e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: June 30, 2011
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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)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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41-2015127
(I.R.S. Employer
Identification No.) |
333 South Seventh Street, Suite 1000, Minneapolis, MN 55402
(Address of Principal Executive Offices, Including Zip Code)
(612) 435-9400
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
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
þ No o
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.
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| Large Accelerated Filer o
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Accelerated Filer o
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Non-Accelerated Filer o
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Smaller Reporting Company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding at
July 29, 2011 was 11,962,690 shares.
SPS COMMERCE, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
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, 2010 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.
2
PART I. — FINANCIAL INFORMATION
Item 1. Financial Statements
SPS COMMERCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share amounts)
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June 30, |
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December 31, |
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2011 |
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2010 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
29,788 |
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$ |
40,473 |
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Accounts receivable, less allowance for doubtful accounts
of $193 and $209 |
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7,353 |
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5,574 |
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Deferred costs, current |
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5,177 |
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4,720 |
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Prepaid expenses and other
current assets |
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1,564 |
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874 |
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Total current assets |
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43,882 |
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51,641 |
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PROPERTY AND EQUIPMENT, net |
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2,896 |
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2,760 |
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GOODWILL |
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5,877 |
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1,166 |
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INTANGIBLE ASSETS, net |
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6,287 |
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290 |
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OTHER ASSETS |
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Deferred costs, net of
current portion |
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2,193 |
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1,943 |
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Other non-current assets |
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80 |
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80 |
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$ |
61,215 |
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$ |
57,880 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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Capital lease obligations,
current |
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$ |
— |
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$ |
122 |
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Accounts payable |
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1,821 |
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998 |
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Accrued compensation and
benefits |
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3,836 |
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3,577 |
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Accrued expenses and other current liabilities |
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1,260 |
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807 |
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Deferred revenue, current |
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3,734 |
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3,585 |
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Total current liabilities |
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10,651 |
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9,089 |
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OTHER LIABILITIES |
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Deferred revenue, less current portion |
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5,461 |
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5,002 |
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Other non-current liabilities |
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247 |
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281 |
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Total liabilities |
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16,359 |
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14,372 |
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COMMITMENTS and CONTINGENCIES |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares
issued and outstanding |
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— |
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Common stock, $0.001 par value; 55,000,000 shares authorized; 11,955,017
and 11,849,572 shares
issued and outstanding,
respectively |
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12 |
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12 |
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Additional paid-in capital |
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107,229 |
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106,264 |
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Accumulated deficit |
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(62,385 |
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(62,768 |
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Total stockholders’
equity |
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44,856 |
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43,508 |
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$ |
61,215 |
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$ |
57,880 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
SPS COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenues |
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$ |
13,937 |
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$ |
10,944 |
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$ |
26,586 |
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$ |
21,187 |
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Cost of revenues |
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3,750 |
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3,101 |
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7,071 |
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6,082 |
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Gross profit |
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10,187 |
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7,843 |
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19,515 |
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15,105 |
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Operating expenses |
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Sales and marketing |
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5,852 |
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4,122 |
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10,978 |
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7,629 |
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Research and development |
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1,414 |
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1,067 |
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2,654 |
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2,110 |
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General and administrative |
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2,839 |
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1,975 |
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5,294 |
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3,640 |
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Amortization of intangible assets |
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123 |
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— |
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123 |
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— |
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Total operating expenses |
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10,228 |
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7,164 |
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19,049 |
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13,379 |
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Income (loss) from operations |
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(41 |
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679 |
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466 |
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1,726 |
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Other income (expense) |
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Interest expense |
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— |
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(13 |
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— |
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(58 |
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Interest income |
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26 |
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— |
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58 |
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— |
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Other income (expense) |
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(16 |
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10 |
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(34 |
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(8 |
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Total other income (expense), net |
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10 |
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(3 |
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24 |
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(66 |
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Income (loss) before income taxes |
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(31 |
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676 |
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490 |
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1,660 |
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Income tax expense |
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(78 |
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(38 |
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(107 |
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(103 |
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Net income (loss) |
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$ |
(109 |
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$ |
638 |
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$ |
383 |
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$ |
1,557 |
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Net income (loss) per share |
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Basic |
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$ |
(0.01 |
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$ |
0.08 |
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$ |
0.03 |
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$ |
0.36 |
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Diluted |
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$ |
(0.01 |
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$ |
0.05 |
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$ |
0.03 |
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$ |
0.15 |
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Weighted average common shares used to compute net income (loss) per share |
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Basic |
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11,919 |
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8,301 |
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11,892 |
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4,358 |
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Diluted |
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11,919 |
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11,844 |
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12,659 |
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10,699 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
SPS COMMERCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
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Six Months Ended |
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June 30, |
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2011 |
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2010 |
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Cash flows from operating activities |
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Net income |
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$ |
383 |
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$ |
1,557 |
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Reconciliation of net income to net cash provided by operating activities |
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Depreciation and amortization of property and equipment |
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895 |
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745 |
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Amortization of intangible assets |
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123 |
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— |
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Provision for doubtful accounts |
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120 |
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165 |
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Stock-based compensation |
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799 |
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226 |
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Change in carrying value of preferred stock warrants |
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— |
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27 |
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Other |
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— |
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1 |
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Changes in assets and liabilities, net of effect of acquisition |
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Accounts receivable |
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(1,799 |
) |
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(385 |
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Prepaid expenses and other current assets |
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(593 |
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484 |
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Other assets |
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— |
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2 |
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Deferred costs |
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(708 |
) |
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(488 |
) |
Accounts payable |
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823 |
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(362 |
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Deferred revenue |
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608 |
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590 |
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Accrued compensation and benefits |
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259 |
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491 |
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Accrued expenses and other current liabilities |
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216 |
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(351 |
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Net cash provided by operating activities |
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1,126 |
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2,702 |
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Cash flows from investing activities |
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Acquisition of Direct EDI |
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(10,865 |
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— |
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Purchases of property and equipment |
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(989 |
) |
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(1,214 |
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Net cash used in investing activities |
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(11,854 |
) |
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(1,214 |
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Cash flows from financing activities |
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Borrowings on line of credit |
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— |
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4,450 |
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Payments on line of credit |
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— |
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(5,950 |
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Payments on equipment loans |
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— |
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(732 |
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Payments of capital lease obligations |
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(122 |
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(116 |
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Net proceeds from initial public offering |
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— |
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32,902 |
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Stock offering costs |
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(108 |
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— |
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Net proceeds from exercise of options to purchase common stock |
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273 |
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— |
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Net cash provided by financing activities |
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43 |
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30,554 |
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Net increase (decrease) in cash and cash equivalents |
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(10,685 |
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32,042 |
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Cash and cash equivalents at beginning of period |
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40,473 |
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5,931 |
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Cash and cash equivalents at end of period |
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$ |
29,788 |
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$ |
37,973 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
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
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, 2010 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, 2010 included in our Annual Report on Form 10-K as filed with
the Securities and Exchange Commission on March 3, 2011.
