Item 1 - Business
Overview
Speed Commerce, Inc. (the “Company” or “Speed Commerce”) is a leading provider of flexible end-to-end E-commerce 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 from four facilities located in Pennsylvania, Ohio, Missouri, and Texas, utilizing 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 by providing 24x7 customer support. Our corporate headquarters and web development and technology operations are based in Dallas, Texas.
Recent Developments
On April 16, 2015, we sold 13,035,713 shares of our common stock, Series A Warrants to purchase up to 7,776,784 shares of our common stock and Series B Warrants to purchase up to 2,000,000 shares of our common stock. Each share of our common stock was sold together with 0.597 of a Series A Warrant to purchase one share of our common stock at an exercise price of $0.56 per share and 0.153 of a Series B Warrant to purchase one share of our common stock at an exercise price of $0.56 per share. The securities were sold at a price of $0.56 per share and related Series A Warrant and Series B Warrant. The Series A Warrants are exercisable on the one-year anniversary of the date of issuance, subject to our right, exercisable within 90 days of the issuance date, to reduce the number of shares of our common stock available for exercise of the Series A Warrants to the extent needed to sell additional securities in a public or private offering for cash, and will expire on the fifth anniversary of the date they first become exercisable. The Series B Warrants are exercisable beginning on the later of (i) one year and one day from the date of issuance and (ii) the date our shareholders approve an increase in the number of our authorized shares of common stock in an amount sufficient to permit the exercise in full of the warrants, and will expire on the fifth anniversary of the date they first become exercisable. The shares of common stock, the Series A Warrants and the Series B Warrants are immediately separable. We do not have a sufficient number of authorized shares of our common stock to permit the exercise of the Series B Warrants. We are required to call a shareholders meeting within 135 days of closing, which is schedule to be held on June 30, 2015, to increase the number of shares of our common stock we are authorized to issue. In the event that we are unable to effect an increase in our authorized shares of common stock by October 21, 2015, the investors will have certain rights to require us to repurchase the unexercisable portion of their Series B Warrants based on the Black Scholes value thereof as calculated pursuant to a formula contained in the Series A Warrants and the Series B Warrants.
On March 16, 2015, we entered into an agreement to which we exchanged an aggregate of 344,001.10 shares of Series D Preferred Stock for all the outstanding shares of our Series C Convertible Preferred Stock held by the original institutional holders. The effect was to restructure the terms of its outstanding Series C Convertible Preferred Stock to lower the annual dividend rate from 7% to 5%, reduce the conversion price at which shares will convert into our common stock from $3.00 to $1.50, reduce the price at which we have the right to force the conversion of the preferred stock from $5.00 to $2.50 and limit the voting rights of the holders. The restructuring was affected by exchanging one share of a newly established Series D Convertible Preferred Stock has a stated value of $30 per share, for each ten shares of outstanding Series C Preferred Stock, which has a stated value of $3 per share, plus accrued dividends. In the exchange, the Company issued a total of 344,001.10 shares of Series D Preferred Stock. In connection with the issuance of the Series D Preferred Stock, we entered into a registration rights agreement with the holder.
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: $54.3 million in cash, net of cash acquired, 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. In April 2015, the purchase agreement was amended to increase the maximum number of common shares for the earn-out consideration from 7,000,000 shares to 8,400,000 shares. These shares are not presently reserved for issuance and the earn-out amount will be determined by the Company on or before October 31, 2015. If such shares are not issued, cash held in escrow will be released, restrictive covenants lapse and indemnity limits will be reduced.
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 March 31, 2015, we recognized a gain of $2.2 million on the sale. 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. The value of the promissory note has been adjusted to $1.5 million based on final agreement on post-closing adjustments. 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, a pre-configured accelerator for Oracle Commerce. SARA is targeted to midsize E-commerce retailers as a lower cost E-commerce platform that can be launched quickly. SARA 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.
E-commerce and Fulfillment Market
In calendar 2014, the US retail E-commerce market was estimated at $306 billion, as compared to $264 billion for calendar 2013, and is estimated to grow to $498 billion by 2018. The year-over-year increase of 13% continues a long-term trend of double digit growth in the marketplace. The U.S Commerce Department reported that E-commerce spending for the fourth quarter of calendar 2014 was approximately $80 billion, a 15% increase over same period in the prior year. In the United States, e-commerce accounts for about 10% of retail sales and growth in the relative percentage of e-commerce sales is anticipated to continue as consumers become more comfortable with online shopping. We believe that the fundamental growth in e-commerce sales has and will require retailers to invest in e-commerce sales and distribution platforms as consumers shift spending patterns from traditional physical stores to online shopping portals.
Speed Commerce’s E-commerce and Fulfillment Services
Our clients include retailers such as, Yankee Candle, Avenue, Spencers and Lenox. Our clients also include The Army & Air Force Exchange Service, Navy Exchange Service Command and Veterans Canteen Services which offer online shopping services to qualified military personnel and veterans.
With the acquisition of Fifth Gear, our client base expanded to include a variety of B2B, online only retailer and niche market retailers such as Burger King, All Heart, Dog.com and Scrubs and Beyond. We believe that Fifth Gear’s customer base helps diversify our overall client base and reduces our exposure to holiday trade season seasonality. In addition, with the acquisition of Fifth Gear we now have the ability to offer product personalization with shorter lead times.
We offer an end-to-end e-commerce outsourcing solution to our clients, which allows our clients to have a single point of contact and integration for their e-commerce business, customer care and logistics management. Our fulfillment centers allow clients to place their inventory in locations that help reduce freight charges to and from the fulfillment center as well as reduce the time to deliver orders to their customers. 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 do not typically own 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. Additional services for technology or logistics management services are generally billed on a time and material basis. Upfront costs to onboard a client, including web site development, are deferred and recognized over the expected life of the relationship with the client.
Web platform development and hosting. Our technology services include fast, flexible development and deployment of our E-commerce web platform that allow our client sites to have a completely customized look and feel based on their branding and market strategy. We utilize the best-of-breed Oracle Commerce platforms to provide feature-rich functionality based on our clients’ requirements. We offer real time integration with client systems and partners such as Akamai, Bazaarvoice, Exact Target, Omniture and various social media connectors.
The core of our technology services is SARA. We continue to invest in the development of its functionality and believe that it will provide us a competitive advantage by being able to significantly reduce the time and expense to deploy and maintain client web platforms. SARA is a pre-integrated reference application has more than 100 out-of-the-box functionality features pre-configured with Oracle content management, SPEED order management systems and numerous third-party applications including back office applications, payment processors, analytic tools, marketing providers and fulfillment center management systems.
We utilize a proprietary order management system known as SPEED order. SPEED order is a fully integrated order management system built around a dynamic database offering real-time information to our clients regarding inventory, shipping and customer relationship management. SPEED order supports credit card processing and a tax calculation based on clients’ requirements and is fully PCI compliant. SPEED order also supports client promotion programs at a variety of product levels that can be applied at the order line level. In addition, promotions may be highlighted or messaged on the client site in a number of ways. Speed order includes our “Store Portal” application which provides clients with omni-channel capabilities including ship from store, ship to store, ship by 3rd party, and more.
Our use of technology enables us to design and deliver services for each client’s fulfillment and customer support needs. The open architecture of our technology platform permits us to seamlessly interact with many different e-commerce platforms and client support systems. SPEED order allows clients to review their programs’ progress on-line to obtain real-time comprehensive trend analysis, inventory levels and order status and to instantly alter certain program parameters. As the needs of a client evolve, our web development team works with our client services team to modify the program on an ongoing basis. Information can be exchanged via real-time XML, direct system integration, EDI, secure FTP and internet access. We believe that our flexible technology platform provides us with the resources to continue to offer leading edge services to current and new clients and to integrate our systems with their system based on the clients preferred technology. We believe that the integrity of client information is adequately protected by our data security system.
We also provide our clients the ability to utilize our team of developers, web architects, system integrators and infrastructure specialists for technical and functional development projects.
Fulfillment. Through our four fulfillment centers, we provide full service outsourcing solutions to clients for E-commerce and logistics management services. For the year ended March 31, 2015, we shipped approximately $1.5 billion in gross merchandise value of e-commerce products for our clients. We are committed to delivering our clients’ products to their customers on a timely and accurate basis. Our omni-channel platform supports various fulfillment options including drop shipments, store shipment, pick-up in store and ship to store, in addition to delivery from our fulfillment centers. Our fulfillment personnel pick, pack, verify and ship product orders and requests for our clients. We use several custom-designed, semi-automated packaging and labeling lines to pack and ship products as well as highly automated and conveyorized systems utilizing RF scanning. By utilizing these technologies, we are able to reduce labor costs and provide more timely shipments to our clients’ customers. We streamline and customize the fulfillment procedures for each client based upon the client’s request and the tracking, reporting and inventory controls necessary to implement that client’s marketing support program. We also offer comprehensive product return services management whereby our personnel receive, repackage and return to stock products that are returned from our clients’ consumers.
We also provide a variety of value added services at our fulfillment centers including embroidery, engraving and other personalization services. Each of our fulfillment centers also provide specialized kitting and assembly of packages, vendor compliance management, custom packaging and gift wrapping and bulk processing and sortation. We believe these and other services allow our clients a fully customized and personalized service for their customers.
Through our SPEED order reporting system, clients are able to monitor sales activity, inventory reorder levels, and evaluate shipping methods in order to reduce the total cost of shipping. We have long-established relationships with parcel carriers including FedEx and USPS. Our clients are able to benefit from discounted shipping rates based on our aggregate volume of shipments.
Contact Center Services. We provide customer care management services for our clients that are completely integrated with our fulfillment and web platforms. We operate four customer contact centers with over 650 seats with 24 hours per day, seven days a week availability. Our customer care management systems support email, web chat and live voice options to deliver an exceptional customer experience across all touch points.
Our customer service representatives take orders for certain clients and resolve questions regarding shipping, billing and order status as well as a variety of other questions. We provide dedicated customer care agents or shared groups or a combination to provide economy of scale benefits to our clients. Our services include brand scripting and training, up-sell, cross-sell and save-the-sale, along with quality monitoring and controls. We also provide payment processing and fraud support services.
Competition
Many companies offer, on an individual basis, one or more of the same services offered by our E-commerce and Fulfillment services business. We face competition from many different sources, depending upon the type and range of services requested by a potential client. Our competitors include vertical outsourcers, which are companies that offer a single function, such as call centers, public warehouses or credit card processors. We compete against transportation logistics providers who offer product management functions as an ancillary service to their primary transportation services. We also compete against other business process outsourcing providers, who perform many similar services as we do. Some of our competitors in this segment are eBay Enterprises, PFSWeb, Inc., and Innotrac Corporation. Many of these companies have greater capabilities than we do for the single or multiple functions the competitors provide. In many instances, our competition is the in-house operations of our potential clients themselves. The in-house personnel of potential clients often believe that they can perform the same services we do, while others are reluctant to outsource business functions that involve direct customer contact. We cannot be certain that we will be able to compete successfully against these or other competitors or competitive factors in the future.
We believe competition in all of our businesses will remain intense and that the keys to our growth and profitability include: (i) superior client service, (ii) continued focus on improvements and operating efficiencies, (iii) the ability to rapidly advance our technology offerings to customers, and (iv) the ability to attract new customers.
Environmental Matters
We do not anticipate any material effect on our capital expenditures, earnings or competitive position due to compliance with government regulations involving environmental matters.
Employees
As of March 31, 2015, we had 1,609 employees of which 75 were employed in our Mexico operations. None of our employees are subject to collective bargaining agreements and are not represented by unions. We believe we have good relations with our employees. We also utilize temporary labor during peak operational periods.
Capital Resources - Financing
See further disclosure in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.
Available Information
We also make available, free of charge, in the “Investors - SEC Filings” section of our website, www.speedcommerce.com, annual, quarterly and current reports (and amendments thereto) that we may file or furnish to the SEC pursuant to Sections 13(a) or 15(d) of Securities Act of 1934 as soon as reasonably practicable after our electronic filing. In addition, the SEC maintains a website containing these reports that can be located at http://www.sec.gov. These reports may also be read and copied at the SEC’s Public Reference Room at 100 Fifth Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0300. References to our website are not intended to and do not incorporate information on the website into this Annual Report.
Executive Officers of the Company
The following table sets forth our executive officers as of June 12, 2015:
Richard S Willis has been a member of Speed Commerce’s Board of Directors since February 2011 and was appointed President and Chief Executive Officer of the Company in September 2011. Previously, he was the executive chairman of Charlotte Russe, a mall-based specialty retailer of value-priced women’s apparel and accessories (2011). He previously also served as president of Shoes for Crews (2009 to 2011), a seller of slip resistant footwear; chairman, president and chief executive officer of Baker & Taylor Corporation (2003 to 2007), the world's largest distributor of books, as well as a global distributor of DVDs and music; chairman, president and chief executive officer of Troll Communications; president and chief executive officer of Bell Sports; and chief financial officer of several magazine companies, including Petersen Publishing, which he helped take public in 1997. While at Baker & Taylor he served for two years as the chairman of the National Association of Recording Merchants. Mr. Willis also serves as a regent at Baylor University.
Terry J. Tuttle was appointed as Speed Commerce's CFO in June 2013. Prior to joining Speed Commerce he served as a partner in the accounting firm of Weston & Tuttle; as COO of one of the nation’s largest children’s book publishers, Troll Communications; as CFO of bicycle helmet maker, Bell Sports; and as CFO of McMullen Argus Publishing.
Matthew Konkle has been Chief Operating Officer since February 2015, and previously served as President of the company’s e-commerce fulfillment business operated under the “Fifth Gear” brand. Prior to Fifth Gear being acquired by Speed Commerce in November of 2014, Mr. Konkle was President of that company for over seven years. Matt has over 20 years of technology and business services management experience.
Item 1A
Item 1A - Risk Factors
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 Annual Report, 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 of us. 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. No assurance can be given that the results reflected in any forward-looking statements 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:
Risks Relating to Our Business and Industry
If we fail to meet our significant working capital requirements or if our working capital requirements increase substantially, our business and prospects could be adversely affected.
We have significant working capital requirements, principally to procure licenses, finance accounts receivable, develop our technology infrastructure, fund technology development and staff our fulfillment and customer contact centers. Our working capital needs will increase in response to growth and/or seasonality. In addition, license advances, prepayments to enhance margins, investments and inventory increases to meet customer requirements could increase our working capital needs. The failure to obtain additional financing or maintain working capital credit facilities on reasonable terms in the future could adversely affect our business. In addition, if the cost of financing is too expensive or not available, it could require a reduction in our E-commerce and fulfillment activities.
We rely upon bank borrowings and vendor credit and payment terms to fund our general working capital and other needs and it may be necessary for us to secure additional financing in the future. If we were unable to borrow under our credit facility, obtain acceptable vendor terms or were otherwise unable to secure sufficient financing on acceptable terms or at all, our ability to grow or profit could be adversely affected.
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. We cannot provide assurance that our credit facilities will be renewed by the lending parties. Additionally, these credit facilities include both financial and non-financial covenants. We are now in compliance with these covenants, but cannot provide assurance that we will be able to maintain compliance with these covenants. A non-renewal, default under or acceleration of any of our credit facilities could have a material adverse impact upon our business and financial condition.
We have identified a material weakness in our internal controls over financial reporting that, if not remediated, could result in material financial misstatements.
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.
We may be unable to refinance our debt facility.
We currently have a $100 million term loan facility with our lender, which was made available and was fully funded to the Company, less certain fees and costs in November 2014. We may need to refinance all or a portion of our indebtedness on or before the maturity date November 21, 2019 of our credit facility. Our ability to refinance our indebtedness, obtain additional financing or comply with our lenders’ requirements will depend on, among other things:
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our financial condition at the time;
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the amount of financing outstanding and lender requirements at the time;
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restrictions in our credit agreement or other outstanding indebtedness; and
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other factors, including the condition of the financial markets or the e-commerce and fulfillment markets.
As a result, we may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or proceeds of asset sales are not available to us, we may not have sufficient cash to enable us to meet all of our obligations.
We are uncertain about the availability of additional capital.
We may require additional capital to take advantage of opportunities, including strategic alliances and acquisitions, and to fund capital expenditures and working capital needs, or to respond to changing business conditions and unanticipated competitive pressures. We may also require additional funds to finance operating losses. Should these circumstances arise, our existing cash balance and credit facility may be insufficient and we may need to raise additional funds either by borrowing money or issuing additional equity or both. We cannot assure you that such resources will be adequate or available for all of our future financing needs. Our inability to finance our growth, either internally or externally, may limit our growth potential and our ability to execute our business strategy.
Our credit agreement contains significant restrictions that limit our operating and financial flexibility.
Our credit agreement requires us to maintain specified financial ratios and includes other covenants. We may be unable to meet such ratios and covenants. Any of these restrictions may limit our ability to execute our business strategy. Moreover, if operating results fall below current levels, we may be unable to comply with these covenants. If that occurs, our lenders could accelerate our indebtedness, in which case we may not be able to repay all of our indebtedness.
We may be able to incur additional indebtedness, which could further exacerbate the risks associated with our current indebtedness level.
The level of our indebtedness could have important consequences. We and our subsidiaries could incur substantial additional indebtedness in the future. If we or our subsidiaries incur additional indebtedness or other obligations, the related risks that we face could be magnified.
We may not be able to identify or complete any potential strategic transaction, including a sale of the Company, which may limit our success and profitability.
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.
Recent and future acquisitions and investments could result in operating difficulties and other harmful consequences that may adversely impact our business and results of operations.
Acquisitions have been an important element of our overall corporate strategy and we expect this to continue. We recently completed the acquisition of the assets of Fifth Gear, Inc. in November 2014. This transaction and any potential future transactions have been and could continue to be material to our financial condition and results of operations. The process of integrating acquired companies, businesses, or technology has created, and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks include:
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Diversion of management time and focus from operating our business to acquisition integration challenges.
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Implementation or remediation of controls, procedures, and policies at the acquired company.
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Integration of the acquired company’s accounting, human resource, and other administrative systems, and coordination of operations, sales and marketing functions.
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Transition of our operations and infrastructure as we seek to integrate existing operations with those of the acquired business.
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The acquired company may not produce revenue, earnings or business synergies as anticipated.
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Cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire.
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Potential loss of customers and vendors.
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Liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities.
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Litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former shareholders, or other third parties.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally.
If we make acquisitions or divestitures, a significant amount of management’s time and financial resources may be required to complete the acquisition or divestiture and integrate the acquired business into our existing operations or divest a business from our operations. Even with this investment of management time and financial resources, an acquisition may not produce the revenue, earnings or business synergies anticipated. Acquisitions involve numerous other risks, including assumption of unanticipated operating problems or legal liabilities, problems integrating the purchased operations, technologies or products, diversion of management’s attention from our core businesses, adverse effects on existing business relationships with suppliers and customers, incorrect estimates made in the accounting for acquisitions and amortization of acquired intangible assets that would reduce future reported earnings (goodwill impairments), ensuring acquired companies’ compliance with the legal requirements and potential loss of customers or key employees of acquired businesses. We cannot assure you that if we make any future acquisitions, investments, strategic alliances, joint ventures or divest a component of our business, that such transactions will be completed in a timely manner or achieve anticipated results, that they will be structured or financed in a way that will enhance our business or creditworthiness or that they will meet our strategic objectives or otherwise be successful. In addition, we may not be able to secure the financing necessary to consummate future acquisitions, and future acquisitions and investments could involve the issuance of additional equity securities or the incurrence of additional debt, which could harm our financial condition or creditworthiness or result in dilution. Moreover, we may be unable to locate a suitable candidate with whom to accomplish an acquisition or divestiture, or may be unable to do so on terms favorable to us, which failure could negatively impact our profitability.
The completed divestiture of our distribution business may result in post-transaction payments or adjustments.
In July 2014, we divested our distribution business through an asset sale. The acquiring shareholders could also make indemnity claims against us under the indemnification provisions of the purchase agreement.
We may be the subject of lawsuits from the acquirer’s shareholders related to the prior divestiture of our distribution business.
In July 2014 we divested our distribution business and we may be the subject of lawsuits from either the acquiring company’s shareholders. Such lawsuits could result from the actions of the distribution business prior to the date of the divestiture, from actions after the divestiture or otherwise. Defending potential lawsuits could cost us significant expense and detract management’s attention from the operation of our core business. Additionally, these lawsuits could result in the cancellation of or the inability to renew certain insurance coverage that would be necessary to protect our assets. We may also be the subject of lawsuits in connection with other aspects of our business beyond the sale of our distribution business.
To expand our business, we may incur significant expenses in the foreseeable future, which may reduce our ability to achieve or maintain profitability.
In efforts to achieve our strategic plan to grow our business, we may increase operating and marketing expenses, as well as capital expenditures. We will need to generate additional profitable business to offset these expenses. If our revenue declines or grows slower than anticipated, or our operating and marketing expenses exceed our projections, we may not generate sufficient revenue to be profitable.
Our revenue and gross margin is dependent upon our clients’ business and transaction volumes and our costs; certain of our client service agreements are terminable by the client at will; we may incur financial penalties if we fail to meet contractual service levels under client service agreements.
Our revenue is primarily transaction based and fluctuates with the volume of transactions or level of sales of the products by the clients for whom we provide transaction management services. If we are unable to retain existing clients or attract new clients or if we dedicate significant resources to clients whose business does not generate sufficient revenue or whose products do not generate substantial customer sales, our business may be materially adversely affected. Moreover, our ability to estimate service fee revenue for future periods is substantially dependent upon our clients’ projections, the accuracy of which has been, and will continue to be, unpredictable. Therefore, our planning for client activity and targeted goals for service fee revenue and gross margin may be materially adversely affected by incomplete, delayed or inaccurate projections. In addition, certain of our service agreements with clients are terminable by the client at will. Therefore, we cannot make assurances that any of our clients will continue to use our services for any period of time. The loss of a significant amount of service fee revenue due to client terminations could have a material adverse effect on our ability to cover our costs and thus on our profitability. Certain of our client service agreements contain minimum service level requirements and impose financial penalties if we fail to meet such requirements. The imposition of a substantial amount of such penalties could have a material adverse effect on our e-commerce and fulfillment business and operations.
If we fail to manage our technological infrastructure, our customers may experience service outages, which would impair existing and prospective client relationships and our business would be materially adversely affected.
We aim to maintain sufficient capacity in our technological infrastructure to meet the needs of our customers. We also seek to maintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments. If we do not accurately predict our infrastructure capacity requirements, particularly in the fourth quarter of each calendar year when our customers’ e-commerce sites experience significant increases in traffic, our customers could experience service outages. If we are not able to maintain an appropriate level of operating performance or our hosting infrastructure capacity fails to keep pace with increased sales, we may be in breach of our client contractual obligations that may subject us to financial penalties and result in customer losses and could harm our reputation and adversely affect our revenue growth.
Our revenue and margins may be materially impacted by client transaction volumes that differ from client projections and business assumptions.
Our pricing for client transaction services, such as call center and fulfillment, is often based upon volume projections and business assumptions provided by the client and our anticipated costs to perform such work. In the event the actual level of activity or cost is substantially different from the projections or assumptions, we may have insufficient or excess staffing, incremental costs or other assets dedicated for such client that may negatively impact our margins and business relationship with such client. In the event we are unable to meet the service levels expected by the client, our relationship with the client may suffer and could result in financial penalties and/or the termination of the client contract.
We depend on third party shipping and fulfillment companies for the delivery of our products.
We rely almost entirely on arrangements with third party shipping and fulfillment companies, principally FedEx, for the delivery of our products. The termination of our arrangements with one or more of these third party shipping companies, or the failure or inability of one or more of these third party shipping companies to deliver products on a timely or cost efficient basis from suppliers to us, or products from us to our reseller customers or their end-user customers, would significantly disrupt our business and harm our reputation and net sales. Furthermore, an increase in amounts charged or the implementation of surcharges by these shipping companies could negatively affect our gross margins and earnings.
We subcontract a portion of our client services to third parties, and we are subject to various risks and liabilities if such subcontractors do not provide the subcontracted services or provide them in a manner that does not meet required service levels.
We currently, and may in the future, subcontract certain business services to one or more third parties. Under the terms of our contracts with our business service clients we are obligated to provide such subcontracted services and may be liable for the actions and omissions of such subcontractors. In the event a subcontractor fails to provide the subcontracted services in compliance with required services levels, or otherwise breaches its obligations, or discontinues its business, whether as the result of bankruptcy, insolvency or otherwise, we may be required to provide such services at a higher cost to us and may otherwise be liable for various costs and expenses related to such event. In addition, any such failure may damage our reputation and otherwise result in a material adverse effect upon our business and financial condition.
We depend on a variety of systems for our operations, and a failure of these systems could disrupt our business and harm our reputation and net revenue and negatively impact our results of operations.
We depend on a variety of systems for our operations. These systems support our operating functions, including inventory management, order processing, shipping, receiving and accounting. Certain of these systems are operated by third parties and their performance may be outside of our control. Any failures or significant downtime in our systems could prevent us from taking customer orders, printing product pick-lists, and/or shipping product. It could also prevent customers from accessing our price and product availability information.
From time to time we may acquire other businesses having information systems and records, which may be converted and integrated into our information systems. This can be a lengthy and expensive process that results in a material diversion of resources from other operations. As our needs for technology evolve, we may experience difficulty or significant cost in upgrading or significantly replacing our systems.
We also rely on the internet for a portion of our orders and information exchanges with our customers. The internet and individual websites can experience disruptions and slowdowns. In addition, some websites have experienced security breakdowns. Our website could experience material breakdowns, disruptions or breaches in security. If we were to experience a security breakdown, disruption or breach that compromised sensitive information, this could harm our relationship with our customers or suppliers or result in claims. Disruption of our website or the internet in general could impair our order processing or more generally prevent our customers and suppliers from accessing information, which could cause us to lose business.
Our inability to develop and maintain competitive customer information systems could cause our business and market share to suffer.
We believe customer information systems and product ordering and delivery systems, including internet-based systems, are becoming increasingly important in our business. Although we seek to enhance our customer information systems by adding new features, we offer no assurance that competitors will not develop superior customer information systems or that we will be able to meet evolving market requirements by upgrading our current systems at a reasonable cost, or at all. Our inability to develop and maintain competitive customer information systems could cause our business and market share to suffer.
The expansion of our business has inherent cybersecurity risks that may disrupt our business.
Our strategic growth plans may increase our exposure to cybersecurity risks. A compromise of our security systems could result in a service disruption, or customers' personal information or our proprietary information being obtained by unauthorized users. Although we have implemented processes to mitigate the risk of security breaches and cyber incidents, there can be no assurance that such an attack will not occur. Any breach of our security could result in violation of privacy laws, potential litigation, and a loss of confidence in our security measures, all of which could have a negative impact on our financial results and reputation.
We may not be able to recover all or a portion of our start-up costs associated with one or more of our clients.
We generally incur start-up costs in connection with the planning and implementation of business process solutions for our clients. Although we generally attempt to recover these costs from the client in the early stages of the client relationship, or upon contract termination if the client terminates without cause prior to full amortization of these costs, there is a risk that the client contract may not fully cover the start-up costs or that the client will terminate the contract for cause and withhold payment of any unamortized start-up costs. To the extent start-up costs exceed the start-up fees received, certain excess costs will be expensed as incurred. Additionally, in connection with new client contracts we generally incur capital expenditures associated with assets whose primary use is related to the client solution. There is a risk that the contract may end before expected and we may not recover the full amount of our capital costs.
