SPS Commerce
SPS COMMERCE INC (Form: 10-Q, Received: 10/27/2017 16:08:44)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended: September 30, 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 October 23, 2017 was 17,224,320 shares.

 

 


 

SPS COMMERCE, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 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

 

14

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

21

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

21

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

22

 

 

 

 

 

Item 1A.

 

Risk Factors

 

22

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

22

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

22

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

22

 

 

 

 

 

Item 5.

 

Other Information

 

22

 

 

 

 

 

Item 6.

 

Exhibits

 

22

 

 

 

 

 

Signatures

 

23

 

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. – FINANC IAL INFORMATION

Item 1.

Financial Statements

SPS COMMERCE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

128,984

 

 

$

115,877

 

Short-term marketable securities

 

 

34,869

 

 

 

23,076

 

Accounts receivable, less allowance for doubtful accounts of $878 and $515,

  respectively

 

 

24,175

 

 

 

20,746

 

Deferred costs

 

 

23,326

 

 

 

19,224

 

Other current assets

 

 

5,853

 

 

 

7,010

 

Total current assets

 

 

217,207

 

 

 

185,933

 

PROPERTY AND EQUIPMENT, net

 

 

15,616

 

 

 

15,314

 

GOODWILL

 

 

51,783

 

 

 

49,777

 

INTANGIBLE ASSETS, net

 

 

17,720

 

 

 

19,788

 

MARKETABLE SECURITIES, non-current

 

 

2,491

 

 

 

7,494

 

OTHER ASSETS

 

 

 

 

 

 

 

 

Deferred costs, non-current

 

 

6,475

 

 

 

6,086

 

Deferred income tax asset, non-current

 

 

26,628

 

 

 

12,446

 

Other non-current assets

 

 

1,101

 

 

 

1,527

 

Total assets

 

$

339,021

 

 

$

298,365

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,089

 

 

$

2,302

 

Accrued compensation

 

 

12,681

 

 

 

13,740

 

Accrued expenses

 

 

3,991

 

 

 

3,508

 

Deferred revenue

 

 

16,209

 

 

 

11,055

 

Deferred rent

 

 

1,655

 

 

 

1,556

 

Total current liabilities

 

 

37,625

 

 

 

32,161

 

OTHER LIABILITIES

 

 

 

 

 

 

 

 

Deferred revenue, non-current

 

 

10,625

 

 

 

10,847

 

Deferred rent, non-current

 

 

3,498

 

 

 

4,179

 

Deferred income tax liability, non-current

 

 

2,100

 

 

 

1,911

 

Total liabilities

 

 

53,848

 

 

 

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; 17,224,060 and

   17,081,145 shares issued and outstanding, respectively

 

 

17

 

 

 

17

 

Additional paid-in capital

 

 

294,943

 

 

 

286,315

 

Accumulated deficit

 

 

(10,800

)

 

 

(33,739

)

Accumulated other comprehensive income (loss)

 

 

1,013

 

 

 

(3,326

)

Total stockholders’ equity

 

 

285,173

 

 

 

249,267

 

Total liabilities and stockholders’ equity

 

$

339,021

 

 

$

298,365

 

 

See accompanying notes to these condensed consolidated financial statements.

3


 

SPS COMMERCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

56,150

 

 

$

49,284

 

 

$

162,366

 

 

$

142,234

 

Cost of revenues

 

 

18,645

 

 

 

16,171

 

 

 

54,166

 

 

 

47,024

 

Gross profit

 

 

37,505

 

 

 

33,113

 

 

 

108,200

 

 

 

95,210

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

18,239

 

 

 

16,526

 

 

 

54,059

 

 

 

49,092

 

Research and development

 

 

6,549

 

 

 

5,574

 

 

 

17,023

 

 

 

16,185

 

General and administrative

 

 

8,744

 

 

 

7,149

 

 

 

24,709

 

 

 

21,516

 

Amortization of intangible assets

 

 

1,128

 

 

 

1,194

 

 

 

3,460

 

 

 

3,553

 

Total operating expenses

 

 

34,660

 

 

 