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.
Business Combinations
We account for acquisitions of businesses pursuant to FASB ASC 805, Business Combinations. In
accordance with ASC 805, we recognize separately from goodwill the fair value of the assets
acquired and the liabilities assumed at the acquisition date as defined by FASB ASC 820, Fair Value
Measurements and Disclosures. Goodwill as of the acquisition date is measured as the excess of
consideration transferred and the net of the acquisition date amounts of the assets acquired and
the liabilities assumed. Assets acquired include tangible and intangible assets. We determine the
value and useful lives of purchased intangible assets with the assistance of an independent
third-party valuation firm using certain estimates and assumptions.
While we use estimates and assumptions that we believe are reasonable as a part of the
purchase price allocation process to accurately value the assets acquired and the liabilities
assumed at the acquisition date, they are inherently uncertain and subject to refinement. As a
result, during the measurement period, which may be up to one year from the acquisition date, we
may record adjustments to the fair value of the assets acquired and the liabilities assumed based
on new information about facts and circumstances that existed as of the acquisition date. Any such
adjustments would be recorded as an offset to goodwill. Upon the conclusion of the measurement
period or final determination of the fair values, whichever comes first, any subsequent adjustments
would be recorded in our statements of operations.
6
Significant Accounting Policies
During the six months ended June 30, 2011, 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, 2010 as filed with the Securities and Exchange
Commission on March 3, 2011 for additional information regarding our significant accounting
policies.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2009-13, Revenue Recognition (ASC Topic 605), Multiple-Deliverable Revenue
Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the fair
value requirements of ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements, by
allowing the use of the “best estimate of selling price” in addition to Vendor Specific Objective
Evidence and third-party evidence (or TPE) for determining the selling price of a deliverable. A
vendor is now required to use its best estimate of the selling price when Vendor Specific Objective
Evidence or TPE of the selling price cannot be determined. In addition, the residual method of
allocating arrangement consideration is no longer permitted.
In October 2009, the FASB issued ASU No. 2009-14, Software (ASC Topic 985), Certain Revenue
Arrangements That Include Software Elements, a consensus of the FASB Emerging Issues Task Force.
This guidance modifies the scope of ASC subtopic 965-605, Software-Revenue Recognition, to exclude
from its requirements (a) non-software components of tangible products and (b) software components
of tangible products that are sold, licensed or leased with tangible products when the software
components and non-software components of the tangible product function together to deliver the
tangible product’s essential functionality.
ASU No. 2009-13 and ASU No. 2009-14 both require expanded qualitative and quantitative
disclosures and are effective for fiscal years beginning on or after June 15, 2010. We have
adopted these updates and they did not have a material impact on our financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC
Topic 820), Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 enhances the
disclosure requirements to include transfers in and out of Level 1 and 2 and the associated
reasons, which was effective for fiscal years beginning on or after December 15, 2009. ASU No.
2010-06 also requires the disclosure of a disaggregated gross reconciliation of Level 3 fair value
measurements, which is effective for fiscal years beginning on or after December 15, 2010. We have
adopted these updates and they did not have a material impact on our financial statements.
In July 2010, the FASB issued ASU No. 2010-20, Receivables (ASC Topic 310), Disclosures about
the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU No. 2010-20
enhances the disclosure requirements about the credit quality and related allowance for credit
losses of financing receivables. We will be required to disclose the nature of the inherent risk of
receivables, the methodology and analytics that support that assessment, and support any changes to
the allowance for doubtful accounts. We will also be required to provide a rollforward of the
allowance and disclose the accounts receivable on a disaggregated basis. This update is effective
for fiscal years beginning on or after December 15, 2010. We have adopted this update and it did
not have a material impact on our financial statements.
