2018
ANNUAL REPORT
CORPORATE HEADQUARTERS
SPS Commerce
333 South Seventh Street, Suite 1000
Minneapolis, MN 55402 USA
Toll-free: (866) 245-8100
Main: (612) 435-9400
BEIJING: +86 10 5940 1616
HONG KONG: +852 5808 6596
LONDON: +44 808 234 3866
MELBOURNE: +61 3 9847 7000
TORONTO: 888-550-8665
SYDNEY: +61 2 8073 8209
spscommerce.com
TO OUR STOCKHOLDERS:
2018 marks a year of continued strong execution for SPS Commerce. We delivered on our strategic goals and financial
targets as we focused on increased profitability and expanded margins while posting solid revenue growth. The fourth
quarter of 2018 represented our seventy-second consecutive quarter of revenue growth.
For the full year, revenue grew 13% to $248.2 million. Recurring revenue grew 13% for the year and adjusted EBITDA* grew
50% to $51.3 million. Net income for the year was $23.9 million and EPS was $1.36. We ended the year with over 29,000
recurring revenue customers and wallet share, or average revenue per recurring revenue customer, was approximately
$8,400.
As retailers and suppliers continue on their journey to embrace e-commerce, SPS Commerce plays an integral role in
providing cloud-based supply chain management solutions. In 2018, we experienced a strong year of enablement
campaigns with retailers and distributors across a broad group of industries. We grew our network through strategic
partnerships and added an integration to a leading web-based shipping solution. The continued growth of our
integrations to retailers and logistics providers strengthens SPS Commerce’s competitive position and enhances our ability
to meet our customers’ increasingly complex needs.
Other achievements in 2018 include:
• We acquired EDIAdmin, a provider of supply chain integration technology. EDIAdmin was a long-time partner of SPS
Commerce with a shared vision of helping trading partners work better together through end-to-end automation
and integration solutions. We believe bringing this technology in-house accelerates our industry leadership by
delivering additional automation capabilities for our products.
• We acquired CovalentWorks, a provider of cloud-based EDI solutions to approximately 2,000 small and medium-sized
businesses. CovalentWorks is known in the industry for its affordable and easy-to-use solutions and superior
customer service. The company’s products include web-based and integrated EDI solutions. CovalentWorks will
expand SPS’s market leadership in helping small and medium-sized businesses quickly and easily meet their
customers’ electronic trading requirements.
• We repurchased 290,000 shares at an average price of $68.56 per share through our share
repurchase program.
With two acquisitions, technology enhancements, and continued focus on strategic partnerships, we continue to scale our
offerings and extend our leadership. We ended the year with over 80,000 customers and over 29,000 recurring revenue
customers. Over 2,400 customers pay us more than $20,000 annually.
In closing, I am proud of our strong execution in 2018 and I would like to thank all SPS Commerce employees and
customers for their continued dedication and commitment. Our strength is powered by the continued growth of our retail
network, and I am excited about our business and the tremendous opportunity ahead of us.
Sincerely,
Archie Black
President and CEO
*We use Adjusted EBITDA as a measure of operating performance because it assists us in comparing performance on a consistent basis, as it removes the
impact of our capital structure from our operating results. A reconciliation of net income to Adjusted EBITDA can be found on page 33 within the attached
Form 10-K.
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SPS COMMERCE, INC.
ANNUAL REPORT ON FORM 10-K
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
SIGNATURES
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Unless the context otherwise requires, for purposes of the Annual Report on Form 10-K, the words “we,” “us,”
“our,” the “Company,” and “SPS” refer to SPS Commerce, Inc.
3
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K 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 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 this Annual Report on
Form 10-K. 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. 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 Securities and Exchange Commission (“SEC”) that advise
interested parties of the risks and factors that may affect our business.
4
Item 1.
Business
Overview
PART I
SPS Commerce is a leading provider of cloud-based supply chain management services 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. Implementing and maintaining a suite of supply
chain management capabilities is resource intensive and is not a core competency for most businesses. The services
offered by SPS Commerce eliminate the need for on-premise software and support staff by taking on that capability
on the customer’s behalf. The services SPS Commerce provides allow our customers to increase their supply cycle
agility, optimize their inventory levels and sell-through, reduce operational costs and gain increased visibility into
customer orders, ensuring that suppliers, grocers, distributors, and logistics firms can satisfy exacting retailer
requirements.
As of December 31, 2018, we had approximately 29,000 customers with contracts to pay us monthly fees,
which we refer to as recurring revenue customers. We have also generated revenues by providing our cloud-based
supply chain management services to an additional 51,000 organizations that, together with our recurring revenue
customers, we refer to as our customers. Once connected to the SPS Commerce Platform, our customers often
require integrations to new organizations that represent an expansion of our Platform and new sources of revenues
for us.
For the years ended December 31, 2018, 2017 and 2016, we generated revenues of $248.2 million, $220.1
million and $193.2 million, respectively. Our fiscal quarter ended December 31, 2018 represented our 72nd
consecutive quarter of increased revenues. Recurring revenues from recurring revenue customers accounted for
93%, 93% and 92% of our total revenues for the years ended December 31, 2018, 2017 and 2016, respectively. Our
revenues are not concentrated with any customer, as our largest customer represented less than 1% of total revenues
for the years ended December 31, 2018, and 2017 and less than 2% of total revenues for the year ended December
31, 2016.
Our Solutions
SPS Commerce operates one of the largest retail trading partner networks through cloud-based services that
improve the way retailers, suppliers, grocers, distributors and logistics firms manage and fulfill orders, administer
sell-through performance and source new items. Today, approximately 80,000 customers across more than 60
countries are using SPS Commerce solutions to expand and optimize the performance of their trading relationships.
The SPS Commerce business model fundamentally changes how organizations use electronic communication
to manage their omnichannel, supply chain, and other business requirements by replacing the collection of
traditional, custom-built, point-to-point integrations with a model that facilitates a single automated connection to
the entire SPS Commerce network of trading partners.
From that single connection, a member of our network can make use of the full suite of our services, from
fulfillment automation, to the analysis and optimization of item sell-through performance, to sourcing new items,
retailing relationships, logistics providers, or other services. These cloud services deliver value as stand-alone
offerings but can also provide greater value when used collectively. This represents a fundamental change to
fulfillment automation and enables inherent adaptability and flexibility not possible with traditional supply chain
management system architectures.
Our fulfillment service allows customers to comply with numerous rulebooks for retailers, grocers and
distributors. Maintaining current connections with retailers, grocers, and distributors removes the need for their
trading partners to continually stay up-to-date with their required rulebook change. The utilization of a cloud
services model eliminates or greatly reduces the burden on trading partners to support and maintain an on-premise
software application, thereby reducing ongoing operating costs. As the transaction hub for trading partners, we can
provide increased performance visibility and data analytics capabilities across their supply chains, each of which is
difficult to gain from traditional, point-to-point integration solutions.
5
The following services are enabled through the SPS Commerce cloud services Platform:
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Trading Partner Community. The Community solution empowers retailers, grocers, and distributors to
introduce changes to their supply chain requirements to their trading partner community, and onboard
new vendors quickly to receive their first orders.
Trading Partner Fulfillment. The Fulfillment solution provides fulfillment automation and replaces or
augments an organization’s existing staff and trading partner electronic communication infrastructure by
enabling easy compliance with retailers’ rulebooks, electronic exchange of information among
numerous trading partners through various protocols, and greater visibility into the journey of an order.
Trading Partner Assortment. Today’s retail marketplace requires the management of tens and even
hundreds of individual attributes associated with each item a retailer or supplier sells. This information
can include supply chain descriptions and measurements, store and shelf dimensions, warehouse
dimensions, digital images/video, customer facing descriptions and measurements, and warehouse
information. The Assortment solution provides robust, extensible, management of this information,
enabling accurate orders and rapid fulfillment.
Trading Partner Analytics. The Analytics solution consists of data analytics applications that allow our
customers to improve their visibility across, and analysis of, their supply chains. When focused on
point-of-sale data, for example, retailers and suppliers can ensure inventory is located where demand is
highest. Additionally, retailers improve their visibility into supplier performance and their
understanding of product sell-through.
Trading Partner Sourcing. Through the Sourcing Solution, retailers can leverage our social network for
the retail industry, and source providers of new items, suppliers can connect with new retailers, and the
broader retailing community can make connections to expand their business networks and grow.
