SPS Commerce
SPS COMMERCE INC (Form: 10-Q, Received: 07/28/2017 16:08:25)

 

 

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: June 30, 2017

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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   ☐  (Do not check if a smaller reporting company)    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 July 24, 2017 was 17,221,797 shares.

 

 

 


SPS COMMERCE, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

 

          Page  

PART I. FINANCIAL INFORMATION

 

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016      3  
   Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2017 and 2016 (unaudited)      4  
   Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 (unaudited)      5  
   Notes to Condensed Consolidated Financial Statements (unaudited)      6  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      15  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      23  

Item 4.

   Controls and Procedures      23  

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings      24  

Item 1A.

   Risk Factors      24  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      24  

Item 3.

   Defaults Upon Senior Securities      24  

Item 4.

   Mine Safety Disclosures      24  

Item 5.

   Other Information      24  

Item 6.

   Exhibits      24  

Signatures

     25  

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.

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements regarding us, our business prospects and our results of operations that 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 for the year ended December 31, 2016 as filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. 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 Commission that advise interested parties of the risks and factors that may affect our business.

 

2


PART I. – FINANCIAL INFORMATION

Item 1. Financial Statements

SPS COMMERCE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except share amounts)

 

     June 30,     December 31,  
     2017     2016  

ASSETS

    

CURRENT ASSETS

    

Cash and cash equivalents

   $ 131,744     $ 115,877  

Short-term marketable securities

     26,896       23,076  

Accounts receivable, less allowance for doubtful accounts of $790 and $515, respectively

     21,545       20,746  

Deferred costs

     21,917       19,224  

Other current assets

     6,955       7,010  
  

 

 

   

 

 

 

Total current assets

     209,057       185,933  

PROPERTY AND EQUIPMENT, net

     15,527       15,314  

GOODWILL

     50,766       49,777  

INTANGIBLE ASSETS, net

     18,484       19,788  

MARKETABLE SECURITIES, non-current

     4,997       7,494  

OTHER ASSETS

    

Deferred costs, non-current

     6,419       6,086  

Deferred income tax asset, non-current

     27,524       12,446  

Other non-current assets

     1,098       1,527  
  

 

 

   

 

 

 

Total assets

   $ 333,872     $ 298,365  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES

    

Accounts payable

   $ 2,720     $ 2,302  

Accrued compensation

     13,243       13,740  

Accrued expenses

     3,723       3,508  

Deferred revenue

     16,624       11,055  

Deferred rent

     1,606       1,556  
  

 

 

   

 

 

 

Total current liabilities

     37,916       32,161  

OTHER LIABILITIES

    

Deferred revenue, non-current

     11,050       10,847  

Deferred rent, non-current

     3,899       4,179  

Deferred income tax liability, non-current

     1,977       1,911  
  

 

 

   

 

 

 

Total liabilities

     54,842       49,098  
  

 

 

   

 

 

 

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; 17,221,798 and 17,081,145 shares issued and outstanding, respectively

     17       17  

Additional paid-in capital

     292,533       286,315  

Accumulated deficit

     (12,665     (33,739

Accumulated other comprehensive loss

     (855     (3,326
  

 

 

   

 

 

 

Total stockholders’ equity

     279,030       249,267  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 333,872     $ 298,365  
  

 

 

   

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

3


SPS COMMERCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in thousands, except per share amounts)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2017     2016     2017     2016  

Revenues

   $ 54,284     $ 47,351     $ 106,216     $ 92,950  

Cost of revenues

     18,191       15,972       35,521       30,853  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     36,093       31,379       70,695       62,097  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Sales and marketing

     18,741       16,677       35,820       32,566  

Research and development

     5,369       5,542       10,474       10,611  

General and administrative

     8,139       7,082       15,966       14,367  

Amortization of intangible assets

     1,117       1,198       2,332       2,359  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     33,366       30,499       64,592       59,903  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     2,727       880       6,103       2,194  

Other income (expense)

        

Interest income, net

     242       151       433       296  

Other income (expense), net

     (102     (374     (162     (81
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     140       (223     271       215  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,867       657       6,374       2,409  

Income tax expense

     (1,042     (305     (1,578     (1,013
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,825     $ 352     $ 4,796     $ 1,396  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share

        

Basic

   $ 0.11     $ 0.02     $ 0.28     $ 0.08  

Diluted

   $ 0.11     $ 0.02     $ 0.28     $ 0.08  

Weighted average common shares used to compute net income per share

        

Basic

     17,198       16,909       17,176       16,873  

Diluted

     17,378       17,120       17,384       17,100  

Other comprehensive income (loss)

        

Foreign currency translation adjustments

     935       (856     2,512       1,965  

Unrealized gain on investments (net of tax of ($5), $15, ($10) and $61)

     (9     24       (17     99  

Reclassification of gain on investments into earnings (net of tax of ($5), $0, ($15) and $0)

     (8     —         (24     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 2,743     $ (480   $ 7,267     $ 3,460  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

4


SPS COMMERCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

     Six Months Ended  
     June 30,  
     2017     2016  

Cash flows from operating activities

    

Net income

   $ 4,796     $ 1,396  

Reconciliation of net income to net cash provided by operating activities

    