Our sales and implementation cycles are highly variable and our ability to finalize pending contracts may cause our operating results to vary widely.
Our sales cycle is variable, typically ranging between several months to up to a year or longer from initial contact with the potential client to the signing of a contract. Occasionally the sales cycle requires substantially more time. Delays in signing and executing client contracts may affect our revenue and cause our operating results to vary widely. A potential client’s decision to purchase our services is discretionary, involves a significant commitment of the client’s resources and is influenced by intense internal and external pricing and operating comparisons. To successfully sell our services, we generally must educate our potential clients regarding the use and benefit of our services, which can require significant time and resources. Consequently, the period between initial contact and the purchase of our services is often long and subject to delays associated with the lengthy approval and competitive evaluation processes that typically accompany significant operational decisions. Additionally, the time required to finalize pending contracts and to implement our systems and integrate a new client can range from several weeks to many months. Delays in signing and integrating new clients may affect our revenue and cause our operating results to vary widely.
If our efforts to protect the security of customers, vendors, and other business information are unsuccessful, future issues could result in private litigation and investigations, and our sales and reputation could suffer.
The nature of our business involves the receipt, transmission and storage of information about our customers, vendors, and other business information. We have various security measures in place to protect this information and thwart data security incidents, however we may be unable to guard against new deceptive techniques aimed to breach our systems. In addition, hardware, software or applications we develop or procure from third parties may contain defects that could compromise information security. Unauthorized parties may attempt to gain access to our systems or facilities through fraud, trickery or deceiving our employees. A party who is able to circumvent our security measures could misappropriate proprietary or confidential information or interrupt our operations. Any compromise or elimination of our security could reduce demand for our services. A potential data breach may bring private claims and investigations from state and federal agencies, including State Attorneys General, the Federal Trade Commission and the SEC. Such investigations may have an adverse effect on how we operate our business and our results of operations. If we experience significant data security breaches, our customers and vendors could lose confidence in our ability to protect their information, which could cause them to discontinue using our services.
We may be required to expend significant capital and other resources to protect against security breaches or to address any problem they may cause. Because our activities involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage our reputation, cause us to lose clients, impact our ability to attract new clients, and we could be exposed to litigation and possible liability. Our security measures may not prevent security breaches, and failure to prevent security breaches may disrupt our operations. In certain circumstances, we do not carry insurance against the risk of credit card fraud and other fraud, so the failure to adequately control fraudulent transactions on either our behalf or our client’s behalf could increase our expenses and diminish the value of our brand-name and our reputation.
We may be liable for misappropriation of our customers’ and our clients’ customers’ personal information.
Data security laws are becoming more stringent in the United States and abroad. Third parties are engaging in increased cyber-attacks against companies doing business on the Internet and individuals are increasingly subjected to identity and credit card theft on the Internet. If third parties or unauthorized employees are able to penetrate our network security or otherwise misappropriate our customers’ or our clients’ customers’ personal information or credit card information, or if we give third parties or our employees’ improper access to customers’ personal information or credit card information, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. This liability could also include claims for other misuses of personal information, including unauthorized marketing purposes. Liability for misappropriation of this information could decrease our profitability and adversely affect our business. In such circumstances, we also could be liable for failing to provide timely notice of a data security breach affecting certain types of personal information. In addition, the Federal Trade Commission and state agencies have brought numerous enforcement actions against Internet companies for alleged deficiencies in those companies’ privacy and data security practices, and they may continue to bring such actions. We could incur additional expenses if new regulations regarding the collection, use or storage of personal information are introduced or if government agencies investigate our privacy or security practices.
Our market is subject to rapid technological change and to compete we must continually enhance our systems to comply with evolving standards.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our services and the underlying infrastructure. If we are unable to adapt to changing market conditions, client requirements or emerging industry standards, our business could be adversely affected. The internet and e-commerce environments are characterized by rapid technological change, changes in user requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render our technology and systems obsolete. Our success will depend, in part, on our ability to both internally develop and license leading technologies to enhance our existing services and to develop new services. We must continue to address the increasingly sophisticated and varied needs of our clients and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of proprietary technology involves significant technical and business risks. We may fail to develop new technologies effectively or to adapt our proprietary technology and systems to client requirements or emerging industry standards.
Our revenues are dependent on the preferences and demand of our customers and, in many instances, their end-user customers, which can change at any time.
Our business and operating results depend upon the appeal of our customer’s products and services. A decline in the popularity of these products and services, or the failure of our customer’s products and services to achieve and sustain market acceptance could result in reduced overall revenues, which could have a material adverse effect on our financial condition and results of operations. Consumer preferences are continuously changing, are difficult to predict and can vary over time.
Our customer’s failure to successfully anticipate, identify and react to consumer preferences could have a material adverse effect on our revenues, profitability and results of operations. In addition, changes in consumer preferences may cause our revenues and results of operations to vary significantly between comparable periods.
A deterioration in the businesses or markets of significant customers, could harm our business.
During weak economic times, there is an increased risk that certain of our customers will, among other things, reduce orders, delay payment for product purchased, or have fewer transactions. Our revenues could negatively be affected by a number of factors, including the following:
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the credit available to our customers;
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the opening and closing of retail stores;
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product marketing and promotional activities; and
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general economic changes affecting the buying pattern of consumers, particularly those changes affecting consumer demand.
In addition, if a customer files for bankruptcy, we may be required to forego collection of pre-petition amounts owed and to repay amounts remitted to us during the 90-day preference period preceding the filing. The bankruptcy laws, as well as specific circumstances of each bankruptcy, may limit our ability to collect pre-petition amounts. Although we have sufficient reserves to cover our exposure resulting from anticipated customer difficulties, bankruptcies or defaults, we can provide no assurance that such reserves will be adequate. If they are not adequate, our business, operating results and financial condition could be adversely affected.
Our business is seasonal and variable in nature and, as a result, the level of revenue and profitability during our peak season could adversely affect our results of operations and liquidity.
Traditionally, our third quarter (October 1-December 31) has accounted for our largest quarterly revenue figures and a substantial portion of our earnings. Our third quarter accounted for 31.9% and 30.4% of our net revenue for the fiscal years ended March 31, 2015 and 2014, respectively. As a service provider of end-to-end e-commerce and fulfillment solutions, our business is affected by the pattern of seasonality common to other suppliers of retailers, particularly during the holiday season. Because of this seasonality, if we or our customers experience a weak holiday season or poor weather conditions our financial results and liquidity could be negatively affected.
Growth of our non-U.S. sales and operations could subject us to additional risks that could harm our business.
Although increasing in number, we have a limited number of customers in Canada, these customers expose us to foreign currency exchange risks because gain or loss on these activities is a function of the foreign exchange rate, over which we have no control. In addition, our non-U.S. operations are subject to a variety of risks, which could cause fluctuations in our results. These additional risks include, but are not limited to:
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compliance with foreign regulatory and market requirements;
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variability of foreign economic, political and labor conditions;
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changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by U.S. import and export laws;
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potentially adverse tax consequences;
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difficulties in protecting intellectual property;
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burdens of complying with foreign laws; and
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as we generate cash flow in non-U.S. jurisdictions, we may experience difficulty transferring such funds to the U.S. in a tax efficient manner.
Any one or more of these factors could have an adverse effect on our business, financial condition and operating results.
We rely on insurance to mitigate some risks facing our business, and to the extent our insurance does not mitigate or our insurers are unable to meet their obligations, our operating results may be negatively impacted.
We contract for insurance to cover certain potential risks and liabilities. It is possible that we may not be able to purchase enough insurance to meet our needs, may have to pay very high prices for the coverage we do obtain, have very high deductibles or may not be able to, or may choose not to, acquire any insurance for certain types of business risk. In addition, not all of our contracts may limit our exposure for certain liabilities, such as data security claims or claims of third parties for which we may be required to indemnify our clients. This could leave us exposed to potential claims. If we were found liable for a significant, underinsured or uninsured claim in the future, our operating results could be negatively impacted. Also, to the extent the cost of maintaining insurance increases, our operating results could be negatively affected. Additionally, we are subject to the risk that one or more of our insurers may become insolvent and would be unable to pay a claim that may be made in the future. There can be no assurance that our insurance will be adequate to protect us from pending and future claims. In addition, we are required to maintain insurance coverage under some of our agreements with our clients. If we are not able to or do not maintain the required insurance coverage, we could breach those agreements.
Changes in regulations, regulatory scrutiny, or user concerns regarding privacy and protection of user data could adversely affect our business.
We are subject to U.S. and foreign laws relating to the collection, use, retention, security and transfer of personally identifiable information. The interpretation and application of user data protection laws are in a state of flux, and may vary from country to country. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between or among ourselves, our subsidiaries and other parties with which we have commercial relations. Further, these laws continue to develop in ways we cannot predict and which may adversely impact our business. For example, new laws or regulations, in particular, financial or privacy laws or regulations, may be enacted in jurisdictions in which we do business that require data (including customer information, transaction data or other information) to be stored locally on servers in that jurisdiction and/or prohibit such data from being transmitted outside of that jurisdiction, which would increase our operational costs or capital expenditures and potentially impact the performance or availability of our services and/or our ability to use or process customer data.
We may not be able to successfully protect our intellectual property rights.
We rely on a combination of copyright, trademark and other proprietary rights laws to protect the intellectual property we license. Third parties may try to challenge the ownership of such intellectual property by us or our licensors. In addition, our business is subject to the risk of third parties infringing on our intellectual property rights or those of our licensors. If we need to resort to litigation in the future to protect our intellectual property rights or those of our licensors, such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business and competitive position.
As a result of current economic conditions, intellectual property we license may be subject to heightened non-litigation risks, as well, including the risk that our licensors or their parents, subsidiaries or affiliates may seek protection under bankruptcy laws. Although we believe that we would continue to retain our rights to license intellectual property in such circumstances, there can be no assurance that our rights or our licensors obligations (including any obligation to provide, among other things, updates to licensed intellectual property or software updates) would not be modified, reduced or eliminated in a bankruptcy proceeding. Such a result could significantly harm our business and financial results.
If third parties claim we or our clients are infringing their intellectual property rights, we could incur significant litigation costs, be required to pay damages, or change our business or incur licensing expenses.
Third parties have asserted, and may in the future assert, that our business or the technologies we use infringe on their intellectual property rights. As a result, we or our clients may be subject to intellectual property legal proceedings and claims in the ordinary course of business. We cannot predict whether third parties will assert claims of infringement in the future or whether any future claims will prevent us from offering popular products or services. If we or our clients are found to infringe, we may be required to pay monetary damages, which could include treble damages and attorneys’ fees for any infringement that is found to be willful, and either be enjoined or required to pay ongoing royalties with respect to any technologies found to infringe. Further, as a result of infringement claims either against us or our clients, we may be required, or deem it advisable, to develop non-infringing technology, which could be costly and time consuming, or enter into costly royalty or licensing agreements. Such royalty or licensing agreements, if required, may be unavailable on terms that are acceptable, or at all. If a third party successfully asserts an infringement claim against us or our clients and we are enjoined or required to pay monetary damages or royalties or we are unable to develop suitable non-infringing alternatives or license the infringed or similar technology on reasonable terms on a timely basis, our business, results of operations and financial condition could be materially harmed
We may incur liability for indemnification obligations under our contracts with our clients and business partners, which may have a material adverse effect upon our business, results of operations and financial condition.
We include indemnification provisions in the contracts we enter into with our clients and business partners. Generally, the provisions require us to defend claims arising out of our infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwise culpable conduct, including breach of data security. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims. In many instances, our indemnification obligations to our clients include the actions or omissions of our third-party service providers. Although we seek to limit our total liability under such provisions to either a portion of the value of the contract or a specified, agreed-upon amount, in some cases our total liability under such provisions is unlimited. Although in most cases our third party service providers indemnify us for their actions and omissions, such providers may dispute or be unable to satisfy their indemnification obligation to us. In addition, our indemnification obligation to our clients may be broader in scope, or may be subject to larger limitations of liability, than the indemnification obligation of our third party service providers to us. In most cases, the term of the indemnity provision is perpetual. If we are required to indemnify a claim in a material amount, or if a series of indemnification claims are in the aggregate a material amount, we may be required to expend significant resources to defend the claims, which may have a material adverse effect upon our business, results of operations and financial condition.
Determinations under government audits could negatively affect our business.
We provide services to U.S. government agencies under certain contracts that provide the agencies with the right to audit and review our performance under the contract, our pricing practices, our cost structure, and our compliance with applicable laws, regulations, and standards. If a government audit determines that we are in breach of our contractual terms, or have engaged in improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of the contract, suspension of payments, or disqualification from continuing to do business, or bidding on new business, with this agency and other federal agencies.
Our failure to diversify our business and customer base could harm us.
Our efforts to diversify our business and customer base has placed, and will continue to place, demands on our personnel, as well as on our operational and financial infrastructure. To effectively manage our diversification efforts, we will need to continue to expand, improve and adapt our personnel, operations, infrastructure and our financial and information management systems and continue to implement adequate controls. These enhancements and improvements are likely to be complex and could require significant operating expenses, capital expenditures and allocation of valuable management resources. We may also have to expand our management team by recruiting and employing additional experienced executives and employees. We may not be able to attract the talent necessary to effectively diversify our business into growing segments, and we may struggle to keep the talent currently employed and focused on diversification, if our compensation and benefits are not adequate or meet market demand. If we are unable to adapt our systems and business, put adequate controls in place and adapt our management team in a timely manner to accommodate our diversification, our business may be adversely affected.
We depend on a limited number of customers, the loss of which could adversely affect our business.
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.
The loss of key personnel could affect the depth, quality and effectiveness of our management team. In addition, if we fail to attract and retain qualified personnel, the depth, quality and effectiveness of our management team and employees could be negatively affected.
We depend on the services of our key personnel because of their experience in the e-commerce and fulfillment areas. The loss of the services of one or several of our key employees could result in the loss of customers or other important business relationships, or otherwise inhibit our ability to operate and diversify our business successfully.
Our ability to enhance and develop markets for our current products and to introduce new products to the marketplace also depends on our ability to attract and retain qualified management personnel. We compete for such personnel with other companies and organizations, many of which have substantially greater capital resources and name recognition than we do. If we are not successful in recruiting or retaining such personnel, it could have a material adverse effect on our business.
Our business may suffer if we are unable to hire and retain sufficient temporary and seasonal workers or if labor costs increase. In addition, recent healthcare legislation and related regulations could affect our cost of providing healthcare benefits adversely affecting our results and cash flows.
We regularly hire a large number of temporary, part-time and seasonal workers, particularly during the fourth quarter holiday season and to meet temporary increases in client activity volume related to customer short-term marketing programs. Any difficulty we may encounter in hiring such workers could result in significant increases in labor costs, or inability to support our clients’ business, which could have a material adverse effect on our business, financial condition and results of operations. Competition for labor could substantially increase our labor costs. In addition, the Patient Protection and Affordable Care Act and regulations that interpret the law contain provisions which could materially impact our future healthcare costs. While the legislation’s ultimate impact is not yet known, it is possible that these changes could significantly increase our employee benefits costs which would adversely affect our results and cash flows. Although we seek to preserve the contractual ability to pass through increases in labor costs to our clients, not all of our current contracts provide us with this protection, and we may enter into contracts in the future which limit or prohibit our ability to pass through increases in labor costs to our clients.
Impairment in the carrying value of our assets could negatively affect our consolidated results of operations and net worth.
We recorded impairment charges to goodwill and other intangible assets of $18.8 million during the fiscal year ended March 31, 2015. We evaluate assets on the balance sheet whenever events or a change in circumstance indicates that their carrying value may not be recoverable. Materially different assumptions regarding the future performance of our businesses could result in additional asset impairment charges which could negatively affect our operating results and potentially result in future operating losses.
We may not be able to adequately adjust our business in a timely fashion in response to a decrease in net sales or an increase in our cost structure, which may cause our profitability to suffer.
A significant portion of our selling, general and administrative expense is comprised of personnel, facilities and costs of invested capital. If we were to experience declines in our net revenue or an increase to our cost structure, we may not be able to exit facilities, reduce personnel, improve business processes, reduce inventory or make other significant changes to our business without significant disruption to our operations or without significant termination and exit costs. Additionally, if management is not able to implement such actions in a timely manner, or at all, to offset a shortfall in net revenue and gross profit, our operating costs could suffer.
Our businesses operate in highly competitive industries and compete with large national firms. Further competition, among other things, could reduce our sales volume and margins.
Many companies offer, on an individual basis, one or more of the same services offered by our E-commerce and fulfillment business. We face competition from many different sources, depending upon the type and range of services requested by a potential client. Our competitors include vertical outsourcers, which are companies that offer a single function, such as call centers, public warehouses or credit card processors. We compete against transportation logistics providers who offer product management functions as an ancillary service to their primary transportation services. We also compete against other business process outsourcing providers, who perform many similar services. Some of our competitors are PFSWeb, Inc., Innotrac Corporation, Moduslink, Inc., Newgistics, Inc. and EBay Enterprise, Inc. Many of these companies have greater capabilities than we do for the single or multiple functions the competitors provide. In many instances, our competition is the in-house operations of our potential clients. The in-house operations of potential clients often believe that they can perform the same services we do, while others are reluctant to outsource business functions that involve direct customer contact. We cannot be certain that we will be able to compete successfully against these or other competitors or competitive factors in the future.
Interruption of our business or catastrophic loss at any of our facilities could lead to a curtailment or shutdown of our business.
We receive, manage, ship and process customer products and returns of such inventory from centralized distribution and fulfillment centers in Dallas, Texas, Columbus, Ohio, Louisiana, Missouri, and Hazle Township, Pennsylvania. An interruption in the operation of or in the service capabilities at these facilities as a result of equipment failure or other reasons could result in our inability to ship and process products, which would reduce our net sales and earnings for the affected period. In the event of a stoppage at such facilities, even if only temporary, or if we experience delays as a result of events that are beyond our control, delivery times to our customers or their customers and consumers and our relationship with such customers could be severely affected. Any significant delay in deliveries to our customers could lead to increased returns or cancellations and cause us to lose future sales. Our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions, violent weather conditions or other natural disasters. We may experience a shutdown of our facilities or periods of reduced production as a result of equipment failure, delays in deliveries or catastrophic loss, which could have a material adverse effect on our business, results of operations or financial condition.
Future terrorist or military actions could result in disruption to our operations or loss of assets.
Future terrorist or military actions, in the U.S. or abroad, could result in destruction or seizure of assets or suspension or disruption of our operations. Additionally, such actions could affect the operations of our suppliers or customers, resulting in loss of access to products, potential losses on supplier programs, loss of business, higher losses on receivables or inventory, or other disruptions in our business, which could negatively affect our operating results. We do not carry insurance covering such terrorist or military actions, and even if we were to seek such coverage and such coverage was available, the cost likely would not be commercially reasonable.
If one or more jurisdictions successfully assert that we should collect or should have collected sales or other taxes on the sale of our merchandise over the internet, our business could be harmed.
The application of sales tax or other similar taxes to interstate and international sales over the internet is complex and evolving. One or more local, state or foreign jurisdictions may seek to impose past and future sales tax obligations on us or other out-of-state companies that engage in E-commerce. If one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of merchandise for which we are not currently collecting taxes, it could result in potentially material tax liability for past sales, decrease future sales and otherwise harm our business.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited.
As of March 31, 2015, we had estimated available federal net operating loss carry-forwards (“NOLs”) of $152.4 million for federal income tax purposes that begin to expire in 2029. Our ability to use these NOLs will be dependent on our ability to generate future taxable income and may expire before we generate sufficient taxable income.
Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain shareholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event of an ownership change, utilization of our NOLs would be subject to an annual limitation under Section 382. Any unused NOLs in excess of the annual limitation may be carried over to later years.
Changes to financial accounting standards may affect our reported results of operations.
Our financial statements conform to United States generally accepted accounting principles (“GAAP”). GAAP is subject to interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in those policies or interpretations could have a significant effect on our reported results and could even affect our reporting of transactions that were completed before a change is announced. Financial reporting and accounting rules affect many aspects of our business, including rules relating to accounting for revenue recognition and operating leases, which are currently under review. Changes to those rules or interpretations of those rules, may have a material adverse effect on our financial results.
Risks Relating to Our Common Stock
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.
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(a) for continued listing. NASDAQ Listing Rule 5450(a) requires listed securities to maintain a minimum bid price of $1.00 per share and NASDAQ Listing Rule 5810(c)(3)(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.
If our common stock is delisted from NASDAQ, trading in our common stock would likely thereafter be conducted in the over-the-counter markets in the so-called pink sheets or the OTC Bulletin Board. In such event, the liquidity of our common stock would likely be impaired, not only in the number of shares which could be bought and sold, but also through delays in the timing of the transactions, and there would likely be a reduction in the coverage of our company by securities analysts and the news media, thereby resulting in lower prices for our common stock than might otherwise prevail. In addition, delisting would likely adversely affect our ability to address any short-term liquidity issues.
Fluctuations in our stock price could impair our ability to raise capital and make an investment in our securities undesirable.
During fiscal 2015, the last reported price of our common stock as quoted on the NASDAQ Global Market ranged from a low of $0.64 to a high of $3.92. Our closing stock price as of June 12, 2015 was $0.30. We believe factors such as the market’s acceptance of our business and products, our capital structure, the performance of our business relative to market expectations, as well as general volatility in the securities markets, could cause the market price of our common stock to fluctuate substantially. In addition, the stock markets have experienced price and volume fluctuations, resulting in changes in the market prices of the stock of many companies, which may not have been directly related to the operating performance of those companies. Fluctuations in our stock price could impair our ability to raise capital and could make an investment in our securities undesirable.
The exercise of outstanding options may adversely affect our stock price.
As of March 31, 2015, options to purchase 4,091,726 shares of our common stock were outstanding, of which 1,708,517 options were exercisable as of that date. Our outstanding options are likely to be exercised at a time when the market price for our common stock is higher than the exercise prices of the options. If holders of these outstanding options sell the common stock received upon exercise, it may have a negative effect on the market price of our common stock.
The holders of our Series D Preferred Stock are entitled to receive dividends in preference to the holders of our common stock.
In March 2015, we issued a total of 344,001.10 shares of Series D Convertible Preferred Stock in exchange for all the outstanding shares of our Series C Convertible Preferred Stock. Cumulative dividends accrue on shares of our Series D Convertible Preferred Stock at an annual rate of 5% and are payable quarterly in arrears, commencing on June 30, 2015. The dividend may be paid in additional shares of Series D Preferred Stock or in cash, at the Company’s option. Also, upon a liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, after the satisfaction of the debts of the Company and the payment of any liquidation preference owed to the holders of capital stock ranking prior to the Series D Convertible Preferred Stockholders, the holders of our Series D Convertible Preferred Stock are entitled to participate pari passu with the holders of our Common Stock (on an as converted basis) in the net assets of the Company.
Because of the potential for dividend or liquidation payment to which the holders of shares of the Series D Preferred Stock are entitled, the amount available to be distributed to the holders of shares of our common stock upon a liquidation, dissolution or winding up of the affairs of the Company could be substantially limited or reduced to zero and may make it more difficult to raise capital or recruit and retain key personnel in the future.
The conversion of our Series D Convertible Preferred Stock or the exercise of the warrants related to our Series A, Series B or Series D shares, could adversely affect the market price of our common stock.
Each share of Series D Convertible Preferred Stock is convertible into the number of shares of our common stock equal conversion price of $1.50 per share (subject to adjustment) and the Company has the right to force the conversion of the Series D Convertible Preferred Stock into shares of the Company’s common stock in the event the common stock trades above $2.50 per shares (subject to adjustment) for 28 trading days in a 30 consecutive trading day period provided that the conversion shares have been registered pursuant to an effective registration statement and provided certain other conditions are met. Upon conversion, we must also pay any accrued but unpaid dividends. A holder of Series D Convertible Preferred Stock may elect to convert at any time. We have the right to force conversion of any then-outstanding shares of Series D Preferred Stock, upon certain conditions being met. Our holders of Series C warrants to purchase our common stock may also do so in the event that our common stock trades above $3.50 per shares (subject to adjustment) for 28 trading days in a 30 consecutive trading day period provided that the warrant shares have been registered pursuant to an effective registration statement and provided certain other conditions are met. The holders of warrants related to our Series A and Series B shares may also choose to exercise their warrants if certain conditions are met. We also have the right to force the exercise of the warrants related to our Series A, Series B and Series D shares if certain other conditions are met.
Public sales of the shares of common stock acquired upon conversion of the Series D Convertible Preferred Stock or the exercise of the warrants, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock and impair our ability to raise funds in additional stock financings.
Our anti-takeover provisions, our ability to issue preferred stock and our staggered board may discourage takeover attempts that could be beneficial for our shareholders.
We are subject to Sections 302A.671 (Control Share Acquisitions) and 302A.673 (Business Combinations) of the Minnesota Business Corporation Act, which may have the effect of limiting third parties from acquiring significant amounts of our common stock without our approval. These laws, among others, may have the effect of delaying, deferring or preventing a third party from acquiring us or may serve as a barrier to shareholders seeking to amend our articles of incorporation or bylaws. Our articles of incorporation also permit us to issue preferred stock, which could allow us to delay or block a third party from acquiring us. The holders of preferred stock could also have voting and conversion rights that could adversely affect the voting power of the holders of the common stock. Finally, our articles of incorporation and bylaws divide our board of directors into three classes that serve staggered, three-year terms. Each of these factors could make it difficult for a third party to effect a change in control of us. As a result, our shareholders may lose opportunities to dispose of their shares at the higher prices typically available in takeover attempts or that may be available under a merger or other proposal.
In addition, these measures may have the effect of permitting our current directors to retain their positions and place them in a better position to resist changes that our shareholders may wish to make if they are dissatisfied with the conduct of our business.
We currently do not intend to pay dividends on our common stock and, consequently, there may be no opportunity for our shareholders to achieve a return on their investment through dividend payments.
We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. Further, the payment of dividends by us is restricted by our credit facility and loan agreements. Consequently, shareholders should not expect an opportunity to achieve a return on their investment through dividend payments.
Our directors may not be held personally liable for certain actions, which could discourage shareholder suits against them.
Minnesota law and our articles of incorporation and bylaws provide that our directors shall not be personally liable to us or our shareholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. These provisions may discourage shareholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by shareholders on behalf of us against a director. In addition, our bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Minnesota law.
Other Risks
Our business operates in a continually changing environment that involves numerous risks and uncertainties. It is not reasonable for us to itemize all of the factors that could affect us and/or the products and services or the distribution industry or the E-commerce and fulfillment industry as a whole. Future events that may not have been anticipated or discussed here could adversely affect our business, financial condition, results of operations or cash flows.
Thus, the foregoing is not a complete description of all risks relevant to our future performance, and the foregoing risk factors should be read and understood together with and in the context of similar discussions which may be contained in the documents that we file with the SEC in the future.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Located in the Richardson suburb of Dallas, Texas, our corporate headquarters consists of approximately 23,000 square feet of office space. Our nearby Dallas, Texas fulfillment center consists of approximately 540,000 square feet of combined office and fulfillment center space for general office, fulfillment, call center, and web development. The lease expires on August 1, 2017. In Indianapolis, Indiana, we operate a 12,612 square foot office space for Fifth Gear management and IT development. The lease on this facility began on June 1, 2011 and runs through September 1, 2018.
