UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the quarterly period ended December 31, 2014
Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the transition period from  to

 

Commission File Number 0-22982

 

SPEED COMMERCE, INC.

(Exact name of registrant as specified in its charter)

 

Minnesota	41-1704319
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

 

1303 E. Arapaho Road, Suite 200, Richardson, TX 75081

(Address of principal executive offices)

 

Registrant’s telephone number, including area code (866) 377-3331

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑      No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Outstanding at February 6, 2015

Common Stock, No Par Value

66,010,885 shares

 

 

SPEED COMMERCE, INC.

 

Index

 

 

PART I. FINANCIAL INFORMATION	3
Item 1. Consolidated Financial Statements.	3
Consolidated Balance Sheets — December 31, 2014 and March 31, 2014	3
Consolidated Statements of Operations and Comprehensive Loss— Three and Nine Months ended December 31, 2014 and 2013	4
Consolidated Statements of Shareholders’ Equity – December 31, 2014	5
Consolidated Statements of Cash Flows — Nine Months ended December 31, 2014 and 2013	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	24
Item 4. Controls and Procedures.	24
PART II. OTHER INFORMATION	25
Item 1. Legal Proceedings.	25
Item 1A. Risk Factors.	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	25
Item 3. Defaults Upon Senior Securities.	25
Item 4. Mine Safety Disclosures.	25
Item 5. Other Information.	25
Item 6. Exhibits.	26
SIGNATURES	27

 

 

PART I. FINANCIAL INFORMATION 

 

Item 1. Consolidated Financial Statements. 

 

SPEED COMMERCE, INC.

Consolidated Balance Sheets

(In thousands, except share amounts)

 

 

See accompanying notes to consolidated financial statements.

 

 

SPEED COMMERCE, INC.

Consolidated Statements of Operations and Comprehensive Loss

(In thousands)

(Unaudited)

 

 

See accompanying notes to consolidated financial statements.

 

 

SPEED COMMERCE, INC.

Consolidated Statements of Shareholders’ Equity

(in thousands, except share amounts)

(Unaudited)

 

 

See accompanying notes to consolidated financial statements.

 

 

SPEED COMMERCE, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

See accompanying notes to consolidated financial statements.

 

 

SPEED COMMERCE, INC.

Notes to Consolidated Financial Statements

 

 

SPEED COMMERCE, INC.

Notes to Consolidated Financial Statements

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

We are a leading provider of end-to-end E-commerce and fulfillment services to retailers and manufacturers. We provide web platform development and hosting, order management, fulfillment, logistics and contact center services which provide clients with easy to implement, cost-effective, transaction-based services and information management tools. We manage over 1.8 million square feet of fulfillment center space in Pennsylvania, Ohio, Missouri and Texas. Our facilities utilize advanced automation technology such as high-efficiency unit sortation, pick-to-pack conveyors and radio frequency (“RF”) scanning. We also operate four customer contact centers to enhance our clients’ brand experience. Our corporate headquarters and web development and technology operations are based in Dallas, Texas with Fifth Gear administration in Indianapolis, Indiana.

 

Recent Events

 

On November 21, 2014, we completed the purchase of certain assets of Sigma Holdings LLC under the trade name of Fifth Gear. Total consideration included: $55.0 million in cash at closing (subject to working capital adjustment), and up to 7,000,000 shares of our Common Stock upon Fifth Gear’s achieving certain financial metrics ending for its fiscal year ended December 31, 2014.  The cash paid at closing was funded by the Amended and Restated Credit and Guaranty Agreement. The combined fair value of the earn-out consideration was estimated to be $10.4 million. We have not yet finalized the preliminary assessment of the fair value of tangible assets and intangible assets separate from goodwill.

 

On November 21, 2014, we entered into a five-year, $100 million Amended and Restated Credit and Guaranty Agreement with various lenders. Upon the closing of the Amended and Restated Credit Facility, $100 million was funded to us, less certain fees and costs. The principal amount of the loans provided under the Amended and Restated Credit Facility are subject to repayment through an annual excess cash sweep and will be amortized at a rate of 2.5% annually through September 30, 2015, a rate of 3.0% annually through September 30, 2016, a rate of 3.5% annually through September 30, 2017, a rate of 5.0% annually through the remaining term of the credit facility. The remaining principal balance is due and payable on November 21, 2019. The Amended and Restated Credit Facility replaced in its entirety our existing credit facility dated on July 9, 2014.

