# SPS Commerce Inc: Form 10-Q for the period ended Sep 30, 2020

- Company: [SPS Commerce Inc](/companies/spsc.md) (CIK 1092699)
- Form: 10-Q
- Filed: 2020-10-28
- Accepted by EDGAR: Oct 28, 2020, 16:12 ET
- Period: 2020-09-30
- Accession: 0001564590-20-048340
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1092699/000156459020048340/spsc-10q_20200930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1092699/000156459020048340/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $79.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $229.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $25.0m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2020-01-01 to 2020-09-30 | $72.9m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2020-07-01 to 2020-09-30 | $54.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2020-01-01 to 2020-09-30 | $156.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-07-01 to 2020-09-30 | $8.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2020-01-01 to 2020-09-30 | $23.1m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $14.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | $36.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $5.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $11.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | $32.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.31 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | $0.89 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.32 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | $0.91 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 36,366,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 36,137,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $65.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $11.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2020-01-01 to 2020-09-30 | $18.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-09-30 | $208.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $337.0m | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $487.7m | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $70.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-30 | $92.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2020-09-30 | $394.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 29,101 characters.

*This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding us, our business prospects and our results of operations are subject to certain risks and uncertainties posed by many factors and events, many of which may be amplified by the coronavirus (COVID-19) pandemic, 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “assumes,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Similarly, statements that describe our future plans, objectives or goals are also forward-looking. Forward-looking statements may also be made from time to time in oral presentations, including telephone conferences and/or webcasts open to the public. Shareholders, potential investors, and others are cautioned that all forward-looking statements involve risks and uncertainties that could cause results in future periods to differ materially from those anticipated by some of the statements made in this report, including the risks and uncertainties described under the heading “Risk Factors” appearing in our Annual Report on Form 10-K for the year ended December 31, 2019, as may be updated in our subsequent Quarterly Reports on Form 10-Q from time to time, including the updates in this Quarterly Report on Form 10-Q. We expressly disclaim any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 SEC that advise interested parties of the risks and factors that may affect our business.*

### 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 September 30, 2020, our revenues were $79.6 million, an increase of 12% from the comparable period in 2019, and represented our 79th consecutive quarter of increased revenues. Total operating expenses increased 10% for the same period in 2020 from 2019. For the nine months ended September 30, 2020, revenues increased 11% and operating expenses increased 9% compared to the same period in 2019.

### Impact of COVID-19

Although the global emergence of COVID-19 did not have a material adverse effect on our business, operating results, and overall financial performance for the nine months ended September 30, 2020, the future impact remains uncertain and depends on several factors, including, but not limited to, the pandemic’s duration and continued spread, impact on our customers, impact on our partners or employees, and impact on the economic environment and financial markets, all of which are uncertain and cannot be predicted. We will continue to actively monitor the situation and may take further actions that alter our business operations, as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, and shareholders.

### Key Financial Terms and Metrics

We have several key financial terms and metrics, including annualized average recurring revenues per recurring revenue customer. During the three and nine months ended September 30, 2020, 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, 2019 as filed with the SEC.

**SPS COMMERCE, INC.** 20 **Form 10-Q for the quarterly period ended September 30, 2020**

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 business combinations are the most critical to fully understand and evaluate our financial condition and results of operations.

During the nine months ended September 30, 2020, there were no changes in our critical accounting policies or estimates. 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 for the year ended December 31, 2019, as filed with the SEC, for additional information regarding our accounting policies.

