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 June 30, 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☐ | Smaller reporting company☐ |
(Do not check if a 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 practical date.
Class |
| Outstanding at August 6, 2014 |
Common Stock, No Par Value |
| 65,434,029shares |
SPEED COMMERCE, INC.
Index
PART I. FINANCIAL INFORMATION | 3 |
Item 1. Consolidated Financial Statements. | 3 |
Consolidated Balance Sheets — June 30, 2014 and March 31, 2014 | 3 |
Consolidated Statements of Operations and Comprehensive Loss— Three Months ended June 30, 2014 and 2013 | 4 |
Consolidated Statements of Shareholders’ Equity – June 30, 2014 | 5 |
Consolidated Statements of Cash Flows — Three Months ended June 30, 2014 and 2013 | 6 |
Notes to Consolidated Financial Statements | 7 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 13 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk. | 20 |
Item 4. Controls and Procedures. | 20 |
PART II. OTHER INFORMATION | 20 |
Item 1. Legal Proceedings. | 20 |
Item 1A. Risk Factors. | 20 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | 20 |
Item 3. Defaults Upon Senior Securities. | 20 |
Item 4. Mine Safety Disclosures. | 20 |
Item 5. Other Information. | 20 |
Item 6. Exhibits. | 21 |
SIGNATURES | 22 |
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
SPEED COMMERCE, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
June 30, | March 31, | |||||||
2014 | 2014 | |||||||
(Unaudited) | (Audited) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | - | $ | 13 | ||||
Accounts receivable, net | 15,956 | 18,527 | ||||||
Prepaid expenses | 1,416 | 1,000 | ||||||
Deferred costs | 3,238 | 1,708 | ||||||
Assets of discontinued operations | 87,875 | 102,278 | ||||||
Total current assets | 108,485 | 123,526 | ||||||
Property and equipment, net | 16,742 | 15,409 | ||||||
Other assets: | ||||||||
Intangible assets, net | 18,902 | 19,596 | ||||||
Goodwill | 30,665 | 30,665 | ||||||
Assets of discontinued operations | 7,305 | 7,578 | ||||||
Other assets | 7,952 | 5,914 | ||||||
Total assets | $ | 190,051 | $ | 202,688 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Revolving line of credit | $ | 18,100 | $ | 38,362 | ||||
Accounts payable | 9,636 | 12,683 | ||||||
Accrued expenses | 2,934 | 1,730 | ||||||
Deferred payment obligation short-term - acquisition | 1,104 | 1,104 | ||||||
Liabilities related to assets of discontinued operations | 95,761 | 88,388 | ||||||
Other liabilities — short-term | 7,926 | 4,279 | ||||||
Total current liabilities | 135,461 | 146,546 | ||||||
Long-term liabilities: | ||||||||
Deferred payment obligation long-term - acquisition | 1,104 | 1,380 | ||||||
Deferred tax liabilities - long term | 1,558 | 1,288 | ||||||
Liabilities related to assets of discontinued operations | 98 | 7 | ||||||
Other liabilities — long-term | 2,633 | 2,072 | ||||||
Total liabilities | 140,854 | 151,293 | ||||||
Commitments and contingencies (Note 7) | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, no par value: Authorized shares — 10,000,000; issued and outstanding shares —3,333,333 at June 30, 2014 and zero at March 31, 2014 | 5,126 | - | ||||||
Common stock, no par value: Authorized shares — 100,000,000; issued and outstanding shares —65,297,357 at June 30, 2014 and 65,208,193 at March 31, 2014 | 216,912 | 213,354 | ||||||
Accumulated deficit | (173,517 | ) | (162,734 | ) | ||||
Accumulated other comprehensive income | 676 | 775 | ||||||
Total shareholders’ equity | 49,197 | 51,395 | ||||||
Total liabilities and shareholders’ equity | $ | 190,051 | $ | 202,688 |
See accompanying notes to consolidated financial statements.
SPEED COMMERCE, INC.
Consolidated Statements of Operations and ComprehensiveLoss
(In thousands)
(Unaudited)
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Net revenue | $ | 22,060 | $ | 22,016 | ||||
Cost of revenue | 17,341 | 16,011 | ||||||
Gross profit | 4,719 | 6,005 | ||||||
Operating expenses: | ||||||||
Selling and marketing | 1,002 | 562 | ||||||
General and administrative | 3,808 | 4,176 | ||||||
Information technology | 844 | 659 | ||||||
Depreciation and amortization | 1,769 | 1,314 | ||||||
Total operating expenses | 7,423 | 6,711 | ||||||
Loss from operations | (2,704 | ) | (706 | ) | ||||
Other income (expense): | ||||||||
Interest expense, net | (541 | ) | (380 | ) | ||||
Other income (expense), net | (125 | ) | 10 | |||||
Loss from continuing operations, before income tax | (3,370 | ) | (1,076 | ) | ||||
Income tax expense from continuing operations | (54 | ) | (19 | ) | ||||
Net loss from continuing operations | (3,424 | ) | (1,095 | ) | ||||
Discontinued operations: | ||||||||
Loss from discontinued operations, net of tax | (7,359 | ) | (2,756 | ) | ||||
Net loss | $ | (10,783 | ) | $ | (3,851 | ) | ||
Basic loss per common share: | ||||||||
Continuing operations | $ | (0.05 | ) | $ | (0.02 | ) | ||
Discontinued operations | (0.11 | ) | (0.05 | ) | ||||
Net loss | $ | (0.16 | ) | $ | (0.07 | ) | ||
Diluted loss per common share: | ||||||||
Continuing operations | $ | (0.05 | ) | $ | (0.02 | ) | ||
Discontinued operations | (0.11 | ) | (0.05 | ) | ||||
Net loss | $ | (0.16 | ) | $ | (0.07 | ) | ||
Weighted average shares outstanding: | ||||||||
Basic | 65,217 | 56,241 | ||||||
Diluted | 65,217 | 56,241 | ||||||
Other comprehensiveloss: | ||||||||
Net unrealized gain (loss) on foreign exchange rate translation | (99 | ) | 124 | |||||
Comprehensive loss | $ | (10,882 | ) | $ | (3,727 | ) |
See accompanying notes to consolidated financial statements.