In the Columbus, Ohio suburb of Pataskala, we operate a fulfillment and call center in an approximately 770,000 square feet of leased space beginning October 1, 2013 and running through October 31, 2024.
Located in Louisiana, Missouri, we operate a 400,000 square foot fulfillment center which includes a call center and general office space. The company owns this facility.
Located in Hazle Township, Pennsylvania, we operate a 116,000 square foot fulfillment center. The lease on this facility began April 1, 2011 and runs through March 31, 2017.
In addition to the properties mentioned above, we have facilities in Minnetonka, Minnesota; Moberley, Missouri, Chihuahua, Mexico; and Queretaro, Mexico.
The present aggregate base monthly rent for all of our fulfillment and office facilities is approximately $400,000. We believe our facilities are adequate for our present operations as well as for the incorporation of growth. We continually explore alternatives to certain of these facilities that could expand our capacities and enhance efficiencies, and we believe we can renew or obtain replacement or additional space, if required, on commercially reasonable terms.
Item 3.
Item 3. Legal Proceedings
See Note 10 to the consolidated financial statements.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our common stock, no par value, is traded on The NASDAQ Global Market under the symbol “SPDC”. The following table presents the range of high and low closing sale prices for our stock for each period indicated as reported on The NASDAQ Global Market. Such prices reflect inter-dealer prices, do not include adjustments for retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions.
Holders
At June 12, 2015, we had 554 common shareholders of record and an estimated 5,400 beneficial owners whose shares were held by nominees or broker dealers.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain all earnings for use in our business and do not intend to pay any dividends on our common stock in the foreseeable future.
The Series D Preferred Stock accrues cumulative dividends at an annual rate of 5% payable in cash or in additional shares of Series D Preferred Stock, at our option, subject to certain limitations.
Comparative Stock Performance
The following Performance Graph compares performance of our common stock on The NASDAQ Global Market, of The NASDAQ Stock Market LLC (US companies), the NASDAQ Composite Indices and the Peer Group Index described below. The graph compares the cumulative total return from March 31, 2010 to March 31, 2015 on $100 invested on March 31, 2010, assumes reinvestment of all dividends, and has been adjusted to reflect stock splits.
The New Peer Group Index below includes the stock performance of the following companies: Forward Air Corp, Harte Hanks Inc., PFSweb Inc., Radiant Logistics Inc., Roadrunner Transportation Systems Inc., Startek Inc., and Sykes Enterprises Inc. The Old Peer Group Index below includes the stock performance of the following companies: Ascent Capital Group Inc., Demandware, Inc., Ingram Micro, Inc., Leapfrog Enterprises, PFSweb, Inc., Rosetta Stone, Take Two Interactive Software and Tech Data Corp. The stock performance of Digital River Inc. is no longer included in the Old Peer Group Index because it is no longer publicly traded.
Source: Research Data Group, Inc.
Purchases of Equity Securities
We did not purchase any shares of our common stock during fiscal 2015.
Equity Compensation Plan Information
During fiscal 2015, we granted 1,996,167 options and awarded 2,132,807 restricted shares.
The following table below presents certain information regarding our Equity Compensation Plans as of March 31, 2015:
Unregistered Securities
On June 3, 2014 the Company 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, the Company 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 Warrants are exercisable at any time six months after their issuance and entitle the Series C holders 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 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 March 2015, the Company entered into an Exchange and Settlement Agreement (the “Exchange Agreement”) pursuant to which it exchanged shares of the Company’s Series D Preferred Stock for all of the outstanding shares of the Company’s Series C Preferred Stock. The exchange was effected by issuing one share of Series D Preferred Stock for each 10 shares of outstanding Series C Preferred Stock and resulted in the Company issuing 344,011.10 shares of newly established Series D Preferred Stock. The Series D Preferred Stock will accrue dividends at an annual rate of 5% payable in stock or in cash and are convertible at any time into common stock of the Company at a conversion price of $1.50 per share (subject to adjustment). The Company may also force the conversion of the Series D Preferred Stock in the event that the Company trades above $2.50 per share for 28 trading days in a consecutive 30 day period provided the conversion shares are registered pursuant to an effective registration statement available for resales and certain other conditions are met. The Company also has the right to call the outstanding Series D Preferred Stock at a redemption price per share equal to 110% of the stated value per share of the Series D Preferred Stock, plus accrued and unpaid dividends.
In connection with the Exchange Agreement, the Company entered into a Registration Rights Agreement with the Series D holders pursuant to which the Company agreed to file a registration statement with the SEC to register the common stock issuable upon the conversion of the Series D Preferred Stock. The registration statement was filed on Form S-3 on May 15, 2015.
During fiscal 2014, 590,036 unregistered common shares were issued in connection with the acquisition of SpeedFC, Inc.
During fiscal 2013, 18,865,283 unregistered common shares were issued in connection with the acquisition of SpeedFC, Inc. On November 20, 2012, along with approximately $25.0 million in cash consideration, the Company issued 17,095,186 shares of its unregistered common stock to all of the stock and option holders of the former SpeedFC, Inc. entity (the "SFC Equityholders") in exchange for all of their ownership in that entity, pursuant to the closing of the SpeedFC acquisition transaction. In February 2013 and in connection with the achievement of a portion of the first earn-out tranche payable to the SFC Equityholders, the Company issued an additional 1,770,097 shares along with approximately $998,788 in cash consideration to the SFC Equityholders.
The share consideration issued to the SFC Equityholders in fiscal 2013 and 2014 was issued in reliance upon an exemption from registration under federal securities laws provided by Section 4(2) of the Securities Act of 1933 promulgated thereunder for transactions by an issuer not involving a public offering and exemption from registration under applicable state securities laws. The shares issued contain a legend restricting their transferability absent registration or applicable exemption. the shares are subject to the terms and conditions of the Registration Rights Agreement dated November 20, 2012, the form of which was filed as Exhibit 10.1 to the Company's Current Report on Form 8-K September 28, 2012.
Item 6.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with Item 8, Financial Statements and Supplementary Data and related notes and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , and other financial information appearing elsewhere in this Annual Report on Form 10-K. We derived the following historical financial information from our consolidated financial statements for the fiscal years ended March 31, 2015, 2014, 2013, 2012 and 2011 which have been audited by Grant Thornton LLP (in thousands, except per share data):
(1)
Fiscal years 2013, 2012 and 2011 have been restated for discontinued operations related to legacy distribution business segment.
(2)
Includes $5.3 million for anticipated losses on web development projects and $6.5 million charge for deferred costs not expected to be realized.
(3)
Includes $18.8 million write off goodwill and intangible assets.
(4)
Includes $5.9 million gain for change in fair value of the Fifth Gear earn-out liability and $1.5 million gain for change in fair value of the Series C warrant liability.
Item 7.
Item 7. 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 the Fifth Gear operating segment administration located in Indianapolis, Indiana.
Historical and Recent Events
On April 16, 2015, we sold 13,035,713 shares of our common stock together with 0.597 of a Series A Warrant to purchase one share of our common stock at an exercise price of $0.56 per share and 0.153 of a Series B Warrant to purchase one share of our common stock at an exercise price of $0.56 per share. Each share of our common stock was sold with Series A Warrants that will convert up to an aggregate of 7,776,784 shares of our common stock. The Series A Warrants are exercisable on the one-year anniversary of the date of issuance, subject to our right, exercisable within 90 days of the issuance date, to reduce the number of shares of our common stock available for exercise of the Series A Warrants to the extent needed to sell additional securities in a public or private offering for cash, and will expire on the fifth anniversary of the date they first become exercisable. The Series B Warrants will convert up to an aggregate of 2,000,000 shares of our common stock, are exercisable beginning on the later of (i) one year and one day from the date of issuance and (ii) the date our shareholders approve an increase in the number of our authorized shares of common stock in an amount sufficient to permit the exercise in full of the warrants, and will expire on the fifth anniversary of the date they first become exercisable. We do not have a sufficient number of authorized shares of our common stock to permit the exercise in full of all of the Series B Warrants. We are required to call a shareholders meeting within 135 days of closing to increase the number of shares of our common stock we are authorized to issue. A shareholders meeting is scheduled for June 30, 2015 to vote to authorize the increase in our authorized shares to issue. In the event that we are unable to effect an increase in our authorized shares of common stock by October 21, 2015, the investors will have certain rights to require us to repurchase the unexercisable portion of their Series B Warrants based on the Black Scholes value thereof as calculated pursuant to a formula contained in the Series B Warrants.
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: $54.5 million in cash 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 combined fair value of the earn-out consideration was estimated to be $10.4 million. In April 2015, the purchase agreement was amended to increase the maximum number of common shares for the earn-out consideration from 7,000,000 shares to 8,400,000 shares. These shares are not presently reserved for issuance and the earn-out amount will be determined by the Company on or before October 31, 2015. If such shares are not issued, cash held in escrow will be released, restrictive covenants lapse and indemnity limits will be reduced.
On July 9, 2014, we sold the assets of our legacy Distribution business to Wynit Distribution, LLC. The total purchase price for the Distribution business was $15 million. As of March 31, 2015, we has recognized a gain of $2.2 million on the sale. 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. The promissory note amount was adjusted to $1.5 million based on final working capital and other post-closing adjustments. 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. We and the buyer also entered into a transition services agreement to provide one another with certain transitional services, which was substantially completed by April 30, 2015. 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, a pre-configured accelerator for Oracle Commerce. SARA is targeted to midsize E-commerce retailers as a lower cost E-commerce platform that can be launched quickly. SARA 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.
Financial Condition and Working Capital
Throughout fiscal 2015 we have invested in variety of growth initiatives for our e-commerce business including the acquisition of Fifth Gear in November 2014, several e-commerce web sites for new clients, and expansion of our Ohio fulfillment center. We finance our operations through cash and cash equivalents, funds generated through operations, accounts payable and credit facility. The timing of required payments can significantly impact our working capital levels.
In April 2015, we announced that our Board of Directors has initiated a process to explore and consider possible strategic alternatives for enhancing shareholder value. These alternatives could include, but are not limited to, a recapitalization or a sale or merger of the Company. The Board of Directors is overseeing this process and Stifel has been retained as financial and strategic advisor to the Company.
In March 2015, we performed our annual goodwill and intangible asset impairment assessments using widely-accepted valuation techniques and recorded impairment charges for our SCC reporting unit of $18.8 million as of March 31, 2015. In the fourth quarter of fiscal 2015, we determined that several of SCC’s web development only client projects had become unprofitable as contractual site requirements required significantly more customization programming than anticipated. As a result we recorded provisions for anticipated losses on website development projects of $5.3 million and recorded charges of $6.5 million for deferred project costs that we no longer anticipate to recover over the period of the customer relationship. Finally, we recorded provisions for uncollectable receivables of $1.7 million principally from two clients that ceased operations after the 2014 holiday season.
In April 2015, our largest customer terminated its fulfillment services contract with us. We continue to provide web site and customer care support services to the customer.
To finance our acquisition of Fifth Gear and incremental working capital requirements, we refinanced our credit facility which increased the principal amount of our outstanding debt by $65 million. We incurred related expenditures for the issuance of debt of $4.4 million and transaction costs of $2.1 million. In addition throughout fiscal 2015, we made significant investments in the growth our business including $9.0 million of capital expenditures and experienced cost overruns on certain web development projects that are not recoverable. As a result, our available liquidity is limited. To offset these expenditures, we issued convertible preferred stock for $9.9 million in net proceeds in Q1 2015 and raised $6.8 million in net proceeds from our April 2016 common stock offering, of which $1.3 was used to pay down principal of our credit facility. After the April offering, we have no available shares of common stock for additional equity offerings.
Our on-going liquidity is primarily affected by three factors: (i) interest and principal payments on our credit facility and other debt, (ii) cash flow from operations and (iii) our capital expenditures. In an effort to maintain our liquidity, we have delayed capital expenditures, reduced costs and fund the dividends for the convertible preferred stock through additional shares of preferred stock. We will continue to seek additional opportunities to reduce cash costs and/or complete a financing to provide additional liquidity. In April 2015, our board of directors announced the commencement of a process to explore strategic alternatives for long-term opportunities including possible sale of the company. We also have a stockholders meeting on June 30, 2015 to increase the authorized number of common shares. Our ability to access the capital markets by issuing debt or equity securities will be dependent on our results of operations, our current financial condition, the outcome of the shareholder vote on June 30, 2015, current market conditions and other factors beyond our control.
Credit Facility
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 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.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we review and evaluate our estimates, including those related to bad debt, long-lived assets including intangible assets, goodwill, share-based compensation, income taxes, contingencies and litigation. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies are affected by our judgment, estimates and/or assumptions used in the preparation of our consolidated financial statements.
Revenue Recognition
Revenue for the Company is recognized based on terms of service within the customer contract. A portion of the Company’s service revenue arrangements include upfront service elements, such as web implementation and migration, and recurring service elements such as web site support, e-commerce fulfillment services and additional services. The Company does not earn or receive any commissions from its customers. Fees related to upfront contract services, such as web site implementation and migration, are deferred and recognized ratably over the expected term of the relationship with the customer, beginning when delivery of recurring services has occurred. Costs associated with the upfront contract fees are deferred and recognized consistent with the recognition of revenues. Recurring contract service elements are charged based on the number of transactions processed and recognized as the services are performed as measured by the volume of orders completed. Customer credits and appeasements agreed to as part of an on-going business relationship are reported as reductions in revenue.
Allowance for Doubtful Accounts
We make estimates of the uncollectability of our accounts receivable. In determining the adequacy of our allowances, we analyze customer financial information, historical collection experience, aging of receivables, and other economic and industry factors. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Although risk management practices and methodologies are utilized to determine the adequacy of the allowance, it is possible that the accuracy of the estimation process could be materially impacted by different judgments as to the collectability based on the information considered and further deterioration of accounts. If customer circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us), our estimates of the recoverability of amounts due could be reduced by a material amount.
Deferred Project Costs
Upfront revenues and costs related to contract services, such as web site implementation and migration, are deferred until the customer’s site is launched. We amortize the deferred revenues and costs over the expected life of our customer relationship. Changes in project requirements or scope, estimated life of customer relationship or project profitability may result in revisions in the timing and/or recoverability of deferred project costs. The effects of such revisions are recognized in the period that the revisions are determined. Estimated losses on projects are recognized when we first determine that upfront costs cannot be recovered over the expected life of the customer relationship. We make key judgments in areas such as the customer life, estimated project revenues and costs, and costs to complete sites that are not launched at the end of the reporting period. Any deviations from estimates could have a significant positive or negative impact on our results of operations.
We may incur costs subject to statements of work or similar change requests, whether approved or unapproved by the customer. We determine the probability that such costs will be recovered based upon evidence such as past practices with the customer, specific discussions or preliminary negotiations with the customer or verbal approvals. For change requests associated with initial development requirements, the anticipated revenues and costs are deferred and amortized over the life of the customer relationship. For change requests for active sites that were not part of the initial development requirements, costs are recognized as incurred.
Acquisition
Initial consideration is recognized at fair value as of the acquisition date. Any contingent consideration is recognized as a liability at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations. Acquisition costs are expensed as incurred.
We allocate the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabilities based on their estimated fair values, with any excess recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. We determine the fair values of such assets, principally intangible assets, generally in consultation with third-party valuation advisors.
Goodwill and Intangible Assets
We review goodwill and indefinite lived intangible assets by first performing a qualitative assessment for potential impairment annually for each reporting unit, or when events or changes in circumstances indicate the carrying value of the goodwill might exceed its current fair value. We also assess potential impairment of goodwill and intangible assets when there is evidence that recent events or changes in circumstances have made recovery of an asset’s carrying value unlikely. The amount of impairment loss would be recognized as the excess of the asset’s carrying value over its fair value. Factors which may cause impairment include negative industry or economic trends and significant underperformance relative to historical or projected future operating results.
We determine fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analysis. As allowed by US GAAP, management initially performs a qualitative analysis of goodwill using qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount including goodwill. Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events. If after assessing the totality of events or circumstances, the Company determines through the qualitative assessment that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary, and performing the two-step impairment test outlined in US GAAP is not required.
At the year ended March 31, 2015 assessment date, we determined that the fair value of our SCC of our reporting unit was less than its fair value, and accordingly, an impairment of goodwill and other intangibles of $18.8 million was recorded. In determining the amount of impairment, US. GAAP requires the Company to analyze the fair values of the assets and liabilities of the reporting units as if the reporting units had been acquired in a current business combination.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and amortizable intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value. If our results from operations deteriorate considerably and are not consistent with our assumptions, we may be exposed to a material impairment charge.
Share-Based Compensation
We have granted stock options, restricted stock units and restricted stock to certain employees and non-employee directors. We recognize share-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award (normally the vesting period) or when the performance condition has been met.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. We use the Black-Scholes model to value our stock option awards and the opening stock price on the date of grant to value restricted stock unit awards. We believe future volatility will not materially differ from the historical volatility. Thus, the fair value of the share-based payment awards represents our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, share-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from the estimate, share-based compensation expense could be significantly different from what has been recorded in the current period.
Income Taxes
Income taxes are recorded under the liability method, whereby deferred income taxes provide for temporary differences between the financial reporting and tax basis of assets and liabilities. In the preparation of our consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposures together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management reviews our deferred tax assets for recoverability on a quarterly basis and assesses the need for valuation allowances. The recoverability of these 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 that we would not be able to realize all or part of our deferred tax assets.
As a result of the current market conditions and their impact on our future outlook, management has reviewed its deferred tax assets and concluded that the uncertainties related to the realization of some of its assets, have become unfavorable. The Company has considered the positive and negative evidence for the potential utilization of the net deferred tax asset and has concluded that it is more likely than not that the Company will not realize the full amount of net deferred tax assets. A valuation allowance of $53.5 million and $39.5 million is recorded against net deferred tax assets with determinable lives as of March 31, 2015 and 2014, respectively.
Contingencies and Litigation
There are various claims, lawsuits and pending actions against us. If a loss arising from these actions is probable and can be reasonably estimated, we record the amount of the estimated loss. If the loss is estimated using a range within which no point is more probable than another, the minimum estimated liability is recorded. Based on current available information, we believe the ultimate resolution of existing actions will not have a material adverse effect on our consolidated financial statements. As additional information becomes available, we assess any potential liability related to existing actions and may need to revise our estimates. Future revisions of our estimates could materially impact our consolidated results of operations, cash flows or financial position.
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.
Results from Continuing Operations
Fiscal 2015 As Compared To Fiscal 2014
Net Revenue
Net revenue was $120.0 million for fiscal 2015 compared to $107.1 million for fiscal 2014, an increase of $12.9 million, or 12.0%. Fiscal 2015 includes revenue from Fifth Gear from the date of its acquisition, November 21, 2014, of $21.3 million, offset by a decrease in freight service revenue and the departure of a significant client. We believe sales results in the future will be dependent upon our ability to continue to win new client relationships and generate new opportunities from our client pipeline.
Cost of Revenue
Cost of revenue was $105.4 million for fiscal 2015 compared to $89.0 million for fiscal 2014, an increase of $16.4 million, or 18.4%. Fiscal year 2015 includes costs from Fifth Gear from the date of its acquisition, November 21, 2014, of $11.1 million and higher operating costs in our Ohio fulfillment center. In addition cost of revenue for fiscal 2015 includes $12.7 million of write-offs of deferred costs and accrual for anticipated losses on web development projects. Fiscal year 2014 includes $9.2 million of transition costs associated with relocation and expansion of our fulfillment center facilities in Texas and Ohio. Cost of revenue as percentage of net revenue increased to 87.8% in fiscal 2015 as compared to 83.1% in fiscal 2014 primarily due to higher operating costs in our Ohio fulfillment center.
Operating Expenses
Selling and marketing expenses were $3.0 million in fiscal 2015 compared to $2.7 million in fiscal 2014, an increase of $0.3 million, or 11.1%. The increase in fiscal 2015 was primarily attributable to personnel growth in the sales team and marketing programs for the introduction of SARA.
General and administrative expenses were $21.7 million in fiscal 2015 compared to $12.5 million in fiscal 2014, an increase of $9.2 million, or 73.6%. Fiscal 2015 includes $5.6 million of incremental expenses from Fifth Gear, $2.1 million of transaction costs incurred related to the purchase of Fifth Gear, and $1.0 million bad debt expense. Fiscal 2014 includes $2.0 million related to transaction and transition expenses primarily for the severance and relocation of corporate headquarters to Dallas, Texas. 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 $4.6 million in fiscal 2015 compared to $2.8 million in fiscal 2014, an increase of $1.8 million or 64.3%. The increase in fiscal 2015 was primarily attributable to personnel growth in IT development team for new client launches and the Fifth Gear acquisition.
Depreciation and amortization expenses were $9.1 million in fiscal 2015 compared to $5.8 million in fiscal 2014, an increase of $3.3 million or 56.9%. The increase in fiscal 2015 was primarily attributable to amortization of our intangible assets and newly acquired intangible assets from our Fifth Gear acquisition.
Goodwill and intangible impairment was $18.8 million for fiscal 2015 compared to zero for fiscal 2014. During the fourth quarter of fiscal 2015, we concluded that indicators of potential impairment were present due to sustained decline of our share price and the results of our operations.
Interest expense, net
Interest expense was $4.7 million for fiscal 2015 compared to expense of $1.9 million for fiscal 2014, an increase of $2.8 million or 147.4%. The increase principally reflected higher average debt balances as a result of the refinancing of the credit facility.
Fiscal 2014 As Compared To Fiscal 2013
Net Revenue
Net revenue was $107.1 million for fiscal 2014 compared to $54.5 million for fiscal 2013, an increase of $52.6 million, or 96.5%. Fiscal 2014 revenue includes a full year of revenue from SCC, which was acquired on November 20, 2012, whereas fiscal 2013 only includes revenue from the date of acquisition.
Cost of Revenue
Cost of revenue was $89.0 million for fiscal 2014 compared to $44.7 million for fiscal 2013, an increase of $44.3 million, or 99.1%. Fiscal year 2014 includes $9.2 million of transition costs associated with relocation and expansion of our fulfillment center facilities in Texas and Ohio. Cost of revenue increased in fiscal 2014 due to a full year of SCC’s operating results in fiscal 2014 as compared to fiscal 2013 only includes cost of revenue from the date of acquisition. Cost of revenue as percentage of net revenue increased to 83.1% in fiscal 2014 as compared to 82.1% in fiscal 2013 primarily due to transition costs in fiscal 2014.
Operating Expenses
Selling and marketing expenses were $2.7 million in fiscal 2014 compared to $1.6 million in fiscal 2013, an increase of $1.1 million, or 68.8%. The increase in fiscal 2014 was primarily attributable to personnel growth in the SCC sales team and fiscal 2014 include a full year of operation whereas fiscal 2013 only included SCC selling and marketing expense from the date of acquisition.
General and administrative expenses were $12.5 million in fiscal 2014 compared to $11.1 million in fiscal 2013, an increase of $1.4 million, or 12.6%. Fiscal 2014 includes $2.0 million related to transaction and transition expenses primarily for the severance and relocation of corporate headquarters to Dallas, Texas. 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 $2.8 million in fiscal 2014 compared to $1.1 million in fiscal 2013, an increase of $1.7 million or 154.5%. The increase in fiscal 2014 was primarily attributable to personnel growth in IT development team for new client launches scheduled for fiscal 2015 and fiscal 2014 include a full year of operations whereas fiscal 2013 only includes IT expense from the date of acquisition.
Depreciation and amortization expenses were $5.8 million in fiscal 2014 compared to $1.1 million in fiscal 2013, an increase of $4.7 million or 427.2%. The increase in fiscal 2014 was primarily attributable to amortization of intangible assets from the SCC acquisition.
Interest expense, net
Interest expense was $1.9 million for fiscal 2014 compared to expense of $1.0 million for fiscal 2013, an increase of $0.9 million or 90.0%. The increase in interest expense in fiscal 2014 was attributable to higher average debt balances from the acquisition of SCC in November 2012, capital expenditures to expand and add automated sortation equipment in the Ohio fulfillment center.
Consolidated Income Tax Expense or Benefit from Continuing Operations for All Periods
We recorded income tax expense from continuing operations of $213,000 for fiscal 2015, or an effective rate of negative 0.5%, $290,000 for fiscal 2014, or an effective rate of negative 3.8%, $11.7 million for fiscal 2013, or an effective rate of negative 187.9%. The change in our effective tax rate from year to year is principally attributable to the fact that we recorded a valuation allowance of $12.9 million during fiscal 2013.
For the year ended March 31, 2015 we recorded income tax expense from discontinued operations of $41,000. For the years ended March 31, 2014 and 2013, we recorded income tax expense from discontinued operations of $27,000 and $137,000, respectively. The effective tax rate applied to discontinued operations for the year ended March 31, 2015 was a negative 0.3%. The effective tax rate applied to discontinued operations for the years ended March 31, 2014 and March 31, 2013 was a negative 0.1% and 2.2%, respectively.
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.
As a result of the current market conditions and their impact on the Company’s future outlook, management has reviewed its deferred tax assets and concluded that the uncertainties related to the realization of some of its assets, have become unfavorable. As of March 31, 2015 and March 31, 2014, the Company had a net deferred tax asset position before valuation allowance of $52.2 million and $38.2 million, respectively, which is 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. The Company has considered the positive and negative evidence for the potential utilization of the net deferred tax assets and has concluded that it is more likely than not that the Company will not realize the full amount of net deferred tax assets. Accordingly, a valuation allowance of $53.5 million and $39.5 million has been recorded as of March 31, 2015 and March 31, 2014.
Discontinued Operations
On July 9, 2014, the Company completed the sale of its Distribution business to Wynit Distribution, LLC (the “Buyers”). 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, which was subsequently adjusted to $1.5 million based on working capital delivered and other post-closing adjustments. The Company has recognized a pre-tax gain of approximately $2.2 million. 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 following table provides the components of discontinued operations:
Net revenue for the Distribution business was $71.7 million in fiscal year 2015 as compared to $391.2 million in fiscal year 2014, a decrease of $319.5 million or 81.7%. The decline in net revenue was due to operating only 100 days during the fiscal year of 2015 compared to full year of fiscal year 2014. Pre-tax loss from discontinued operations was $15.3 million and $18.7 million in fiscal year 2015 and 2014, respectively.
Net revenue for the Distribution business was $391.2 million in fiscal year 2014 as compared to $430.8 million in fiscal year 2013, a decrease of $39.6 million or 8.8%. The decline in net revenue was largely attributable to a $59.5 million decline in software product group revenue, partially offset by a $28.0 million increase in revenue from the consumer electronic and accessories product group. Pre-tax income (loss) from discontinued operations was a loss of $(18.7) million in fiscal year 2014 as compared to income of $6.3 million in fiscal 2013. Fiscal 2014 pre-tax loss includes $9.0 million in transition costs for the relocation of the distribution center and $4.5 million for exit costs of the New Hope distribution center.
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. Our third quarter accounted for 31.9% and 30.4% of our net sales for the fiscal years ended March 31, 2015 and 2014, respectively. As a provider of services to retail customers, 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 fiscal 2015 were primarily impacted by the following, net of the effect of the acquisition of Fifth Gear:
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Non-cash charges of $25.9 million, including depreciation and amortization of $9.1 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 $1.8 million, amortization of debt issuance cost of $1.1 million, goodwill and intangible impairment of $18.8 million and loss on extinguishment of debt of $3.9 million; offset by decrease in fair value of liabilities of $7.5 million and obligation settlement of $1.3 million;
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Accounts receivable increased $5.0 million, resulting from the timing of invoices to clients;
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Inventories increased $497,000, primarily resulting from the timing of purchases;
●
Prepaid expenses increased $435,000, primarily resulting from the timing of payments;
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Other assets increased $12.7 million, primarily due to deferred project costs for SCC client development;
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Accounts payable increased $2.5 million, primarily as a result of timing of payments and purchases; and
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Accrued expenses increased by $19.2 million, primarily as a result of deferred revenues for up-front fees for new clients.