Other Trading Partner Solutions. We provide a number of peripheral solutions such as barcode
labeling, planogram services and our scan and pack application, which helps trading partners process
information to streamline the picking and packaging process.
Our Customer and Sales Sources
As one of the largest providers of cloud services for retail supply chain management, the trading partner
relationships that we enable among our retailer, supplier, grocer, distributor, and logistics customers naturally lead to
new customer acquisition opportunities.
“Network Effect”
Once connected to our network, trading partners can exchange electronic supply chain information with each
other. The value of our network increases with the number of trading partners connected to it. The addition of each
new customer enables that new customer to communicate with our existing customers and permits our existing
customers to do business with the new customer. Additionally, through our Sourcing service, our community now
has a social network focused on facilitating connections and business interactions among retailers and suppliers.
This “network effect” of adding additional customers to our solutions infrastructure creates a significant opportunity
for existing customers to realize incremental sales by working with our new trading partners and vice versa. As a
result of this increased volume of activity among our network participants, we earn additional revenues from these
participants.
6
Customer Acquisition Sources
Community. As retailers and suppliers reshape how they do business in an omnichannel landscape, they need
to bring new capabilities and services to their trading partner networks. For instance, a supplier may wish to
collaborate with their retailers around point-of-sale analytics data, or a retailer may decide to change the workflow
or protocol by which it interacts with its suppliers. In each case, the supplier and retailer may engage us to work
with its trading partner base to enable the new capability. Performing these programs on behalf of retailers and
suppliers often generates supplier sales leads for us.
Referrals from Our Customers. We also receive sales leads from our customers seeking to communicate
electronically with their trading partners. For example, a supplier may refer to us its third-party logistics provider or
manufacturer which is not in our network.
Channel Partners. In addition to the customer acquisition sources identified above, we market and sell our
solutions through a variety of channel partners including software providers, resellers, system integrators and
logistics partners. For example, software partners such as Microsoft, NetSuite, Oracle, SAP, Sage and their business
partner communities generate sales for us as part of broader enterprise resource planning, warehouse management
system and/or transportation management system sales efforts. Our logistics partners also drive new sales both by
providing leads and by embedding our solutions as part of their service offerings.
Our Sales Force
We also sell our solutions through a global sales force which is organized as follows:
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Retailer Sales. We employ a team of sales representatives who focus on selling our cloud services suite
to retailers and distributors.
Supplier Sales. We employ a team of supplier sales representatives focused on selling our cloud
services suite to suppliers.
Logistic Sales. We employ a team of logistic sales representatives focused on selling our cloud services
suite to logistic service providers.
Business Development Efforts. Our business development organization is tasked with finding new
sources of revenue and development of new business opportunities through channel partners and other
areas that present an opportunity for growth.
Our Growth Strategy
Our objective is to be the leading global provider of supply chain management solutions. Key elements of our
strategy include:
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Further Penetrate Our Current Market. We believe the global supply chain management market is
underpenetrated and, as the retail industry continues to respond to the changing requirements of the
omnichannel marketplace, and as the supply chain ecosystem becomes more complex and
geographically dispersed, the demand for supply chain management solutions will increase, especially
among small- and medium-sized businesses. We intend to continue leveraging our relationships with
customers and their trading partners to obtain new sales leads.
Increase Revenues from Our Customer Base. We believe our overall customer satisfaction is strong
and will lead our customers to further expand their use of the solutions they have purchased, as well as
purchase additional services to continue improving the performance of their trading partner
relationships, generating additional revenues for us. We also expect to introduce new solutions to sell to
our customers. We believe our position as the incumbent supply chain management solution provider to
our customers, our integration into our recurring revenue customers’ business systems and the modular
nature of our Platform are conducive to deploying additional solutions with customers.
Expand Our Distribution Channels. We intend to grow our business by expanding our sales capacity to
gain new customers. We also believe there are valuable opportunities to promote and sell our solutions
through collaboration with other providers.
7
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Expand Our International Presence. We believe our presence in the Asia Pacific, as well as in Europe,
represents a significant competitive advantage. We plan to increase our global sales efforts to obtain
new customers around the world. We intend to leverage our current global presence to increase the
number of integrations we have with retailers in foreign markets to make our solutions more valuable to
their trading partners based overseas.
Enhance and Expand Our Services. We intend to further improve and develop the functionality and
features of our Platform, including, from time to time, developing new solutions and applications.
Selectively Pursue Strategic Acquisitions. The fragmented nature of our market provides an
opportunity for selective acquisitions. We plan to evaluate potential acquisitions based on the number of
new customers, revenue, functionality, or geographic reach the acquisition would provide relative to the
purchase price and our ability to integrate and operate the acquired business. In 2018, we acquired
EDIAdmin, a leading provider of supply chain integration technology. Also, in 2018, we acquired
CovalentWorks, a provider of cloud-based EDI solutions to small- and medium-sized businesses. These
acquisitions further extended the power of our network.
Technology, Development and Operations
Technology
SPS Commerce was an early provider of cloud services to the retail supply chain management industry,
launching the first version of what would become our current services in 1997. We use commercially available
hardware and cloud services with a combination of proprietary and commercially available software.
Our cloud service model treats all customers as logically separate tenants within a shared virtual
infrastructure. As a result, we spread the cost of delivering our solutions across our customer base. Because we do
not manage thousands of distinct applications with their own business logic and database schemes, we believe that
we can scale our business faster than traditional software vendors, even those that modified their products to be
accessible over the Internet.
Development
Our research and development efforts focus on maintaining, improving and enhancing our existing solutions,
as well as developing new solutions and applications. Our multi-tenant solutions serve all of our customers, which
allows us to maintain relatively low research and development expenses and release software updates more
frequently compared to traditional on-premise licensed software solutions that support multiple versions. Our
development efforts take place at our U.S. locations in Minnesota and New Jersey; as well as in Melbourne,
Australia; Toronto, Canada; and Kiev, Ukraine.
Operations
We operate our infrastructure in third-party data centers located in Minnesota, New Jersey, and Melbourne,
Australia, as well as provisioned services in public cloud providers. In all cases, infrastructure and services are
managed by us.
We have internal and third-party monitoring software that continually checks our network and key underlying
components for continuous availability and performance, ensuring the network is always available and providing
adequate service levels. We have a technology operations team that provides system provisioning, management,
maintenance, monitoring and back-up.
We operate a service architecture using industry best practices to ensure multiple points of redundancy, high
availability and scale as needed. Our databases are replicated between locations with a defined recovery point
objective.
8
Our Customers
As of December 31, 2018, we had approximately 29,000 recurring revenue customers and approximately
80,000 total customers. Our primary source of revenue is from small- to mid-sized suppliers. We also generate
revenues from other members of the supply chain ecosystem, including retailers, distributors, third-party logistics
providers and other trading partners. Our revenues are not concentrated with any customer, as our largest customer
represented less than 1% of total revenues for both the years ended December 31, 2018 and 2017 and less than 2%
of total revenues for the year ended December 31, 2016.
Competition
Vendors in the supply chain management industry offer solutions through three delivery methods: traditional
on-premise software, cloud-based managed services and cloud-based full-service solutions.
The market for cloud-based supply chain management solutions is fragmented and rapidly evolving. Cloud
service vendors compete directly with each other based on the following:
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the breadth of pre-built connections to retailers, third-party logistics providers, and other trading
partners;
a history of establishing and maintaining reliable connections with trading partners;
a reputation of the cloud service vendor in the supply chain management industry;
price;
specialization in a customer market segment;
speed and quality with which the cloud service vendor can integrate its customers to their trading
partners;
functionality of the cloud service solution, such as the ability to integrate the solution with a customer’s
business systems;
breadth of complementary supply chain management solutions the cloud service vendor offers; and
training and customer support services provided during and after a customer’s initial integration.
We expect to encounter new and increased competition as this market segment consolidates and matures.
Consolidation among cloud service vendors could create a direct competitor that can compete with us more
effectively than the numerous, smaller vendors currently offering cloud service supply chain management solutions.
Increased competition from cloud service vendors could reduce our market share, revenues, and operating margins
or otherwise adversely affect our business.
Cloud service vendors also compete with traditional on-premise software companies. Traditional on-premise
software companies focused on supply chain integration management include IBM Sterling Commerce and
OpenText-GXS. These companies offer a “do-it-yourself” approach in which customers purchase, install, and
manage specialized software, hardware and value-added networks for their supply chain integration needs. This
approach requires customers to invest in staff to operate and maintain the software. Traditional on-premise software
companies use a single-tenant approach in which information maps to retailers are built for and used by one
supplier, as compared to cloud service solutions that allow multiple customers to share information maps with a
retailer.
