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SPS COMMERCE INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended: September 30, 2019

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from              to             

Commission file number 001-34702

SPS COMMERCE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

41-2015127

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

333 South Seventh Street, Suite 1000, Minneapolis, MN 55402

(Address of Principal Executive Offices, Including Zip Code)

(612) 435-9400

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol

 

Name of exchange on which registered

Common Stock, par value $0.001 per share

 

SPSC

 

The Nasdaq Stock Market LLC (Nasdaq Global Market)

 

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding at October 18, 2019 was 34,839,275 shares.

 


 

SPS COMMERCE, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018 (Unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (Unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (Unaudited)

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

29

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

30

 

 

 

 

 

Item 1A.

 

Risk Factors

 

30

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

30

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

30

 

 

 

 

 

Item 5.

 

Other Information

 

30

 

 

 

 

 

Item 6.

 

Exhibits

 

31

 

 

 

 

 

Signatures

 

32

 

Unless the context otherwise requires, for purposes of the Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company” and “SPS” refer to SPS Commerce, Inc.


2


 

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  Forward-looking statements regarding us, our business prospects and our results of operations are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those described under the heading “Risk Factors” included in our Annual Report on Form 10-K/A for the year ended December 31, 2018 as filed with the Securities and Exchange Commission (“SEC”), as may be updated in our subsequent Quarterly Reports on Form 10-Q from time to time.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.  In some cases, you can identify forward-looking statements by the following words: “anticipate,” “assumes,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.  We expressly disclaim any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.

 

3


 

PART I. – FINANCIAL INFORMATION

Item 1.Financial Statements

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except per share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

149,727

 

 

$

133,859

 

Short-term investments

 

 

51,446

 

 

 

44,537

 

Accounts receivable, less allowance for doubtful accounts of $1,500 and $1,392, respectively

 

 

29,383

 

 

 

27,488

 

Deferred costs

 

 

34,583

 

 

 

34,502

 

Other current assets

 

 

8,385

 

 

 

9,229

 

Total current assets

 

 

273,524

 

 

 

249,615

 

PROPERTY AND EQUIPMENT, less accumulated depreciation of $49,168 and $41,175, respectively

 

 

20,757

 

 

 

20,957

 

OPERATING LEASE RIGHT-OF-USE ASSETS

 

 

13,648

 

 

 

 

GOODWILL

 

 

76,366

 

 

 

69,658

 

INTANGIBLE ASSETS, net

 

 

23,844

 

 

 

22,741

 

OTHER ASSETS

 

 

 

 

 

 

 

 

Deferred costs

 

 

10,998

 

 

 

10,973

 

Deferred income tax asset

 

 

4,839

 

 

 

10,456

 

Other assets

 

 

2,621

 

 

 

1,723

 

Total assets

 

$

426,597

 

 

$

386,123

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,367

 

 

$

4,440

 

Accrued compensation

 

 

17,660

 

 

 

20,415

 

Accrued expenses

 

 

4,874

 

 

 

4,558

 

Deferred revenue

 

 

30,351

 

 

 

25,328

 

Deferred rent

 

 

 

 

 

1,781

 

Operating lease liabilities

 

 

3,281

 

 

 

 

Total current liabilities

 

 

60,533

 

 

 

56,522

 

OTHER LIABILITIES

 

 

 

 

 

 

 

 

Deferred revenue

 

 

2,601

 

 

 

2,512

 

Deferred rent

 

 

 

 

 

5,371

 

Operating lease liabilities

 

 

16,224

 

 

 

 

Deferred income tax liability

 

 

1,169

 

 

 

1,376

 

Other non-current liabilities

 

 

1,002

 

 

 

1,368

 

Total liabilities

 

 

81,529

 

 

 

67,149

 

COMMITMENTS and CONTINGENCIES

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 55,000,000 shares authorized; 36,026,218 and 35,515,256 shares issued; and 34,901,884 and 34,691,472 outstanding, respectively

 

 

36

 

 

 

36

 

Treasury stock, at cost; 1,124,334 and 823,784 shares, respectively

 

 

(40,645

)

 

 

(25,679

)

Additional paid-in capital

 

 

349,014

 

 

 

332,574

 

Retained earnings

 

 

39,811

 

 

 

15,261

 

Accumulated other comprehensive loss

 

 

(3,148

)

 

 

(3,218

)

Total stockholders’ equity

 

 

345,068

 

 

 

318,974

 

Total liabilities and stockholders’ equity

 

$

426,597

 

 

$

386,123

 

 

Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective August 22, 2019.

 

See accompanying notes to these condensed consolidated financial statements.

4


 

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

$

70,928

 

 

$

62,868

 

 

$

206,391

 

 

$

183,051

 

Cost of revenues

 

 

23,263

 

 

 

20,411

 

 

 

68,330

 

 

 

60,571

 

Gross profit

 

 

47,665

 

 

 

42,457

 

 

 

138,061

 

 

 

122,480

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

16,937

 

 

 

16,952

 

 

 

52,404

 

 

 

54,023

 

Research and development

 

 

7,743

 

 

 

5,146

 

 

 

20,444

 

 

 

15,571

 

General and administrative

 

 

10,725

 

 

 

11,174

 

 

 

33,674

 

 

 

31,278

 

Amortization of intangible assets

 

 

1,327

 

 

 

928

 

 

 

3,897

 

 

 

3,086

 

Total operating expenses

 

 

36,732

 

 

 

34,200

 

 

 

110,419

 

 

 

103,958

 

Income from operations

 

 

10,933

 

 

 

8,257

 

 

 

27,642

 

 

 

18,522

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

843

 

 

 

628

 

 

 

2,233

 

 

 

1,589

 

Other income (expense), net

 

 

(165

)

 

 

(219

)

 

 

28

 

 

 

(541

)

Change in earn-out liability

 

 

22

 

 

 

 

 

 

366

 

 

 

 

Total other income, net

 

 

700

 

 

 

409

 

 

 

2,627

 

 

 

1,048

 

Income before income taxes

 

 

11,633

 

 

 

8,666

 

 

 

30,269

 

 

 

19,570

 

Income tax expense

 

 

2,692

 

 

 

605

 

 

 

5,719

 

 

 

2,839

 

Net income

 

$

8,941

 

 

$

8,061

 

 

$

24,550

 

 

$

16,731

 

Other comprehensive income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(958

)

 

 

76

 

 

$

73

 

 

$

(2,155

)

Unrealized gain on investments, net of tax of $38, $41, $105, and $88, respectively

 

 

115

 

 

 

123

 

 

$

315

 

 

$

264

 

Reclassification of gain on investments into earnings, net of tax of ($48), ($11), ($109) and ($64), respectively

 

 

(145

)

 

 

(33

)

 

$

(326

)

 

$

(191

)

Total other comprehensive income (expense)

 

 

(988

)

 

 

166

 

 

 

62

 

 

 

(2,082

)

Comprehensive income

 

$

7,953

 

 

$

8,227

 

 

$

24,612

 

 

$

14,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.26

 

 

$

0.23

 

 

$

0.70

 

 

$

0.49

 

Diluted

 

$

0.25

 

 

$

0.23

 

 

$

0.68

 

 

$

0.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares used to compute net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,015

 

 

 

34,438

 

 

 

34,966

 

 

 

34,334

 

Diluted

 

 

35,932

 

 

 

35,482

 

 

 

35,952

 

 

 

35,114

 

 

Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective August 22, 2019.

 

See accompanying notes to these condensed consolidated financial statements.

5


 

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited; in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balances, June 30, 2018

 

 

34,319,638

 

 

$

35

 

 

 

631,082

 

 

$

(17,684

)

 

$

313,869

 

 

$

59

 

 

$

(1,590

)

 

$

294,689

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,973

 

 

 

 

 

 

 

 

 

2,973

 

Exercise of stock options and issuance of restricted stock

 

 

338,008

 

 

 

 

 

 

 

 

 

 

 

 

6,680

 

 

 

 

 

 

 

 

 

6,680

 

Repurchases of common stock

 

 

(52,502

)

 

 

 

 

 

52,502

 

 

 

(1,998

)

 

 

 

 

 

 

 

 

 

 

 

(1,998

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,061

 

 

 

 

 

 

8,061

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76

 

 

 

76

 

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

123

 

 

 

123

 

Reclassification of gain on investments into earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33

)

 

 

(33

)

Balances, September 30, 2018

 

 

34,605,144

 

 

$

35

 

 

 

683,584

 

 

$

(19,682

)

 

$

323,522

 

 

$

8,120

 

 

$

(1,424

)

 

$

310,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, June 30, 2019

 

 

34,936,212

 

 

$

36

 

 

 

1,007,478

 

 

$

(34,645

)

 

$

344,232

 

 

$

30,870

 

 

$

(2,160

)

 

$

338,333

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,804

 

 

 

 

 

 

 

 

 

2,804

 

Exercise of stock options and issuance of restricted stock

 

 

80,350

 

 

 

 

 

 

 

 

 

 

 

 

1,902

 

 

 

 

 

 

 

 

 

1,902

 

Employee stock purchase plan

 

 

2,178

 

 

 

 

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

 

 

 

76

 

Repurchases of common stock

 

 

(116,856

)

 

 

 

 

 

116,856

 

 

 

(6,000

)

 

 

 

 

 

 

 

 

 

 

 

(6,000

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,941

 

 

 

 

 

 

8,941

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(958

)

 

 

(958

)

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

115

 

 

 

115

 

Reclassification of gain on investments into earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(145

)

 