SPEED COMMERCE, INC.
Consolidated Statements of Shareholders’ Equity
(in thousands, except share amounts)
Convertible Preferred Stock | Common Stock | Accumulated | Accumulated Other Comprehensive Income | Total Shareholders' | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Deficit | (Loss) | Equity | ||||||||||||||||||||||
Balance at March 31, 2014 | - | - | 65,208,193 | 213,354 | (162,734 | ) | 775 | 51,395 | ||||||||||||||||||||
Net shares issued upon exercise of stock options and for restricted stock | - | - | 89,164 | 100 | - | - | 100 | |||||||||||||||||||||
Share based compensation | - | - | - | 440 | - | - | 440 | |||||||||||||||||||||
Issuance of convertible preferred stock, Series C | 3,333,333 | 4,665 | - | 3,533 | - | - | 8,198 | |||||||||||||||||||||
Accretion of convertible preferred stock, Series C | - | 461 | - | (461 | ) | - | - | - | ||||||||||||||||||||
Dividend for convertible preferred stock, Series C dividends | - | - | - | (54 | ) | - | - | (54 | ) | |||||||||||||||||||
Netloss | - | - | - | - | (10,783 | ) | - | (10,783 | ) | |||||||||||||||||||
Unrealized loss on foreign exchange rate translation | - | - | - | - | - | (99 | ) | (99 | ) | |||||||||||||||||||
Balance at June 30, 2014 | 3,333,333 | $ | 5,126 | 65,297,357 | $ | 216,912 | $ | (173,517 | ) | $ | 676 | $ | 49,197 |
See accompanying notes to consolidated financial statements.
SPEED COMMERCE, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Operating activities: | ||||||||
Net loss | $ | (10,783 | ) | $ | (3,851 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Loss from discontinued operations, net of tax | 7,359 | 2,756 | ||||||
Depreciation and amortization | 1,769 | 1,314 | ||||||
Amortization of debt acquisition costs | 81 | �� | 81 | |||||
Share-based compensation expense | 358 | 240 | ||||||
Deferred income taxes | 270 | (21 | ) | |||||
Other | - | 41 | ||||||
Changes in operating assets and liabilities | (859 | ) | (4,624 | ) | ||||
Operating activities from discontinued operations, net | 14,796 | 13,162 | ||||||
Net cash provided by operating activities | 12,991 | 9,098 | ||||||
Investing activities: | ||||||||
Cash proceeds related to acquisition | - | 837 | ||||||
Purchases of property, equipment and software, net | (2,408 | ) | (607 | ) | ||||
Investing activities from discontinued operations, net | (32 | ) | (47 | ) | ||||
Net cash provided by (used in) investing activities | (2,440 | ) | 183 | |||||
Financing activities: | ||||||||
Proceeds from revolving line of credit | 55,969 | 26,412 | ||||||
Payments on revolving line of credit | (76,231 | ) | (37,800 | ) | ||||
Proceeds from equity offering | 9,928 | - | ||||||
Other | (230 | ) | 5 | |||||
Financing activities from discontinued operatings, net | - | 2,015 | ||||||
Net cash used in financing activities | (10,564 | ) | (9,368 | ) | ||||
Net decrease in cash and cash equivalents | (13 | ) | (87 | ) | ||||
Cash and cash equivalents at beginning of period | 13 | 91 | ||||||
Cash and cash equivalents at end of period | $ | - | $ | 4 |
See accompanying notes to consolidated financial statements.
SPEED COMMERCE, INC.
Notes to Consolidated Financial Statements
Note 1 Organization and Basis of Presentation
Speed Commerce, Inc. (the “Company” or “Speed Commerce”), a Minnesota corporation formed in 1983, is a provider of web platform development and hosting, customer care, fulfillment, order management, logistics and call center capabilities for clients.
On March 31, 2014, the Company announced that it had commenced the process of divesting its legacy Distribution business segment, which is engaged in the retail distribution of computer software and consumer electronics and accessories. The distribution business segment is reclassified as discontinued operations in the consolidated financial statements for all periods presented. The transaction was completed in second quarter of fiscal 2015.
The accompanying unaudited consolidated financial statements of Speed Commerce have been prepared in accordance with accounting principles generally accepted ("GAAP") in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements.