Managed service providers focused on the supply chain management market include IBM Sterling Commerce,
OpenText GXS, TrueCommerce, DiCentral, B2B Gateway and many other small providers. These companies offer
a cloud-based solution in which they develop and maintain the core technology, while the customer’s internal staff is
responsible for the day-to-day customization, optimization, and operations of the technology.
In contrast, full-service providers, including SPS Commerce, offer cloud-based solutions and that customize,
optimize and operate the technology. This approach offloads the time-intensive process of managing these solutions,
which is not a core competency for most businesses.
9
Customers of traditional on-premise software providers must typically make significant upfront investments in
the supply chain management solutions these competitors provide, which can decrease the customers’ willingness to
abandon their investments in favor of a cloud service solution. Cloud service vendors compete with these traditional
software solutions based on total cost of ownership and flexibility.
Intellectual Property and Proprietary Content
SPS Commerce relies on a combination of copyright, trademark and trade secret laws as well as
confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We enter
into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and
control access to software, documentation and other proprietary information. We have registered trademarks and
pending trademark applications in the U.S. and certain foreign countries.
Depending on the jurisdiction, trademarks are generally valid as long as they are in use or their registrations
are properly maintained and they have not been found to have become generic. Registrations of trademarks can also
generally be renewed indefinitely as long as the trademarks are in use. We do not have any patents, but we have
pending patent applications. Our trade secrets consist primarily of the software we have developed for our SPS
Commerce Network. Our software is also protected under copyright law, but we do not have any registered
copyrights.
Employees
As of December 31, 2018, we had 1,231 employees. We also employ independent contractors to support our
operations. We believe that our continued success will depend on our ability to continue to attract and retain skilled
technical and sales personnel. We have never had a work stoppage, and none of our employees are represented by a
labor union. We believe our relationship with our employees is good.
Company Information
We were originally incorporated as St. Paul Software, Inc., a Minnesota corporation, on January 28, 1987. On
May 30, 2001, we reincorporated in Delaware under our current name, SPS Commerce, Inc. Our principal
executive offices are located at 333 South Seventh Street, Suite 1000, Minneapolis, Minnesota 55402, and our
telephone number is (612) 435-9400. Our website address is www.spscommerce.com. Information on our website
does not constitute part of this Annual Report on Form 10-K or any other report we file or furnish with the SEC.
We provide free access to various reports that we file with or furnish to the SEC through our website as soon as
reasonably practicable after they have been filed or furnished. These reports include, but are not limited to, our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any
amendments to these reports. Our SEC reports can be accessed through the investor relations section of our website
or through the SEC’s website at www.sec.gov. Stockholders may also request copies of these documents from:
SPS Commerce, Inc.
Attention: Investor Relations
333 South Seventh Street
Suite 1000
Minneapolis, MN 55402
Executive Officers
Set forth below are the names, ages and titles of the persons serving as our executive officers.
Name
Archie C. Black
Kimberly K. Nelson
James J. Frome
Age
56
51
54
Position
Chief Executive Officer and President
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Operating Officer
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Archie C. Black has served as our President and Chief Executive Officer and a director since 2001.
Previously, Mr. Black served as our Senior Vice President and Chief Financial Officer from 1998 to 2001. Prior to
joining us, Mr. Black was a Senior Vice President and Chief Financial Officer at Investment Advisors, Inc. in
Minneapolis, Minnesota and also spent three years at Price Waterhouse.
Kimberly K. Nelson has served as our Executive Vice President and Chief Financial Officer since 2007. Prior
to joining us, Ms. Nelson served as the Finance Director, Investor Relations for Amazon.com from 2005 through
2007 and as the Finance Director, Worldwide Application for Amazon.com’s Technology group from 2003 until
2005. Ms. Nelson also served as Amazon.com’s Finance Director, Financial Planning and Analysis from 2000 until
2003.
James J. Frome has served as our Executive Vice President and Chief Operating Officer since 2012.
Previously, Mr. Frome served as our Executive Vice President and Chief Strategy Officer from 2001 to 2012 and as
our Vice President of Marketing from 2000 to 2001. Prior to joining us, Mr. Frome served as a Divisional Vice
President of Marketing at Sterling Software, Inc. from 1999 to 2000 and as a Senior Product Manager and Director
of Product Management at Information Advantage, Inc. from 1993 to 1999.
11
Item 1A. Risk Factors
Set forth below and elsewhere in this Annual Report on Form 10-K, and in other documents we file with the
SEC, are risks and uncertainties that could cause our actual results to differ materially from the results
contemplated by the forward-looking statements contained in this Annual Report on Form 10-K and in other written
and oral communications from time to time. You should carefully consider all of the following risks and the other
information in this Report and our other filings with the SEC before you decide to invest in our Company or to
maintain or increase your investment. Our business could be harmed by any of these risks. The trading price of our
common stock could decline due to any of these risks. In assessing these risks, you should also refer to the other
information contained in this Annual Report on Form 10-K, including our financial statements and related notes.
The risks included in this section are not the only ones we face. We operate in a very competitive and rapidly
changing environment. New risk factors emerge from time-to-time, and it is not possible for management to predict
all such risk factors, nor can it assess the potential impact of all such risk factors on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ materially from those in any forward-
looking statements. If any of the following risks actually occur, our business, results of operations, financial
condition and future prospects would likely suffer. In that case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
If we are unable to attract new customers, or sell additional solutions, or if our customers do not increase
their use of our solutions, our revenue growth and profitability will be adversely affected.
To increase our revenues and achieve and maintain profitability, we must regularly add new customers, sell
additional solutions and our customers must increase their use of the solutions for which they currently subscribe.
We intend to grow our business by retaining and attracting talent, developing strategic relationships with resellers,
including resellers that incorporate our applications in their offerings, and increasing our marketing activities. If we
are unable to hire or retain quality personnel, convert companies that have been referred to us by our existing
network into paying customers, ensure the effectiveness of our marketing programs, or if our existing or new
customers do not perceive our solutions to be of sufficiently high value and quality, we might not be able to increase
sales and our operating results will be adversely affected. If we fail to sell our new solutions to existing or new
customers, we will not generate anticipated revenues from these solutions, our operating results will suffer and we
might be unable to grow our revenues or maintain profitability.
We do not have long-term contracts with most of our recurring revenue customers, and our success therefore
depends on our ability to maintain a high level of customer satisfaction and a strong reputation in the supply
chain management industry.
Our contracts with our recurring revenue customers typically allow the customer to cancel the contract for any
reason with 30 to 90 days’ notice. Our continued success therefore depends significantly on our ability to meet or
exceed our recurring revenue customers’ expectations because most recurring revenue customers do not make long-
term commitments to use our solutions. In addition, if our reputation in the supply chain management industry is
harmed or diminished for any reason, our recurring revenue customers have the ability to terminate their relationship
with us on short notice and seek alternative supply chain management solutions. We may also not be able to
accurately predict future trends in customer renewals, and our customers’ renewal rates may decline or fluctuate
because of several factors, including their dissatisfaction with our services, the cost of our services compared to the
cost of services offered by our competitors and reductions in our customers’ spending levels. If a significant number
of recurring revenue customers seek to terminate their relationship with us, our business, results of operations and
financial condition can be adversely affected in a short period of time.
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Our quarterly results of operations may fluctuate in the future, which could result in volatility in our stock
price.
Our quarterly revenues and results of operations have varied in the past and may fluctuate as a result of a
variety of factors, including our Trading Partner Analytics solution. If our quarterly revenues or results of
operations fluctuate, the price of our common stock could decline substantially. Fluctuations in our results of
operations may be due to a number of factors, including, but not limited to, those listed below and identified
throughout this “Risk Factors” section:
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our ability to retain and increase sales to customers and attract new customers, including our ability to
maintain and increase our number of recurring revenue customers;
the timing and success of introductions of new solutions or upgrades by us or our competitors;
the strength of the economy, in particular as it affects the retail sector;
the financial condition of our customers;
changes in our pricing policies or those of our competitors;
competition, including entry into the industry by new competitors and new offerings by existing
competitors;
the amount and timing of our expenses, including stock-based compensation and expenditures related to
expanding our operations, supporting new customers, performing research and development, or
introducing new solutions;
regulatory compliance costs and unforeseen legal expenses, including litigation and settlement costs;
the timing, size, and integration success of potential future acquisitions;
changes in the payment terms for our solutions; and
system or service failures, security breaches or network downtime.