Deferred income taxes

     1,236       (439

Share-based earn-out liability

     —         (72

Depreciation and amortization of property and equipment

     3,431       3,259  

Amortization of intangible assets

     2,332       2,359  

Provision for doubtful accounts

     873       592  

Stock-based compensation

     4,486       3,992  

Other, net

     9       —    

Changes in assets and liabilities

    

Accounts receivable

     (1,607     (2,495

Deferred costs

     (3,025     (2,592

Other current and non-current assets

     (3     (3,138

Accounts payable

     195       719  

Accrued compensation

     (546     439  

Accrued expenses

     206       464  

Deferred revenue

     5,772       4,325  

Deferred rent

     (249     (17
  

 

 

   

 

 

 

Net cash provided by operating activities

     17,906       8,792  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of property and equipment

     (3,334     (3,070

Purchases of marketable securities

     (22,350     (8,499

Maturities of marketable securities

     21,000       2,500  

Acquisitions of businesses and intangible assets, net of cash acquired

     (500     (18,062
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,184     (27,131
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net proceeds from exercise of options to purchase common stock

     1,244       1,749  

Excess tax benefits from exercise of options to purchase common stock

     —         1,421  

Net proceeds from employee stock purchase plan

     1,011       786  
  

 

 

   

 

 

 

Net cash provided by financing activities

     2,255       3,956  
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes

     890       5  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     15,867       (14,378

Cash and cash equivalents at beginning of period

     115,877       121,538  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 131,744     $ 107,160  
  

 

 

   

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

5


SPS COMMERCE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE A – General

Business Description

We are a leading provider of cloud-based supply chain management solutions, providing network-proven fulfillment, sourcing, and item assortment management solutions, along with comprehensive retail performance analytics to thousands of customers worldwide. We provide our solutions through the SPS Commerce platform, a cloud-based product suite that improves the way suppliers, retailers, distributors and logistics firms orchestrate the sourcing, set up of new vendors and items, and fulfillment of the products that customers buy from retailers and suppliers. We derive the majority of our revenues from thousands of monthly recurring subscriptions from businesses that utilize our solutions.

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. The December 31, 2016 condensed consolidated balance sheet data was derived from our audited financial statements at that date. For further information, refer to the consolidated financial statements and accompanying notes for the year ended December 31, 2016 included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 27, 2017.

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 and 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.

Significant Accounting Policies

During the six months ended June 30, 2017, there were no material changes in our significant accounting policies. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on February 27, 2017, for additional information regarding our significant accounting policies.

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled and provides an accounting policy election to account for forfeitures as they occur. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows within operating activities. The standard also allows entities to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the statements of cash flows. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted.

We adopted ASU 2016-09 during the six months ended June 30, 2017. The impact to our consolidated balance sheet as of January 1, 2017 was a $16.3 million increase in deferred income tax assets, non-current and a corresponding $16.3 million decrease in accumulated deficit. This impact results from the cumulative-effect adjustment for previously unrecognized excess tax benefits using the modified retrospective method required by the new standard. We elected to adopt the changes in cash flow statement presentation prospectively to be consistent with the prospective transition for the treatment of excess tax benefits in the income statement. Accordingly, we no longer classify excess tax benefits as a financing activity subsequent to January 1, 2017.

 

6


Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective. These new requirements are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. We do not believe the new revenue recognition standard will materially impact our recognition of the primary fees received from customers for our cloud-based supply chain solutions. We believe the adoption of the new standard will impact our accounting for certain upfront set-up fees and the periods over which the related revenues are recognized, as well as the timing of cost recognition for some sales commissions. These impacts will not be material to our financial statements. We are currently finalizing our evaluation of implementation methods and the extent of the impact that implementation of this standard will have on our financial statement disclosures upon adoption.

In February 2016, the FASB issued ASU 2016-02, Leases which will supersede the existing lease guidance and will require all leases with a term greater than 12 months to be recognized in the statements of financial position and eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing between finance leases and operating leases. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We believe the adoption of the new lease accounting standard will materially impact our consolidated financial statements by increasing our non-current assets and non-current liabilities on our consolidated balance sheets in order to record the right of use assets and related lease liabilities for our existing operating leases. We are in the process of determining the financial statement impact and are currently unable to estimate the impact on our consolidated financial statements.

NOTE B – Financial Instruments

We invest primarily in money market funds, highly liquid debt instruments of the U.S. government, and U.S. corporate debt securities. All highly liquid investments with original maturities of 90 days or less are classified as cash equivalents. All investments with original maturities greater than 90 days and remaining maturities less than one year from the balance sheet date are classified as short-term marketable securities. Investments with remaining maturities of more than one year from the balance sheet date are classified as marketable securities, non-current. Short-term marketable securities and marketable securities, non-current, are also 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. Consequently, we may or may not keep securities with stated holding periods to maturity.

Our fixed-income investments are carried at fair value and unrealized gains and losses on these investments are included in other comprehensive income (loss) in the condensed consolidated statements of comprehensive income (loss). Realized gains or losses are included in other income (expense) in the condensed consolidated statements of comprehensive income (loss). 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 (loss).

