# SPS Commerce Inc: Form 10-Q for the period ended Jun 30, 2019

- Company: [SPS Commerce Inc](/companies/spsc.md) (CIK 1092699)
- Form: 10-Q
- Filed: 2019-07-26
- Accepted by EDGAR: Jul 26, 2019, 16:01 ET
- Period: 2019-06-30
- Accession: 0001564590-19-026357
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1092699/000156459019026357/spsc-10q_20190630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1092699/000156459019026357/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $68.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2019-01-01 to 2019-06-30 | $135.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-04-01 to 2019-06-30 | $23.7m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2019-01-01 to 2019-06-30 | $45.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2019-04-01 to 2019-06-30 | $44.8m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2019-01-01 to 2019-06-30 | $90.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2019-04-01 to 2019-06-30 | $6.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2019-01-01 to 2019-06-30 | $12.7m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | $9.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-01-01 to 2019-06-30 | $16.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2019-04-01 to 2019-06-30 | $2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2019-01-01 to 2019-06-30 | $3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | $8.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-01-01 to 2019-06-30 | $15.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.49 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2019-01-01 to 2019-06-30 | $0.87 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.50 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2019-01-01 to 2019-06-30 | $0.89 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-04-01 to 2019-06-30 | 18,010,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2019-01-01 to 2019-06-30 | 18,003,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2019-01-01 to 2019-06-30 | $29.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-01-01 to 2019-06-30 | $5.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2019-01-01 to 2019-06-30 | $9.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-06-30 | $147.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $272.8m | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $418.6m | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $58.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-06-30 | $80.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2019-06-30 | $338.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 25,407 characters.

### Overview

SPS Commerce is a leading provider of cloud-based solutions that make it easier for retailers, suppliers, grocers, distributors and logistics firms to orchestrate the management of item data, order fulfillment, inventory control and sales analytics across all channels. The solutions offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability on the customer’s behalf. We derive the majority of our revenues from numerous monthly recurring subscriptions from businesses that utilize our solutions.

We plan to continue to grow our business by further penetrating the supply chain management market, increasing revenues from our customers as their businesses grow, expanding our distribution channels, expanding our international presence and, from time to time, developing new solutions and applications. We also intend to selectively pursue acquisitions that will add customers, allow us to expand into new regions, or allow us to offer new functionalities.

For the three months ended June 30, 2019, our revenues were $68.5 million, an increase of 12% from the comparable period in 2018, and represented our 74th consecutive quarter of increased revenues. Total operating expenses increased 2% for the same period in 2019 from 2018. For the six months ended June 30, 2019, revenues increased 13% and operating expenses increased 6% compared to the same period in 2018.

### Key Financial Terms and Metrics

We have several key financial terms and metrics, including annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share. During the three and six months ended June 30, 2019, 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/A for the year ended December 31, 2018 as filed with the SEC.

To supplement our financial statements, we also provide investors with Adjusted EBITDA and non-GAAP income per share, both of which are non-GAAP financial measures. We believe that these non-GAAP measures provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare the company’s performance to that of prior periods for trend analyses and planning purposes. Adjusted EBITDA is also used for purposes of determining executive and senior management incentive compensation. These measures are presented to our board of directors.

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP. These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in our financial statements and are subject to inherent limitations. Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this “*Management’s Discussion and Analysis of Financial Condition and Results of Operations.”*

### Critical Accounting Policies and Estimates

This discussion of our financial condition and results of operations is based upon our condensed consolidated financial statements, which are prepared in accordance with GAAP and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. Our actual results may differ from these estimates under different assumptions or conditions.

A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments relating to uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, we believe that our policies for revenue recognition and income taxes are the most critical to fully understand and evaluate our financial condition and results of operations.

During the three and six months ended June 30, 2019, there were no changes in our critical accounting policies or estimates, other than the adoption of ASU No. 2016-02. See Note A to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K/A for the year ended December 31, 2018, as filed with the SEC, for additional information regarding our accounting policies.