Due to the foregoing factors, and other risks including those discussed in this Annual Report on Form 10-K,
comparing our operation results on a period-to-period basis may not be meaningful. You should not rely on these
comparisons of our past results of operations as an indication of our future performance. It is possible that our
operating results in one or more future quarters may fall below the expectations of securities analysts and investors
or below any guidance we may provide to the market. If this occurs, the trading price of our common stock could
decline significantly.
Interruptions or delays from third-party data centers or to the telecommunications infrastructure could
impair the delivery of our solutions and our business could suffer.
We use third-party data centers, located in Minnesota, New Jersey and Australia, as well as provision services
in public cloud providers, to conduct our operations. In all cases, infrastructure and services on which our Platform
runs is managed by us. In addition, our ability to deliver our services depends on the development and maintenance
of telecommunications infrastructure by third parties. This includes maintenance of a reliable network backbone
with the necessary speed, data capacity, bandwidth capacity, and security. Our operations depend on the protection
of the equipment and information we store in these third-party centers, or utilize from third-party
telecommunications providers, against damage or service interruptions that may be caused by fire, flood, severe
storm, power loss, telecommunications failures, natural disasters, war, criminal act, military action, terrorist attack,
financial failure of the service provider, and other events beyond our control. In addition, third party malfeasance,
such as intentional misconduct by computer hackers, unauthorized intrusions, computer viruses or denial of service
attacks, may also cause substantial service disruptions. A prolonged service disruption affecting our solutions for
any of the foregoing reasons could damage our reputation with current and potential customers, expose us to
liability, cause us to lose recurring revenue customers or otherwise adversely affect our business. We may also
incur significant costs for using alternative equipment or taking other actions in preparation for, or in reaction to,
events that damage the data centers we use.
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Our cloud-based supply chain management solutions are accessed by a large number of customers at the same
time. As we continue to expand the number of our customers and solutions available to our customers, we may not
be able to scale our technology to accommodate the increased capacity requirements, which may result in
interruptions or delays in service. In addition, the failure of our third-party data centers to meet our capacity
requirements could result in interruptions or delays in our solutions or impede our ability to scale our operations. In
the event that our data center arrangements are terminated, or there is a lapse of service or damage to such facilities,
we could experience interruptions in our solutions as well as delays and additional expense in arranging new
facilities and services.
Our industry is a prime target for those that seek to steal confidential information and computer malware,
viruses, hacking, phishing attacks, spamming, and other cyber-threats could harm our business and cause us
to lose the confidence of our users, which could significantly impact our business and results of operations.
As demonstrated by recent material and high-profile data security breaches within the retail industry,
computer malware, viruses, computer hacking, phishing attacks, social engineering, and other electronic threats have
become more prevalent in our industry, have occurred on our systems in the past, and may occur on our systems in
the future. While we continue to expand our focus on this issue and are taking measures to safeguard our solutions
and services from cybersecurity threats and vulnerabilities, cyber-attacks and other security incidents continue to
evolve in sophistication and frequency. Furthermore, given the interconnected nature of the retail supply chain and
our significant presence in the retail industry, we believe that we are a particularly attractive target for such attacks.
In addition, our connection to the retail industry could present the opportunity for an attack on our system to serve as
a way to obtain access into our users’ systems, which could have a material adverse effect on our financial condition
and growth prospectus. Our security measures may also be breached due to employee or other error, intentional
malfeasance and other third-party acts, and system errors or vulnerabilities, including vulnerabilities of our third
party vendors, customers, or otherwise. Businesses in our industry have experienced material sales declines after
discovering data breaches, and our business could be similarly impacted. The security costs to reduce the likelihood
of an attack are high and may continue to increase. Furthermore, some US states and international jurisdictions have
enacted laws requiring companies to notify consumers of data security breaches involving their personal data. These
mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our
customers to lose confidence in the effectiveness of our data security measures. Reputational value is based in large
part on perceptions of subjective qualities. While reputations may take decades to build, any negative incidents can
quickly erode trust and confidence, particularly if they result in adverse mainstream and social media publicity,
governmental investigations or litigation. Though it is difficult to determine what, if any, harm may directly result
from any specific interruption or attack, any failure to maintain performance, reliability, security and availability of
our products and technical infrastructure to the satisfaction of our users may harm our reputation, impair our ability
to retain existing customers and attract new customers and expose us to legal claims and government action, each of
which could have a material adverse impact on our financial condition, results of operations and growth prospects.
A failure to protect the integrity and security of our customers’ information and access to our customers’
information systems could expose us to litigation, materially damage our reputation and harm our business,
or lead to service disruptions, and the costs of preventing such a failure could adversely affect our results of
operations.
Our business involves the collection and use of confidential information of our customers and their trading
partners. The collection and use of this information sometimes requires our direct access to our customers’
information systems. We cannot assure you that our efforts to protect this confidential information and access will
be successful. Our security measures may be breached as a result of third-party action, including intentional
misconduct by computer hackers, employee error, malfeasance or otherwise and result in someone obtaining
unauthorized access to our customers’ data or our data, including our intellectual property and other confidential
business information, or our IT systems. Additionally, third parties may attempt to fraudulently induce employees
or customers into disclosing sensitive information such as user names, passwords or other information in order to
gain access to our customers’ data or our data or IT systems. Because the techniques used to obtain unauthorized
access, or to sabotage systems, change frequently and generally are not recognized until launched against a target,
we may be unable to anticipate these techniques or to implement adequate preventative measures. Malicious third-
parties may also conduct attacks designed to temporarily deny customers access to our services.
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If any compromise of this information security were to occur, or if we fail to detect and appropriately respond
to a significant data security breach, we could face service disruptions, be subject to legal claims and government
action, experience an adverse effect on our reputation and need to incur significant additional costs to protect against
similar information security breaches in the future, each of which could adversely impact our financial condition,
results of operations and growth prospects. Litigation resulting from such claims may be costly, time-consuming
and distracting to management. In addition, because of the critical nature of data security, any perceived breach of
our security measures could cause existing or potential customers not to use our solutions and could harm our
reputation.
We may experience service failures or interruptions due to defects in the hardware, software, infrastructure,
third party components or processes that comprise our existing or new solutions, any of which could
adversely affect our business.
Technology solutions as complex as ours may contain undetected defects in the hardware, software,
infrastructure, third party components or processes that are part of the solutions we provide. If these defects lead to
service failures, we could experience delays or lost revenues, diversion of software engineering resources, material
non-monetary concessions, negative media attention or increased service costs as a result of performance claims
during the period required to correct the cause of the defects. We cannot be certain that defects will not be found in
new solutions or upgraded solutions, resulting in loss of, or delay in, market acceptance, which could have an
adverse effect on our business, results of operations and financial condition.
Because customers use our cloud-based supply chain management solutions for critical business processes,
any defect in our solutions, any disruption to our solutions or any error in execution could cause recurring revenue
customers to cancel their contracts with us, prevent potential customers from joining our network and harm our
reputation. Although most of our contracts with our customers limit our liability to our customers for these defects,
disruptions or errors, we nonetheless could be subject to litigation for actual or alleged losses to our customers’
businesses, which may require us to spend significant time and money in litigation or arbitration or to pay significant
settlements or damages. We do not currently maintain any warranty reserves. Defending a lawsuit, regardless of its
merit, could be costly and divert management’s attention and could cause our business to suffer.
The insurers under our existing liability insurance policy could deny coverage of a future claim that results
from an error or defect in our technology or a resulting disruption in our solutions, or our existing liability insurance
might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot assure you
that our current liability insurance coverage will continue to be available to us on acceptable terms or at all. The
successful assertion against us of one or more large claims that exceeds our insurance coverage, or the occurrence of
changes in our liability insurance policy, including an increase in premiums or imposition of large deductible or co-
insurance requirements, could have an adverse effect on our business, financial condition and operating results.
Even if we succeed in litigation with respect to a claim, we are likely to incur substantial costs and our
management’s attention will be diverted from our operations.
Our business is dependent on our ability to maintain and scale our technical infrastructure, and any failure to
effectively maintain and grow our technical infrastructure service could damage our reputation, result in a
potential loss of users and engagement, and adversely affect our financial results.