 

7


Cash equivalents and marketable securities, consisted of the following:

 

     June 30, 2017  
     Amortized      Unrealized      Fair  
     Cost      Gains (Losses)      Value  
     (Dollars in thousands)  

Cash equivalents:

        

Money market funds

   $ 80,158      $ —        $ 80,158  

Marketable securities:

        

Corporate bonds

     14,677        (134      14,543  

Commercial paper

     4,975        —          4,975  

U.S. treasury securities

     12,380        (5      12,375  
  

 

 

    

 

 

    

 

 

 
   $ 112,190      $ (139    $ 112,051  
  

 

 

    

 

 

    

 

 

 

Due within one year

 

   $ 107,054  

Due within two years

 

     4,997  
        

 

 

 

Total

 

   $ 112,051  
        

 

 

 

 

     December 31, 2016  
     Amortized      Unrealized      Fair  
     Cost      Gains (Losses)      Value  
     (Dollars in thousands)  

Cash equivalents:

        

Money market funds

   $ 75,375      $ —        $ 75,375  

Marketable securities:

        

Corporate bonds

     15,681        (96      15,585  

Commercial paper

     4,977        10        4,987  

U.S. treasury securities

     7,489        10        7,499  

U.S. agency obligations

     2,497        3        2,500  
  

 

 

    

 

 

    

 

 

 
   $ 106,019      $ (73    $ 105,946  
  

 

 

    

 

 

    

 

 

 

Due within one year

 

   $ 98,452  

Due within two years

 

     7,494  
        

 

 

 

Total

 

   $ 105,946  
        

 

 

 

We do not believe any of the unrealized losses represent an other-than-temporary impairment based on our valuation of available evidence as of June 30, 2017. We expect to receive the full principal and interest on all of these cash equivalents and marketable securities.

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.

 

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

Level 1 Measurements

Our cash equivalents held in money market funds are measured at fair value using level 1 inputs.

 

8


Level 2 Measurements

Our available-for-sale U.S. treasury securities, U.S. agency obligations, commercial paper and corporate debt securities are measured at fair value using level 2 inputs. We obtain the fair values of our level 2 available-for-sale securities from a professional pricing service.

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:

 

     June 30, 2017  
     Level 1      Level 2      Level 3      Total  
     (Dollars in thousands)  

Assets:

           

Cash and cash equivalents:

           

Money market funds

   $ 80,158      $ —        $ —        $ 80,158  

Marketable securities:

           

Corporate bonds

     —          14,543        —          14,543  

Commercial paper

     —          4,975        —          4,975  

U.S. treasury securities

     —          12,375        —          12,375  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 80,158      $ 31,893      $ —        $ 112,051  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2016  
     Level 1      Level 2      Level 3      Total  
     (Dollars in thousands)  

Assets:

           

Cash and cash equivalents:

           

Money market funds

   $ 75,375      $ —        $ —        $ 75,375  

Marketable securities:

           

Corporate bonds

     —          15,585        —          15,585  

Commercial paper

     —          4,987        —          4,987  

U.S. treasury securities

     —          7,499        —          7,499  

U.S. agency obligations

     —          2,500        —          2,500  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 75,375      $ 30,571      $ —        $ 105,946  
  

 

 

    

 

 

    

 

 

    

 

 

 

We classify our cash and cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value.

 

9


NOTE C – Goodwill and Intangible Assets, net

Changes in the carrying amount of goodwill for the six months ended June 30, 2017 are as follows:

 

     2017  
     (Dollars in thousands)  

Balances, January 1

   $ 49,777  

Goodwill acquired during the period

     —    

Foreign currency translation adjustments

     989  
  

 

 

 

Balances, June 30

   $ 50,766  
  

 

 

 

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 9 years). Information regarding intangible assets included on our consolidated balance sheets is as follows:

 

     June 30, 2017  
     Carrying
Amount
     Accumulated
Amortization
     Foreign
Currency
Translation
     Net  
     (Dollars in thousands)  

Subscriber relationships

   $ 34,350      $ (17,606    $ 366      $ 17,110  

Non-competition agreements

     2,499        (1,965      29        563  

Technology and other

     2,130        (1,352      33        811  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 38,979      $ (20,923    $ 428      $ 18,484  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2016  
     Carrying
Amount
     Accumulated
Amortization
     Foreign
Currency
Translation
     Net  
     (Dollars in thousands)  

Subscriber relationships

   $ 33,736      $ (15,708    $ 295      $ 18,323  

Non-competition agreements

     2,234        (1,818      17        433  

Technology and other

     2,089        (1,120      63        1,032  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 38,059      $ (18,646    $ 375      $ 19,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total amortization expense for intangible assets during the three months ended June 30, 2017 and 2016 was $1.1 million and $1.2 million, respectively. Total amortization expense for intangible assets during the six months ended June 30, 2017 and 2016 was $2.3 million and $2.4 million, respectively. The estimated annual amortization expense related to intangible assets subject to amortization for the next five years is as follows:

 

     (Dollars in thousands)  

Remainder of 2017

   $ 2,221  

2018

     3,968  

2019

     3,676  

2020

     3,321  

2021

     2,481  

Thereafter

     2,817  
  

 

 

 
   $ 18,484  
  

 

 

 

 

10


NOTE D – Commitments and Contingencies

Operating Leases

At June 30, 2017, our future minimum payments under operating leases were as follows:

 

     (Dollars in thousands)  

Remainder of 2017

   $ 1,688  

2018

     3,353  

2019

     3,443  

2020

     1,893  

2021

     1,040  

Thereafter

     1,174  
  

 

 

 
   $ 12,591  
  

 

 

 

NOTE E – Stock-Based Compensation

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, to employees, non-employee directors and other consultants who provide services to us. 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 2017, 1,024,868 additional shares were reserved for future issuance under our 2010 Equity Incentive Plan. At June 30, 2017, there were approximately 4.5 million shares available for grant under approved equity compensation plans.

