UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the Quarterly Period Ended: March 31, 2012
For the Transition Period from to
Commission file number 001-34702
SPS COMMERCE, INC.
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
(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 x 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding at April 27, 2012 was 12,204,986 shares.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1A.
Item 5.
Item 6.
Signatures
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, 2011 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 undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. 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.
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PART I. – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $243 and $222, respectively
Deferred costs, current
Deferred income taxes, current
Prepaid expenses and other current assets
Total current assets
PROPERTY AND EQUIPMENT, net
GOODWILL
INTANGIBLE ASSETS, net
OTHER ASSETS
Deferred costs, net of current portion
Deferred income taxes, net of current portion
Other non-current assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Accrued compensation and benefits
Accrued expenses and other current liabilities
Deferred revenue, current
Total current liabilities
OTHER LIABILITIES
Deferred revenue, less current portion
Total liabilities
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; 12,186,915 and 12,138,858 shares issued and outstanding, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)
Revenues
Cost of revenues
Gross profit
Operating expenses
Sales and marketing
Research and development
General and administrative
Amortization of intangible assets
Total operating expenses
Income from operations
Other income (expense)
Interest income
Other expense
Total other income (expense), net
Income before income taxes
Income tax expense
Net income
Net income per share
Basic
Diluted
Weighted average common shares used to compute net income per share
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
Cash flows from operating activities
Reconciliation of net income to net cash provided by operating activities
Deferred income taxes
Depreciation and amortization of property and equipment
Provision for doubtful accounts
Stock-based compensation
Changes in assets and liabilities
Accounts receivable
Deferred costs
Deferred revenue
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities
Payments of capital lease obligations
Net proceeds from exercise of options to purchase common stock
Excess tax benefit from exercise of options to purchase common stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A – General
Business Description
We are a leading provider of on-demand supply chain management solutions and the Retail Universe community, providing integration, collaboration, connectivity, visibility and data analytics to thousands of customers worldwide. We provide our solutions through SPSCommerce.net, a hosted software suite that improves the way suppliers, retailers, distributors and other customers manage and fulfill orders. We deliver our solutions to our customers over the Internet using a Software-as-a-Service model and 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 have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 footnotes required by GAAP. We have included all normal recurring adjustments considered necessary to give a fair statement 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, 2011 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, 2011 included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 9, 2012.
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 three months ended March 31, 2012, 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, 2011, as filed with the Securities and Exchange Commission on March 9, 2012, for additional information regarding our significant accounting policies.
Recent Accounting Pronouncements
We have evaluated all recent accounting pronouncements and believe that none of them will have a material effect on our consolidated financial statements.
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NOTE B – Financial Statement Components
Intangible Assets, net
Intangible assets included the following (in thousands):
Subscriber relationships
Non-competition agreements
Amortization expense for intangible assets was $260,000 for the three months ended March 31, 2012. There was no amortization expense for the three months ended March 31, 2011.
NOTE C – Line of Credit
We have a revolving credit agreement with JPMorgan Chase Bank, N.A. which provides for a $20 million revolving credit facility that we may draw upon from time to time, subject to certain terms and conditions, and will mature on September 30, 2016. There were no borrowings outstanding at March 31, 2012 and we were in compliance with all covenants under the revolving credit agreement as of that date.
NOTE D – Commitments and Contingencies
Operating Leases
On February 14, 2012, we executed a new lease agreement for our current headquarters location which commences on November 1, 2012 and expires on April 30, 2020. The lease includes additional square footage upon commencement, an automatic expansion of space on or about September 1, 2013, a right of first offer to lease certain additional space, and two options to extend the term of the lease for three years at a market rate determined in accordance with the lease. We will also have a rent holiday from November 2012 to October 2013 which will be incorporated into our deferred rent calculation upon commencement of the lease. In connection with this new lease, we will deliver to the landlord cash or an irrevocable letter of credit for approximately $172,000, subject to increase based on square footage expansion, as security for performance of our obligations under the lease.
At March 31, 2012, our future minimum payments under operating leases were as follows (in thousands):
Remainder of 2012
2013
2014
2015
2016
Thereafter
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, to employees, non-employee directors and other consultants who provide services to us. Stock options generally vest over three to four years and have a contractual term of eight to ten years from the date of grant. At March 31, 2012, there were approximately 1,141,000 shares available for grant under approved equity compensation plans.