Our reputation and ability to attract, retain and serve our customers is dependent upon the reliable
performance of our Platform and our underlying technical infrastructure. As our user base and the amount and types
of information shared on our Platform continue to grow, we will need an increasing amount of technical
infrastructure, including network capacity and computing power, to continue to satisfy the needs of our users. It is
possible that we may fail to effectively scale and grow our technical infrastructure to accommodate these increased
demands. Any failure to effectively maintain and grow our technical infrastructure could damage our reputation,
result in a potential loss of users and engagement, and adversely affect our financial results.
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Our inability to adapt to rapid technological change could impair our ability to remain competitive.
The industry in which we compete is characterized by rapid technological change, frequent introductions of
new products and evolving industry standards. Existing products can become obsolete and unmarketable when
vendors introduce products utilizing new technologies or new industry standards emerge, and as a result, it is
difficult for us to estimate the life cycles of our products. Our ability to attract new customers and increase revenues
from customers will depend in significant part on our ability to anticipate industry standards and to continue to
enhance existing solutions or introduce or acquire new solutions on a timely basis to keep pace with technological
developments. The success of any enhancement or new solution depends on several factors, including the timely
completion, introduction and market acceptance of the enhancement or solution. Any new solution we develop or
acquire might not be introduced in a timely or cost-effective manner and might not achieve the broad market
acceptance necessary to generate significant revenues. If any of our competitors or new market entrants implement
new technologies or upgrades to existing technologies before we are able to implement them, they may be able to
provide more effective solutions than ours at lower prices. Any delay or failure in the introduction of new or
enhanced solutions could adversely affect our business, results of operations and financial condition. Moreover, the
development of new technologies requires substantial investment and we have no assurance that such investments
will achieve their expected benefits on a timely manner or at all, either of which could have a material adverse effect
on our results of operations.
If we fail to protect our intellectual property and proprietary rights adequately, our business could be
adversely affected.
We believe that proprietary technology is essential to establishing and maintaining our leadership position.
We seek to protect our intellectual property through trade secrets, copyrights, confidentiality, non-compete and
nondisclosure agreements, trademarks, domain names and other measures, some of which afford only limited
protection. We do not have any patents or registered copyrights. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our technology or to obtain and use information that we
regard as proprietary. We cannot assure you that our means of protecting our proprietary rights will be adequate or
that our competitors will not independently develop similar or superior technology or design around our intellectual
property. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as
the laws of the U.S. Intellectual property protections may also be unavailable, limited or difficult to enforce in some
countries, which could make it easier for competitors to capture market share. Our failure to protect adequately our
intellectual property and proprietary rights could adversely affect our business, financial condition and results of
operations.
In addition, if we resort to legal proceedings to enforce our intellectual property rights or to determine the
validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be
burdensome and expensive, even if we were to prevail. Any litigation that is necessary in the future could result in
substantial costs and diversion of resources and could have a material adverse effect on our business, operating
results or financial condition.
An assertion by a third party that we are infringing its intellectual property, whether or not correct, could
subject us to costly and time-consuming litigation or expensive licenses and our business might be harmed.
The Internet supply chain management and technology industries are characterized by the existence of a large
number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of
infringement or other violations of intellectual property rights. As we seek to extend our solutions, we could be
constrained by the intellectual property rights of others.
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We might not prevail in any intellectual property infringement litigation given the complex technical issues
and inherent uncertainties in such litigation. Defending such claims, regardless of their merit, could be time-
consuming and distracting to management, result in costly litigation or settlement, cause development delays,
require us to enter into royalty or licensing agreements or require us to redesign our products to avoid infringement.
If our solutions violate any third-party proprietary rights, we could be required to withdraw those solutions from the
market, re-develop those solutions or seek to obtain licenses from third parties, which might not be available on
reasonable terms or at all. Any efforts to re-develop our solutions, obtain licenses from third parties on favorable
terms or license a substitute technology might not be successful and, in any case, might substantially increase our
costs and harm our business, financial condition and operating results. Withdrawal of any of our solutions from the
market might harm our business, financial condition and operating results. We face additional risk of infringement
or misappropriation claims if we hire an employee who possess third party proprietary information who decides to
use such information in connection with our solution, services, or business processes without such third party’s
authorization.
In addition, we incorporate open source software into our Platform. Given the nature of open source software,
third parties might assert copyright and other intellectual property infringement claims against us based on our use
of certain open source software programs. The terms of many open source licenses to which we are subject have not
been interpreted by U.S. or foreign courts, and there is a risk that those licenses could be construed in a manner that
imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that event, we
could be required to seek licenses from third parties in order to continue offering our solutions, to re-develop our
solutions or to discontinue sales of our solutions, or to release our proprietary software code under the terms of an
open source license, any of which could adversely affect our business.
Our new products and changes to existing products could fail to attract or retain users or generate revenue.
Our ability to retain, increase and engage our customers and to increase our revenues will depend heavily on
our ability to create successful new products. We may introduce significant changes to our existing products or
develop and introduce new and unproven products which include or use technologies with which we have little or no
prior development or operating experience. If new or enhanced products fail to engage customers, we may fail to
attract or retain customers or to generate sufficient revenues, operating margin, or other value to justify our
investments and our business may be adversely affected. In the future, we may invest in new products and
initiatives to generate revenue, but there is no guarantee these approaches will be successful. If we are not
successful with new approaches to monetization, we may not be able to maintain or grow our revenues as
anticipated or recover any associated development costs and our financial results could be adversely affected.
Our software is highly technical, and if it contains undetected errors, our business could be adversely
affected.
Our products incorporate software that is highly technical and complex. Our software has contained, and may
now or in the future contain, undetected errors, bugs or vulnerabilities. Some errors in our software code may only
be discovered after the code has been released. Any defects or errors discovered in our code after release could
result in damage to our reputation, loss of customers, loss of revenue or liability for damages, any of which could
adversely affect our business and financial results.
The market for cloud-based supply chain management solutions is at an early stage of development. If this
market does not develop or develops more slowly than we expect, our revenues may decline or fail to grow
and we may incur operating losses.
We derive, and expect to continue to derive, substantially all of our revenues from providing cloud-based
supply chain management solutions to suppliers, retailers, distributors and logistics firms. The market for cloud-
based supply chain management solutions is in an early stage of development, and it is uncertain whether these
solutions will achieve and sustain high levels of demand and market acceptance. Our success will depend on the
willingness of retailers and their trading partners to accept our cloud-based supply chain management solutions as an
alternative to traditional licensed hardware and software solutions.
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Some suppliers, retailers, distributors, or logistics firms may be reluctant or unwilling to use our cloud-based
supply chain management solutions for a number of reasons, including existing investments in supply chain
management technology. Supply chain management functions traditionally have been performed using purchased or
licensed hardware and software implemented by each supplier. Because this traditional approach often requires
significant initial investments to purchase the necessary technology and to establish systems that comply with
retailers’ unique requirements, suppliers may be unwilling to abandon their current solutions for our cloud-based
supply chain management solutions.
Other factors that may limit market acceptance of our cloud-based supply chain management solutions
include:
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our ability to maintain high levels of customer satisfaction;
our ability to maintain continuity of service for all users of our Platform;
the price, performance and availability of competing solutions; and
our ability to assuage suppliers’ confidentiality concerns about information stored outside of their
controlled computing environments.
If retailers and their trading partners do not perceive the benefits of our cloud-based supply chain management
solutions, or if retailers and their trading partners are unwilling to accept our Platform as an alternative to the
traditional approach, the market for our solutions might not continue to develop or might develop more slowly than
we expect, either of which would significantly adversely affect our revenues and growth prospects.
Privacy concerns and laws, evolving regulation of cloud computing, cross-border data transfer restrictions
and other domestic or foreign regulations may limit the use and adoption of our solutions and adversely
affect our business.
Regulation related to the provision of services on the Internet is increasing, as federal, state and foreign
governments continue to adopt new laws and regulations addressing data privacy and the collection, processing,
storage and use of personal information. In some cases, foreign data privacy laws and regulations, such as the
European Union’s Data Protection Directive, and the country-specific regulations that implement that directive, also
govern the processing of personal information. Further, laws are increasingly aimed at the use of personal
information for marketing purposes, such as the European Union’s e-Privacy Directive, and the country-specific
regulations that implement that directive. Such laws and regulations are subject to differing interpretations and may
be inconsistent among jurisdictions. These and other requirements could reduce demand for our solutions or restrict
our ability to store and process data or, in some cases, impact our ability to offer our services and solutions in certain
locations.