**SPS COMMERCE, INC.** 21 **Form 10-Q for the quarterly period ended September 30, 2020**

### Results of Operations

### Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

The following table presents our results of operations for the periods indicated:

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2020 | % of revenue | 2019 | % of revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $79,557 | 100.0% | $70,928 | 100.0% | $8,629 | 12.2% |
| Cost of revenues | 25,045 | 31.5 | 23,263 | 32.8 | 1,782 | 7.7 |
| Gross profit | 54,512 | 68.5 | 47,665 | 67.2 | 6,847 | 14.4 |
| Operating expenses |  |  |  |  |  |  |
| Sales and marketing | 19,233 | 24.2 | 16,937 | 23.9 | 2,296 | 13.6 |
| Research and development | 8,053 | 10.1 | 7,743 | 10.9 | 310 | 4.0 |
| General and administrative | 11,939 | 15.0 | 10,725 | 15.1 | 1,214 | 11.3 |
| Amortization of intangible assets | 1,333 | 1.7 | 1,327 | 1.9 | 6 | 0.5 |
| Total operating expenses | 40,558 | 51.0 | 36,732 | 51.8 | 3,826 | 10.4 |
| Income from operations | 13,954 | 17.5 | 10,933 | 15.4 | 3,021 | 27.6 |
| Other income (expense) |  |  |  |  |  |  |
| Interest income, net | 116 | 0.1 | 843 | 1.2 | (727) | (86.2) |
| Other income (expense), net | 307 | 0.4 | (165) | (0.2) | 472 | 286.1 |
| Change in earn-out liability | — | — | 22 | — | (22) | (100.0) |
| Total other income, net | 423 | 0.5 | 700 | 1.0 | (277) | (39.6) |
| Income before income taxes | 14,377 | 18.0 | 11,633 | 16.4 | 2,744 | 23.6 |
| Income tax expense | 2,970 | 3.7 | 2,692 | 3.8 | 278 | 10.3 |
| Net income | $11,407 | 14.3% | $8,941 | 12.6% | $2,466 | 27.6% |

***Revenues.*** The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and an 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 5% to 32,025 at September 30, 2020 from 30,551 at September 30, 2019.
- Wallet share increased 8% to $9,473 for the three months ended September 30, 2020 from $8,793 for the same period in 2019. The increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.

Recurring revenues from recurring revenue customers accounted for 95% and 94% of our total revenues for the three months ended September 30, 2020 and 2019, respectively. We anticipate that the number of recurring revenue customers and wallet share will 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 September 30, 2020 was primarily due to increased headcount which resulted in an increase of $1.4 million in personnel-related costs, driven by increased salaries and benefits and increased contract labor and an increase of $0.2 million in stock-based compensation expense. Additionally, a $0.4 million increase in depreciation expense pertaining to continued investment in infrastructure to support our platform contributed to the increase in cost of revenue, partially offset by a $0.3 million decrease in network costs.

***Sales and Marketing Expenses.*** The increase in sales and marketing expense for the three months ended September 30, 2020 was primarily due to an increase of $0.9 million in variable compensation earned by sales personnel and referral partners. Additionally, increased headcount led to increased personnel-related costs of $0.5 million, primarily driven by increased salaries and benefits, and increases of $0.4 million in promotional expenses and $0.3 million in stock-based compensation expense.

***Research and Development Expenses.*** The increase in research and development expense for the three months ended September 30, 2020 was primarily due to an increase in stock-based compensation expense of $0.3 million.

***General and Administrative Expenses.*** The increase in general and administrative expense for the three months ended September 30, 2020 was driven by an increase in stock-based compensation expense of $0.9 million and an increase of $0.4 million of charitable donations, partially offset by a decrease of $0.5 million in total consulting and contract labor expenses. Additionally, as a result of continued business growth, bad debt expense increased $0.3 million, compared to the same period in 2019.

**SPS COMMERCE, INC.** 22 **Form 10-Q for the quarterly period ended September 30, 2020**

***Other Income (Expense).*** The decrease in other income (expense) for the three months ended September 30, 2020 was due primarily to the decrease in income from investments.

***Income Tax Expense.*** The increase in income tax expense for the three months ended September 30, 2020 was primarily due to the increase in pre-tax income and a change in the estimated R&D tax credit in 2020, partially offset by discrete tax benefits. 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 fluctuate.