We recorded stock-based compensation expense of $2.2 million and $4.5 million for the three and six months ended June 30, 2017 and $2.1 million and $4.0 million for the three and six months ended June 30, 2016, respectively. This expense was allocated in the consolidated statements of comprehensive income (loss) as follows (in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2017      2016      2017      2016  

Cost of revenues

   $ 469      $ 317      $ 920      $ 597  

Operating expenses

           

Sales and marketing

     574        639        1,091        1,293  

Research and development

     228        141        457        279  

General and administrative

     915        968        2,018        1,823  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 2,186      $ 2,065      $ 4,486      $ 3,992  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2017, there was approximately $22.0 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 2.8 years.

 

11


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:

 

     Options      Weighted Average
Exercise Price
 
     (#)      ($/share)  

Outstanding at December 31, 2016

     1,016,012      $ 44.72  

Granted

     167,903        56.00  

Exercised

     (60,592      20.52  

Forfeited

     (8,417      56.28  
  

 

 

    

Outstanding at June 30, 2017

     1,114,906        47.65  
  

 

 

    

Of the total outstanding options at June 30, 2017, 671,876 were exercisable with a weighted average exercise price of $43.11 per share. The total outstanding options had a weighted average remaining contractual life of 4.53 years.

The weighted average grant date fair value of options granted during the first six months of 2017 was $18.90 and this was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

Volatility

     37.4

Dividend yield

     0

Life (in years)

     4.5  

Risk-free interest rate

     1.85

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). During the three months ended March 31, 2017, we recognized expense of $169,000 for PSU awards; and during the three months ended June 30, 2017 we recognized a reversing benefit of $169,000 as the probability of attainment was decreased.

Restricted stock units 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 performance share units and restricted stock units was as follows:

 

     Performance Share and
Restricted Stock Units
     Weighted Average
Grant Date Fair Value
 
     (#)      ($/share)  

Outstanding at December 31, 2016

     189,042      $ 54.14  

Granted

     206,043        55.72  

Vested and common stock issued

     (64,818      53.63  

Forfeited

     (3,317      54.67  
  

 

 

    

Outstanding at June 30, 2017

     326,950        55.23  
  

 

 

    

The number of restricted stock units outstanding at June 30, 2017 included 18,448 units that have vested, but for which shares of common stock have not yet been issued pursuant to the terms of the agreement.

 

12


Our restricted stock awards activity was as follows:

 

     Restricted Stock
Awards
     Weighted Average
Grant Date Fair Value
 
     (#)      ($/share)  

Outstanding at December 31, 2016

     1,524      $ 52.28  

Restricted common stock issued

     5,454        58.29  

Restrictions lapsed

     (2,886      55.11  

Forfeited

     —          —    
  

 

 

    

Outstanding at June 30, 2017

     4,092        58.29  
  

 

 

    

Employee Stock Purchase Plan

Our employee stock purchase plan 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 1.0 million shares of common stock are reserved for issuance under the plan.

For the offering period that began on January 1, 2017 and ended on June 30, 2017, we withheld approximately $1,021,000 from employees participating in the plan. On June 30, 2017, approximately $1,011,000 of these funds were used to purchase 18,655 shares on behalf of the employees participating in the plan. The remaining funds are expected to be refunded to employees pursuant to the requirements of the plan.

For the three and six months ended June 30, 2017, we recorded approximately $154,000 and $292,000, respectively, of stock-based compensation expense associated with the employee stock purchase plan. 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

     26.0

Dividend yield

     0

Life (in years)

     0.5  

Risk-free interest rate

     0.62

NOTE F – 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 credit. Additionally, excess tax benefits generated upon settlement or exercise of stock awards are now 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 June 30, 2017 we do not have any unrecognized tax benefits nor any accrued interest or tax penalties.

NOTE G – 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 and restricted stock units. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income per share.

 

13


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      Six Months Ended  
     June 30,      June 30,  
     2017      2016      2017      2016  

Net income

   $ 1,825      $ 352      $ 4,796      $ 1,396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share

           

Basic

   $ 0.11      $ 0.02      $ 0.28      $ 0.08  

Diluted

   $ 0.11      $ 0.02      $ 0.28      $ 0.08  

Weighted average common shares outstanding, basic

     17,198        16,909        17,176        16,873  

Options to purchase common stock

     152        209        177        226  

Restricted stock units

     28        2        31        1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     17,378        17,120        17,384        17,100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive shares

     267,000        315,000        267,000        339,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading provider of cloud-based supply chain management solutions, providing network-proven fulfillment, sourcing, and item assortment management solutions, along with comprehensive retail performance analytics to thousands of customers worldwide. We provide our solutions through the SPS Commerce platform, a cloud-based product suite that improves the way suppliers, retailers, distributors and logistics firms orchestrate the sourcing, set up of new vendors and items, and fulfillment of the products that customers buy from retailers and suppliers. We derive the majority of our revenues from thousands of 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 June 30, 2017, our revenues were $54.3 million, an increase of 15% from the comparable period in 2016, and represented our 66 th consecutive quarter of increased revenues. Total operating expenses increased 9% for the same period in 2017 from 2016. We experienced similar results for the six months ended June 30, 2017 with revenues increasing 14% and operating expenses increasing 8% compared to the same period in 2016.