In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (ASC Topic 805),
Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU No. 2010-29
amends the disclosure requirements for supplementary pro forma information for business
combinations. This update addresses the diversity in practice about the interpretation of the pro
forma revenue and earnings disclosure requirements for business combinations. The update specifies
that if a public entity presents comparative financial statements, the entity should disclose
revenue and earnings of the combined entity as though the business combination(s) that occurred
during the current year had occurred as of the beginning of the comparable prior annual reporting
period only. It also expands the supplemental pro forma disclosures to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. This update is effective prospectively
for business combinations for
7
which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2010. We have adopted this update and,
with the acquisition of Direct EDI in May 2011, the required supplementary pro forma information is
presented in Note B.
NOTE B — Acquisition of Direct EDI
On May 17, 2011, we entered into an asset purchase agreement with Direct EDI LLC, a
privately-held provider of cloud-based integration solutions for electronic data interchange, and
we completed the asset purchase on May 18, 2011. Under the asset purchase agreement, we purchased
and acquired substantially all of the assets of Direct EDI for $10.9 million in cash and assumed
certain liabilities of Direct EDI. The acquisition of Direct EDI allows us to expand our base of
recurring revenue customers.
Purchase Price Allocation
We accounted for the acquisition as a business combination. We allocated the purchase price
to the tangible and identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values as of the acquisition date. We engaged an independent third-party valuation
firm to assist us in the determination of the value of the purchased intangible assets. The excess
of the purchase price over the fair value of net tangible and identifiable intangible assets
acquired was recorded as goodwill. Goodwill is attributed to a trained workforce and other
buyer-specific value resulting from expected synergies, including long-term cost savings, that are
not included in the fair values of assets. Goodwill will not be amortized; however it is
deductible for tax purposes. Although we believe the purchase price allocation is substantially
complete, it is considered preliminary and the finalization of the valuation of the net tangible
and intangible assets acquired and liabilities assumed could result in a future adjustment to the
purchase price allocation.
The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the acquisition date (in thousands):
| |
|
|
|
|
Current assets |
|
$ |
195 |
|
Property and equipment |
|
|
42 |
|
Intangible assets |
|
|
6,120 |
|
Goodwill |
|
|
4,712 |
|
Current liabilities |
|
|
(204 |
) |
|
|
|
|
Total purchase price |
|
$ |
10,865 |
|
|
|
|
|
Purchased Intangible Assets
The following table summarizes the estimated fair value of the purchased intangible assets and
their estimated useful lives (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Estimated |
|
|
Estimated |
|
| |
|
Fair Value |
|
|
Life |
|
| Purchased Intangible Assets |
|
(in thousands) |
|
|
(in years) |
|
Subscriber relationships |
|
$ |
5,250 |
|
|
|
7 |
|
Non-competition agreements |
|
|
870 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The purchased intangible assets are being amortized on a straight-line basis over their
estimated useful lives. Amortization expense related to these intangible assets was $123,000 for
the three and six months ended June 30, 2011.
8
Acquisition-Related Costs and Post-Acquisition Operating Results
Acquisition-related costs were approximately $232,000, of which $203,000 and $232,000 were
recorded in our condensed consolidated statements of operations for the three and six months ended
June 30, 2011, respectively. Acquisition-related costs were recorded as general and administrative
expense in accordance with the current accounting guidance for business combinations. The
operating results of Direct EDI have been included in our condensed consolidated financial
statements from May 18, 2011, the date of the acquisition. For the three months ended June 30,
2011, approximately $480,000 of our revenue was derived from Direct EDI customers. The amount of
operating income or loss from Direct EDI was not separately identifiable due to our integration.
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below presents the combined
operating results of SPS Commerce and Direct EDI as if the acquisition had occurred on January 1,
2010. The unaudited pro forma information includes the historical operating results of each
company and certain pro forma adjustments, including annual amortization expense for purchased
intangible assets of approximately $1.0 million and additional annual compensation expense of
approximately $280,000 related to employment arrangements entered into as part of the acquisition.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
| (in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma total revenue |
|
$ |
14,528 |
|
|
$ |
11,921 |
|
|
$ |
28,432 |
|
|
$ |
23,040 |
|
Pro forma net income (loss) |
|
$ |
(119 |
) |
|
$ |
492 |
|
|
$ |
256 |
|
|
$ |
1,197 |
|
Pro forma net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
0.06 |
|
|
$ |
0.02 |
|
|
$ |
0.27 |
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
0.04 |
|
|
$ |
0.02 |
|
|
$ |
0.11 |
|
The unaudited pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the results of operations that would have actually been
reported had the acquisition occurred on January 1, 2010, nor is it necessarily indicative of our
results of operations for any future periods.
NOTE C — Intangible Assets
Intangible assets included the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
| |
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
| |
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
Subscriber relationships |
|
$ |
7,180 |
|
|
$ |
(2,019 |
) |
|
$ |
5,161 |
|
|
$ |
1,930 |
|
|
$ |
(1,930 |
) |
|
$ |
— |
|
Covenants not-to-compete |
|
|
1,450 |
|
|
|
(324 |
) |
|
|
1,126 |
|
|
|
580 |
|
|
|
(290 |
) |
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,630 |
|
|
$ |
(2,343 |
) |
|
$ |
6,287 |
|
|
$ |
2,510 |
|
|
$ |
(2,220 |
) |
|
$ |
290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $123,000 for the three and six months
ended June 30, 2011. There was no amortization expense for intangible assets for the three or six
months ended June 30, 2010.
