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, 2020
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 001-34702
SPS COMMERCE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
41-2015127
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
333 South Seventh Street, Suite 1000, Minneapolis, MN 55402
(Address of principal executive offices, including Zip Code)
(612) 435-9400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common Stock, par value $0.001 per share
SPSC
The Nasdaq Stock Market LLC (Nasdaq Global Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding at October 23, 2020 was 35,308,834 shares.
Table of Contents
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
3
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Comprehensive Income
4
Condensed Consolidated Statements of Stockholders’ Equity
5
Condensed Consolidated Statements of Cash Flows
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
29
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
30
Signatures
31
Unless the context otherwise requires, for purposes of the Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company,” “SPS,” and “SPS Commerce” refer to SPS Commerce, Inc.
2
Form 10-Q for the quarterly period ended September 30, 2020
PART I. – FINANCIAL INFORMATION
Item 1.Financial Statements
SPS COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
December 31,
(In thousands, except shares)
2020
2019
ASSETS
(unaudited)
CURRENT ASSETS
Cash and cash equivalents
$
208,930
179,252
Short-term investments
52,300
34,284
Accounts receivable
34,048
33,001
Allowance for credit losses
(3,759
)
(1,469
Accounts receivable, net
30,289
31,532
Deferred costs
36,562
35,274
Other assets
8,927
11,279
Total current assets
337,008
291,621
PROPERTY AND EQUIPMENT, less accumulated depreciation of $58,629 and $50,574,
respectively
25,053
23,752
OPERATING LEASE RIGHT-OF-USE ASSETS
14,092
15,744
GOODWILL
76,543
76,845
INTANGIBLE ASSETS, net
18,575
22,668
INVESTMENTS
2,476
—
OTHER ASSETS
Deferred costs, non-current
11,571
11,667
Deferred income tax assets
140
2,630
Other assets, non-current
2,228
2,513
Total assets
487,686
447,440
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
5,036
4,274
Accrued compensation
19,374
22,303
Accrued expenses
6,042
6,207
Deferred revenue
35,582
31,463
Operating lease liabilities
4,355
3,783
Total current liabilities
70,389
68,030
OTHER LIABILITIES
Deferred revenue, non-current
2,693
2,851
Operating lease liabilities, non-current
16,725
20,085
Deferred income tax liabilities
2,939
1,193
Other liabilities, non-current
405
Total liabilities
92,746
92,564
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; 110,000,000 and 55,000,000 shares authorized;
36,904,856 and 36,104,619 shares issued; and
35,291,606 and 34,863,271 outstanding, respectively
37
36
Treasury stock, at cost; 1,613,250 and 1,241,348 shares, respectively
(65,247
(46,297
Additional paid-in capital
382,992
354,115
Retained earnings
80,020
48,973
Accumulated other comprehensive loss
(2,862
(1,951
Total stockholders’ equity
394,940
354,876
Total liabilities and stockholders’ equity
See accompanying notes to these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
Nine Months Ended
(In thousands, except per share amounts) (Unaudited)
Revenues
79,557
70,928
229,322
206,391
Cost of revenues
25,045
23,263
72,915
68,330
Gross profit
54,512
47,665
156,407
138,061
Operating expenses
Sales and marketing
19,233
16,937
56,143
52,404
Research and development
8,053
7,743
23,087
20,444
General and administrative
11,939
10,725
36,591
33,674
Amortization of intangible assets
1,333
1,327
3,985
3,897
Total operating expenses
40,558
36,732
119,806
110,419
Income from operations
13,954
10,933
36,601
27,642
Other income (expense)
Interest income, net
116
843
982
2,233
Other income (expense), net
307
(165
308
Change in earn-out liability
22
(72
366
Total other income, net
423
700
1,218
2,627
Income before income taxes
14,377
11,633
37,819
30,269
Income tax expense
2,970
2,692
5,703
5,719
Net income
11,407
8,941
32,116
24,550
Other comprehensive income (expense)
Foreign currency translation adjustments
969
(958
(779
73
Unrealized gain (loss) on investments,
net of tax of ($21), $38, $6 and $105
(59
115
19
315
Reclassification of (gain) loss on investments into earnings,
net of tax of $2, ($49), ($51) and ($109)
(145
(151
(326
Total other comprehensive income (expense)
917
(988
(911
62
Comprehensive income
12,324
7,953
31,205
24,612
Net income per share
Basic
0.32
0.26
0.91
0.70
Diluted
0.31
0.25
0.89
0.68
Weighted average common shares used to compute net income per share
35,295
35,015
35,133
34,966
36,366
35,932
36,137
35,952
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
Additional
Other
Total
Common Stock
Treasury Stock
Paid-in
Retained
Comprehensive
Stockholders'
(In thousands, except shares) (Unaudited)
Shares
Amount
Capital
Earnings
Loss
Equity
Balances, June 30, 2019
34,936,212
1,007,478
(34,645
344,232
30,870
(2,160
338,333
Stock-based compensation
2,804
Exercise of stock options and issuance of restricted stock
80,350
1,902
Employee stock purchase plan
2,178
76
Repurchases of common stock
(116,856
116,856
(6,000
Unrealized gain on investments, net of tax
Reclassification of gain on investments into earnings,
net of tax
Balances, September 30, 2019
34,901,884
1,124,334
(40,645
349,014
39,811
(3,148
345,068
Balances, June 30, 2020
35,126,118
1,613,250
373,686
68,613
(3,779
373,310
4,494
163,478
4,717
2,010
95
Unrealized loss on investments, net of tax
Reclassification of loss on investments into earnings,
Balances, September 30, 2020
35,291,606
Balances, December 31, 2018
34,691,472
823,784
(25,679
332,574
15,261
(3,218
318,974
10,312
483,492
5,273
32,992
1,155
(300,550
300,550
(14,966
Settlement and subsequent return of shares
(5,522
(300
Adoption of ASU 2018-02
8
Balances, December 31, 2019
34,863,271
1,241,348
13,090
765,144
1
14,142
14,143
35,093
1,645
(371,902
371,902
(18,950
Adoption of ASU 2016-13
(1,069
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Cash flows from operating activities
Reconciliation of net income to net cash provided by operating activities
Deferred income taxes
4,324
5,360
72
(366
Depreciation and amortization of property and equipment
9,474
8,143
Provision for credit losses
4,198
2,429
14,246
11,316
Other, net
(16
(551