 

On July 9, 2014, we entered into an Asset Purchase Agreement with Wynit Distribution, LLC to sell substantially all of the assets of our legacy Distribution business. The total purchase price for the Distribution business was $15 million. As of December 31, 2014, we has recognized a gain of $2.1 million on the sale which remains subject to final adjustments. Pursuant to the Asset Purchase Agreement, $5 million of the purchase price was paid in cash and up to an additional $10 million is payable to us under a promissory note that is secured by all of Buyer’s assets. Our security interest in the buyer’s assets is subordinated to the buyer’s secured lenders. There are no principal payments under the promissory note during the first year following the closing of the transaction, with the principal balance being amortized over three years during the second through fourth years following the closing of the transaction. The promissory note amount will be reduced if certain amounts are payable by us to buyer in connection with certain post-closing adjustments. Potential adjustments include, among other things, a final working capital adjustment. We has adjusted the value of the promissory note to $1.5 million based on estimated adjustments but has not yet finalized all post-closing adjustments that may impact the value of the promissory note with the buyer. In connection with the sale, we and the buyer also entered into a transition services agreement to provide one another with certain transitional services. The Distribution business has been reclassified as discontinued operations in the consolidated financial statements for all periods presented.

 

 

On June 2, 2014, we closed a private offering with institutional investors for approximately $10 million of our Series C Preferred Stock. Under the terms of the offering, we sold an aggregate of 3,333,333 shares of our Series C Preferred Stock and issued five-year warrants to purchase an additional 833,333 shares of Common Stock for $3.50 per share, for an aggregate purchase price of $10 million. The net proceeds of the offering were used to pay down indebtedness and for general corporate purposes.

 

In June 2014, we announced the launch of SARA X, a pre-configured accelerator for Oracle Commerce.  SARA X is targeted to midsize E-commerce retailers as a lower cost E-commerce platform that can be launched quickly. SARA X is pre-configured with features and functionality generally found in E-commerce web sites with a fully customizable "look & feel" to represent the retailer's brand.  

 

Our Business

 

We offer an end-to-end outsourcing solution to our clients allowing them to have a single point of contact and integration for their E-commerce business and logistics management. We offer a flexible suite of services that allow us to customize our solutions and services to the needs of each client. The services to be provided and service levels for each client are defined by the terms of the written contract with each client. While we maintain client inventory at our fulfillment centers, we rarely own any of the inventory. Our earned revenue is based upon transaction fees earned from the services performed in accordance with the contract provisions. Recurring contract service elements are charged based upon the number of transactions processed and recognized as the services are performed. Upfront costs to onboard clients, including web site development, are deferred and recognized over the expected life of the relationship with the client.

 

Our clients include retailers such as The Army & Air Force Exchange Service and Navy Exchange Service Command, Justice, Yankee Candle, and Avenue With the addition of Fifth Gear in November 2014, our client base expanded to include, among others, Burger King, Lens.com, Smithsonian Institute, Zeeberry.com and popular pet specialty companies, Dog.com, Horse.com and Petbox. In October, we launched our E-commerce solution with Lowe’s Mexico, our first client in Mexico.

 

As a result of the acquisition of Fifth Gear, we have significantly expanded our fulfillment services infrastructure and the combined company has opportunities to cross-market web site and development and fulfillment services to its expanded customer base. The expanded footprint of our combined fulfillment centers affords clients greater flexibility to manage their inventory levels and cost structures. Fifth Gear’s client base includes a number of clients that are less subject to seasonal retail trends.

 

Working Capital and Capital Resources

 

Historically, our distribution business required significant levels of working capital primarily to finance accounts receivable and inventories. In addition, we have invested in variety of growth initiatives for our E-commerce business including the acquisition of Fifth Gear, expansion of our Ohio fulfillment center, automated sortation equipment, significant upfront new client deployment efforts and the development of SARA X. 

 

On November 21, 2014, the Company entered into a five-year, $100 million Amended and Restated Credit and Guaranty Agreement with various lenders and Garrison Loan Agency Services, LLC (“Garrison”) acting as the agent (the “Amended and Restated Credit Facility”). Upon the closing of the Amended and Restated Credit Facility, $100 million was funded to the Company, less certain fees and costs. The principal amount of the loans provided under the Amended and Restated Credit Facility are subject to repayment through an annual excess cash sweep and will be amortized at a rate of 2.5% annually through September 30, 2015, a rate of 3.0% annually through September 30, 2016, a rate of 3.5% annually through September 30, 2017, a rate of 5.0% annually through the remaining term of the credit facility. The remaining principal balance is due and payable by the Company on November 21, 2019. Funds provided under the Amended and Restated Credit Facility were used to fund our purchase of Fifth Gear and to repay the Company’s previous $50.0 million term loan facility with Garrison.