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 six months ended June 30, 2017, 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 for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on February 27, 2017.

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 U.S. generally accepted accounting principles (“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. 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, income taxes, stock-based compensation and the valuation of goodwill and purchased intangible assets are the most critical to fully understand and evaluate our financial condition and results of operations.

 

15


During the six months ended June 30, 2017, there were no changes in our significant 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 for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on February 27, 2017, for additional information regarding our accounting policies.

Results of Operations

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

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

 

     Three Months Ended June 30,              
     2017     2016     Change  
           % of
revenue
          % of
revenue
    $     %  

Revenues

   $ 54,284       100.0   $ 47,351       100.0     6,933       14.6  

Cost of revenues

     18,191       33.5       15,972       33.7       2,219       13.9  
  

 

 

     

 

 

       

Gross profit

     36,093       66.5       31,379       66.3       4,714       15.0  
  

 

 

     

 

 

       

Operating expenses

            

Sales and marketing

     18,741       34.5       16,677       35.2       2,064       12.4  

Research and development

     5,369       9.9       5,542       11.7       (173     (3.1

General and administrative

     8,139       15.0       7,082       15.0       1,057       14.9  

Amortization of intangible assets

     1,117       2.1       1,198       2.5       (81     (6.8
  

 

 

     

 

 

       

Total operating expenses

     33,366       61.5       30,499       64.4       2,867       9.4  
  

 

 

     

 

 

       

Income from operations

     2,727       5.0       880       1.9       1,847       209.9  

Other income (expense)

            

Interest income, net

     242       0.4       151       0.3       91       60.3  

Other expense, net

     (102     (0.2     (374     (0.8     (272     (72.7
  

 

 

     

 

 

       

Total other income (expense), net

     140       0.3       (223     (0.5     (363     (162.8
  

 

 

     

 

 

       

Income before income taxes

     2,867       5.3       657       1.4       2,210       336.4  

Income tax expense

     (1,042     (1.9     (305     (0.6     737       241.6  
  

 

 

     

 

 

       

Net income

   $ 1,825       3.4     $ 352       0.7       1,473       418.5  
  

 

 

     

 

 

       

Due to rounding, totals may not equal the sum of the line items in the table above.

Revenues. Revenues for the three months ended June 30, 2017 increased $6.9 million, or 15%, to $54.3 million from $47.4 million for the same period in 2016. The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and the increase in annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share.

 

    The number of recurring revenue customers increased 4% to 25,153 at June 30, 2017 from 24,186 at June 30, 2016.

 

    Annualized average recurring revenues per recurring revenue customer, or wallet share, increased 11% to $7,993 for the three months ended June 30, 2017 from $7,223 for the same period in 2017. This increase in wallet share was primarily attributable to increased usage of our solutions by our recurring revenue customers and growth in larger customers.

Recurring revenues from recurring revenue customers accounted for 92% of our total revenues for each of the three months ended June 30, 2017 and 2016. 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. Cost of revenues for the three months ended June 30, 2017 increased $2.2 million, or 14%, to $18.2 million from $16.0 million for the same period in 2016. The increase in cost of revenues for the three-month period in 2017 was primarily due to an increase in personnel-related costs of approximately $1.5 million, driven by increased headcount and an increase of $886,000 in consulting costs. Compared to the same period in 2016, stock-based compensation expense increased by $151,000.

 

16


Additionally, as we continued to invest in the infrastructure supporting our platform, costs for software and cloud-based subscriptions increased by $550,000 and depreciation expense increased by $164,000, while direct network costs decreased by $113,000 compared to the same period in 2016. As a percentage of revenues, cost of revenues were 34% for each of the three months ended June 30, 2017 and 2016. Going forward, we anticipate that cost of revenues will increase in absolute dollars as we continue to expand our business.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended June 30, 2017 increased $2.0 million, or 12%, to $18.7 million from $16.7 million for the same period in 2016. The increase in sales and marketing expenses for the three-month period in 2017 was due to increased headcount, which resulted in an increase of $402,000 in personnel-related costs, as well as an increase of $1.5 million in variable compensation earned by sales personnel and referral partners from new business, compared to the same period in 2016. We also incurred higher promotional costs of approximately $288,000, partially offset by a decrease in depreciation expense of $95,000. As a percentage of revenues, sales and marketing expenses were 35% for each of the three months ended June 30, 2017 and 2016. As we expand our business, we will continue to add resources to our sales and marketing efforts over time, and we expect that these expenses will continue to increase in absolute dollars.

