mattersight Lost $0.22 Per Share, On A GAAP Basis, In Q2 2017 — DEAD ON Bob’s Projection!

The loss was seven cents per share worse than the “paid” analysts (at Lake Street Capital, JMP Securities and Craig Hallum) had predicted. But Bob was… spot on, as ever!

More in a moment. Bob has these jokers — dead to rights! And it will be fascinating to watch how quickly Mr. Singer, the activist behind Viex — a new 5 per cent stock-holder — surfaces, to advocate for more aggressive changes in the business model, and executive management. And perhaps… the board, as well.

U G L Y.

As Bob points out, the company had to really push the large accounts for collections, in order to get to the level of cash flow burn they are now showing. Truly ugly.

Several large deals are (once again) taking longer in getting to the start line, and/or fully deployed, according to CFO and board member Mullen. Same old song — same old. Same old.

Only $10.558 million in total revenue.

Another humpty-dumpty quarter. Look for the stock to fall again, tomorrow.

CEO Conway is openly saying that the company needs to rebuild its pipeline — it is relying on too few deals, and so a delay in more than one causes a miss at the revenue line, on the quarter. Mr. Conway is finally admitting what has been clear since Q2 2016 — the larger customers are taking “slow walks“, or even a “wait and see” approach — to deploying into larger seat footprints.

We will listen to the call in a few moments.

That ought to be… priceless.

I am on the call now — revenues falling (per the SEC filed Q2 2017 slide deck):

The Lake Street Capital analyst just called “Q2 2017 a disappointing replay of Q1 2017….” That sums it up.

George Sutton of Craig-Hallum is asking for granularity on the way they think they can get to a projection of EBITDA positive (as adjusted) in Q4 2017. That’s a projection they are remaking, expecting $300,000 of cost savings per quarter in Q3 and Q4 2017 — compared to Q1 and Q2.

It seems, says Mr. Sutton, the “price rebate guarantee” is not driving all the leverage the company had hoped for. Now Mr. Conway is explaining how hard it is to sell to large companies’ procurement functions.

This is just… sad. There is no other word for it.

JMP Securities is asking what was the typical sales cycle a year ago, as compared to today? Great question! CEO Conway says they are so different, that one cannot generalize. What an ugly dodge.

I’ll close this by posting a link to the same Q2 call — but from five years ago: 2012. Except for the CFO, it is a… dead ringer. These guys have been telling this same “Cubs story” (i.e., wait until next year) for 17 years. Un-freaking-believable. But actually, that is now an insult to… the Cubs. They actually… won. It was in the papers — at least I think it was.

More Losses Per Share Due — In 24 Hours, Or So…

And… absent some stupendous, world-beating Q2 2017 results (not even remotely likely)…

We have been given to understand that our local counsel will deliver a pre-suit demand to this company, later this week — on behalf of damaged investors — alleging various (putative class action) violations of the federal securities law applicable to public companies. [With a very friendly wave — to the Winston & Strawn lawyers looking in repeatedly, on Friday, and over the weekend — likely retained now, on behalf of Mattersight. On more wave — as of 11:16 a.m. Today, on Monday! Hilarious!]

We are only reporting what we have heard, here — and not under any obligation of confidentiality. So we shall as ever, see….

This is a follow up to that “investigation of class action” post we put up on behalf of our counsel, some weeks ago.

Now, buckle-up — for what is likely to be a Q2 2017 disclosure of $0.22 or $0.23 in GAAP losses per share, from continuing operations, tomorrow evening as the NASDAQ closes.

The stock is off smartly, this morning, in a likely agreement on Wall Street, with this take of ours — and repudiating the “paid” analysts — as they are looking for $0.15 to $0.17 in GAAP losses per share.

Be careful out there. More in 24….

Customary Shiny Object Alert! (Pre Q2 2017 Results Edition)…

So — this happened (or at least Mattersight is trumpeting it, today). [Update: I think Mr. Conway means to trumpet this largely trivial continuation US Patent No. 9,667,788 B2 (an almost 3 MB PDF file), from May of 2017. But whatever.]

And we mentioned the concept of it here, before [a space already known to be dominated IBM (See US Patent No. 9,369,410) and soon to be applied by Amazon, Apple, Google and Microsoft et al.]….

And in REAL NEWS: expect a truly horrific Q2 loss, from continuing operations, in about five days.

Out.

So Viex Is Long Mattersight At Around $2.45 (Average)… On About One-Third Of Its Holdings

The other about two-thirds, or over a million shares, were acquired prior to the last 90 days — and so prices are not required to be disclosed, under SEC rules.

[It is likely however, that those million or so shares were acquired above $2.70, since Viex became an active buyer at $2.70, going into Memorial Day weekend this year.] But let’s be generous and assume that the hedge fund’s weighted average basis in its MATR position is about $2.50. The salient question is… what will be the fund’s reaction to a stunningly worse than predicted (by Wall Street analysts, at least) Q2 2017 GAAP Losses Per Share — in about 15 days?

Mattersight will announce what I predict will be about $0.21 per share of GAAP Loss Per Share, from Operations, on August 8, 2017. Bob’s model predicts ($0.22). The two “paid” analysts are on record at ($0.16) and ($0.17), respectively.