9
At June 30, 2011, future amortization expense for intangible assets was as follows (in thousands):
| |
|
|
|
|
Remainder of 2011 |
|
$ |
520 |
|
2012 |
|
|
1,040 |
|
2013 |
|
|
1,040 |
|
2014 |
|
|
861 |
|
2015 |
|
|
750 |
|
Thereafter |
|
|
2,076 |
|
|
|
|
|
|
|
$ |
6,287 |
|
|
|
|
|
NOTE D — 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 ten years from the date of grant. At June 30, 2011, there were
approximately 668,000 shares available for grant under approved equity compensation plans.
We recorded stock-based compensation expense of $487,000 and $175,000 for the three months
ended June 30, 2011 and 2010, respectively. We recorded stock-based compensation expense of
$799,000 and $226,000 for the six months ended June 30, 2011 and 2010, respectively. This expense
was allocated as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Cost of revenues |
|
$ |
72 |
|
|
$ |
24 |
|
|
$ |
118 |
|
|
$ |
34 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
137 |
|
|
|
48 |
|
|
|
226 |
|
|
|
65 |
|
Research and development |
|
|
16 |
|
|
|
4 |
|
|
|
23 |
|
|
|
5 |
|
General and administrative |
|
|
262 |
|
|
|
99 |
|
|
|
432 |
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
487 |
|
|
$ |
175 |
|
|
$ |
799 |
|
|
$ |
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, there was approximately $5.2 million of unrecognized stock-based
compensation expense under our equity compensation plans, which is expected to be recognized on a
straight line basis over a weighted average period of approximately two years.
Our stock option activity was as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average |
|
| |
|
Options |
|
|
Exercise Price |
|
| |
|
(#) |
|
|
($/share) |
|
Outstanding at December 31, 2010 |
|
|
1,549,344 |
|
|
$ |
4.59 |
|
Granted |
|
|
420,042 |
|
|
|
16.97 |
|
Exercised |
|
|
(105,445 |
) |
|
|
2.59 |
|
Forfeited |
|
|
(19,129 |
) |
|
|
10.80 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011 |
|
|
1,844,812 |
|
|
|
7.46 |
|
|
|
|
|
|
|
|
|
10
The weighted average fair value per share of options granted during the first six months
of 2011 was $8.21 and this was estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
| |
|
|
|
|
Weighted-average volatility |
|
|
45.0 |
% |
Expected dividend yield |
|
|
0 |
% |
Expected life (in years) |
|
|
6.25 |
|
Weighted-average risk-free interest rate |
|
|
2.47%-3.05 |
% |
NOTE E — Income Taxes
We recorded a provision for income taxes of $78,000 and $38,000 for the three months ended
June 30, 2011 and 2010, respectively. We recorded a provision for income taxes of $107,000 and
$103,000 for the six months ended June 30, 2011 and 2010, respectively. We record our interim
provision for income taxes based on our estimated annual effective tax rate for the year. Our
provision for income taxes includes estimated federal alternative minimum taxes and state income
taxes, as well as deferred tax expense resulting from the book and tax basis difference in goodwill
from asset acquisitions.
As of December 31, 2010, we had net operating loss carryforwards of $49.9 million for U.S.
federal tax purposes and $31.4 million for state tax purposes. These loss carryforwards expire
between 2011 and 2029. Section 382 of the U.S. Internal Revenue Code generally imposes an annual
limitation on the amount of net operating loss carryforwards that might be used to offset taxable
income when a corporation has undergone significant changes in stock ownership. We have performed
a Section 382 analysis for the time period from our inception through December 8, 2010. During
this time period it was determined that we had six separate ownership changes under Section 382.
We believe that approximately $17.6 million of federal losses and $7.0 million of state losses will
expire unused due to Section 382 limitations; however, additional state net operating loss
carryforwards could expire unused due to future changes in apportionment factors. This limitation
could be further restricted if ownership changes occur in future years. Our deferred tax asset is
reported net of this limitation.
Realization of our net operating loss carryforwards and other deferred tax temporary
differences are contingent upon future taxable earnings. Our net deferred tax assets have been
reduced fully by a valuation allowance, as realization is not considered to be likely based on an
assessment of the history of losses and the likelihood of sufficient future taxable income. Our
deferred tax liability relates to goodwill created in a prior asset acquisition which is deductible
for tax purposes.
We are subject to income taxes in the U.S. federal jurisdiction and various state
jurisdictions. As of June 30, 2011, we are generally subject to U.S. federal and state tax
examinations for all tax years 2010 and prior due to net operating loss carryforwards.
As of June 30, 2011, 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.
11
NOTE F — Net Income (Loss) Per Share
Basic net income (loss) per share has been computed using the weighted average number of
shares of common stock outstanding during each period. Diluted net income (loss) per share also
includes the impact of our outstanding potential common shares, such as options, warrants and
redeemable convertible preferred stock. Potential common shares that are anti-dilutive are
excluded from the calculation of diluted net income (loss) per share.