Changes in assets and liabilities
(4,551
(3,670
(1,129
Other current and non-current assets
2,612
(820
1,357
181
(3,989
(3,716
(3
(84
3,961
4,929
Operating leases
(1,128
(487
Net cash provided by operating activities
65,529
50,960
Cash flows from investing activities
Purchases of property and equipment
(11,639
(8,387
Purchases of investments
(67,636
(61,967
Maturities of investments
47,300
55,225
Acquisitions of businesses and intangible assets, net of cash acquired
(11,500
Net cash used in investing activities
(31,975
(26,629
Cash flows from financing activities
Net proceeds from exercise of options to purchase common stock
Net proceeds from employee stock purchase plan
Payment for earn-out liability
(688
Net cash used in financing activities
(3,850
(8,538
Effect of foreign currency exchange rate changes
(26
75
Net increase in cash and cash equivalents
29,678
15,868
Cash and cash equivalents at beginning of period
133,859
Cash and cash equivalents at end of period
149,727
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A – General
Business Description
SPS Commerce is a leading provider of cloud-based supply chain management solutions that make it easier for retailers, suppliers, grocers, distributors and logistics firms to orchestrate the management of item data, order fulfillment, inventory control and sales analytics across all channels. For many businesses, implementing and maintaining a suite of supply chain management capabilities is resource-intensive and not a core competency. The solutions offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer’s behalf. These solutions also enable our customers to increase their supply cycle agility, optimize their inventory levels and sell-through, reduce operational costs and gain increased visibility into customer orders, helping ensure that suppliers, grocers, distributors, and logistics firms can satisfy retailer requirements.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of SPS Commerce, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and notes required by GAAP. We have included all normal recurring adjustments considered necessary to provide a fair presentation of our financial position, results of operations, stockholders’ equity, and cash flows for the interim periods shown. Operating results for these interim periods are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (“SEC”).
Effective January 1, 2020, we adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) with a modified-retrospective approach and recorded a $1.1 million cumulative-effect adjustment to retained earnings. Under the standard, in determining the allowances for credit losses, we pool our outstanding accounts receivable invoices based on the contractual due date of payment at the balance sheet date. We take several factors into consideration for estimated credit losses by pool, primarily our historical credit losses. Additional adjustments are made for current and future conditions, primarily the rate of retail bankruptcies across the United States.
On July 25, 2019, we announced that our board of directors declared a two-for-one stock split of our common stock, effected in the form of a 100 percent stock dividend as of the record date on August 8, 2019. The stock split dividend was distributed on August 22, 2019. Earnings per share and weighted average shares outstanding are presented in this Quarterly Report on Form 10-Q after the effect of the 100 percent stock dividend. The two-for-one stock split is reflected in the share amounts in all periods presented in this Quarterly Report on Form 10-Q.
Use of Estimates
Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
Standard
Date of Issuance
Description
Date Adopted
Effect on the Financial Statements
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements
June 2016
This amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This is intended to provide financial statement users with more decision-useful information about the expected credit losses.
January 2020
The adoption of this standard did not have a material impact on our condensed consolidated financial statements. See above under "Basis of Presentation" for significant inputs for the allowance for credit losses.
ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
August 2018
This amendment adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement.
The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
January 2017
This amendment eliminates Step 2 from the goodwill impairment test.
Significant Accounting Policies
There were no material changes in our significant accounting policies during the nine months ended September 30, 2020. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC, for additional information regarding our significant accounting policies.
NOTE B – Revenue
We derive our revenues from the following revenue streams:
(In thousands)
Recurring revenues:
Fulfillment
64,115
55,546
183,963
161,685
Analytics
9,826
9,422
28,809
27,540
1,244
1,458
3,664
4,303
Recurring Revenues
75,185
66,426
216,436
193,528
One-time revenues
4,372
4,502
12,886
12,863
Revenues are recognized when our services are made available to our customers, in an amount that reflects the consideration we are contractually and legally entitled to in exchange for those services.
We determine revenue recognition through the following steps:
-
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
Recurring revenues consists of recurring subscriptions from customers that utilize our Fulfillment, Analytics, and Other cloud-based supply chain management solutions. Revenue for these solutions is generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our contracts with our recurring revenue customers are recurring in nature, ranging from monthly to annual, and generally allow the customer to cancel the contract for any reason with 30 to 90 days’ notice. Timing of billings varies by customer and by contract type and are either in advance or within 30 days of the service being performed.
The deferred revenue liability for recurring revenue contracts are for one year or less and recognized on a ratable basis over the contract term. We have applied the optional exemption to not disclose information about the remaining performance obligations for contracts which have original durations of one year or less.