 

The Amended and Restated Credit Facility contains customary affirmative and negative covenants. The financial covenants include a limitation on capital expenditures, a minimum EBITDA level, a maximum fixed charge coverage ratio, and a maximum indebtedness to EBITDA ratio. The creation of indebtedness outside the credit facility, creation of liens, making of certain investments, sale of assets, and incurrence of debt are all either limited or require prior approval from Garrison and/or the other lenders under the Amended and Restated Credit Facility. This credit facility also contains customary events of default such as nonpayment, bankruptcy, and change in control, which if they occur may constitute an event of default. The Amended and Restated Credit Facility is secured by a first priority security interest in substantially all of the Company’s assets. At December 31, 2014, we were in compliance with all covenants of the agreement.

 

On July 9, 2014, the Company entered into a five-year, $50 million term loan credit facility with various lenders and Garrison Loan Agency Services, LLC. Upon the closing of the Term Loan, $35 million was funded to the Company, less certain fees and costs. An additional $15 million delayed draw term loan was available to the Company under the Term Loan. Funds provided under the Term Loan, together with funds received in connection with the sale of the Company’s retail distribution and software publishing business, were used to repay in full the Company’s previous line of credit with Wells Fargo Capital Finance LLC, which was terminated in connection with the entry into the Term Loan. We refinanced the $50 million term loan credit facility in November with the Amended and Restated Credit Facility.

 

At March 31, 2014, we had $38.4 million on our revolving credit facility (the “Credit Facility”) with Wells Fargo Capital Finance, LLC as agent and lender, and a participating lender.   Amounts available under the Credit Facility were subject to a borrowing base formula. At March 31, 2014, we had $76,000 of excess availability at the time but we were not in compliance with a covenant in the Credit Facility that required that we maintain excess availability of at least $5 million. This event of default was subsequently waived by Wells Fargo.

 

 

Forward-Looking Statements / Risk Factors

 

We make written and oral statements from time to time regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the SEC, including this Quarterly Report on Form 10-Q, news releases, written or oral presentations made by officers or other representatives made by us to analysts, shareholders, investors, news organizations and others and discussions with management and other representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties and you should not place undue reliance on these statements. No assurance can be given that the results reflected in any forward-looking statement will be achieved. Any forward-looking statement made by or on behalf of us speaks only as of the date on which such statement is made. Our forward-looking statements are based on assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by or on behalf of us.

  

In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement that may be made by or on behalf of us.

 

Some of these important factors, but not necessarily all important factors, include the following:

 

●

our service fee revenue and gross margin is dependent upon our clients’ business and transaction volumes and our costs;

   

●

we may incur significant expenditures to expand our business which may reduce our ability to achieve or maintain profitability;

   

●

technological developments, particularly software as a service application, electronic transfer and downloading could adversely impact sales, margins and results of operations;

   

●

our restructuring and integration efforts, may have unpredictable outcomes, including the possibility of us incurring additional restructuring charges;

   

●

the seasonality and variability in our business could adversely affect our results of operations;

   

●

the divestiture of our distribution business could result in post-transaction payments and adjustments;

   

●

our ability to meet our significant working capital requirements or if working capital requirements change significantly;

   

●

certain of our contracts are terminable at will or contain penalty provisions;

 

 

●

we may incur financial penalties if we fail to meet contractual service levels under client service agreements;

   

●

the expected benefits of our acquisition of Fifth Gear or any future acquisitions may not be realized, and the indemnification obligations owed to us in connection with that transaction may be insufficiently supported;

   

●

future acquisitions or divestitures could disrupt business, including the potential failure of successfully integrating future-acquired companies;

   

●

our ability to use net operating loss carryforwards to reduce future tax payments may be limited; and

   

●

our E-commerce business has inherent cybersecurity risks that may disrupt our business.

 

A detailed statement of risks and uncertainties is contained in our reports to the SEC, including, in particular, our Annual Report on Form 10-K for the year ended March 31, 2014 and other public filings and disclosures. Investors and shareholders are urged to read these documents carefully.

 

Critical Accounting Policies

 

We consider our critical accounting policies to be those related to revenue recognition, allowance for doubtful accounts, goodwill and intangible assets, impairment of long-lived assets, share-based compensation, income taxes, and contingencies and litigation. There have been no material changes to these critical accounting policies as discussed in greater detail under this heading in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 31, 2014.

 

 

Results of Operations

 

The following table sets forth for the periods indicated the percentage of net sales represented by certain items included in our Consolidated Statements of Operations and Comprehensive Loss (Unaudited).