Research and Development Expenses. Research and development expenses for the three months ended June 30, 2017 decreased $173,000, or 3%, to $5.4 million from $5.5 million for the same period in 2016. During the three months ended June 30, 2017, personnel costs increased by $156,000 and stock-based compensation increased by $87,000 compared to the same period in 2016. These increased costs were offset by an increase of $431,000 in the amount of internal labor capitalized for internal-use software development, which reduced the current period expense by that amount. As a percentage of revenues, research and development expenses were 10% and 12% for the three months ended June 30, 2017 and 2016, respectively. As we enhance and expand our solutions and applications, we expect that research and development expenses will continue to increase in absolute dollars.

General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2017 increased $1.0 million, or 14%, to $8.1 million from $7.1 million for the same period in 2016. The increase in general and administrative expenses for the three-month period in 2017 was primarily due to headcount growth, which resulted in an increase of $740,000 in personnel-related costs compared to the same period in 2016. Additionally, bad debt expense increased by $253,000 and costs of software subscriptions increased by $193,000, while legal, audit and tax fees decreased by $132,000 compared to the same period in 2016. As a percentage of revenues, general and administrative expenses were 15% for each of the three months ended June 30, 2017 and 2016. Going forward, we expect that general and administrative expenses will continue to increase in absolute dollars as we expand our business.

Other Income (Expense), net. Other income (expense), net for the three months ended June 30, 2016 included $293,000 of expense for an adjustment to the fair value of the Toolbox Solutions share-based earn-out liability due to the change in the stock price during the six months ended June 30, 2016. There was no similar charge during the three months ended June 30, 2017 as the contingent consideration arrangement had been resolved.

Income Tax Expense. We recorded income tax expense of $1.0 million for the three months ended June 30, 2017 compared to income tax expense of $305,000 for three months ended June 30, 2016. The increase in income tax expense for the three-month period in 2017 was primarily due to increased pretax book income, offset by discrete tax benefits from the adoption of ASU 2016-09 relating to stock-based compensation. Under ASU 2016-09, excess tax benefits generated upon the settlement or exercise of stock awards are no longer recognized as additional paid-in capital but are instead recognized as a reduction to income tax expense. As a result of recording these excess tax benefits in income tax expense, we expect that our annual effective income tax rate will be more volatile than it has been historically.

 

17


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 Toolbox Solutions share-based earn-out liability. The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):

 

     Three Months Ended  
     June 30,  
     2017      2016  

Net income

   $ 1,825      $ 352  

Depreciation and amortization of property and equipment

     1,740        1,633  

Amortization of intangible assets

     1,117        1,198  

Interest income, net

     (242      (151

Income tax expense

     1,042        305  

Stock-based compensation expense

     2,186        2,065  

Other

     —          293  
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 7,668      $ 5,695  
  

 

 

    

 

 

 

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 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 Toolbox Solutions share-based 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  
     June 30,  
     2017      2016  

Net income

   $ 1,825      $ 352  

Stock-based compensation expense

     2,186        2,065  

Amortization of intangible assets

     1,117        1,198  

Other

     —          293  

Income tax effects of adjustments

     (1,211      (1,272
  

 

 

    

 

 

 

Non-GAAP income

   $ 3,917      $ 2,636  
  

 

 

    

 

 

 

Shares used to compute non-GAAP income per share

     

Basic

     17,198        16,909  

Diluted

     17,378        17,120  

Non-GAAP income per share

     

Basic

   $ 0.23      $ 0.16  

Diluted

   $ 0.23      $ 0.15  

 

18


Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

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

 

     Six Months Ended June 30,              
     2017     2016     Change  
           % of
revenue
          % of
revenue
    $     %  

Revenues

   $ 106,216       100.0   $ 92,950       100.0     13,266       14.3  

Cost of revenues

     35,521       33.4       30,853       33.2       4,668       15.1  
  

 

 

     

 

 

       

Gross profit

     70,695       66.6       62,097       66.8       8,598       13.8  
  

 

 

     

 

 

       

Operating expenses

            

Sales and marketing

     35,820       33.7       32,566       35.0       3,254       10.0  

Research and development

     10,474       9.9       10,611       11.4       (137     (1.3

General and administrative

     15,966       15.0       14,367       15.5       1,599       11.1  

Amortization of intangible assets

     2,332       2.2       2,359       2.5       (27     (1.1
  

 

 

     

 

 

       

Total operating expenses

     64,592       60.8       59,903       64.4       4,689       7.8  
  

 

 

     

 

 

       

Income from operations

     6,103       5.7       2,194       2.4       3,909       178.2  

Other income (expense)

            

Interest income, net

     433       0.4       296       0.3       137       46.3  

Other expense, net

     (162     (0.2     (81     (0.1     (81     100.0  
  

 

 

     

 

 

       

Total other income (expense), net

     271       0.3       215       0.2       56       26.0  
  

 

 

     

 

 

       

Income before income taxes

     6,374       6.0       2,409       2.6       3,965       164.6  

Income tax expense

     (1,578     (1.5     (1,013     (1.1     (565     55.8  
  

 

 

     

 

 

       

Net income

   $ 4,796       4.5     $ 1,396       1.5       3,400       243.6  
  

 

 

     

 

 

       

Due to rounding, totals may not equal the sum of the line items in the table above.

