Mr. Conway Will Report Q2 2012 Results (Showing Another Quarter Of GAAP Losses Per Share) On August 5, 2012 5 PM EDT

Perhaps mercifully (albeit unintentionally), I am now scheduled to be aboard a ship -- somewhere in the Atlantic, when the call happens (i.e., it is highly unlikely I'll have access to internet to live-blog it). So, all of you here assembled will have to sort through his manifold smoke-screens, for yourselves. Here's a link through to his call details, for your easy reference.

Count on the following, though -- there will be GAAP losses per share from continuing operations, given that Mr. Conway has indicated he expects flat to down sales revenue for Q2 2012. Count also on this prediction: you will have to dig down, to very near the end of his attached slides, in all lkelihood, in order to find the first mention of the negative GAAP results. [13-plus years worth, now!]

Count also on Mr. Conway to tout his "unusual" notion of what he calls "backlog". [See Mattersight's FAQ No. 7.] Most companies use the term "backlog" to refer to firmly-committed contractual work already in process under non-cancellable contracts, which -- but for plant capacity (for example), would be completed in the present quarter, and pulled into current sales revenue. In Mr. Conway's case, it seems clear that he includes in his "backlog" contracts for services he hasn't yet performed -- AND, in almost all of those contracts, the services may be cancelled on 90 days (or shorter) notice (in most cases with or without cause). Thus, in my humble opinion, his backlog is nowhere near as "firm" as, say Boeing's -- which is sitting on firm orders for modified 767s from various parties, that it just hasn't the capacity to build, yet.

So, yes -- look for that, whilst I am sailing the high seas. I'll likely comment on his Q2 2012 results around the 15^th of Augist, if the Universe is willing, and the prevailing winds are high.

Do be very careful out there.

Mr. Noon To Receive 20,000 Stock Options -- If He Sticks Around For A Year. WHY?

See tonight's SEC Form 8-K text, at Item 5.02(b). Why 20,000 stock options for Mr. Noon? Why? Shareholders should ask the board this question.

I do understand transition planning, but I'm not sure Mr. Noon should be getting anything more than cash to stick around. What is this for? What, exactly?:

. . .Mr. Noon will also receive, subject to approval of the compensation committee of the Company’s board of directors, an option to purchase 20,000 shares of the Company’s common stock, vesting quarterly over four years beginning August 31, 2012, so long as he remains employed by the Company. . . .

Afterall, the grant to Mr. Noon by the compensation committee of the board, of these stock options is presumably at a price which reflects a dip in the market-value, due to the mis-statement of the size of the GAAP loss from continuing operations. Recall that Mattersight was trading around $9 a share before the announcement that GAAP Losses per share had been vastly understated in 2011 due to an elementary accounting error.

Now the stock is at $7.80 or so. Granting Mr. Noon these "cheapened" stock options effectively allows him an opportunity to reap additional income -- from his and Mr. Conway's "mistakes".

That cannot be sensible corporate governance -- even if the company is feeling a cash crunch. Recall here that Mr. Conway recently crowed about the $26 million of cash on hand (at year end 2011) -- and that makes Mattersight (he said) attractive, as a takeover candidate. I am sure some of that cash could be used appropriately to create a modest stay-bonus opportunity for Mr. Noon -- if his transition services are so desperately needed on Wacker Drive, Chicago.
This company seems -- more than occasionally -- to take actions without thinking them through. This may be one of those times.

Why should a guy exiting the CFO role get a cheap stock option denominated stay bonus?

If, on the other hand, we posit that Mr. Noon is the guy who is "falling on his sword" (to protect Mr. Conway's job) -- then, at least the cheap options make internal sense: they are providied to keep him happy, because if he were to complain to the board -- maybe Mr. Conway would be asked to step aside as well.

As ever, be careful out there.

New CFO To Get $75,000 More A Year Than Mr. Noon; Mr. Iserloth's Bonus Opportunity Is 2-1/2 Times Mr. Noon's

Under his May 23, 2012 (re-struck) employment agreement, Mr. Noon used to make $200,000 a year and was eligible for up to $80,000 in bonus money. Because he is no longer a Section 16 executive officer of Mattersight, under the '34 Act rules, we will not know what he is being paid as VP of Finance. [More on his retention arrangement, though -- in my next post.]

The new CFO, on the other hand, is a '34 Act Section 16 executive officer, and so -- here is his shiny new employment agreement, via an SEC Form 8-K, filed tonight. Mr. Iserloth, is being paid $275,000, with a $200,000 bonus opportunity. However, he hasn't yet been granted any restricted stock or incentive stock options, per the initial SEC Form 3 he filed tonight. In fact, he owns no shares of Mattersight at present. We may well see a Form 4 shortly -- which will likely disclose an equity award from the board, to him -- of some sort, though.

We will keep you posted.

Caremark Finance Alum Selected To Replace Bill Noon As CFO, Effective Immediately

Well -- the handwriting was on the wall, at the end of May -- when Mr. Noon's contract was renegotiated, to add beefed-up litigation defense/cooperation duties, even if terminated, and to drop his payouts on termination. [I am sorely tempted to observe that this resignation is one rung too low, on the totem pole -- given that the CEO is a former CPA, and should ALSO know how to properly book preferred repurchase, and dividend, obligations.]