All inter-company accounts and transactions have been eliminated in consolidation. In the opinion of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Because of the seasonal nature of the Company’s business, the operating results and cash flows for the three month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in Speed Commerce, Inc.’s Annual Report on Form 10-K for the year ended March 31, 2014.
Significant accounting policies
There were no significant changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K filed with the SEC for the year ended March 31, 2014.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("Update 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on April 1, 2017, and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.
Note2 Discontinued Operations
On March 31, 2014, the Company announced that it had commenced the process of divesting its legacy Distribution business segment, which is engaged in the retail distribution of computer software and consumer electronics and accessories. The distribution business segment is reclassified as discontinued operations in the consolidated financial statements for all periods presented. The transaction was completed in second quarter of fiscal year 2015. At March 31, 2014, the Company adjusted the estimated carrying value of the assets and liabilities of discontinued operations by $2.2 million to reflect fair value measurements. In addition, the assets and liabilities associated with the discontinued operations are classified as Assets of discontinued operations and Liabilities related to assets of discontinued operations, as appropriate, in the consolidated balance sheets.
The following table provides the components of Discontinued operations (unaudited):
Three Months ended June 30, | ||||||||
2014 | 2013 | |||||||
Net revenue | $ | 69,267 | $ | 75,716 | ||||
Cost of revenue | 67,269 | 70,173 | ||||||
Total operating expenses | 9,354 | 8,284 | ||||||
Pre-tax loss from discontinued operations | (7,356 | ) | (2,741 | ) | ||||
Income tax expense | (3 | ) | (15 | ) | ||||
Loss from discontinued operations, net of tax | $ | (7,359 | ) | $ | (2,756 | ) |
SPEED COMMERCE, INC.
Notes to Consolidated Financial Statements
The following table provides the components of Assets of discontinued operations and Liabilities related to assets of discontinued operations:
June 30, 2014 | March 31, 2014 | |||||||
(Unaudited) | (Audited) | |||||||
Accounts receivable, net | $ | 54,218 | $ | 67,494 | ||||
Inventories | 32,438 | 33,386 | ||||||
Prepaid expenses | 1,219 | 1,398 | ||||||
Property and equipment, net | 3,177 | 3,181 | ||||||
Software development costs, net | 606 | 574 | ||||||
Non-current prepaid royalties | 3,378 | 3,261 | ||||||
Other non-current assets | 144 | 562 | ||||||
Assets of discontinued operations | $ | 95,180 | $ | 109,856 | ||||
Current liabilities | $ | 95,761 | $ | 88,388 | ||||
Other liabilities | 98 | 7 | ||||||
Liabilities related to assets of discontinued operations | $ | 95,859 | $ | 88,395 |
Note 3Supplemental Cash Flow Information
For the three months ended June 30, 2014 and 2013, net cash paid for income taxes was $24,000 and $134,000, respectively. For the three months ended June 30, 2014 and 2013, net cash paid for interest was $555,000 and $259,000, respectively.
The following table provides the components of Changes in operating assets and liabilities, net of acquisition (unaudited):
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Accounts receivable | �� | $ | 2,571 | $ | (1,702 | ) | ||
Prepaid expenses | (416 | ) | (430 | ) | ||||
Other assets | (3,649 | ) | (1,302 | ) | ||||
Accounts payable | (3,047 | ) | (2,205 | ) | ||||
Accrued expenses and other liabilities | 3,682 | 1,015 | ||||||
Changes in operating assets and liabilities | $ | (859 | ) | $ | (4,624 | ) |
SPEED COMMERCE, INC.
Notes to Consolidated Financial Statements
Note4 Intangible Assets
Intangible Asset Summary
Identifiable intangible assets, with zero residual value, are being amortized (except for the trademarks which have an indefinite life) over useful lives of five years for developed technology, eight to fourteen years for customer relationships, seven years for the domain name, and three to five years for internal-use software and are valued as follows (in thousands):
June 30, 2014 | March 31, 2014 | |||||||||||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||||||
Gross carrying | Accumulated | Gross carrying | Accumulated | |||||||||||||||||||||
amount | amortization | Net | amount | amortization | Net | |||||||||||||||||||
Developed technology | $ | 4,170 | $ | (1,761 | ) | $ | 2,409 | $ | 4,170 | $ | (1,483 | ) | $ | 2,687 | ||||||||||
Customer relationships | 14,490 | (2,007 | ) | 12,483 | 14,490 | (1,485 | ) | 13,005 | ||||||||||||||||
Domain name | 135 | (20 | ) | 115 | 135 | (19 | ) | 116 | ||||||||||||||||
Internal-use software | 379 | (74 | ) | 305 | 244 | (46 | ) | 198 | ||||||||||||||||
Trademarks (not amortized) | 3,590 | - | 3,590 | 3,590 | - | 3,590 | ||||||||||||||||||
$ | 22,764 | $ | (3,862 | ) | $ | 18,902 | $ | 22,629 | $ | (3,033 | ) | $ | 19,596 |
Debt issuance costs
Debt issuance costs are included in “Other Assets” and are amortized over the life of the related debt. Debt issuance costs consisted of the following (in thousands):
June 30, 2014 | March 31, 2014 | |||||||
(Unaudited) | (Audited) | |||||||
Debt issuance costs | $ | 2,822 | $ | 2,771 | ||||
Less: accumulated amortization | (1,929 | ) | (1,848 | ) | ||||
Debt issuance costs, net | $ | 893 | $ | 923 |
Note 5 Property and Equipment
Property and equipment consisted of the following (in thousands):
June 30, 2014 | March 31, 2014 | |||||||
(Unaudited) | (Audited) | |||||||
Furniture and fixtures | $ | 58 | $ | 27 | ||||
Computer and office equipment | 6,020 | 5,561 | ||||||
Warehouse equipment | 11,007 | 10,464 | ||||||
Leasehold improvements | 1,123 | 826 | ||||||
Construction in progress | 3,703 | 2,851 | ||||||
Total | 21,911 | 19,729 | ||||||
Less: accumulated depreciation and amortization | 5,169 | 4,320 | ||||||
Net property and equipment | $ | 16,742 | $ | 15,409 |
SPEED COMMERCE, INC.