Revenues. Revenues for the six months ended June 30, 2017 increased $13.3 million, or 14%, to $106.2 million from $93.0 million for the same period in 2016. The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and the increase in annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share.

 

    The number of recurring revenue customers increased 4% to 25,153 at June 30, 2017 from 24,186 at June 30, 2016.

 

    Annualized average recurring revenues per recurring revenue customer, or wallet share, increased 10% to $7,852 for the six months ended June 30, 2017 from $7,139 for the same period in 2016. This increase in wallet share was primarily attributable to increased fees resulting from increased usage of our solutions by our recurring revenue customers and growth in larger customers.

Recurring revenues from recurring revenue customers accounted for 92% of our total revenues for the six months ended June 30, 2017 and 2016. 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. Cost of revenues for the six months ended June 30, 2017 increased $4.7 million, or 15%, to $35.5 million from $30.9 million for the same period in 2016. The increase in cost of revenues for the six-month period in 2017 was primarily due to an increase in personnel-related costs of approximately $3.3 million, driven by increased headcount and an increase of $1.5 million in consulting costs. Compared to the same period in 2016, stock-based compensation expense increased by $323,000 and occupancy costs increased by $78,000. Additionally, as we continued to invest in the infrastructure supporting our platform, costs for software and cloud-based subscriptions increased by $943,000 and depreciation expense increased by $286,000, while direct network costs decreased by $212,000 compared to the same period in 2016. As a percentage of revenues, cost of revenues were 33% for each of the six months ended June 30, 2017 and 2016. Going forward, we anticipate that cost of revenues will increase in absolute dollars as we continue to expand our business.

 

19


Sales and Marketing Expenses. Sales and marketing expenses for the six months ended June 30, 2017 increased $3.3 million, or 10%, to $35.8 million from $32.6 million for the same period in 2016. The increase in sales and marketing expenses for the six-month period in 2017 was primarily due to increased headcount, which resulted in an increase of $1.1 million in personnel-related costs, as well as an increase of $2.0 million in variable compensation earned by sales personnel and referral partners from new business compared to the same period in 2016. We also incurred higher promotional costs of approximately $455,000, partially offset by a decrease in depreciation expense of $209,000 and a decrease in stock-based compensation of $202,000. As a percentage of revenues, sales and marketing expenses were 34% and 35% for the six months ended June 30, 2017 and 2016, respectively. As we expand our business, we will continue to add resources to our sales and marketing efforts over time, and we expect that these expenses will continue to increase in absolute dollars.

Research and Development Expenses. Research and development expenses for the six months ended June 30, 2017 decreased $137,000, or 1%, to $10.5 million from $10.6 million for the same period in 2016. During the six months ended June 30, 2017, personnel costs increased by $255,000 and stock-based compensation increased by $178,000 compared to the same period in 2016. These increased costs were offset by an increase of $811,000 in the amount of internal labor capitalized for internal-use software development, which reduced the current period expense by that amount. Additionally, occupancy costs increased by $133,000 and costs of software and cloud-based subscriptions increased by $204,000 during the six months ended June 30, 2017 compared to the same period in 2016. As a percentage of revenues, research and development expenses were 10% and 11% for the six months ended June 30, 2017 and 2016, respectively. As we enhance and expand our solutions and applications, we expect that research and development expenses will continue to increase in absolute dollars.

General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2017 increased $1.6 million, or 11%, to $16.0 million from $14.4 million for the same period in 2016. The increase in general and administrative expenses for the six-month period in 2017 was primarily due to headcount growth, which resulted in an increase of $1.0 million in personnel-related costs and an increase of $195,000 in stock-based compensation compared to the same period in 2016. Additionally, costs of software and cloud-based subscriptions increased by $483,000, bad debt expense increased by $281,000 and credit card fees increased by $126,000, while legal, audit and tax fees decreased by $281,000 and hardware costs decreased by $207,000 compared to the same period in 2016. As a percentage of revenues, general and administrative expenses were 15% and 16% for the six months ended June 30, 2017 and 2016, respectively. Going forward, we expect that general and administrative expenses will continue to increase in absolute dollars as we expand our business.

Other Income (Expense), net. Other income (expense), net for the six months ended June 30, 2016 included $72,000 of expense for an adjustment to the fair value of the Toolbox Solutions share-based earn-out liability due to the change in the stock price between December 31, 2015 and June 30, 2016. There was no similar charge during the six months ended June 30, 2017 as the contingent consideration arrangement had been resolved.

Income Tax Expense. We recorded income tax expense of $1.6 million for the six months ended June 30, 2017 compared to income tax expense of $1.0 million for six months ended June 30, 2016. The increase in income tax expense for the six-month period in 2017 was primarily due to increased pretax book income, offset by discrete tax benefits from the adoption of ASU 2016-09 relating to stock-based compensation. Under ASU 2016-09, excess tax benefits generated upon the settlement or exercise of stock awards are no longer recognized as additional paid-in capital but are instead recognized as a reduction to income tax expense. As a result of recording these excess tax benefits in income tax expense, we expect that our annual effective income tax rate will be more volatile than it has been historically.