It is interesting that Mr. Noon stays on as VP of Finance -- and it is interesting that the new CFO was an alum of Caremark -- at least historically, one of Mattersight's largest customers. Here is the presser:

. . .Mark Iserloth has joined the company as Vice President and Chief Financial Officer, effective immediately. Mr. Iserloth, who brings more than 25 years of finance, business development, strategy, and operations experience, will be responsible for finance, accounting, human resources, and administrative functions for Mattersight. Mr. Iserloth replaces Bill Noon, who has served as CFO since February 2009 and will continue at Mattersight as Vice President of Finance.

Prior to joining Mattersight, Mr. Iserloth was Chief Financial Officer of Trustwave Holdings, Inc., a rapidly growing, leading provider of cloud-based compliance and information security solutions, where he was responsible for finance and human resources. Prior to joining Trustwave, Mr. Iserloth was Chief Financial Officer of Initiate Systems, Inc., a leader in the master data management space. Mr. Iserloth holds an MBA from the J.L. Kellogg Graduate School of Management at Northwestern University and a Bachelor of Science in Electrical Engineering from Northwestern University. . . .

The incoming CFO looks to have managed "explosive growth" situations. Didn't CEO Kelly Conway tell the world on May 10, 2012 not to expect much or any sales growth at Mattersight for the next few quarters? Yes, in fact -- he did. Not sure why they need this sort of a CFO today, then.

In addition, to complete the record -- here is the last sale Mr. Noon transacted in Mattersight's common stock (he sold the shares back to the company, privately) -- to pay his taxes on equity grants, last month.

Erh -- It's (Past) Time To Update Your FAQs, Mr. Conway!

Here is what the mattersight.com FAQ No. 6 presently offers (link was accurate as of Noon on July 11, 2012):

. . .6. What have been the company’s revenue growth rates?

The growth rate for Mattersight’s principal revenue source, Behavioral Analytics subscriptions, was 50% in 2009, 33% in 2010, and 10% in 2011. While Mattersight’s subscription revenue growth slowed somewhat in late 2010 and early 2011, the company expects growth to re-accelerate back to historical levels in 2012. . . .

Well -- as of May 10, 2012 [on the "Regular Quarterly GAAP Losses Per Share Call"(!)], Mr. Conway indicated that revenue would be flat to down for at least the next two quarters. [BTW, when is the Q2 2012 conference call? No press release as of July 11, 2012.]

That is a far cry from between 33% and 50% growth, year over year.

'Tis (past) time to tell the truth, Mr. Conway -- update your FAQs.

Mr. Conway "Tones Down" His "Over-The-Top Puffery" -- On Phone Fraudster Analytics Tool

Do see below, but just before the 4^th, Mattersight, and Mr. Conway, put out a press release, again touting the virtues of his phone fraud analytics tool. However, it has been significantly revised -- when compared to the June 12, 2012 version -- and much of the over-the-top, wild-eyed puffery is now gone.

I can't help but think he and his marketing team (and the lawyers!) are regular readers of this blog. [My stat-packages confirm that many hundreds of visits here orginate from devices connected inside Mattersight's intranet and extranet.] So -- it seems we are having an effect -- see our original piece -- at mid-June 2012.

In any event, gone is the claim that his tool "solves" the phone fraud problem -- now replaced by the far-more-supportable claim that it "counteracts" the fraudsters "tactics". If one of his key engagement clients (each of which pay him millions, year over year -- for his product offerings) were to suffer a massive loss due to fraudsters breaching the private credit card or health records data of millions of customers, and Mr. Conway had continued to claim that his tool "solved" the problem of fraudulent access -- I'd have some difficulty defending a claim for breach of impled warranty -- and fitness for the intended purpose, here. [But -- then again -- maybe I'm just not as skilled a lawyer as those Mr. Conway employs -- at Chicago's Winston & Strawn. They too visit here often.]

Actually, it is more than even money that the revision was purposeful -- so do take a look below.

This is a comparison of the old June 12, 2012 press release language -- against new -- line by line:

". . . .Sophisticated fraudsters and fraud rings are able to gather enough customer information from publicly available sources to exploit the authentication procedures in call centers and gain access to customer accounts. The complexity of capturing and analyzing call center interactions to identify fraudsters has heretofore made it nearly impossible for companies to measure the frequency of these types of attacks, let alone proactively identify this activity and take preventive action.

Mattersight's Fraud Analytics solution solves these problemscounteracts these tactics by capturing customer interactions and automatically analyzingidentifying fraudsters conducting fraudulent activity through the contact center by leveraging predictive analytics to score the percentage likelihood each caller is a fraudster. The result is a significant reduction in voice-facilitated fraud losses and the enhanced ability to identify and stop fraud before it occurs.

