Item 1.Financial Statements
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.
SPS COMMERCE, INC.
|
7
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
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.
|
|
January 2020
|
|
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.
|
|
January 2020
|
|
The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
|
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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Recurring revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment
|
|
$
|
64,115
|
|
|
$
|
55,546
|
|
|
$
|
183,963
|
|
|
$
|
161,685
|
|
Analytics
|
|
|
9,826
|
|
|
|
9,422
|
|
|
|
28,809
|
|
|
|
27,540
|
|
Other
|
|
|
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
|
|
|
|
$
|
79,557
|
|
|
$
|
70,928
|
|
|
$
|
229,322
|
|
|
$
|
206,391
|
|
SPS COMMERCE, INC.
|
8
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Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
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
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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
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
|
|
|
$
|
10,692
|
|
|
$
|
10,078
|
|
SPS COMMERCE, INC.
|
9
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Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Balance, beginning of period
|
|
$
|
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
|
)
|
Balance, end of period
|
|
$
|
48,133
|
|
|
$
|
45,581
|
|
|
$
|
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.
SPS COMMERCE, INC.
|
10
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
Cash equivalents and investments consisted of the following:
|
|
September 30, 2020
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Value
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
175,850
|
|
|
$
|
—
|
|
|
$
|
175,850
|
|
Certificates of deposit
|
|
|
7,161
|
|
|
|
—
|
|
|
|
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
|
|
|
|
2,476
|
|
Total
|
|
|
$
|
230,626
|
|
|
|
December 31, 2019
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
|
Gains, net
|
|
|
Value
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
151,266
|
|
|
$
|
—
|
|
|
$
|
151,266
|
|
Certificates of deposit
|
|
|
7,030
|
|
|
|
—
|
|
|
|
7,030
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
9,785
|
|
|
|
20
|
|
|
|
9,805
|
|
Commercial paper
|
|
|
7,503
|
|
|
|
—
|
|
|
|
7,503
|
|
U.S. treasury securities
|
|
|
9,855
|
|
|
|
91
|
|
|
|
9,946
|
|
|
|
$
|
185,439
|
|
|
$
|
111
|
|
|
$
|
185,550
|
|
Maturing within one year
|
|
|
|
|
|
|
|
|
|
$
|
185,550
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
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.
SPS COMMERCE, INC.
|
11
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
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:
|
|
September 30, 2020
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
175,850
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
175,850
|
|
Certificates of deposit
|
|
|
7,161
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,161
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
12,557
|
|
|
|
—
|
|
|
|
12,557
|
|
Commercial paper
|
|
|
—
|
|
|
|
5,046
|
|
|
|
—
|
|
|
|
5,046
|
|
U.S. treasury securities
|
|
|
—
|
|
|
|
30,012
|
|
|
|
—
|
|
|
|
30,012
|
|
|
|
$
|
183,011
|
|
|
$
|
47,615
|
|
|
$
|
—
|
|
|
$
|
230,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
307
|
|
|
$
|
307
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
307
|
|
|
$
|
307
|
|
|
|
December 31, 2019
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
151,266
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
151,266
|
|
Certificates of deposit
|
|
|
7,030
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,030
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
9,805
|
|
|
|
—
|
|
|
|
9,805
|
|
Commercial paper
|
|
|
—
|
|
|
|
7,503
|
|
|
|
—
|
|
|
|
7,503
|
|
U.S. treasury securities
|
|
|
—
|
|
|
|
9,946
|
|
|
|
—
|
|
|
|
9,946
|
|
|
|
$
|
158,296
|
|
|
$
|
27,254
|
|
|
$
|
—
|
|
|
$
|
185,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
405
|
|
|
$
|
405
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
405
|
|
|
$
|
405
|
|
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.