In addition to government activity, privacy advocacy and other industry groups have established or may
establish new self-regulatory standards that may place additional burdens on us. Our customers may expect us to
meet voluntary certification or other standards established by third parties. If we are unable to maintain these
certifications or meet these standards, it could adversely affect our ability to provide our solutions to certain
customers and could harm our business.
The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use
and adoption of our services and reduce overall demand for them, or lead to significant fines, penalties or liabilities
for any noncompliance.
Furthermore, concerns regarding data privacy may cause our customers’ customers to resist providing the data
necessary to allow our customers to use our service effectively. Even the perception that the privacy of personal
information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our
products or services and could limit adoption of our cloud-based solutions.
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Evolving regulation of the Internet may increase our expenditures related to compliance efforts, which may
adversely affect our financial condition.
As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes
more likely. We are particularly sensitive to these risks because the Internet is a critical component of our cloud-
based business model. For example, we believe that increased regulation is likely in the area of data privacy, and
laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information
could affect our customers’ ability to use and share data, potentially reducing demand for solutions accessed via the
Internet and restricting our ability to store, process and share data with our clients via the Internet. In addition,
taxation of services provided over the Internet or other charges imposed by government agencies or by private
organizations for accessing the Internet may be imposed. Any regulation imposing greater fees for Internet use or
restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability
of Internet-based services, which could harm our business.
Industry-specific regulation is evolving and unfavorable industry-specific laws, regulations or interpretive
positions could harm our business.
Our customers and potential customers do business in a variety of industries. Regulators in certain industries
have adopted and may in the future adopt regulations or interpretive positions regarding the use of cloud computing
and other outsourced services. The costs of compliance with, and other burdens imposed by, industry-specific laws,
regulations and interpretive positions may limit customers’ use and adoption of our services and reduce overall
demand for our services. In addition, an inability to satisfy the standards of certain voluntary third-party
certification bodies that our customers may expect may have an adverse impact on our business. If in the future we
are unable to achieve or maintain these industry-specific certifications or other requirements or standards relevant to
our customers, it may harm our business.
In some cases, industry-specific laws, regulations or interpretive positions may also apply directly to us as a
service provider. Any failure or perceived failure by us to comply with such requirements could have an adverse
impact on our business.
We rely on third party infrastructure, software and services that could take a significant time to replace or
upgrade.
We rely on infrastructure, software and services licensed from third parties to offer our cloud-based supply
chain management solutions. This infrastructure, software and services, as well as maintenance rights for this
infrastructure, software and services, may not continue to be available to us on commercially reasonable terms, or at
all. If we lose the right to use or upgrade any of these licenses, our customers could experience delays or be unable
to access our solutions until we can obtain and integrate equivalent technology. There might not always be
commercially reasonable hardware or software alternatives to the third-party infrastructure, software and services
that we currently license. Any such alternatives could be more difficult or costly to replace than the third-party
infrastructure, software and services we currently license, and integration of the alternatives into our Platform could
require significant work and substantial time and resources. Any delays or failures associated with our Platform
could injure our reputation with customers and potential customers and result in an adverse effect on our business,
results of operations and financial condition.
We may pursue acquisitions and our potential inability to successfully integrate newly acquired companies or
businesses could adversely affect our financial results.
We may pursue acquisitions of other companies or their businesses in the future. If we complete acquisitions,
we face many risks commonly encountered with growth through acquisitions. These risks include:
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incurring significantly higher than anticipated capital expenditures and operating expenses;
failing to assimilate the operations, customers, and personnel of the acquired company or business;
disrupting our ongoing business;
dissipating our management resources;
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dilution to existing stockholders from the issuance of equity securities;
liabilities or other problems associated with the acquired business;
incurring debt on terms unfavorable to us or that we are unable to repay;
becoming subject to adverse tax consequences, substantial depreciation or deferred compensation
charges;
improper compliance with laws and regulations;
failing to maintain uniform standards, controls and policies; and
impairing relationships with employees and customers as a result of changes in management.
Fully integrating an acquired company or business into our operations may take a significant amount of time.
In addition, we may only be able to conduct limited due diligence on an acquired company’s operations. Following
an acquisition, we may be subject to liabilities arising from an acquired company’s past or present operations,
including liabilities related to data security, encryption and privacy of customer data, and these liabilities may be
greater than the warranty and indemnity limitations that we negotiate. We cannot assure you that we will be
successful in overcoming these risks or any other problems encountered with acquisitions. To the extent we do not
successfully avoid or overcome the risks or problems related to any acquisitions, our results of operations and
financial condition could be adversely affected. Future acquisitions also could impact our financial position and
capital needs, and could cause substantial fluctuations in our quarterly and yearly results of operations. Acquisitions
could include significant goodwill and intangible assets, which may result in future impairment charges that would
reduce our stated earnings.
Because our long-term success depends, in part, on our ability to expand the sales of our solutions to
customers located outside of North America, our business will be susceptible to risks associated with
international operations.
Our inexperience in operating our business outside of North America increases the risk that our current and
any future international expansion efforts will not be successful. Conducting international operations subjects us to
new risks that, generally, we have not faced in the U.S., including:
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misjudging the markets and competitive landscape of foreign jurisdictions;
fluctuations in currency exchange rates;
unexpected changes in foreign regulatory requirements;
longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
difficulties in managing and staffing international operations;
differing technology standards;
potentially adverse tax consequences, including the complexities of foreign value added tax systems and
restrictions on the repatriation of earnings;
localization of our solutions, including translation into foreign languages and associated expenses;
the burdens of complying with a wide variety of foreign laws and different legal standards, including
laws and regulations related to privacy;
increased financial accounting and reporting burdens and complexities;
political, social and economic instability abroad, terrorist attacks and security concerns in general;
greater potential for corruption and bribery; and
reduced or varied protection for intellectual property rights in some countries.
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The occurrence of any one of these risks could negatively affect our international business and, consequently,
our results of operations generally. Additionally, operating in international markets also requires significant
management attention and financial resources. We cannot be certain that the investment and additional resources
required in establishing, acquiring or integrating operations in other countries will produce desired levels of
revenues or profitability.
In addition, we operate in parts of the world, such as Ukraine, that are recognized as having governmental
corruption problems to some degree and where local customs and practices may not foster strict compliance with
anti-corruption laws. Our continued operation and potential expansion outside the U.S. could increase the risk of
such violations in the future. Despite our training and compliance programs, we cannot assure you that our internal
control policies and procedures will protect us from unauthorized reckless or criminal acts committed by our
employees or agents, including by third parties we utilize in foreign jurisdictions. In the event that we believe, or
have reason to believe, that our employees or agents have or may have violated applicable anti-corruption laws,
including the U.S. Foreign Corrupt Practices Act, we may be required to investigate or have outside counsel
investigate the relevant facts and circumstances, which can be expensive and require significant time and attention
from senior management. Violations of these laws may result in severe criminal or civil sanctions, which could
disrupt our business and result in a material adverse effect on our reputation, business, results of operations or
financial condition.
The use of open source software in our products may expose us to additional risks and harm our intellectual
property.
Some of our products use or incorporate software that is subject to one or more open source licenses. Open
source software is typically freely accessible, usable and modifiable. Certain open source software licenses require
a user who intends to distribute the open source software as a component of the user’s software to disclose publicly
part or all of the source code to the user’s software. In addition, certain open source software licenses require the
user of such software to make any derivative works of the open source code available to others on unfavorable terms
or at no cost. This can subject previously proprietary software to open source license terms. Furthermore, if we fail
to comply with these licenses, we may be subject to certain unfavorable requirements. These requirements may
include, but are not limited to, offering our services that incorporate the open source software for no cost, making
available any of our modifications to the source code, making available any derivative works we create based upon,
incorporating, or using the open source software, or licensing such modifications or derivative works under the
terms of the particular open source license. If an author or third party that distributes such open source software
were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to
incur significant legal expenses defending against such allegations and could be subject to significant damages,
enjoined from the sale of our services that contained the open source software and required to comply with the
foregoing conditions, which could disrupt the distribution and sale of some of our services.
While we monitor the use of all open source software in our products, processes and technology and try to
ensure that no open source software is used in such a way as to require us to disclose the source code to the related
product or solution, such use could inadvertently occur. Additionally, if a third-party software provider has
incorporated certain types of open source software into software we license from such third party for our products
and solutions, we could, under certain circumstances, be required to disclose the source code to our products and
solutions. This could harm our intellectual property position and have a material adverse effect on our business,
results of operations, cash flow and financial condition.