 

(145

)

Balances, September 30, 2019

 

 

34,901,884

 

 

$

36

 

 

 

1,124,334

 

 

$

(40,645

)

 

$

349,014

 

 

$

39,811

 

 

$

(3,148

)

 

$

345,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Paid-in

 

 

(Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit)

 

 

Income (Loss)

 

 

Equity

 

Balances, December 31, 2017

 

 

34,254,012

 

 

$

34

 

 

 

244,294

 

 

$

(5,815

)

 

$

301,846

 

 

$

(8,611

)

 

$

657

 

 

$

288,111

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,040

 

 

 

 

 

 

 

 

 

9,040

 

Exercise of stock options and issuance of restricted stock

 

 

749,936

 

 

 

1

 

 

 

 

 

 

 

 

 

11,800

 

 

 

 

 

 

 

 

 

11,801

 

Employee stock purchase plan

 

 

40,486

 

 

 

 

 

 

 

 

 

 

 

 

836

 

 

 

 

 

 

 

 

 

836

 

Repurchases of common stock

 

 

(439,290

)

 

 

 

 

 

439,290

 

 

 

(13,867

)

 

 

 

 

 

 

 

 

 

 

 

(13,867

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,731

 

 

 

 

 

 

16,731

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,155

)

 

 

(2,155

)

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

264

 

 

 

264

 

Reclassification of gain on investments into earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(190

)

 

 

(190

)

Balances, September 30, 2018

 

 

34,605,144

 

 

$

35

 

 

 

683,584

 

 

$

(19,682

)

 

$

323,522

 

 

$

8,120

 

 

$

(1,424

)

 

$

310,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2018

 

 

34,691,472

 

 

$

36

 

 

 

823,784

 

 

$

(25,679

)

 

$

332,574

 

 

$

15,261

 

 

$

(3,218

)

 

$

318,974

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,312

 

 

 

 

 

 

 

 

 

10,312

 

Exercise of stock options and issuance of restricted stock

 

 

483,492

 

 

 

 

 

 

 

 

 

 

 

 

5,273

 

 

 

 

 

 

 

 

 

5,273

 

Employee stock purchase plan

 

 

32,992

 

 

 

 

 

 

 

 

 

 

 

 

1,155

 

 

 

 

 

 

 

 

 

1,155

 

Repurchases of common stock

 

 

(300,550

)

 

 

 

 

 

300,550

 

 

 

(14,966

)

 

 

 

 

 

 

 

 

 

 

 

(14,966

)

Settlement and subsequent return of shares

 

 

(5,522

)

 

 

 

 

 

 

 

 

 

 

 

(300

)

 

 

 

 

 

 

 

 

(300

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,550

 

 

 

 

 

 

24,550

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73

 

 

 

73

 

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

315

 

 

 

315

 

Reclassification of gain on investments into earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(326

)

 

 

(326

)

Adoption of ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

8

 

Balances, September 30, 2019

 

 

34,901,884

 

 

$

36

 

 

 

1,124,334

 

 

$

(40,645

)

 

$

349,014

 

 

$

39,811

 

 

$

(3,148

)

 

$

345,068

 

 

Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective August 22, 2019.

 

See accompanying notes to these condensed consolidated financial statements.

6


 

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

24,550

 

 

$

16,731

 

Reconciliation of net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

5,360

 

 

 

1,934

 

Change in earn-out liability

 

 

(366

)

 

 

 

Depreciation and amortization of property and equipment

 

 

8,143

 

 

 

6,308

 

Amortization of intangible assets

 

 

3,897

 

 

 

3,086

 

Provision for doubtful accounts

 

 

2,429

 

 

 

1,780

 

Stock-based compensation

 

 

11,316

 

 

 

9,978

 

Other, net

 

 

(551

)

 

 

(255

)

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,670

)

 

 

(4,279

)

Deferred costs

 

 

(151

)

 

 

(3,813

)

Other current and non-current assets

 

 

(820

)

 

 

(681

)

Accounts payable

 

 

181

 

 

 

382

 

Accrued compensation

 

 

(3,716

)

 

 

(592

)

Accrued expenses

 

 

(84

)

 

 

(718

)

Deferred revenue

 

 

4,929

 

 

 

7,039

 

Deferred rent

 

 

 

 

 

647

 

Operating leases

 

 

(487

)

 

 

 

Net cash provided by operating activities

 

 

50,960

 

 

 

37,547

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(8,387

)

 

 

(9,875

)

Purchases of investments

 

 

(61,967

)

 

 

(64,434

)

Maturities of investments

 

 

55,225

 

 

 

60,000

 

Acquisitions of businesses and intangible assets, net of cash acquired

 

 

(11,500

)

 

 

(381

)

Net cash used in investing activities

 

 

(26,629

)

 

 

(14,690

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(14,966

)

 

 

(13,867

)

Net proceeds from exercise of options to purchase common stock

 

 

5,273

 

 

 

11,800

 

Net proceeds from employee stock purchase plan

 

 

1,155

 

 

 

836

 

Net cash used in financing activities

 

 

(8,538

)

 

 

(1,231

)

Effect of foreign currency exchange rate changes

 

 

75

 

 

 

(5

)

Net increase in cash and cash equivalents

 

 

15,868

 

 

 

21,621

 

Cash and cash equivalents at beginning of period

 

 

133,859

 

 

 

123,127

 

Cash and cash equivalents at end of period

 

$

149,727

 

 

$

144,748

 

 

See accompanying notes to these condensed consolidated financial statements.

 

7


 

SPS COMMERCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE A – General

Business Description

SPS Commerce is a leading provider of cloud-based supply chain management solutions that make it easier for retailers, suppliers, grocers, distributors and logistics firms to orchestrate the management of item data, order fulfillment, inventory control and sales analytics across all channels. The solutions offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer’s behalf.  The solutions SPS Commerce provides allow our customers to increase their supply cycle agility, optimize their inventory levels and sell-through, reduce operational costs and gain increased visibility into customer orders, ensuring that suppliers, grocers, distributors, and logistics firms can satisfy exacting retailer requirements.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SPS Commerce, Inc. and its subsidiaries.  All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, these condensed consolidated financial statements do not include all of the information and notes required by GAAP.  We have included all normal recurring adjustments considered necessary to provide a fair presentation of our financial position, results of operations, stockholders’ equity, and cash flows for the interim periods shown.  Operating results for these interim periods are not necessarily indicative of the results to be expected for the full year.  For further information, refer to the consolidated financial statements and accompanying notes for the year ended December 31, 2018 included in our Annual Report on Form 10-K/A filed with the SEC.

Effective January 1, 2019, we adopted the requirements of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), and used the effective date as our date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard were not provided for dates and periods before January 1, 2019.  The new standard provides several optional practical expedients in transition. We elected the “package of practical expedients,” which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of hindsight or the practical expedient pertaining to land easements, the latter not being applicable to us.  The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify, which means we will not recognize right-of-use (“ROU”) assets or lease liabilities for these leases. This includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all leases.

On July 25, 2019, the Company announced that its board of directors declared a two-for-one stock split of the Company’s common stock, effected in the form of a 100 percent stock dividend as of the record date on August 8, 2019. The stock split dividend was distributed on August 22, 2019. Earnings per share and weighted average shares outstanding are presented in this Quarterly Report on Form 10-Q after the effect of 100 percent stock dividend. The two-for-one stock split is reflected in the share amounts in all periods presented in this Quarterly Report on Form 10-Q.  

Use of Estimates

Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

 

Lease Policy

We determine if an arrangement is a lease at inception.  Operating leases are included in operating lease ROU assets, current lease liabilities, and long-term lease liabilities in our consolidated balance sheets.

8


 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.  Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  We estimate the discount rate for a similar collateralized asset by reviewing quoted costs of borrowing.  We use the implicit interest rate when readily determinable.  The operating lease ROU asset also includes any lease payments made and lease incentives that have been incurred.  The options to extend our leases are not recognized as part of our right-of-use assets and lease liabilities unless it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For all leases we combine non-lease components with the related lease components and account for it as a single lease component.  The ROU assets are subject to the same impairment process as our long-lived assets.  Additionally, we review our lease liabilities for remeasurement whenever there is a triggering event or when relevant facts and circumstances change.

 

Recently Adopted Accounting Pronouncements

 

Standard

 

Date of Issuance

 

Description

 

Date Adopted

 

Effect on the Financial Statements

ASU 2016-02, Leases and all related amendments

 

February

2016

 

Requires all leases with a term greater than 12 months to be recognized in the statements of financial position and eliminates current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing between finance leases and operating leases.

 

January

2019

 

The adoption of this standard and related amendments resulted in the recognition of approximately $15.7 million in right-of-use assets and lease liabilities on our balance sheet as of January 1, 2019. Comparative periods will continue to be measured and presented under historical guidance, and only the period of adoption and future periods will be subject to this ASU. There was no cumulative effect on retained earnings or other components of equity at the adoption date.  For more information see Note H.

ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220)

 

February

2018

 

Allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 and requires certain disclosures regarding stranded tax effects in accumulated other comprehensive income.

 

January

2019

 

The adoption of this standard did not have a material impact on our consolidated financial statements.

9


 

Accounting Pronouncements Not Yet Adopted

 

Standard

 

Date of Issuance

 

Description

 

Date of Required

Adoption

 

Effect on the Financial Statements

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements

 

June

2016

 

The amendment in this update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses.

 

January 2020

 

We are currently evaluating the impact of the adoption on our condensed consolidated financial statements.

ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

 

August 2018

 

This ASU adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement.

 

January 2020

 

We are currently evaluating the impact of the adoption on our condensed consolidated financial statements.

Significant Accounting Policies

Except for the accounting policy for leases that was updated as a result of adopting ASU 2016-02, there were no material changes in our significant accounting policies during the nine months ended September 30, 2019. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2018, as filed with the SEC, for additional information regarding our significant accounting policies.

 

NOTE B – Business Acquisitions

MAPADOC

On August 26, 2019, we completed our asset acquisition of the MAPADOC business, an operating unit of SWK Technologies, Inc., a leading provider of EDI System Automation solutions for the Sage and Acumatica markets. Pursuant to the asset purchase agreement, the purchase price is $11.8 million, of which $11.5 million has been paid in cash and $0.3 million is due to the seller as part of the initial net working capital adjustment. The net working capital adjustment will be paid in cash upon final net working capital settlement.  The purchase accounting for the MAPADOC acquisition has not been finalized as of September 30, 2019. Provisional amounts are primarily related to intangible assets and net working capital. We expect to finalize the allocation of purchase price within the one-year measurement period following the acquisition.

Purchase Price Allocation

We accounted for the acquisition as a business combination.  We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.  We engaged a third-party valuation firm to assist us in the determination of the value of the purchased intangible assets.  The excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill.  Goodwill is attributed to a trained workforce and other buyer-specific value resulting from expected synergies, including long-term cost savings, which are not included in the fair values of identifiable assets. The final purchase price is subject to a net working capital adjustment to be determined by the sellers and us, pursuant to the terms of the purchase agreement.

10


 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

 

Current assets

 

$

612

 

Goodwill

 

 

6,570

 

Intangible assets

 

 

4,900

 

Deferred revenue

 

 

(300

)

 

 

$

11,782

 

 

Purchased Intangible Assets

The following table summarizes the estimated fair value of the purchased intangible assets and their estimated useful lives:

 

 

 

Estimated

 

 

Estimated

 

 

 

Fair Value

 

 

Life

 

Purchased Intangible Assets

 

(in thousands)

 

 

(in years)

 

Developed technology

 

$

3,500

 

 

 

8

 

Subscriber relationships

 

 

1,400

 

 

 

8

 

 

 

$

4,900

 

 

 

 

 

 

The purchased intangible assets are being amortized on a straight-line basis over their estimated useful lives. Amortization expense for the period from August 26, 2019 through September 30, 2019 was not material.

 

 

EDIAdmin

On October 3, 2018, we completed our asset acquisition of EDIAdmin, a privately held company providing end-to-end integration solutions, featuring a dedicated Integration Platform as a Service (“iPaaS”) called Cloud Hybrid Integration Platform (“CHIP”) and collaborative managed services for leading systems and applications, both cloud-based and on-premise. Pursuant to the asset purchase agreement, we paid $7.5 million in cash to the owner of EDIAdmin.  The purchase agreement also allowed the seller to receive up to $1.7 million in cash, which becomes payable in first quarter 2020 and 2021 contingent upon the completion of certain revenue milestones at December 31, 2019 and December 31, 2020.  The fair value of this contingent consideration was $1.3 million at the date of acquisition and $1.0 million at September 30, 2019.  Due to the remeasurement of the contingent liability, we recognized an insignificant amount of income and $0.4 million of income for the three and nine months ended September 30, 2019, respectively, in our condensed consolidated statements of comprehensive income.  See Note E for further disclosures on the remeasurement of the contingent liability.  

We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.  The excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill.  Goodwill is attributed to a trained workforce and other buyer-specific value resulting from expected synergies, including long-term cost savings, which are not included in the fair values of identifiable assets.  The purchase accounting for the EDIAdmin acquisition was complete as of December 31, 2018. The consolidated balance sheet as of December 31, 2018 reflects the final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.

CovalentWorks

On December 18, 2018, we completed our asset acquisition of CovalentWorks, a privately held company providing cloud-based EDI solutions to small- and medium-sized businesses. Pursuant to the asset purchase agreement, we paid $19.4 million in cash and issued $3.4 million in common stock, or 80,956 shares, as adjusted for the two-for-one stock split, to the owners of CovalentWorks.

We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.  The excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill.  Goodwill is attributed to a trained workforce and other buyer-specific value resulting from expected synergies, including long-term cost savings, which are not included in the fair values of identifiable assets.  The purchase accounting, purchase price allocation and net working capital adjustment for the CovalentWorks acquisition were finalized during the first quarter of 2019 and there have been no subsequent adjustments.

 

11


 

NOTE C – Revenue

 

We derive our revenues primarily from the following revenue streams (in thousands):  

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Recurring revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment

 

$

55,546

 

 

$

48,482

 

 

$

161,685

 

 

$

140,326

 

Analytics

 

 

9,422

 

 

 

8,750

 

 

 

27,540

 

 

 

25,639

 

Other

 

 

1,458

 

 

 

1,412

 

 

 

4,303

 

 

 

3,969

 

Recurring Revenues

 

 

66,426

 

 

 

58,644

 

 

 

193,528

 

 

 

169,934

 

One-time revenues

 

 

4,502

 

 

 

4,224

 

 

 

12,863

 

 

 

13,117

 

 

 

$

70,928

 

 

$

62,868

 

 

$

206,391

 

 

$

183,051

 

 

Revenues are recognized when our services are made available to our customers, in an amount that reflects the consideration we are contractually and legally entitled to in exchange for those services.

We determine revenue recognition through the following steps:

 

-

Identification of the contract, or contracts, with a customer

 

-

Identification of the performance obligations in the contract

 

-

Determination of the transaction price

 

-

Allocation of the transaction price to the performance obligations in the contract

 

-

Recognition of revenue when, or as, we satisfy a performance obligation

Recurring Revenues

Recurring revenues consists of recurring subscriptions from customers that utilize our Fulfillment, Analytics, and Other cloud-based supply chain management solutions.  Revenue for these solutions is generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer.  Our contracts with our recurring revenue customers are recurring in nature, ranging from monthly to annual, and generally allow the customer to cancel the contract for any reason with 30 to 90 days’ notice.  Timing of billings varies by customer and by contract type and are either in advance or within 30 days of the service being performed.

The deferred revenue liability for recurring revenue contracts are for one year or less and recognized on a ratable basis over the contract term. We have applied the optional exemption under Accounting Standards Codification (“ASC”) 606-10-50-14(a) and will not disclose information about the remaining performance obligations for contracts which have original durations of one year or less.

One-time Revenues

One-time revenues consist of set-up fees from customers and miscellaneous one-time fees.

Set-up fees are specific for each connection a customer has with a trading partner and many of our customers have connections with numerous trading partners.  Set-up fees related to our cloud-based supply chain management solutions are nonrefundable upfront fees that are necessary for our customers to utilize our cloud-based services.  These set-up fees do not provide any standalone value to our customers.  Except for our Analytics platform, we have determined the set-up fees represent a material renewal option right to our customers as they will not be incurred again upon renewal.  These set-up fees and related costs are deferred and recognized ratably over two years, which is the estimated connection life between the customer and the trading partner.  For our Analytics platform, we have determined the set-up fees do not represent a material customer renewal right and, as such, are deferred and recognized ratably over the estimated initial contract term, which is one year.

12


 

The table below presents the activity of the portion of the deferred revenue liability relating to set-up fees (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Balances, at beginning of period

 

$

10,063

 

 

$

9,886

 

 

$

9,857

 

 

$

10,031

 

Invoiced set-up fees

 

 

2,599

 

 

 

2,697

 

 

 

7,965

 

 

 

7,807

 

Amortized set-up fees

 

 

(2,584

)

 

 

(2,596

)

 

 

(7,744

)

 

 

(7,851

)

Balances, at end of period

 

$

10,078

 

 

$

9,987

 

 

$

10,078

 

 

$

9,987

 

 

The entire balance of set-up fees will be recognized within two years and, as such, current amounts will be recognized in the next 1-12 months and long-term amounts will be recognized in the next 13-24 months.

Miscellaneous one-time fees consist of professional services and testing and certification. The deferred revenue liability for these one-time fees are for one year or less and recognized at the time service is provided. We have applied the optional exemption under ASC 606-10-50-14(a) and will not disclose information about the remaining performance obligations for contracts which have original durations of one year or less.

 

NOTE D – Deferred Costs

Deferred costs consist of costs to obtain customer contracts, such as commissions paid to sales personnel and to third-party partners for customer referrals, and costs to fulfill customer contracts, such as customer implementation costs.

Sales commissions relating to recurring revenues are considered incremental and recoverable costs of obtaining a contract with our customer.  These commissions are calculated based on estimated annual recurring revenue to be generated over the customer’s initial contract year.  These costs are deferred and amortized over the expected period of benefit which we have determined to be two years.  Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of comprehensive income.

Customer implementation costs are considered incremental and recoverable costs of obtaining a contract with our customer.  These costs are deferred and amortized over the expected period of benefit which we have determined to be two years.  Amortization expense is included in cost of revenues in the accompanying condensed consolidated statements of comprehensive income.