Mattersight's Fraud Analytics solution captures customer interactions and automatically analyzes every second of every captured interaction in the cloud, using millions of proprietary algorithms and unique behavioral models. The output of this analysis is hundreds of contextually accurate data attributes on every captured interaction. . . ."

Well -- it is baby-stepping the problem -- but it is baby-stepping in the right general direction.

Be careful out there.

Mattersight Admits Its Business Model Isn't Scalable -- Without Additional Significant Hardware Investments

Mattersight's CIO, Jeff Geltz recently acted as the overseer of an apparently very large hardware migration -- from disk-based storage -- to flash drive (solid state) storage arrays. See the press release from Pure Storage, the chosen vendor -- from yesterday afternoon. [Pure Storage is a great company -- here's their website, BTW. All IP is -- and remains -- the property of its owner. It appears here for clear identification, and commentary, only.]

The press release makes two things clear: (1) the analytics are not provided in anything near real-time (but those of us who understand computing knew that already), and (2) Mattersight's business model in analytics may be very capital intensive (again, something we suspected, given the extremely massive amounts of data voice conversations generate) -- as the company adds flash storage arrays to scale the business.

What was surprising -- to me, at least -- was how open the CIO was about all of this (from the end of the press release):

. . . .Mattersight CIO Jeff Geltz said, "The Mattersight Business Monitoring Engine is an I/O hungry application, and it was clear that traditional disk-based storage just wouldn't allow us to scale our business. . . ."

Indeed.

The $3.7 Million Mattersight Lending Floats -- At 750 bps Above Prime -- Ouch!

Well -- after hours, Mr. Conway filed his SEC Form 8-K -- and the loan from Silicon Valley floats at 750 basis points over prime. [It also totes a 125 bps ununsed commitment fee.]

That's pretty pricey, for money that is lent for less than two years -- here is the just filed SEC Form 8-K, and the loan and security agreement (in full), too:

. . .On June 29, 2012, Mattersight Corporation (the “Company”), together with its wholly-owned subsidiaries Mattersight Europe Holding Corporation and Mattersight International Holding, Inc., as co-borrowers, entered into a Loan and Security Agreement with Silicon Valley Bank (the “Credit Facility”). The Credit Facility provides for a $10,000,000 revolving line of credit maturing in 2014 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, and other personal property, with the exception of the Company’s intellectual property rights. The Company and its subsidiaries, subject to certain limits and restrictions, may from time to time request the issuance of letters of credit under the Credit Facility.

On June 29, 2012, the Company used the Credit Facility to repay in full the principal balance and accrued and unpaid interest outstanding under the promissory notes issued by the Company to various affiliates of Technology Crossover Ventures to settle previously disclosed arbitration, in an amount equal to approximately $3.7 million. The principal amount outstanding under the Credit Facility will accrue interest at a floating annual rate equal to three quarters of one percentage point (0.75%) above the United States prime rate, payable monthly. In addition, the Company will pay a commitment fee on the Credit Facility and a fee equal to one-eighth of one percent (0.125%) per annum of the average unused portion of the Credit Facility, payable quarterly in arrears.

The Credit Facility imposes various restrictions on the Company, including usual and customary limitations on the ability of the Company or any of its subsidiaries to incur debt and to grant liens upon their assets, and prohibits certain consolidations, mergers, and sales and transfers of assets by the Company and its subsidiaries. The Credit Facility includes usual and customary events of default for facilities of this nature (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default, payment of all amounts payable under the Credit Facility 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 Credit Facility will automatically become immediately due and payable, and the lenders’ commitments will automatically terminate.

The description of the Credit Facility contained herein does not purport to be complete and is qualified in its entirety by reference to the full text of the Credit Facility, which is filed as Exhibit 10.1 to this Current Report on Form 8-K and incorporated herein by reference. . . .

We still don't know who sold nearly 7 percent of MATR's outstandings, two weeks ago -- nor who acquired those shares. Time will tell.

This Is Material -- SEC Form 8-K Due Soon -- What Interest Rate Is Mattersight Paying?

It appears that B of A has pushed away from the table -- in its relationship with Mattersight. B of A has terminated its $5 million revolver with Mr. Conway's company. Today, Mattersight announced that it has signed -- and immediately borrowed under -- a new $10 million two year (one and one half, actually) facility with Silicon Valley Bank. Here is the MATR presser:

. . .Mattersight Corp.. . . announced that on June 29, 2012, the company entered into a new two-year, $10 million credit agreement with Silicon Valley Bank.

The credit agreement provides for borrowings under a revolving credit facility maturing in 2014. The company immediately borrowed under the credit agreement approximately $3.7 million to pay off the remaining balance on the promissory notes previously issued by the company to various affiliates of Technology Crossover Ventures to settle previously disclosed arbitration. . . .

This borrowing is clearly material to Mattersight -- and yet the company does not recite the interest rate it is paying, on the $3.7 million obligation. Mr. Conway's SEC Form 8-K -- due shortly -- better disclose both the interest rate, and the full credit acgreement -- covenants, defaults, and any collateralization provisions -- or he will plainly have violated his SEC reporting duties.

We will keep you posted.