Mr. Singer — as an activist five per cent stockholder, may make quick moves, once the Q2 losses are disclosed. We shall see.

More soon, but Bob and I need to confer — as much is developing in real time.

So we will stay quiet — in the public space — for a bit.

But do be careful out there — as the new masthead implies, there are sharks in MATR’s open water NASDAQ OTC share volumes,  once more….

The Bulk Of The Sold Puts Expire Worthless Today, So Viex Pockets The Cash…

Perhaps more importantly, the sale of the puts (which are expiring worthless today, absent a significant drop on the NASDAQ, in Mattersight’s stock price — to well below $2.50) reduce the overall average effective price the hedge fund paid for its stake in the company. We should expect more potentially market price distorting gamesmanship (though all of it clearly lawful), in the coming weeks and months — in Mattersight’s stock, since Viex is the first “activist” hedge fund 13D filer the company has seen in quite a while (over a decade at least — based on a quick review). More on that, toward the end of the post…. Yep — just confirmed — while it is not clear that Viex will go fully hostile, Viex is the first openly activist hedge fund to enter a Mattersight position, in two decades (from its founding funders’ web site):

…VIEX engages in an activist strategy, creating catalysts to unlock shareholder value in small cap companies, predominantly in technology….

Here, Bob explains (as a bit of highly-useful background) what this is all about:

…Remember, any trade has two parties. If someone wants to short puts (essentially selling puts you don’t own and putting up the cash as collateral, betting the price of puts falls, whereby they can be bought back for less money to make a profit, which would only happen if the price of the stock rose), there needs to be another party that takes the opposite side of the trade. In this case, the broker who would then make another trade (buy the stock or buy calls on the stock) to eliminate their risk. That the stock price rose suddenly today is confirmation of that.

I don’t think we’ve seen many of these kinds of trades in MATR and a person would have to have some solid belief the stock price will rise significantly in the short-term, based on the expiration. To do so on a mere hunch, given the history of MATR, would be equivalent to volunteering for a psychiatric hold for observation. It is logical to assume that this person has some information that is not well-known by the investing public….

I would add that Viex clearly timed the bulk of the sold puts to expire only one day after the the date on which Viex knew it would have to disclose its large position to the world (under SEC rules) — and also likely knew that its disclosure would cause an increase in the trading price on the NASDAQ, all things being equal.

All of that is clearly lawful hedge fund trading — but what now looms is a likely horrible set of GAAP losses, in the Q2 2017 results, in a few weeks, now scheduled for after NASDAQ close on August 8, 2017. 

Unlike a 13G filer (which is a so-called long term passive investor filing), Viex is a 13D filer, leaving wide open the possibility that it seeks changes in board composition and executive management. And in truth that too could cause an increase in the NASDAQ stock price, as quoted on the NASDAQ OTC.

We shall see.

Onward — and as ever — a huge debt of thanks is owed, and goes out to Bob. [Just to complete the record, some time prior to 2014, the founder, Mr. Singer, changed Viex’s name — it used to be called Vertex Capital Advisors. I suspect, but cannot prove, that Vertex Pharmaceuticals may have oh-so politely asked him to do that. Smile….]

New 5% Holder Has Also Shorted Puts At 260,000 Shares (By Option) At $2.50 Per Share…

A fairly strange new major holder crossed the five per cent line as of July 11, 2017. [I need to get to a client dinner, right now — just saw this — so, I will look at this in detail later tonight, and may well add to or revise my thoughts.]

I say strange because an affiliate of the holder has also “sold short in over the counter market American-style put options referencing an aggregate of 265,000 Shares and 20,000 Shares, respectively, which expire on July 21, 2017 and October 20, 2017, respectively, and have an exercise price of $2.50 per Share….” So if I understand this correctly, about one eight of the new holders shares are subject to shorts — at a strike of $2.50.

And so, it is just a little puzzling that the stock rose nearly seven percent on the day — albeit on low to moderate volume. Though to be fair — Eric Singer (the controlling person of the holder) has been seen as a hedge fund rising star, in at least some circles.

Here is the link to the Schedule 13D, just filed earlier today.

We also are given to understand that there may a very fascinating story told, out of one of the contacts from the company — perhaps as early as Monday.

Investigation into D&O malfeasance now underway (Attorney Advertising)

As a “thank you” of sorts, to the law firm that has long provided pro bono legal advice to this blog, the authors of the blog are making this space available to his law firm, for some protected/permitted attorney advertising:

“…Counsel for this blog today announced that his firm is investigating whether certain officers and/or directors of Mattersight Corporation have violated federal or state laws.

The investigation focuses on failures to disclose various items of SEC required information, to the monetary detriment of long term unaffiliated Mattersight shareholders, and whether the board members of Mattersight breached their fiduciary duties in connection with (i) various borrowings, and (ii) various privately placed common stock offerings. The investigation also centers on false and/or misleading statements and/or failures to disclose the metrics for determining whether the company was in compliance with various of its lending covenants.