The table below presents the activity of deferred costs and amortization of deferred costs (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Balances, at beginning of period

 

$

45,528

 

 

$

42,544

 

 

$

45,475

 

 

$

39,933

 

Incurred deferred costs

 

 

12,676

 

 

 

12,391

 

 

 

36,888

 

 

 

36,807

 

Amortized deferred costs

 

 

(12,623

)

 

 

(11,204

)

 

 

(36,782

)

 

 

(33,009

)

Balances, at end of period

 

$

45,581

 

 

$

43,731

 

 

$

45,581

 

 

$

43,731

 

 

NOTE E – Financial Instruments

We invest primarily in money market funds, certificates of deposit, highly liquid debt instruments of the U.S. government and U.S. corporate debt securities.  All investments with remaining maturities of less than one year from the balance sheet date are classified as short-term investments.  Investments with remaining maturities of more than one year from the balance sheet date are classified as long-term investments. As of September 30, 2019 and December 31, 2018, all of our investments held were classified as short-term.

Our short-term marketable securities are classified as available-for-sale.  We intend to hold marketable securities until maturity; however, we may sell these securities at any time for use in current operations or for other purposes.

Our marketable securities are carried at fair value and unrealized gains and losses on these investments, net of taxes, are included in accumulated other comprehensive loss in the condensed consolidated balance sheets.  Realized gains or losses are included in other income (expense), net in the condensed consolidated statements of comprehensive income.  When a determination has been made that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is realized and is included in other income (expense), net in the condensed consolidated statements of comprehensive income.

13


 

Cash equivalents and short-term investments consisted of the following (in thousands):

 

 

 

September 30, 2019

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains (Losses)

 

 

Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

124,046

 

 

$

 

 

$

124,046

 

Certificates of deposit

 

 

6,747

 

 

 

 

 

 

6,747

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

19,821

 

 

 

(11

)

 

 

19,810

 

Commercial paper

 

 

9,961

 

 

 

41

 

 

 

10,002

 

U.S. treasury securities

 

 

14,778

 

 

 

109

 

 

 

14,887

 

Total

 

$

175,353

 

 

$

139

 

 

$

175,492

 

 

 

 

December 31, 2018

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

109,265

 

 

$

 

 

$

109,265

 

Certificates of deposit

 

 

7,000

 

 

 

 

 

 

7,000

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

15,194

 

 

 

40

 

 

 

15,234

 

Commercial paper

 

 

9,889

 

 

 

76

 

 

 

9,965

 

U.S. treasury securities

 

 

12,300

 

 

 

38

 

 

 

12,338

 

Total

 

$

153,648

 

 

$

154

 

 

$

153,802

 

 

We do not believe any of the unrealized losses represent an other-than-temporary impairment based on our valuation of available evidence as of September 30, 2019.  We expect to receive the full principal and interest on all of these cash equivalents, certificates of deposit, and marketable securities.

Recurring Fair Value Measurements

We measure certain financial assets at fair value on a recurring basis based on a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The three levels of inputs that may be used to measure fair value are:

 

Level 1 – quoted prices in active markets for identical assets or liabilities

 

Level 2 – observable inputs other than Level 1 prices, such as: (a) quoted prices for similar assets or liabilities, (b) quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or (c) model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.  We obtain the fair values of our level 2 available-for-sale securities from a professional pricing service.

 

Level 3 – unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

For the earn-out liability related to the EDIAdmin acquisition, the Company utilized the Monte Carlo simulation method to estimate the fair value of this contingent liability as of the reporting date.  Thousands of iterations of the simulation were performed using forecasted revenues to develop a distribution of future values of recurring revenue which, in turn, provide indicated earn-out payments.  The total estimated fair value equals the sum of the average present values of the indicated earn-out payments.  Changes in assumptions described above could have an impact on the payout of contingent consideration with a maximum payout being $1.7 million.  The earn-out liability has been measured as Level 3 given the unobservable inputs that are significant to the measurement of the liability.

14


 

The following table presents information about our financial assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):

 

 

 

September 30, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

124,046

 

 

$

 

 

$

 

 

$

124,046

 

Certificates of deposit

 

 

6,747

 

 

 

 

 

 

 

 

 

6,747

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

 

 

 

19,810

 

 

 

 

 

 

19,810

 

Commercial paper

 

 

 

 

 

10,002

 

 

 

 

 

 

10,002

 

U.S. treasury securities

 

 

 

 

 

14,887

 

 

 

 

 

 

14,887

 

Total

 

$

130,793

 

 

$

44,699

 

 

$

 

 

$

175,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out liability

 

$

 

 

$

 

 

$

1,002

 

 

$

1,002

 

Total

 

$

 

 

$

 

 

$

1,002

 

 

$

1,002

 

 

 

 

December 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

109,265

 

 

$

 

 

$

 

 

$

109,265

 

Certificates of deposit

 

 

7,000

 

 

 

 

 

 

 

 

 

7,000

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

 

 

 

15,234

 

 

 

 

 

 

15,234

 

Commercial paper

 

 

 

 

 

9,965

 

 

 

 

 

 

9,965

 

U.S. treasury securities

 

 

 

 

 

12,338

 

 

 

 

 

 

12,338

 

Total

 

$

116,265

 

 

$

37,537

 

 

$

 

 

$

153,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earn-out liability

 

$

 

 

$

 

 

$

1,368

 

 

$

1,368

 

Total

 

$

 

 

$

 

 

$

1,368

 

 

$

1,368

 

 

Nonrecurring Fair Value Measurements

The Company measures certain assets and liabilities at fair value on a nonrecurring basis. Assets and liabilities that are measured at fair value on a nonrecurring basis include long-lived assets, goodwill and indefinite-lived intangible assets, which would generally be recorded at fair value as a result of an impairment charge. Assets acquired and liabilities assumed as part of business combinations are measured at fair value. For additional information on the Company's business combinations and the related nonrecurring fair value measurement of the assets acquired and liabilities assumed, refer to Note B, Business Acquisitions.

Other Fair Value Disclosures

The carrying values of the Company's short-term financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, when applicable, approximate their respective fair values due to their short-term nature.

 

15


 

NOTE F – Goodwill and Intangible Assets, net

The changes in the net carrying amount of goodwill for the nine months ended September 30, 2019 are as follows (in thousands):

 

 

 

2019

 

Balance, January 1

 

$

69,658

 

Goodwill acquired during the period

 

 

6,570

 

Foreign currency translation adjustments

 

 

138

 

Balance, September 30, 2019

 

$

76,366

 

 

Intangible assets subject to amortization primarily include subscriber relationships, non-competition agreements and acquired technology and are amortized over their respective useful lives (ranging from 1 to 10 years). Intangible assets, net included the following (in thousands):

 

 

 

September 30, 2019

 

 

 

Gross

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Currency

 

 

 

 

 

 

 

Amount

 

 

Amortization

 

 

Translation

 

 

Net

 

Subscriber relationships

 

$

43,640

 

 

$

(26,178

)

 

$

76

 

 

$

17,538

 

Non-competition agreements

 

 

2,495

 

 

 

(2,334

)

 

 

7

 

 

 

168

 

Technology and other

 

 

8,502

 

 

 

(2,372

)

 

 

8

 

 

 

6,138

 

 

 

$

54,637

 

 

$

(30,884

)

 

$

91

 

 

$

23,844

 

 

 

 

December 31, 2018

 

 

 

Gross

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Currency

 

 

 

 

 

 

 

Amount

 

 

Amortization

 

 

Translation

 

 

Net

 

Subscriber relationships

 

$

43,212

 

 

$

(23,284

)

 

$

(623

)

 

$

19,305

 

Non-competition agreements

 

 

2,560

 

 

 

(2,247

)

 

 

(28

)

 

 

285

 

Technology and other

 

 

5,199

 

 

 

(2,012

)

 

 

(36

)

 

 

3,151

 

 

 

$

50,971

 

 

$

(27,543

)

 

$

(687

)

 

$

22,741

 

 

The estimated annual amortization expense related to intangible assets subject to amortization for the next five years is as follows (in thousands):

 

Remainder of 2019

 

$

1,412

 

2020

 

 

5,309

 

2021

 

 

4,471

 

2022

 

 

3,367

 

2023

 

 

3,297

 

Thereafter

 

 

5,988

 

 

 

$

23,844

 

 

NOTE G – Other Assets

 

The changes in the net amount of capitalized implementation costs for internal-use software from hosting arrangements for the nine months ended September 30, 2019 is as follows (in thousands):

 

 

 

2019

 

Balance, January 1

 

$

455

 

Capitalized implementation fees

 

 

670

 

Amortization of implementation fees

 

 

(52

)

Balance, September 30, 2019

 

$

1,073

 

 

There were no impairment losses in relation to the capitalized implementation costs for the period presented.

 

16


 

NOTE H – Leases

We are obligated under non-cancellable operating leases, primarily for office space and certain equipment, as follows:

 

 

 

September 30, 2019

 

 

 

Remaining

 

 

Right-of-Use

 

 

 

Term (years)

 

 

Asset (in thousands)

 

Minneapolis, MN lease

 

 

6

 

 

$

10,823

 

Little Falls, NJ lease

 

 

4

 

 

 

1,674

 

Other leases

 

< 1 - 3

 

 

 

1,151

 

 

 

 

 

 

 

$

13,648

 

 

Some of our leases may include options to extend the leases for up to 5 years.  The options to extend our leases are not recognized as part of our ROU assets and lease liabilities as it is not reasonably certain that we will exercise those options.  Additionally, our agreements do not include options to terminate the leases.

On December 20, 2017, we executed the fourth amendment to our lease agreement for our current headquarters located in Minneapolis, Minnesota where we lease approximately 189,000 square feet under an agreement that expires on April 30, 2025.  We have agreed to expand our headquarters premises by approximately 25,000 square feet during 2020. Our lease agreement also includes a further expansion right and a right of first offer to lease certain additional space and two options to extend the term of the lease for five years at a market rate determined in accordance with the lease.  Incentives of $6.4 million are included as a lease component.