One-time Revenues
One-time revenues consist of set-up fees from customers and miscellaneous one-time fees.
Set-up fees are specific for each connection a customer has with a trading partner and many of our customers have connections with numerous trading partners. Set-up fees related to our cloud-based supply chain management solutions are nonrefundable upfront fees that are necessary for our customers to utilize our cloud-based services. These set-up fees do not provide any standalone value to our customers.
Certain contracts contain set-up fees that constitute a material renewal option right. This material right provides customers a significant future incentive that would not otherwise be available to them unless they entered into the contract, as the set-up fees will not be incurred again upon contract renewal.
For our Fulfillment solution, we have determined that the set-up fees and related costs represent a material renewal option right to our customers as they will not be incurred again upon renewal. These set-up fees and related costs are deferred and recognized ratably over two years, which is the estimated period for which a material right is present for our customers.
For our Analytics solution, we have determined that the set-up fees do not represent a material customer renewal right and, as such, are deferred and recognized ratably over the estimated initial contract term, which is generally one year.
The table below presents the activity of the portion of the deferred revenue liability relating to set-up fees:
Balance, beginning of period
10,633
10,063
10,518
9,857
Invoiced set-up fees
2,757
2,599
8,224
7,965
Amortized set-up fees
(2,698
(2,584
(8,050
(7,744
Balance, end of period
10,692
10,078
9
The entire balance of set-up fees will be recognized within two years and, as such, current amounts will be recognized in the next 1-12 months and non-current amounts will be recognized in the next 13-24 months.
Miscellaneous one-time fees consist of professional services and testing and certification. The deferred revenue liability for these one-time fees are for one year or less and recognized at the time service is provided. We have applied the optional exemption to not disclose information about the remaining performance obligations for contracts which have original durations of one year or less.
NOTE C – Deferred Costs
Deferred costs consist of costs to obtain customer contracts, such as commissions paid to sales personnel and to third-party partners for customer referrals, and costs to fulfill customer contracts, such as customer implementation costs.
Costs to obtain customer contracts relating to recurring revenues are considered incremental and recoverable costs of obtaining a contract with our customer. These costs are deferred and amortized over the expected period of benefit which we have determined to be two years. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of comprehensive income.
Costs to fulfill customer contracts are considered incremental and recoverable costs of obtaining a contract with our customer. These costs are deferred and amortized over the expected period of benefit which we have determined to be two years. Amortization expense is included in cost of revenues in the accompanying condensed consolidated statements of comprehensive income.
The table below presents the activity of deferred costs and amortization of deferred costs:
46,649
45,528
46,941
45,475
Incurred deferred costs
14,258
12,676
39,329
36,888
Amortized deferred costs
(12,774
(12,623
(38,137
(36,782
48,133
45,581
NOTE D – Financial Instruments
Cash equivalents and investments
We invest primarily in money market funds, certificates of deposit, highly liquid debt instruments of the U.S. government and U.S. corporate debt securities. Highly liquid investments with original maturities of 90 days or less are classified as cash equivalents. Investments with remaining maturities of less than one year from the balance sheet date are classified as short-term investments whereas those with remaining maturities of more than one year from the balance sheet date are classified as investments. Our marketable securities are classified as available-for-sale. We intend to hold marketable securities until maturity; however, we may sell these securities at any time for use in current operations or for other purposes.
Our marketable securities are carried at fair value and unrealized gains and losses on these investments, net of taxes, are included in accumulated other comprehensive loss in the condensed consolidated balance sheets. Realized gains or losses are included in other income (expense), net in the condensed consolidated statements of comprehensive income. When a determination has been made that the fair value of a marketable security is below its amortized cost basis, the portion of the unrealized loss that corresponds to a credit-related factor is realized through a credit allowance on the marketable security and the equivalent expense is realized in other income (expense), net in the condensed consolidated statements of comprehensive income.
10
Cash equivalents and investments consisted of the following:
September 30, 2020
Amortized
Unrealized
Fair
Cost
Gains (Losses)
Value
Cash equivalents:
Money market funds
175,850
Certificates of deposit
7,161
Marketable securities:
Corporate bonds
12,558
(1
12,557
Commercial paper
5,076
(30
5,046
U.S. treasury securities
30,046
(34
30,012
230,691
(65
230,626
Maturing within one year
228,150
Maturing within one to two years
December 31, 2019
Gains, net
151,266
7,030
9,785
9,805
7,503
9,855
91
9,946
185,439
111
185,550
Recurring Fair Value Measurements
We measure certain financial assets at fair value on a recurring basis based on a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are:
•
Level 1 – quoted prices in active markets for identical assets or liabilities.
Level 2 – observable inputs other than Level 1 prices, such as: (a) quoted prices for similar assets or liabilities, (b) quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or (c) model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
We obtain the fair values of our level 2 available-for-sale securities from a professional pricing service.
For the earn-out liability related to the EDIAdmin acquisition, we utilized the Monte Carlo simulation method to estimate the fair value of this contingent liability as of the balance sheet date. Thousands of iterations of the simulation were performed using forecasted revenues to develop a distribution of future values of recurring revenue which, in turn, provided indicated earn-out payments. The total estimated fair value equals the sum of the average present values of the indicated earn-out payments. Changes in the assumptions used in the simulations described above could have an impact on the payout of contingent consideration.