Notes to Consolidated Financial Statements
Note 6 Accrued Expenses
Accrued expenses consisted of the following (in thousands):
June 30, 2014 | March 31, 2014 | |||||||
(Unaudited) | (Audited) | |||||||
Compensation and benefits | $ | 1,208 | $ | 1,135 | ||||
Accrued interest | 60 | 158 | ||||||
Other | 1,666 | 437 | ||||||
Total accrued expenses | $ | 2,934 | $ | 1,730 |
Note7 Commitments and Contingencies
Litigation and Proceedings
In the normal course of business, the Company is involved in a number of litigation/arbitration and administrative/regulatory matters that are incidental to the operation of the Company’s business. These proceedings generally include, among other things, various matters with regard to products distributed by the Company and services provided by the Company, disagreements regarding ownership of intellectual property, the payment of amounts owed by the Company to third parties, and the collection of accounts receivable owed to the Company.
The Company does not currently believe that the resolution of any pending matters will have a material adverse effect on the Company’s financial position or liquidity, but an adverse decision in more than one could be material to the Company’s consolidated results of operations. No amounts were accrued with respect to proceedings as of June 30, 2014 and March 31, 2014, respectively as not probable or estimable.
Note 8 Bank Financing and Debt
On November 12, 2009, the Company entered into a three year, $65.0 million revolving credit facility (the “Credit Facility”) with Wells Fargo Capital Finance, LLC as agent and lender, and a participating lender. On December 29, 2011, the Credit Facility was amended to reduce the revolving credit facility limit to $50.0 million, provide for an additional $20.0 million under the Credit Facility under certain circumstances and extend the maturity date to December 29, 2016. On November 20, 2012, the Credit Facility was amended to provide for the acquisition of Speed Commerce Corp. (“SCC”), eliminate the additional $20.0 million available under the Credit Facility and extend the maturity date to November 20, 2017.The Credit Facility was again amended on June 28, 2013 in order to modify the Company’s limitations on capital expenditures under the Credit Facility and to make certain adjustments to the definition of “EBITDA”, in connection with the final earn-out calculations related to the acquisition of SCC.
On June 2, 2014, the Company, together with its subsidiaries, entered into a Waiver and Amendment Agreement with Wells Fargo Capital Finance, LLC (the “Waiver and Amendment”). The Waiver and Amendment amended the Credit Facility to provide for, among other things, each of the following: (i) the consent of Wells Fargo to the Series C Preferred Stock financing; (ii) the waiver of certain defaults under the Credit Facility; (iii) the modification to the maximum revolver amount to $30.0 million; (iv) the amendment to certain provisions of the Credit Facility that determined the Company’s borrowing availability under the Credit Facility, and (v) the provision of a release in favor of Wells Fargo Capital Finance, LLC.
At June 30, 2014 and March 31, 2014 the Company had $18.1 million and $38.4 million, respectively, outstanding on the Credit Facility. On July 9, 2014, the Credit Facility was repaid in full and replaced by the Term Loan facility described below. The amount available under the Credit Facility was subject to a borrowing base formula. At March 31, 2014, the Company had $76,000 of excess availability at the time but the Company was not in compliance with a covenant in the Credit Facility that required that it maintain excess availability of at least $5 million. This event of default was subsequently waived by Wells Fargo pursuant to the Waiver and Amendment.
The Credit Facility was secured by a first priority security interest in all of the Company’s assets, as well as the capital stock of its subsidiary companies. Additionally, the Credit Facility, as amended, called for monthly interest payments at the bank’s base rate (as defined in the Credit Facility) plus 1.75%, or LIBOR plus 2.75%, at the Company’s discretion. In association with, and per the terms of the Credit Facility, the Company also paid certain facility and agent fees. Weighted-average interest on the Credit Facility was 5.12% and 5.17% at June 30, 2014 and March 31, 2014, respectively.
SPEED COMMERCE, INC.
Notes to Consolidated Financial Statements
Under the Credit Facility, the Company was required to meet certain financial and non-financial covenants. The financial covenants included a variety of financial metrics that are used to determine the Company’s overall financial stability as well as limitations on capital expenditures, a minimum ratio of EBITDA to fixed charges and a minimum borrowing base availability requirement.
Term Loan
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 (“Garrison”) acting as agent (the “Term Loan”). Upon the closing of the Term Loan, $35 million was funded to the Company, less certain fees and costs (the “Closing Date Loans”). An additional $15 million delayed draw term loan is available to the Company under the Term Loan, which can be drawn prior to January 1, 2016, if the Company is in compliance with certain obligations under the Term Loan (the “Delayed Draw Loan”). The principal amount of all loans provided under the Term Loan will be amortized at 2.5% annually, with the remaining principal balance being due and payable on July 9, 2019.