On February 25, 2016, we executed the first amendment to our lease agreement for our Little Falls, New Jersey location where we lease approximately 26,000 square feet under an agreement that expires on June 30, 2023. The agreement includes an option to extend the term of the lease for five years at a market rate determined in accordance with the lease.  Incentives of $0.9 million are included as a lease component.

The components of lease expense were as follows (in thousands):  

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2019

 

Operating lease cost

 

$

650

 

 

$

1,956

 

Variable lease cost

 

 

721

 

 

 

2,360

 

 

 

$

1,371

 

 

$

4,316

 

 

Operating lease cost for short-term leases was not material for the three and nine months ended September 30, 2019.

 

Supplemental cash flow information related to leases was as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

1,109

 

 

 

3,246

 

ROU assets obtained in exchange for operating lease liabilities

 

 

 

 

 

 

 

The ROU assets obtained in exchange for operating lease liabilities excludes the transition amount of $15.7 million.

Supplemental balance sheet information related to leases was as follows:

 

 

 

September 30, 2019

 

Weighted-average remaining lease term - operating leases

 

5.1 years

 

Weighted-average discount rate - operating leases

 

 

4.5

%

 

17


 

At September 30, 2019, our future minimum payments under operating leases were as follows (in thousands):

 

Remainder of 2019

 

$

1,125

 

2020

 

 

3,635

 

2021

 

 

4,483

 

2022

 

 

4,042

 

2023

 

 

3,855

 

Thereafter

 

 

4,816

 

 

 

 

21,956

 

Less: imputed interest

 

 

(2,451

)

 

 

$

19,505

 

 

At December 31, 2018, our future minimum payments under operating leases were as follows (in thousands):

 

2019

 

$

4,209

 

2020

 

 

3,542

 

2021

 

 

4,414

 

2022

 

 

4,042

 

2023

 

 

3,855

 

Thereafter

 

 

4,816

 

 

 

$

24,878

 

 

NOTE I – Stock-Based Compensation

On August 22, 2019, we effected a two-for-one stock split of the Company’s common stock. There was no change in the number of authorized common shares of the Company. All share and per share data have been adjusted for all periods presented to reflect the stock split.

Our equity compensation plans provide for the grant of incentive and nonqualified stock options, as well as other stock-based awards including restricted stock and restricted stock units (“RSU”), to employees, non-employee directors and other consultants who provide services to us.  We also provide an employee stock purchase plan and 401(k) stock match.

Restricted stock awards result in the issuance of new shares when granted.  For other stock-based awards, new shares are issued when the award is exercised, vested or released according to the terms of the agreement.  In February 2019, 2,081,488 additional shares were reserved for future issuance under our 2010 Equity Incentive Plan.  At September 30, 2019, there were approximately 12,255,888 million shares available for grant under approved equity compensation plans.

We recognize stock-based compensation expense on a straight-line basis over the vesting period, except for expense relating to retirement-eligible employees which is recognized immediately upon the employee becoming retirement-eligible.

Stock-based compensation expense was allocated in the condensed consolidated statements of comprehensive income as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cost of revenues

 

$

778

 

 

$

535

 

 

$

2,027

 

 

$

1,587

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

784

 

 

 

691

 

 

 

2,208

 

 

 

2,054

 

Research and development

 

 

697

 

 

 

287

 

 

 

1,822

 

 

 

973

 

General and administrative

 

 

888

 

 

 

1,753

 

 

 

5,259

 

 

 

5,364

 

Total stock-based compensation expense

 

$

3,147

 

 

$

3,266

 

 

$

11,316

 

 

$

9,978

 

 

18


 

Stock-based compensation expense by plan type was as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Stock options

 

$

619

 

 

$

677

 

 

$

2,548

 

 

$

2,670

 

Performance share units

 

 

152

 

 

 

74

 

 

 

1,226

 

 

960

 

Restricted stock units

 

 

1,719

 

 

 

1,976

 

 

 

5,581

 

 

 

4,727

 

Restricted stock awards

 

 

128

 

 

 

137

 

 

 

409

 

 

 

352

 

Employee stock purchase plan

 

 

186

 

 

 

109

 

 

 

547

 

 

 

332

 

401(k) stock match

 

 

343

 

 

 

293

 

 

 

1,005

 

 

 

937

 

Total stock-based compensation expense

 

$

3,147

 

 

$

3,266

 

 

$

11,316

 

 

$

9,978

 

 

As of September 30, 2019, there was approximately $21.3 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted average period of 2.6 years.

Stock Options

Stock options generally vest over four years and have a contractual term of seven to ten years from the date of grant.  Our stock option activity was as follows:

 

 

 

 

 

 

 

Weighted Average

 

 

 

Options

 

 

Exercise Price

 

 

 

(#)

 

 

($/share)

 

Outstanding at December 31, 2018

 

 

1,746,468

 

 

$

25.93

 

Granted

 

 

184,194

 

 

 

53.92

 

Exercised

 

 

(309,310

)

 

 

21.57

 

Forfeited

 

 

(39,818

)

 

 

30.57

 

Outstanding at September 30, 2019

 

 

1,581,534

 

 

 

29.93

 

 

Of the total outstanding options at September 30, 2019, 1,129,294 were exercisable with a weighted average exercise price of $27.03 per share. The total outstanding options had a weighted average remaining contractual life of 3.2 years.

The weighted average grant date fair value of options granted during the first nine months of 2019 was $16.86 per share. This was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

Volatility

 

 

33.2

%

Dividend yield

 

 

0

%

Life (in years)

 

 

4.4

 

Risk-free interest rate

 

 

2.41

%

 

Performance Share Units and Restricted Stock Units and Awards

In February 2017, our executive officers were granted performance share unit (“PSU”) awards with vesting contingent on successful attainment of pre-determined revenue targets over the course of a three-year performance period (fiscal years 2017 – 2019).  The fair value is measured as the number of performance shares expected to be earned multiplied by the grant date fair value of our shares.  The number of performance shares expected to vest during the current service period is estimated and the fair value of those shares is recognized over the remaining service period less any amounts already recognized.

In February 2018 and 2019, our executive officers were granted PSU awards with vesting contingent on the Company’s total shareholder return as compared to indexed total shareholder return over the course of a three-year performance period (fiscal years 2018 – 2020 and fiscal years 2019 – 2021, respectively).  The grant date fair value was estimated using a Monte Carlo simulation that utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award and calculates the fair market value for the PSUs granted.  Expense is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied.

19


 

RSUs vest over four years and, upon vesting, the holder is entitled to receive shares of our common stock.  With restricted stock awards, shares of our common stock are issued when the award is granted and the restrictions lapse over one year.

Activity for our PSUs and RSUs was as follows:

 

 

 

 

 

 

 

Weighted Average

 

 

 

PSUs and RSUs

 

 

Grant Date Fair Value

 

 

 

(#)

 

 

($/share)

 

Outstanding at December 31, 2018

 

 

754,670

 

 

$

29.95

 

Granted

 

 

272,454

 

 

 

55.90

 

Vested and common stock issued

 

 

(190,624

)

 

 

28.76

 

Forfeited

 

 

(28,144

)

 

 

33.14

 

Outstanding at September 30, 2019

 

 

808,356

 

 

 

38.86

 

 

The number of RSUs outstanding at September 30, 2019 included 88,196 units that have vested, but for which shares of common stock have not yet been issued pursuant to the terms of the agreement.

Our restricted stock awards activity was as follows:

 

 

 

Restricted Stock

 

 

Weighted Average Grant

 

 

 

Awards (#)

 

 

Date Fair Value ($/share)

 

Outstanding at December 31, 2018

 

 

3,664

 

 

$

37.22

 

Restricted common stock issued

 

 

9,840

 

 

 

51.80

 

Restrictions lapsed

 

 

(8,584

)

 

 

45.58

 

Forfeited

 

 

 

 

 

 

Outstanding at September 30, 2019

 

 

4,920

 

 

$

51.80

 

 

Employee Stock Purchase Plan

We have an employee stock purchase plan which allows participating employees to purchase shares of our common stock at a discount through payroll deductions.  The plan is available to all employees subject to certain eligibility requirements.  Participating employees may purchase common stock, on a voluntary after-tax basis, at a price that is the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period.  The plan consists of two six-month offering periods, beginning on January 1 and July 1 of each calendar year, respectively.  A total of 2.0 million shares of common stock are reserved for issuance under the plan.

For the offering periods that began on January 1, 2019 and January 1, 2018, we withheld approximately $1.2 million and $0.8 million from employees participating in the plan. For the offering periods that began on July 1, 2019 and July 1, 2018, we withheld approximately $0.7 million and $0.5 million from employees participating in the plan as of September 30, 2019 and 2018, respectively.

The fair value was estimated based on the market price of our common stock at the beginning of the offering period using the Black-Scholes option pricing model with the following assumptions:

 

Volatility

 

 

40

%

Dividend yield

 

 

0

%

Life (in years)

 

 

0.5

 

Risk-free interest rate

 

 

2.56

%

 

401(k) Stock Match

We sponsor a 401(k) retirement savings plan for our U.S. employees where employees can contribute up to 80% of their compensation, subject to the limits established by law.  We match 50% of the employee’s elective deferrals, up to the first 6% of the employee’s pre-tax compensation for each pay period.  A portion of our match is in company stock, which is purchased from the open market by our plan provider and immediately deposited into the employee’s 401(k) account.   