11
The following table presents information about our financial assets and liabilities 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:
Level 1
Level 2
Level 3
Assets:
183,011
47,615
Liabilities:
Earn-out liability
158,296
27,254
During the three months ended September 30, 2020, there was no change in the earn-out liability. During the nine months ended September 30, 2020, we recognized an expense of $0.1 million in our condensed consolidated statements of comprehensive income due to the remeasurement of the contingent liability and, additionally, we transferred $0.2 million out of Level 3. The remaining earn-out liability is expected to be paid in the first quarter of 2021 and has been measured as Level 3 given the unobservable inputs that are significant to the measurement of the liability. The earn-out has a maximum potential payout of $1.7 million, of which $0.7 million was paid.
There were no other transfers in or out of our Level 1, 2, or 3 assets or liabilities during the nine months ended September 30, 2020 and 2019.
Nonrecurring Fair Value Measurements
We measure certain assets and liabilities at fair value on a nonrecurring basis. Assets that are measured at fair value on a nonrecurring basis include long-lived assets, goodwill and indefinite-lived intangible assets, which would generally be recorded at fair value as a result of an impairment charge. Assets acquired and liabilities assumed as part of business combinations are measured at fair value.
12
Other Fair Value Disclosures
The carrying values of our financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, when applicable, approximate their respective fair values due to their short-term nature.
NOTE E – Allowance for Credit Losses
The allowance for credit losses activity, included in accounts receivable, net, was as follows:
1,469
1,392
1,069
Write-offs, net of recoveries
(2,977
(2,321
3,759
1,500
NOTE F – Goodwill and Intangible Assets, net
The changes in the net carrying amount of goodwill was as follows:
69,658
Goodwill acquired during the period
6,570
(302
138
76,366
Intangible assets subject to amortization are amortized over their respective useful lives (ranging from three to ten years). Intangible assets, net included the following:
Gross
Foreign
Carrying
Currency
Amortization
Translation
Net
Subscriber relationships
36,847
(23,587
(106
13,154
Non-competition agreements
698
(659
(5
34
Acquired technology
7,795
(2,408
5,387
45,340
(26,654
(111
43,640
(27,287
214
16,567
2,495
(2,371
134
8,602
(2,643
5,967
54,737
(32,301
232
13
The estimated annual amortization expense related to intangible assets subject to amortization for the next five years and thereafter is as follows:
Remainder of 2020
1,332
2021
4,498
2022
3,394
2023
3,320
2024
2,100
Thereafter
3,931
NOTE G – Other Assets
The changes in the net amount of capitalized implementation costs for software hosting arrangements is as follows:
1,188
946
1,166
455
Capitalized implementation fees
153
87
670
Amortization of implementation fees
(123
(52
1,130
1,073
There were no impairment losses in relation to the capitalized implementation costs for the nine months ended September 30, 2020 and 2019.
NOTE H – Commitments and Contingencies
Leases
We are obligated under non-cancellable operating leases, primarily for office space and certain equipment, as follows:
(In thousands, except remaining term)
Remaining
Term
Right-of-Use
Asset
Minneapolis, MN lease
5 years
9,870
10,704
Kyiv, Ukraine lease
2,027
2,316
Little Falls, NJ lease
3 years
1,265
4 years
1,574
Other leases
<1 - 5 years
930
1,150
Some of our leases may include options to extend the leases for up to five years. The options to extend our leases are not recognized as part of our Right-of-Use (“ROU”) assets and lease liabilities as it is not reasonably certain that we will exercise those options. Additionally, our agreements do not include options to terminate the leases.
The components of lease expense were as follows:
Operating lease cost
857
650
2,225
1,956
Variable lease cost
886
721
2,687
2,360
1,743
1,371
4,912
4,316
14
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
3,190
3,246
ROU assets obtained in exchange for operating lease liabilities
342
Supplemental balance sheet information related to leases was as follows:
Weighted-average remaining lease term - operating leases
4.3 years
5.0 years
Weighted-average discount rate - operating leases
4.5
%
At September 30, 2020, our future minimum payments under operating leases were as follows:
3,050
5,226
4,704
4,440
4,149
1,440
23,009
Less: imputed interest
(1,929
21,080
Purchase Commitments
In May 2020, we entered into a noncancelable agreement with a computing infrastructure vendor for services through May 2023. At September 30, 2020, the remaining purchase commitment was $14.4 million.
NOTE I – 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 performance share units (“PSU”), restricted stock awards (“RSA”), restricted stock units (“RSU”), and deferred stock units (“DSU”), to employees, non-employee directors and other consultants who provide services to us. We also provide an employee stock purchase plan (“ESPP”) and 401(k) stock match.
RSAs 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 2020, 2.1 million additional shares were reserved for future issuance under our 2010 Equity Incentive Plan. At September 30, 2020, there were approximately 13.9 million shares available for grant under approved equity compensation plans.
We generally recognize stock-based compensation expense on a straight-line basis over the vesting period. Exceptions include when retirement-eligible employees have not given their required notice, in which case expense is recognized on a continuous pro-rata basis relative to the time period until notice is given, and for PSUs, in which case expense is recognized on a straight-line basis from the grant date through the end of the performance period, regardless of whether the market condition is satisfied.
15
Stock-based compensation expense was allocated in the condensed consolidated statements of comprehensive income as follows:
1,003
778
2,767
1,123
784
2,979
2,208
983
697
2,789
1,822
1,784
888
5,711
5,259
4,893
3,147
Stock-based compensation expense by plan type was as follows:
Stock options
541
619
1,675
2,548
PSUs
804
152
2,596
1,226
RSUs
2,729
1,719
7,730
5,581
RSAs and DSUs
106
128
340
409
ESPP
314
186
749
547
401(k) stock match
399
343
1,156
1,005
As of September 30, 2020, there was $26.5 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized over a weighted average period of 2.6 years.
