Dirt Swept Under The Carpet: Speed Commerce, Inc. Fiscal Q1 2016 Results
Summary
Speed Commerce announced its fiscal Q1 2016 results on August 11, 2015 and only allowed 2 analysts to participate in the earnings call Q&A.
A number of important issues for shareholders were ignored by management; such as the impending delisting of the company's shares from NASDAQ on October 15.
Speed's customers are concerned about the possibility of a sale of the company, and management refused to comment about the status of a deal on the earnings call.
Speed recently lost its largest customer, and remaining customers are concerned about the company's ability to remain solvent given new obligations including 12% interest payments on $100M of debt.
Speed Commerce recently identified “Material weakness in its internal controls over financial reporting that, if not remediated, could result in material financial misstatements.”.
According to Speed Commerce's Fiscal Q1 2016 Earnings Announcement, Cody Slach of Liolios Group, Inc. is the investor relations point for Speed Commerce, Inc. (NASDAQ:SPDC)
Requests to participate in earnings call Q&A denied
Immediately after Speed Commerce announced earnings on Monday, August 11th, I sent an email to Cody which said, "Please let the management team know that I'm planning on participating in their earnings call at 10am for Q&A."
I then dialed into the earnings call, identified myself as a Seeking Alpha and Yahoo! Finance Contributor, and told the operator that I would be participating in Q&A as a speaker.
When the phone lines were opened up for Q&A, 2 analysts (Mark Argento - Lake Street Capital Markets and Ross Licero - Craig Hallum Capital Markets) were allowed to ask questions (see SA earnings call transcript), however I was not.
Subsequent requests for a comment on the four (4) questions have been ignored
Immediately after not being able to ask questions during the Q&A, I sent 2nd and 3rd emails to Cody Slach (Liolios Group, Inc.) which said, "Please: (1) Confirm your receipt of this email, (2) Forward the questions below to Speed Commerce's management team and (3) Let us know by COB today if the Company will comment."
As of the writing of this article, neither Speed Commerce's management team or its IR point have responded. If and when either does, the responses will be published immediately.
The four (4) questions effectively 'Swept under the carpet':
1. NASDAQ has said it intends to delist Speed Commerce on October 5, 2015. What are the "Likely adverse affects" contemplated in the 10K?
"On April 6, 2015, we received a deficiency letter from NASDAQ notifying us that our common stock was subject to delisting from the NASDAQ Global Market because we are not in compliance with the minimum bid requirements set forth in NASDAQ Listing Rule 5450 for continued listing. NASDAQ Listing Rule 5450 requires listed securities to maintain a minimum bid price of $1.00 per share and NASDAQ Listing Rule 5810(c)(3)(NYSE:A) provides that a failure to meet the minimum bid price requirements exist if the deficiency continues for a period of 30 consecutive days. Our stock currently remains listed on the NSADAQ Global Market as of the date of this Annual Report on Form 10-K. Per the deficiency letter, we have been provided until October 5, 2015 to regain compliance with this continued listing requirement, which would require us to maintain a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days. Because we currently fail to comply with NASDAQ requirements for continued listing, our common stock could be delisted from NASDAQ, which would likely adversely affect our ability to address any short-term liquidity issues and hinder investors' ability to trade our common stock in the secondary market." Source: Speed Commerce 10K dated 6/15/15, page 17
2. Speed Commerce recently lost its largest customer (termination of fulfillment services in April 2015). Ordinarily an announcement of a sale process increases the probability of customer churn. Why would that not be the case here?
"Historically, the majority of our revenue has come from a small number of customers purchasing our products and services. Our five largest customers accounted for approximately 42% of our revenue in fiscal 2015. Our largest customer in fiscal 2015 accounted for approximately 19% of our revenue and the customer terminated fulfillment services in April 2015. A customer or group of customers may stop utilizing our services for a number of reasons, including the acquisition of a customer by another company that has a different strategy with respect the sourcing of its e-commerce services needs. If this happens, our revenue could be greatly reduced, which would materially and adversely affect our business. Source: Speed Commerce 10K dated 6/15/15, page 15
On April 16, 2015, we announced that our Board of Directors had formed a special committee to explore potential strategic alternatives, including a sale of the Company. Our inability to identify or complete such a strategic transaction could harm our long-term value for our shareholders, impact compliance with our credit facility, hinder our growth, result in the loss of key employees and/or result in increased volatility of our stock price. It could also have a material adverse impact upon our business and financial condition. Further, the potential impact of an announcement of a proposed strategic transaction on the market value of our common stock could have a deleterious effect." Source:Speed Commerce 10K dated 6/15/15, page 8
3. Speed Commerce identified "Material weakness in its internal controls over financial reporting that, if not remediated, could result in material financial misstatements." Is it possible that Speed's customers have been incorrectly billed?
"A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. As disclosed in Item 9A, management identified a material weakness in our internal controls over the recording and reconciling of deferred costs regarding internal development costs due to the failure to use an adequate time-keeping system which required management use estimates that did not have adequate supporting documentation in a timely manner. We are in the process of implementing new controls to remediate this material weakness, but these new processes and controls have not yet been fully tested. If our remedial measures are insufficient and material errors should occur in the recording of these processes, our financial statements could contain material misstatements." Source: Speed Commerce 10K dated 6/15/15, page 37
4. Speed Commerce has an enormous amount of debt (e.g.approximately $100M at 12% interest, 7 turns of EBITDA guidance). Ordinarily, high levels of debt service reduces the likelihood that a Company can retain existing customers. Why would that not be the case here?
"On May 11, 2015, the Company entered into a Consent and Second Amendment to Amended and Restated Credit and Guaranty Agreement with Garrison. Pursuant to the Amendment, among other things, (1) permission to add back certain balance sheet write-offs to Adjusted EBITDA (as defined) for the calculation of financial covenants, (2) subject to lender approval the ability to add back certain restructuring, transaction fees and expenses and one-time charges not exceed $2.5 million to the calculation of financial covenants, (3) the interest rate on the facility increased to LIBOR +11%, with a 1% LIBOR floor and (4) the Company will pay an amendment fee equal to 200 basis points, (5) the Company agreed to provide Garrison with certain additional forecasts and updates regarding the Company's liquidity and financial condition, and (6) the Company is required to maintain a minimum of $1 million of unrestricted cash at all times." Source: Speed Commerce 10K dated 6/15/15, page 91
"Interest Rate Risk. Our exposure to changes in interest rates results primarily from our Credit Facility borrowings. As of March 31, 2015 we had $98.8 million outstanding indebtedness subject to interest rate fluctuations. Based on these borrowings subject to interest rate fluctuations outstanding on March 31, 2015, an increase of 100-basis points in the current LIBOR rate would have a $987,500 negative impact on our annual interest expense. The level of outstanding indebtedness fluctuates from period to period and therefore could have a future impact on our interest expense." Source: Speed Commerce 10K dated 6/15/15, page 35
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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