Our operations may be adversely affected by ongoing developments in Ukraine.
The political and civil situation in Ukraine cannot be accurately predicted since the removal of President
Yanukovych from power by the Ukrainian parliament in late February 2014, which was followed by reports of
Russian military activity in the Crimean region. Ukraine’s political activities remain fluid and beyond our control.
We also cannot predict the outcome of developments there or the reaction to such developments by U.S., European,
U.N. or other international authorities.
We currently engage in software development activities in the Ukraine and have an office in Kiev. We
continue to monitor the situation closely. Prolonged or expanded unrest, military activities, or broad-based
sanctions, should they be implemented, could have a material adverse effect on our operations
21
We have incurred operating losses in the past and may incur operating losses in the future.
We began operating our supply chain management solution business in 1997. Throughout most of our history,
we have experienced net losses and negative cash flows from operations. As of December 31, 2018, we had
retained earnings of $15.3 million compared to an accumulated deficit of $8.6 million as of December 31, 2017. We
expect our operating expenses to continue to increase in the future as we expand our operations and increase our
customer base due to expected increased sales and marketing expenses, operations costs, research and development
costs and general and administration costs. If our revenues do not continue to grow to offset these increased
expenses, we may not be profitable. We cannot assure you that we will be able to maintain profitability. You
should not consider recent revenue growth as indicative of our future performance. In fact, in future periods, we
may not have any revenue growth, or our revenues could decline. In addition, our ability to achieve profitability is
subject to a number of the risks and uncertainties, including those discussed herein, many of which are beyond our
control.
Our ability to use our U.S. net operating loss carryforwards might be limited.
As of December 31, 2018, we had net operating loss carryforwards of $37.5 million for U.S. federal tax
purposes. We also had $3.2 million of various state net operating loss carryforwards. The net operating loss
carryforwards for federal tax purposes will expire between 2020 and 2038 if not utilized. The net operating loss
carryforwards for state tax purposes will expire between 2019 and 2031 if not utilized. To the extent these net
operating loss carryforwards are available, we intend to use them to reduce the corporate income tax liability
associated with our operations. 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 have not updated the Section 382 analysis subsequent to
December 8, 2010; however, we believe there have not been any events subsequent to that date that would
materially impact the analysis. We believe that approximately $17.6 million of federal losses will expire unused due
to Section 382 limitations. The maximum annual limitation of federal net operating losses under Section 382 is
approximately $1.0 million. This limitation could be further restricted if any ownership changes occur in future
years. To the extent our use of net operating loss carryforwards is significantly limited, our taxable income could be
subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which
could result in lower profits.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or
other tax returns could adversely affect our operating results and financial condition.
We are subject to income taxes in the U.S. and various foreign jurisdictions, and our domestic and
international tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective
tax rates could be subject to volatility or adversely affected by a number of factors, including:
•
•
•
•
•
•
•
changes in the valuation of our deferred tax assets and liabilities ;
expected timing and amount of the release of tax valuation allowances ;
expiration of, or detrimental changes in, research and development tax credit laws;
tax effects of stock-based compensation;
costs related to intercompany restructurings;
changes in tax laws, regulations, accounting principles or interpretations thereof; and
future earnings being lower than anticipated in countries where we have lower statutory tax rates and
higher than anticipated earnings in countries where we have higher statutory tax rates.
In addition, we may be subject to audits of our income and sales taxes by the Internal Revenue Service and
other foreign and state tax authorities. Outcomes from these audits could have an adverse effect on our operating
results and financial condition.
22
The markets in which we participate are highly competitive, and our failure to compete successfully would
make it difficult for us to add and retain customers and would reduce or impede the growth of our business.
The markets for supply chain management solutions are increasingly competitive and global. We expect
competition to increase in the future both from existing competitors and new companies that may enter our markets.
Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to
achieve or maintain broad market acceptance. We face competition from:
•
•
•
cloud service providers that deliver business-to-business information systems using a multi-tenant
approach;
traditional on-premise software providers; and
managed service providers that combine traditional on-premise software with professional information
technology services.
To remain competitive, we will need to invest continuously in software development, marketing, customer
service and support and product delivery infrastructure. However, we cannot assure you that new or established
competitors will not offer solutions that are superior to or lower in price than ours. We may not have sufficient
resources to continue the investments in all areas of software development and marketing needed to maintain our
competitive position. In addition, some of our competitors are better capitalized than us, which may provide them
with an advantage in developing, marketing or servicing new solutions. Increased competition could reduce our
market share, revenues and operating margins, increase our costs of operations and otherwise adversely affect our
business.
Mergers or other strategic transactions involving our competitors could weaken our competitive position,
which could harm our operating results.
Our industry is highly fragmented, and we believe it is likely that our existing competitors will continue to
consolidate or will be acquired. In addition, some of our competitors may enter into new alliances with each other
or may establish or strengthen cooperative relationships with systems integrators, third-party consulting firms or
other parties. New entrants not currently considered to be competitors may also enter the market through
acquisitions, partnerships, or strategic relationships. Any such consolidation, acquisition, alliance or cooperative
relationship could lead to pricing pressure, loss of customers and our loss of market share and could result in a
competitor with greater financial, technical, marketing, service and other resources, all of which could have a
material adverse effect on our business, operating results and financial condition.
Economic weakness and uncertainty could adversely affect our revenue, lengthen our sales cycles and make it
difficult for us to forecast operating results accurately.
Our revenues depend significantly on general economic conditions and the health of retailers. Economic
weakness and constrained retail spending adversely affected revenue growth rates in late 2008 and similar
circumstances may result in slower growth, or reductions, in revenues and gross profits in the future. We have
experienced, and may experience in the future, reduced spending in our business due to financial turmoil affecting
the U.S. and global economy, and other macroeconomic factors affecting spending behavior. Uncertainty about
future economic conditions makes it difficult for us to forecast operating results and to make decisions about future
investments. In addition, economic conditions or uncertainty may cause customers and potential customers to
reduce or delay technology purchases, including purchases of our solutions. Our sales cycle may lengthen if
purchasing decisions are delayed as a result of uncertain information technology or development budgets or contract
negotiations become more protracted or difficult as customers institute additional internal approvals for information
technology purchases. Delays or reductions in information technology spending could have a material adverse
effect on demand for our solutions, and consequently our results of operations, prospects and stock price.
23
Our continued growth could strain our personnel resources and infrastructure, and if we are unable to
implement appropriate controls and procedures to manage our growth, we will not be able to implement our
business plan successfully.
We have experienced a period of rapid growth in our headcount and operations. To the extent that we are able
to sustain such growth, it might place a significant strain on our management, administrative, operational and
financial infrastructure. Our success will depend in part upon the ability of our senior management to manage this
growth effectively. To do so, we must continue to hire, train and manage new employees as needed. If our new
hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees, if
we are not successful in retaining our existing employees, or if our culture is adversely affected by any of the
foregoing, our business would be harmed. To manage the expected growth of our operations and personnel, we will
need to continue to improve our operational, financial and management controls and our reporting systems and
procedures. The additional headcount we are adding will increase our cost base, which will make it more difficult
for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully
manage our growth, we will be unable to execute our business plan.
If we fail to retain our Chief Executive Officer and other key personnel, our business would be harmed and
we might not be able to implement our business plan successfully.
Given the complex nature of the technology on which our business is based and the speed with which such
technology advances, our future success is dependent, in large part, upon our ability to attract and retain highly
qualified managerial, technical and sales personnel. The loss of any member of our senior management team or key
personnel might significantly delay or prevent the achievement of our business objectives and could materially harm
our business and our customer relationships. In addition, because of the nature of our business, the loss of any
significant number of our existing engineering, project management and sales personnel could have an adverse
effect on our business, results of operations and financial condition. Competition for talented personnel is intense,
and we cannot be certain that we can retain our managerial, technical and sales personnel or that we can attract,
assimilate or retain such personnel in the future. Our inability to attract and retain such personnel could have an
adverse effect on our business, results of operations and financial condition.
Our failure to maintain adequate internal control over financial reporting in accordance with Section 404 of
the Sarbanes-Oxley Act of 2002 or to prevent or detect material misstatements in our annual or interim
financial statements in the future could result in inaccurate financial reporting, or could otherwise harm our
business and stock price.
