spsc-10q_20190331.htm

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: March 31, 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)

 

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 April 19, 2019 was 17,914,088 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 March 31, 2019 and December 31, 2018 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and March 31, 2018 (unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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

 

20

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

25

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

26

 

 

 

 

 

Item 1A.

 

Risk Factors

 

26

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

26

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

26

 

 

 

 

 

Item 5.

 

Other Information

 

26

 

 

 

 

 

Item 6.

 

Exhibits

 

27

 

 

 

 

 

Signatures

 

28

 

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”).  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 share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

143,715

 

 

$

133,859

 

Short-term investments

 

 

41,683

 

 

 

44,537

 

Accounts receivable, less allowance for doubtful accounts of $1,478 and $1,392, respectively

 

 

28,301

 

 

 

27,488

 

Deferred costs

 

 

34,692

 

 

 

34,502

 

Other current assets

 

 

8,858

 

 

 

9,229

 

Total current assets

 

 

257,249

 

 

 

249,615

 

PROPERTY AND EQUIPMENT, less accumulated depreciation of $43,702 and $41,175, respectively

 

 

20,710

 

 

 

20,957

 

OPERATING LEASE RIGHT-OF-USE ASSETS

 

 

15,234

 

 

 

 

GOODWILL

 

 

70,075

 

 

 

69,658

 

INTANGIBLE ASSETS, net

 

 

21,572

 

 

 

22,741

 

OTHER ASSETS

 

 

 

 

 

 

 

 

Deferred costs

 

 

11,199

 

 

 

10,973

 

Deferred income tax asset

 

 

9,528

 

 

 

10,456

 

Other assets

 

 

1,630

 

 

 

1,723

 

Total assets

 

$

407,197

 

 

$

386,123

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,391

 

 

$

4,440

 

Accrued compensation

 

 

11,974

 

 

 

20,415

 

Accrued expenses

 

 

4,619

 

 

 

4,558

 

Deferred revenue

 

 

28,889

 

 

 

25,328

 

Deferred rent

 

 

 

 

 

1,781

 

Operating lease liabilities

 

 

3,509

 

 

 

 

Total current liabilities

 

 

53,382

 

 

 

56,522

 

OTHER LIABILITIES

 

 

 

 

 

 

 

 

Deferred revenue

 

 

2,649

 

 

 

2,512

 

Deferred rent

 

 

 

 

 

5,371

 

Operating lease liabilities

 

 

17,723

 

 

 

 

Deferred income tax liability

 

 

1,315

 

 

 

1,376

 

Other non-current liabilities

 

 

1,424

 

 

 

1,368

 

Total liabilities

 

 

76,493

 

 

 

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; 17,913,306 and 17,757,628 shares issued; and 17,467,682 and 17,345,736 outstanding, respectively

 

 

18

 

 

 

18

 

Treasury stock, at cost; 445,624 and 411,892 shares, respectively

 

 

(28,645

)

 

 

(25,679

)

Additional paid-in capital

 

 

339,730

 

 

 

332,592

 

Retained earnings

 

 

22,074

 

 

 

15,261

 

Accumulated other comprehensive loss

 

 

(2,473

)

 

 

(3,218

)

Total stockholders’ equity

 

 

330,704

 

 

 

318,974

 

Total liabilities and stockholders’ equity

 

$

407,197

 

 

$

386,123

 

 

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

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenues

 

$

66,934

 

 

$

59,092

 

Cost of revenues

 

 

21,367

 

 

 

19,758

 

Gross profit

 

 

45,567

 

 

 

39,334

 

Operating expenses

 

 

 

 

 

 

 

 

Sales and marketing

 

 

17,922

 

 

 

18,647

 

Research and development

 

 

6,192

 

 

 

5,132

 

General and administrative

 

 

12,770

 

 

 

10,130

 

Amortization of intangible assets

 

 

1,304

 

 

 

1,125

 

Total operating expenses

 

 

38,188

 

 

 

35,034

 

Income from operations

 

 

7,379

 

 

 

4,300

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest income, net

 

 

577

 

 

 

414

 

Other expense, net

 

 

(47

)

 

 

(154

)

Change in earn-out liability

 

 

(56

)

 

 

 

Total other income, net

 

 