Cash flows used in operating activities during fiscal 2014 were primarily impacted by the following:
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Non-cash charges of $7.2 million, including depreciation and amortization of $6.2 million, which increased due to the acquisition of SCC, and share-based compensation of $1.0 million;
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Accounts receivable increased $3.6 million, resulting from the timing of invoices to clients;
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Prepaid expenses increased $391,000, primarily resulting from the timing of payments;
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Other assets increased $5.5 million, primarily due to deferred project costs for SCC client development;
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Accounts payable increased $1.5 million, primarily as a result of timing of payments and purchases; and
●
Accrued expenses increased by $4.6 million, primarily as a result of deferred revenues for up-front fees for new clients.
Cash flows used in operating activities during the fiscal year ended March 31, 2013 were primarily impacted by following:
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Non-cash charges of $2.3 million, including depreciation and amortization of $1.3 million, share-based compensation of $793,000;
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Accounts receivable increased $297,000, resulting from the timing of invoices to clients;
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Accounts payable increased $2.6 million, primarily as a result of timing of payments and purchases; and
●
Accrued expenses decreased $7.1 million, net of various accrual payments and a decrease in accrued wages.
Investing Activities
Cash flows used in investing activities totaled $58.3 million for the fiscal 2015 and $11.5 million for the same period last year.
The purchases of property, equipment and software totaled $9.0 million and $10.5 million in fiscal year 2015 and 2014, respectively. Payment received from sale of Distribution business was $5.0 million and cash paid related to the Fifth Gear acquisition was $54.3 million in fiscal 2015. Payment received from the working capital adjustment related to the acquisition of SpeedFC was $0.3 million in fiscal 2014.
Cash flows used in investing activities totaled $11.5 million for the fiscal 2014 and $26.0 million fiscal 2013.
The purchases of property, equipment and software totaled $10.5 million and $2.0 million in the year of fiscal 2014 and 2013, respectively. The increase in purchases of property, equipment and software of $7.1 million in fiscal year 2014 from fiscal 2013 is primarily due to the purchase and installation of automated sorter equipment in our Columbus warehouse.
Financing Activities
Cash flows provided financing activities totaled $65.3 million for fiscal 2015 and cash flows provided by financing activities totaled $36.6 million for fiscal 2014. In fiscal year 2015, we received $9.9 million in net proceeds from the issuance of our preferred stock.
Cash flows provided financing activities totaled $36.6 million for fiscal 2014 and cash flows provided by financing activities totaled $26.7 million for fiscal 2013. In fiscal year 2014, we received $21.8 million in net proceeds from the issuance of 8,000,000 shares of our common stock.
For fiscal 2015, we had net payments for the revolving line of credit of $38.4 million and had net proceeds from long-term debt of $98.8 million.
For fiscal 2014, we had net proceeds from the revolving line of credit of $14.5 million.
For fiscal 2013, we had net proceeds from the revolving line of credit of $23.9 million.
Discontinued Operations
Net cash flows provided by discontinued operations were $3.1 million for fiscal 2015 and consisted of $3.1 million of cash flows provided by operating activities, $0 of cash flows used in investing activities and $0 of cash flows provided by financing activities.
Net cash flows used in discontinued operations were $22.4 million for fiscal 2014 and consisted of $21.1 million of cash flows used in operating activities, $1.4 million of cash flows used in investing activities and $19,000 of cash flows provided by financing activities.
Net cash flows provided by discontinued operations were $5.7 million for fiscal 2013 and consisted of $4.1 million of cash flows provided by operating activities, $1.9 million of cash flows used in investing activities and $3.5 million of cash flows provided by financing activities.
Capital Resources
Credit Facility
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 acting as the agent. 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.
At March 31, 2015, the interest rate was roughly equal to the LIBOR rate, plus 7.5%, except upon an event of default. The LIBOR rate for all loans under the Amended and Restated Term Loan is subject to a minimum level of 1.0%. The interest rate on Amended and Restated Credit Facility at March 31, 2015 was 8.50%.
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 Credit Facility is secured by a first priority security interest on substantially all of the Company’s assets.
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. At March 31, 2015 we were in compliance with all covenants of the agreement, as amended.
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.
In March 2015, the Series C Preferred Stock was exchanged for Series D Preferred Stock. Each share of Series D Preferred was exchange for ten shares of Series C Preferred Stock. We issued a total of 344,001.10 shares of $30 par value Series D Preferred Stock in the exchange.
Description of the Series C Warrants
The Series C Warrants issued in June 2014 are exercisable at any time six months after their issuance to purchase shares of the Company’s common stock for a period of five years. The Series C 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 Series C 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 Series C Warrants for their Black-Scholes value calculated as provided in the warrant agreement.
As a result of the April 2015 offering, the Series C warrants’ exercise price was reduced to $2.68 per common share and the conversion price of the Series D preferred stock was reduced to $1.19 per common share.
Liquidity
We finance our operations through cash and cash equivalents, funds generated through operations and our credit facility. We also extend varying levels of credit to our customers and receive varying levels of credit from our vendors. 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.
In April 2015, we entered into agreements with investors for a registered direct offering of 13,035,713 shares of our common stock and warrants to purchase up to 9,776,784 shares of our common stock at a combined public offering price of $0.56 per share and related warrants for total gross proceeds of $7.3 million. The warrants have an exercise price of $0.56 per share. The Company does not have a sufficient number of authorized shares of our common stock to permit the exercise in full of all of Series B warrants. We are required to call a shareholders meeting within 135 days of closing to increase the number of shares of our common stock we are authorized to issue. A shareholders meeting is scheduled for June 30, 2015 to vote to authorize the increase in our authorized shares to issue. In the event that we are unable to affect an increase in our authorized shares of common stock by October 21, 2015, the investors will have certain rights to require us to repurchase the unexercisable portion of the Series B warrants based on the Black Scholes value thereof as calculated pursuant to a formula contained in the warrants.
In May 2015, as described above, we amended our credit facility which modified certain covenant calculations, imposed additional reporting requirements, requires us to maintain $ 1 million in available cash and cash equivalents at all times and increased the interest rate for the credit facility from LIBOR plus 7.5% to LIBOR plus 11%.
We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources. We plan for potential fluctuations in accounts receivable, 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) legal disputes and contingencies; (3) equipment needs for our operations; and (4) asset or company acquisitions.
We currently believe cash and cash equivalents, funds generated from the expected results of operations, and vendor terms will be sufficient to satisfy our working capital requirements and other cash needs for at least the next twelve months.
In April 2015, we announced that our Board of Directors has initiated a process to explore and consider possible strategic alternatives for enhancing shareholder value. These alternatives could include, but are not limited to, a recapitalization or a sale or merger of the Company. The Board of Directors is overseeing this process and Stifel has been retained as financial and strategic advisor to the Company. There can be no assurance as to when we will finalize a strategic transaction but we except to be completed by December 31, 2015.
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, credit rating agency downgrades of our debt, industry conditions, general economic conditions, market conditions and market perceptions of us and our industry.
Contractual Obligations
The following table presents information regarding contractual obligations that exist as of March 31, 2015 by fiscal year (in thousands):
We have excluded liabilities resulting from uncertain tax positions of $1.0 million from the table above because we are unable to make a reasonably reliable estimate of the period of cash settlement with the respective taxing authorities. Additionally, interest payments related to the Credit Facility have been excluded as future interest rates are uncertain.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as such term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future effect on our financial condition or changes in financial condition, operating results, or liquidity.
Item 7A.
Item 7A. - Quantitative and Qualitative Disclosures About Market Risk
Market Risk. Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors such as liquidity will result in losses for a certain financial instrument or group of financial instruments. We do not hold or issue financial instruments for trading purposes, and do not enter into forward financial instruments to manage and reduce the impact of changes in foreign currency rates because we have few foreign relationships. Based on the controls in place and the relative size of the financial instruments entered into, we believe the risks associated with not using these instruments will not have a material adverse effect on our consolidated financial position or results of operations.
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.
Foreign Currency Risk. We maintain technical and administrative offices in Mexico which exposes us to foreign currency exchange risk for transactions denominated in Mexican Pesos.
We monitor our activities in Mexico and can reduce exposure from the exchange rate fluctuations by limiting these activities or taking other actions, such as exchange rate hedging. During the years ended March 31, 2015, 2014 and 2013, the Company did not have any hedging activities.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information called for by this item is set forth in the Consolidated Financial Statements and Schedule covered by the Reports of Independent Registered Public Accounting Firms at the end of this report commencing at the pages indicated below:
Reports of Independent Registered Public Accounting Firm
All of the foregoing Consolidated Financial Statements and Schedule are hereby incorporated in this Item 8 by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure 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, including our Annual Report on Form 10-K, was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information was 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) promulgated 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 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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of an issuer’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Internal control over financial reporting includes policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of an issuer’s assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that an issuer’s receipts and expenditures are being made only in accordance with authorizations of its management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of an issuer’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, the application of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that compliance with the policies or procedures may deteriorate.
As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of March 31, 2015. Management has elected to exclude from our assessment the internal control over financial reporting of Fifth Gear, which was acquired on November 21, 2014. Fifth Gear is a wholly-owned subsidiary of Speed Commerce, Inc, whose total assets and total revenues represented approximately 45.3% and 17.7%, respectively, of the related consolidated financial statement amounts as of and for the year ended March 31, 2015. Management’s assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 1992 Internal Control - Integrated Framework (“COSO”). Based on the assessment, management has concluded that, as of March 31, 2015, the Company's internal control over financial reporting was not effective due to the material weaknesses described below.
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. Management has identified material weaknesses in the internal control over financial reporting relating to the following:
The Company did not maintain effective controls over the recording of and reconciling of deferred costs regarding internal development costs. Due to the failure of use of an adequate time-keeping system, Management used estimates at the time of reporting that did not have adequate supporting documentation in a timely manner.
Because of the material weakness described above, management has concluded that it did not maintain effective internal control over financial reporting as of March 31, 2015 based on the criteria established in Internal Control-Integrated Framework issued by the COSO.
Grant Thornton LLP, our independent registered public accounting firm, has issued an attestation report, included herein, on our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal 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.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The following chart provides the Class, Term and current Committee membership, if any, of the Company’s Directors.
Identification of Directors:
TIMOTHY R. GENTZ, age 65, (Class II Director - Term expires 2016) has served as a director of the Company since May 2004 and as Chairman of the Board since September 2011 and is Chair of the Governance and Nominating Committee. From January 2005 to June 2012, Mr. Gentz was a self-employed consultant to multiple medical products and services companies and also was engaged in such activity from January to December 2003. During 2004, Mr. Gentz served as the COO of The Palm Tree Group, a Houston-based international distributor of medical products and supplies. From October 2000 to December 2002, he was the COO and CFO for Gulf South Medical Supply, Inc., a wholly-owned subsidiary of PSS World Medical (NASDAQ), Inc. Previously, Mr. Gentz was a private investor in an Internet entertainment start-up company, a CD package company, a Houston-based investment banking firm and other private companies. In May 2011, Mr. Gentz was elected as a director of TOBI, Inc. (TOAK.OB), an inactive bank holding company formerly known as Treaty Oak Bancorp, Inc. Mr. Gentz’s director qualifications include his extensive financial expertise, his diverse business experience with other public companies, and his significant distribution industry experience. Mr. Gentz holds a B.B.A. in Finance & Accounting from the University of Iowa. Mr. Gentz’ director qualifications include his leadership skills and qualifications have been demonstrated as a CEO, COO and CFO in private and public companies.
RICHARD S WILLIS, age 54, (Class I Director - Term expires 2015) has served as a director of the Company since February 2011 and was a member of the Compensation Committee until his appointment as President and Chief Executive Officer of the Company in September 2011. Previously, he was the executive chairman of Charlotte Russe, a mall-based specialty retailer of value-priced women’s apparel and accessories (in 2011). From 2009 to 2011, he served as President of Shoes for Crews, a seller of slip resistant footwear. From 2003 to 2007, he was President and CEO of Baker & Taylor Corporation, the world's largest distributor of books, as well as a global distributor of DVDs and music. While at Baker & Taylor he served for two years as the Chairman of the National Association of Recording Merchandisers. Previously, Mr. Willis served as Chairman, President and CEO of Troll Communications; President and CEO of Bell Sports; and CFO of several magazine companies, including Petersen Publishing, which he helped take public in 1997. Mr. Willis also currently serves on the Board of Directors and as the chair of the audit committee of Tuesday Morning, an upscale off-price retailer specializing in name brand closeout merchandise and also serves on the board of directors of Shoes for Crews. Mr. Willis has a bachelor's degree in business administration and a master's of business administration from Baylor University, where he also serves as a Regent. Mr. Willis’ director qualifications include his considerable executive leadership experience across multiple industries, including with distribution businesses that serve retailers and their suppliers. Mr. Willis’ has significant expertise in operating businesses and directing transformative changes to their strategic plans.
ALEXANDRA CONSTANTINOPLE, age 45, (Class III Director, Term expires 2017) is Chief Executive Officer of The OutCast Agency and has more than 20 years of experience as a strategic communications and marketing executive for high-profile global brands. At OutCast, Ms. Constantinople works closely with founders and executives of some of the world’s most well-known and disruptive companies to help shape their brands and build their businesses. Prior to joining OutCast in September 2010, she was responsible for communications for the business and editorial divisions of Condé Nast’s WIRED magazine and its digital properties. Ms. Constantinople also spent 15 years at General Electric, where she served in marketing and communications roles for GE Corporate and NBC. As General Manager of GE Corporate and marketing services, she oversaw global marketing initiatives such as the launch of GE’s groundbreaking ecomagination platform and imagination at work branding campaign. While at NBC, she served as Vice President of NBC News as well as Director of Corporate Communications and head of publicity for the Today show. She began her career at CNN as a publicist for Larry King Live.
SCOTT GUILFOYLE, age 57, (Class III Director, Term expires 2017) joined eBay in 2008 as Chief Technology Officer of PayPal in charge of the PayPal payments platform operations. His other responsibilities at eBay included participating on the 12 member eBay leadership team and on the technology committee of the eBay Board of Directors and serving as Chief Information Officer of eBay and an executive director of the PayPal Bank Board in Luxembourg. Since his retirement from eBay in 2012, Mr. Guilfoyle has been serving as an angel investor and board advisor to several firms focused primarily in technology, e-commerce and payments. Prior to working at eBay, Mr. Guilfoyle served as Chief Information Officer of LendingTree from 2007 to 2008 and as Chief Information Officer of eCommerce and Card Services at Bank of America from 2002 to 2007. At Bank of America, he was responsible for leading the technology organization for online banking, credit card, debit and ATM, merchant services and mortgage services. While at Bank of America, Mr. Guilfoyle played a significant role in the acquisition and integration of MBNA Corporation, a leading provider of credit card and payment products. Mr. Guilfoyle began his professional career with General Electric, where he worked for 18 years, including as a Chief Information Officer overseeing multiple GE businesses, including GE Power Systems, GE Appliances, GE Plastics, GE ebusiness and GE Aviation Services.
FREDERICK C. GREEN IV, age 58, (Class III Director - Term expires 2017) has served as a director of the Company since September 2009 and is Chair of the Compensation Committee. Mr. Green is the President of Range Systems, Inc. and the Chief Development Officer of Sealed Mindset, LLC, companies providing live fire shooting products and services for the military, law enforcement and consumer communities. Previously, Mr. Green was the President of Jonaco Machine, a contract manufacturer to the aerospace and medical equipment industries. From 2005 to 2010, Mr. Green was the Managing Director of Denali Partners, LLC, a private equity firm that he co-founded in 2004. Jonaco Machine was previously a portfolio company of Denali Partners and was sold by Denali in late 2010. Previously, from 2002 to 2004, he founded and was the Managing Director of Marathon Partners LLC, a management firm for the portfolio companies of private equity firms. From 1999 to 2002, he served as the Chief Operating Officer of Bracknell Corporation, a $1.4 billion facilities infrastructure company with 33 locations in North America, and previously he was the President and CEO of Nationwide Electric, Inc., a national electrical installation and services company that was acquired by Bracknell. From 1996 to 1998, he was the President and CEO of Product Safety Resources, Inc., a company focused on electronic product safety information, and from 1988 to 1996, Mr. Green held various operations and leadership positions with Emerson Electric Co. (NYSE:EMR), a multinational manufacturer of a broad range of electrical, electromechanical and electronic products and systems, including: Vice President, General Manager, Process Flow; Vice President Marketing and Sales; and Vice President of Strategic Planning and Technology. Prior to joining Emerson Electric Mr. Green was a management consultant with McKinsey & Company. Mr. Green’s director qualifications include his extensive and diverse business experience, his significant experience in merger, acquisition and divestiture transactions, his understanding of capital markets, and his extensive background in strategic planning.
BRADLEY J. SHISLER, age 44, (Class I Director - Term expires 2015) has served as a director of the Company since February 2011 and is Chairman of the Audit Committee and a member of the Governance and Nominating Committee. Mr. Shisler currently serves on the board of directors of Rockhaven Resources Ltd. (TSX-V:RK), an exploration company with a portfolio of gold-silver projects located in Yukon Territory, CUDA Pharmaceuticals, which develops and markets generic pharmaceutical products, and on the board of directors of RealManage Holdings, Inc., a community association management company. Mr. Shisler is a Managing Director of Condire Investors, LLC and is an employee of CPMG, Inc., both of which are Dallas-based investment management companies. From February 2012 to March 2014, Mr. Shisler served on the board of directors of Pixelworks, Inc. (NASDAQ: PXLW), which creates, develops and markets video display processing technology. From September 2007 until December 2008, Mr. Shisler served as a partner at Blue River Partners, L.L.C., a start-up private equity firm formed to make control investments in lower middle-market companies. Previously, from 1996 to 2007, Mr. Shisler was a principal of Willis Stein & Partners, a private equity fund with nearly $3 billion of equity capital under management. While at Willis Stein, Mr. Shisler served on the boards of directors of Baker & Taylor Corporation, a leading national distributor of books, DVDs and music; CompuPay, Inc., a provider of outsourced payroll processing, tax filing and other related services; National Veterinary Associates, Inc., an owner and operator of 96 companion animal veterinary hospitals throughout the U.S.; and Ziff Davis Media Inc., an integrated media company focused on the technology and video game markets. Mr. Shisler has a M.B.A., with distinction, from the Kellogg School of Management at Northwestern University, as well as both a B.S. degree in chemical engineering and a B.A. degree in political science from Rice University. Mr. Shisler’s director qualifications include his deep experience with the development of corporate strategy and the oversight of its implementation that results from the active involvement in the direction of numerous companies in a variety of industries, including service on eight other corporate boards and four other audit committees. Mr. Shisler has extensive private equity experience where he has evaluated hundreds of businesses for potential investment.
REBECCA LYNN ATCHISON, age 55, (Class I Director - Term expires 2015) has served as a director of the Company since October 2013. Ms. Atchison has been the Chief Financial Officer of HomeAway, Inc. (NASDAQ: AWAY), an internet-based operator of the world’s largest online marketplace for the vacation rental industry since August 2006. Previously, Ms. Atchison was Chief Financial Officer of Infoglide Software Corporation, an enterprise software provider, from February 2004 to August 2006. From October 2003 to January 2004, Ms. Atchison worked as a business consultant for Range Online Media, an internet marketing firm. From May 1996 to April 2003, Ms. Atchison served as Chief Financial Officer and Vice President of Finance and Administration of Hoover’s, Inc., a provider of online business information. From November 1994 to April 1996, Ms. Atchison served as Chief Financial Officer of Travelogix, Inc., a provider of travel ticketing systems software. From May 1990 to November 1994, Ms. Atchison worked as a consultant providing controller functions for software, technology and non-profit organizations, including Trilogy Development, a provider of sales automation software, and Austin American Technology. Prior to that, Ms. Atchison worked for eight years as an accountant with Ernst & Young LLP. Ms. Atchison holds a B.B.A. in accounting from Stephen F. Austin State University. Ms. Atchison’s director qualifications include her 30 years of finance and accounting experience and her experience in operating internet-based businesses.
STEPHEN F. DUCHELLE, age 59, (Class III Director - Term expires 2017) was appointed as a director of the Company and as a member of the Audit Committee, effective as of April 1, 2014. From October 2012 to June 2014, Mr. Duchelle was the Vice President of e-commerce for Juicy Couture, a retail provider of women’s and girl’s apparel and accessories, which recently operated as part of Fifth & Pacific Companies, where he was responsible for its e-commerce business strategy and web operations. Previously, from August 2009 to September 2012, Mr. Duchelle served as the Vice President of e-commerce Strategy at GSI Commerce, Inc., now eBay Enterprise, a provider of e-commerce and interactive marketing services related to direct to consumers sales, where he was responsible for a portfolio of e-commerce clients providing e-commerce omni-channel consulting and client services support. Mr. Duchelle also served as the Senior Vice President of e-commerce for Belk, Inc., a retail provider of fashion apparel, shoes, accessories and houseware merchandise, from September 2007 to July 2009. Mr. Duchelle holds both a B.S. and M.S. degrees from Virginia Tech as well as a M.B.A. from James Madison University. Mr. Duchelle’s director qualifications include his more than 20 years of retail industry experience, including 16 years in various e-commerce leadership roles, and his extensive management and operating experience at internet-based businesses.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that the Company’s directors and executive officers, and persons who own more than 10 percent of a registered class of the Company’s equity securities, file with the SEC initial reports of ownership and reports of changes in ownership of our Common Stock. These insiders are required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file, including Forms 3, 4 and 5. Based solely upon our review of Forms 3, 4 and 5 filed by the Company’s insiders, and written representations from our directors and executive officers, we believe all Section 16(a) filing requirements were met for the fiscal year ending March 31, 2014, except for one late filing on a Form 3 for Mr. Matthew Konkle, which was filed on March 9, 2015.
Audit Committee
Our Board of Directors has established a standing Audit Committee that meets regularly. The Audit Committee oversees the accounting and financial reporting processes and audits of our consolidated financial statements. The Audit Committee assists the Board in fulfilling its oversight responsibilities for the quality and integrity of our financial reports, our compliance with legal and regulatory requirements and the independent auditors’ qualifications and independence, as well as accounting and reporting processes. The Audit Committee reviews the Company’s significant controls, policies and procedures in connection with the assessment and management of enterprise risk, and coordinates with the Company’s internal auditing department to ensure that effective programs are in place to monitor compliance with applicable policies and procedures. The Audit Committee also reviews the internal and external financial reporting of the Company and reviews the scope of the independent audit. The members of the Audit Committee at March 31, 2015 were Bradley Shisler (Chair), Rebecca Lynn Atchison, Stephen Duchelle and Alexandra Constantinople. Ms. Kathleen Iverson, the former chair of the Audit Committee, retired as a director on October 30, 2014, following the election of Mr. Duchelle and Ms. Constantinople at the annual stockholder meeting. Our Board of Directors has determined that all members of the Audit Committee are financially literate and are “independent,” as that term is defined in Rule 5605(a)(2) of NASDAQ’S Marketplace Rules and SEC Rule 10A-3. The Board has also determined that all members of the Audit Committee are each qualified as an “audit committee financial expert,” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K.
Code of Business Conduct and Ethics
On March 29, 2004, the Board of Directors adopted a Code of Business Conduct and Ethics (the “Code of Conduct”), that applies to all of our directors, officers and employees. Our Code of Conduct is available on our website, www.speedcommerce.com . A copy of our Code of Conduct may also be obtained, without charge, upon written request to: Speed Commerce, Inc., Investor Relations, 1303 E. Arapaho Road, Suite 200, Richardson, Texas 75081. The Audit Committee is responsible for overseeing compliance with the Code of Conduct and reviewing and updating the Code of Conduct. The Audit Committee reviewed the Code of Conduct in fiscal year 2015 and determined that no amendments were warranted. In accordance with the NASDAQ Marketplace Rules, any waivers of the Code of Conduct for directors and executive officers must be approved by our Board of Directors. No waivers were granted during fiscal year 2015.
Item 11.
Item 11. Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis discusses the Company’s compensation philosophy, policies, practices and decisions that were applicable in fiscal year 2015 with respect to: (i) our Chief Executive Officer (“CEO”) (our principal executive officer); (ii) our Chief Financial Officer (“CFO”) (our principal financial officer); (iii) our Chief Operating Officer (“COO”), who was appointed in February 2015; and (iv) two former executive officers who were not serving as executive officers at March 31, 2015 but whose total compensation in fiscal year 2015 would have been among the three other most highly compensated executive officers (collectively, the “Named Executive Officers” or “NEO’s”), as follows:
This discussion should be read in conjunction with the “Executive Compensation Tables” and accompanying narrative disclosure. The tables and narrative provide more detailed information regarding the total compensation and benefits awarded to, earned by, or paid to the Named Executive Officers during fiscal year 2015, and, depending on tenure, during fiscal years 2014 and 2013.
Executive Summary
General Overview
It is the overall goal of our executive compensation program to provide compensation that is reasonable and fair to both the Company and to the Named Executive Officer in light of the performance of the Company, the contribution of each executive officer to that performance and the competition the Company faces to attract and retain highly qualified executive officers. The Company believes that executive compensation should be aligned with and reflect the Company’s financial performance and as a result, each Named Executive Officer’s annual incentive compensation is directly tied to Company financial performance thresholds and metrics, as further described below. The Named Executive Officers are compensated with a combination of base salary, annual cash incentive opportunity and long-term incentives in the form of equity awards under the Company’s shareholder-approved equity plan. Base salary provides the Named Executive Officers with a fixed level of cash compensation in line with their individual experience and responsibilities and market factors. The annual cash incentive provides the Named Executive Officers an opportunity for short-term returns linked to specified Company performance measures. Annual equity awards focus the Named Executive Officers on the long-term future performance of the Company and building shareholder value. The Named Executive Officers also participate in benefit and retirement plans generally available to the Company’s other employees.
Executive Compensation Philosophy
We recognize that the success of our Company depends on the talent of our workforce and our relationships with customers and suppliers. The first tenet of our executive compensation philosophy is to develop and retain a high quality professional management team that is able to develop and strengthen relationships with customers and suppliers over the long-term and to profitably grow our business. The executive compensation program must be competitive with the practices of other organizations in similar industries and of similar sizes in order to facilitate the recruitment of strong leaders as we expand our product and service offerings.
The second tenet of our executive compensation philosophy is to reward our executives fairly and provide proper and balanced incentives in support of long-term value creation for our shareholders. When executives contribute to the attainment of Company financial performance which exceeds a designated threshold amount, they are rewarded with attractive, but capped, annual cash incentive awards. In years when performance is below expectations, the executives receive little or no annual cash incentive. In terms of long-term incentives, we believe that the performance of our stock is the best measure of our performance. The opportunity for our executives to participate in the performance of our stock through equity grants is the most direct link between both performance and pay and between our executives and our shareholders. We reward our executives with equity incentives to more closely align their interests with those of our shareholders, and we maintain ownership guidelines to reinforce that link.