Stock Options
Stock options generally vest over four years and have a contractual term of seven to ten years from the date of grant. Our stock option activity was as follows:
Nine Months Ended September 30, 2020
Weighted Average
Options (#)
Exercise Price (per share)
Outstanding, beginning of period
1,543,912
30.03
Granted
127,388
58.88
Exercised
(558,954
25.30
Forfeited
(8,908
44.87
Outstanding, end of period
1,103,438
35.64
Of the total outstanding options at September 30, 2020, 0.8 million were exercisable. The outstanding and exercisable options had a weighted average exercise price of $31.40 per share and a weighted average remaining contractual life of 3.2 years.
The weighted average grant date fair value of options granted during the first nine months of 2020 was $16.13 per share. This was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Volatility
32.9
Dividend yield
0
Life (in years)
4.0
Risk-free interest rate
1.0
16
The expected volatility of the options is based on the historical volatility of our common stock. We have not issued dividends on our common stock and do not expect to do so in the foreseeable future. Beginning with awards granted in 2020, the expected term of options is derived from historical data on employee exercises and post-vesting employment termination behavior. For awards granted prior to 2020, the expected term of the options was based on the simplified method which did not consider historical employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date.
Performance Share Units, Restricted Stock Units and Awards, and Deferred Stock Units
In February 2017, our executive officers were granted PSU awards with vesting contingent on successful attainment of pre-determined revenue targets over the course of a three-year performance period (fiscal years 2017 – 2019). The fair value is measured as the number of performance shares expected to be earned multiplied by the grant date fair value of our shares.
In February 2018, 2019, and 2020, our executive officers were granted PSU awards with vesting contingent on our total shareholder return as compared to indexed total shareholder return over the course of a fiscal based three-year performance period, starting in the fiscal year of grant. The grant date fair value was estimated using a Monte Carlo simulation that utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award and calculates the fair market value for the PSUs granted.
RSUs generally vest over four years and, upon vesting, the holder is entitled to receive shares of our common stock.
RSAs vest over one year and, upon vesting, the holder is entitled to receive shares of our common stock. In lieu of RSAs, a participant may elect to receive DSUs with one year vesting but the participant directs delayed receipt of common shares of up to ten years after the end of service to the Company.
Activity for our PSU, RSU, RSA, and DSU was as follows:
Weighted Average Grant
(#)
Date Fair Value (per share)
797,546
38.80
315,816
61.12
Vested and common stock issued
(205,050
34.97
(161,737
29.69
746,575
51.27
Employee Stock Purchase Plan
We have an ESPP which allows participating employees to purchase shares of our common stock at a discount through payroll deductions. The plan is available to all employees subject to certain eligibility requirements. Participating employees may purchase common stock, on a voluntary after-tax basis, at a price that is the lower of 85% of the fair market value of 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 1.9 million shares of common stock are reserved for issuance under the plan as of September 30, 2020.
Our ESPP activity was as follows:
(In thousands, except share data)
Amounts for shares purchased
Shares purchased
17
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:
30.6
0.5
1.6
401(k) Stock Match
We sponsor a 401(k) retirement savings plan for our U.S. employees where participants can contribute up to 80% of their compensation, subject to the limits established by law. We match 50% of the employee’s elective deferrals, up to the first 6% of the employee’s pre-tax compensation for each pay period. A portion of our match is in Company stock, which is purchased from the open market by our plan provider and immediately deposited into the employee’s 401(k) account.
NOTE J – Income Taxes
We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pretax income and adjust the provision for discrete tax items recorded in the period. Differences between our effective tax rate and statutory tax rates are primarily due to the impact of permanently non-deductible expenses partially offset by the tax benefits associated with foreign-derived intangible income. Additionally, excess tax benefits generated upon settlement or exercise of stock awards are recognized as a reduction to income tax expense as a discrete tax item in the quarter that the event occurs creating potentially significant fluctuation in tax expense by quarter and by year. Our provisions for income taxes include current foreign and state income tax expense, as well as deferred tax expense.
As of September 30, 2020, we do not have any unrecognized tax benefits nor any material accrued interest or tax penalties.
NOTE K – Net Income Per Share
Basic net income per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted net income per share also includes the impact of our outstanding potential common shares, including options, PSUs, RSUs, RSAs, and DSUs. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income per share.
The following table presents the components of the computation of basic and diluted net income per share for the periods indicated:
(In thousands, except per share amounts)
Numerator
Denominator
Weighted average common shares outstanding, basic
Options to purchase common stock
578
634
596
687
PSUs, RSUs, RSAs, and DSUs
493
283
408
299
Weighted average common shares outstanding, diluted
18
The following table presents the effect of the outstanding potential common shares that were excluded from the calculation of diluted net income per share as they were anti-dilutive:
Anti-dilutive shares
240
203
164
NOTE L – Geographic Information
For the three and nine months ended September 30, 2020 and 2019, 85% of our revenue was attributable to customers based within the United States. No single jurisdiction outside of the U.S. had revenues in excess of 10%.