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We recorded stock-based compensation expense of $612,000 and $312,000 for the three months ended March 31, 2012 and 2011, respectively. This expense was allocated as follows (in thousands):
Total stock-based compensation expense
As of March 31, 2012, there was approximately $7.2 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a straight line basis over a weighted average period of approximately two years.
Stock Options
Our stock option activity was as follows:
Outstanding at December 31, 2011
Granted
Exercised
Forfeited
Outstanding at March 31, 2012
Of the total outstanding options at March 31, 2012, 1,004,350 were exercisable with a weighted average exercise price of $4.33 per share. The total outstanding options had a weighted average remaining contractual life of 6.4 years.
The weighted average fair value per share of options granted during the first three months of 2012 was $10.02 and this was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Weighted-average volatility
Expected dividend yield
Expected life (in years)
Weighted-average risk-free interest rate
Restricted Stock Units
During the three months ended March 31, 2012, we granted 62,367 restricted stock units with a grant date fair value of $25.32 per share. These restricted stock units vest over a four year period and, upon vesting, the holder is entitled to receive shares of our common stock.
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NOTE F – Income Taxes
We recorded a provision for income taxes of $153,000 and $29,000 for the three months ended March 31, 2012 and 2011, respectively. We record our interim provision for income taxes based on our estimated annual effective tax rate for the year. Our provisions for income taxes included current federal alternative minimum tax expense and current foreign and state income tax expense. In addition, our provision for income taxes for the three months ended March 31, 2012 included deferred tax expense.
For periods prior to the fourth quarter of 2011, a full valuation allowance was recorded against all of our deferred tax assets as it was more-likely-than-not that we would not realize these deferred tax assets, largely due to our history of taxable losses since inception. Based on our assessment during the fourth quarter of 2011, we determined that it was more-likely-than-not that we would be able to realize approximately $12.8 million of our deferred tax assets, which enabled us to release a substantial portion of the valuation allowance previously recorded. This determination was based on weighing both the positive and negative evidence available including, but not limited to, our earnings history, our projected future taxable income, our business strategy and the nature of each of our deferred tax assets.
We are subject to income taxes in the U.S. federal and various state and international jurisdictions. As of March 31, 2012, we are generally subject to tax examinations for all prior years due to our net operating loss carryforwards.
As of March 31, 2012, we do not have any unrecognized tax benefits. It is our practice to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We do not expect any material changes in our unrecognized tax positions over the next 12 months.
NOTE G – Net Income per Share
Basic net income per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted net income per share also includes the impact of our outstanding potential common shares, including options and restricted stock units. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income per share.
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
Restricted stock units
Weighted average common shares outstanding, diluted
For the three months ended March 31, 2012, all outstanding potential common shares were included in the calculation of diluted net income per share. For the three months ended March 31, 2011, the effect of approximately 235,000 outstanding potential common shares was excluded from the calculation of diluted net income per share because they were anti-dilutive.
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Overview
We are a leading provider of on-demand supply chain management solutions and the Retail Universe community, providing integration, collaboration, connectivity, visibility and data analytics to thousands of trading partners worldwide. We provide our solutions through SPSCommerce.net, a hosted software suite that improves the way suppliers, retailers, distributors and other trading partners manage and fulfill orders. We deliver our solutions to our customers over the Internet using a Software-as-a-Service model.
We plan 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 developing new solutions and applications. We also intend to selectively pursue acquisitions that will add customers, allow us to expand into new regions or industries or allow us to offer new functionalities.
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 months ended March 31, 2012, 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, 2011 as filed with the Securities and Exchange Commission on March 9, 2012.
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 also 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 generally accepted accounting principles in the United States of America (“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 financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. 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. 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. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, the following accounting policies involve a greater degree of judgment, complexity and effect on materiality. 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 for 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, the allowance for doubtful accounts, income taxes, stock-based compensation and the valuation of goodwill and intangible assets are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
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During the three months ended March 31, 2012, there were no significant changes in our critical accounting policies or estimates.
See Note A to our 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, 2011, as filed with the Securities and Exchange Commission on March 9, 2012, for additional information regarding our critical accounting policies, as well as a description of our other significant accounting policies.
Results of Operations
The following table presents our results of operations for the periods indicated (dollars in thousands):
Due to rounding, totals may not equal the sum of the line items in the table above.