 

		Three Months Ended December 31,																Nine Months Ended December 31,
		2014								2013								2014								2013
Net revenue		$	38,257				100.0	%		$	32,576				100.0	%		$	83,384				100.0	%		$	83,154				100.0	%
Cost of revenue			29,200				76.3				28,894				88.7				64,096				76.9				67,840				81.6
Gross profit			9,057				23.7				3,682				11.3				19,288				23.1				15,314				18.4
Operating Expenses:
Selling and marketing			627				1.6				732				2.2				2,392				2.9				1,879				2.3
General and administrative			7,470				19.5				3,374				10.4				15,221				18.3				11,536				13.9
Information technology			1,223				3.2				698				2.1				3,023				3.6				2,075				2.5
Depreciation and amortization			2,274				5.9				1,381				4.2				5,888				7.1				4,000				4.8
Total operating expenses			11,594				30.2				6,185				18.9				26,524				31.9				19,490				23.5
Loss from operations			(2,537	)			(6.5	)			(2,503	)			(7.6	)			(7,236	)			(8.8	)			(4,176	)			(5.1	)
Interest expense, net			(1,130	)			(3.0	)			(432	)			(1.3	)			(2,509	)			(3.0	)			(1,230	)			(1.5	)
Loss on early extinguishment of debt, net			(3,047	)			(8.0	)			-				-				(3,863	)			(4.6	)			-				-
Other income			(250	)			(0.7	)			(2	)			-				1,511				1.8				8				-
Loss from continuing operations, before income tax			(6,964	)			(18.2	)			(2,937	)			(8.9	)			(12,097	)			(14.6	)			(5,398	)			(6.6	)
Income tax expense from continuing operations			(170	)			(0.4	)			(25	)			(0.1	)			(343	)			(0.4	)			(53	)			(0.1	)
Net loss from continuing operations			(7,134	)			(18.6	)			(2,962	)			(9.0	)			(12,440	)			(15.0	)			(5,451	)			(6.7	)
Discontinued operations:
Gain on sales of discontinued operations			(1,792	)			(4.7	)			-				-				2,135				2.6				-				-
Loss from discontinued operations, net of tax			(476	)			(1.2	)			1,898				5.8				(11,399	)			(13.7	)			(2,186	)			(2.6	)
Net loss		$	(9,402	)			(24.5	)%		$	(1,064	)			(3.2	)%		$	(21,704	)			(26.1	)%		$	(7,637	)			(9.3	)%

 

 

Results from Continuing Operations

 

Three Months Ended December 31, 2014 compared to Three Months Ended December 31, 2013

 

Net Revenue

 

Net revenue was $38.3 million for the three months ended December 30, 2014 compared to $32.6 million for the three months ended December 31, 2013, an increase of $5.7 million, or 17.5%. The increase was primarily attributable to our Fifth Gear acquisition, offset by a decrease in freight service revenue and the departure of a significant client.

 

Cost of Revenue

 

Cost of revenue was $29.2 million for the three months ended December 31, 2014 compared to $28.9 million for the three months ended December 31, 2013, an increase of $0.3 million, or 1.0%. The increase was primarily due to our Fifth Gear acquisition and higher operating costs in our Ohio fulfillment center. The cost of revenue for the three months ended December 31, 2014 included $5.0 million in transition costs for the consolidation of our Dallas facility and relocation of our Ohio facility. 

 

Operating Expenses

  

Selling and marketing expenses were $0.6 million for the three months ended December 31, 2014 compared to $0.7 million for the three months ended December 31, 2013, a decrease of $0.1 million, or 14.3%. The decrease was primarily due to changes in the sales team during the third quarter of fiscal 2015, partially offset by incremental costs due to Fifth Gear acquisition.

 

General and administrative expenses were $7.5 million for the three months ended December 31, 2014 compared to $3.4 million for the three months ended December 31, 2013, an increase of $4.1 million, or 120.6%. The increase was primarily due to our Fifth Gear acquisition costs of $2.0 million and $1.8 million related to incremental Fifth Gear’s expenses. General and administrative expenses consisted principally of executive, accounting and administrative personnel and related expenses, including professional fees. No on-going corporate costs or general overhead expenses were allocated to discontinued operations.

 

Information technology expenses were $1.2 million for the three months ended December 31, 2014 compared to $0.7 million for the three months ended December 31, 2013, an increase of $0.5 million or 71.4%. The increase was primarily attributable to our Fifth Gear acquisition and personnel growth in IT infrastructure and support costs for new clients launched in fiscal 2015.

 

Depreciation and amortization expenses were $2.3 million for the three months ended December 31, 2014 compared to $1.4 million for the three months ended December 31, 2013, an increase of $0.9 million or 64.3%. The increase was primarily attributable to amortization of our intangible assets and newly acquired intangible assets from our Fifth Gear acquisition.

 

Interest expense, net 

 

Interest expense was $1.1 million for the three months ended December 31, 2014 compared to expense of $0.4 million for the three months ended December 31, 2013, an increase of $0.7 million or 175.0%. The increase principally reflected higher average debt balances as a result of the refinancing of the credit facility.