At September 30, 2020 and 2019, 9% of property and equipment, net was located at subsidiary and office locations outside of the United States.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding us, our business prospects and our results of operations are subject to certain risks and uncertainties posed by many factors and events, many of which may be amplified by the coronavirus (COVID-19) pandemic, 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “assumes,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Similarly, statements that describe our future plans, objectives or goals are also forward-looking. Forward-looking statements may also be made from time to time in oral presentations, including telephone conferences and/or webcasts open to the public. Shareholders, potential investors, and others are cautioned that all forward-looking statements involve risks and uncertainties that could cause results in future periods to differ materially from those anticipated by some of the statements made in this report, including the risks and uncertainties described under the heading “Risk Factors” appearing in our Annual Report on Form 10-K for the year ended December 31, 2019, as may be updated in our subsequent Quarterly Reports on Form 10-Q from time to time, including the updates in this Quarterly Report on Form 10-Q. We expressly disclaim any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.
Overview
SPS Commerce is a leading provider of cloud-based solutions that make it easier for retailers, suppliers, grocers, distributors, and logistics firms to orchestrate the management of item data, order fulfillment, inventory control and sales analytics across all channels. The solutions offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer’s behalf. We derive the majority of our revenues from numerous monthly recurring subscriptions from businesses that utilize our solutions.
We plan to continue to grow our business by further penetrating the supply chain management market, increasing revenues from our customers as their businesses grow, expanding our distribution channels, expanding our international presence and, from time to time, developing new solutions and applications. We also intend to selectively pursue acquisitions that will add customers, allow us to expand into new regions, or allow us to offer new functionalities.
For the three months ended September 30, 2020, our revenues were $79.6 million, an increase of 12% from the comparable period in 2019, and represented our 79th consecutive quarter of increased revenues. Total operating expenses increased 10% for the same period in 2020 from 2019. For the nine months ended September 30, 2020, revenues increased 11% and operating expenses increased 9% compared to the same period in 2019.
Impact of COVID-19
Although the global emergence of COVID-19 did not have a material adverse effect on our business, operating results, and overall financial performance for the nine months ended September 30, 2020, the future impact remains uncertain and depends on several factors, including, but not limited to, the pandemic’s duration and continued spread, impact on our customers, impact on our partners or employees, and impact on the economic environment and financial markets, all of which are uncertain and cannot be predicted. We will continue to actively monitor the situation and may take further actions that alter our business operations, as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, and shareholders.
Key Financial Terms and Metrics
We have several key financial terms and metrics, including annualized average recurring revenues per recurring revenue customer. During the three and nine months ended September 30, 2020, 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, 2019 as filed with the SEC.
To supplement our financial statements, we also provide investors with Adjusted EBITDA and non-GAAP income per share, both of which are non-GAAP financial measures. We believe that these non-GAAP measures provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analyses and planning purposes. Adjusted EBITDA is also used for purposes of determining executive and senior management incentive compensation. These measures are presented to our board of directors.
These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP. These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in our financial statements and are subject to inherent limitations. Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Critical Accounting Policies and Estimates
This discussion of our financial condition and results of operations is based upon our condensed consolidated financial statements, which are prepared in accordance with GAAP and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. Our actual results may differ from these estimates under different assumptions or conditions.
A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments relating to uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, we believe that our policies for revenue recognition and business combinations are the most critical to fully understand and evaluate our financial condition and results of operations.
During the nine months ended September 30, 2020, there were no changes in our critical accounting policies or estimates. See Note A to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC, for additional information regarding our accounting policies.
21
Results of Operations
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
The following table presents our results of operations for the periods indicated:
Three Months Ended September 30,
Change
(Dollars in thousands)
% of revenue
100.0
8,629
12.2
31.5
32.8
1,782
7.7
68.5
67.2
6,847
14.4
24.2
23.9
2,296
13.6
10.1
10.9
310
15.0
15.1
1,214
11.3
1.7
1.9
51.0
51.8
3,826
10.4
17.5
15.4
3,021
27.6
0.1
1.2
(727
(86.2
0.4
(0.2
472
286.1
(22
(100.0
(277
(39.6
18.0
16.4
2,744
23.6
3.7
3.8
278
10.3
14.3
12.6
2,466
Revenues. The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and an 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 5% to 32,025 at September 30, 2020 from 30,551 at September 30, 2019.
Wallet share increased 8% to $9,473 for the three months ended September 30, 2020 from $8,793 for the same period in 2019. The increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.
Recurring revenues from recurring revenue customers accounted for 95% and 94% of our total revenues for the three months ended September 30, 2020 and 2019, respectively. We anticipate that the number of recurring revenue customers and wallet share will increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.
Cost of Revenues. The increase in cost of revenues for the three months ended September 30, 2020 was primarily due to increased headcount which resulted in an increase of $1.4 million in personnel-related costs, driven by increased salaries and benefits and increased contract labor and an increase of $0.2 million in stock-based compensation expense. Additionally, a $0.4 million increase in depreciation expense pertaining to continued investment in infrastructure to support our platform contributed to the increase in cost of revenue, partially offset by a $0.3 million decrease in network costs.
Sales and Marketing Expenses. The increase in sales and marketing expense for the three months ended September 30, 2020 was primarily due to an increase of $0.9 million in variable compensation earned by sales personnel and referral partners. Additionally, increased headcount led to increased personnel-related costs of $0.5 million, primarily driven by increased salaries and benefits, and increases of $0.4 million in promotional expenses and $0.3 million in stock-based compensation expense.
Research and Development Expenses. The increase in research and development expense for the three months ended September 30, 2020 was primarily due to an increase in stock-based compensation expense of $0.3 million.