***Adjusted EBITDA.*** Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for depreciation and amortization, investment income (interest income/expense, realized investments gain/loss excluding realized gain/loss from foreign currency on investments), income tax expense, stock-based compensation expense, realized gain/loss from foreign currency on cash and investments held, 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 in 2019 related to the acquisition of ToolBox Solutions (“Toolbox”), and impairment of internally developed software. The following table provides a reconciliation of net income to Adjusted EBITDA:

*(In thousands)*

|  | Three Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net income | $11,407 | $8,941 |
| Depreciation and amortization of property and equipment | 3,198 | 2,819 |
| Amortization of intangible assets | 1,333 | 1,327 |
| Investment income, net | (107) | (843) |
| Income tax expense | 2,970 | 2,692 |
| Stock-based compensation expense | 4,893 | 3,147 |
| Realized gain from foreign currency on cash and investments held | (559) | — |
| Other | 103 | (22) |
| Adjusted EBITDA | $23,238 | $18,061 |

***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, realized gain/loss from foreign currency on cash and investments held, 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 in 2019 related to the acquisition of ToolBox, and 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)*

|  | Three Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net income | $11,407 | $8,941 |
| Stock-based compensation expense | 4,893 | 3,147 |
| Amortization of intangible assets | 1,333 | 1,327 |
| Realized gain from foreign currency on cash and investments held | (559) | — |
| Other | 103 | (22) |
| Income tax effects of adjustments | (2,929) | (1,606) |
| Non-GAAP income | $14,248 | $11,787 |
| Shares used to compute non-GAAP income per share |  |  |
| Basic | 35,295 | 35,015 |
| Diluted | 36,366 | 35,932 |
| Non-GAAP income per share |  |  |
| Basic | $0.40 | $0.34 |
| Diluted | $0.39 | $0.33 |

**SPS COMMERCE, INC.** 23 **Form 10-Q for the quarterly period ended September 30, 2020**

### Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

The following table presents our results of operations for the periods indicated:

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2020 | % of revenue | 2019 | % of revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $229,322 | 100.0% | $206,391 | 100.0% | $22,931 | 11.1% |
| Cost of revenues | 72,915 | 31.8 | 68,330 | 33.1 | 4,585 | 6.7 |
| Gross profit | 156,407 | 68.2 | 138,061 | 66.9 | 18,346 | 13.3 |
| Operating expenses |  |  |  |  |  |  |
| Sales and marketing | 56,143 | 24.5 | 52,404 | 25.4 | 3,739 | 7.1 |
| Research and development | 23,087 | 10.0 | 20,444 | 9.9 | 2,643 | 12.9 |
| General and administrative | 36,591 | 16.0 | 33,674 | 16.3 | 2,917 | 8.7 |
| Amortization of intangible assets | 3,985 | 1.7 | 3,897 | 1.9 | 88 | 2.3 |
| Total operating expenses | 119,806 | 52.2 | 110,419 | 53.5 | 9,387 | 8.501 |
| Income from operations | 36,601 | 16.0 | 27,642 | 13.4 | 8,959 | 32.4 |
| Other income (expense) |  |  |  |  |  |  |
| Interest income, net | 982 | 0.4 | 2,233 | 1.1 | (1,251) | (56.0) |
| Other income, net | 308 | 0.1 | 28 | — | 280 | 1,000.0 |
| Change in earn-out liability | (72) | — | 366 | 0.2 | (438) | (119.7) |
| Total other income, net | 1,218 | 0.5 | 2,627 | 1.3 | (1,409) | (53.6) |
| Income before income taxes | 37,819 | 16.5 | 30,269 | 14.7 | 7,550 | 24.9 |
| Income tax expense | 5,703 | 2.5 | 5,719 | 2.8 | (16) | (0.3) |
| Net income | $32,116 | 14.0% | $24,550 | 11.9% | $7,566 | 30.8% |

***Revenues.*** The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and an 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 5% to 32,025 at September 30, 2020 from 30,551 at September 30, 2019.
- Wallet share increased 7% to $9,191 for the nine months ended September 30, 2020 from $8,622 for the same period in 2019. The increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.