SPS COMMERCE, INC.
|
12
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
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:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
Balance, beginning of period
|
|
$
|
1,469
|
|
|
$
|
1,392
|
|
Adoption of ASU 2016-13
|
|
|
1,069
|
|
|
|
—
|
|
Provision for credit losses
|
|
|
4,198
|
|
|
|
2,429
|
|
Write-offs, net of recoveries
|
|
|
(2,977
|
)
|
|
|
(2,321
|
)
|
Balance, end of period
|
|
$
|
3,759
|
|
|
$
|
1,500
|
|
NOTE F – Goodwill and Intangible Assets, net
The changes in the net carrying amount of goodwill was as follows:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
Balance, beginning of period
|
|
$
|
76,845
|
|
|
$
|
69,658
|
|
Goodwill acquired during the period
|
|
|
—
|
|
|
|
6,570
|
|
Foreign currency translation adjustments
|
|
|
(302
|
)
|
|
|
138
|
|
Balance, end of period
|
|
$
|
76,543
|
|
|
$
|
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:
|
|
September 30, 2020
|
|
|
|
Gross
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
|
(In thousands)
|
|
Amount
|
|
|
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
|
)
|
|
$
|
18,575
|
|
|
|
December 31, 2019
|
|
|
|
Gross
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
|
(In thousands)
|
|
Amount
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
Subscriber relationships
|
|
$
|
43,640
|
|
|
$
|
(27,287
|
)
|
|
$
|
214
|
|
|
$
|
16,567
|
|
Non-competition agreements
|
|
|
2,495
|
|
|
|
(2,371
|
)
|
|
|
10
|
|
|
|
134
|
|
Acquired technology
|
|
|
8,602
|
|
|
|
(2,643
|
)
|
|
|
8
|
|
|
|
5,967
|
|
|
|
$
|
54,737
|
|
|
$
|
(32,301
|
)
|
|
$
|
232
|
|
|
$
|
22,668
|
|
SPS COMMERCE, INC.
|
13
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
The estimated annual amortization expense related to intangible assets subject to amortization for the next five years and thereafter is as follows:
(In thousands)
|
|
|
|
|
Remainder of 2020
|
|
$
|
1,332
|
|
2021
|
|
|
4,498
|
|
2022
|
|
|
3,394
|
|
2023
|
|
|
3,320
|
|
2024
|
|
|
2,100
|
|
Thereafter
|
|
|
3,931
|
|
|
|
$
|
18,575
|
|
NOTE G – Other Assets
The changes in the net amount of capitalized implementation costs for software hosting arrangements is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Balance, beginning of period
|
|
$
|
1,188
|
|
|
$
|
946
|
|
|
$
|
1,166
|
|
|
$
|
455
|
|
Capitalized implementation fees
|
|
|
7
|
|
|
|
153
|
|
|
|
87
|
|
|
|
670
|
|
Amortization of implementation fees
|
|
|
(65
|
)
|
|
|
(26
|
)
|
|
|
(123
|
)
|
|
|
(52
|
)
|
Balance, end of period
|
|
$
|
1,130
|
|
|
$
|
1,073
|
|
|
$
|
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:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
(In thousands, except remaining term)
|
|
Remaining
Term
|
|
Right-of-Use
Asset
|
|
|
Remaining
Term
|
|
Right-of-Use
Asset
|
|
Minneapolis, MN lease
|
|
5 years
|
|
$
|
9,870
|
|
|
5 years
|
|
$
|
10,704
|
|
Kyiv, Ukraine lease
|
|
5 years
|
|
|
2,027
|
|
|
5 years
|
|
|
2,316
|
|
Little Falls, NJ lease
|
|
3 years
|
|
|
1,265
|
|
|
4 years
|
|
|
1,574
|
|
Other leases
|
|
<1 - 5 years
|
|
|
930
|
|
|
<1 - 5 years
|
|
|
1,150
|
|
|
|
|
|
$
|
14,092
|
|
|
|
|
$
|
15,744
|
|
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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
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
|
|
SPS COMMERCE, INC.
|
14
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
Supplemental cash flow information related to leases was as follows:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
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:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Weighted-average remaining lease term - operating leases
|
|
4.3 years
|
|
|
5.0 years
|
|
Weighted-average discount rate - operating leases
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
At September 30, 2020, our future minimum payments under operating leases were as follows:
(In thousands)
|
|
|
|
|
Remainder of 2020
|
|
$
|
3,050
|
|
2021
|
|
|
5,226
|
|
2022
|
|
|
4,704
|
|
2023
|
|
|
4,440
|
|
2024
|
|
|
4,149
|
|
Thereafter
|
|
|
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.
