SPSC SPS Commerce Inc

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE A – General

Business Description

We are a leading provider of on-demand supply chain management solutions, providing prewired, proven integrations and comprehensive retail performance analytics to thousands of customers worldwide. We provide our solutions through the SPS Commerce platform, a cloud-based 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 notes 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, 2012 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, 2012 included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 6, 2013.

Use of Estimates

Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Significant Accounting Policies

During the six months ended June 30, 2013, 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, 2012, as filed with the Securities and Exchange Commission on March 6, 2013, 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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Amortization expense for intangible assets was $717,000 and $1.4 million for the three and six months ended June 30, 2013, and $260,000 and $520,000 for the three and six months ended June 30, 2012, respectively.

At June 30, 2013, future amortization expense for intangible assets was as follows (in thousands):

The table above does not include amounts related to non-competition agreements where the term of the agreement has not yet started. The term of such agreements, and the related amortization, begins with the termination of employment of the respective employee(s).

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 June 30, 2013 and we were in compliance with all covenants under the revolving credit agreement as of that date.

NOTE D – Accrued Expenses and Other Current Liabilities

In the second quarter of 2013, we entered into an agreement to purchase software licenses. At June 30, 2013, our future payments under this agreement, which are included in accrued expenses and other current liabilities in our consolidated balance sheets, were approximately $900,000 for the remainder of 2013 and approximately $1.4 million for 2014.

NOTE E – Stock-Based Compensation

Our equity compensation plans provide for the grant of incentive and nonqualified stock options, as well as other stock-based awards including restricted stock, to employees, non-employee directors and other consultants who provide services to us. Restricted stock awards result in the issuance of new shares when granted. For other stock-based awards, new shares are issued when the award is exercised or vested. In January 2013, 888,765 additional shares were reserved for future issuance under our 2010 Equity Incentive Plan. At June 30, 2013, there were approximately 1.8 million shares available for grant under approved equity compensation plans.

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We recorded non-cash stock-based compensation expense of $1.1 million and $2.0 million for the three and six months ended June 30, 2013, and $715,000 and $1.3 million for the three and six months ended June 30, 2012, respectively. This expense was allocated as follows (in thousands):

As of June 30, 2013, there was approximately $9.3 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a straight line basis over a weighted average period of 2.9 years.

Of the total outstanding options at June 30, 2013, 702,687 were exercisable with a weighted average exercise price of $11.37 per share. The total outstanding options had a weighted average remaining contractual life of 6.3 years.

The weighted average fair value per share of options granted during the first six months of 2013 was $14.26 and this was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

Restricted Stock Units and Awards

Restricted stock units vest over four years and, upon vesting, the holder is entitled to receive shares of our common stock. With restricted stock awards, shares of our common stock are issued when the award is granted and the restrictions lapse over one year.

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Our restricted stock units activity was as follows:

The number of restricted stock units outstanding at June 30, 2013 included 3,482 units that have vested but shares of common stock have not yet been issued pursuant to the terms of the agreement.

Our restricted stock awards activity was as follows:

Employee Stock Purchase Plan

Our employee stock purchase plan allows participating employees to purchase shares of our common stock at a discount through payroll deductions. The plan is available to all employees subject to certain eligibility requirements. Participating employees may purchase common stock, on a voluntary after tax basis, at a price that is the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period. The plan consists of two six-month offering periods, beginning on January 1 and July 1 of each calendar year. A total of 1.2 million shares of common stock are reserved for issuance under the plan.

For the offering period that began on January 1, 2013 and ended June 30, 2013, we withheld approximately $551,000 from employees participating in the plan. On June 30, 2013, 17,386 shares were purchased on behalf of the employees participating in the plan and approximately 1.2 million shares were available for future purchases.

For the three and six months ended June 30, 2013, we recorded approximately $90,000 and $183,000 of stock-based compensation expense associated with the employee stock purchase plan. The fair value was estimated based on the market price of our common stock at the beginning of the offering period, which was $37.27 per share, and using the Black-Scholes option pricing model with the following assumptions:

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NOTE F – Income Taxes

We recorded income tax expense of $169,000 and $103,000 for the three and six months ended June 30, 2013. We recorded income tax expense of $300,000 and $453,000 for the three and six months ended June 30, 2012. We record our interim provision for income taxes based on our estimated annual effective tax rate for the year. Differences between our effective tax rate and statutory tax rates are primarily due to the impact of meals, entertainment and employee stock purchase plan expenses, as well as the federal R&D credit. Our provisions for income taxes included current foreign and state income tax expense, as well as deferred tax expense.

The decrease in income tax expense for the six months ended June 30, 2013, compared to the six months ended June 30, 2012, was primarily due to a discrete tax benefit of $117,000 in 2013 for the retroactive benefit of the 2012 federal R&D credit. The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 and extended the federal R&D credit from January 1, 2012 through December 31, 2013.

We are subject to income taxes in the U.S. federal and various state and international jurisdictions. As of June 30, 2013, we are generally subject to tax examinations for all prior years due to our net operating loss carryforwards.

As of June 30, 2013, 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):

For each of the three and six months ended June 30, 2013, the effect of approximately 16,000 outstanding potential common shares were excluded from the calculation of diluted net income per share because they were anti-dilutive. For each of the three and six months ended June 30, 2012, the effect of approximately 22,000 outstanding potential common shares were excluded from the calculation of diluted net income per share because they were anti-dilutive.

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