 

Total other income and loss

 

Total other loss was $3.3 million for the three months ended December 31, 2014 compared to $0.0 million for the three months ended December 31, 2013, an increase of $3.3 million or 100.0%. Total other loss included a $3.0 million of expense related to early extinguishment of debt and $0.2 million of expense related to changes in fair value of our convertible warrants.

 

Results from Continuing Operations

 

Nine Months Ended December 31, 2014 compared to Nine Months Ended December 31, 2013

 

Net Revenue

 

Net revenue was $83.4 million for the nine months ended December 31, 2014 compared to $83.2 million for the nine months ended December 31, 2013, an increase of $0.2 million, or 0.2%. The increase was primarily attributable to our Fifth Gear acquisition, offset by a decrease in freight service revenue, the departure of a significant client and non-recurring IT pass through licensing fees of $4.8 million earned in fiscal 2014.

 

Cost of Revenue

 

Cost of revenue was $64.1 million for the nine months ended December 31, 2014 compared to $67.8 million for the nine months ended December 31, 2013, a decrease of $3.7 million, or 5.5%. The decrease was primarily due to $6.6 million of transition costs incurred in fiscal 2014 related to the consolidation of Dallas facility and relocation of the Ohio facility, partially offset by incremental costs from the acquisition of Fifth Gear in November 2014.

 

 

Operating Expenses

  

Selling and marketing expenses were $2.4 million for the nine months ended December 31, 2014 compared to $1.9 million for the nine months ended December 31, 2013, an increase of $0.5 million, or 26.3%. The increase was primarily attributable to personnel growth in the sales team and marketing programs for the introduction of SARA X.

 

General and administrative expenses were $15.2 million for the nine months ended December 31, 2014 compared to $11.5 million for the nine months ended December 31, 2013, an increase of $3.7 million, or 32.2%. The increase was primarily due to Fifth Gear acquisition costs of $2.0 million and $1.8 million related to Fifth Gear’s expenses. General and administrative expenses consisted principally of executive, accounting and administrative personnel and related expenses, including professional fees. No on-going corporate costs or general overhead expenses were allocated to discontinued operations.

 

Information technology expenses were $3.0 million for the nine months ended December 31, 2014 compared to $2.1 million for the nine months ended December 31, 2013, an increase of $0.9 million or 42.9%. The increase was primarily attributable to personnel growth in IT infrastructure and support for new client launches in fiscal 2015.

 

Depreciation and amortization expenses were $5.9 million for the nine months ended December 31, 2014 compared to $4.0 million for the nine months ended December 31, 2013, an increase of $1.9 million or 47.5%. The increase was primarily attributable to amortization of our intangible assets and newly acquired intangible assets from our Fifth Gear acquisition.

 

Interest expense, net 

 

Interest expense was $2.5 million for the nine months ended December 31, 2014 compared to expense of $1.2 million for the nine months ended December 31, 2013, an increase of $1.3 million or 108.3%. The increase principally reflected higher average debt balances as a result of the refinancing of the credit facility.

 

Total other income and loss

 

Other loss was $2.4 million for the nine months ended December 31, 2014 compared to $0.0 million for the nine months ended December 31, 2013, an increase of $2.4 million or 100.0%. Total other loss included $3.9 million of expense related to early extinguishment of debt, offset by a $0.3 million gain in fair value of our convertible warrants and a $1.3 million settlement of certain pre-acquisition liabilities.

 

Consolidated Income Tax Expense or Benefit from Continuing Operations for All Periods

 

For the three months ended December 31, 2014, the Company recorded income tax expense from continuing operations of $170,000, compared to income tax expense from continuing operations of $25,000 for the three months ended December 31, 2013. The effective income tax rate applied to continuing operations for the three months ended December 31, 2014 was a negative 2.4%, compared to a negative 0.9% for the three months ended December 31, 2013.

 

For the nine months ended December 31, 2014, the Company recorded income tax expense from continuing operations of $343,000, compared to income tax expense from continuing operations of $53,000 for the nine months ended December 31, 2013. The effective income tax rate applied to continuing operations for the nine months ended December 31, 2014 was a negative 2.8%, compared to a negative 1.0% for the nine months ended December 31, 2013.

 

Deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income streams and the impact of tax planning strategies. A valuation allowance is recorded to reduce deferred tax assets when it is determined that it is more likely than not, based on the weight of available evidence, we would not be able to realize all or part of our deferred tax assets. An assessment is required of all available evidence, both positive and negative, to determine the amount of any required valuation allowance.