 

20


 

NOTE J – Income Taxes

We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pretax income and adjust the provision for discrete tax items recorded in the period.  Differences between our effective tax rate and statutory tax rates are primarily due to the impact of permanently non-deductible expenses partially offset by the federal research and development credits.  Additionally, excess tax benefits generated upon settlement or exercise of stock awards are recognized as a reduction to income tax expense as a discrete tax item in the quarter that the event occurs creating potentially significant fluctuation in tax expense by quarter and by year.  Our provisions for income taxes include current foreign and state income tax expense, as well as deferred tax expense.

As of September 30, 2019, we do not have any unrecognized tax benefits nor any material accrued interest or tax penalties.

NOTE K – Net Income Per Share

Basic net income per share has been computed using the weighted average number of shares of common stock outstanding during each period.  Diluted net income per share also includes the impact of our outstanding potential common shares, including options, PSUs, RSUs and restricted awards.  Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income per share.

The following table presents the components of the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,941

 

 

$

8,061

 

 

$

24,550

 

 

$

16,731

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

35,015

 

 

 

34,438

 

 

 

34,966

 

 

 

34,334

 

Options to purchase common stock

 

 

634

 

 

 

790

 

 

 

687

 

 

 

586

 

PSUs, RSUs and restricted stock awards

 

 

283

 

 

 

254

 

 

 

299

 

 

 

194

 

Weighted average common shares outstanding, diluted

 

 

35,932

 

 

 

35,482

 

 

 

35,952

 

 

 

35,114

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.26

 

 

$

0.23

 

 

$

0.70

 

 

$

0.49

 

Diluted

 

$

0.25

 

 

$

0.23

 

 

$

0.68

 

 

$

0.48

 

Antidilutive shares (in thousands)

 

 

240

 

 

 

 

 

 

164

 

 

 

54

 

 

Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective August 22, 2019.

NOTE L – Subsequent Event

Subsequent to September 30, 2019, the Company’s board of directors authorized an increase and extension of its previously announced stock repurchase program pursuant to which the Company may, from time to time, purchase shares of its outstanding common stock. The stock repurchase program originally authorized the Company to purchase up to $50.0 million of its outstanding common stock and that amount has been increased by the board to $100.0 million. As of September 30, 2019, $9.3 million remained available under the previously unused stock repurchase program. The board also authorized an extension of the original expiration date of the stock repurchase program from November 2, 2019 to November 2, 2021. The number of shares to be purchased and the timing of purchases will be based on the price of the Company’s common stock, general business and market conditions and other investment considerations and factors.

The program does not obligate the Company to repurchase any specific number of shares and it may be suspended or discontinued at any time without prior notice. The Company intends to finance the share repurchase program with cash on hand.  

 

21


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

SPS Commerce is a leading provider of cloud-based solutions that make it easier for retailers, suppliers, grocers, distributors and logistics firms to orchestrate the management of item data, order fulfillment, inventory control and sales analytics across all channels. The solutions offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer’s behalf.  We derive the majority of our revenues from numerous monthly recurring subscriptions from businesses that utilize our solutions.

We plan to continue to grow our business by further penetrating the supply chain management market, increasing revenues from our customers as their businesses grow, expanding our distribution channels, expanding our international presence and, from time to time, developing new solutions and applications. We also intend to selectively pursue acquisitions that will add customers, allow us to expand into new regions, or allow us to offer new functionalities.

For the three months ended September 30, 2019, our revenues were $70.9 million, an increase of 13% from the comparable period in 2018, and represented our 75th consecutive quarter of increased revenues.  Total operating expenses increased 7% for the same period in 2019 from 2018.  For the nine months ended September 30, 2019, revenues increased 13% and operating expenses increased 6% compared to the same period in 2018.

Key Financial Terms and Metrics

We have several key financial terms and metrics, including annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share.  During the three and nine months ended September 30, 2019, there were no changes in the definitions of our key financial terms and metrics, which are discussed in more detail under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K/A for the year ended December 31, 2018 as filed with the SEC.

To supplement our financial statements, we also provide investors with Adjusted EBITDA and non-GAAP income per share, both of which are non-GAAP financial measures.  We believe that these non-GAAP measures provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations.  Our management uses these non-GAAP measures to compare the company’s performance to that of prior periods for trend analyses and planning purposes.  Adjusted EBITDA is also used for purposes of determining executive and senior management incentive compensation.  These measures are presented to our board of directors.

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP.  These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in our financial statements and are subject to inherent limitations.  Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Policies and Estimates

This discussion of our financial condition and results of operations is based upon our condensed consolidated financial statements, which are prepared in accordance with GAAP and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.  On an ongoing basis, we evaluate our estimates and assumptions.  We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable.  Our actual results may differ from these estimates under different assumptions or conditions.

A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments relating to uncertain matters that could have a material effect on our financial condition and results of operations.  Accordingly, we believe that our policies for revenue recognition and business combinations are the most critical to fully understand and evaluate our financial condition and results of operations.

22


 

During the three and nine months ended September 30, 2019, there were no changes in our critical accounting policies or estimates.  See Note A to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K/A for the year ended December 31, 2018, as filed with the SEC, for additional information regarding our accounting policies.  

Results of Operations

Three months ended September 30, 2019 compared to three months ended September 30, 2018

The following table presents our results of operations for the periods indicated (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

 

 

 

 

 

% of revenue

 

 

 

 

 

 

% of revenue

 

 

$

 

 

%

 

Revenues

 

$

70,928

 

 

 

100.0

%

 

$

62,868

 

 

 

100.0

%

 

$

8,060

 

 

 

12.8

%

Cost of revenues

 

 

23,263

 

 

 

32.8

 

 

 

20,411

 

 

 

32.5

 

 

 

2,852

 

 

 

14.0

 

Gross profit

 

 

47,665

 

 

 

67.2

 

 

 

42,457

 

 

 

67.5

 

 

 

5,208

 

 

 

12.3

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

16,937

 

 

 

23.9

 

 

 

16,952

 

 

 

26.9

 

 

 

(15

)

 

 

(0.1

)

Research and development

 

 

7,743

 

 

 

10.9

 

 

 

5,146

 

 

 

8.2

 

 

 

2,597

 

 

 

50.5

 

General and administrative

 

 

10,725

 

 

 

15.1

 

 

 

11,174

 

 

 

17.8

 

 

 

(449

)

 

 

(4.0

)

Amortization of intangible assets

 

 

1,327

 

 

 

1.9

 

 

 

928

 

 

 

1.5

 

 

 

399

 

 

 

43.0

 

Total operating expenses

 

 

36,732

 

 

 

51.8

 

 

 

34,200

 

 

 

54.4

 

 

 

2,532

 

 

 

7.4

 

Income from operations

 

 

10,933

 

 

 

15.4

 

 

 

8,257

 

 

 

13.1

 

 

 

2,676

 

 

 

32.4

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

843

 

 

 

1.2

 

 

 

628

 

 

 

1.0

 

 

 

215

 

 

 

34.2

 

Other expense, net

 

 

(165

)

 

 

(0.2

)

 

 

(219

)

 

 

(0.3

)

 

 

(54

)

 

 

(24.7

)

Change in earn-out liability

 

 

22

 

 

 

0.0

 

 

 

 

 

 

0.0

 

 

 

22

 

 

 

100.0

 

Total other income, net

 

 

700

 

 

 

1.0

 

 

 

409

 

 

 

0.7

 

 

 

291

 

 

 

71.1

 

Income before income taxes

 

 

11,633

 

 

 

16.4

 

 

 

8,666

 

 

 

13.8

 

 

 

2,967

 

 

 

34.2

 

Income tax expense

 

 

2,692

 

 

 

3.8

 

 

 

605

 

 

 

1.0

 

 

 

2,087

 

 

 

345.0

 

Net income

 

$

8,941

 

 

 

12.6

%

 

$

8,061

 

 

 

12.8

%

 

$

880

 

 

 

10.9

%

 

Revenues.  The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and the retainment of annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share.

 

The number of recurring revenue customers increased 14% to 30,551 at September 30, 2019 from 26,869 at September 30, 2018.

 

Annualized average recurring revenues per recurring revenue customer, or wallet share, decreased slightly to $8,793 for the three months ended September 30, 2019 from $8,838 for the same period in 2018. The slight decrease in wallet share is due to the increase in recurring revenue customers.

Recurring revenues from recurring revenue customers accounted for 94% of our total revenues for the three months ended September 30, 2019, increasing from 93% for the same period in 2018. We anticipate that the number of recurring revenue customers and wallet share will increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.

Cost of Revenues.  The increase in cost of revenues for the three months ended September 30, 2019 was primarily due to an increase in personnel-related costs of $1.9 million, driven by increased salaries and benefits due to business growth and by increased headcount, consulting, and contract labor. As we continued to invest in the infrastructure supporting our platform, depreciation expense increased by $0.6 million.

Sales and Marketing Expenses.  The decrease in sales and marketing expense for the three months ended September 30, 2019 was primarily due to a decrease of $0.3 million in variable compensation earned by sales personnel and referred partners, offset by an increase of $0.1 million in salaries and benefits and an increase of $0.1 in stock-based compensation  

Research and Development Expenses.  The increase in research and development expense for the three months ended September 30, 2019 was primarily due to increased headcount which resulted in an increase in personnel costs of $2.0 million and an increase in stock-based compensation expense of $0.4 million.