30,443

 

 

 

99,251

 

 

 

90,346

 

Income from operations

 

 

2,845

 

 

 

2,670

 

 

 

8,949

 

 

 

4,864

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

272

 

 

 

112

 

 

 

704

 

 

 

408

 

Other income (expense), net

 

 

(195

)

 

 

947

 

 

 

(356

)

 

 

866

 

Total other income (expense), net

 

 

77

 

 

 

1,059

 

 

 

348

 

 

 

1,274

 

Income before income taxes

 

 

2,922

 

 

 

3,729

 

 

 

9,297

 

 

 

6,138

 

Income tax expense

 

 

(1,058

)

 

 

(1,220

)

 

 

(2,636

)

 

 

(2,233

)

Net income

 

$

1,864

 

 

$

2,509

 

 

$

6,661

 

 

$

3,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

0.15

 

 

$

0.39

 

 

$

0.23

 

Diluted

 

$

0.11

 

 

$

0.14

 

 

$

0.38

 

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares used to compute net income

   per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,223

 

 

 

17,001

 

 

 

17,192

 

 

 

16,916

 

Diluted

 

 

17,410

 

 

 

17,341

 

 

 

17,394

 

 

 

17,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1,779

 

 

 

443

 

 

 

4,291

 

 

 

2,408

 

Unrealized gain (loss) on investments (net of tax of $10, ($50), $0, $12)

 

 

17

 

 

 

(80

)

 

 

 

 

 

20

 

Reclassification of unrealized gain on investments into earnings (net of tax of $44, $14, $29, $13)

 

 

72

 

 

 

22

 

 

 

48

 

 

 

21

 

Comprehensive income

 

$

3,732

 

 

$

2,894

 

 

$

11,000

 

 

$

6,354

 

 

See accompanying notes to these condensed consolidated financial statements.

 

4


 

SPS COMMERCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

6,661

 

 

$

3,905

 

Reconciliation of net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

1,968

 

 

 

(818

)

Share-based earn-out liability

 

 

 

 

 

(1,103

)

Depreciation and amortization of property and equipment

 

 

5,261

 

 

 

4,883

 

Amortization of intangible assets

 

 

3,460

 

 

 

3,553

 

Provision for doubtful accounts

 

 

1,365

 

 

 

977

 

Stock-based compensation

 

 

6,833

 

 

 

6,004

 

Other, net

 

 

(19

)

 

 

 

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,476

)

 

 

(3,879

)

Deferred costs

 

 

(4,487

)

 

 

(4,194

)

Other current and non-current assets

 

 

1,135

 

 

 

(2,840

)

Accounts payable

 

 

632

 

 

 

(90

)

Accrued compensation

 

 

(1,140

)

 

 

173

 

Accrued expenses

 

 

469

 

 

 

126

 

Deferred revenue

 

 

4,932

 

 

 

3,927

 

Deferred rent

 

 

(622

)

 

 

(271

)

Net cash provided by operating activities

 

 

21,972

 

 

 

10,353

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,242

)

 

 

(5,972

)

Purchases of marketable securities

 

 

(29,819

)

 

 

(18,137

)

Maturities of marketable securities

 

 

23,029

 

 

 

12,500

 

Acquisitions of businesses and intangible assets, net of cash acquired

 

 

(500

)

 

 

(18,062

)

Net cash used in investing activities

 

 

(12,532

)

 

 

(29,671

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net proceeds from exercise of options to purchase common stock

 

 

1,307

 

 

 

3,520

 

Excess tax benefits from exercise of options to purchase common stock

 

 

 

 

 

2,710

 

Net proceeds from employee stock purchase plan

 

 

1,011

 

 

 

786

 

Net cash provided by financing activities

 

 

2,318

 

 

 

7,016

 

Effect of foreign currency exchange rate changes

 

 

1,349

 

 

 

399

 

Net increase (decrease) in cash and cash equivalents

 

 

13,107

 

 

 

(11,903

)

Cash and cash equivalents at beginning of period

 

 

115,877

 

 

 

121,538

 

Cash and cash equivalents at end of period

 

$

128,984

 

 

$

109,635

 

 

See accompanying notes to these condensed consolidated financial statements.