Three Months Ended March 31, 2012 compared to Three Months Ended March 31, 2011
Revenues. Revenues for the three months ended March 31, 2012 increased $3.9 million, or 31%, to $16.5 million from $12.6 million for the same period in 2011. Our fiscal quarter ended March 31, 2012 represented our 45th consecutive quarter of increased revenues.
The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and the increase in annualized average recurring revenues per recurring revenue customer.
The number of recurring revenue customers increased 26% to 16,433 at March 31, 2012 from 13,040 at March 31, 2011.
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Annualized average recurring revenues per recurring revenue customer increased 7% to $3,529 for the three months ended March 31, 2012 from $3,291 for the same period in 2011. This increase was primarily attributable to increased fees resulting from increased usage of our solutions by our recurring revenue customers, including growth in large enterprise customers.
Recurring revenues from recurring revenue customers accounted for 87% of our total revenues for the three months ended March 31, 2012, compared to 83% for the same period in 2011. We anticipate that the number of recurring revenue customers and the recurring revenues per recurring revenue customer will continue to increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.
Cost of Revenues. Cost of revenues for the three months ended March 31, 2012 increased $1.1 million, or 34%, to $4.4 million from $3.3 million for the same period in 2011. The increase was attributable to increased costs for personnel, network services, referral fees and stock-based compensation. As a percentage of revenues, cost of revenues was 27% for the three months ended March 31, 2012, compared to 26% for the same period in 2011. Going forward, we anticipate that cost of revenues will continue to increase in absolute dollars as we build our business.
Sales and Marketing Expenses. Sales and marketing expenses for the three months ended March 31, 2012 increased $1.3 million, or 26%, to $6.4 million from $5.1 million for the same period in 2011. The increase in sales and marketing expenses was primarily due to increased personnel costs and higher commissions earned by sales personnel from new business. As a percentage of revenues, sales and marketing expenses were 39% for the three months ended March 31, 2012, compared to 41% for the same period in 2011. As we build our business, we will continue to add resources to our sales and marketing efforts over time, and we expect that these expenses will continue to increase in absolute dollars.
Research and Development Expenses. Research and development expenses for the three months ended March 31, 2012 increased $492,000, or 40%, to $1.7 million from $1.2 million for the same period in 2011. The increase in research and development expenses was due primarily to increased personnel costs. As a percentage of revenues, research and development expenses were 11% for the three months ended March 31, 2012, compared to 10% for the same period in 2011. As we enhance and expand our solutions and applications, we expect that research and development expenses will continue to increase in absolute dollars.
General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2012 increased $733,000, or 30%, to $3.2 million from $2.5 million for the same period in 2011. The increase in general and administrative expenses was primarily due to increased personnel costs, as well as increased stock-based compensation, professional services and credit card processing expenses. As a percentage of revenues, general and administrative expenses were 19% for each of the three months ended March 31, 2012 and 2011. Going forward, we expect that general and administrative expenses will continue to increase in absolute dollars as we build our business.
Amortization of Intangible Assets. Amortization expense was $260,000 for the three months ended March 31, 2012 related to intangible assets recorded with the acquisition of Direct EDI in May 2011. There was no amortization expense for the comparable period in 2011.
Other Income (Expense). Interest income for the three months ended March 31, 2012 and 2011 was $15,000 and $32,000, respectively. Other expense for the three months ended March 31, 2012 and 2011 was $65,000 and $18,000, respectively.
Income Tax Expense. Income tax expense was $153,000 and $29,000 for the three months ended March 31, 2012 and 2011, respectively. We record our interim provision for income taxes based on our estimated annual effective tax rate for the year. Our provisions for income taxes included current federal alternative minimum tax expense and current foreign and state income tax expense. In addition, our provision for income taxes for the three months ended March 31, 2012 included deferred tax expense. The increase in income tax expense was primarily due to the reversal of substantially of the valuation allowance on our deferred tax assets in the fourth quarter of 2011 and the subsequent normal tax effect on our pretax income in 2012.
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Adjusted EBITDA. Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income plus depreciation and amortization, interest expense, interest income, income tax expense and non-cash, stock-based compensation expense. We use Adjusted EBITDA as a measure of operating performance because it assists us in comparing performance on a consistent basis, as it removes from our operating results the impact of our capital structure. We believe Adjusted EBITDA is useful to an investor in evaluating our operating performance because it is widely used to measure a company’s operating performance without regard to items such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of corporate performance exclusive of our capital structure and the method by which assets were acquired.