### Results of Operations

#### Three months ended June 30, 2019 compared to three months ended June 30, 2018

The following table presents our results of operations for the periods indicated (dollars in thousands):

|  | Three Months Ended June 30, 2019 | % of revenue | 2018 | % of revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $68,529 | 100.0% | $61,091 | 100.0% | $7,438 | 12.2% |
| Cost of revenues | 23,700 | 34.6 | 20,402 | 33.4 | 3,298 | 16.2 |
| Gross profit | 44,829 | 65.4 | 40,689 | 66.6 | 4,140 | 10.2 |
| Operating expenses |  |  |  |  |  |  |
| Sales and marketing | 17,545 | 25.6 | 18,424 | 30.1 | (879) | (4.8) |
| Research and development | 6,509 | 9.5 | 5,293 | 8.7 | 1,216 | 23.0 |
| General and administrative | 10,179 | 14.9 | 9,974 | 16.3 | 205 | 2.1 |
| Amortization of intangible assets | 1,266 | 1.8 | 1,033 | 1.7 | 233 | 22.6 |
| Total operating expenses | 35,499 | 51.8 | 34,724 | 56.8 | 775 | 2.2 |
| Income from operations | 9,330 | 13.6 | 5,965 | 9.8 | 3,365 | 56.4 |
| Other income (expense) |  |  |  |  |  |  |
| Interest income, net | 813 | 1.2 | 547 | 0.9 | 266 | 48.6 |
| Other expense, net | 240 | 0.4 | (168) | (0.3) | 408 | 242.9 |
| Change in earn-out liability | 400 | 0.6 | — | 0.0 | 400 | 100.0 |
| Total other income, net | 1,453 | 2.1 | 379 | 0.6 | 1,074 | 283.4 |
| Income before income taxes | 10,783 | 15.7 | 6,344 | 10.4 | 4,439 | 70.0 |
| Income tax expense | 1,987 | 2.9 | 928 | 1.5 | 1,059 | 114.1 |
| Net income | $8,796 | 12.8% | $5,416 | 8.9% | $3,380 | 62.4% |

*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, which we also refer to as wallet share.

- The number of recurring revenue customers increased 14% to 29,889 at June 30, 2019 from 26,212 at June 30, 2018.
- Annualized average recurring revenues per recurring revenue customer, or wallet share, stayed level at $8,674 for the three months ended June 30, 2019 from $8,665 for the same period in 2018. The consistent wallet share is due to the increase in recurring revenue customers.

Recurring revenues from recurring revenue customers accounted for 94% of our total revenues for the three months ended June 30, 2019, increasing from 92% for the same period in 2018. We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.

*Cost of Revenues.* The increase in cost of revenues for the three months ended June 30, 2019 was primarily due to an increase in personnel-related costs of $2.5 million, driven by increased salaries and benefits due to business growth and by increased consulting and contract labor. As we continued to invest in the infrastructure supporting our platform, depreciation expense increased by $0.5 million compared to the same period in 2018.

*Sales and Marketing Expenses.* The decrease in sales and marketing expenses for the three months ended June 30, 2019 was primarily due to decreased headcount, which resulted in a decrease of $0.5 million in salaries and benefits, compared to the same period in 2018.

*Research and Development Expenses.* The increase in research and development expense for the three months ended June 30, 2019 was primarily due to increased headcount which resulted in an increase in personnel costs of $0.8 million and an increase in stock-based compensation expense of $0.2 million.

*General and Administrative Expenses.* The increase in general and administrative expenses for the three months ended June 30, 2019 was a result of continued business growth which drove an increase in personnel-related costs of $0.5 million, an increase of $0.3 million in cloud-based and software subscriptions, and an increase of $0.3 million in bad debt expense. The increases in these costs were offset by a decrease in stock-based compensation of $0.7 million driven by the timing of the Chief Executive Officer’s 2019 RSU grants compared to his 2018 RSU grants.

*Other Income (Expense).* Interest income, net, other expense, net, and change in earn-out liability for the three months ended June 30, 2019 increased over the same period in 2018 primarily due to increased interest income from investments, offset by realized foreign currency exchange gains, and decrease in the fair value of the earn-out liability. The change in fair value of the earn-out liability for the three months ended June 30, 2019 of $0.4 million in income was driven by an adjustment to the fair value of the EDIAdmin earnout liability due to estimated revenue at the earn-out measurement dates, December 31, 2019 and December 31, 2020.

*Income Tax Expense.* The increase in income tax expense for the three months ended June 30, 2019 was primarily due to an increase in pre-tax income. Under ASU 2016-09, excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will be volatile.