The following table presents the components of the computation of basic and diluted net income
(loss) per share for the periods indicated (in thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(109 |
) |
|
$ |
638 |
|
|
$ |
383 |
|
|
$ |
1,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding, basic |
|
|
11,919 |
|
|
|
8,301 |
|
|
|
11,892 |
|
|
|
4,358 |
|
Options and warrants to purchase
common and
preferred stock |
|
|
— |
|
|
|
1,168 |
|
|
|
767 |
|
|
|
1,138 |
|
Redeemable convertible preferred stock |
|
|
— |
|
|
|
2,375 |
|
|
|
— |
|
|
|
5,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding, diluted |
|
|
11,919 |
|
|
|
11,844 |
|
|
|
12,659 |
|
|
|
10,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
0.08 |
|
|
$ |
0.03 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
0.05 |
|
|
$ |
0.03 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding options were excluded from the computation of diluted net
income (loss) per share for the periods indicated because they were anti-dilutive (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three and six Month Ended |
|
| |
|
June 30, |
|
| |
|
2010 |
|
|
2010 |
|
Option to purchase common stock |
|
|
420 |
|
|
|
2 |
|
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading provider of on-demand supply chain management solutions, 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.
Acquisition of Direct EDI
On May 17, 2011, we entered into an asset purchase agreement with Direct EDI LLC, a
privately-held provider of cloud-based integration solutions for electronic data interchange, and
we completed the asset purchase on May 18, 2011. Under the asset purchase agreement, we purchased
and acquired substantially all of the assets of Direct EDI for $10.9 million in cash and assumed
certain liabilities of Direct EDI. The acquisition of Direct EDI allows us to expand our base of
recurring revenue customers. See Note B to our consolidated financial statements included in this
Quarterly Report on Form 10-Q for additional information regarding the acquisition of Direct EDI.
Key Financial Terms and Metrics
We have several key financial terms and metrics, including annualized average recurring
revenues per recurring revenue customer. During the six months ended June 30, 2011, 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, 2010 as
filed with the Securities and Exchange Commission on March 3, 2011.
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. These non-GAAP financial measures exclude significant expenses and income that are
required by GAAP to be recorded in the company’s 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.”
13
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.
During the six months ended June 30, 2011, except as noted below, there were no significant
changes in our critical accounting policies or estimates. With the acquisition of Direct EDI, we
have expanded our critical accounting policy for the valuation of goodwill to include the valuation
of purchased intangible assets.
Valuation of Goodwill and Purchased Intangible Assets
We account for acquisitions pursuant to FASB ASC 805, Business Combinations. Goodwill
represents the excess of the purchase price over the fair value of identifiable net assets
acquired. Assets acquired may include identifiable intangible assets such as subscriber
relationships. In accordance with ASC 805, we recognize separately from goodwill the fair value of
the identifiable intangible assets acquired. We have determined the fair value and useful lives of
our purchased intangible assets with the assistance of an independent third-party valuation firm
using certain estimates and assumptions. We test goodwill for impairment annually at December 31,
or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The impairment test is conducted by comparing the fair value of the net assets with the carrying
value of the reporting unit. Fair value is determined using the direct market observation of
market price and outstanding equity of the reporting unit at December 31. If the carrying value of
the goodwill exceeds the fair value of the reporting unit, goodwill may be impaired. If this
occurs, the fair value is then allocated to its assets and liabilities in a manner similar to a
purchase price allocation in order to determine the implied fair value of goodwill. This implied
fair value is then compared to the carrying amount of goodwill and, if it is less, we would
recognize an impairment loss. For the years ended December 31, 2009 and prior, the impairment test
compared the carrying value of the company to the fair value of the company, which was based on a
analysis of the discounted future cash flows. The methodology for evaluating the fair value of the
company was changed with the completion of our initial public offering to use the per share prices
as a direct market observable measure. There has been no impairment of our goodwill to date.
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, 2010 as filed with the Securities
and Exchange Commission on March 3, 2011 for additional information regarding our critical
accounting policies, as well as a description of our other significant accounting policies.
14
Results of Operations
The following table presents our results of operations for the periods indicated (dollars in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, |
|
|
|
|
| |
|
2011 |
|
|
2010 |
|
|
Change |
|
| |
|
|
|
|
|
% of revenue |
|
|
|
|
|
|
% of revenue |
|
|
$ |
|
|
% |
|
Revenues |