The Closing Date Loans bear a blended interest rate that is roughly equal to the LIBOR rate, plus 5.5%, except upon an event of default. The Delayed Draw Loan, if drawn, would bear an interest rate at the LIBOR rate, plus 5.5%, except upon an event of default. The LIBOR rate for all loans under the Term Loan is subject to a minimum level of 1.0%. 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 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.
Letters of Credit
On April 14, 2011, the Company was released from a lease guaranty by providing a five-year, standby letter of credit for $1.5 million, which is reduced by $300,000 each subsequent year. The standby letter of credit can be drawn down, to the extent in default, prompt payments are not made under this office lease by the tenant. No claims have been made against this financial instrument. There was no indication that the tenant under that office lease would not be able to pay the required future lease payments totaling $2.1 million and $2.3 million at June 30, 2014 and March 31, 2014, respectively. Therefore, at June 30, 2014 and March 31, 2014, the Company did not believe a future draw on the standby letter of credit was probable and an accrual related to any future obligation was not considered necessary at such times.
Note 9 Income Taxes
For the three months ended June 30, 2014, the Company recorded income tax expense from continuing operations of $54,000, compared to income tax expense from continuing operations of $19,000 for the three months ended June 30, 2013. The effective income tax rate applied to continuing operations for the three months ended June 30, 2014 was a negative 1.6%, compared to a negative 1.8% for the three months ended June 30, 2013.
For the three months ended June 30, 2014, the Company recorded income tax expense from discontinued operations of $3,000, compared to income tax expense from discontinued operations of $15,000 for the three months ended June 30, 2013. The effective income tax rate applied to discontinued operations for the three months ended June 30, 2014 was a negative 0.1%, compared to a negative 0.6% for the three months ended June 30, 2013.
The Company does not consider any foreign earnings as permanently reinvested in foreign jurisdictions and records deferred tax liabilities for temporary differences related to its foreign operations.
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, the Company would not be able to realize all or part of its deferred tax assets. An assessment is required of all available evidence, both positive and negative, to determine the amount of any required valuation allowance.
As of June 30, 2014 and March 31, 2014, the Company had , a valuation allowance of $43.1 million and $39.5 million has been recorded to offset net deferred tax assets of $41.8 million and $38.2 million, respectively. The net deferred tax assets before valuation allowance are composed of temporary differences, primarily related to net operating loss carryforwards, which will begin to expire in fiscal 2029. The Company also has foreign tax credit carryforwards which will begin to expire in 2016.
As of June 30, 2014 and March 31, 2014, the Company provided for a liability of $1.2 million and $1.1 million, respectively, for unrecognized tax benefits (excluding interest and penalties) related to various income tax matters, which was included in long-term deferred tax liabilities.
The Company does not anticipate that the total unrecognized tax benefits will significantly change prior to March 31, 2015.
SPEED COMMERCE, INC.
Notes to Consolidated Financial Statements
Note 10 Earnings (loss) Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Numerator: | ||||||||
Net loss from continuing operations | $ | (3,424 | ) | $ | (1,095 | ) | ||
Dividend for convertible preferred stock, Series C dividends | (54 | ) | - | |||||
Loss from discontinued operations, net of tax | (7,359 | ) | (2,756 | ) | ||||
Net loss attributable to common shareholders | $ | (10,837 | ) | $ | (3,851 | ) | ||
Denominator: | ||||||||
Denominator for basic loss per share — weighted average shares | 65,217 | 56,241 | ||||||
Denominator for diluted loss per share — weighted-average shares | 65,217 | 56,241 | ||||||
Basic loss per common share | ||||||||
Continuing operations | $ | (0.05 | ) | $ | (0.02 | ) | ||
Discontinued operations | (0.11 | ) | (0.05 | ) | ||||
Net loss | $ | (0.16 | ) | $ | (0.07 | ) | ||
Diluted loss per common share | ||||||||
Continuing operations | $ | (0.05 | ) | $ | (0.02 | ) | ||
Discontinued operations | (0.11 | ) | (0.05 | ) | ||||
Net loss | $ | (0.16 | ) | $ | (0.07 | ) |
Due to the Company’s net loss for the three months ended June 30, 2014 and 2013, diluted loss per share excludes 2.0 million and 2.0 million, respectively, stock options and restricted stock awards because their inclusion would have been anti-dilutive. The per share amounts also exclude the as-if conversion of the Series C preferred stock and warrants as their inclusion would have been anti-dilutive for the three months ended June 30, 2014.
Note 11 Subsequent Events
On July 9, 2014, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Wynit Distribution, LLC, together with certain of its subsidiaries (collectively, the “Buyers”). Under the Purchase Agreement, the Buyers purchased substantially all of the assets of the Company’s retail distribution and software publishing business on July 9, 2014. In connection with the sale, the Company and the Buyer also entered into a transition services agreement to provide one another with certain transitional services.