474

 

 

 

260

 

Income before income taxes

 

 

7,853

 

 

 

4,560

 

Income tax expense

 

 

1,040

 

 

 

1,306

 

Net income

 

$

6,813

 

 

$

3,254

 

Other comprehensive income (expense)

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

740

 

 

 

(1,055

)

Unrealized gain on investments, net of tax of $30 and $13

 

 

90

 

 

 

39

 

Reclassification of unrealized gain on investments into earnings, net of tax of ($31) and ($8)

 

 

(93

)

 

 

(24

)

Total other comprehensive income (expense)

 

 

737

 

 

 

(1,040

)

Comprehensive income

 

$

7,550

 

 

$

2,214

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

Basic

 

$

0.39

 

 

$

0.19

 

Diluted

 

$

0.38

 

 

$

0.19

 

 

 

 

 

 

 

 

 

 

Weighted average common shares used to compute net income per share

 

 

 

 

 

 

 

 

Basic

 

 

17,471

 

 

 

17,093

 

Diluted

 

 

17,992

 

 

 

17,307

 

5


 

 

See accompanying notes to these condensed consolidated financial statements.

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited; in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

17,127,006

 

 

$

17

 

 

 

122,147

 

 

$

(5,815

)

 

$

301,863

 

 

$

(8,611

)

 

$

657

 

 

$

288,111

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,181

 

 

 

 

 

 

 

 

 

3,181

 

Exercise of stock options and issuance of restricted stock

 

 

96,927

 

 

 

 

 

 

 

 

 

 

 

 

715

 

 

 

 

 

 

 

 

 

715

 

Repurchases of common stock

 

 

(113,984

)

 

 

 

 

 

113,984

 

 

 

(5,871

)

 

 

 

 

 

 

 

 

 

 

 

(5,871

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,254

 

 

 

 

 

 

3,254

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,055

)

 

 

(1,055

)

Reclassification of gain on investments into earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

39

 

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23

)

 

 

(23

)

Balances, March 31, 2018

 

 

17,109,949

 

 

 

17

 

 

 

236,131

 

 

$

(11,686

)

 

$

305,759

 

 

$

(5,357

)

 

$

(382

)

 

$

288,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2018

 

 

17,345,736

 

 

$

18

 

 

 

411,892

 

 

$

(25,679

)

 

$

332,592

 

 

$

15,261

 

 

$

(3,218

)

 

$

318,974

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,966

 

 

 

 

 

 

 

 

 

4,966

 

Exercise of stock options and issuance of restricted stock

 

 

158,439

 

 

 

 

 

 

 

 

 

 

 

 

2,472

 

 

 

 

 

 

 

 

 

2,472

 

Repurchases of common stock

 

 

(33,732

)

 

 

 

 

 

33,732

 

 

 

(2,966

)

 

 

 

 

 

 

 

 

 

 

 

(2,966

)

Settlement and subsequent return of shares

 

 

(2,761

)

 

 

 

 

 

 

 

 

 

 

 

(300

)

 

 

 

 

 

 

 

 

(300

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,813

 

 

 

 

 

 

6,813

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

740

 

 

 

740

 

Reclassification of gain on investments into earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90

 

 

 

90

 

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(93

)

 

 

(93

)

Adoption of ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

8

 

Balances, March 31, 2019

 

 

17,467,682

 

 

$

18

 

 

 

445,624

 

 

$

(28,645

)

 

$

339,730

 

 

$

22,074

 

 

$

(2,473

)

 

$

330,704

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

6


 

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

6,813

 

 

$

3,254

 

Reconciliation of net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

838

 

 

 

1,020

 

Change in earn-out liability

 

 

56

 

 

 

 

Depreciation and amortization of property and equipment

 

 

2,637

 

 

 

2,083

 

Amortization of intangible assets

 

 

1,304

 

 

 

1,125

 

Provision for doubtful accounts

 

 

655

 

 

 

410

 

Stock-based compensation

 

 

5,294

 

 

 

3,533

 

Other, net

 

 

(240

)

 

 

(32

)

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,328

)

 

 

(1,520

)

Deferred costs

 

 

(414

)

 

 

(1,628

)

Other current and non-current assets

 

 

(337

)

 

 

367

 