General and Administrative Expenses. The increase in general and administrative expense for the three months ended September 30, 2020 was driven by an increase in stock-based compensation expense of $0.9 million and an increase of $0.4 million of charitable donations, partially offset by a decrease of $0.5 million in total consulting and contract labor expenses. Additionally, as a result of continued business growth, bad debt expense increased $0.3 million, compared to the same period in 2019.
Other Income (Expense). The decrease in other income (expense) for the three months ended September 30, 2020 was due primarily to the decrease in income from investments.
Income Tax Expense. The increase in income tax expense for the three months ended September 30, 2020 was primarily due to the increase in pre-tax income and a change in the estimated R&D tax credit in 2020, partially offset by discrete tax benefits. Excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will fluctuate.
Adjusted EBITDA. Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for depreciation and amortization, investment income (interest income/expense, realized investments gain/loss excluding realized gain/loss from foreign currency on investments), income tax expense, stock-based compensation expense, realized gain/loss from foreign currency on cash and investments held, and other adjustments as necessary for a fair presentation. Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability, returned escrow shares in 2019 related to the acquisition of ToolBox Solutions (“Toolbox”), and impairment of internally developed software. The following table provides a reconciliation of net income to Adjusted EBITDA:
3,198
2,819
Investment income, net
(107
(843
Stock-based compensation expense
Realized gain from foreign currency on cash and investments held
(559
103
Adjusted EBITDA
23,238
18,061
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, realized gain/loss from foreign currency on cash and investments held, and other adjustments as necessary for a fair presentation, divided by the weighted average number of shares of common stock outstanding during each period. Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability, returned escrow shares in 2019 related to the acquisition of ToolBox, and impairment of internally developed software. The following table provides a reconciliation of net income to non-GAAP income per share:
Income tax effects of adjustments
(2,929
(1,606
Non-GAAP income
14,248
11,787
Shares used to compute non-GAAP income per share
Non-GAAP income per share
0.40
0.34
0.39
0.33
23
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Nine Months Ended September 30,
22,931
11.1
31.8
33.1
4,585
6.7
68.2
66.9
18,346
13.3
24.5
25.4
3,739
7.1
10.0
9.9
2,643
12.9
16.0
16.3
2,917
8.7
88
2.3
52.2
53.5
9,387
8.501
13.4
8,959
32.4
1.1
(1,251
(56.0
Other income, net
280
1,000.0
0.2
(438
(119.7
1.3
(1,409
(53.6
16.5
14.7
7,550
24.9
2.5
2.8
(0.3
14.0
11.9
7,566
30.8
Wallet share increased 7% to $9,191 for the nine months ended September 30, 2020 from $8,622 for the same period in 2019. The increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.
Recurring revenues from recurring revenue customers accounted for 94% of our total revenues for the nine months ended September 30, 2020 and 2019. We anticipate that the number of recurring revenue customers and wallet share will increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.
Cost of Revenues. The increase in cost of revenues for the nine months ended September 30, 2020 was primarily due to increased headcount which resulted in an increase of $3.0 million in personnel-related costs, driven by increased salaries and benefits and increased contract labor, and increases of $0.7 million in stock-based compensation expense and $0.5 million in software subscriptions. Additionally, a $1.1 million increase in depreciation expense pertaining to continued investment in infrastructure to support our platform contributed to the increase in cost of revenues, partially offset by a $0.7 million decrease in direct network expense.
Sales and Marketing Expenses. The increase in sales and marketing expense for the nine months ended September 30, 2020 was primarily due to increased headcount which resulted in an increase of $1.8 million in personnel-related costs, driven by increased salaries and benefits, and increases of $0.7 million in stock-based compensation expense, $0.3 million in variable compensation earned by sales personnel and referral partners, $0.4 million in promotional expense, and $0.3 million in software subscriptions.
Research and Development Expenses. The increase in research and development expense for the nine months ended September 30, 2020 was primarily due to increased headcount which resulted in an increase in personnel costs of $0.9 million and increases in stock-based compensation expense of $1.0 million, occupancy expense of $0.4 million, and depreciation expense of $0.2 million.
General and Administrative Expenses. The increase in general and administrative expense for the nine months ended September 30, 2020 was driven by an increase of $1.8 million in bad debt expense due to continued business growth. Additionally, increases of $1.0 million in charitable donations and $0.5 in stock-based compensation expenses led to the overall increase, partially offset by a decrease of $0.5 million in personnel-related costs.
24
Other Income (Expense). The decrease in other income (expense) for the nine months ended September 30, 2020 was due primarily to the decrease in investment income.
Income Tax Expense. The relatively consistent income tax expense for the nine months ended September 30, 2020 was due to the increase in pre-tax income and a change in the estimated R&D tax credit in 2020, partially offset by discrete tax benefits. Excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will fluctuate.
Adjusted EBITDA. Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for depreciation and amortization, investment income (interest income/expense, realized investments gain/loss excluding realized gain/loss from foreign currency on investments), income tax expense, stock-based compensation expense, realized gain/loss from foreign currency on cash and investments held, and other adjustments as necessary for a fair presentation. Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability, returned escrow shares in 2019 related to the acquisition of Toolbox, and impairment of internally developed software. The following table provides a reconciliation of net income to Adjusted EBITDA:
(1,079
(2,233
(686
257
(483
64,016
50,909
(8,841
(5,972
41,077
33,308
1.17
0.95
1.14
0.93
25
Liquidity and Capital Resources
At September 30, 2020, our principal sources of liquidity were cash, cash equivalents, certificates of deposit, and short-term investments of $261.2 million and accounts receivable, net of provision for credit losses of $30.3 million. Certificates of deposit and marketable securities are invested in accordance with our investment policy, with a goal of maintaining liquidity and capital preservation. Our cash equivalents and marketable securities are held in highly liquid money market funds, commercial paper, federal agency securities, and corporate debt securities.