These tenets guide the Compensation Committee in seeking to design effective pay programs and assessing the proper allocation between base salary, annual incentive compensation, and long-term compensation. Since 2011, the Compensation Committee has retained Pearl Meyer & Partners (“PM&P”) as an independent consultant to advise the Committee on executive compensation matters, including program design, best practices and market trends. PM&P has provided competitive market data regarding executive compensation levels and components of compensation and to provide the Compensation Committee with updated data on an annual basis for each upcoming fiscal year.
In fiscal year 2015, the Compensation Committee also evaluated the independence of PM&P by considering each of the independence factors recently adopted by NASDAQ and the SEC. Based on such evaluation, the Compensation Committee determined that no conflict of interest exists that would prevent PM&P from providing compensation advice to the Compensation Committee.
For fiscal year 2015, PM&P provided the Compensation Committee with updated peer group information and comparative analysis as described below.
Summary of Key Fiscal Year 2015 Compensation Elements and Actions
Long-Term
Incentive
Compensation
(Awarded value delivered through grants of stock options and restricted stock
units).
Stock options: generally vest in one-third increments over three-year service period.
Restricted Stock Units: generally vest in one-third increments over three-year service period; Award settled in shares of Company stock.
Equity awards support our growth strategy, provide a link between the Named Executive Officers and our shareholders, and due to vesting over time, serve as a retention tool. We consider stock options to be performance-based as they only have value if the stock price increases.
Restricted stock units provide added retention value as, unlike stock options that could be underwater, they maintain value in times of stock volatility.
The aggregate grant date fair value of all employee equity awards granted in fiscal year 2015, as a percent of aggregate base salaries, was slightly less than the competitive median determined by PM&P in fiscal year 2015, except for Mr. Konkle who received equity awards in connection with his initial hiring incentive and his subsequent receipt of an additional grant in February 2015 which was made in connection with his promotion to the position of COO. .
Pay for Performance
The annual cash incentive and long-term incentive components of our compensation program reflect our pay-for-performance philosophy, since annual cash incentives are paid upon the achievement of a set of measurable Company financial performance metrics, and equity award values depend on the value of the Company’s stock, thus encouraging achievement of long-term value creation that benefits all shareholders. To avoid excessive windfall payments, annual cash incentives are capped at 150% of target values, and the Compensation Committee retains discretion, including negative discretion, in modifying awards.
Good Corporate Governance and Compensation Policies
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No Excise Tax Gross-Ups: The Company has not entered into any agreements with the Named Executive Officers that provide for IRC Section 280G excise tax gross-ups with respect to payments contingent upon a change in control.
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No Supplemental Retirement Plans: The NEOs do not participate in any executive retirement plans other than the 401(k) plan available to all employees.
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Limited Perquisites: Perquisites are not an integral part of our compensation program and are only offered in exceptional circumstances. Most benefits payable to our NEOs are also available to our general employee population.
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Compensation Committee Independence: The Compensation Committee is comprised solely of independent directors, and the Compensation Committee periodically uses an independent and conflict-free compensation consultant that does not provide any other services to the Company.
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Stock Ownership Guidelines: The Named Executive Officers are subject to stock ownership guidelines with an expectation that they reach a certain level of stock ownership within five years of assuming their current position through stock purchases and retention of shares acquired through equity grants. The Compensation Committee regularly reviews achievement of the guidelines and may consider failure to meet the goals as a negative factor when making compensation decisions.
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Hedging Prohibited: The Named Executive Officers are prohibited from engaging in any speculative transactions in our Common Stock and from hedging the economic risk of ownership of our Common Stock.
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Clawbacks: When the SEC adopts final rules regarding “clawback” of incentive compensation, the Board intends to adopt a “clawback” policy in accordance with those rules providing for recovery of incentive compensation, if any, in excess of what would have been paid to officers of the Company in the event that the Company is required to restate financial results.
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Risk Assessment: When creating compensation incentives, the Compensation Committee discusses and considers any enterprise risks that the Named Executive Officers may be incentivized to take in order to achieve the compensation goals. The Compensation Committee believes that the Company’s compensation policies and programs do not create any risks that are reasonably likely to have a material adverse effect on the Company. The Compensation Committee also reviews the Company’s sales commissions plans to ensure that they create no inappropriate risk incentives.
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Capped Incentives: Annual cash incentives are capped at 150% of target values, and the Compensation Committee retains discretion, including negative discretion, in modifying awards.
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No Option Repricings: Even though a significant portion of the Company’s outstanding stock options have been underwater for the past several years, the Company has not repriced or replaced any underwater stock options.
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Option Forfeitures: Options forfeited during April 2015. Not replaced with subsequent grants.
Say-on-Pay Voting Results
The Compensation Committee considers the prior year shareholder advisory vote on the compensation of the Named Executive Officers as appropriate in making compensation decisions. At the annual meeting of shareholders held in October 2014, more than 96% percent of the shareholders present and voting on the matter approved, on an advisory basis, the compensation disclosed in the Company’s proxy statement for the meeting. As a result, the Compensation Committee concluded that the Company's shareholders were generally supportive of the Company's executive compensation philosophy, policies and programs and the Compensation Committee will continue to reach out to shareholders regarding compensation matters. The Compensation Committee determined to continue such philosophy, policies and programs, with such updates and modifications as appropriate for changing circumstances.
Compensation Setting Process
Role of the Compensation Committee
The Compensation Committee is responsible for our executive compensation philosophy, the design of our executive compensation programs and the administration of our compensation and benefit plans. The Compensation Committee, which is composed entirely of independent, non-employee directors, determines the compensation paid to the CEO and reviews and approves the compensation paid to other executive officers (further detail as to the Committee’s roles and responsibilities can be found in our charter available for viewing and downloading on the Company’s website at www.speedcommerce.com and may be found by selecting the “Investors” tab and then clicking on the “Corporate Governance” link). Compensation Committee members as of March 31, 2015 were: Mr. Green (Chair); Mr. Shisler; Mr. Gentz and Mr. Guilfoyle. Mr. David Bryant retired from the Board and the Compensation Committee in February 2015.
In setting compensation for the Named Executive Officers, the Compensation Committee:
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Reviews external market data;
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Confirms the reasonableness of total compensation and of each component of compensation when compared to competitive market data;
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Evaluates overall Company performance in relation to financial and strategic objectives, competition and industry circumstances;
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In conjunction with the other independent directors on the Board, reviews and approves the annual goals and objectives for the CEO and evaluates the CEO’s performance in light of the established goals and objectives and strategic and operational accomplishments;
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For other Named Executive Officers, reviews annual goals and objectives and assesses individual performance and any changes in duties and responsibilities;
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Adjusts base salaries, as appropriate, based on job performance, leadership, tenure, experience, and other factors, including competitive market data;
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Approves the design of the annual cash incentive plan, establishes the annual financial objectives for the plan and assesses Company performance in light of the pre-established goals; and
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Grants awards under our long-term incentive plan, as appropriate, based on competitive market data and an evaluation of the current performance and future potential of each Named Executive Officer.
The Compensation Committee regularly holds executive sessions that are not attended by any members of management or non-independent directors. The Compensation Committee has the ultimate authority to make decisions with respect to the compensation of our Named Executive Officers, but may, if it chooses, delegate any of its responsibilities as allowed under applicable law. The Compensation Committee has delegated to certain officers of the Company, the authority to grant long-term incentive awards to non-executive officers under limited circumstances and pursuant to specific guidelines established by the Compensation Committee. The Compensation Committee has not delegated any of its authority with respect to the compensation of executive officers. The Compensation Committee normally discusses compensation decisions with respect to the CEO in executive sessions without the CEO or other management present, and makes determinations regarding the CEO in consultation with the independent directors on the Governance and Nominating Committee.
Role of Management
Most Compensation Committee meetings, except for the executive portions thereof, are attended by the CEO, and the Company’s General Counsel. Depending on the topics to be discussed, the CFO may also attend. The CEO’s role in the Compensation Committee process is oversight of all of management’s recommendations and reports to the Compensation Committee and/or Board of Directors. The CEO provides direct input to the Compensation Committee on such matters as the affordability and efficacy of various plan designs. The CEO may also make recommendations with respect to scheduling meetings and agenda topics and occasionally meets with Compensation Committee members outside of scheduled meetings. The Compensation Committee considers the CEO’s input, but ultimately makes all of its decisions independently. The CEO sets objectives each year for the other Named Executive Officers which are tailored to the duties and responsibilities of the particular officer and the challenges that his or her business or functional unit faces. The Compensation Committee reviews and approves the objectives. Following the end of the fiscal year, the CEO, also with the oversight of the Compensation Committee, evaluates the performance of the other Named Executive Officers against their individual objectives for the year.
Management makes recommendations to the Compensation Committee on the base salary, annual incentive plan targets and equity compensation for the executive team and other employees. The Compensation Committee considers, but is not bound to and does not always accept, management’s recommendations with respect to executive compensation.
Role of Independent Compensation Consultants & Benchmarking
The Compensation Committee has from time to time engaged independent compensation consultants to advise on executive compensation levels and practices, plan designs and competitive market data. Since 2011, the Compensation Committee has engaged Pearl Meyer & Partners (“PM&P”), a consultant that specializes in providing compensation services to boards of directors and that has never provided any compensation or other services to our management. PM&P was selected for its experience and independence and lack of conflict as assessed by considering each of the independence factors recently adopted by NASDAQ and the SEC. Based on such evaluation, the Compensation Committee determined that no conflict of interest exists that would prevent or negatively impact PM&P from providing compensation advice to the Compensation Committee.
PM&P has been a leading compensation consultant to boards of directors for over two decades and it has never provided any compensation or employee benefits services to the Company’s management.
For fiscal year 2015, PM&P provided the Compensation Committee with updated data that compared the Company’s overall executive compensation program, including base salary and annual and long-term incentive compensation, in comparison to the executive compensation offered by similarly situated public companies (the “Peer Group”). Mr. Konkle was appointed to the position of COO in February 2015 and the Company used the data related to Mr. Jeffrey Zisk’s compensation as a general guide in setting Mr. Konkle’s compensation as it believed Mr. Konkle’s title and job responsibilities were substantially similar to Mr. Zisk’s prior position as the President of Speed Commerce, Inc. Also, due to changes in our business composition following the divestiture of our distribution business in July 2014, PM&P recommended changes to our Peer Group for fiscal year 2015 to better align with our short and long term business strategy. This data was reviewed by the Compensation Committee in evaluating executive compensation for fiscal year 2015 but the Compensation Committee does not establish rigid benchmarks based on the Peer Group data. Rather, the Compensation Committee uses the Peer Group data as a general guide, together with considerations about the total compensation opportunity and recommendations from management. The Committee reviews the Peer Group data and may decide to position an individual executive’s total compensation opportunity above or below any specific level to reflect that individual’s past experience, future potential, individual performance or contributions to the execution of the Company’s strategic goals. The Companies in the Peer Group have annual revenue in the range from approximately $100 million to $900 million and Speed Commerce’s revenue is below the median of the Peer Group. The 14 companies included in the Peer Group for fiscal year 2014 are:
Ciber, Inc.
Cafe Press, Inc.
Sykes Enterprises Inc.
Harte Hanks Inc.
ModusLink Global Solutions Inc.
Echo Global Logistics Inc.
Perficient, Inc.
ExlService Holdings Inc.
Digital River Inc.
SPS Commerce, Inc.
Wayside Technology Group
PFSweb Inc.
Web.com Group, Inc.
Demandware, Inc.
Compensation Mix
Our executive compensation is comprised primarily of the following elements: fixed cash compensation, in the form of base salary; and variable compensation, in the form of short-term annual incentive pay and long-term incentive compensation. Long-term incentive compensation consists of equity grants, while short-term incentive compensation is paid in cash. Although the Compensation Committee has not set specific targets for the relative percentages of these elements, it strives for a balance that rewards executives for the achievement of short-term (annual) goals while also focusing on the long-term revenue and profitability of the Company. Because the Compensation Committee believes that the CEO has a greater impact on the achievement of long-term targets, it determined that variable compensation should constitute a greater percentage of his compensation when compared to the other Named Executive Officers ("NEO"). For fiscal year 2015, the relative percentages of these elements were as follows:
Relative Percentages of Compensation Elements for NEO’s serving as of March 31, 2015
(1)
Mr. Konkle was appointed our COO in February 2015.
(2)
Mr. Thomas resigned from the Company in July 2014.
(3)
Mr. Zisk retired from the Company in February 2015.
Compensation Elements and Actions for 2015
Base Salary Compensation
Base salary is used to provide competitive levels of compensation to executives based upon their experience, duties and areas of responsibility. We pay base salaries because it provides a fixed level of compensation that we feel is necessary to recruit and retain executives. An important aspect of base salary is the Compensation Committee’s ability to use annual base salary adjustments, when the financial performance of the Company permits, to reflect an individual’s performance or changed responsibilities. The Compensation Committee monitors the performance of the executive officers on individual performance objectives established for the fiscal year and annually reviews their base salaries.
The Compensation Committee’s goal is to set base salaries for each executive, including the CEO, at a level that reflects each individual’s performance and organizational impact and at a competitive level. Differences in the amount of base salary between the Named Executive Officers reflect the Compensation Committee’s assessment of the differences in the scope of each executive’s responsibilities and contributions in light of competitive pay levels for similar positions in other similarly situated organizations.
Fiscal Year 2015 Base Salary Actions:
The Committee did not approve any base salary increases for NEO’s in fiscal year 2014. Mr. Konkle joined the Company in November 2014 following our acquisition of the assets of Fifth Gear, LLC. In February 2015, Mr. Konkle was appointed our COO and his base salary was set at $335,000, which the Committee believes was reasonable and commensurate with his title, job responsibilities, credentials and past work experience.
Annual Incentive
Annual incentive compensation is used to reward executives for their contributions toward the achievement of the Company’s short-term goals for the current year. Executive officers and other management employees selected by the Compensation Committee participate in the Company’s Annual Incentive Plan. The fiscal year 2015 target amounts approved by the Compensation Committee under the Annual Incentive Plan were intended to provide annual cash compensation (i.e., base salary plus annual incentive) within the competitive range of market data as determined in prior years, provided that the Company’s goals were met.
Annual Incentive Opportunity and Results for NEO’s serving as of March 31, 2015
(1)
Mr. Konkle was appointed our COO in February 2015.
(2)
Mr. Thomas resigned from the Company in July 2014.
(3)
Mr. Zisk retired from the Company in February 2015.
(4)
Each of Mr. Tuttle and Mr. Thomas received a transaction bonus in July 2014 in the amounts listed, which was made for the performance and contribution of each in connection with the successful closing of the divesture of our distribution business.
For fiscal year 2015, the Annual Incentive Plan performance measures for the Named Executive Officers were based on earnings before interest, depreciation and amortization and excluding stock based compensation expense and after the bonus pool adjusted accrual (“Adjusted EBITDA”), weighted at 75%, and net revenue, weighted at 25%. The Compensation Committee selected the following financial objectives for fiscal year 2014: target consolidated Adjusted EBITDA of $17 million and target consolidated net sales of $137 million. The Compensation Committee chose earnings and sales performance criteria for fiscal year 2014 because it believed these are critical drivers of our strategy to achieve profitable and sustainable growth, and thereby create long-term value for our shareholders. The annual plan design contains performance thresholds. Other than possible discretionary awards as discussed below, annual incentives are not earned if funding any portion of the annual incentive pool caused the Company to fail to achieve at least 90% of the consolidated Adjusted EBITDA target. The plan design also provided an opportunity for participants to earn an enhanced annual incentive based on Adjusted EBITDA growth. If consolidated Adjusted EBITDA (inclusive of the annual incentive pool accrual) exceeds the target, then the annual incentive pool is increased by 25% of the excess amount. Participants share in the enhanced annual incentive pool on a pro rata basis taking into consideration the achievement of the financial and individual objectives applicable to each participant. However, annual incentive payments under the Plan, including the growth enhancement, are capped at 150% of a participant’s target annual incentive. For fiscal year 2015, the Compensation Committee included in the plan design a potential discretionary pool of up to $500,000, which may or may not be awarded in whole or in part. The Compensation Committee may determine, in its discretion, to reward participants with exemplary performance during the fiscal year out of the discretionary pool whether or not the Company’s financial objectives are achieved. The Compensation Committee also reserved the right to change, suspend, or discontinue the Annual Incentive Plan at any time without prior notice to participants.
At the time the fiscal year 2015 annual financial objectives were determined, the Compensation Committee believed the Adjusted EBITDA and net revenue targets to be appropriately challenging but realistic under the current economic conditions. Since the consolidated Adjusted EBITDA threshold was not met, no annual incentive was earned under the annual incentive plan pool for fiscal year 2015 regardless of actual results on the other objectives and no bonuses were awarded to any of the NEOs. Mr. Tuttle and Mr. Thomas were each awarded a transaction bonus in the amount of $75,000 for Mr. Tuttle and $200,000 for Mr. Thomas, each of which was paid in July 2014 following the closing of the divestiture of our distribution business to reflect the performance and contributions of each to successfully complete the transaction. The Committee approved a pool of up to $300,000 to be paid in July 2014 as transaction bonuses to certain non-officer employees related to their performance in connection with the divestiture of our distribution business as identified by management. The Committee also approved a pool of up to $500,000 to be paid as bonuses to certain non-officer employees in December 2014 , which was granted in the discretion of the Compensation Committee for meeting individual performance-related and non-performance related goals.
Long-Term Incentives
Long-term incentive compensation is used to reward executives for their contributions toward the achievement of the Company’s long-term goals. Changes in Company stock price have a direct effect on the amount of compensation the Named Executive Officers realize from long-term incentive compensation. This encourages long-term value creation that benefits all shareholders. In addition, multi-year vesting of long-term incentive compensation encourages the retention of our Named Executive Officers.
PM&P’s analysis prepared in fiscal year 2014 and updated data provided in fiscal year 2015 indicated that the Company’s long-term incentive compensation, as measured by the value of the prior year grants, was generally below the competitive range of the comparative market data. This also lowers the total direct compensation of the Named Executive Officers. When determining the size of individual long-term incentive awards and the total number of long-term incentive awards for all management employees for the fiscal year, the Compensation Committee considers:
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the projected impact on our Company’s earnings for the anticipated fiscal year grants and outstanding grants from prior years;
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the value of the equity awards in the competitive range of the comparative market data;
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the reasonableness of the proportion of our total shares outstanding (our “run rate”) used for annual equity grants; and
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the reasonableness of the potential voting power dilution to our shareowners (our “overhang”).
Fiscal Year 2015 Long-Term Incentive Actions:
Of the long-term incentive awards granted in fiscal year 2015 (excluding grants to Non-employee Directors), 65% were time vested nonqualified stock options and 35% were time vested restricted stock units. The Compensation Committee determined that the restricted stock units will continue to provide an enhanced retention incentive to employees. In addition, the grant of restricted stock units consumes fewer shares under the Company’s shareholder authorized stock plan and has been determined by the Compensation Committee to be consistent with the compensation trends as previously reported by PM&P. The non-qualified stock option awards vest over three years and expire ten years from the grant date provided that the participant is still employed by the Company. The restricted stock units also generally vest over three years. Upon vesting, participants, who are still employed by the Company, will receive one unrestricted share of Common Stock for each vested restricted stock unit.
The Named Executive Officers received long-term incentive awards in fiscal year 2015 covering a total of 1,156,450 shares, which was more than the shares granted in fiscal year 2014 by 485,793 shares, primarily as a result of the hiring and subsequent appointment to the position of COO of Mr. Konkle and the result of our decreased share price at the time the grants were made. All other employees received long-term incentive awards in fiscal year 2015 covering a total of 2,972,524 shares compared to 492,494 shares in fiscal year 2014. The individual NEOs received equity grants as follows:
In April 2015, each of Mr. Willis and Mr. Tuttle agreed to cancel certain outstanding and unvested stock options, including the August 2014 annual grant of options as described above, in order to provide the Company with additional shares available for issuance in connection with the Company’s April 2015 equity offering of common stock. Mr. Willis agreed to the cancellation of options that represented an aggregate of 1,326,679 underlying shares of common stock and Mr. Tuttle agreed to the cancellation of options that represented an aggregate of 236,789 underlying shares of common stock.
In August 2014, Mr. Willis was granted 108,096 restricted stock units and a stock option covering 220,109 shares and Mr. Tuttle was granted 40,036 restricted stock units and a stock option covering 81,522 shares. Mr. Konkle received a stock option covering 100,000 shares in connection with his initial hiring by the Company as an incentive to remain with the Company following the asset acquisition of Fifth Gear, LLC in November 2014. Upon Mr. Konkle’s promotion to the position of COO in February 2015, Mr. Konkle was granted 125,000 restricted stock units and a stock option covering 350,000 shares, which the Committee believes was reasonable to reflect his promotion to an executive officer position and his increased job responsibilities.
Mr. Thomas resigned from the Company in July 2014 following the divestiture of our distribution business and therefore did not receive any grants of restricted stock or stock options for fiscal year 2015. In August 2014, Mr. Zisk was granted 43,372 restricted stock units and a stock option covering 88,315 shares but he subsequently resigned from the Company in February 2015 and all unvested restricted stock units and options were forfeited and cancelled at such time.
Equity Grant Process
For fiscal year 2015 and prior to October 29, 2014, equity-based incentives were granted under our shareholder-approved Amended and Restated 2004 Stock Plan (the “2004 Plan”). On October 29, 2014 at our annual meeting, our stockholders approved the Company’s 2014 Stock Incentive Plan (the “2014 Plan”) which had been previously approved by the Board in August 2014 and which governs all equity grants made following October 30, 2014. The Compensation Committee has granted equity awards at its scheduled meetings or by written action without a meeting. These actions are usually taken on the same day as, or prior to, the grant date. Annual grants have traditionally been discussed and authorized for grant in scheduled meetings taking place during the Company’s second and third fiscal quarters and become effective and are priced as of the beginning of the first day of the open trading window after public disclosure of the Company’s second quarter financial results. Under authority delegated by the Compensation Committee, management may grant equity awards to employees (other than executive officers) as part of a new hire offer, promotion or reward/incentive for significant achievement, up to 10,000 shares per individual. Grants made outside of the annual grant are effective as of the date of approval or at a predetermined future date (for example, new hire grants are effective as of the later of the date of approval or the newly hired employee’s start date). All stock options granted pursuant to the Plan have a per share exercise price no less than the fair market value of our Common Stock on the grant date, defined as the opening price for our Common Stock on the NASDAQ Global Market during a regular trading session, or, if the grant date is not a trading day, then the last reported sales price listed on the NASDAQ Global Market prior to the grant date. All stock option grants pursuant to the 2014 Plan have a per share exercise price no less than the fair market value of our Common Stock on the grant date, defined as the closing price for our Common Stock the trading day before the grant date on the NASDAQ Global Market during a regular trading session.. The Compensation Committee does not grant equity compensation awards to executives in anticipation of the release of material nonpublic information that is likely to result in changes to the price of our Common Stock. Similarly, the Company does not time the release of material nonpublic information based on equity award grant dates.
Benefits and Executive Perquisites
The main objectives of our benefits program is to enhance health and productivity and give our employees access to quality healthcare, insurance protection from unforeseen events and assistance in achieving retirement financial goals.
In fiscal year 2015, the Named Executive Officers were eligible to receive the following benefits that are generally available to all our employees: (i) group medical and dental insurance; (ii) group long-term and short-term disability insurance; (iii) group life and accidental death and dismemberment insurance; (iv) medical and dependent care flexible spending accounts; (v) wellness programs; (vi) educational assistance; (vii) employee assistance; and (viii) paid time-off policies, including vacation, sick time, and holidays. In addition, we maintain a tax-qualified 401(k) Plan, which provides for broad-based employee participation. Under the 401(k) Plan, all participating employees are eligible to receive, at the discretion of the Company determined on an annual basis, a matching contribution of 50% of the participant’s contribution up to 4% of base pay. If granted, the matching contribution vests over three years and is generally calculated and paid in April or May for all employee contributions made during the preceding calendar year by participants employed on the last day of the calendar year. The 401(k) Plan match and the incremental value of benefits provided to the Named Executive Officers under the Company’s benefits program are included in the “All Other Compensation” column of the “Summary Compensation Table.” We do not provide defined benefit pension plans or defined contribution retirement plans to executives or other employees other than the 401(k) Plan.
In general, we do not offer executive perquisites to our officers. However, in some cases, specific perquisites are negotiated at the time of an executive’s initial recruitment or promotion to a new position. In fiscal year 2015, these included for Mr. Willis reimbursement for out-of-pocket family medical expenses up to $12,000 per plan year. The dollar values for all perquisites are included in the “All Other Compensation” column of the “Summary Compensation Table.”
Executive Employment Agreements
As of March 31, 2015, we have entered into employment and/or severance agreements with certain of the Named Executive Officers, including Mr. Willis, Mr. Tuttle and Mr. Konkle, the terms of which are described under “Executive Severance and Change in Control Agreements.” The previous employment and/or severance agreements of Mr. Thomas and Mr. Zisk were terminated in fiscal year 2015 as described below. The Compensation Committee believes that such employment agreements promote the stability of the Company by (i) lessening the personal uncertainties and potential distraction of the executives created by Company actions resulting in a termination of their employment for reasons other than cause and (ii) establishing the rights and obligations of both the Company and the executive after the employment relationship ends. In addition, reasonable severance arrangements offer a competitive benefit and aid in retention of the services of valuable executives.
The Compensation Committee believes that the amount of severance offered to the Named Executive Officers is not excessive and that the trigger for severance payments, which in all cases is involuntarily termination by the Company without cause or constructive termination due to adverse Company actions, is appropriate and in the best interests of the shareholders. Further, the Compensation Committee believes that the differences in the amount of severance offered among the Named Executive Officers are justified by the scope of each executive’s responsibilities and contributions. Mr. Thomas’ agreement was terminated upon his resignation from the Company in July 2014 in connection with the divestiture of our distribution business. In connection with Mr. Thomas’ resignation from the Company, he received severance in the form of a lump sum cash payment in the amount of $524,667, a payment of $200,000 as a transaction completion bonus and the accelerated vesting of all his outstanding restricted stock units and stock options. Mr. Zisk’s employment agreement was terminated upon his retirement from the Company in February 2015. In connection with his retirement, Mr. Zisk received severance in the form of a cash payment to be paid in 12 equal monthly installments beginning September 2015 in the aggregate amount of $325,000. Mr. Willis’ employment agreement automatically renewed in September 2014 for an additional one year term and no changes were made to its terms. Otherwise, no changes were made to the employment and severance agreements in fiscal year 2015.
Accounting and Tax Considerations
None of the compensation or benefits to our executive officer or directors is grossed-up nor is reimbursement otherwise permitted for tax amounts the executive officer or director might pay pursuant to Section 280G or Section 409A of the Internal Revenue Code (the “IRC”).
IRC Section 162(m) prohibits the Company from deducting as compensation expense amounts exceeding $1,000,000 a year for the CEO and the other Named Executive Officers (excluding the CFO) relating to the period during which the compensation is earned, unless the payment of such compensation is based on pre-established, objective performance goals approved by the shareholders. We anticipate that all compensation expense related to realized stock option gains will qualify for deduction under Section 162(m). A portion of executive compensation, however, may be based on significant subjective measures that may cause certain compensation not to be deductible. We intend to consider the impact of IRC Section 162(m) when making future compensation decisions but believe it is important to continue to evaluate the performance of executive officers, in part, on subjective performance measures.
