In Dirt Swept Under The Carpet: Speed Commerce, Inc. Fiscal Q1 2016 Results I promised to immediately publish any response I received from Speed Commerce (’Speed’ or the ‘Company’) in regard to what I called ‘Dirt Swept Under the Carpet’.

Internet Retailer publishes story

Internet Retailer published a story about Speed yesterday titled E-commerce services provider Speed Commerce hits a rough patch (see below for complete text).

In the story Speed’s CEO, Richard Willis, told Internet Retailer that Speed was not forced to renegotiate the debt; it did so to ensure it met financial goals. “We gave ourselves a little cushion to make sure we were going to make what we said.”

Speed CEO’s comments contradict Speed’s 10K

Page 7 of its 10K -- We operate with significant levels of indebtedness and are required to comply with certain financial and non-financial covenants. “As of March 31, 2015, our total credit facilities outstanding, including debt and capital lease obligations was approximately $100.4 million, which was in excess of amounts permitted under our credit facility.”

Speed CEO spends $2.5 million for “A little cushion”?

For context $2.5 million dollars is very material amount for a Company whose market capitalization (stock price * shares outstanding) is less than $12 million. Let’s walk through some logic. If I’m the CEO of Speed and I’m trying to “make what I said” and I’m “not forced” why in the world would I incur $2.5 million of excess cost coupled with extremely onerous terms (described below).

Speeds’s amended debt terms

"On May 11, 2015, the Company entered into a Consent and Second Amendment to Amended and Restated Credit and Guaranty Agreement with Garrison. Pursuant to the Amendment, among other things, (i) permission to add back certain balance sheet write-offs to Adjusted EBITDA (as defined) for the calculation of financial covenants, (ii) subject to lender approval the ability to add back certain restructuring, transaction fees and expenses and one-time charges not exceed $2.5 million to the calculation of financial covenants, (iii) the interest rate on the facility increased to LIBOR +11%, with a 1% LIBOR floor, (iv) the Company will pay an amendment fee equal to 200 basis points, (v) the Company agreed to provide Garrison with certain additional forecasts and updates regarding the Company's liquidity and financial condition, and (vi) the Company is required to maintain a minimum of $1 million of unrestricted cash at all times." - Source: Speed Commerce 10-K dated 6/15/15, page 91 

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. 

INTERNET RETAILER ARTICLE

E-commerce services provider Speed Commerce hits a rough patch. 

August 18, 2015, 1:06 PM 

BY SANDRA GUY Senior Editor, Internet Retailer

The loss of its biggest customer doesn’t dampen CEO Richard Willis’s optimism for the company’s future.

The CEO of Speed Commerce, an e-commerce fulfillment company, says the company is adding new customers, enjoying double-digit percentage sales growth and is on its way to a record holiday season despite losing its biggest customer, renegotiating its debt and facing a possible delisting of its stock.

“We are doing a better job than we ever have before—we’re excited about that,” president and CEO Richard Willis said Tuesday.

Speed Commerce has signed agreements with all 11 customers whose agreements have come up for renewal this year, Willis says. “Those are very important customers,” he says.

Glen Demeraski, CEO of Tabcom LLC, parent company of Dog.com, says in an email that his company renewed its contract with Speed Commerce through 2019 and feels confident that Speed Commerce “will right the ship.”

“We are concerned, but we have been working closely with Speed Commerce’s management and we are confident in their current plans to move forward,” Demeraski says. “There has been no deterioration in our service levels, and we are not anticipating one.”

Speed Commerce in April lost its largest customer, which accounted for 19% of its revenue in fiscal 2015, according to the company’s June 15 10K filing. That customer was tween apparel brand Justice, says Abe Garver, M&A adviser with BG Strategic Advisors.

Willis confirmed the loss of Justice and its sister brand, Dress Barn, both owned by Ascena Retail Group Inc., No. 87 in the Internet Retailer 2015 Top 500 Guide, but he says Speed Commerce has been up front about Ascena’s plans to take its e-commerce fulfillment in-house. Speed Commerce’s five largest customers accounted for about 42% of its fiscal 2015 revenue, according to the regulatory filing. Its clients include Yankee Candle (No. 391), Avenue, Spencers (No. 743 in the Internet Retailer 2015 Second 500) and Lenox, as well as The Army & Air Force Exchange Service, Navy Exchange Service Command and Veterans Canteen Services that provide online shopping services to members of the military and veterans.

Speed Commerce provides outsourced fulfillment services to five of the e-retailers in the Internet Retailer Top 1,000. It also listed as the provider of order management software for three of the Top 1,000, customer service software for two and the e-commerce platform for one.