|
$ |
13,937 |
|
|
|
100.0 |
% |
|
$ |
10,944 |
|
|
|
100.0 |
% |
|
$ |
2,993 |
|
|
|
27.3 |
% |
Cost of revenues |
|
|
3,750 |
|
|
|
26.9 |
|
|
|
3,101 |
|
|
|
28.3 |
|
|
|
649 |
|
|
|
20.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
10,187 |
|
|
|
73.1 |
|
|
|
7,843 |
|
|
|
71.7 |
|
|
|
2,344 |
|
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
5,852 |
|
|
|
42.0 |
|
|
|
4,122 |
|
|
|
37.7 |
|
|
|
1,730 |
|
|
|
42.0 |
|
Research and development |
|
|
1,414 |
|
|
|
10.1 |
|
|
|
1,067 |
|
|
|
9.7 |
|
|
|
347 |
|
|
|
32.5 |
|
General and administrative |
|
|
2,839 |
|
|
|
20.4 |
|
|
|
1,975 |
|
|
|
18.0 |
|
|
|
864 |
|
|
|
43.7 |
|
Amortization of intangible assets |
|
|
123 |
|
|
|
0.9 |
|
|
|
— |
|
|
|
— |
|
|
|
123 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
10,228 |
|
|
|
73.4 |
|
|
|
7,164 |
|
|
|
65.5 |
|
|
|
3,064 |
|
|
|
42.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(41 |
) |
|
|
(0.3 |
) |
|
|
679 |
|
|
|
6.2 |
|
|
|
(720 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
(13 |
) |
|
|
(0.1 |
) |
|
|
13 |
|
|
|
(100.0 |
) |
Interest income |
|
|
26 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
* |
|
Other income (expense) |
|
|
(16 |
) |
|
|
(0.1 |
) |
|
|
10 |
|
|
|
0.1 |
|
|
|
(26 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
|
10 |
|
|
|
0.1 |
|
|
|
(3 |
) |
|
|
— |
|
|
|
13 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(31 |
) |
|
|
(0.2 |
) |
|
|
676 |
|
|
|
6.2 |
|
|
|
(707 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(78 |
) |
|
|
(0.6 |
) |
|
|
(38 |
) |
|
|
(0.3 |
) |
|
|
(40 |
) |
|
|
105.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(109 |
) |
|
|
(0.8 |
) |
|
$ |
638 |
|
|
|
5.8 |
|
|
|
(747 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
|
|
|
| |
|
2011 |
|
|
2010 |
|
|
Change |
|
| |
|
|
|
|
|
% of revenue |
|
|
|
|
|
|
% of revenue |
|
|
$ |
|
|
% |
|
Revenues |
|
$ |
26,586 |
|
|
|
100.0 |
% |
|
$ |
21,187 |
|
|
|
100.0 |
% |
|
$ |
5,399 |
|
|
|
25.5 |
% |
Cost of revenues |
|
|
7,071 |
|
|
|
26.6 |
|
|
|
6,082 |
|
|
|
28.7 |
|
|
|
989 |
|
|
|
16.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
19,515 |
|
|
|
73.4 |
|
|
|
15,105 |
|
|
|
71.3 |
|
|
|
4,410 |
|
|
|
29.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
10,978 |
|
|
|
41.3 |
|
|
|
7,629 |
|
|
|
36.0 |
|
|
|
3,349 |
|
|
|
43.9 |
|
Research and development |
|
|
2,654 |
|
|
|
10.0 |
|
|
|
2,110 |
|
|
|
10.0 |
|
|
|
544 |
|
|
|
25.8 |
|
General and administrative |
|
|
5,294 |
|
|
|
19.9 |
|
|
|
3,640 |
|
|
|
17.2 |
|
|
|
1,654 |
|
|
|
45.4 |
|
Amortization of intangible assets |
|
|
123 |
|
|
|
0.5 |
|
|
|
— |
|
|
|
— |
|
|
|
123 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
19,049 |
|
|
|
71.7 |
|
|
|
13,379 |
|
|
|
63.1 |
|
|
|
5,670 |
|
|
|
42.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
466 |
|
|
|
1.8 |
|
|
|
1,726 |
|
|
|
8.1 |
|
|
|
(1,260 |
) |
|
|
(73.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
(58 |
) |
|
|
(0.3 |
) |
|
|
58 |
|
|
|
(100.0 |
) |
Interest income |
|
|
58 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
58 |
|
|
|
* |
|
Other expense |
|
|
(34 |
) |
|
|
(0.1 |
) |
|
|
(8 |
) |
|
|
— |
|
|
|
(26 |
) |
|
|
325.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
|
24 |
|
|
|
0.1 |
|
|
|
(66 |
) |
|
|
(0.3 |
) |
|
|
90 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
490 |
|
|
|
1.8 |
|
|
|
1,660 |
|
|
|
7.8 |
|
|
|
(1,170 |
) |
|
|
(70.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(107 |
) |
|
|
(0.4 |
) |
|
|
(103 |
) |
|
|
(0.5 |
) |
|
|
(4 |
) |
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
383 |
|
|
|
1.4 |
|
|
$ |
1,557 |
|
|
|
7.3 |
|
|
|
(1,174 |
) |
|
|
(75.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to rounding, totals may not equal the sum of the line
items in the table above.
|
|
|
| * |
|
Percentage is not meaningful. |
15
Three and Six Months Ended June 30, 2011 compared to Three and Six Months Ended June 30, 2010
Revenues. Revenues for the three months ended June 30, 2011 increased $3.0 million, or 27%,
to $13.9 million from $10.9 million for the same period in 2010. Revenues for the six months ended
June 30, 2011 increased $5.4 million, or 25%, to $26.6 million from $21.2 million for the same
period in 2010. Our fiscal quarter ended June 30, 2011 represented our 42nd 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 30% to 15,324 at June 30,
2011 from 11,804 at June 30, 2010. This increase included approximately 1,800
recurring revenue customers gained from the acquisition of Direct EDI. |
| |
• |
|
Annualized average recurring revenues per recurring revenue customer increased
5% to $3,321 for the three months ended June 30, 2011 from $3,149 for the same
period in 2010. This increase was primarily attributable to increased fees
resulting from increased usage of our solutions by our recurring revenue customers. |
| |
• |
|
If the impact of Direct EDI was excluded, the annualized average recurring
revenues per recurring revenue customer would have been $3,402 for the three months
ended June 30, 2011, an increase of 8% from the same period in 2010. |
Recurring revenues from recurring revenue customers accounted for 84% of our total revenues
for each of the three and six months ended June 30, 2011, compared to 83% for each of the same
periods in 2010. 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, such as the Trading Partner Intelligence solution we introduced in late 2009,
and increase the penetration of those solutions across our customer base.