23


 

General and Administrative Expenses.  The decrease in general and administrative expense for the three months ended September 30, 2019 was driven by a decrease in stock-based compensation of $0.9 million primarily due to the timing of the Chief Executive Officer’s 2019 RSU grants compared to his 2018 RSU grants, offset by an increase of $0.2 million in cloud-based and software subscriptions and an increase of $0.2 million in miscellaneous service fees.

Other Income (Expense).  Interest income, net, other expense, net, and change in earn-out liability for the three months ended September 30, 2019 increased primarily due to increased interest income from investments, offset by realized foreign currency exchange gains, and decrease in the fair value of the earn-out liability.  The change in fair value of the earn-out liability for the three months ended September 30, 2019 was driven by an adjustment to the fair value of the EDIAdmin earnout liability due to estimated revenue at the earn-out measurement dates, December 31, 2019 and December 31, 2020.

Income Tax Expense.  The increase in income tax expense for the three months ended September 30, 2019 was primarily due to an increase in pre-tax income, as well as a decrease of $1.5 million in third quarter discrete tax benefits, primarily driven by a decrease in stock activity. Under ASU 2016-09, excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will be volatile.

Adjusted EBITDA.  Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for depreciation and amortization, interest expense, interest income, income tax expense, stock-based compensation expense, and other adjustments as necessary for a fair presentation.  Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability.  The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Net income

 

$

8,941

 

 

$

8,061

 

Depreciation and amortization of property and equipment

 

 

2,819

 

 

 

2,132

 

Amortization of intangible assets

 

 

1,327

 

 

 

928

 

Interest income, net

 

 

(843

)

 

 

(628

)

Income tax expense

 

 

2,692

 

 

 

605

 

Stock-based compensation expense

 

 

3,147

 

 

 

3,266

 

Other

 

 

(22

)

 

 

 

Adjusted EBITDA

 

$

18,061

 

 

$

14,364

 

 

Non-GAAP Income per Share.  Non-GAAP income per share, which is also a non-GAAP measure of financial performance, consists of net income plus stock-based compensation expense, amortization expense related to intangible assets, and other adjustments as necessary for a fair presentation, divided by the weighted average number of shares of common stock outstanding during each period.  Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability. The following table provides a reconciliation of net income to non-GAAP income per share (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Net income

 

$

8,941

 

 

$

8,061

 

Stock-based compensation expense

 

 

3,147

 

 

 

3,266

 

Amortization of intangible assets

 

 

1,327

 

 

 

928

 

Other

 

 

(22

)

 

 

 

Income tax effects of adjustments

 

 

(1,606

)

 

 

(3,008

)

Non-GAAP income

 

$

11,787

 

 

$

9,247

 

Shares used to compute non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

 

35,015

 

 

 

34,438

 

Diluted

 

 

35,932

 

 

 

35,482

 

Non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

 

$

0.27

 

Diluted

 

$

0.33

 

 

$

0.26

 

 

24


 

Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

The following table presents our results of operations for the periods indicated (dollars in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

 

 

 

 

 

% of revenue

 

 

 

 

 

 

% of revenue

 

 

$

 

 

%

 

Revenues

 

$

206,391

 

 

 

100.0

%

 

$

183,051

 

 

 

100.0

%

 

$

23,340

 

 

 

12.8

%

Cost of revenues

 

 

68,330

 

 

 

33.1

 

 

 

60,571

 

 

 

33.1

 

 

 

7,759

 

 

 

12.8

 

Gross profit

 

 

138,061

 

 

 

66.9

 

 

 

122,480

 

 

 

66.9

 

 

 

15,581

 

 

 

12.7

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

52,404

 

 

 

25.4

 

 

 

54,023

 

 

 

29.5

 

 

 

(1,619

)

 

 

(3.0

)

Research and development

 

 

20,444

 

 

 

9.9

 

 

 

15,571

 

 

 

8.5

 

 

 

4,873

 

 

 

31.3

 

General and administrative

 

 

33,674

 

 

 

16.3

 

 

 

31,278

 

 

 

17.1

 

 

 

2,396

 

 

 

7.7

 

Amortization of intangible assets

 

 

3,897

 

 

 

1.9

 

 

 

3,086

 

 

 

1.7

 

 

 

811

 

 

 

26.3

 

Total operating expenses

 

 

110,419

 

 

 

53.5

 

 

 

103,958

 

 

 

56.8

 

 

 

6,461

 

 

 

6.2

 

Income from operations

 

 

27,642

 

 

 

13.4

 

 

 

18,522

 

 

 

10.1

 

 

 

9,120

 

 

 

49.2

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

2,233

 

 

 

1.1

 

 

 

1,589

 

 

 

0.9

 

 

 

644

 

 

 

40.5

 

Other income (expense), net

 

 

28

 

 

 

0.0

 

 

 

(541

)

 

 

(0.3

)

 

 

569

 

 

 

105.2

 

Change in earn-out liability

 

 

366

 

 

 

0.2

 

 

 

 

 

 

 

 

 

366

 

 

 

100.0

 

Total other income (expense), net

 

 

2,627

 

 

 

1.3

 

 

 

1,048

 

 

 

0.6

 

 

 

1,579

 

 

 

150.7

 

Income before income taxes

 

 

30,269

 

 

 

14.7

 

 

 

19,570

 

 

 

10.7

 

 

 

10,699

 

 

 

54.7

 

Income tax expense

 

 

5,719

 

 

 

2.8

 

 

 

2,839

 

 

 

1.6

 

 

 

2,880

 

 

 

101.4

 

Net income

 

$

24,550

 

 

 

11.9

%

 

$

16,731

 

 

 

9.1

%

 

$

7,819

 

 

 

46.7

%

 

Revenues. The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and the retainment of annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share.

 

The number of recurring revenue customers increased 14% to 30,551 at September 30, 2019 from 26,869 at September 30, 2018.

 

Annualized average recurring revenues per recurring revenue customer, or wallet share, stayed level at $8,622 for the nine months ended September 30, 2019 compared to $8,612 for the same period in 2018.  The consistent wallet share is due to the increase in recurring revenue customers.

Recurring revenues from recurring revenue customers accounted for 94% of our total revenues for the nine months ended September 30, 2019, increasing from 93% for the same period in 2018.  We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.

Cost of Revenues.  The increase in cost of revenues for the nine months ended September 30, 2019 was primarily due to an increase of $5.4 million in personnel-related costs and $0.4 million in stock-based compensation, driven by continued business growth and by an increase in headcount and contractor labor. As we continued to invest in the infrastructure supporting our platform, depreciation expense increased by $1.6 million compared to the same period in 2018.

Sales and Marketing Expenses.  The decrease in sales and marketing expenses for the nine months ended September 30, 2019 was primarily due to decreased headcount which resulted in a decrease of $1.8 million of personnel-related costs, offset by a $0.2 million increase in stock-based compensation.

Research and Development Expenses.  The increase in research and development expenses for the nine months ended September 30, 2019 was primarily due to increased headcount which resulted in an increase in personnel costs of $3.6 million and an increase of stock-based compensation of $0.8 million.

General and Administrative Expenses.  The increase in general and administrative expenses for the nine months ended September 30, 2019 was driven by continued business growth which resulted in an increase in personnel-related costs of $1.0 million, software subscriptions costs of $0.8 million and bad debt expense of $0.6 million.

25


 

Other Income (Expense), net.  Interest income, net, other expense, net, and change in earn-out liability for the nine months ended September 30, 2019 increased over the same period in 2018 primarily due to increased income from investments and settlement and subsequent return of escrowed shared from the acquisition of Toolbox Solutions, Inc. (“Toolbox”) in 2016, offset by realized foreign currency exchange gains, and decrease in fair value of the earn-out liability. The change in earn-out liability for the nine months ended September 30, 2019 was $0.4 million in income driven by an adjustment to the fair value of the EDIAdmin earnout liability due to estimated revenue at the earn-out measurement dates, December 31, 2019 and December 31, 2020.

Income Tax Expense.  The increase in income tax expense for the nine months ended September 30, 2019, as compared to the same period in 2018, was primarily due to an increase in pre-tax income, as well as a decrease of $0.3 million in discrete tax benefits, primarily driven by a decrease in stock activity. Under ASU 2016-09, excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will be volatile.

Adjusted EBITDA.  Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for depreciation and amortization, interest expense, interest income, income tax expense, stock-based compensation expense, and other adjustments as necessary for a fair presentation.  Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability, returned escrow shares related to the Toolbox acquisition, and an impairment of internally developed software.  The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Net income

 

$

24,550

 

 

$

16,731

 

Depreciation and amortization of property and equipment

 

 

8,143

 

 

 

6,308

 

Amortization of intangible assets

 

 

3,897

 

 

 

3,086

 

Interest income, net

 

 

(2,233

)

 

 

(1,589

)

Income tax expense

 

 

5,719

 

 

 

2,839

 

Stock-based compensation expense

 

 

11,316

 

 

 

9,978

 

Other

 

 

(483

)

 

 

 

Adjusted EBITDA

 

$

50,909

 

 

$

37,353

 

 

Non-GAAP Income per Share.  Non-GAAP income per share, which is also a non-GAAP measure of financial performance, consists of net income plus stock-based compensation expense, amortization expense related to intangible assets, and other adjustments as necessary for a fair presentation, divided by the weighted average number of shares of common stock outstanding during each period.  Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability, returned escrow shares related to the Toolbox acquisition, and an impairment of internally developed software.  The following table provides a reconciliation of net income to Non-GAAP income per share (in thousands, except per share amounts):

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Net income

 

$

24,550

 

 

$

16,731

 

Stock-based compensation expense

 

 

11,316

 

 

 

9,978

 

Amortization of intangible assets

 

 

3,897

 

 

 

3,086

 

Other

 

 

(483

)

 

 

 

Income tax effects of adjustments

 

 

(5,972

)

 

 

(5,188

)

Non-GAAP income

 

$

33,308

 

 

$

24,607

 

Shares used to compute non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

 

34,966

 

 

 

34,334

 

Diluted

 

 

35,952

 

 

 

35,114

 

Non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

$

0.95

 

 

$

0.72

 

Diluted

 

$

0.93

 

 

$

0.70

 

 

26


 

Liquidity and Capital Resources

At September 30, 2019, our principal sources of liquidity were cash, cash equivalents, certificates of deposit and marketable securities of $201.2 million and accounts receivable, net of allowance for doubtful accounts of $29.4 million.  Certificates of deposit and marketable securities are invested in accordance with our investment policy, with a goal of maintaining liquidity and capital preservation.  Our cash equivalents and marketable securities are held in highly liquid money market funds, commercial paper, federal agency securities and corporate debt securities.