 

Discontinued Operations

 

On July 9, 2014, the Company completed the sale of its Distribution business to Wynit Distribution, LLC. The Company received cash proceeds of $5.0 million and a promissory note from the Buyers in an amount equal to $10.0 million at the close of the transaction, subject to adjustments for working capital and other matters. Based on estimated working capital and other adjustments, the Company has recognized a pre-tax gain of approximately $2.1 million, inclusive of a $1.8 million expense during three months ended December 31, 2014 based on changes in estimated final working capital. There are no principal payments under the promissory note until July 2015, with the final as adjusted principal balance payable in equal quarterly installments over three years. The sale of the Distribution business is not expected to generate a federal tax liability but is subject to applicable state income taxes. In connection with the sale, the Company and the Buyer also entered into a transition services agreement to provide one another with certain post-closing transitional services. The Distribution business is reclassified as discontinued operations in the consolidated financial statements for all periods presented. The final gain is subject to change until final working capital adjustments and other purchase agreement matters are settled with the Buyers.

 

 

The following table provides the components of discontinued operations (unaudited):

 

		Three Months Ended December 31,								Nine Months Ended December 31,
		2014				2013				2014				2013
Net revenue		$	-			$	149,935			$	71,743			$	316,099
Cost of revenue			-				136,470				70,678				289,129
Total operating expenses			475				11,551				12,445				29,103
Pre-tax income (loss) from discontinued operations			(475	)			1,914				(11,380	)			(2,133	)
Gain (loss) on sale of discontinued operations			(1,792	)			-				2,135				-
Income tax expense			(1	)			(16	)			(19	)			(53	)
Income (loss) from discontinued operations, net of tax		$	(2,268	)		$	1,898			$	(9,264	)		$	(2,186	)

 

Net revenue for the Distribution business was $0 million for the three months ended December 31, 2014 as compared to $149.9 million for the three months ended December 31, 2013, a decrease of $149.9 million or 100.0%. The decrease in net revenue was due to our sale of the Distribution business during second quarter of fiscal 2015. Net revenue for the Distribution business was $71.7 million for the nine months ended December 31, 2014 as compared to $316.1 million for the nine months ended December 31, 2013, a decrease of $244.4 million or 77.3%. The decline in net revenue was due to operating only 100 days during the fiscal year of 2015 compared to 275 days during the fiscal year of 2014. Pre-tax loss from discontinued operations was $0.5 million and $11.4 million for the three and nine months ended December 31, 2014, respectively, as compared to pre-tax income of $1.9 million and pre-tax loss $2.1 for the three and nine months ended December 31, 2013, respectively.   

 

Market Risk

 

At December 31, 2014, we had $99.4 million of indebtedness subject to interest rate fluctuations. As such, a 100-basis point change in the current LIBOR rate would have a $993,750 impact on our annual interest expense.

 

Seasonality and Inflation

 

Quarterly operating results are affected by the seasonality of our business. Specifically, our third quarter (October 1-December 31) typically accounts for our largest quarterly revenue figures and a substantial portion of our earnings. As a provider of services to retailers, our business is affected by the pattern of seasonality common to other suppliers of retailers, particularly during the holiday selling season. Poor economic or weather conditions during this period could negatively affect our operating results. Inflation is not expected to have a significant impact on our business, financial condition or results of operations since we can generally offset the impact of inflation through a combination of productivity gains and price increases.

 

Liquidity and Capital Resources

 

Cash Flow Analysis

 

Operating Activities

  

Cash flows used in operating activities during the nine months ended December 31, 2014 were $2.0 million and were primarily impacted by the following:

 

●

Non-cash charges of $9.8 million, including depreciation and amortization of $5.9 million, which increased due to the purchases of computer hardware for new client launches scheduled for fiscal 2015 and fiscal year 2015 charges for the enhancements to the sortation equipment in our Ohio fulfillment center, share-based compensation of $1.5 million, increases in deferred income taxes of $1.3 million, and amortization of debt acquisition cost of $1.1 million;

●

Accounts receivable increased $5.3 million, resulting from the timing of collections;

●

Prepaid expenses increased $1.1 million, primarily from timing of annual insurance renewals and rent payments;

●

Other assets increased $17.9 million, primarily due to additional deferred project costs for in-process client development;

●

Accounts payable increased $2.6 million, primarily as a result of timing of payments and purchases; and

●

Accrued expenses and other liabilities increased by $12.5 million, primarily as a result of deferred revenues for up-front fees for new clients.