Cost of Revenues. Cost of revenues for the three months ended June 30, 2011 increased
$649,000, or 21%, to $3.7 million from $3.1 million for the same period in 2010. Cost of revenues
for the six months ended June 30, 2011 increased $1.0 million, or 16%, to $7.1 million from $6.1
million for the same period in 2010. The increase in costs for both periods was primarily
attributable to higher costs of personnel, network services, occupancy and stock-based
compensation. As a percentage of revenues, cost of revenues was 27% for each of the three and six
months ended June 30, 2011, compared to 28% and 29% for the same periods in 2010. Increased
revenues allowed us to leverage our personnel and infrastructure costs and decrease our cost of
revenues as a percentage of total revenues. Going forward, we anticipate that cost of revenues
will increase in absolute dollars as we continue to build our business.
Sales and Marketing Expenses. Sales and marketing expenses for the three months ended June
30, 2011 increased $1.7 million, or 42%, to $5.8 million from $4.1 million for the same period in
2010. Sales and marketing expenses for the six months ended June 30, 2011 increased $3.4 million,
or 43%, to $11.0 million from $7.6 million for the same period in 2010. The increase in sales and
marketing expenses was due to increased personnel costs, higher commissions earned by sales
personnel from new business, and increased promotional and stock-based compensation costs. As a
percentage of revenues, sales and marketing expenses were 42% and 41% for the three and six months
ended June 30, 2011, compared to 38% and 36% for the same periods in 2010. 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 increase in absolute dollars.
Research and Development Expenses. Research and development expenses for the three months
ended June 30, 2011 increased $347,000, or 33%, to $1.4 million from $1.1 million for the same
period in 2010. Research and development expenses for the six months ended June 30, 2011 increased
$544,000, or 26%, to $2.7 million from $2.1 million for the same period in 2010. The increase in
research and development expenses was due primarily to increased personnel costs. As a percentage
of revenues, research and development expenses were 10% for each of the three and six month periods
ended June 30, 2011 and 2010. We expect research and development expenses will increase in
absolute dollars as we continue to enhance and expand our solutions and applications.
16
General and Administrative Expenses. General and administrative expenses for the three months
ended June 30, 2011 increased $864,000, or 44%, to $2.8 million from $2.0 million for the same
period in 2010. General and administrative expenses for the six months ended June 30, 2011
increased $1.7 million, or 45%, to $5.3 million from $3.6 million for the same period in 2010. The
increase in general and administrative expenses was due to increased expenses related to being a
public company, including legal and accounting fees, as well as increased personnel, software
maintenance and stock-based compensation expenses. In addition, for the three months ended June
30, 2011, general and administrative expenses included approximately $200,000 of costs related to
the Direct EDI acquisition. As a percentage of revenues, general and administrative expenses were
20% for each of the three and six months ended June 30, 2011, compared to 18% and 17% for the same
periods in 2010. Going forward, we expect that general and administrative expenses will increase
in absolute dollars.
Amortization of Intangible Assets. Amortization expense was $123,000 for the three and six
months ended June 30, 2011 related to intangible assets recorded with the acquisition of Direct EDI
in May 2011. There was no amortization expense for the comparable periods in 2010.
Other Income (Expense). We did not incur any interest expense for the three and six months
ended June 30, 2011 as our capital lease obligations were fully repaid in early January 2011. For
the same periods in 2010, interest expense was $13,000 and $58,000 and was related to outstanding
indebtedness under our equipment loans and credit facility, which were repaid in the second quarter
of 2010, as well as our capital lease obligations. Interest income for the three and six months
ended June 30, 2011 was $26,000 and $58,000, respectively, as the result of interest earned on our
cash and cash equivalents. Other expense for the three and six months ended June 30, 2011 was
$16,000 and $34,000, respectively. We recorded other income of $10,000 and other expense of $8,000
for the comparable periods in 2010.
Income Tax Expense. Income tax expense was $78,000 for the three months ended June 30, 2011,
compared to $38,000 for the three months ended June 30, 2010. Income tax expense was $107,000 for
the six months ended June 30, 2011, compared to $103,000 for the six months ended June 30, 2010.
We record our interim provision for income taxes based on our estimated annual effective tax rate
for the year. Our provision for income taxes includes estimated federal alternative minimum taxes
and state income taxes, as well as deferred tax expense resulting from the book and tax basis
difference in goodwill from asset acquisitions.
Adjusted EBITDA. Adjusted EBITDA, which is a non-GAAP measure of financial performance,
consists of net income (loss) 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.