The below table summarizes the activity within the statement of cash flows:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Net cash provided by operating activities

 

$

50,960

 

 

$

37,547

 

Net cash used in investing activities

 

 

(26,629

)

 

 

(14,690

)

Net cash used in financing activities

 

$

(8,538

)

 

$

(1,231

)

 

Net Cash Flows from Operating Activities

The increase in operating cash flows was driven by continued business growth which resulted in increased net income and decreased deferred tax assets and was driven by continued acquisitions and business expansions which resulted in increased depreciation and amortization, offset by increased compensation due to an increase in headcount.

Net Cash Flows from Investing Activities

The change in net cash used in investing activities was primarily due to $11.5 million used for the MAPADOC acquisition.

Net Cash Flows from Financing Activities

The change in net cash used in financing activities was primarily due to the decrease in net proceeds from stock option exercises, offset by an increase in cash used for share repurchases.

Effect of Foreign Currency Exchange Rate Changes

Our results of operations and cash flows were not materially affected by fluctuations in foreign currency exchange rates.  We maintain approximately 5% of our total cash and cash equivalents outside of the U.S. in foreign currencies, primarily in Australian and Canadian dollars.  We believe that a significant change in foreign currency exchange rates or an inability to access these funds would not affect our ability to meet our operational needs.

Adequacy of Capital Resources

Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:

 

costs to develop and implement new solutions and applications, if any;

 

sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications that we may develop;

 

expansion of our operations in the United States and internationally;

 

response of competitors to our solutions and applications; and,

 

use of capital for acquisitions, if any.

Historically, we have experienced increases in our expenditures consistent with the growth in our operations, and we anticipate that our expenditures will continue to increase as we expand our business.

We believe our cash, cash equivalents, certificates of deposit, marketable securities and our cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

27


 

Inflation and changing prices did not have a material effect on our business during the nine months ended September 30, 2019 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

Off-Balance Sheet Arrangements 

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.  Additionally, we are not a party to any derivative contracts or synthetic leases.

Contractual and Commercial Commitment Summary

Our contractual obligations and commercial commitments as of September 30, 2019 are summarized below:

 

 

 

Payments Due By Period (in thousands)

 

 

 

 

 

 

 

Less Than

 

 

 

 

 

 

 

 

 

 

More Than

 

Contractual Obligations

 

Total

 

 

1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

5 Years

 

Operating lease obligations, including imputed interest

 

$

21,956

 

 

$

3,966

 

 

$

8,286

 

 

$

7,581

 

 

$

2,123

 

 

Our contractual obligations and commercial commitments as of December 31, 2018 are summarized below:

 

 

 

Payments Due By Period (in thousands)

 

 

 

 

 

 

 

Less Than

 

 

 

 

 

 

 

 

 

 

More Than

 

Contractual Obligations

 

Total

 

 

1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

5 Years

 

Operating lease obligations, including imputed interest

 

$

24,878

 

 

$

4,209

 

 

$

7,956

 

 

$

7,896

 

 

$

4,817

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity Risk

The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss.  We are exposed to market risk related to changes in interest rates.  However, based on the nature and current level of our investments (primarily cash and cash equivalents, which approximate fair value due to their short maturities, certificates of deposit and marketable securities), we believe there is no material risk exposure. We do not enter into investments for trading or speculative purposes.

We did not have any outstanding debt as of September 30, 2019. Therefore, we do not have any material risk to interest rate fluctuations.

Foreign Currency Exchange Risk

We have revenue, expenses, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Australian dollar and Canadian dollar.  As of September 30, 2019, we maintained approximately 5% of our total cash and cash equivalents outside of the U.S. in foreign currencies.  We believe that a significant change in foreign currency exchange rates or an inability to access these funds would not affect our ability to meet our operational needs.  As we expand internationally, our results of operations and cash flows may be impacted by changes in foreign currency exchange rates, and would be adversely impacted when the U.S. dollar appreciates relative to other foreign currencies.  We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk, although we may do so in the future.

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Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).  Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019.

For the year ended December 31, 2018, management’s assessment of internal control over financial reporting excluded the internal control of EDIAdmin and CovalentWorks, which were acquired on October 3, 2018 and December 18, 2018, respectively. Pursuant to the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope for a period not to exceed one year from the date of acquisition, the scope of our most recent assessment did not include EDIAdmin or CovalentWorks. Our assessment of the effectiveness of internal control over financial reporting as of December 31, 2019 will include EDIAdmin and CovalentWorks. As of December 31, 2018, EDIAdmin and CovalentWorks represented approximately 2% and 6% of our total consolidated assets, respectively, and each represented less than 1% of our consolidated revenues as of and for the year ended December 31, 2018.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Disclosure regarding changes, if any, in internal control over financial reporting resulting from the acquisitions described will be included in the annual report in which the Company’s assessment that encompasses the acquired business is included.

For the quarter ended September 30, 2019, management’s assessment of our internal control over financial reporting excluded the internal control over financial reporting of the MAPADOC business, an operating unit of SWK Technologies, Inc., which was acquired on August 26, 2019. Pursuant to the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope for a period not to exceed one year from the date of acquisition, the scope of our most recent assessment did not include MAPADOC. For the three and nine months ended September 30, 2019, MAPADOC represented approximately 3% of our total consolidated assets and less than 1% of our consolidated revenues.

29


 

PART II. – OTHER INFORMATION

Item 1.

We are not currently subject to any material legal proceedings.  From time to time, we may be named as a defendant in legal actions or otherwise be subject to claims arising from our normal business activities.  Any such actions, even those that lack merit, could result in the expenditure of significant financial and managerial resources.  We believe that we have obtained adequate insurance coverage or rights to indemnification in connection with potential legal proceedings that may arise.

Item 1A.

Risk Factors

There have been no material changes in our risk factors from those disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2018 as filed with the SEC.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(c) Share Repurchases

The following table presents the total number of shares of our common stock that we purchased during the third quarter of 2019, the average price paid per share, the number of shares that we purchased as part of our publicly announced repurchase program and the approximate dollar value of shares that still could be repurchased at the end of the applicable period.

 

Period

 

Total Number

of Shares

Purchased

 

 

Average Price

Paid per Share

 

 

Total Number

of Shares

Purchased as

Part of Publicly

Announced

Program (1)

 

 

Approximate

Dollar Value of

Shares that

May Yet be

Purchased

Under the

Program (1)(2)

 

July 1 - 31, 2019

 

 

72,384

 

 

$

51.28

 

 

 

72,384

 

 

$

11,643,000

 

August 1 - 31, 2019

 

 

44,472

 

 

$

51.45

 

 

 

44,472

 

 

$

9,355,000

 

September 1 - 30, 2019

 

 

 

 

 

 

 

 

 

 

$

9,355,000

 

Total third quarter 2019

 

 

116,856

 

 

$

51.35

 

 

 

116,856

 

 

$

9,355,000

 

 

(1)

Pursuant to a $50.0 million share repurchase program that was announced by our board of directors on November 2, 2017. Under the program, purchases may be made from time to time in the open market through November 2, 2019.

(2)

Subsequent to September 30, 2019, our board of directors amended our share repurchase program to increase the amount of outstanding common stock it is authorized to purchase to $100.0 million and to extend the original expiration date of the program to November 2, 2021. For further information, see Note L.

 

Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective August 22, 2019.

 

Item 3.

Defaults Upon Senior Securities

Not Applicable.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

Not Applicable.

30


 

Item 6.

Exhibits

 

Number

 

Description

 

 

 

3.1

 

Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-3 (File No. 333-182097) filed with the Commission on September 13, 2012).

 

 

 

3.2

 

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (File No. 001-34702) filed with the Commission on October 12, 2017).

 

 

 

31.1

 

Certification of Principal Executive Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).

 

 

 

31.2

 

Certification of Principal Financial Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).

 

 

 

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

101

 

Interactive Data Files Pursuant to Rule 405 of Regulation S-T (filed herewith). The XBRL instance document does not appear in the Interactive Data File because its tags are embedded within the Inline XBRL document.

 

104

 

The cover page from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL.

 

 

 

 

 

 

 

 

 

31


 

SIGNATURES

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

 

Dated: October 25, 2019

 

  SPS COMMERCE, INC.

 

 

 

 

 

  /s/ KIMBERLY K. NELSON

 

 

  Kimberly K. Nelson

 

 

  Executive Vice President and Chief Financial Officer

 

 

  (principal financial and accounting officer)

 

 

32