*Adjusted EBITDA.* Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for depreciation and amortization, interest expense, interest income, income tax expense, stock-based compensation expense, the discrete impact from tax law change, and other adjustments as necessary for a fair presentation. Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability. The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):

|  | Three Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net income | $8,796 | $5,416 |
| Depreciation and amortization of property and equipment | 2,688 | 2,093 |
| Amortization of intangible assets | 1,266 | 1,033 |
| Interest income, net | (813) | (547) |
| Income tax expense | 1,987 | 928 |
| Stock-based compensation expense | 2,875 | 3,179 |
| Other | (400) | — |
| Adjusted EBITDA | $16,399 | $12,102 |

*Non-GAAP Income per Share.* Non-GAAP income per share, which is also a non-GAAP measure of financial performance, consists of net income plus stock-based compensation expense, amortization expense related to intangible assets, the discrete impact from tax law change and other adjustments as necessary for a fair presentation, divided by the weighted average number of shares of common stock outstanding during each period. Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability. The following table provides a reconciliation of net income to non-GAAP income per share (in thousands, except per share amounts):

|  | Three Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net income | $8,796 | $5,416 |
| Stock-based compensation expense | 2,875 | 3,179 |
| Amortization of intangible assets | 1,266 | 1,033 |
| Other | (400) | — |
| Income tax effects of adjustments | (1,723) | (1,027) |
| Non-GAAP income | $10,814 | $8,601 |
| Shares used to compute non-GAAP income per share |  |  |
| Basic | 17,505 | 17,163 |
| Diluted | 18,010 | 17,549 |
| Non-GAAP income per share |  |  |
| Basic | $0.62 | $0.50 |
| Diluted | $0.60 | $0.49 |

24

#### Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

The following table presents our results of operations for the periods indicated (dollars in thousands):

|  | Six Months Ended June 30, 2019 | % of revenue | 2018 | % of revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $135,463 | 100.0% | $120,183 | 100.0% | $15,280 | 12.7% |
| Cost of revenues | 45,067 | 33.3 | 40,160 | 33.4 | 4,907 | 12.2 |
| Gross profit | 90,396 | 66.7 | 80,023 | 66.6 | 10,373 | 13.0 |
| Operating expenses |  |  |  |  |  |  |
| Sales and marketing | 35,467 | 26.2 | 37,071 | 30.8 | (1,604) | (4.3) |
| Research and development | 12,701 | 9.4 | 10,425 | 8.7 | 2,276 | 21.8 |
| General and administrative | 22,949 | 16.9 | 20,104 | 16.7 | 2,845 | 14.2 |
| Amortization of intangible assets | 2,570 | 1.9 | 2,158 | 1.8 | 412 | 19.1 |
| Total operating expenses | 73,687 | 54.4 | 69,758 | 58.0 | 3,929 | 5.6 |
| Income from operations | 16,709 | 12.3 | 10,265 | 8.5 | 6,444 | 62.8 |
| Other income (expense) |  |  |  |  |  |  |
| Interest income, net | 1,390 | 1.0 | 961 | 0.8 | 429 | 44.6 |
| Other income (expense), net | 193 | 0.1 | (322) | (0.3) | 515 | 159.9 |
| Change in earn-out liability | 344 | 0.3 | — | — | 344 | 100.0 |
| Total other income (expense), net | 1,927 | 1.4 | 639 | 0.5 | 1,288 | 201.6 |
| Income before income taxes | 18,636 | 13.8 | 10,904 | 9.1 | 7,732 | 70.9 |
| Income tax expense | 3,027 | 2.2 | 2,234 | 1.9 | 793 | 35.5 |
| Net income | $15,609 | 11.5% | $8,670 | 7.2% | $6,939 | 80.0% |

*Revenues.* Revenues for the six months ended June 30, 2019 increased $15.3 million, or 13%, to $135.5 million from $120.2 million for the same period in 2018. 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, which we also refer to as wallet share.

- The number of recurring revenue customers increased 14% to 29,889 at June 30, 2019 from 26,212 at June 30, 2018.
- Annualized average recurring revenues per recurring revenue customer, or wallet share, stayed level at $8,588 for the six months ended June 30, 2019 from $8,567 for the same period in 2018. The consistent wallet share is due to the increase in recurring revenue customers.

Recurring revenues from recurring revenue customers accounted for 94% of our total revenues for the six months ended June 30, 2019, increasing from 93% for the same period in 2018. We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.

*Cost of Revenues.* The increase in cost of revenues for the six months ended June 30, 2019 was primarily due to an increase of $3.5 million in personnel-related costs, driven by continued business growth and by an increase in contractor labor. As we continued to invest in the infrastructure supporting our platform, depreciation expense increased by $1.0 million compared to the same period in 2018.