The Company currently has a policy that prohibits any NEO from engaging in any speculative transactions in its Common Stock and from hedging the economic risk of ownership in its Common Stock. The Company does not currently have a “clawback” policy that provides for the clawback of NEO incentive compensation. However, when the SEC adopts final rules regarding the clawback of such incentive compensation, the Board intends to adopt such a policy in accordance with the rules and guidance provided.
COMPENSATION COMMITTEE REPORT
The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), except to the extent that Speed Commerce specifically incorporates it by reference into a document filed under the Securities Act of 1933 (the “Securities Act”) or the Exchange Act.
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis for fiscal year 2015. Based on the review and discussions, the Compensation Committee recommended to the Board, and the Board has approved, that the Compensation Discussion and Analysis be included in this Form 10-K for fiscal year 2015.
This report is submitted by the Compensation Committee:
Frederick C. Green IV (Chair)
Bradley J. Shisler
Timothy R. Gentz
Scott A. Guilfoyle
RISK ASSESSMENT OF OUR COMPENSATION POLICIES AND PRACTICES
The Compensation Committee, with the assistance of management, reviews periodically and at least on an annual basis the Company’s compensation policies and programs for all employees for the purpose of assessing the risks associated with compensation. The Compensation Committee has reviewed the compensation program details, participant information, plan administrative oversight and design features with respect to (i) base salary determination as applicable to our executive officers; (ii) short term incentive pay for director-level employees and above under the annual incentive plan; (iii) short term incentive pay in the form of a quarterly or monthly sales bonus program for a small number of sales employees; and (iv) long term incentive in the form of equity grants to director-level employees and above. The Committee reviewed the strategies that are tied to these compensation practices and identified both the risks inherent in these programs and the following factors that mitigate any such risks to acceptable levels:
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Appropriate mix between short-term cash compensation and long-term equity grants.
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Participation in the same annual incentive and long-term equity plans by all director-level and above employees.
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Maximum payout levels for annual incentive capped at 150% of target.
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Negative discretion over annual incentive program payouts and sales bonus programs may be exercised.
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Ranges for annual incentive metrics established to avoid payouts on an “all or nothing” basis.
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Multi-year and overlapping vesting schedules for long-term equity grants.
As a result of the foregoing review, the Compensation Committee determined that the Company’s compensation policies and programs do not create risks that are reasonably likely to have a material adverse effect on the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is a current or former officer or employee of the Company or any of its subsidiaries. In addition, no member of the Compensation Committee is an executive officer of another entity where any of the Company’s executives serve on the other entity’s compensation committee.
EXECUTIVE COMPENSATION
Summary Compensation Table
(1)
The amounts in this column represent the grant date fair value of all restricted stock units awarded in the applicable fiscal year as determined using the opening sale price of our Common Stock on such date. This amount was computed in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 718. We recognize the expense for financial reporting purposes over the applicable vesting period.
(2)
The amounts in this column represent the grant date fair value of all stock options awarded in the applicable fiscal year as determined using the Black-Scholes pricing model. This amount was computed in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 718. The assumptions used to arrive at the Black-Scholes value are discussed in Note 16 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015. We recognize the expense for financial reporting purposes over the applicable vesting period.
(3)
The amounts in this column represent the annual incentive paid under our Annual Incentive Plan as discussed in “Compensation Discussion and Analysis.” The amounts listed for fiscal year 2013 were earned for fiscal year 2013 although paid after the end of the 2013 fiscal year. No awards were earned for fiscal year 2014 or fiscal year 2015 under the Annual Management Incentive Plan other than discretionary bonuses that were awarded based on exemplary performance and the $75,000 transaction bonus for Mr. Tuttle and the $200,000 transaction bonus for Mr. Thomas, which was paid for the performance and contributions made by each to complete the divestiture of our distribution business in July 2014.
(4)
The table below shows the components of this column for fiscal year 2015, which include amounts paid or accrued by the Company in fiscal year 2015 for perquisites, severance, tax gross-ups and Company matching contributions to our 401(k) defined contribution plan.
(5)
Mr. Tuttle was hired as the Company’s Chief Financial Officer on June 24, 2013.
(6)
Mr. Konkle was hired by the Company in November 2014 and was promoted to the position of COO in February 2015.
(7)
Mr. Thomas resigned from the Company in July 2014 in connection with the divestiture of our former distribution business.
(8)
Mr. Zisk retired from the Company in February 2015.
Grants of Plan-Based Awards in Fiscal Year 2015
(1)
The date of grant for each award is established by the Compensation Committee during a meeting or by written action without a meeting on or prior to the date of the grant. Pursuant to guidelines adopted by the Compensation Committee, annual grants are normally discussed and approved in scheduled meetings taking place in the fall to become effective as of the first day of the open trading window after public disclosure of second quarter financial information.
(2)
Our Annual Incentive Plan is considered a “non-equity incentive plan.” This column represents the range of awards under the plan possible for fiscal year 2015. The amounts that were actually earned by the Named Executive Officers in fiscal year 2015 are set forth in the “Non-Equity Incentive Plan Compensation” column of the “Summary Compensation Table” above. For fiscal year 2015, each Named Executive Officer’s target award was established as a percentage of base salary. The target award percentages, objectives and other details are set forth in the discussion of “Annual Incentive Compensation” in our “Compensation Discussion and Analysis.”
(3)
Under the terms of the Amended and Restated 2004 Stock Plan (the “2004 Stock Plan”) and 2014 Stock Option and Incentive Plan (the “2014 Stock Plan”), as approved by our shareholders, the exercise price is no less than the grant date fair market value defined as the opening price for our Common Stock on the NASDAQ Global Market during a regular trading session or, if the grant date is not a trading day, then the last reported sales price listed on the NASDAQ Global Market prior to the grant date.
(4)
Restricted stock units were granted in fiscal year 2015 under the 2004 Stock Plan and the 2014 Stock Plan as discussed in “Long-Term Incentive Compensation” in our “Compensation Discussion and Analysis.”
(5)
Stock option grants to the Named Executive Officers in fiscal year 2015 under the 2004 Stock Plan as discussed in “Long-Term Incentive Compensation” in our “Compensation Discussion and Analysis.”
(6)
Mr. Thomas resigned from the Company in July 2014 in connection with the divestiture of our former distribution business and did not receive a grant of any stock options or restricted stock units in fiscal year 2015.
(7)
Mr. Zisk retired from the Company in February 2015 and grant of stock options or restricted stock units during fiscal year 2015 were cancelled.
Outstanding Equity Awards at Fiscal Year 2015 Fiscal Year-End
(1)
Represents the value of the shares of restricted stock units at $0.64 per share, the closing price of our common stock on March 31, 2015, the last trading day of fiscal year 2015.
(2)
Non-employee Director initial stock option granted on February 11, 2011 with vesting in three equal annual installments on February 11, 2012, February 11, 2013 and February 11, 2014, conditioned on continued service as a director through those dates.
(3)
Non-employee Director annual stock option granted on April 1, 2011 with vesting in three equal annual installments on April 1, 2012, April 1, 2013 and April 1, 2014, conditioned on continued service as a director through those dates.
(4)
Stock option granted September 15, 2011 with vesting in three annual installments of 100,000 shares on September 15, 2012, 175,000 shares on September 15, 2013 and 200,000 shares on September 15, 2014, conditioned on continued employment through those dates.
(5)
Stock options granted November 26, 2012 with vesting in three equal annual installments on November 26, 2013, November 26, 2014 and November 26, 2015, conditioned on continued employment through those dates.
(6)
Stock option granted November 8, 2013 with vesting in three equal annual installments on November 8, 2014, November 8, 2015 and November 8, 2016, conditioned on continued employment through those dates.
(7)
Stock option granted on June 24, 2013 with vesting in three equal installments on June 24, 2014, June 24, 2015 and June 24, 2016, conditioned on continued employment through these dates.
(8)
Stock option granted August 14, 2014 with vesting in three equal annual installments on August 14, 2015, August 14, 2016 and August 14, 2017, conditioned on continued employment through those dates.
(9)
Stock option granted November 21, 2014 with vesting in three equal annual installments on November 21, 2015, November 21, 2016 and November 21, 2016, conditioned on continued employment through those dates.
(10)
Stock option granted February 18, 2015 with vesting in three equal annual installments on February 18, 2016, February 18, 2017 and February 18, 2018, conditioned on continued employment through those dates.
(11)
Restricted stock unit award granted November 26, 2012 with vesting in three equal annual installments on November 26, 2013, November 26, 2014 and November 26, 2015, conditioned on continued employment through those dates. One share of Common Stock will be issued for every restricted stock unit which vests.
(12)
Restricted stock unit award granted November 8, 2013 with vesting in three equal annual installments on November 8, 2014, November 8, 2015 and November 8, 2016, conditioned on continued employment through those dates. One share of Common Stock will be issued for every restricted stock unit which vests.
(13)
Restricted stock unit award granted August 14, 2014 with vesting in three equal installments on August 14, 2015, August 14, 2016 and August 14, 2017, conditioned on continued employment through these dates. One share of Common Stock will be issued for every restricted stock unit which vests.
(14)
Restricted stock unit award granted June 24, 2013 with vesting in three equal installments on June 24, 2014, June 24, 2015 and June 24, 2016, conditioned on continued employment through these dates. One share of Common Stock will be issued for every restricted stock unit which vests.
(15)
Restricted stock unit award granted March 26, 2015 with vesting in three equal installments on March 26, 2016, March 26, 2017 and March 26, 2018, conditioned on continued employment through these dates. One share of Common Stock will be issued for every restricted stock unit which vests.
(16)
Mr. Konkle was hired by the Company in November 2014 and was promoted to the position of COO in February 2015.
(17)
Mr. Thomas resigned from the Company in July 2014 in connection with the divestiture of our former distribution business.
(18)
Mr. Zisk retired from the Company in February 2015 and grant of stock options or restricted stock units during fiscal year 2015 were cancelled.
Option Exercises and Stock Vested in Fiscal Year 2015
(1)
Amount determined using the closing price of our Common Stock on the vesting date.
(2)
Mr. Willis vested in 100,000 shares of restricted stock units on September 15, 2014 at a price of $2.86 per share, vested in 29,780 shares of restricted stock units on November 8, 2014 at a price of $2.92 per share and vested in 36,666 shares of restricted stock units on November 26, 2014 at a price of $2.94 per share.
(3)
Mr. Tuttle vested in 20,000 shares of restricted stock units on June 24, 2014 at a price of $3.40 per share and vested in 9,706 shares of restricted stock units on November 8, 2014 at a price of $2.92 per share.
(4)
Mr. Konkle was hired by the Company in November 2014 and was promoted to the position of COO in February 2015, therefore did not vest in any shares during fiscal year 2015.
(5)
Mr. Thomas vested in 54,065 shares of restricted stock units on July 9, 2014 at a price of $3.26 per share.
(6)
Mr. Zisk vested in 10,515 shares of restricted stock units on November 8, 2014 at a price of $2.92 per share.
EXECUTIVE SEVERANCE AND CHANGE IN CONTROL AGREEMENTS
We have entered into employment and other agreements with certain executive officers to attract and retain talented executives. With respect to these agreements, a termination for “Cause” generally means a felony conviction, willful neglect, malfeasance or misconduct, or violation of a Company policy, which could result in material harm to the Company, fraud or dishonesty with respect to the Company’s business, breach of duty of loyalty or a material breach of the executive’s covenants in the agreement. A termination “Without Cause” is an involuntary termination for which the Company did not have Cause. A termination by an executive for “Good Reason” generally means a reduction in the executive’s compensation, rights or benefits, a material reduction in duties, responsibilities or authority, relocation to other than the Company’s principal headquarters, an adverse material change in working conditions or a material breach of the Company’s covenants in the agreement. A “Change in Control Transaction” generally includes the occurrence of any of the following: (i) the acquisition by any person or entity of 50% or more of the voting power of the Company’s outstanding shares; (ii) a sale, merger, other business combination, liquidation or dissolution of the Company, unless following such transaction the Company’s shareholders before the transaction have the same proportionate ownership of stock of the surviving entity; (iii) the board of directors prior to any transaction does not constitute a majority of the board thereafter; and (iv) any other transaction required to be reported as a change of control under Regulation 14A of the Securities and Exchange Commission.
Richard S Willis Employment Agreement with Restrictive Covenants
On October 3, 2011, we entered into an Employment Agreement with Restrictive Covenants with Mr. Willis which was consistent with and superseded the terms of the letter agreement between the Company and Mr. Willis dated September 15, 2011. The agreement commenced on September 15, 2011. In September 2014, Mr. Willis’ agreement automatically renewed for an additional year and expires on September 14, 2015, subject to automatic extension for successive one-year periods unless either party provides 60 days' advance written notice of such party's desire not to renew. During the term of the agreement, Mr. Willis will serve as a director of the Company and have the authority, responsibilities and duties customarily performed by a president and chief executive officer of similar businesses. The agreement provides for a minimum annual base salary of $450,000 and a target bonus opportunity of up to 80% of base salary for each fiscal year of service. Pursuant to the agreement, Mr. Willis was granted a non-qualified stock option covering 475,000 shares of our Common Stock, vesting over three years, and an award of 225,000 restricted stock units, vesting over three years. Mr. Willis is also entitled to reimbursement for reasonable business expenses, paid vacation and participation in benefit plans on the same basis as other key executive officers of the Company. In addition, Mr. Willis will receive reimbursement for out-of-pocket family medical expenses up to $12,000 per plan year, a one-time reimbursement of up to $5,000 for attorney’s fees, and reimbursement, on a tax neutral basis, for reasonable commuting expenses between Texas and Minnesota, including airfare, lodging and local transportation. For fiscal year 2015, Mr. Willis’ severance payments are calculated using a base salary of $450,000.
Either the Company or Mr. Willis may terminate the Employment Agreement for any reason at any time. In the event Mr. Willis’ employment is terminated by the Company due to (i) death, (ii) disability lasting longer than 180 days, (iii) Cause or (iv) non-renewal of the Employment Agreement, Mr. Willis will only be entitled to all earned and unpaid base salary and vacation time as of the termination date. If Mr. Willis is otherwise involuntarily terminated or terminates his employment due to Good Reason, including termination without Cause or for Good Reason within 12 months of a Change in Control Transaction, he will be entitled to severance payments equal to two times his then current base salary and two times the average amount of bonus paid to him during the immediately preceding three years. Severance payments, which require a written release of all claims, will be paid in 24 equal monthly installments beginning on the first day of the seventh month after the termination date.
The agreement requires that Mr. Willis honor confidentiality obligations during and after his employment and provides that for 18 months following the termination of his employment, Mr. Willis will not compete with any material portion of the Company’s business activities, nor solicit the Company's employees, consultants or customers.
Executive Severance Agreement for Terry J. Tuttle
The Company entered into an executive severance agreement with Mr. Tuttle in June 2013. The agreement provides for severance payments in the event that the executive’s employment is terminated Without Cause or by the executive for Good Reason, whether or not a Change in Control Transaction has occurred. Severance payments would equal one times base salary and one times the average amount of bonus earned and paid with respect to the preceding three years. Severance payments would be paid in a lump sum within 30 days after the date of termination. If applicable, severance payments will be offset by any income protection benefits payable during the first 12 months of a qualifying disability under the Company’s group short-term and long-term disability insurance plans. Severance payments require a written release of all claims and agreements by the executive with respect to non-solicitation, confidentiality obligations and assignment of intellectual property rights.
Matthew Konkle Employment Agreement
On November 21, 2014, the Company entered into an executive employment agreement with restrictive covenants with Matthew Konkle as President of Fifth Gear Acquisitions, Inc., a new subsidiary of the Company as a result of the asset acquisition of Fifth Gear, LLC in November 2014. The agreement provided for a base salary of $300,000 and a target bonus opportunity of up to 50% of base salary for each fiscal year of service.Mr. Konkle also received a grant of 100,000 stock options in connection with his initial hiring. Mr. Konkle’s employment agreement was subsequently amended in February 2015 upon his promotion to the position of COO and his base salary was increased to $335,000 and he was granted 125,000 restricted stock units and 350,000 stock options to reflect reasonable compensation for his increased responsibilities with the Company. All other key terms of Mr. Konkle’s employment agreement remained the same. The agreement also grants Mr. Konkle the same eligibility to participate in the Company’s 2014 Stock Incentive Plan on the same basis as similarly situated executive officers of the Company in future years,. Mr. Konkle is also entitled to reimbursement for reasonable business expenses, paid vacation and participation in benefit plans on the same basis as similarly situated executive officers of the Company. The initial term of the agreement is for one year from November 21, 2014 and will be automatically renewed on an at-will basis, unless notice of termination is provided by either party to the other at least 30 days prior to the expiration of the initial term. Thereafter, employment may be terminated by either party upon written notice.
The agreement provides for severance payments in the event that Mr. Konkle’s employment is terminated Without Cause or by him for Good Reason during the initial term, whether or not a Change in Control Transaction has occurred. Severance payments would equal one times base salary and one times the average amount of bonus earned and paid with respect to the preceding three years. Severance payments would be paid in a lump sum within 30 days after the effective date of the termination of employment. Severance payments require a written release of all claims against the Company. In addition, the agreement requires that Mr. Konkle honor confidentiality obligations during and after his employment and agree to non-competition, non-recruitment, and non-solicitation provisions during his employment and for up to 12 months following termination of his employment.
POTENTIAL PAYMENTS UPON TERMINATION
The following table assumes that Mr. Willis, Mr. Tuttle and Mr. Konkle, the currently serving Named Executive Officers, were terminated on March 31, 2015. Without Cause or terminated for Good Reason and illustrates the payments that each Named Executive Officer would be entitled to under the employment and severance agreements described above. Mr. Thomas resigned from the Company in July 2014 and Mr. Zisk retired in February 2015 and the amounts below reflect what was paid to each in connection with his retirement and severance. The numbers in the following table do not change if a Change in Control Transaction occurred within the 12 month period prior to March 31, 2015.
(1)
Represents Mr. Willis’s substitute incentive plan payment calculated as the average of the amounts earned by Mr. Willis for the last three years under the Annual Management Incentive Plan ($0, $0, $100,000).
(2)
Represents Mr. Tuttle’s substitute incentive plan payment calculated as the average of the amounts earned by Mr. Tuttle for the last three years under the Annual Management Incentive Plan ($75,000, $0, $0).
(3)
Mr. Thomas resigned from the Company in July 2014 in connection with the divestiture of our distribution business. The amounts above reflect the amounts paid in connection with his severance and accelerated vesting of options and restricted stock following his resignation. Mr. Thomas was also paid an additional $200,000 as a transaction bonus, which was paid for his performance and contributions in connection with the successful closing of the divestiture of our former distribution business in July 2014.
(4)
Mr. Zisk retired from the Company in February 2015. The amounts above reflect the amount to be paid in connection with his retirement, which will be paid in 12 equal monthly installments beginning in September 2015.
COMPENSATION OF DIRECTORS
Retainer and Meeting Fees
Directors who are Company employees do not receive compensation for their services as directors. During fiscal year 2015, Directors who were not employees of the Company (“Non-employee Directors”) each received an annual retainer of $36,000, paid in monthly installments. No additional compensation was paid for meeting attendance. The chairpersons of the Audit Committee, the Compensation Committee and the Governance and Nominating Committee each received an additional annual fee of $5,000 and the Chairman of the Board received an additional annual fee of $15,000. In addition, Directors are reimbursed for travel and other reasonable out-of-pocket expenses related to attendance at board and committee meetings.
In August 2014, the Board, following a review of survey data and recommendations provided by PM&P, approved changes to Board of Director compensation to provide that Board cash compensation for fiscal year 2016 would consist of an annual retainer of $50,000, additional annual cash compensation for each Committee chairperson of $10,000 and additional annual cash compensation of $30,000 to be paid to the Chairman of the Board.
Equity Compensation
In fiscal year 2015, Non-employee Directors also received equity compensation consisting of an initial stock option grant and annual stock option grants under the terms of the 2004 Stock Plan, which had been approved by the shareholders. Each newly elected or appointed Non-employee Director received an initial non-qualified stock option grant covering 50,000 shares of Common Stock. Each Non-employee Director also received an annual grant on April 1, 2014, of a non-qualified stock option to purchase 12,000 shares of our Common Stock. All stock option grants to Non-employee Directors are exercisable at the fair market value on the date of the grant and vest one-third per year beginning one year from the grant date and expire on the earlier of (i) ten years from the grant date and (ii) one year after the director ceases to serve. Vesting is accelerated upon the occurrence of a “Change of Control Transaction,” as defined in the 2004 Stock Plan. As an exception to the foregoing, the 2004 Stock Plan provides that any Non-employee Director who is ineligible to stand for re-election after reaching the Board’s mandatory retirement age of 70 will receive an award of 3,000 shares of restricted stock per year during each of the last two years of such director’s last term in lieu of annual stock option grants for such years. In fiscal year 2015, each of Ms. Constantinople and Mr. Guilfoyle received an initial grant of 50,000 shares on July 11, 2014 upon appointment to the Board at an exercise price of $3.13 per share. Each of Mr. Duchelle, Mr. Gentz, Mr. Green, Mr. Shisler and Ms. Atchison received an annual stock option grant on April 1, 2014 covering 12,000 shares of common stock at an exercise price of $3.65 per share. Each of Ms. Iverson and Mr. Bryant, who resigned from the Board in October 2014 and February 2015, respectively, also received an annual grant on April 1, 2014 covering 12,000 shares of common stock at an exercise price of $3.65 per share. Any unexercised and outstanding stock options for each of Ms. Iverson and Mr. Bryant will be cancelled and forfeited on the one year anniversary date of his/her resignation from the Board.
In August 2014, the Board, following a review of survey data and recommendations provided by PM&P, approved changes to Board of Director equity compensation to provide that for fiscal year 2016 all grants issued under the Company’s new 2014 Stock Incentive Plan would consist of an annual grant of 12,000 stock options and 8,000 restricted stock units on April 1 of each year. The Board also agreed to discontinue grant of an initial equity grant of stock options covering 50,000 shares..
In April 2015, the Non-employee Directors agreed to cancel certain of their stock options in order to provide the Company with additional shares available for issuance in connection with the Company’s April 2015 equity offering of common stock. The Non-employee Directors cancelled stock options covering an aggregate of 540,000 shares of our Common Stock, which is described in more detail in the Director Compensation Table below.
The following table shows compensation information for our Non-employee Directors for fiscal year 2015.
Director Compensation Table for Fiscal Year 2015
(1)
Mr. Willis is not included in this table because he is an employee of the Company and received no compensation for services as a director. Mr. Zisk retired from the Company in February 2015 but also did not receive any compensation for his services as a director in fiscal year 2015 as he was an employee of the Company.
(2)
The amount in this column represents the grant date fair value of restricted stock awarded in fiscal year 2015 as determined using the opening sale price of our Common Stock on such date. This amount was computed in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 718.
(3)
The amounts in this column represent the grant date fair value of all stock options awarded in fiscal year 2015 as determined using the Black-Scholes pricing model. The assumptions used to arrive at the Black-Scholes value are discussed in Note 16 to our consolidated financial statements included herein.
As of March 31, 2015, each of the Non-employee Directors then serving had outstanding stock options and restricted stock awards covering the following total amount of shares of our Common Stock; shares; Mr. Gentz, 12,000 shares; Mr. Green, 12,000 shares; Ms. Atchison, 12,000 shares; Mr. Shisler, 12,000 shares; Mr. Duchelle, 62,000 shares; Ms. Constantinople, 50,000 shares; Mr. Guilfoyle, 50,000 shares. In April 2015, the Non-employee Directors agreed to cancel certain of their stock options in order to provide the Company with additional shares available for issuance in connection with the Company’s April 2015 equity offering of common stock. Each of the Non-employee Directors cancelled stock options covering the following total amount of shares of our Common Stock: Mr. Gentz, 108,000 shares; Mr. Green, 110,000 shares; Ms. Atchison, 62,000 shares; Mr. Shisler, 98,000 shares; Mr. Duchelle, 62,000 shares; Ms. Constantinople, 50,000 shares; Mr. Guilfoyle, 50,000 shares.
(4)
Mr. Benson retired from the Board of Directors in May 2014, Mr. Bryant resigned from the Board of Directors in February 2015 and Ms. Iverson resigned from the Board of Directors in October 2014.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The following table sets forth certain information regarding the beneficial ownership of our Common Stock as of May 1, 2015 (except as otherwise noted), by (i) each of our directors, (ii) each of the executive officers named in the Summary Compensation Table, (iii) all of the executive officers and directors as a group, and (iv) each person known to us who beneficially owns more than 5% of the outstanding shares of our Common Stock. The address of each director and executive officer is 1303 Arapaho Road, Suite 200, Richardson, Texas 75081. Percentage computations are based on 79,051,088 shares of our Common Stock outstanding as of May 1, 2015.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. We believe that all persons named in the table have sole voting and sole investment power with respect to all shares beneficially owned by them, unless otherwise indicated. All figures include shares of Common Stock which are not currently outstanding but are deemed beneficially owned because of the right to acquire shares pursuant to options exercisable and other convertible securities (including restricted stock units) vesting within 60 days of May 1, 2015 and, which are deemed to be outstanding and to be beneficially owned by the person holding such rights for the purpose of computing the percentage ownership of that person, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
*
Indicates ownership of less than one percent.
(1)
Includes shares of Common Stock issuable upon exercise of outstanding options exercisable and restricted stock units vesting within sixty days of May 1, 2015 in the following amounts: Timothy R. Gentz - 6,000 shares; Terry J. Tuttle - 20,000 shares; and all directors and executive officers as a group - 26,000 shares.
(2)
According to the information provided in Schedule 13G/A, filed with the SEC by Wellington Management Group, LLP, in its capacity as an investment advisor (“Wellington Management”), on February 12, 2015, Wellington Management has shared voting power over 5,338,105 shares and has shared dispositive power over 7,353,839 shares of the Company’s common stock.
(3)
According to the information provided in Schedule 13G/A, filed with the SEC by Wellington Trust Company, NA, (“Wellington Trust”), on February 12, 2015, Wellington Trust has shared voting power and shared dispositive power over 3,397,626 shares of the Company’s common stock.
(4)
According to the information provided in Schedule 13D/A, filed with the SEC by SPDC Investment, LLC, (“SPDC Fund”), on October 2, 2014, Red Alder Group GP, as the managing member of the SPDC Fund, and Mr. Schuster Tanger, as the managing member of Red Alder Group GP, may be deemed to beneficially own the shares owned by SPDC Fund. SPDC Fund, Red Alder GP and Mr. Tanger have the sole power to vote or direct the vote of and to dispose or direct the disposition of the 6,948,191 shares held by the SPDC Fund.
(5)
According to information provided to us by Becker Drapkin Partners (QP), LP (“BDQP”) on April 30, 2015. BC Advisors, LLC (“BCA”) is the general partner of BD. Steven R. Becker and Matthew A. Drapkin are the co-managing members of BCA. Through their control of BCA, Messrs. Becker and Drapkin share voting and investment control over the securities held by BDQP. Includes shares of common stock which are not currently outstanding but are deemed beneficially owned because of the right to acquire shares pursuant to conversion or exercise of the Series D Preferred Stock or warrants held by BDQP and, which are deemed to be outstanding and to be beneficially owned by BDQP for the purpose of computing BDQP’s percentage ownership but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Does not include shares of our common stock issuable upon the conversion of additional shares of Series D Preferred Stock that we have the right to issue to BDQP in lieu of cash dividends on the shares of Series D Preferred Stock owned by BDQP.