The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):
Interest expense
EBITDA
Stock-based compensation expense
Adjusted EBITDA
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 non-cash, stock-based compensation expense and amortization expense related to intangible assets divided by the weighted average number of shares of common stock outstanding during each period. We believe non-GAAP income per share is useful to an investor because it is widely used to measure a company's operating performance.
The following table provides a reconciliation of net income to non-GAAP income per share (in thousands, except per share amounts):
Non-GAAP income
Shares used to compute non-GAAP income per share
Non-GAAP income per share
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Liquidity and Capital Resources
At March 31, 2012, our principal sources of liquidity were cash and cash equivalents of $33.1 million and accounts receivable, net of allowance for doubtful accounts, of $8.0 million. Our working capital at March 31, 2012 was $38.6 million compared to $36.8 million at December 31, 2011. The increase in working capital from December 31, 2011 to March 31, 2012 resulted primarily from the following:
$1.1 million increase in cash and cash equivalents, due primarily to cash provided by operations, slightly offset by cash used for capital expenditures;
$337,000 increase in deferred costs, current, for expenses related to increased implementation resources and commission payments for new business;
$131,000 increase in prepaid expenses and other current assets, primarily related to prepaid service contracts;
$171,000 decrease in accounts payable, primarily due to timing of payments;
$570,000 decrease in accrued compensation and benefits, due payments made in early 2012 for bonuses accrued as of December 31, 2011 slightly offset by an increase in salary accruals;
$214,000 increase in accrued expenses and other current liabilities, primarily due to an increase in accruals for professional services; and,
$237,000 increase in deferred revenue, current, due to new business for the three months ended March 31, 2012.
Net Cash Flows from Operating Activities
Net cash provided by operating activities was $1.6 million for the three months ended March 31, 2012 compared to $560,000 for the same period in 2011. The $236,000 decrease in net income was more than offset by the changes in non-cash expenses, including increased amortization and stock-based compensation, and the changes in working capital accounts discussed above, resulting in the overall increase in net cash provided by operations.
Net Cash Flows from Investing Activities
Net cash used in investing activities was $630,000 for the three months ended March 31, 2012 and $488,000 for the same period in 2011, all for capital expenditures. Our capital expenditures are for supporting our business growth and existing customer base, as well as for our internal use such as equipment for our employees.
Net Cash Flows from Financing Activities
Net cash provided by financing activities was $104,000 for the three months ended March 31, 2012, representing the proceeds and excess tax benefit from the exercise of stock options. Net cash used in financing activities was $98,000 for the three months ended March 31, 2011, representing repayments of capital lease obligations slightly offset by proceeds from the exercise of stock options.
Credit Facility
On September 30, 2011, we entered into a revolving credit agreement with JPMorgan Chase Bank, N.A. The revolving credit agreement provides for a $20 million revolving credit facility that we may draw upon from time to time, subject to certain terms and conditions, and will mature on September 30, 2016. Proceeds from the credit facility are anticipated to be used for acquisitions and our capital needs.
There were no borrowings outstanding at March 31, 2012 and we were in compliance with all covenants under the revolving credit agreement as of that date.
Adequacy of Capital Resources
Our future capital requirements may vary significantly from those now planned and will depend on many factors, including the costs to develop and implement new solutions and applications, the sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications we develop, the expansion of our operations in the United States and internationally, the response of competitors to our solutions and applications and our use of capital for acquisitions, if any. Historically, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will increase as we continue to grow our business.
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We believe our cash and cash equivalents and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.
Inflation and changing prices did not have a material effect on our business during the three months ended March 31, 2012. 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.
Interest Rate Sensitivity Risk
For fixed rate debt, interest rate changes affect the fair value of financial instruments but do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities. We did not have any outstanding debt as of March 31, 2012. We therefore do not have any material risk to interest rate fluctuations unless we borrow under our credit facility.
Foreign Currency Exchange Risk
Our results of operations and cash flows are not materially affected by fluctuations in foreign currency exchange rates.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. – OTHER INFORMATION
We are not currently subject to any material legal proceedings. From time to time, however, we may be engaged in legal actions 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.
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, 2011 as filed with the Securities and Exchange Commission on March 9, 2012.
Not Applicable.
The exhibits filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index immediately following the signatures to this report.
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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.
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
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EXHIBIT INDEX
Exhibit
Number
Description
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