*Sales and Marketing Expenses.* The decrease in sales and marketing expenses for the six months ended June 30, 2019 was due to a decrease of $2.1 million of personnel-related costs, offset by a $0.3 million increase in variable compensation earned by sales personnel and referral partners, as a result of new business.

*Research and Development Expenses.* The increase in research and development expenses for the six months ended June 30, 2019 was primarily due to increased headcount which resulted in an increase in personnel costs of $1.6 million and an increase of stock-based compensation of $0.4 million.

*General and Administrative Expenses.* The increase in general and administrative expenses for the six months ended June 30, 2019 was a result of continued business growth driven by an increase in personnel-related costs of $1.0 million and an increase in stock-based compensation of $0.8 million. Additionally, other expenses increased by $1.2 million, primarily driven by increased costs of software subscriptions, credit card fees and bad debt expense.

*Other Income (Expense), net.* Interest income, net, other expense, net, and change in earn-out liability for the six months ended June 30, 2019 increased over the same period in 2018 primarily due to increased income from investments and settlement and subsequent return of escrowed shared from the Toolbox acquisition, offset by realized foreign currency exchange gains, and decrease in fair value of the earn-out liability. The change in earn-out liability for the six months ended June 30, 2019 was $0.3 million in income driven by an adjustment to the fair value of the EDIAdmin earnout liability due to estimated revenue at the earn-out measurement dates, December 31, 2019 and December 31, 2020.

*Income Tax Expense.* The increase in income tax expense for the six months ended June 30, 2019, as compared to the same period in 2018, was primarily due to an increase in pre-tax income, partially offset by an increase of $1.2 million in discrete tax benefits, primarily driven by an increase in stock activity. Under ASU 2016-09, excess tax benefits generated upon the settlement or exercise of stock awards are recognized as a reduction to income tax expense and, as a result, we expect that our annual effective income tax rate will be volatile.

*Adjusted EBITDA.* Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for depreciation and amortization, interest expense, interest income, income tax expense, stock-based compensation expense, the discrete impact from tax law change, and other adjustments as necessary for a fair presentation. Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability, returned escrow shares related to the Toolbox acquisition, and an impairment of internally developed software. The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):

|  | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net income | $15,609 | $8,670 |
| Depreciation and amortization of property and equipment | 5,324 | 4,176 |
| Amortization of intangible assets | 2,570 | 2,158 |
| Interest income, net | (1,390) | (961) |
| Income tax expense | 3,027 | 2,234 |
| Stock-based compensation expense | 8,169 | 6,712 |
| Other | (461) | — |
| Adjusted EBITDA | $32,848 | $22,989 |

26

*Non-GAAP Income per Share.* Non-GAAP income per share, which is also a non-GAAP measure of financial performance, consists of net income plus stock-based compensation expense, amortization expense related to intangible assets, the discrete impact from tax law change and other adjustments as necessary for a fair presentation, divided by the weighted average number of shares of common stock outstanding during each period. Other adjustments included the impact of the fair value adjustment for the EDIAdmin earn-out liability, returned escrow shares related to the Toolbox acquisition, and an impairment of internally developed software. The following table provides a reconciliation of net income to Non-GAAP income per share (in thousands, except per share amounts):

|  | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net income | $15,609 | $8,670 |
| Stock-based compensation expense | 8,169 | 6,712 |
| Amortization of intangible assets | 2,570 | 2,158 |
| Other | (461) | — |
| Income tax effects of adjustments | (4,366) | (2,180) |
| Non-GAAP income | $21,521 | $15,360 |
| Shares used to compute non-GAAP income per share |  |  |
| Basic | 17,488 | 17,140 |
| Diluted | 18,003 | 17,446 |
| Non-GAAP income per share |  |  |
| Basic | $1.23 | $0.90 |
| Diluted | $1.20 | $0.88 |

### Liquidity and Capital Resources

At June 30, 2019, our principal sources of liquidity were cash, cash equivalents, certificates of deposit and marketable securities of $198.7 million and accounts receivable, net of allowance for doubtful accounts of $30.7 million. Certificates of deposit and marketable securities are invested in accordance with our investment policy, with a goal of maintaining liquidity and capital preservation. Our cash equivalents and marketable securities are held in highly liquid money market funds, commercial paper, federal agency securities and corporate debt securities.