17
The following table provides a reconciliation of net income (loss) to Adjusted EBITDA (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income (loss) |
|
$ |
(109 |
) |
|
$ |
638 |
|
|
$ |
383 |
|
|
$ |
1,557 |
|
Depreciation and amortization of property and equipment |
|
|
473 |
|
|
|
403 |
|
|
|
895 |
|
|
|
745 |
|
Amortization of intangible assets |
|
|
123 |
|
|
|
— |
|
|
|
123 |
|
|
|
— |
|
Interest expense |
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
|
58 |
|
Interest income |
|
|
(26 |
) |
|
|
— |
|
|
|
(58 |
) |
|
|
— |
|
Income tax expense |
|
|
78 |
|
|
|
38 |
|
|
|
107 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
539 |
|
|
|
1,092 |
|
|
|
1,450 |
|
|
|
2,463 |
|
Stock-based compensation expense |
|
|
487 |
|
|
|
175 |
|
|
|
799 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
1,026 |
|
|
$ |
1,267 |
|
|
$ |
2,249 |
|
|
$ |
2,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Income per Share. Non-GAAP income per share, which is also a non-GAAP measure
of financial performance, consists of net income (loss) 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 (loss) to non-GAAP income per
share (in thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income (loss) |
|
$ |
(109 |
) |
|
$ |
638 |
|
|
$ |
383 |
|
|
$ |
1,557 |
|
Stock-based compensation expense |
|
|
487 |
|
|
|
175 |
|
|
|
799 |
|
|
|
226 |
|
Amortization of intangible assets |
|
|
123 |
|
|
|
— |
|
|
|
123 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP income |
|
$ |
501 |
|
|
$ |
813 |
|
|
$ |
1,305 |
|
|
$ |
1,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute non-GAAP income
per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
11,919 |
|
|
|
8,301 |
|
|
|
11,892 |
|
|
|
4,358 |
|
Diluted |
|
|
12,620 |
|
|
|
11,844 |
|
|
|
12,659 |
|
|
|
10,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.04 |
|
|
$ |
0.10 |
|
|
$ |
0.11 |
|
|
$ |
0.41 |
|
Diluted |
|
$ |
0.04 |
|
|
$ |
0.07 |
|
|
$ |
0.10 |
|
|
$ |
0.17 |
|
18
Liquidity and Capital Resources
At June 30, 2011, our principal sources of liquidity were cash and cash equivalents of $29.8
million and accounts receivable, net of allowance for doubtful accounts, of $7.4 million. Our
working capital at June 30, 2011 was $33.2 million compared to $42.6 million at December 31, 2010.
The decrease in working capital from December 31, 2010 to June 30, 2011 resulted primarily from the
following:
| |
• |
|
$10.7 million decrease in cash and cash equivalents, due primarily to cash used for
the acquisition of Direct EDI in May 2011; |
| |
• |
|
$1.8 million increase in net accounts receivable, due to new business for the six
months ended June 30, 2011; |
| |
• |
|
$457,000 increase in deferred costs, current, for expenses related to increased
implementation resources and commission payments for new business; |
| |
• |
|
$690,000 increase in prepaid expenses and other current assets, primarily related to
the renewals of insurance coverage and a prepaid service contract; |
| |
• |
|
$122,000 decrease in capital lease obligations, current, as all of our outstanding
capital leases were repaid; |
| |
• |
|
$823,000 increase in accounts payable, primarily due to timing of payments for
equipment purchases, professional services and rent; |
| |
• |
|
$259,000 increase in accrued compensation and benefits, due to increases in salary,
vacation and commission accruals, slightly offset by payments made in early 2011 for
bonuses accrued as of December 31, 2010; |
| |
• |
|
$453,000 increase in accrued expenses and other current liabilities, primarily due
to an increase in accruals for professional services; and, |
| |
• |
|
$149,000 increase in deferred revenue, current, due to new business for the six
months ended June 30, 2011. |
Net Cash Flows from Operating Activities
Net cash provided by operating activities was $1.1 million for the six months ended June 30,
2011 compared to $2.7 million for the same period in 2010. The approximate $1.2 million decrease
in net income, the changes in non-cash expenses, including increased amortization and stock-based
compensation, and the changes in working capital accounts discussed above all contributed to the
decrease in net cash provided by operations.
Net Cash Flows from Investing Activities
Net cash used in investing activities was $11.9 million for the six months ended June 30, 2011
and $1.2 million for the same period in 2010. In 2011, we used approximately $10.9 million for the
acquisition of Direct EDI. Our capital expenditures, which totaled $1.0 million in 2011 and $1.2
million in 2010, 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 $43,000 for the six months ended June 30, 2011,
representing cash received from the exercise of stock options offset by payments of capital lease
obligations and stock offering costs. Net cash provided by financing activities was $30.6 million
for the six months ended June 30, 2010, representing the approximate $33.0 million of net proceeds
from our initial public offering slightly offset by $2.3 million of net repayments on our
outstanding indebtedness.
Credit Facility
We terminated our previous credit facility with BlueCrest Venture Finance Master Fund Limited
effective March 31, 2010. We continue to review our future needs for a credit facility.
19
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.
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 six
months ended June 30, 2011. 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.
Recent Accounting Pronouncements
See Note A to our financial statements in this Quarterly Report on Form 10-Q and in our Annual
Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange
Commission on March 3, 2011 for a full description of recent accounting pronouncements, including
the respective expected dates of adoption and effects on our results of operations and financial
condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not
required to provide the information required under this item.
Item 4. Controls and Procedures
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 June 30, 2011.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter
ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
20
PART II. — OTHER INFORMATION
Item 1. Legal Proceedings
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.
Item 1A. Risk Factors
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, 2010 as filed with
the Securities and Exchange Commission on March 3, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits
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.
21
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: August 8, 2011
|
|
SPS COMMERCE, INC. |
|
|
|
|
|
/s/ KIMBERLY K. NELSON
Kimberly
K. Nelson
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer) |
22
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
2.1
|
|
Asset Purchase Agreement, dated as of May 17, 2011, by and between
Direct EDI LLC and the registrant (incorporated by reference to
the like-numbered exhibit to the registrant’s Current Report on
Form 8-K filed with the Commission on May 23, 2011 (File No.
001-34702)). |
|
|
|
4.1
|
|
Registration Rights Agreement, as amended (incorporated by
reference to Exhibit 10.2 to the registrant’s Current Report on
Form 8-K filed with the Commission on May 6, 2011 (File No.
001-34702)). |
|
|
|
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 |
23