SPS COMMERCE, INC.
|
15
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
Stock-based compensation expense was allocated in the condensed consolidated statements of comprehensive income as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Cost of revenues
|
|
$
|
1,003
|
|
|
$
|
778
|
|
|
$
|
2,767
|
|
|
$
|
2,027
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,123
|
|
|
|
784
|
|
|
|
2,979
|
|
|
|
2,208
|
|
Research and development
|
|
|
983
|
|
|
|
697
|
|
|
|
2,789
|
|
|
|
1,822
|
|
General and administrative
|
|
|
1,784
|
|
|
|
888
|
|
|
|
5,711
|
|
|
|
5,259
|
|
|
|
$
|
4,893
|
|
|
$
|
3,147
|
|
|
$
|
14,246
|
|
|
$
|
11,316
|
|
Stock-based compensation expense by plan type was as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
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
|
|
|
|
$
|
4,893
|
|
|
$
|
3,147
|
|
|
$
|
14,246
|
|
|
$
|
11,316
|
|
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
|
%
|
SPS COMMERCE, INC.
|
16
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
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:
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
|
|
|
Weighted Average Grant
|
|
|
|
(#)
|
|
|
Date Fair Value (per share)
|
|
Outstanding, beginning of period
|
|
|
797,546
|
|
|
$
|
38.80
|
|
Granted
|
|
|
315,816
|
|
|
|
61.12
|
|
Vested and common stock issued
|
|
|
(205,050
|
)
|
|
|
34.97
|
|
Forfeited
|
|
|
(161,737
|
)
|
|
|
29.69
|
|
Outstanding, end of period
|
|
|
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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands, except share data)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Amounts for shares purchased
|
|
$
|
95
|
|
|
$
|
76
|
|
|
$
|
1,645
|
|
|
$
|
1,155
|
|
Shares purchased
|
|
|
2,010
|
|
|
|
2,178
|
|
|
|
35,093
|
|
|
|
32,992
|
|
SPS COMMERCE, INC.
|
17
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
The fair value was estimated based on the market price of our common stock at the beginning of the offering period using the Black-Scholes option pricing model with the following assumptions:
Volatility
|
|
|
30.6
|
%
|
Dividend yield
|
|
|
0
|
%
|
Life (in years)
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands, except per share amounts)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,407
|
|
|
$
|
8,941
|
|
|
$
|
32,116
|
|
|
$
|
24,550
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
|
35,295
|
|
|
|
35,015
|
|
|
|
35,133
|
|
|
|
34,966
|
|
Options to purchase common stock
|
|
|
578
|
|
|
|
634
|
|
|
|
596
|
|
|
|
687
|
|
PSUs, RSUs, RSAs, and DSUs
|
|
|
493
|
|
|
|
283
|
|
|
|
408
|
|
|
|
299
|
|
Weighted average common shares outstanding, diluted
|
|
|
36,366
|
|
|
|
35,932
|
|
|
|
36,137
|
|
|
|
35,952
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
|
$
|
0.26
|
|
|
$
|
0.91
|
|
|
$
|
0.70
|
|
Diluted
|
|
$
|
0.31
|
|
|
$
|
0.25
|
|
|
$
|
0.89
|
|
|
$
|
0.68
|
|
SPS COMMERCE, INC.
|
18
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents
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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Anti-dilutive shares
|
|
|
8
|
|
|
|
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.
SPS COMMERCE, INC.
|
19
|
Form 10-Q for the quarterly period ended September 30, 2020
|
Table of Contents