The total consideration under the Purchase Agreement (the “Purchase Price”) was $15 million. Pursuant to the Purchase Agreement, $5 million of the Purchase Price was paid to the Company in cash. Up to an additional $10 million is payable to the Company under a promissory note (the “Promissory Note”) that is secured by all of Buyer’s assets. The Company’s 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 the Company to Buyer in connection with certain post-closing adjustments to the Purchase Price. Potential adjustments include, among other things, a working capital adjustment and an adjustment in connection with the repurchase of certain uncollectible accounts receivable. The Purchase Agreement contains customary representations and warranties and indemnification obligations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 1.3 million square feet of fulfillment center from our facilities in Columbus, Ohio and Dallas, Texas, utilizing advanced automation technology such as high-efficiency unit sortation, pick-to-pack conveyors and radio frequency (“RF”) scanning. We also operate three customer contact centers to enhance our clients’ brand experience. Our corporate headquarters and web development and technology operations are based in Dallas, Texas.
Our clients include retailers with brand names such as Justice, Dress Barn, Yankee Candle, and Warby Parker. In June 2014, we launched our E-commerce solution with Huawei U.S. consumer business group. In fiscal 2014, we entered into separate agreements with The Army & Air Force Exchange Service and Navy Exchange Service Command to build and maintain fully integrated, E-commerce platforms as well as provide a variety of fulfillment and call center related services.
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 distribution centers, we do not own any of our clients’ 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 a client, including web site development, are deferred and recognized over the expected life of the relationship with the client.
RecentEvents
On July 9, 2014, the Company entered into an Asset Purchase Agreement with Wynit Distribution, LLC to sell substantially all of the assets of the Company’s legacy retail distribution business segment. The total consideration received for the distribution segment is $15 million. 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 the Company under a promissory note (the “Promissory Note”) that is secured by all of Buyer’s assets. The Company’s 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 will be reduced if certain amounts are payable by the Company to buyer in connection with certain post-closing adjustments to the Purchase Price. Potential adjustments include, among other things, a working capital adjustment and an adjustment in connection with the repurchase of certain uncollectible accounts receivable. In connection with the sale, the Company and the buyer also entered into a transition services agreement to provide one another with certain transitional services. The distribution business segment has been reclassified as discontinued operations in the consolidated financial statements for all periods presented.
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 is available to the Company under the Term Loan, which can be drawn prior to January 1, 2016. The principal amount of all loans provided under the Term Loan will be amortized at 2.5% annually, with the remaining principal balance being due and payable on July 9, 2019. The Term Loan replaces the prior asset-based revolving credit facility with Wells Fargo Capital Finance, LLC.
On June 3, 2014 Speed Commerce closed a private offering with institutional investors for approximately $10 million of the Company's Series C Preferred Stock. Under the terms of the offering, Speed Commerce sold an aggregate of 3,333,333 shares of the Company's 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.
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 expansion of our Ohio fulfillment center, automated sortation equipment, and significant upfront new client deployment efforts.
At June 30, 2014 and March 31, 2014 we had $18.1 million and $38.4 million, respectively, 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.
On June 2, 2014, the Company, together with its subsidiaries, entered into a Waiver and Amendment Agreement with Wells Fargo Capital Finance, LLC (the “Waiver and Amendment”). The Waiver and Amendment amended the Credit Facility to provide for, among other things, each of the following: (i) the consent of Wells Fargo to the Series C Preferred Stock financing; (ii) the waiver of certain defaults under the Credit Facility; (iii) the modification to the maximum revolver amount to $30.0 million; (iv) the amendment to certain provisions of the Credit Facility that determined the Company’s borrowing availability under the Credit Facility, and (v) the provision of a release in favor of Wells Fargo Capital Finance, LLC.
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 is available to the Company under the Term Loan, which can be drawn prior to January 1, 2016. The principal amount of all loans provided under the Term Loan will be amortized at 2.5% annually, with the remaining principal balance being due and payable on July 9, 2019.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 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.
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 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.
Funds provided under the delayed draw term loan would be available to the Company for use in connection with permitted acquisitions, as defined in the agreement, and to pay costs and expenses in connection therewith or, with the prior written approval of Garrison, for permitted capital expenditures or other corporate purposes. The Term Loan is secured by a first priority security interest in substantially all of the Company’s assets.
The Term Loan contains customary affirmative and negative covenants. The financial covenants include a limitation on capital expenditures, 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 or the lenders under those facilities. These credit facilities also contain customary events of default such as nonpayment, bankruptcy, and change in control, which if they occur may constitute an event of default.
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, including our relocation, may have unpredictable outcomes, including the possibility of us incurring additional restructuring charges; |
| ● | the seasonality and variability in our business and decreased sales 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; |
| ● | our service fee revenue and gross margin are dependent upon transaction volume, which volume may differ from our projections; |
| ● | 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 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.