Willis said during the Richardson, Texas-based company’s fiscal Q1 2016 earnings call on Aug. 10 that “this is the first quarter that we had that was impacted by the loss of several customers.” On Tuesday, Willis sought to downplay the challenges facing Speed Commerce, saying that, excluding the loss of Justice and other departing customers, overall revenue grew 56% and the average customer’s spending was up 10.7%.

However, Garver says Speed Commerce identified “material weakness in its internal controls over financial reporting that, if not remediated, could result in material financial misstatements.”

Willis says it was just a matter of moving funds from one category to another, and that Speed Commerce had no misstatements, restatements or change in its income statement.

The customer loss carries other costs. About 45 days after Speed Commerce announced the customer loss, Speed Commerce reached an agreement with a group of four lenders to amend its credit agreement, Garver says.  “Speed Commerce had to do that because it didn’t have the income to service the debt payments on the $100 million it owed—primarily due to Speed Commerce’s acquisition of e-commerce fulfillment provider Fifth Gear on Nov. 24, 2014,” Garver says. Speed Commerce, under the new terms of the agreement, must pay a minimum of 12% interest on the debt, Garver says.

Speed Commerce had acquired Fifth Gear, a competing provider of e-commerce services, to expand its client base to include business-to-business customers like All Heart, Scrubs and Beyond, and RSI, the provider of uniforms to Burger King, Willis says. “It’s the fastest-growing section of e-commerce; it’s growing faster than the direct-to-consumer section. 25% of our sales are now business-to-business.” Prior to the acquisition, business-to-business accounted for less than 5% of sales, Willis says.

Willis says the company was not forced to renegotiate the debt; it did so to ensure it met financial goals.

“We gave ourselves a little cushion to make sure we were going to make what we said,” Willis says.

As to its stock, Speed Commerce in April said it had received a deficiency letter from the Nasdaq exchange notifying it that its common stock was subject to delisting because it didn’t meet minimum bid requirements. In its June regulatory filing, Speed Commerce stated it had until Oct. 5 to regain compliance with listing requirements. Those terms required the company to maintain a closing bid price of at least $1 per share for a minimum of 10 consecutive business days.

Willis says the stock issue will be resolved before Oct. 5 because the company plans a reverse stock split that will take the shares back above $1.

Speed Commerce’s stock closed Monday at 17 cents. The stock is down 93% for the past year.

A possible sale, first mentioned in April, remains a possibility.

Summary

Speed Commerce announced its fiscal Q1 2016 results on August 11, 2015 and only allowed 2 analysts to participate in the earnings call Q&A.

A number of important issues for shareholders were ignored by management; such as the impending delisting of the company's shares from NASDAQ on October 15.

Speed's customers are concerned about the possibility of a sale of the company, and management refused to comment about the status of a deal on the earnings call.

Speed recently lost its largest customer, and remaining customers are concerned about the company's ability to remain solvent given new obligations including 12% interest payments on $100M of debt.

Speed Commerce recently identified “Material weakness in its internal controls over financial reporting that, if not remediated, could result in material financial misstatements.”.

According to Speed Commerce's Fiscal Q1 2016 Earnings Announcement, Cody Slach of Liolios Group, Inc. is the investor relations point for Speed Commerce, Inc. (NASDAQ:SPDC)

Requests to participate in earnings call Q&A denied

Immediately after Speed Commerce announced earnings on Monday, August 11th, I sent an email to Cody which said, "Please let the management team know that I'm planning on participating in their earnings call at 10am for Q&A."

I then dialed into the earnings call, identified myself as a Seeking Alpha and Yahoo! Finance Contributor, and told the operator that I would be participating in Q&A as a speaker.

When the phone lines were opened up for Q&A, 2 analysts (Mark Argento - Lake Street Capital Markets and Ross Licero - Craig Hallum Capital Markets) were allowed to ask questions (see SA earnings call transcript), however I was not.

Subsequent requests for a comment on the four (4) questions have been ignored

Immediately after not being able to ask questions during the Q&A, I sent 2nd and 3rd emails to Cody Slach (Liolios Group, Inc.) which said, "Please: (1) Confirm your receipt of this email, (2) Forward the questions below to Speed Commerce's management team and (3) Let us know by COB today if the Company will comment."

As of the writing of this article, neither Speed Commerce's management team or its IR point have responded. If and when either does, the responses will be published immediately.

The four (4) questions effectively 'Swept under the carpet':

1. NASDAQ has said it intends to delist Speed Commerce on October 5, 2015. What are the "Likely adverse affects" contemplated in the 10K?