 

 

Cash flows used in operating activities during the nine months ended December 31, 2013 were $25.6 million and were primarily impacted by the following:

 

●

Non-cash charges of $4.9 million, including depreciation and amortization of $4.0 million, share-based compensation of $0.7 million, and amortization of debt acquisition cost $0.2 million;

●

Accounts receivable increased $13.1 million, primarily due to the trade season sales activity and the timing of certain payments;

●

Prepaid expenses increased $0.4 million, primarily from the timing of annual insurance renewals and rent payment;

●

Other assets increased $4.7 million, primarily due to deferred project costs for client development;

●

Accounts payable increased $1.9 million, primarily as a result of timing of payments and purchases; and

●

Accrued expenses and other liabilities increased $2.9 million, net of various accrual payments and a decrease in accrued wages.

 

Investing Activities

 

Cash flows used in investing activities totaled $57.5 million for the nine months ended December 31, 2014 and cash flows used in investing activities totaled $8.6 million for the same period last year.

 

The purchases of property, equipment and software totaled $7.7 million and $8.4 million in the nine months ended December 31, 2014 and 2013, respectively. Payment received from sale of Distribution business was $5.0 million in the second quarter of fiscal 2015. Cash paid related to the Fifth Gear acquisition was $54.8 million in the third quarter of fiscal 2015. Payment received from the working capital adjustment related to the acquisition of SpeedFC was $0.3 million in the first quarter of fiscal 2014.

 

Financing Activities

 

Cash flows provided by financing activities totaled $67.0 million for the nine months ended December 31, 2014. In first quarter of fiscal 2015, we received $9.9 million in net proceeds from the issuance of 3,333,333 shares of Series C convertible preferred stock, and we had net payment to the revolving line of credit of $38.4 million. We received $135 million net proceeds and paid $35.6 million related to our term loan credit facility. We received $0.5 million from other sources including proceeds from option exercises.

  

Cash flows provided by financing activities totaled $34.1 million for the nine months ended December 31, 2013, and we had net proceeds from the revolving line of credit of $7.0 million and $0.5 million from other sources including proceeds from option exercises. We received $21.8 million in net proceeds from the issuance of 8,000,000 shares of our common stock.

 

Discontinued Operations

 

Net cash flows provided by discontinued operations were $7.2 million for the nine months ended December 31, 2014 and consisted of $7.2 million of cash flows provided by operating activities, and $32,000 of cash flows used in investing activities.

 

Net cash flows used in discontinued operations were $7.5 million for the nine months ended December 31, 2013 and consisted of $11.8 million of cash flows used in operating activities, $0.5 million of cash flows used in investing activities and $4.8 million of cash flows provided by financing activities.

 

Capital Resources

 

Series C Preferred Stock

 

On June 2, 2014, we entered into a Purchase Agreement pursuant to which the Company issued and sold to institutional investors an aggregate of 3,333,333 of the Company’s Series C Convertible Preferred Stock and warrants to purchase an aggregate of up to 833,333 shares of the Company’s common stock. In connection with the sale of the Series C Preferred Stock and Warrants, the Company entered into a registration rights agreement with the Investors. The Company received gross proceeds of approximately $10,000,000, less transaction expenses.

 

 

The Series C Preferred Stock accrues dividends at an annual rate of 7% payable in cash or, at the Company’s option with respect to dividends accrued during the first year, additional shares of Series C Preferred Stock, and is convertible at any time commencing six months after the Closing into common stock of the Company at a conversion price of $3.00 per share (subject to adjustment). On December 31, 2014, the Company issued 59,158 additional shares of Series C Preferred Stock as dividend in accordance with the terms of Section 2 of the Certificate of Designation of Series C Preferred Stock dated June 2, 2014. The Company has the right to force the conversion of the Series C Preferred Stock in the event that the Company’s common stock trades above $5.00 per share (subject to adjustment) for 28 trading days in a 30 consecutive trading day period commencing on the initial convertibility date provided that the conversion shares are registered pursuant to an effective registration statement available for resales and certain other conditions are met. Commencing on the one-year anniversary of the issuance date, the Company also has the right to call the outstanding Series C Preferred Stock at a redemption price per share equal to 110% of the stated value per share of the Series C Preferred Stock, plus accrued and unpaid dividends thereon, provided that the conversion shares are registered pursuant to an effective registration statement available for resales and certain other conditions are met.

 

The Company also issued warrants to the Series C preferred share investors which are exercisable at any time six months after their issuance and entitle the investors to purchase shares of the Company’s common stock for a period of five years from the date of the warrants. The warrants are exercisable at an exercise price of $3.50 per share (subject to adjustment). The Company has the right to force the exercise of the Warrants for cash in the event that the Company’s common stock trades above $6.00 (subject to adjustment) for 28 trading days in a period of 30 consecutive trading days after the initial exercisability date, provided that the warrant shares are registered pursuant to an effective registration statement available for resales and certain other conditions are met. In connection with certain specified “fundamental transactions” or a “change of control” the investors have the right to require the Company to repurchase the warrants for their Black-Scholes value calculated as provided in the warrants. Based on fair value allocation $1.7 million of the proceeds from the Series C preferred offering were assigned to the warrants and included in other current liabilities. The warrants are accounted for as liability awards and subject to mark-to-market accounting. We recognized $186,000 of loss and $358,000 of gain for the three and nine months ended December 31, 2014, respectively, for as fair value adjustment which is included in other income (expense) in our statement of operations.