Accounts payable

 

 

353

 

 

 

317

 

Accrued compensation

 

 

(8,843

)

 

 

(3,939

)

Accrued expenses

 

 

60

 

 

 

(592

)

Deferred revenue

 

 

3,698

 

 

 

3,680

 

Deferred rent

 

 

 

 

 

1,271

 

Operating leases

 

 

(345

)

 

 

 

Net cash provided by operating activities

 

 

10,201

 

 

 

9,349

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,899

)

 

 

(3,884

)

Purchases of investments

 

 

(12,447

)

 

 

(19,927

)

Maturities of investments

 

 

15,225

 

 

 

17,500

 

Acquisitions of businesses and intangible assets, net of cash acquired

 

 

 

 

 

(381

)

Net cash used in investing activities

 

 

(121

)

 

 

(6,692

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(2,966

)

 

 

(5,871

)

Net proceeds from exercise of options to purchase common stock

 

 

2,472

 

 

 

715

 

Net cash used in financing activities

 

 

(494

)

 

 

(5,156

)

Effect of foreign currency exchange rate changes

 

 

270

 

 

 

(81

)

Net increase (decrease) in cash and cash equivalents

 

 

9,856

 

 

 

(2,580

)

Cash and cash equivalents at beginning of period

 

 

133,859

 

 

 

123,127

 

Cash and cash equivalents at end of period

 

$

143,715

 

 

$

120,547

 

 

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 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.

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.

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.

 

8


 

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 Act 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.

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 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 three months ended March 31, 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.

 

9


 

NOTE B – Business Acquisitions

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 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 $1.4 million at March 31, 2019.  During the quarter ended March 31, 2019, we recognized expense of $0.1 million in our consolidated statements of comprehensive income due to the remeasurement of the contingent liability.  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 40,478 shares, 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 for the CovalentWorks acquisition was finalized during the first quarter of 2019.  The purchase price allocation and net working capital adjustment were finalized during the first quarter of 2019. During the quarter ended March 31, 2019, there were no adjustments to the purchase price allocation.

 

NOTE C – Revenue

 

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Recurring revenues:

 

 

 

 

 

 

 

 

Fulfillment

 

$

52,445

 

 

$

45,364

 

Analytics

 

 

8,873

 

 

 

8,259

 

Other

 

 

1,428

 

 

 

1,237

 

Recurring Revenues

 

 

62,746

 

 

 

54,860

 

One-time revenues

 

 

4,188

 

 

 

4,232

 

 

 

$

66,934

 

 

$

59,092

 

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

10


 

 

-

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 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.

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

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Balances, at beginning of period

 

$

9,857

 

 

$

10,031

 

Invoiced set-up fees

 

 

2,537

 

 

 

2,581

 

Amortized set-up fees

 

 

(2,581

)

 

 

(2,660

)

Balances, at end of period

 

$

9,813

 

 

$

9,952

 

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 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.

 

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 operations.

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

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Balances, at beginning of period

 

$

45,475

 

 

$

39,933

 

Incurred deferred costs

 

 

12,332

 

 

 

12,506

 

Amortized deferred costs

 

 

(11,916

)

 

 

(10,882

)

Balances, at end of period

 

$

45,891

 

 

$

41,557

 

 

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 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 March 31, 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 consolidated balance sheets.  Realized gains or losses are included in other income (expense), net in the 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 consolidated statements of comprehensive income.

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

 

 

 

March 31, 2019

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains (Losses)

 

 

Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

113,516

 

 

$

 

 

$

113,516

 

Certificate of deposit

 

 

6,804

 

 

 

 

 

 

6,804

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

12,502

 

 

 

7

 

 

 

12,509

 

Commercial paper

 

 

7,440

 

 

 

41

 

 

 

7,481

 

U.S. treasury securities

 

 

14,787

 

 

 

102

 

 

 

14,889

 

Total

 

$

155,049

 

 

$

150

 

 

$

155,199

 

 

 

 

December 31, 2018

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains (Losses)

 

 

Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

109,265

 

 

$

 

 

$

109,265

 

Certificate 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 March 31, 2019.  We expect to receive the full principal and interest on all of these cash equivalents, certificate of deposit, and marketable securities.


12


 

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.

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):