Three Months Ended June 30, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Net revenue | $ | 22,060 | 100.0 | % | $ | 22,016 | 100.0 | % | ||||||||
Cost of revenue | 17,341 | 78.6 | 16,011 | 72.7 | ||||||||||||
Gross profit | 4,719 | 21.4 | 6,005 | 27.3 | ||||||||||||
Operating Expenses: | ||||||||||||||||
Selling and marketing | 1,002 | 4.5 | 562 | 2.6 | ||||||||||||
General and administrative | 3,808 | 17.3 | 4,176 | 19.0 | ||||||||||||
Information technology | 844 | 3.8 | 659 | 3.0 | ||||||||||||
Depreciation and amortization | 1,769 | 8.0 | 1,314 | 6.0 | ||||||||||||
Total operating expenses | 7,423 | 33.6 | 6,711 | 30.6 | ||||||||||||
Loss from operations | (2,704 | ) | (12.2 | ) | (706 | ) | (3.3 | ) | ||||||||
Interest expense, net | (541 | ) | (2.5 | ) | (380 | ) | (1.7 | ) | ||||||||
Other income (expense), net | (125 | ) | (0.6 | ) | 10 | - | ||||||||||
Loss from continuing operations, before income tax | (3,370 | ) | (15.3 | ) | (1,076 | ) | (5.0 | ) | ||||||||
Income tax expense from continuing operations | (54 | ) | (0.2 | ) | (19 | ) | (0.1 | ) | ||||||||
Net loss from continuing operations | (3,424 | ) | (15.5 | ) | (1,095 | ) | (5.1 | ) | ||||||||
Discontinued operations: | ||||||||||||||||
Loss from discontinued operations, net of tax | (7,359 | ) | (33.4 | ) | (2,756 | ) | (12.5 | ) | ||||||||
Net loss | $ | (10,783 | ) | (48.9 | )% | $ | (3,851 | ) | (17.6 | )% |
Results from Continuing Operations
Three Months Ended June 30, 2014 compared toThree Months EndedJune 30, 2013
Net Revenue
Net revenue was $22.1 million for the three months ended June 30, 2014 compared to $22.0 million for the three months ended June 30, 2013, an increase of $0.1 million, or 0.5%. The increase was primarily due to an increase in management-commerce solution services offset by decreased in third party logistics services.
Cost of Revenue
Cost of revenue was $17.3 million for the three months ended June 30, 2014 compared to $16.0 million for the three months ended June 30, 2013, an increase of $1.3 million, or 8.1%. The increase was primarily due to an increase in labor costs and related support costs for our customer care and fulfillment center facilities as we expanded for new client launches scheduled for the second and third quarter of fiscal year 2015.
Operating Expenses
Selling and marketing expenses were $1.0 million for the three months ended June 30, 2014 compared to $0.6 million for the three months ended June 30, 2013, an increase of $0.4 million, or 66.7%. 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 $3.8 million for the three months ended June 30, 2014 compared to $4.2 million for the three months ended June 30, 2013, a decrease of $0.4 million, or 9.5%. The decrease was primarily due to a decrease in transaction and transition costs resulting from integration. 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 $0.8 million for the three months ended June 30, 2014 compared to $0.7 million for the three months ended June 30, 2013, an increase of $0.1 million or 14.3%. The increase was primarily attributable to personnel growth in IT infrastructure and support for new client launches scheduled for fiscal 2015.
Depreciation and amortization expenses were $1.8 million for the three months ended June 30, 2014 compared to $1.3 million for the three months ended June 30, 2013, an increase of $0.5 million or 38.5%. The increase was primarily attributable to incremental investments in IT equipment for new client launches scheduled for fiscal 2015 and the automatic sortation equipment in our Columbus facility, which was not in service in fiscal 2014.
Interest expense, net
Interest expense was $0.5 million for the three months ended June 30, 2014 compared to expense of $0.4 million for the three months ended June 30, 2013, an increase of $0.1 million or 25.0%. The increase principally reflected higher average debt balances, capital expenditures to expand and the additional automated sortation equipment in the fulfillment center.
Consolidated Income Tax Expense or Benefit from Continuing Operations for All Periods
For the three months ended June 30, 2014, the Company recorded income tax expense from continuing operations of $54,000, compared to income tax expense from continuing operations of $19,000 for the three months ended June 30, 2013. The effective income tax rate applied to continuing operations for the three months ended June 30, 2014 was a negative 1.6%, compared to a negative 1.8% for the three months ended June 30, 2013.
For the three months ended June 30, 2014, the Company recorded income tax expense from discontinued operations of $3,000, compared to income tax expense from discontinued operations of $15,000 for the three months ended June 30, 2013. The effective income tax rate applied to discontinued operations for the three months ended June 30, 2014 was a negative 0.1%, compared to a negative 0.6% for the three months ended June 30, 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 its previously announced divestiture of its legacy Distribution business segment. The distribution business segment has been reclassified as discontinued operations in the consolidated financial statements for all periods presented.
The following table provides the components of discontinued operations:
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Net revenue | $ | 69,267 | $ | 75,716 | ||||
Cost of revenue | 67,269 | 70,173 | ||||||
Total operating expenses | 9,354 | 8,284 | ||||||
Pre-tax loss from discontinued operations | (7,356 | ) | (2,741 | ) | ||||
Income tax expense | (3 | ) | (15 | ) | ||||
Loss from discontinued operations, net of tax | $ | (7,359 | ) | $ | (2,756 | ) |
Net revenue for the Distribution business was $69.3 million for the three months ended June 30, 2014 as compared to $75.7 million for the three months ended June 30, 2013, a decrease of $6.4 million or 8.5%. The decline in net revenue was largely attributable to a $2.9 million decline in software product group revenue, and a $3.0 million decline in revenue from the consumer electronic and accessories product group. Pre-tax loss from discontinued operations was $7.4 million for the three months ended June 30, 2014 as compared to $2.8 million for the three months ended June 30, 2013.