(6)
According to information provided in Form 4, filed with the SEC by Mr. Zisk on May 1, 2015. Includes 19,958 shares of Common Stock issuable upon exercise of outstanding options exercisable within sixty days of May 1, 2015.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Our Board does not have a separate written policy regarding the review and approval of related party transactions. However our Audit Committee Charter and Code of Conduct require that the Audit Committee review and approve all transactions with related persons as may be required by the rules of the Securities and Exchange Commission or NASDAQ’s Marketplace Rules. Under such rules a “related person” includes any of the directors or executive officers of the Company, certain large shareholders, and their immediate families. The transactions to be reviewed include those where the Company is a participant, a related person will have a direct or indirect material interest, and the amount involved exceeds $120,000. The Audit Committee would determine if any such transactions (i) are fair and reasonable, (ii) are on terms no less favorable to the Company than could be obtained in a comparable arm’s length transaction with an unrelated third party, and (iii) do not constitute an objectionable “conflict of interest” for a director, officer or employee of the Company. Directors and executive officers are required to disclose any such transactions under our Code of Conduct and are specifically asked to disclose such transactions in our annual Directors and Officers Questionnaire.
During fiscal year 2015, no transactions were disclosed to the Audit Committee which required review as related party transactions, and the Audit Committee was not otherwise aware of any such transactions. Our Board of Directors has determined that each of the following current Directors: Atchison, Gentz, Green, Constantinople, Guilfoyle, Shisler, and Duchelle are “independent,” as that term is defined in Rule 5605(a)(2) of the Marketplace Rules of the NASDAQ Global Market. Accordingly, each of our directors is independent other than our President and CEO, Mr. Willis, and we meet the requirements of the NASDAQ Marketplace Rule that requires a majority of independent directors. The independent directors meet regularly, generally before or after each regularly scheduled Board meeting without the presence of the CEO. Mr. Willis was similarly determined to be independent prior to his appointment as the Company’s President and CEO.
Item 14.
Item 14. Principal Accounting Fees and Services
AUDIT AND NON-AUDIT FEES
The following table summarizes the fees we were billed for audit and non-audit services rendered for fiscal year 2015 and fiscal year 2014 by Grant Thornton LLP, our independent registered public accounting firm for both years.
(1)
“Audit Fees” consists of fees billed for professional services rendered in connection with the audit of our consolidated financial statements for the fiscal years ended March 31, 2015 and 2014, the reviews of the consolidated financial statements included in each of our quarterly reports on Form 10-Q during those fiscal years, and services provided in connection with various registration statements, comfort letters, and the review and attestation of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim consolidated financial statements.
(2)
“Audit-Related Fees” consists of fees billed for assurance and related services in the fiscal years ended March 31, 2015 and 2014 that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements. There were no fees for this category in fiscal year 2015 and fiscal year 2014.
(3)
“Tax Fees” consists of fees billed for services rendered in connection with tax compliance, tax advice and tax planning. There were no fees for this category in fiscal year 2015 and fiscal year 2014.
(4)
“All Other Fees” consists of fees billed for products and services that do not meet the above category descriptions. There were no fees for this category in fiscal year 2015 and fiscal year 2014.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND
NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. Pre-approval is generally provided for up to one year and is detailed as to the particular service or category of services and is subject to a specific budget. Management is required to seek pre-approval of services that will exceed the budget or for services that are not detailed in an existing pre-approval request. The Chair of the Audit Committee is delegated the authority to pre-approve certain services between regularly scheduled meetings. Management is required to report quarterly to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. During fiscal year 2015, all services were pre-approved by the Audit Committee in accordance with this policy.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report -
(2)
Exhibit Listing
10.6
Form of Employee Restricted Stock Agreement under 2004 Stock Plan
8-K
10.2
4/4/2006
10.7
Form of Director Restricted Stock Agreement under 2004 Stock Plan
8-K
10.3
4/4/2006
10.8
Form of Employee Nonqualified Stock Option Agreement under 2004 Stock Plan
8-K
10.2
9/19/2011
10.9
Form of TSR Stock Unit Agreement under 2004 Stock Plan
8-K
10.4
4/4/2006
10.10
Form of Performance Stock Unit Agreement under 2004 Stock Plan
8-K
10.5
4/4/2006
10.11
Form of Restricted Stock Unit Agreement under 2004 Stock Plan
10-Q
09/31/07
10.1
11/8/2007
10.12
Form of Non-employee Director Stock Option Agreement under 2014 Stock Plan
X
10.13
Form of Non-employee Director Restricted Stock Unit Agreement under 2014 Stock Plan
X
10.14
Form of Employee Stock Option Agreement under 2014 Stock Plan
X
10.15
Form of Employee Restricted Stock Unit Agreement under 2014 Stock Plan
X
10.16
Executive Employment Agreement with Restrictive Covenants dated October 3, 2011 between the Company and Richard S Willis
8-K/A
10.1
10/6/2011
10.17
Amendment to Executive Employment Agreement with Restrictive Covenants dated February 22, 2012 between the Company and Richard S Willis
8-K/A
10.1
2/23/2012
10.18
Executive Severance Agreement dated June 24, 2013 between the Company and Terry J. Tuttle
8-K
10.1
6/26/2013
10.19
Executive Severance Agreement dated August 12, 2010 between the Company and Ward Thomas
8-K
10.1
8/13/2010
10.20
First Amendment to Executive Severance Agreement dated April 4, 2014 between the Company and Ward Thomas
8-K
10.1
4/4/2014
10.21
Executive Employment Agreement with Restrictive Covenants between Speed Commerce, Inc. and Matthew Konkle, dated November 1, 2014.
X
10.22
Amendment No. 1 to Executive Employment Agreement with Restrictive Covenants between Speed Commerce, Inc. and Matthew Konkle, dated February 18, 2015.
X
10.23
Underwriting Agreement dated September 26, 2013 between the Company and Stifel, Nicolaus & Company, Incorporated
8-K
1.1
9/26/2013
10.24
Fiscal Year 2012 Annual Management Incentive Plan
10-K
3/31/2011
10.59
6/9/2011
10.25
Fiscal Year 2013 Annual Management Incentive Plan
8-K
10.1
4/4/2012
10.26
Fiscal Year 2014 Annual Management Incentive Plan
8-K
10.1
6/14/2013
10.27
Fiscal Year 2015 Annual Management Incentive Plan
X
10.28
Lease Agreement between Prologis and Navarre Corporation, dated February 1, 2013.
X
10.29
Amendment No. 1 to Lease Agreement between Prologis and Navarre Corporation, dated February 15, 2013.
X
10.30
Amendment No. 2 to Lease Agreement between Prologis and Navarre Corporation, dated January 22, 2014.
X
10.31
Amendment No. 3 to Lease Agreement between Prologis and Navarre Corporation, dated March 13, 2014.
X
10.32
Lease Agreement between Prologis and Speed Commerce, Inc., dated May 21, 2008.
X
10.33
Amendment No. 1 to Lease Agreement between Prologis and Navarre Corporation, dated November 18, 2008.
X
10.34
Amendment No. 2 to Lease Agreement between Prologis and Navarre Corporation, dated July 10, 2009.
X
10.35
Amendment No. 3 to Lease Agreement between Prologis and Navarre Corporation, dated June 10, 2011.
X
10.36
Lease between Wilson Richardson, LLC and Navarre Corporation, dated August 14, 2013.
X
10.37
Office Lease between Parkstone Office Center, LLC and Sigma Holdings, LLC dba Fifth Gear, dated November 16, 2010.
X
10.38
Lease between Westminster Properties, Inc. and Sigma Holdings, LLC, dated April 1, 2011.
X
10.39
Form of Credit Agreement dated November 12, 2009 among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders
8-K
10.1
11/13/2009
10.40
Consent and Amendment No. 1 to Credit Agreement dated April 29, 2010 among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders
10-K
3/31/2010
10.69
6/11/2010
10.41
Consent and Amendment No. 2 to Credit Agreement dated May 17, 2010 among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders
8-K
10.2
5/17/2010
10.42
Form of Amendment No 5. to Credit Agreement dated December 29, 2011 between the Company and Wells Fargo Capital Finance, LLC
8-K
10.1
1/5/2012
10.43
Form of Amendment No. 6 to Credit Agreement dated February 3, 2012 between the Company and Wells Fargo Capital Finance, LLC
8-K
10.1
2/3/2012
10.44
Consent and Amendment No. 7 to Credit Agreement dated May 17, 2010 among the Company and Wells Fargo Capital Finance, LLC
8-K
10.1
11/21/2012
10.45
Consent and Amendment No. 8 to Credit Agreement dated June 28, 2013 among the Company and Wells Fargo Capital Finance, LLC
8-K
10.1
6/28/2013
10.46
Consent and Amendment No. 9 to Credit Agreement dated November 22, 2013
8-K
10.1
10.47
Asset Purchase Agreement dated May 17, 2010 by and among Encore Software, Inc., Navarre Corporation and Punch Software, LLC
8-K
10.1
5/17/2010
10.48
Agreement and Plan of Merger dated September 27, 2012 between the Company and SpeedFC Equityholders
8-K
2.1
9/28/2012
10.49
Amendment No.1 to the Agreement and Plan of Merger dated October 29, 2012 between the Company and SpeedFC Equityholders
8-K
2.1
10/29/2012
10.50
Amendment No. 2 to Agreement and Plan of Merger dated June 26, 2013
8-K
2.1
6/27/2013
10.51
Amendment No. 3 to the Agreement and Plan of Merger, by and among Speed Commerce, Inc., Speed Commerce Corp and Jeffrey B. Zisk, in his capacity as representative of the SFC Equityholders, dated September 29, 2014.
8-K
2.1
10/3/2014
10.52
Form of Registration Rights Agreement by and among Navarre Corporation and the SFC Equityholders
8-K
10.1
9/28/2012
10.53
Form of Employment Agreement by and between Navarre Corporation and Jeffrey B. Zisk
8-K
10.2
9/28/2012
10.54
Asset Purchase Agreement among Fifth Gear Acquisitions, Inc. and Speed Commerce, Inc., as purchasers and Sigma Holdings, LLC, Sigma Micro, LLC and Lexton Group, LLC, as Sellers, dated November 21, 2014.
8-K
2.1
11/26/2015
10.55
Credit and Guaranty Agreement between Speed Commerce, Inc. and certain of its subsidiaries as Guarantors and Garrison Loan Agency Services, LLC, as administrative agent for the Lenders, dated July 9, 2014.
8-K
10.1
7/9/2014
10.56
Amended and Restated Credit and Guaranty Agreement between Speed Commerce, Inc. and Garrison Loan Agency Services, LLC, as administrative agent, and other Lenders, dated November 21, 2014.
8-K
2.1
11/26/2015
10.57
Limited Waiver to Credit and Guaranty Agreement by and among Speed Commerce, Inc. and certain subsidiaries of the Company, as guarantors and Garrison Loan Services Agency, LLC, as the administrative agent for the Lenders, dated November 10, 2014.
10-Q
10.4
11/10/2014
10.58
Registration Rights Agreement by and among Speed Commerce, Inc. and the Fifth Gear Sellers, including Albert Langsenkamp in his capacity as representative of the Fifth Gear Sellers, dated November 21, 2014.
S-3
4.3
12/26/2014
10.59
Exchange and Settlement Agreement between Speed Commerce, Inc. and the Series C Preferred Stock Stockholders, dated March 16, 2015.
8-K
10.1
3/16/2015
10.60
Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock of Speed Commerce, Inc., dated March 12, 2015.
8-K
10.2
3/16/2015
10.61
Registration Rights Agreement between Speed Commerce, Inc. and the Series D Convertible Preferred Stockholders, dated March 16, 2015.
8-K
10.4
3/16/2015
10.62
Form of Subscription Agreement, dated as of April 16, 2015, between the Company and the Holders of the Series A Warrants and Series B Warrants.
8-K
10.1
4/16/2015
10.63
Form of Series A Warrant to Purchase Common Stock of Speed Commerce, Inc., dated April 21, 2015.
8-K
4.1
4/16/2015
10.64
Form of Series B Warrant to Purchase Common Stock of Speed Commerce, Inc., dated April 21, 2015.
8-K
4.2
4/16/2015
10.65
Placement Agent Agreement between Speed Commerce, Inc. and Roth Capital Partners, LLC, dated April 16, 2015.
8-K
10.2
4/16/2015
10.66
Agreement between Speed Commerce, Inc. and SPDC Investment, LLC, Red Alder GP, LLC and Schuster Tanger, dated July 11, 2014.
8-K
10.1
7/11/2014
10.67
Asset Purchase Agreement among Speed Commerce, Inc. and certain subsidiaries, as Sellers, and Wynit Distribution, LLC and certain subsidiaries, as Purchasers, dated July 9, 2014.
8-K
2.1
7/12/2014
10.68
Consent And Second Amendment To Amended And Restated Credit And Guaranty Agreement between Speed Commerce, Inc. and Garrison Loan Agency Services, LLC, as administrative agent, and other Lenders, dated May 11, 2015. (portions of such exhibit are treated as confidential pursuant to a confidential treatment request file with the Commission by the Company)
X
14.1
Navarre Corporation Code of Business Conduct and Ethics
10-K
3/31/2004
14.1
6/29/2004
21.1
Subsidiaries of the Registrant
X
23.1
Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP
X
24.1
Power of Attorney, contained on signature page
X
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
99.1
Unaudited pro forma condensed consolidated balance sheets of Navarre Corporation as of December 31, 2010, and the unaudited pro forma condensed consolidated statements of operations of Navarre Corporation for the nine months ended December 31, 2010, and the fiscal years ended March 31, 2010, 2009 and 2008
8-K/A
99.2
4/6/2011
99.2
Financial Statements of Business Acquired: Report of Independent Registered Public Accounting Firm; Consolidated balance sheets as of December 31, 2011 and 2010, and related consolidated statements of operations, changes in stockholders' equity and cash flows
8-K/A
99.1
1/25/2013
99.3
Financial Statements of Business Acquired: Consolidated balance sheet as of September 30, 2012, and related consolidated statement of operation for the three and nine months ended September 30, 2012 and September 30, 2011 and cash flows for the nine months ended September 30, 2012 and September 30, 2011
8-K/A
99.2
1/25/2013
99.4
Pro Forma Financial Information: Unaudited pro forma condensed combined consolidated balance sheet as of September 30, 2012, and statements of operations for the six months ended September 30, 2012 and the year ended March 31, 2012
8-K/A
99.3
1/25/2013
101.INS**
XBRL Instance Document
X
101.SCH**
XBRL Taxonomy Extension Schema
X
101.CAL**
XBRL Taxonomy Extension Calculation
X
101.DEF**
XBRL Taxonomy Extension Definition
X
101.LAB**
XBRL Taxonomy Extension Labels
X
101.PRE**
XBRL Taxonomy Extension Presentation
X
** The XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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)
June 15, 2015
/s/ Richard S Willis
Richard S Willis
President and Chief Executive Officer
(Principal Executive Officer)
June 15, 2015
/s/ Terry J. Tuttle
Terry J. Tuttle
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard S Willis and Terry J. Tuttle, or either of them, as his/her true and lawful attorney-in-fact and agent, each with the power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Signature
Title
Date
/s/ Richard S Willis
President and Chief Executive Officer and Director
June 15, 2015
Richard S Willis
(principal executive officer)
/s/ Terry J. Tuttle
Chief Financial Officer
June 15, 2015
Terry J. Tuttle
(principal financial and accounting officer)
/s/ Timothy R. Gentz
Chairman of the Board
June 15, 2015
Timothy R. Gentz
/s/ Rebecca Lynn Atchison
Director
June 15, 2015
Rebecca Lynn Atchison
/s/ Alexandra Constantinople
Director
June 15, 2015
Alexandra Constantinople
/s/ Stephen F. Duchelle
Director
June 15, 2015
Stephen F. Duchelle
/s/ Frederick C. Green IV
Director
June 15, 2015
Frederick C. Green IV
/s/ Scott A. Guilfoyle
Director
June 15, 2015
Scott A. Guilfoyle
/s/ Bradley J. Shisler
Director
June 15, 2015
Bradley J. Shisler
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Speed Commerce, Inc.
We have audited the accompanying consolidated balance sheets of Speed Commerce, Inc. (a Minnesota corporation) and subsidiaries (the “Company”) as of March 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Speed Commerce, Inc. and subsidiaries as of March 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2015, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 15, 2015 expressed an adverse opinion.
/s/ GRANT THORNTON LLP
Dallas, Texas
June 15, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Speed Commerce, Inc.
We have audited the internal control over financial reporting of Speed Commerce, Inc. (a Minnesota corporation) and subsidiaries (the “Company”) as of March 31, 2015, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control 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. The following material weakness has been identified and included in management’s assessment.
The Company did not maintain effective controls over the recording and reconciliation of deferred costs. Due to the failure of management to enforce use of an adequate time-keeping system, management developed estimates to record and report these costs, which were not sufficiently supported and documented in a timely manner.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2015, based on criteria established in the 1992 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended March 31, 2015. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated June 15, 2015, which expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Dallas, Texas
June 15, 2015
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, except per share amounts)
See accompanying notes to consolidated financial statements.
SPEED COMMERCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share amounts)
See accompanying notes to consolidated financial statements.
SPEED COMMERCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes to consolidated financial statements.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Note 1 Business Description
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 November 21, 2014, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Sigma Holdings, LLC. Under the Purchase Agreement, the Company purchased substantially all of the assets which were operated under the trade name Fifth Gear and the Company entered into a five-year Amended and Restated Credit and Guaranty Agreement, $100 million term loan credit facility with various lenders.
On July 9, 2014, the Company completed the sale of its Distribution business. The Distribution business has been reclassified as discontinued operations in the consolidated financial statements for all periods presented.
Note 2 Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of Speed Commerce and its wholly-owned subsidiaries (collectively referred to herein as the “Company”). All inter-company accounts and transactions have been eliminated in consolidation.
Segment Reporting
The Company reports as a single reportable segment based on the nature of the Company’s services, the type of customers and business processes and the economic similarity of the Fifth Gear and Speed Commerce Corporation (“SCC”) operating segments.
Fiscal Year
References in these footnotes to fiscal 2015, 2014 and 2013 represent the twelve months ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the realizability of accounts receivable, goodwill, intangible assets, the recoverability of initial project costs, accruals for certain contracts estimated to be in a loss position and the adequacy of certain accrued liabilities and reserves. Actual results could differ from these estimates.
Fair Value
Fair value is determined utilizing a hierarchy of valuation techniques. The three levels of the fair value hierarchy are as follows:
●
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities
●
Level 2: Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active
●
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Fair Value of Financial Instruments
Financial instruments consist primarily of cash and cash equivalents, receivables, payables and debt instruments. The carrying value of the Company’s financial assets and liabilities approximates fair value at March 31, 2015 and March 31, 2014. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents (Level 1).
Nonrecurring Fair Value Measurements
The purchase price of business acquisitions is primarily allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the excess recorded as goodwill. The Company utilizes Level 3 inputs in the determination of the initial fair value of all assets and liabilities. Non-financial assets such as goodwill, intangible assets, software development costs and property and equipment are subsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized.
Cash and Cash Equivalents
The Company considers short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The balances in cash accounts, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable represent trade receivables from customers when we have invoiced for services and we have not yet received payment. We present accounts receivable net of an allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. It is possible that the accuracy of the estimation process could be materially impacted by different judgments as to collectability based on the information considered and further deterioration of accounts.
Inventory
Inventories are stated at the lower of cost or market with cost determined on the first-in, first-out (FIFO) method. The Company monitors its inventory to ensure that it properly identifies, on a timely basis, inventory items that are slow-moving and non-returnable.
Deferred Costs
Upfront project development revenues and costs related to contract services, such as web site implementation and migration are deferred until the site launched. Deferred revenues and costs are amortized over the expected life of the customer relationship. Changes in project requirements or scope, estimated life of customer relationship or project profitability may result in revisions in the timing and/or recoverability of deferred project costs. The effects of such revisions are recognized in the period that the revisions are determined. Estimated losses on projects are recognized when it is first determined that upfront costs cannot be recovered over the expected life of the customer relationship. The Company makes key judgments in areas such as the customer life, estimated project revenues and costs, and costs to complete sites that are not launched at the end of the reporting period. Any deviations from estimates could have a significant positive or negative impact on the results of operations.
The Company may incur costs subject to statements of work or similar change requests, whether approved or unapproved by the customer. The Company determines the probability that such costs will be recovered based upon evidence such as past practices with the customer, specific discussions or preliminary negotiations with the customer or verbal approvals. For change requests associated with initial development requirements, the anticipated revenues and costs are deferred and amortized over the life of the customer relationship. For change requests for active sites that were not part of the initial development requirements, costs are recognized as incurred.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded, using the straight-line method over estimated useful lives, ranging from one to ten years. Depreciation is computed using the straight-line method for leasehold improvements over the shorter of the lease term or the estimated useful life. Estimated useful lives by major asset categories are generally as follows:
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and property and equipment improvements are capitalized.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value. Fair value is generally determined using a discounted cash flow analysis.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the purchase method. The Company reviews goodwill for potential impairment annually for each reporting unit or when events or changes in circumstances indicate the carrying value of the goodwill might exceed its current fair value. The Company evaluates impairment of goodwill by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Factors which may cause impairment include negative industry or economic trends and significant underperformance relative to historical or projected future operating results. The Company determines fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analyses. The amount of impairment loss is recognized as the excess of the asset’s carrying value over its fair value.
Intangible Assets
Intangible assets include trademarks, developed technology, customer relationships, and a domain name. Intangible assets (except for trademarks) are amortized on a straight-line basis with estimated useful lives ranging from one to twelve years. The straight-line method of amortization of these assets reflects an appropriate allocation of the costs of the intangible assets to its useful life. Definite-lived intangible assets are tested for impairment whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable. Indefinite-lived intangibles, such as trademarks, are evaluated for impairment annually. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated fair value of the asset.
Software acquired or developed for internal-use is deferred and capitalized during application development stage and is amortized on a straight-line basis over its useful life between three and five years.
Revenue Recognition
Revenue for the Company is recognized based on terms of service within the customer contract. A portion of the Company’s service revenue arrangements include upfront service elements, such as web implementation and migration, and recurring service elements such as web site support, e-commerce fulfillment services and additional services. The Company does not earn or receive any commissions from its customers. Fees related to upfront contract services, such as web site implementation and migration, are deferred and recognized ratably over the expected term of the relationship with the customer, beginning when delivery of recurring services has occurred. Costs associated with the upfront contract fees are deferred and recognized consistent with the recognition of revenues. Recurring contract service elements are charged based on the number of transactions processed and recognized as the services are performed as measured by the volume of orders completed. We record all taxes imposed directly on revenue-producing transactions on a gross basis.
Shipping Costs
Shipping costs incurred by the e-commerce and fulfillments services related to providing logistical services are classified in cost of sales.
Operating Leases
The Company conducts substantially all operations in leased facilities. Leasehold allowances, rent holidays and escalating rent provisions are accounted for on a straight-line basis over the term of the lease. The portion of deferred rent due in twelve months or less is considered short-term and is included in accrued expenses in the accompanying Consolidated Balance Sheets. The long-term portion is included in other liabilities - long-term.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Income Taxes
Income taxes are recorded under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management assesses the likelihood that deferred tax assets will be recovered from future taxable income and establishes a valuation allowance when management believes recovery is not likely.
The Company records estimated penalties and interest related to income tax matters, including uncertain tax positions as a component of income tax expense. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Stock-Based Compensation
The Company has a stock-based compensation plan for officers, non-employee directors and key employees. The Company measures the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is to be recognized over the period during which an employee is required to provide services in exchange for the award. The Company’s common stock is purchased by the optionee upon the exercise of stock options, and restricted stock awards are settled in shares of the Company’s common stock.
Loss Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of common shares outstanding during the year plus all additional common shares that would have been outstanding if potentially dilutive common shares related to stock options, restricted stock and warrants had been issued. The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except for per share data):
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Due to the Company’s net loss for the years ended March 31, 2015 and 2014, diluted loss per share from continuing operations excludes 2.9 million and 1.8 million, respectively, stock options and restricted stock awards because their inclusion would have been anti-dilutive.
Transition and Transaction Plan
During April 2013, the Company implemented a series of initiatives in connection with the integration of SCC. These included a reduction in workforce and a consolidation of business structures and processes across the Company's operations. These integration initiatives resulted in, among other things, the leasing of expanded distribution and fulfillment facilities in Columbus, OH and the leasing of new offices in Dallas, TX; and the transition of certain corporate functions from Minneapolis to Dallas. The Company completed these initiatives in fiscal year 2014 and incurred $11.2 million of related expenses during the fiscal 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.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, "Compensation - Stock Compensation" ("ASU 2014-12"). ASU 2014-12 requires that a performance target which affects vesting and which could be achieved after the requisite service period be treated as a performance condition. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 and may be applied prospectively or retrospectively. The Company does not expect adoption of this standard will have a significant impact on the Company's consolidated financial statements.
In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, (“ASU 2014-15”), “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern”. ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The Company does not expect that the adoption of this standard will have a material effect on its financial statements.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03 require the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015. The Company does not expect adoption of this standard will have a significant impact on the Company's consolidated financial statements.
Note 3 Acquisitions
Fifth Gear
On November 21, 2014, the Company completed the purchase of the Fifth Gear Assets. Total consideration included: $54.5 million in cash, after working capital adjustment, and up to 7,000,000 shares of the Company’s common stock upon Fifth Gear’s achieving certain financial metrics for the twelve months ended December 31, 2014. The cash paid at closing was funded by the Company's Amended and Restated Credit and Guaranty Agreement. The combined fair value of the earn-out consideration was estimated to be $10.4 million based upon Level 3 fair value valuation techniques (unobservable inputs that reflect the reporting entity’s own assumptions). A financial model was applied to estimate the value of the consideration that utilized the income approach and option pricing theory to compute expected values and probabilities of reaching the various thresholds in the agreement. Key assumptions included (i) the product of nine times the 2014 Adjusted EBITDA of Seller, on a combined and consolidated basis exceeds (ii) $55 million in an amount not to exceed 7,000,000 shares of the Company’s common stock (See Note 18 Subsequent events).
The goodwill of $32.3 million arising from the Purchase Agreement consists largely of the synergies and economies of scale expected from combining the operations of the Company and Fifth Gear. This transaction qualified as an acquisition of a significant business pursuant to Regulation S-X and financial statements for the acquired business were filed.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
The purchase price was allocated based on preliminary estimates of the fair value of assets acquired and liabilities assumed as follows (in thousands):
Net sales of Fifth Gear, included in net revenue - in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended March 31, 2015 was $21.3 million. Fifth Gear provided operating income of $8,000 to the consolidated Company’s operating income for the year ended March 31, 2015.
Acquisition-related costs (included in general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended March 31, 2015 were $2.1 million.
A gain of $5.9 million was recognized for fiscal year 2015 related to the contingent earn out obligation originally valued at $10.4 million, due to the change in the Company’s stock price as of March 31, 2015.
The following summary, prepared on a condensed pro forma basis presents the Company’s unaudited consolidated results from operations as if the acquisition of Fifth Gear had been completed as of the beginning of fiscal 2015. The pro forma presentation below does not include any impact of transaction costs or synergies.