Recurring revenues from recurring revenue customers accounted for 94% of our total revenues for the nine months ended September 30, 2020 and 2019. We anticipate that the number of recurring revenue customers and wallet share will 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 nine months ended September 30, 2020 was primarily due to increased headcount which resulted in an increase of $3.0 million in personnel-related costs, driven by increased salaries and benefits and increased contract labor, and increases of $0.7 million in stock-based compensation expense and $0.5 million in software subscriptions. Additionally, a $1.1 million increase in depreciation expense pertaining to continued investment in infrastructure to support our platform contributed to the increase in cost of revenues, partially offset by a $0.7 million decrease in direct network expense.

***Sales and Marketing Expenses.*** The increase in sales and marketing expense for the nine months ended September 30, 2020 was primarily due to increased headcount which resulted in an increase of $1.8 million in personnel-related costs, driven by increased salaries and benefits, and increases of $0.7 million in stock-based compensation expense, $0.3 million in variable compensation earned by sales personnel and referral partners, $0.4 million in promotional expense, and $0.3 million in software subscriptions.

***Research and Development Expenses.*** The increase in research and development expense for the nine months ended September 30, 2020 was primarily due to increased headcount which resulted in an increase in personnel costs of $0.9 million and increases in stock-based compensation expense of $1.0 million, occupancy expense of $0.4 million, and depreciation expense of $0.2 million.

***General and Administrative Expenses.*** The increase in general and administrative expense for the nine months ended September 30, 2020 was driven by an increase of $1.8 million in bad debt expense due to continued business growth. Additionally, increases of $1.0 million in charitable donations and $0.5 in stock-based compensation expenses led to the overall increase, partially offset by a decrease of $0.5 million in personnel-related costs.

**SPS COMMERCE, INC.** 24 **Form 10-Q for the quarterly period ended September 30, 2020**

***Other Income (Expense).*** The decrease in other income (expense) for the nine months ended September 30, 2020 was due primarily to the decrease in investment income.

***Income Tax Expense.*** The relatively consistent income tax expense for the nine months ended September 30, 2020 was due to the increase in pre-tax income and a change in the estimated R&D tax credit in 2020, partially offset by discrete tax benefits. 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 fluctuate.

***Adjusted EBITDA.*** Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for depreciation and amortization, investment income (interest income/expense, realized investments gain/loss excluding realized gain/loss from foreign currency on investments), income tax expense, stock-based compensation expense, realized gain/loss from foreign currency on cash and investments held, 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 in 2019 related to the acquisition of Toolbox, and impairment of internally developed software. The following table provides a reconciliation of net income to Adjusted EBITDA:

|  | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net income | $32,116 | $24,550 |
| Depreciation and amortization of property and equipment | 9,474 | 8,143 |
| Amortization of intangible assets | 3,985 | 3,897 |
| Investment income, net | (1,079) | (2,233) |
| Income tax expense | 5,703 | 5,719 |
| Stock-based compensation expense | 14,246 | 11,316 |
| Realized gain from foreign currency on cash and investments held | (686) | — |
| Other | 257 | (483) |
| Adjusted EBITDA | $64,016 | $50,909 |

***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, realized gain/loss from foreign currency on cash and investments held, 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 in 2019 related to the acquisition of ToolBox, and impairment of internally developed software. The following table provides a reconciliation of net income to non-GAAP income per share:

|  | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net income | $32,116 | $24,550 |
| Stock-based compensation expense | 14,246 | 11,316 |
| Amortization of intangible assets | 3,985 | 3,897 |
| Realized gain from foreign currency on cash and investments held | (686) | — |
| Other | 257 | (483) |
| Income tax effects of adjustments | (8,841) | (5,972) |
| Non-GAAP income | $41,077 | $33,308 |
| Shares used to compute non-GAAP income per share |  |  |
| Basic | 35,133 | 34,966 |
| Diluted | 36,137 | 35,952 |
| Non-GAAP income per share |  |  |
| Basic | $1.17 | $0.95 |
| Diluted | $1.14 | $0.93 |