"On April 6, 2015, we received a deficiency letter from NASDAQ notifying us that our common stock was subject to delisting from the NASDAQ Global Market because we are not in compliance with the minimum bid requirements set forth in NASDAQ Listing Rule 5450 for continued listing. NASDAQ Listing Rule 5450 requires listed securities to maintain a minimum bid price of $1.00 per share and NASDAQ Listing Rule 5810(c)(3)(NYSE:A) provides that a failure to meet the minimum bid price requirements exist if the deficiency continues for a period of 30 consecutive days. Our stock currently remains listed on the NSADAQ Global Market as of the date of this Annual Report on Form 10-K. Per the deficiency letter, we have been provided until October 5, 2015 to regain compliance with this continued listing requirement, which would require us to maintain a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days. Because we currently fail to comply with NASDAQ requirements for continued listing, our common stock could be delisted from NASDAQ, which would likely adversely affect our ability to address any short-term liquidity issues and hinder investors' ability to trade our common stock in the secondary market." Source: Speed Commerce 10K dated 6/15/15, page 17

2. Speed Commerce recently lost its largest customer (termination of fulfillment services in April 2015). Ordinarily an announcement of a sale process increases the probability of customer churn. Why would that not be the case here?

"Historically, the majority of our revenue has come from a small number of customers purchasing our products and services. Our five largest customers accounted for approximately 42% of our revenue in fiscal 2015. Our largest customer in fiscal 2015 accounted for approximately 19% of our revenue and the customer terminated fulfillment services in April 2015. A customer or group of customers may stop utilizing our services for a number of reasons, including the acquisition of a customer by another company that has a different strategy with respect the sourcing of its e-commerce services needs. If this happens, our revenue could be greatly reduced, which would materially and adversely affect our business. Source: Speed Commerce 10K dated 6/15/15, page 15

On April 16, 2015, we announced that our Board of Directors had formed a special committee to explore potential strategic alternatives, including a sale of the Company. Our inability to identify or complete such a strategic transaction could harm our long-term value for our shareholders, impact compliance with our credit facility, hinder our growth, result in the loss of key employees and/or result in increased volatility of our stock price. It could also have a material adverse impact upon our business and financial condition. Further, the potential impact of an announcement of a proposed strategic transaction on the market value of our common stock could have a deleterious effect." Source:Speed Commerce 10K dated 6/15/15, page 8

3. Speed Commerce identified "Material weakness in its internal controls over financial reporting that, if not remediated, could result in material financial misstatements." Is it possible that Speed's customers have been incorrectly billed?

"A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. As disclosed in Item 9A, management identified a material weakness in our internal controls over the recording and reconciling of deferred costs regarding internal development costs due to the failure to use an adequate time-keeping system which required management use estimates that did not have adequate supporting documentation in a timely manner. We are in the process of implementing new controls to remediate this material weakness, but these new processes and controls have not yet been fully tested. If our remedial measures are insufficient and material errors should occur in the recording of these processes, our financial statements could contain material misstatements." Source: Speed Commerce 10K dated 6/15/15, page 37

4. Speed Commerce has an enormous amount of debt (e.g.approximately $100M at 12% interest, 7 turns of EBITDA guidance). Ordinarily, high levels of debt service reduces the likelihood that a Company can retain existing customers. Why would that not be the case here?

"On May 11, 2015, the Company entered into a Consent and Second Amendment to Amended and Restated Credit and Guaranty Agreement with Garrison. Pursuant to the Amendment, among other things, (1) permission to add back certain balance sheet write-offs to Adjusted EBITDA (as defined) for the calculation of financial covenants, (2) subject to lender approval the ability to add back certain restructuring, transaction fees and expenses and one-time charges not exceed $2.5 million to the calculation of financial covenants, (3) the interest rate on the facility increased to LIBOR +11%, with a 1% LIBOR floor and (4) the Company will pay an amendment fee equal to 200 basis points, (5) the Company agreed to provide Garrison with certain additional forecasts and updates regarding the Company's liquidity and financial condition, and (6) the Company is required to maintain a minimum of $1 million of unrestricted cash at all times." Source: Speed Commerce 10K dated 6/15/15, page 91

"Interest Rate Risk. Our exposure to changes in interest rates results primarily from our Credit Facility borrowings. As of March 31, 2015 we had $98.8 million outstanding indebtedness subject to interest rate fluctuations. Based on these borrowings subject to interest rate fluctuations outstanding on March 31, 2015, an increase of 100-basis points in the current LIBOR rate would have a $987,500 negative impact on our annual interest expense. The level of outstanding indebtedness fluctuates from period to period and therefore could have a future impact on our interest expense." Source: Speed Commerce 10K dated 6/15/15, page 35

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.