The investigation is also looking into whether the 2016 year end incentives awarded (bonuses and stock awards to executives) were in part the product of intentional manipulation by certain officers of Mattersight, since the company subsequently reversed over $600,000 in revenue reported in Q4 2016, in announcing its Q1 2017 results. Both quarters reported GAAP losses per share from continuing operations, as has been true every quarter since the year 2001.

If you are a longer-term shareholder of Mattersight Corporation, and have continuously held shares from June of 2016, through to at least March of 2017, you may have standing to hold Mattersight itself harmless from the damage the officers and directors may have caused, by making them personally responsible.

You may also be able to assist in reforming Mattersight Corporation’s corporate governance processes, to prevent future breaches of fiduciary duties.

If you are a Mattersight shareholder and are interested in learning more about your legal rights and remedies, please contact the legal counsel for this blog, by leaving a comment below, or email us at this link.

If you email, please include your phone number….”

The attorney making this advertisement is licensed in Illinois — and has over 30 years of securities and corporate experience.

Finally, we are told that any federal class action suit resulting from the ongoing investigation (by this legal counsel) may be brought in the federal courts located in Chicago, where jurisdiction is easily obtainable as against these directors and officers, and venue may appropriately be laid — since Mattersight has a principle executive office in downtown Chicago.

Now you know.

Bob’s Cogent Analysis — Of The Various Capital Restructuring Implications Of Thursday’s Private Bank Re-Fi…

Take it away, Bob —

“…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….”

Quite so, Bob…. And that point may well be September 2017, now… absent a completely shocking (huge win, at the sales line) blow out of a quarter here in Q 2017 results (i.e., not even remotely… possible).

Onward — there’s a train wreck to witness.

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.

Say “Bub-Bye”, Hercules?!

On a train — but Mattersight just 8-K’ed a new $20 million lending facility. Hercules is… out!

Details soon. There also Adjusted EBITDA covenants — more on those tomorrow. Out to dinner, now… back late.

From the SEC filing — just now:

Year to Date Period Ending	Minimum Total Revenue
June 30, 2017	$18,319,002
September 30, 2017	$28,168,987

 

Trailing Twelve-Month Period Ending	Minimum Total Revenue
December 31, 2017	$39,542,625
March 31, 2018	$41,811,956
June 30, 2018	$44,332,178
September 30, 2018	$47,349,202
December 31, 2018	$50,830,431
Last day of each month of each Fiscal Quarter thereafter	85% of budgeted revenue, as determined by Lender in its reasonable discretion based upon the projections for such Fiscal Year delivered pursuant to and in accordance with Section 10.1.8.  Notwithstanding the percentage noted above, Lender shall have discretion to reasonably set the covenant level to plan consistent with the historical levels but in no event shall the covenant levels be less than the prior tested period. Year to Date Period Ending Minimum Total Revenue June 30, 2017 $18,319,002 September 30, 2017 $28,168,987   Trailing Twelve-Month Period Ending Minimum Total Revenue December 31, 2017 $39,542,625 March 31, 2018 $41,811,956 June 30, 2018 $44,332,178 September 30, 2018 $47,349,202 December 31, 2018 $50,830,431 Last day of each month of each Fiscal Quarter thereafter 85% of budgeted revenue, as determined by Lender in its reasonable discretion based upon the projections for such Fiscal Year delivered pursuant to and in accordance with Section 10.1.8.  Notwithstanding the percentage noted above, Lender shall have discretion to reasonably set the covenant level to plan consistent with the historical levels but in no event shall the covenant levels be less than the prior tested period.

 

…On June 29, 2017, Mattersight Corporation (the “Company”) entered into a Loan and Security Agreement with The PrivateBank and Trust Company (the “Loan Agreement”). The Loan Agreement provides for a $20,000,000 revolving line of credit maturing in 2020 (the “Credit Facility”) and is secured by a security interest in the Company’s accounts receivable, equipment, inventory, cash, deposit accounts, securities, and all other investment property, supporting obligations, financial assets, other personal property, intellectual property rights and other personal property. The Company, subject to certain limits and restrictions, may from time to time request the issuance of letters of credit under the Loan Agreement.

On June 29, 2017, the Company used the proceeds of loans advanced under the Loan Agreement to repay in full the principal balance and accrued and unpaid interest outstanding under the Company’s prior credit facility with Hercules Capital, Inc., in an amount equal to $23,827,058.46, comprised of outstanding principal (including interest paid in kind) in the amount of $22,500,000 and accrued interest, fees and expenses in the amount of $1,327,058 (which includes a prepayment charge in the amount of $688,505).

The principal amount outstanding under the Loan Agreement will accrue interest at a floating annual rate equal to 1 month, 2 month or 3 month LIBOR (as selected by the Company) plus 4.50%, 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, prohibits certain consolidations, mergers, and sales and transfers of assets by the Company and requires the Company 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 lenders’ 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 lenders’ commitments will automatically terminate….

Wow. Another train wreck of re-fi/borrowing — at over 10 per cent per annum?!

Kick that can down the alley guys, if you like… but it is going to come due, eventually.

But it means any equity offering will be in Q4 2017.