**SPS COMMERCE, INC.** 25 **Form 10-Q for the quarterly period ended September 30, 2020**

### Liquidity and Capital Resources

At September 30, 2020, our principal sources of liquidity were cash, cash equivalents, certificates of deposit, and short-term investments of $261.2 million and accounts receivable, net of provision for credit losses of $30.3 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 condensed consolidated statements of cash flows:

*(In thousands)*

|  | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $65,529 | $50,960 |
| Net cash used in investing activities | (31,975) | (26,629) |
| Net cash used in financing activities | $(3,850) | $(8,538) |

### Net Cash Flows from Operating Activities

The increase in operating cash flows was primarily driven by continued business growth, which resulted in increased net income and decreased deferred tax assets, as well as increased depreciation, provisions for credit losses, and stock-based compensation.

### Net Cash Flows used in Investing Activities

The increase in net cash used in investing activities was primarily due to an increase of net purchases of investments, partially offset by cash used for an acquisition in 2019. Additionally, the increase was due to increased capital expenditures, based on our business growth and continued investment in our technology.

### Net Cash Flows used in Financing Activities

The decrease in net cash used in financing activities was primarily due to the increase in net proceeds from stock option exercises, partially offset by increases in cash used for share repurchases and an earn-out payment.

### 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 4% 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 materially 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.

**SPS COMMERCE, INC.** 26 **Form 10-Q for the quarterly period ended September 30, 2020**

Inflation and changing prices did not have a material effect on our business during the nine months ended September 30, 2020 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 September 30, 2020 are summarized below:

| Contractual Obligations | Payments Due By Period (in thousands) Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating lease obligations, including imputed interest | $5,142 | $10,429 | $7,438 | $— | $23,009 |
| Purchase commitment | 5,100 | 9,300 | — | — | 14,400 |
| Total | $10,242 | $19,729 | $7,438 | $— | $37,409 |

**SPS COMMERCE, INC.** 27 **Form 10-Q for the quarterly period ended September 30, 2020**

## Market risk

As filed, 1,694 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 September 30, 2020. 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 September 30, 2020, we maintained 4% of our total cash and cash equivalents outside of the U.S. in foreign currencies. We believe that a hypothetical 10% change in foreign currency exchange rates or an inability to access foreign funds would not materially affect our ability to meet our operational needs or result in a material foreign currency loss. 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, 1,831 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 September 30, 2020.

### Changes in Internal Control over Financial Reporting

For the year ended December 31, 2019, management’s assessment of internal control over financial reporting excluded the internal control of the MAPADOC business, an operating unit of SWK Technologies, Inc., which was acquired on August 26, 2019. Our assessment of the effectiveness of internal control over financial reporting as of September 30, 2020 included MAPADOC.

There were no other changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

**SPS COMMERCE, INC.** 28 **Form 10-Q for the quarterly period ended September 30, 2020**

## Risk factors

As filed, 1,729 characters.

With the exception of the addition of the risk factor noted below, 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, 2019 as filed with the SEC.

The extent to which the COVID-19 outbreak and measures taken in response thereto impact our business, results of operations and financial condition will depend on on-going and future developments and outcomes, which are highly uncertain and cannot be predicted.

Our business and financial results may be adversely impacted by health epidemics, pandemics and similar outbreaks. The recent and rapidly spreading COVID-19 pandemic could have adverse impacts on our business, including causing significant volatility in demand for our services due to disruption and downturns in our customers’ businesses and related supply chains, our customers’ ability to pay for our services when due or in full, disruptions to our third party technology providers, limitations on our employees' ability to work and travel, and significant changes in the economic or political conditions in markets in which we operate. Despite our efforts to manage these impacts, their ultimate impact also depends on factors beyond our knowledge or control, including the duration and severity of any such outbreak and actions taken to contain its spread and mitigate its public health effects. Any of these events could cause or amplify the risks and uncertainties set forth in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC, and could materially adversely affect our business, financial condition, results of operations and/or stock price.

Filed Oct 28, 2020.
Source: SEC EDGAR, the filing index for accession 0001564590-20-048340. Last ingested by Listed: Nov 14, 2026, 13:43 ET. No prices; not investment advice.