 

20


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 Toolbox Solutions share-based earn-out liability. The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):

 

     Six Months Ended  
     June 30,  
     2017      2016  

Net income

   $ 4,796      $ 1,396  

Depreciation and amortization of property and equipment

     3,431        3,259  

Amortization of intangible assets

     2,332        2,359  

Interest income, net

     (433      (296

Income tax expense

     1,578        1,013  

Stock-based compensation expense

     4,486        3,992  

Other

     —          (72
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 16,190      $ 11,651  
  

 

 

    

 

 

 

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 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 Toolbox Solutions share-based earn-out liability. The following table provides a reconciliation of net income to non-GAAP income per share (in thousands, except per share amounts):

 

     Six Months Ended  
     June 30,  
     2017      2016  

Net income

   $ 4,796      $ 1,396  

Stock-based compensation expense

     4,486        3,992  

Amortization of intangible assets

     2,332        2,359  

Other

     —          (72

Income tax effects of adjustments

     (3,344      (2,338
  

 

 

    

 

 

 

Non-GAAP income

   $ 8,270      $ 5,337  
  

 

 

    

 

 

 

Shares used to compute non-GAAP income per share

     

Basic

     17,176        16,873  

Diluted

     17,384        17,100  

Non-GAAP income per share

     

Basic

   $ 0.48      $ 0.32  

Diluted

   $ 0.48      $ 0.31  

Liquidity and Capital Resources

At June 30, 2017, our principal sources of liquidity were cash, cash equivalents and marketable securities of $163.6 million and accounts receivable, net of allowance for doubtful accounts, of $21.6 million. 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.

Net Cash Flows from Operating Activities

Net cash provided by operating activities was $17.9 million and $8.8 million for the six months ended June 30, 2017 and 2016, respectively. The increase in operating cash flows as compared to the same period in 2016 was primarily due to increased net income along with increases in deferred income taxes, deferred revenue and other assets, partially offset by a decrease in accrued compensation and the timing of accounts payable payments and accounts receivable receipts.

 

21


Net Cash Flows from Investing Activities

Net cash used in investing activities was $5.2 million and $27.1 million for the six months ended June 30, 2017 and 2016, respectively. The decrease in net cash used in investing activities as compared to the same period in 2016 was primarily due to the acquisition of Toolbox Solutions for $18.1 million. For the six months ended June 30, 2017 and 2016, we purchased marketable securities, net of maturities, of $1.4 million and $6.0 million, respectively and had capital expenditures of $3.3 million and $3.1 million, respectively. Our capital expenditures are for supporting our business growth and existing customer base, as well as for our internal use such as equipment for our employees.

Net Cash Flows from Financing Activities

Net cash provided by financing activities was $2.2 million and $4.0 million for the six months ended June 30, 2017 and 2016, respectively, from the exercise of stock options, proceeds from employee stock purchase plan and excess tax benefit from the exercise of stock options.

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 12% of our total cash and cash equivalents outside of the United States 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 personnel, and we anticipate that our expenditures will continue to increase as we expand our business.

We believe our cash, cash equivalents, 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.

Inflation and changing prices did not have a material effect on our business during the six months ended June 30, 2017 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.

 

22


Contractual and Commercial Commitment Summary

Our contractual obligations and commercial commitments as of June 30, 2017 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

   $ 12,591      $ 3,363      $ 6,474      $ 1,929      $ 825  

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, 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 June 30, 2017. 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 June 30, 2017, we maintained approximately 12% of our total cash and cash equivalents outside of the United States 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.

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 Securities and Exchange Commission’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 June 30, 2017.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

23


PART II. – OTHER INFORMATION

 

Item 1. Legal Proceedings

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 for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on February 27, 2017.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

 

Item 3. Defaults Upon Senior Securities

Not Applicable.

 

Item 4. Mine Safety Disclosures

Not Applicable.

 

Item 5. Other Information

Not Applicable.

 

Item 6. Exhibits

The exhibits filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index immediately following the signatures to this report.

 

24


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: July 28, 2017       SPS COMMERCE, INC.
      /s/ KIMBERLY K. NELSON
      Kimberly K. Nelson
     

Executive Vice President and Chief Financial Officer

(principal financial and accounting officer)

 

25


EXHIBIT INDEX

 

Exhibit

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    Bylaws (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1/A (File No. 333-163476) filed with the Commission on March 5, 2010).
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).

** Indicates management contract or compensatory plan or arrangement.

 

26

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Archie C. Black, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q of SPS Commerce, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

  4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

  5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

/s/ ARCHIE C. BLACK

Archie C. Black

President and Chief Executive Officer

(principal executive officer)

July 28, 2017

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Kimberly K. Nelson, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q of SPS Commerce, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

  4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

  5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

/s/ KIMBERLY K. NELSON

Kimberly K. Nelson

Executive Vice President and Chief Financial Officer

(principal financial and accounting officer)

July 28, 2017

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. §1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of SPS Commerce, Inc. (the “Company”) for the period ended June 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, the Chief Executive Officer and the Chief Financial Officer of the Company, hereby certify, pursuant to and for purposes of 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ ARCHIE C. BLACK

Archie C. Black

President and Chief Executive Officer

(principal executive officer)

/s/ KIMBERLY K. NELSON

Kimberly K. Nelson

Executive Vice President and Chief Financial Officer

(principal financial and accounting officer)

July 28, 2017