The below table summarizes the activity within the statement of cash flows:

|  | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $29,662 | $22,247 |
| Net cash used in investing activities | (12,174) | (13,978) |
| Net cash used in financing activities | (4,516) | (5,913) |

#### Net Cash Flows from Operating Activities

The increase in operating cash flows as compared to the same period in 2018 was primarily due to increased net income, stock-based compensation, depreciation and amortization of property and equipment, and deferred costs, offset by decreases in accrued compensation related to timing of payroll and deferred rent due to the adoption of ASC 842, *Leases.*

#### Net Cash Flows from Investing Activities

The change in net cash used in investing activities compared to the same period in 2018 was primarily due to capital purchases in investments in excess of expenditures and maturities of investments. For the six months ended June 30, 2019, investments purchased, net of maturities, of $6.8 million and capital expenditures of $5.4 million compared to net purchases of $7.1 million and capital expenditures of $6.5 million in the six months ended June 30, 2018. Our capital expenditures are for supporting our business growth and existing customer base, as well as for our internal use such as equipment for our employees.

#### Net Cash Flows from Financing Activities

The change in net cash used in financing activities as compared to the same period in 2018 was primarily due to the decrease in net proceeds from stock option exercises and decrease in cash used for share repurchases.

#### Effect of Foreign Currency Exchange Rate Changes

Our results of operations and cash flows were not materially affected by fluctuations in foreign currency exchange rates. We maintain approximately 6% of our total cash and cash equivalents outside of the U.S. in foreign currencies, primarily in Australian and Canadian dollars. We believe that a significant change in foreign currency exchange rates or an inability to access these funds would not affect our ability to meet our operational needs.

#### Adequacy of Capital Resources

Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:

- costs to develop and implement new solutions and applications, if any;
- sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications that we may develop;
- expansion of our operations in the United States and internationally;
- response of competitors to our solutions and applications; and,
- use of capital for acquisitions, if any.

Historically, we have experienced increases in our expenditures consistent with the growth in our operations, and we anticipate that our expenditures will continue to increase as we expand our business.

We believe our cash, cash equivalents, certificates of deposit, marketable securities and our cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Inflation and changing prices did not have a material effect on our business during the six months ended June 30, 2019 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

#### Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

#### Contractual and Commercial Commitment Summary

Our contractual obligations and commercial commitments as of June 30, 2019 are summarized below:

| Contractual Obligations | Payments Due By Period (in thousands) Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating lease obligations, including imputed interest | $23,036 | $2,183 | $8,140 | $7,897 | $4,816 |

Our contractual obligations and commercial commitments as of December 31, 2018 are summarized below:

| Contractual Obligations | Payments Due By Period (in thousands) Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating lease obligations, including imputed interest | $24,878 | $4,209 | $7,956 | $7,896 | $4,817 |

28

## Market risk

As filed, 1,637 characters.

#### Interest Rate Sensitivity Risk

The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss. We are exposed to market risk related to changes in interest rates. However, based on the nature and current level of our investments (primarily cash and cash equivalents, which approximate fair value due to their short maturities, certificates of deposit and marketable securities), we believe there is no material risk exposure. We do not enter into investments for trading or speculative purposes.

We did not have any outstanding debt as of June 30, 2019. Therefore, we do not have any material risk to interest rate fluctuations.

#### Foreign Currency Exchange Risk

We have revenue, expenses, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Australian dollar and Canadian dollar. As of June 30, 2019, we maintained approximately 6% of our total cash and cash equivalents outside of the U.S. in foreign currencies. We believe that a significant change in foreign currency exchange rates or an inability to access these funds would not affect our ability to meet our operational needs. As we expand internationally, our results of operations and cash flows may be impacted by changes in foreign currency exchange rates, and would be adversely impacted when the U.S. dollar appreciates relative to other foreign currencies. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk, although we may do so in the future.

## Controls and procedures

As filed, 2,166 characters.

#### Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2019.

#### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In the fourth quarter of 2018, we acquired the assets of two separate entities, EDIAdmin and CovalentWorks. EDIAdmin and CovalentWorks represented approximately two percent and six percent of our total consolidated assets, respectively. EDIAdmin and CovalentWorks each represented less than one percent of our consolidated revenues as of and for the year ended December 31, 2018. As these acquisitions occurred in 2018, the scope of our assessment of the effectiveness of internal control over financial reporting does not include EDIAdmin and CovalentWorks. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from the assessment of the effectiveness of internal control over financial reporting in the year following acquisition.

## Risk factors

As filed, 207 characters.

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/A for the year ended December 31, 2018 as filed with the SEC.

Filed Jul 26, 2019.
Source: SEC EDGAR, the filing index for accession 0001564590-19-026357. Last ingested by Listed: Nov 14, 2026, 13:43 ET. No prices; not investment advice.