 

Liquidity

 

We finance our operations through cash and cash equivalents, funds generated through operations and our Amended and Restated Credit and Guaranty Agreement, which is currently fully funded. During the last twelve months, we have not had any significant changes in the terms extended to customers or provided by vendors which would have a material impact on the reported financial statements.

 

We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources. We plan for potential fluctuations in accounts receivable and payment of obligations to creditors and unbudgeted business activities that may arise during the year as a result of changing business conditions or new opportunities. In addition to working capital needs for the general and administrative costs of our ongoing operations, we have cash requirements for among other things: (1) on-boarding expenditures for new clients including web site deployment and fulfillment center capacity investment; (2) equipment needs for our operations; (3) legal disputes and contingencies; and (4) asset or company acquisitions.

 

We currently believe cash and cash equivalents, funds generated from the expected results of operations, funds provided under our Amended and Restated Credit and Guaranty Agreement, which is currently fully funded and vendor terms plus funds received (and to be received) from the sale of our distribution business will be sufficient to satisfy our working capital requirements, other cash needs, and to finance expansion plans and strategic initiatives for at least the next twelve months.

 

We may review from time to time possible expansion and acquisition opportunities relating to our business. The timing, size or success of any acquisition effort and the associated potential capital commitments are unpredictable. We may seek to fund all or part of any such efforts with proceeds from debt and/or equity issuances. Debt or equity financing may not, however, be available to us at that time due to a variety of events, including, among others, industry conditions, general economic conditions, market conditions and market perceptions of us and our industry.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Information with respect to disclosures about market risk is contained in the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk in this Form 10-Q.

 

Item 4. Controls and Procedures

 

(a) Controls and Procedures

 

We maintain disclosure controls and procedures (“Disclosure Controls”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports, was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

 

As required by Rule 13a-15(b) and 15d-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation.

 

(b) Change in Internal Controls over Financial Reporting

 

During the third quarter of 2014, we acquired Fifth Gear, (see Note 2 Acquisition), which represented 35.9% of our total assets as of December 31, 2014. We are in the process of fully integrating Fifth Gear into our internal controls over financial reporting and, in reliance on interpretive guidance issued by the SEC staff, disclosure of changes in internal control over financial reporting related to Fifth Gear have been excluded. Otherwise, there were no changes in our internal control over financial reporting during the most recently completed quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

 

Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

See Litigation and Proceedings disclosed in Note 8 to our consolidated financial statements included herein.

  

Item 1A. Risk Factors 

 

Information regarding risk factors appears in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements / Risk Factors in Part 1 — Item 2 of this Form 10-Q and in Part 1 — Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2014. There have been no other material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

Item 6. Exhibits

 

(a)

The following exhibits are included herein:

 

		Filed	Incorporated by reference
Exhibit		here		Period		Filing
number	Exhibit description	with	Form	ending	Exhibit	date
10.1	Asset Purchase Agreement dated November 21, 2014 by and among the Company and Sigma Holdings, LLC		8-K		2.1	11/26/2014
10.2	Amended and Restated Credit and Guaranty Agreement dated November 21, 2014 among the Company, Garrison Loan Agency Services, LLC, as Agent, and Lenders		8-K		10.1	11/26/2014
10.3	Financial Statements of Business Acquired as of December 31, 2013		8-K/A		99.1	2/4/2015
10.4	Financial Statements of Business Acquired as of September 30, 2014		8-K/A		99.2	2/4/2015
10.5	Pro Forma Financial Information as of September 30, 2014		8-K/A		99.3	2/4/2015
31.1	Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)	X
31.2	Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)	X
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)	X
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)	X
101	The following financial information from our Quarterly Report on Form 10-Q for the third quarter of fiscal 2015, filed with the SEC on February 9, 2015, is formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets at December 31, 2014 and March 31, 2014; (ii) the Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended December 31, 2014 and 2013; (iii) the Consolidated Statements of Cash Flows for the nine months ended December 31, 2014 and 2013; and (iv) the Notes to Consolidated Financial Statements (Unaudited)	X

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Speed Commerce, Inc.
	(Registrant)
Date: February 9, 2015	/s/ Richard S Willis
	Richard S Willis
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: February 9, 2015	/s/ Terry J. Tuttle
	Terry J. Tuttle
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

 

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