SCC
On November 20, 2012, the Company completed the acquisition of SCC, a leading provider of end-to-end e-commerce services. Total consideration included: $24.5 million in cash at closing, which is net of a preliminary working capital adjustment, 17.1 million shares of the Company’s common stock plus performance payments (contingent consideration) up to an additional $5.0 million in cash (undiscounted) and 6.3 million shares of the Company’s common stock contingent upon SCC’s achieving certain financial metrics for the 12 months ending December 31, 2012. The contingent cash payment is comprised of up to a maximum of $1.25 million, of which $1.0 million was paid in early calendar 2013, and up to a maximum of $3.75 million, of which $3.0 million (before interest of five percent per annum) will be paid in equal, quarterly installments beginning in October 2013 and ending on February 29, 2016. The contingent share payment of up to a maximum of 2,215,526 shares was to be issued in early calendar 2013, of which 1,770,097 shares were issued, and up to a maximum of 4,071,842 shares could have been issued in late calendar 2013, of which 590,036 were issued in July 2013. The determination of the remaining contingent cash and share payments was finalized in the first quarter of fiscal 2014. The working capital adjustment was also finalized in the first quarter of fiscal 2014 in accordance with the Merger Agreement, pursuant to which the Company received $836,000, which reduced the amount of cash consideration paid and decreases goodwill.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
On September 29, 2014, the Company entered into Amendment No. 3 which resolved certain outstanding items by reducing the Merger Consideration in the aggregate amount of $1,300,000, and the parties agreed to mutual releases in connection with certain claims.
Note 4 Discontinued Operations
On July 9, 2014, the Company completed the sale of its Distribution business to Wynit Distribution, LLC (the “Buyers”). 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, which was adjusted to $1.5 million based on actual working capital delivered and other post-closing adjustments. The Company has recognized a pre-tax gain of approximately $2.2 million. 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 following table provides the components of discontinued operations:
Note 5 Supplemental Cash Flow Information
For the years ended March 31, 2015, 2014 and 2013, net cash paid for income taxes was $37,000, $448,000 and $202,000, respectively. For the years ended March 31, 2015, 2014, and 2013, net cash paid for interest was $4.5 million, $1.7 million, and $710,000, respectively.
The following table provides the components of changes in operating assets and liabilities, net of acquisition:
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Note 6 Goodwill, Deferred Costs and Intangible Assets
Goodwill
The Company performs an impairment test of goodwill annually, or when events or a change in circumstances indicate that the carrying value might exceed the current fair value. The goodwill as of March 31, 2015 was created in the SCC and Fifth Gear acquisitions. Certain factors may result in the need to perform an impairment test other than annually, including significant underperformance of the Company's business relative to expected operating results, significant adverse economic and industry trends, and a decision to divest an individual business within a reporting unit.
The Company performed the 2015 annual goodwill impairment analysis using two reporting units: SCC and Fifth Gear.
If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, then the Company is required to perform the goodwill impairment test. Goodwill impairment is determined using a two-step process.
•
The first step is to identify if a potential impairment exists by comparing the fair value of the business with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the process is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any.
•
The second step, if necessary, compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.
The Company estimates the fair value using various valuation techniques, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires the Company to make various assumptions about sales, operating margins, growth rates and discount rates. Assumptions about discount rates are based on a weighted-average cost of capital derived from observable market inputs and comparable company data. Assumptions about sales, operating margins, and growth rates are based on management’s forecasts, business plans, economic projections, anticipated future cash flows and marketplace data. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period.
In March 2015, we performed our annual goodwill and intangible asset impairment assessments using widely-accepted valuation techniques and recorded impairment charges for our SCC reporting unit goodwill and trademark of $18.0 million and $0.8 million, respectively as of March 31, 2015.
Deferred Costs
In the fourth quarter of fiscal 2015, we determined that several of SCC’s web development only client projects had become unprofitable as contractual site requirements required significantly more customization programming than anticipated. As a result we recorded provisions for anticipated losses on contracts of $5.3 million and recorded charges of $6.5 million for deferred project costs that we no longer anticipate to recover over the period of customer relationship. Finally, we recorded provisions for uncollectable receivables of $1.7 million principally from two clients that ceased operations after the 2014 holiday season.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
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 twelve years for customer relationships, three years for customer lists and seven years for the domain name and are valued as follows (in thousands):
Aggregate amortization expense for the years ended March 31, 2015, 2014 and 2013 was $4.5 million, $2.4 million and $0.7 million, respectively. The following is a schedule of estimated future amortization expense (in thousands):
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):
Amortization expense was $393,000, $323,000 and $199,000 for the years ended March 31, 2015, 2014 and 2012, respectively and was included in interest expense. During fiscal 2015 and 2014, the Company incurred $4.4 million and $35,000, respectively of debt issuance costs related to amendments to the Company’s Credit Facility. During fiscal 2015, the Company wrote off $3.8 million related to early extinguishment of debt.
Note 7 Prepaid Expenses
Prepaid expenses consisted of the following (in thousands):
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Note 8 Property and Equipment
Property and equipment consisted of the following (in thousands):
Depreciation and amortization expense was $4.4 million, $3.3 million and $1.0 million for the years ended March 31, 2015, 2014 and 2013, respectively.
Net long-lived assets held were $22.8 million and $14.6 million in the United States, and $279,000 and $391,000 in Mexico at March 31, 2015 and 2014, respectively.
Note 9 Other Long-term Assets, Accrued Expenses, Other Current Liabilities and Other Long-term Liabilities
Other long-term assets consisted of the following (in thousands):
Accrued expenses consisted of the following (in thousands):
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Other current liabilities consisted of the following (in thousands):
Other long-term liabilities consisted of the following (in thousands):
Note 10 Commitments and Contingencies
Leases
The Company leases its facilities and a portion of its office and warehouse equipment. The terms of the lease agreements generally range from 3 to 15 years, with certain leases containing options to extend the leases up to an additional 10 years. The Company does not believe that exercise of the renewal options are reasonably assured at the inception of the lease agreements and, therefore, considers the initial base term to be the lease term. The leases require payment of real estate taxes and operating costs in addition to base rent. Total base rent expense including discontinued operations was $5.9 million, $5.4 million and $2.8 million for the years ended March 31, 2015, 2014 and 2013, respectively. Lease terms vary, but generally provide for fixed and escalating rentals which range from an additional $0.06 per square foot to a 3% annual increase over the life of the lease.
The following is a schedule of future minimum rental payments required under noncancelable operating leases as of March 31, 2015 (in thousands):
Guarantee
On May 29, 2007, FUNimation entered into an office lease in Flower Mound, Texas. In order to obtain the lease, the Company, as the parent of the FUNimation subsidiary at that time, guaranteed the full and prompt payment of the lease obligations and as of March 31, 2011, the Company continued to be the guarantor. On April 14, 2011, the Company entered into an agreement to be released from the office lease guarantee 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, if the full and prompt payment of the lease is not completed by FUNimation. There was no indication that FUNimation would not be able to pay the required future lease payments totaling $1.6 million and $2.3 million at March 31, 2015 and 2014, respectively. Therefore, at March 31, 2015 and 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.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
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 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 March 31, 2015 and 2014, respectively as not probable or estimable.
Note 11 Capital Leases
The Company leases certain equipment under noncancelable capital leases. At March 31, 2015 and 2014, leased capital assets included in property and equipment were as follows (in thousands):
Amortization expense for the years ended March 31, 2015, 2014 and 2013 was $295,000, $69,000 and $82,000, respectively. Future minimum lease payments, excluding additional costs such as insurance and maintenance expense payable by the Company under these agreements, by year and in the aggregate are as follows (in thousands):
Note 12 Bank Financing and Debt
Term Loan Credit Facility Opened in November 2014
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. The Amended and Restated Credit Facility replaced in its entirety the Company’s existing credit facility dated on July 9, 2014.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
The interest rate is roughly equal to the LIBOR rate, plus 7.5%, except upon an event of default. The LIBOR rate for all loans under the Amended and Restated Term Loan is subject to a minimum level of 1.0%. The interest rate on the Amended and Restated Credit Facility at March 31, 2015 was 8.50%.
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 Credit Facility is secured by a first priority security interest on substantially all of the Company’s assets.
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. At March 31, 2015 we were in compliance with all covenants of the agreement, as amended.
Inventory Facility
On November 21, 2014, the Company entered into a secured revolving credit agreement with a client in an aggregate principal amount not to exceed $3.5 million. The revolving credit agreement is secured by inventory ordered from approved suppliers and cash and receivables from the client’s customers, the interest rate charged was LIBOR plus 1.5%. At March 31, 2015 the facility had an outstanding balance of $1.4 million which is included in other current liabilities and an interest rate of 2.5%.
Previous Debt Facilities
On July 9, 2014, the Company entered into a five-year, $50 million term loan credit facility with Garrison. Upon the closing, $35 million was funded to the Company. Funds provided under the Amended and Restated Credit Facility were used to repay the Company’s Revolving Credit Facility. The Company recognized a loss of $3.0 million on early extinguishment of debt which related to loan costs previously capitalized.
The Company had a $55.0 million Revolving Credit Facility with Wells Fargo Capital Finance, LLC. In conjunction with the sale of the Distribution business, the Credit Facility was paid-off and terminated effective July 9, 2014. The Company recognized an expense of $0.8 million as a result of the early termination of this facility which related to loan costs previously capitalized.
Letters of Credit
On April 14, 2011, the Company was released from the FUNimation office 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, if the full and prompt payment of the lease is not completed by FUNimation. No claims have been made against this financial instrument. There was no indication that FUNimation would not be able to pay the required future lease payments totaling $1.6 million and $2.3 million at March 31, 2015 and 2014, respectively. Therefore, at March 31, 2015 and 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.
On August 8, 2014, the Company issued an irrevocable standby letter of credit for the benefit of the landlord of one of its facilities in the amount of $576,424, this standby letter of credit expires on August 8, 2015.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Note 13 Income Taxes
The income tax provision (benefit) from continuing operations is comprised of the following (in thousands):
A reconciliation of income tax expense (benefit) from continuing operations to the statutory federal rate is as follows:
The change in the effective tax rate from fiscal 2014 to fiscal 2015 is principally attributable to the fact that the pre-tax book loss was larger in fiscal 2015, which diluted the impact of any rate adjustment. The change in the effective tax rate from fiscal 2013 to fiscal 2014 is principally attributable to the fact that the Company recorded a full valuation allowance against its deferred tax assets, described below, in fiscal 2013.
For the year ended March 31, 2015 the Company recorded income tax expense from discontinued operations of $41,000. The effective tax rate applied to discontinued operations for the year ended March 31, 2015 was (0.3%).
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Deferred income taxes reflect the available tax carryforwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of March 31, 2015 and 2014 are as follows (in thousands):
At March 31, 2015 and 2014, the Company had federal net operating loss carryforwards of $152.4 million and $100.8 million, respectively, which will begin to expire in 2029. The Company had foreign tax credit carryforwards of $444,000 and $413,000 at March 31, 2015 and 2014, which will begin to expire in 2016.
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 a result of the current market conditions and their impact on the Company’s future outlook, management has reviewed its deferred tax assets and concluded that the uncertainties related to the realization of some of its assets, have become unfavorable. As of March 31, 2015 and March 31, 2014, the Company had a net deferred tax asset position before valuation allowance of $52.2 million and $38.2 million, respectively, which is 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. The Company has considered the positive and negative evidence for the potential utilization of the net deferred tax assets and has concluded that it is more likely than not that the Company will not realize the full amount of net deferred tax assets. Additionally, there are certain deferred tax liabilities that have an indefinite reversal period, primarily related to trademarks and goodwill, which cannot be used to support the reversal of deferred tax assets. The Company recorded a valuation allowance of $53.5 million as of March 31, 2015 and $39.5 million as of March 31, 2014 against its net deferred tax assets that are in excess of the deferred tax liabilities.
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.
The Company recognizes interest accrued related to unrecognized income tax benefits (“UTB’s”) in the provision for income taxes. As of March 31, 2015, interest accrued was $212,000 and total UTB’s, net of deferred federal and state income tax benefits that would impact the effective tax rate, if recognized, were $592,000. During fiscal 2015, $140,000 of UTB’s were reversed. As of March 31, 2014, interest accrued was $182,000 and total UTB’s, net of deferred federal and state income tax benefits that would impact the effective tax rate, if recognized, were $555,000.
The Company’s U.S. federal income tax returns for tax years ending in 2012 and 2014 remain subject to examination by tax authorities. The Company’s Canadian income tax return for tax years ending in 2005 through 2014 remain subject to examination by tax authorities The Company files in numerous state jurisdictions with varying statutes of limitations. The Company does not anticipate that the total unrecognized tax benefits will significantly change prior to March 31, 2016.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):
Note 14 Shareholders’ Equity
The Company’s Articles of Incorporation authorize 10,000,000 shares of preferred stock, no par value. On June 2, 2014, the Company closed a private offering with institutional investors for approximately $10 million of the Company's Series C Preferred Stock. The Company received proceeds of $9.9 million after costs from the issuance of the Series C Preferred Stock. Under the terms of the offering, the Company 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 and related warrants, for an aggregate purchase price of $10 million. The net proceeds of the offering were be used to pay down indebtedness and for general corporate purposes. The conversion feature for the Series C Preferred Stock was accounted for as a beneficial conversion feature, which had fair value of $3.5 million at issuance. The beneficial conversion feature was accounted from common shareholder equity to preferred stock over a period of six months from issuance and was fully amortized by March 31, 2015.
Each Holder of Series C Preferred Stock, in preference and priority to the holders of all other classes or series of stock, shall be entitled to receive quarterly dividends at the rate of seven percent (7%) per annum of the Series C Stated Value (the “Series C Preferred Dividends”). 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 warrants issued with the Series C preferred stock are accounted for using the liability method and is subject to mark-to-market adjustments at each reporting period. The fair value of the warrants at issuance was $1.7 million and the fair value was $221,000 at March 31, 2015. Changes in fair value are included in other non-operating income in the statement of operations.
On March 16, 2015, the Company entered into an agreement to which it exchanged an aggregate of 344,001.10 shares of Series D Preferred Stock for all the outstanding shares of the Company’s Series C Convertible Preferred Stock held by the original institutional holders. The effect was to restructure the terms of its outstanding Series C Convertible Preferred Stock to lower the annual dividend rate from 7% to 5%, reduce the conversion price at which shares will convert into the Company’s common stock from $3.00 to $1.50, reduce the price at which the Company has the right to force the conversion of the preferred stock from $5.00 to $2.50 and limit the voting rights of the holders in compliance with NASDAQ rules. The restructuring was affected by exchanging one share of a newly established Series D Convertible Preferred Stock has a stated value of $30 per share, for each ten shares of outstanding Series C Preferred Stock, which has a stated value of $3 per share, plus accrued dividends. In the exchange, the Company issued a total of 344,001.10 shares of Series D Preferred Stock. In connection with the issuance of the Series D Preferred Stock, the Company entered into a registration rights agreement with the holder.
The Series D Preferred Stock will accrue dividends at an annual rate of 5% payable in additional shares of Series D Preferred Stock or in cash, at the Company’s option, and is convertible at any time after the exchange into common stock of the Company at a conversion price of $1.50 per share (subject to adjustment). The Company has the right to force the conversion of the Series D Preferred Stock in the event that the Company’s common stock trades above $2.50 per share (subject to adjustment) for 28 trading days in a 30 consecutive trading day period 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 has the right to call the outstanding Series D Preferred Stock at a redemption price per share equal to 110% of the stated value per share of the Series D 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. (See Note 18 Subsequent events)
In October 2013, the Company issued 8,000,000 shares of its common stock at a price of $3.00 per share in public offering. Net proceeds to the Company after underwriting discounts and commissions and offering expenses were approximately $21.8 million.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Note 15 Share-Based Compensation
On October 29, 2014, the shareholders approved the 2014 Stock Option and Incentive Plan (the “2014 Plan”) and replaced the Company’s 2004 Amended and Restated Stock Incentive Plan (the “2004 Plan”), under which no further awards may be granted after September 13, 2014. All outstanding awards previously granted under the 2004 Stock Plan continue to be governed by and administered under the 2004 Stock Plan.
Equity Compensation Plans
The Company currently grants stock options, restricted stock and restricted stock units under an equity compensation plan. The Company adopted the 2014 Stock Plan to attract and retain eligible persons to perform services for the Company. Eligible recipients include all employees, without limitation, officers and directors who are also employees as well as non-employee directors, consultants and independent contractors or employees of any of the Company’s subsidiaries. A maximum number of 6 million shares of common stock have been authorized and reserved for issuance under the 2014 Stock Plan. The number of shares authorized may also be increased from time to time by approval of the Board of Directors and the shareholders.
The Company is authorized to grant, among other equity instruments, stock options and restricted stock under the 2014 Stock Plan. Stock options have a maximum term fixed by the Compensation Committee of the Board of Directors, not to exceed 10 years from the date of grant. Stock options become exercisable during their terms in the manner determined by the Compensation Committee of the Board of Directors. Vesting for performance-based stock awards is subject to the performance criteria being achieved.
Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards vest as determined by the Compensation Committee of the Board of Directors, depending on the grant. Prior to vesting, ownership of the shares cannot be transferred. The Company expenses the cost of the restricted stock awards, which is the grant date fair value, ratably over the period during which the restrictions lapse. The grant date fair value is based on the Company’s opening stock price on the date of grant.
In August 2014, the Compensation Committee approved changes to our director grants for fiscal year 2015. As a result of these changes, non-employee directors already serving as directors on April 1 of each year starting in 2015 will be granted a Nonqualified Stock Option to purchase 12,000 shares of common stock at an exercise price equal to the fair market value of the stock on that date and will also be granted 8,000 restricted stock units, each of which will vest in increments of 33 1/3% of the original option or restricted stock unit grant beginning one year from the date of the grant and shall expire on the earlier of (i) ten years from the grant date, or (ii) one year after the person ceases to serve as a director. Previously, in fiscal year 2014, each newly appointed or elected non-employee director would receive at the beginning of his/her initial term, 50,000 non-qualified stock options and thereafter on April 1 of each year that a person remained a director, he/she would receive 12,000 non-qualified stock options. Each option would vest in increments of 33 1/3% of the original Option grant beginning one year from the date of the grant and shall expire on the earlier of (i) ten years from the grant date, or (ii) one year after the person ceases to serve as a director.
The Company is entitled to (a) withhold and deduct from future wages of the participant (or from other amounts that may be due and owing to the participant from the Company), or (b) make other arrangements for the collection of all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment-related tax requirements (i) attributable to the grant or exercise of an option or a restricted stock award or to a disqualifying disposition of stock received upon exercise of an incentive stock option, or (ii) otherwise incurred with respect to an option or a restricted stock award, or (iii) require the participant promptly to remit the amount of such withholding to the Company before taking any action with respect to an option or a restricted stock award.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
Stock Options
A summary of the Company’s stock option activity as of March 31, 2015 as follows:
The weighted average fair value of options granted during the year ended March 31, 2015, 2014 and 2013 was $2.1 million, $1.6 million and $1.3 million, respectively, and the total fair value of options exercisable was $2.0 million at March 31, 2015. The weighted average remaining contractual term for options outstanding was 8.0 years and for options exercisable was 6.5 years at March 31, 2015.
The aggregate intrinsic value represents the total pretax intrinsic value, based on the Company’s closing stock price of $0.64 as of March 31, 2015, which theoretically could have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of stock options exercised during the years ended March 31, 2015, 2014 and 2013 was $563,000, $440,000 and $82,000, respectively. The aggregate intrinsic value for options outstanding was $2,000 and for options exercisable was $2,000 at March 31, 2015. The aggregate intrinsic value for options outstanding was $4.4 million and for options exercisable was $2.4 million at March 31, 2014. The aggregate intrinsic value for options outstanding was $1.4 million and for options exercisable was $399,000 at March 31, 2013.
As of March 31, 2015, total compensation cost related to non-vested stock options not yet recognized was $1.8 million, which is expected to be recognized over the next 2.0 years on a weighted-average basis.
During the years ended March 31, 2015, 2014 and 2013, the Company received cash from the exercise of stock options totaling $686,000, $338,000 and $90,000, respectively. There was no excess tax benefit recorded for the tax deductions related to stock options during either the years ended March 31, 2015, 2014 or 2013.
Restricted Stock
Restricted stock granted to employees typically has a vesting period of three years and expense is recognized on a straight-line basis over the vesting period, or when the performance criteria have been met. The value of the restricted stock is established based on the market price on the date of the grant or if based on performance criteria, on the date it is determined the performance criteria will be met. Restricted stock awards vesting is based on service criteria or achievement of performance targets. All restricted stock awards are settled in shares of common stock.
A summary of the Company’s restricted stock activity as of March 31, 2015 as follows:
The total fair value of restricted stock awards granted during the year ended March 31, 2015 was $2.6 million.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
The total fair value of restricted stock awards vested during the years ended March 31, 2015, 2014 and 2013 was approximately $782,000, $340,000 and $240,000, respectively.
As of March 31, 2015, total compensation cost related to non-vested restricted stock awards not yet recognized was $1.3 million which is expected to be recognized over the next 2.1 years on a weighted-average basis. There was no excess tax benefit recorded for the tax deductions related to restricted stock during the years ended March 31, 2015, 2014 or 2013.
Share-Based Compensation Valuation and Expense Information
The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an option award. The fair value of options granted during the years ended March 31, 2015, 2014 and 2013 were calculated using the following assumptions:
Expected life uses historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. The Company believes this historical data is currently the best estimate of the expected term of a new option. The Company uses a weighted-average expected life for all awards and has identified one employee population. Expected volatility uses the Company’s stock historical volatility for the same period of time as the expected life. The Company has no reason to believe that its future volatility will differ from the past. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant for the same period of time as the expected life. Expected dividend yield is zero, as the Company historically has not paid dividends. The Company used a forfeiture rate of 17.86%, 4.63% and 4.63% during for the years ended March 31, 2015, 2014 and 2013.
Share-based compensation expense related to employee stock options, restricted stock and restricted stock units, net of estimated forfeitures for the years ended March 31, 2015, 2014 and 2013 was $1.8 million, $1.0 million and $793,000, respectively. These amounts are included in general and administrative expenses in the Consolidated Statements of Operations. No amount of share-based compensation was capitalized.
Share-based compensation expense related to employee stock options, restricted stock and restricted stock units, net of estimated forfeitures reclassified as discontinued operations were $588,000, $284,000 and $190,000 for the years ended March 31, 2015, 2014 and 2013 was, respectively.
Note 16 Major Customers and Vendors
The Company has a major customer who accounted for 18.7% of consolidated net revenue from continuing operations for fiscal 2015 and accounts receivable from this customers totaled $1.9 million. The Company had two major customers who accounted for 36.2% of consolidated net revenue from continuing operations for fiscal 2014 and accounts receivable from these two customers totaled $3.6 million at March 31, 2014.
The Company had two major vendors who accounted for approximately $32.1 million and $34.8 million of net purchases in fiscal year 2015 and 2014, respectively.
Note 17 Quarterly Data - Seasonality (Unaudited)
The Company’s quarterly operating results fluctuate significantly and will likely do so in the future as a result of seasonal variations of our clients’ products ultimately sold at retail. The Company’s business is affected by the pattern of seasonality common to other suppliers of retailers, particularly the holiday selling season. Traditionally, the Company’s third quarter (October 1-December 31) has accounted for its largest quarterly revenue figures and a substantial portion of its earnings. The Company’s third quarter accounted for 31.9% and 30.4% of its net revenues for the years ended March 31, 2015 and 2014, respectively.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
The following table sets forth certain unaudited quarterly historical financial data of the Company’s operations on a consolidated basis for each of the four quarters in the years ended March 31, 2015 and 2014 (in thousands, except per share amounts):
(1)
Operating loss included $18.8 million goodwill and tradename impairment in the fourth quarter of fiscal 2015. See footnote 6 Goodwill and Intangible Assets for further discussion.
Note 18 Subsequent Events
NASDAQ Delisting Notice
On April 6, 2015, the Company received written notice from NASDAQ Stock Market LLC notifying the Company that it is not in compliance with the minimum bid price requirements for continued listing on The NASDAQ Global Market. NASDAQ requires listed securities to maintain a minimum bid price of $1.00 per share, and NASDAQ rules provide that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of thirty consecutive business days. Based on the closing bid price of the Company’s common stock for the thirty consecutive business days prior to the date of the Notification Letter, the Company no longer meets the minimum bid price requirement. The Company has 180 calendar days, or until October 5, 2015, to regain compliance with NASDAQ listing requirements. To regain compliance, the bid price of the Company’s common stock must have a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days. In the event that the Company does not regain compliance by October 5, 2015, the Company may be eligible for additional time to reach compliance with the minimum bid price requirement.
The Company is currently considering available options to resolve its compliance with the minimum bid price requirement and to regain compliance with NASDAQ’s listing requirements. However, there can be no assurance that the Company will be able to do so.
Stock and Warrant Offering
On April 16, 2015, the Company sold 13,035,713 shares of its common stock together with 0.597 of a Series A Warrant to purchase one share of common stock at an exercise price of $0.56 per share and 0.153 of a Series B Warrant to purchase one share of common stock at an exercise price of $0.56 per share. Each share of the Company’s common stock was sold with Series A Warrants that will convert up to an aggregate of 7,776,784 shares of common stock. The Series A Warrants are exercisable on the one-year anniversary of the date of issuance, subject to the Company’s right, exercisable within 90 days of the issuance date, to reduce the number of shares of its common stock available for exercise of the Series A Warrants to the extent needed to sell additional securities in a public or private offering for cash, and will expire on the fifth anniversary of the date they first become exercisable. The Series B Warrants will convert up to an aggregate of 2,000,000 shares of the Company’s common stock, are exercisable beginning on the later of (i) one year and one day from the date of issuance and (ii) the date the Company’s shareholders approve an increase in the number of our authorized shares of common stock in an amount sufficient to permit the exercise in full of the warrants, and will expire on the fifth anniversary of the date they first become exercisable. The Company does not have a sufficient number of authorized shares of our common stock to permit the exercise of the Series B Warrants. We are required to call a shareholders meeting within 135 days of closing to increase the number of shares of our common stock we are authorized to issue. A shareholders meeting is scheduled for June 30, 2015 to vote to authorize the increase in our authorized shares to issue. In the event that we are unable to effect an increase in our authorized shares of common stock by October 21, 2015, the investors will have certain rights to require us to repurchase the unexercisable portion of their Series B Warrants based on the Black Scholes value thereof as calculated pursuant to a formula contained in the Series A Warrants and the Series B Warrants.
SPEED COMMERCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
As a result of the offering, the Series C warrants’ exercise price was reduced to $2.68 per common share and the conversion price of the Series D preferred stock was reduced to $1.19 per common share.
Amendment to Fifth Gear Acquisition Agreement
In April 2015, the purchase agreement was amended to increase the maximum number of common shares for the earn-out consideration from 7,000,000 shares to 8,400,000 shares in conjunction with the April 2015 equity offering. These shares are not presently reserved for issuance, and the earn-out amount will be determined by the Company on or before October 31, 2015. If such shares are not issued, cash held in escrow will be released, restrictive covenants lapse and indemnity limits will be reduced.
Credit Facility Amendment
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 fee due upon termination, and (vi) the Company is required to maintain a minimum of $1 million of unrestricted cash at all times.
Strategic Alternatives
In April 2015, we announced that our Board of Directors has initiated a process to explore and consider possible strategic alternatives for enhancing shareholder value. These alternatives could include, but are not limited to, a recapitalization or a sale or merger of the Company. The Board of Directors is overseeing this process and Stifel has been retained as financial and strategic advisor to the Company.