Speed Commerce CEO responds indirectly to ‘Dirt Swept Under the Carpet’ article and shares drop to 13 cents
In Dirt Swept Under The Carpet: Speed Commerce, Inc. Fiscal Q1 2016 Results I promised to immediately publish any response I received from Speed Commerce (’Speed’ or the ‘Company’) in regard to what I called ‘Dirt Swept Under the Carpet’.
Internet Retailer publishes story
Internet Retailer published a story about Speed yesterday titled E-commerce services provider Speed Commerce hits a rough patch (see below for complete text).
In the story Speed’s CEO, Richard Willis, told Internet Retailer that Speed was not forced to renegotiate the debt; it did so to ensure it met financial goals. “We gave ourselves a little cushion to make sure we were going to make what we said.”
Speed CEO’s comments contradict Speed’s 10K
Page 7 of its 10K -- We operate with significant levels of indebtedness and are required to comply with certain financial and non-financial covenants. “As of March 31, 2015, our total credit facilities outstanding, including debt and capital lease obligations was approximately $100.4 million, which was in excess of amounts permitted under our credit facility.”
Speed CEO spends $2.5 million for “A little cushion”?
For context $2.5 million dollars is very material amount for a Company whose market capitalization (stock price * shares outstanding) is less than $12 million. Let’s walk through some logic. If I’m the CEO of Speed and I’m trying to “make what I said” and I’m “not forced” why in the world would I incur $2.5 million of excess cost coupled with extremely onerous terms (described below).
Speeds’s amended debt terms
"On May 11, 2015, the Company entered into a Consent and Second Amendment to Amended and Restated Credit and Guaranty Agreement with Garrison. Pursuant to the Amendment, among other things, (i) permission to add back certain balance sheet write-offs to Adjusted EBITDA (as defined) for the calculation of financial covenants, (ii) subject to lender approval the ability to add back certain restructuring, transaction fees and expenses and one-time charges not exceed $2.5 million to the calculation of financial covenants, (iii) the interest rate on the facility increased to LIBOR +11%, with a 1% LIBOR floor, (iv) the Company will pay an amendment fee equal to 200 basis points, (v) the Company agreed to provide Garrison with certain additional forecasts and updates regarding the Company's liquidity and financial condition, and (vi) the Company is required to maintain a minimum of $1 million of unrestricted cash at all times." - Source: Speed Commerce 10-K dated 6/15/15, page 91
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
INTERNET RETAILER ARTICLE
E-commerce services provider Speed Commerce hits a rough patch.
August 18, 2015, 1:06 PM
BY SANDRA GUY Senior Editor, Internet Retailer
The loss of its biggest customer doesn’t dampen CEO Richard Willis’s optimism for the company’s future.
The CEO of Speed Commerce, an e-commerce fulfillment company, says the company is adding new customers, enjoying double-digit percentage sales growth and is on its way to a record holiday season despite losing its biggest customer, renegotiating its debt and facing a possible delisting of its stock.
“We are doing a better job than we ever have before—we’re excited about that,” president and CEO Richard Willis said Tuesday.
Speed Commerce has signed agreements with all 11 customers whose agreements have come up for renewal this year, Willis says. “Those are very important customers,” he says.
Glen Demeraski, CEO of Tabcom LLC, parent company of Dog.com, says in an email that his company renewed its contract with Speed Commerce through 2019 and feels confident that Speed Commerce “will right the ship.”
“We are concerned, but we have been working closely with Speed Commerce’s management and we are confident in their current plans to move forward,” Demeraski says. “There has been no deterioration in our service levels, and we are not anticipating one.”
Speed Commerce in April lost its largest customer, which accounted for 19% of its revenue in fiscal 2015, according to the company’s June 15 10K filing. That customer was tween apparel brand Justice, says Abe Garver, M&A adviser with BG Strategic Advisors.
Willis confirmed the loss of Justice and its sister brand, Dress Barn, both owned by Ascena Retail Group Inc., No. 87 in the Internet Retailer 2015 Top 500 Guide, but he says Speed Commerce has been up front about Ascena’s plans to take its e-commerce fulfillment in-house. Speed Commerce’s five largest customers accounted for about 42% of its fiscal 2015 revenue, according to the regulatory filing. Its clients include Yankee Candle (No. 391), Avenue, Spencers (No. 743 in the Internet Retailer 2015 Second 500) and Lenox, as well as The Army & Air Force Exchange Service, Navy Exchange Service Command and Veterans Canteen Services that provide online shopping services to members of the military and veterans.
Speed Commerce provides outsourced fulfillment services to five of the e-retailers in the Internet Retailer Top 1,000. It also listed as the provider of order management software for three of the Top 1,000, customer service software for two and the e-commerce platform for one.
Willis said during the Richardson, Texas-based company’s fiscal Q1 2016 earnings call on Aug. 10 that “this is the first quarter that we had that was impacted by the loss of several customers.” On Tuesday, Willis sought to downplay the challenges facing Speed Commerce, saying that, excluding the loss of Justice and other departing customers, overall revenue grew 56% and the average customer’s spending was up 10.7%.
However, Garver says Speed Commerce identified “material weakness in its internal controls over financial reporting that, if not remediated, could result in material financial misstatements.”
Willis says it was just a matter of moving funds from one category to another, and that Speed Commerce had no misstatements, restatements or change in its income statement.
The customer loss carries other costs. About 45 days after Speed Commerce announced the customer loss, Speed Commerce reached an agreement with a group of four lenders to amend its credit agreement, Garver says. “Speed Commerce had to do that because it didn’t have the income to service the debt payments on the $100 million it owed—primarily due to Speed Commerce’s acquisition of e-commerce fulfillment provider Fifth Gear on Nov. 24, 2014,” Garver says. Speed Commerce, under the new terms of the agreement, must pay a minimum of 12% interest on the debt, Garver says.
Speed Commerce had acquired Fifth Gear, a competing provider of e-commerce services, to expand its client base to include business-to-business customers like All Heart, Scrubs and Beyond, and RSI, the provider of uniforms to Burger King, Willis says. “It’s the fastest-growing section of e-commerce; it’s growing faster than the direct-to-consumer section. 25% of our sales are now business-to-business.” Prior to the acquisition, business-to-business accounted for less than 5% of sales, Willis says.
Willis says the company was not forced to renegotiate the debt; it did so to ensure it met financial goals.
“We gave ourselves a little cushion to make sure we were going to make what we said,” Willis says.
As to its stock, Speed Commerce in April said it had received a deficiency letter from the Nasdaq exchange notifying it that its common stock was subject to delisting because it didn’t meet minimum bid requirements. In its June regulatory filing, Speed Commerce stated it had until Oct. 5 to regain compliance with listing requirements. Those terms required the company to maintain a closing bid price of at least $1 per share for a minimum of 10 consecutive business days.
Willis says the stock issue will be resolved before Oct. 5 because the company plans a reverse stock split that will take the shares back above $1.
Speed Commerce’s stock closed Monday at 17 cents. The stock is down 93% for the past year.
A possible sale, first mentioned in April, remains a possibility.
If you’re interested in more breaking news about Speed Commerce or direction of its stock, please follow me on Twitter @AbeGarver