5


 

SPS C OMMERCE , I NC .

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 nine months ended September 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 nine months ended September 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 in the condensed consolidated statements of comprehensive income.  Realized gains or losses are included in other income (expense) in the condensed consolidated statements of comprehensive income.  When a determination has been made that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is realized and is included in other income (expense), net in the condensed consolidated statements of comprehensive income.

Cash equivalents and marketable securities, consisted of the following:

 

 

 

September 30, 2017

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains (Losses)

 

 

Value

 

 

 

(Dollars in thousands)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

76,507

 

 

$

 

 

$

76,507

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

15,033

 

 

 

(35

)

 

 

14,998

 

Commercial paper

 

 

9,944

 

 

 

14

 

 

 

9,958

 

U.S. treasury securities

 

 

12,380

 

 

 

24

 

 

 

12,404

 

 

 

$

113,864

 

 

$

3

 

 

$

113,867

 

Due within one year

 

 

$

111,376

 

Due within two years

 

 

 

2,491

 

Total

 

 

$

113,867

 

 

7


 

 

 

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 September 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.

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.

8


 

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 determin e such fair value:

 

 

 

September 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

76,507

 

 

$

 

 

$

 

 

$

76,507

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

 

 

 

14,998

 

 

 

 

 

 

14,998

 

Commercial paper

 

 

 

 

 

9,958

 

 

 

 

 

 

9,958

 

U.S. treasury securities

 

 

 

 

 

12,404

 

 

 

 

 

 

12,404

 

Total

 

$

76,507

 

 

$

37,360

 

 

$

 

 

$

113,867

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 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.

NOTE C – Goodwill and Intangible Assets, net

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

 

 

 

2017

 

 

 

(Dollars in thousands)

 

Balances, January 1

 

$

49,777

 

Goodwill acquired during the period

 

 

 

Foreign currency translation adjustments

 

 

2,006

 

Balances, September 30

 

$

51,783

 

 

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:

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Currency

 

 

 

 

 

 

 

Amount

 

 

Amortization

 

 

Translation

 

 

Net

 

 

 

(Dollars in thousands)

 

Subscriber relationships

 

$

34,350

 

 

$

(18,603

)

 

$

679

 

 

$

16,426

 

Non-competition agreements

 

 

2,499

 

 

 

(2,015

)

 

 

49

 

 

 

533

 

Technology and other

 

 

2,130

 

 

 

(1,436

)

 

 

67

 

 

 

761

 

 

 

$

38,979

 

 

$

(22,054

)

 

$

795

 

 

$

17,720

 

 

9


 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Currency

 

 

 

 

 

 

 

Amount

 

 

Amortization

 

 

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 September 30, 2017 and 2016 was $1.1 million and $1.2 million, respectively. Total amortization expense for intangible assets during the nine months ended September 30, 2017 and 2016 was $3.5 million and $3.6 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

 

$

1,125

 

2018

 

 

4,035

 

2019

 

 

3,743

 

2020

 

 

3,375

 

2021

 

 

2,529

 

Thereafter

 

 

2,913

 

 

 

$

17,720

 

 

NOTE D – Commitments and Contingencies

Operating Leases

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

 

 

 

(Dollars in thousands)

 

Remainder of 2017

 

$

897

 

2018

 

 

3,639

 

2019

 

 

3,678

 

2020

 

 

1,981

 

2021

 

 

1,077

 

Thereafter

 

 

1,173

 

 

 

$

12,445

 

 

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 September 30, 2017, there were approximately 4.5 million shares available for grant under approved equity compensation plans.

10


 

We recorded stock-based compensation expense of $ 2.3 million and $ 6.8 million for the three and nine months ended September 30, 2017 and $ 2 . 0 million and $ 6 . 0 million for the three and nine months ended September 30 , 201 6 , respectively .    Th is expense was allocated in the consolidated statement s of comprehensive income as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of revenues

 

$

494

 

 

$

319

 

 

$

1,414

 

 

$

916

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and mark