Market Risk
At June 30, 2014, we had $18.1 million of indebtedness subject to interest rate fluctuations. As such, a 100-basis point change in the current LIBOR rate would have a $91,000 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 provided by operating activities during the three months ended June 30, 2014 were $13.0 million and were primarily impacted by the following:
| ● | Non-cash charges of $2.5 million, including depreciation and amortization of $1.9 million, which increased due to the purchases computer hardware for new client launches scheduled for fiscal 2015 and fiscal year 2015 charges for the sortation equipment in our Columbus fulfillment center, share-based compensation of $0.4 million, and increased in deferred income taxes of 0.2 million; |
| ● | Accounts receivable decreased $2.6 million, resulting from the improvement in client collections; |
| ● | Prepaid expenses increased $0.4 million, primarily from timing of annual insurance renewals; |
| ● | Other assets increased $3.6 million, primarily due to additional deferred project costs for in-process client development; |
| ● | Accounts payable decreased $3.0 million, primarily as a result of timing of payments and purchases; and |
● | Accrued expenses increased by $3.7 million, primarily as a result of deferred revenues for up-front fees for new clients. |
Cash flows provided by operating activities during the three months ended June 30, 2013 were $9.1 million and were primarily impacted by following:
| ● | Non-cash charges of $1.6 million, including depreciation and amortization of $1.4 million, and share-based compensation of $0.2 million; |
| ● | Accounts receivable increased $1.7 million, resulting from the timing of invoices to clients; |
| ● | Prepaid expenses increased $0.4 million, primarily resulting from the timing of annual insurance renewals; |
| ● | Other assets increased $1.3 million, primarily due to deferred project costs for client development; |
| ● | Accounts payable decreased $2.2 million, primarily as a result of timing of payments and purchases; and |
| ● | Accrued expenses increased $1.0 million, net of various accrual payments and a decrease in accrued wages. |
Investing Activities
Cash flows used in investing activities totaled $2.4 million for the three months ended June 30, 2014 and cash flows provided by investing activities totaled $0.2 million for the same period last year.
The purchases of property, equipment and software totaled $2.4 million and $0.6 million in the three months ended June 30, 2014 and 2013, respectively.Payment received from the working capital adjustment related to the acquisition of Speed Commerce Corp. was $0.8 million in the first quarter of fiscal 2014.
Financing Activities
Cash flows used in financing activities totaled $10.6 million for the three months ended June 30, 2014. In first quarter of fiscal 2015, we received $9.9 million in net proceeds from the issuance of 3,333,333 shares of convertible preferred stock, Series C, and we had net payment to the revolving line of credit of $20.3 million.
Cash flows used in financing activities totaled $9.4 million for the three months ended June 30, 2013, and we had net payment to the revolving line of credit of $11.4 million.
Discontinued Operations
Net cash flows provided by discontinued operations were $14.8 million for the three months ended June 30, 2014 and consisted of $14.8 million of cash flows provided by operating activities, and $32,000 of cash flows used in investing activities.
Net cash flows provided by discontinued operations were $15.1 million for the three months ended June 30, 2014 and consisted of $13.2 million of cash flows provided by operating activities, $47,000 of cash flows used in investing activities and $2.0 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 for approximately $10,000,000 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 will accrue 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). 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. In first quarter of 2015, we recognized $125,000 of expense 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 Term Loan. 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 Term Loan and vendor terms plus 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, including the $15 million delayed draw loan from our Term Loan facility. 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
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 7 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 | Purchase Agreement dated June 2, 2014 among the Company and the Investors | 8-K | 10.1 | 6/3/2014 | ||
10.2 | Form of Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of Speed Commerce dated June 2, 2014 | 8-K | 10.2 | 6/3/2014 | ||
10.3 | Form of Warrant | 8-K | 10.3 | 6/3/2014 | ||
10.4 | Registration Rights Agreement dated June 2, 2014 among the Company and the Investors | 8-K | 10.4 | 6/3/2014 | ||
10.5 | Waiver and Amendment Agreement dated June 2, 2014 by the Company and Wells Fargo Capital Finance, LLC | 8-K | 10.5 | 6/3/2014 | ||
10.6 | Asset Purchase Agreement dated July 9, 2014 by and among the Company and Wynit Distribution, LLC | 8-K | 2.1 | 7/9/2014 | ||
10.7 | Credit and Guaranty Agreement dated July 9, 2014 among the Company, Garrison Loan Agency Services, LLC, as Agent, and Lenders | 8-K | 10.3 | 7/9/2014 | ||
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 first quarter of fiscal 2015, filed with the SEC on August 8, 2014, is formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets at June 30, 2014 and March 31, 2014; (ii) the Consolidated Statements of Operations and Comprehensive Loss for the three months ended June 30, 2014 and 2013; (iii) the Consolidated Statements of Cash Flows for the three months ended June 30, 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: August 8, 2014 | /s/ Richard S Willis |
|
| Richard S Willis |
|
| President and Chief Executive Officer |
|
| (Principal Executive Officer) |
|
|
|
|
Date: August 8, 2014 | /s/ Terry J. Tuttle |
|
| Terry J. Tuttle |
|
| Chief Financial Officer |
|
| (Principal Financial and Accounting Officer) |
|
22