The below table summarizes the activity within the condensed consolidated statements of cash flows:
Net Cash Flows from Operating Activities
The increase in operating cash flows was primarily driven by continued business growth, which resulted in increased net income and decreased deferred tax assets, as well as increased depreciation, provisions for credit losses, and stock-based compensation.
Net Cash Flows used in Investing Activities
The increase in net cash used in investing activities was primarily due to an increase of net purchases of investments, partially offset by cash used for an acquisition in 2019. Additionally, the increase was due to increased capital expenditures, based on our business growth and continued investment in our technology.
Net Cash Flows used in Financing Activities
The decrease in net cash used in financing activities was primarily due to the increase in net proceeds from stock option exercises, partially offset by increases in cash used for share repurchases and an earn-out payment.
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 4% of our total cash and cash equivalents outside of the U.S. in foreign currencies, primarily in Australian and Canadian dollars. We believe that a significant change in foreign currency exchange rates or an inability to access these funds would not materially affect our ability to meet our operational needs.
Adequacy of Capital Resources
Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:
costs to develop and implement new solutions and applications, if any;
sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications that we may develop;
expansion of our operations in the United States and internationally;
response of competitors to our solutions and applications; and
use of capital for acquisitions, if any.
Historically, we have experienced increases in our expenditures consistent with the growth in our operations, and we anticipate that our expenditures will continue to increase as we expand our business.
We believe our cash, cash equivalents, certificates of deposit, marketable securities and our cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.
26
Inflation and changing prices did not have a material effect on our business during the nine months ended September 30, 2020 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
Contractual and Commercial Commitment Summary
Our contractual obligations and commercial commitments as of September 30, 2020 are summarized below:
Payments Due By Period (in thousands)
Less Than
More Than
Contractual Obligations
1 Year
1-3 Years
3-5 Years
5 Years
Operating lease obligations, including imputed interest
5,142
10,429
7,438
Purchase commitment
5,100
9,300
14,400
10,242
19,729
37,409
27
Interest Rate Sensitivity Risk
The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss. We are exposed to market risk related to changes in interest rates. However, based on the nature and current level of our investments (primarily cash and cash equivalents, which approximate fair value due to their short maturities, certificates of deposit and marketable securities), we believe there is no material risk exposure. We do not enter into investments for trading or speculative purposes.
We did not have any outstanding debt as of September 30, 2020. Therefore, we do not have any material risk to interest rate fluctuations.
Foreign Currency Exchange Risk
We have revenue, expenses, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Australian dollar and Canadian dollar. As of September 30, 2020, we maintained 4% of our total cash and cash equivalents outside of the U.S. in foreign currencies. We believe that a hypothetical 10% change in foreign currency exchange rates or an inability to access foreign funds would not materially affect our ability to meet our operational needs or result in a material foreign currency loss. 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.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020.
Changes in Internal Control over Financial Reporting
For the year ended December 31, 2019, management’s assessment of internal control over financial reporting excluded the internal control of the MAPADOC business, an operating unit of SWK Technologies, Inc., which was acquired on August 26, 2019. Our assessment of the effectiveness of internal control over financial reporting as of September 30, 2020 included MAPADOC.
There were no other changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. – OTHER INFORMATION
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.
With the exception of the addition of the risk factor noted below, 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, 2019 as filed with the SEC.
The extent to which the COVID-19 outbreak and measures taken in response thereto impact our business, results of operations and financial condition will depend on on-going and future developments and outcomes, which are highly uncertain and cannot be predicted.
Our business and financial results may be adversely impacted by health epidemics, pandemics and similar outbreaks. The recent and rapidly spreading COVID-19 pandemic could have adverse impacts on our business, including causing significant volatility in demand for our services due to disruption and downturns in our customers’ businesses and related supply chains, our customers’ ability to pay for our services when due or in full, disruptions to our third party technology providers, limitations on our employees' ability to work and travel, and significant changes in the economic or political conditions in markets in which we operate. Despite our efforts to manage these impacts, their ultimate impact also depends on factors beyond our knowledge or control, including the duration and severity of any such outbreak and actions taken to contain its spread and mitigate its public health effects. Any of these events could cause or amplify the risks and uncertainties set forth in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC, and could materially adversely affect our business, financial condition, results of operations and/or stock price.
(c) Share Repurchases
Under a share repurchase program announced by our board of directors on November 2, 2019, from time to time we can repurchase up to a total of $50 million of our stock in the open market through November 2, 2021. We did not make any purchases in the third quarter of 2020. At September 30, 2020, we had approximately $31.1 million remaining for shares that can be repurchased under the plan.
Not Applicable.
Number
3.1
Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K (File No. 001-34702) filed with the SEC on May 21, 2020).
3.2
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (File No. 001-34702) filed with the SEC on October 17, 2017).
31.1
Certification of Principal Executive Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
31.2
Certification of Principal Financial Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101
Interactive Data Files Pursuant to Rule 405 of Regulation S-T (filed herewith). The XBRL instance document does not appear in the Interactive Data File because its tags are embedded within the Inline XBRL document.
104
The cover page from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: October 28, 2020
/s/ KIMBERLY K. NELSON
Kimberly K. Nelson
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)