Ensuring that we have internal financial and accounting controls and procedures adequate to produce accurate
financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial
reporting and disclosure controls and procedures. In particular, we are required to perform annual system and
process evaluation and testing of our internal control over financial reporting to allow management and our
independent registered public accounting firm to report on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act. Furthermore, implementing any appropriate future
changes to our internal control over financial reporting may entail substantial costs in order to modify our existing
accounting systems, may take a significant period of time to complete and may distract our officers, directors and
employees from the operation of our business. If we are not able to comply with the requirements of Section 404 in
the future, or if material weaknesses are identified, the market price of our common stock could decline.
24
Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in
new technologies could reduce our ability to compete successfully and adversely affect our results of
operations.
We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing
on favorable terms, if at all. If we raise additional equity financing, our security holders may experience significant
dilution of their ownership interests and the value of shares of our common stock could decline. If we engage in
debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us
to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. If we need
additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:
•
•
•
•
•
develop and enhance our solutions;
continue to expand our technology development, sales and marketing organizations;
acquire complementary technologies, products or businesses;
hire, train and retain employees; or
respond to competitive pressures or unanticipated working capital requirements.
Our inability to do any of the foregoing could reduce our ability to compete successfully and adversely affect
our results of operations.
If open source, or other no-cost products and services, expand into enterprise application and supply chain
software, our fee revenues may decline.
The open source community is comprised of many different formal and informal groups of software
developers and individuals who have created a wide variety of software and have made that software available for
use, distribution and modification, often free of charge. Open source software, such as the Linux operating system,
has been gaining in popularity among business users. If developers contribute enterprise and supply chain
application software to the open source community, or if competitors make such software available at no cost, and
that software has competitive features and scale to support business users in our markets, we may need to change
our product pricing and distribution strategy to compete successfully, and our fee revenues may decline as a result.
Our stock price may be volatile.
Shares of our common stock were sold in our April 2010 initial public offering at a price of $12.00 per share
and through December 31, 2018, our common stock has traded as high as $100.68 per share and as low as $8.45 per
share. An active, liquid and orderly market for our common stock may not be sustained, which could depress the
trading price of our common stock. Some of the factors that may cause the market price of our common stock to
fluctuate include:
•
•
•
•
•
•
•
•
•
fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to
be similar to us;
fluctuations in our recorded revenue, even during periods of significant sales order activity;
fluctuations in stock market volume;
changes in estimates of our financial results or recommendations by securities analysts;
failure of any of our solutions to achieve or maintain market acceptance;
changes in market valuations of similar companies;
success of competitive products or services;
changes in our capital structure, such as future issuances of securities or the incurrence of debt;
announcements by us or our competitors of significant solutions, contracts, acquisitions or strategic
alliances;
25
•
•
•
•
•
regulatory developments in the United States of America, foreign countries or both;
litigation involving our company, our general industry or both;
additions or departures of key personnel;
investors’ general perception of us; and
changes in general economic, industry and market conditions.
In addition, if the market for software stocks or the stock market in general experiences a loss of investor
confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial
condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may
expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to
management.
If securities or industry analysts cease publishing research or reports about us, our business or our market,
or if they publish negative evaluations of our stock, the price of our stock and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or
industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our
stock or publishes incorrect or unfavorable research about our business, our stock price would likely decline. In
addition, if one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly,
demand for our stock could decrease, which could cause our stock price or trading volume to decline.
Future sales of our common stock by our existing stockholders could cause our stock price to decline.
If our stockholders sell substantial amounts of our common stock in the public market, the market price of our
common stock could decrease significantly. The perception in the public market that our stockholders might sell
shares of our common stock could also depress the market price of our common stock. As of December 31, 2018,
we had approximately 5.3 million shares of our common stock issuable under approved equity compensation plans
which are covered by effective registration statements.
Our charter documents and Delaware law may delay, discourage, or inhibit a takeover that stockholders
consider favorable.
Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may
delay, discourage, or inhibit transactions involving an actual or potential change in our control or change in our
management, including transactions in which stockholders might otherwise receive a premium for their shares, or
transactions that our stockholders might otherwise deem to be in their best interests, and may ultimately result in the
market price of our common stock being lower than it would be without these provisions. These provisions:
•
•
•
•
•
permit our board of directors to issue up to 5,000,000 shares of preferred stock, with any rights,
preferences and privileges as our board may designate, including the right to approve an acquisition or
other change in our control;
provide that the authorized number of directors may be changed by resolution of the board of directors;
provide that all vacancies, including newly created directorships, may, except as otherwise required by
law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate
candidates for election as directors at a meeting of stockholders must provide notice in writing in a
timely manner, and also specify requirements as to the form and content of a stockholder’s notice; and
do not provide for cumulative voting rights.
26
In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in
any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our
associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting
stock. These provisions may have the effect of entrenching our management team and may deprive you of the
opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to
obtain a control premium could reduce the price of our common stock.
We do not intend to declare dividends on our stock in the foreseeable future.
We currently intend to retain all future earnings for the operation and expansion of our business and, therefore,
do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. Investors may
need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the
only way to realize any future gains on their investment. Any payment of future cash dividends on our common
stock will be at the discretion of our board of directors and will depend upon our results of operations, earnings,
capital requirements, financial condition, future prospects, contractual restrictions and other factors deemed relevant
by our board of directors. Therefore, you should not expect to receive dividend income from shares of our common
stock.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Our corporate headquarters, including our principal administrative, marketing, sales, technical support and
research and development facilities, are located in Minneapolis, Minnesota where we lease approximately 189,000
square feet under an agreement that expires on April 30, 2025. We have agreed to expand our headquarters
premises by approximately 25,000 square feet during 2020. Our lease agreement also includes a further expansion
right and a right of first offer to lease certain additional space and two options to extend the term of the lease for five
years at a market rate determined in accordance with the lease.
We also have operations in or near:
•
•
•
•
•
•
Little Falls, New Jersey, where we lease approximately 26,000 square feet under an agreement that
expires on June 30, 2023. The lease includes a right of first offer to lease certain additional space and
one option to extend the term of the lease for five years at a market rate determined in accordance with
the lease.
Toronto, Ontario, where we lease approximately 17,000 square feet under an agreement that expires on
December 31, 2021. The lease includes a right of first offer to lease certain additional space and one
option to extend the term of the lease for five years at a market rate determined in accordance with the
lease.
Melbourne, Australia, where we lease approximately 11,000 square feet under an agreement that expires
on October 15, 2021. The lease includes one option to extend the term of the lease for three years at a
market rate determined in accordance with the lease.
Houston, Texas, where we lease approximately 4,600 square feet under an agreement that expires on
January 31, 2022. The lease includes a right of first offer to lease certain additional spaces and one
option to extend the term of the lease for up to three years at a market rate determined in accordance
with the lease.
Sydney, Australia, where we lease approximately 4,000 square feet under an agreement that expires on
April 30, 2020. The lease includes a right of first offer to lease certain additional space and one option
to extend the term of the lease for three years at a market rate determined in accordance with the lease.
Kiev, Ukraine, where we lease approximately 3,000 square feet under an agreement that expires on
April 26, 2020. The lease includes one option to extend the term of the lease for two years and
11 months at a market rate determined in accordance with the lease.
27
We believe that our current facilities are suitable and adequate to meet our current needs and that suitable
additional or substitute space will be available as needed to accommodate expansion of our operations.
Item 3.
Legal Proceedings
We are not currently subject to any material legal proceedings. From time to time, we may be named as a
defendant in legal actions or otherwise be subject to claims arising from our normal business activities. We believe
that we have obtained adequate insurance coverage or rights to indemnification in connection with potential legal
proceedings that may arise.
Item 4.
Mine Safety Disclosures
Not applicable.
28
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information. Our common stock has traded on the Nasdaq Global Market under the symbol “SPSC”
since April 22, 2010, the date of our initial public offering. The following table sets forth, for the periods indicated,
the high and low sales prices for our common stock as reported on the Nasdaq Global Market.
Stockholders of Record. As of February 8, 2019, we had 76 stockholders of record of our common stock,
excluding holders whose stock is held either in nominee name and/or street name brokerage accounts.
Dividends. We have not historically paid dividends on our common stock. We currently intend to retain our
future earnings, if any, to finance the operation and expansion of our business, and, therefore, we do not expect to
pay cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be
at the discretion of our board of directors after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs, outstanding indebtedness and plans for expansion and
restrictions imposed by lenders, if any.
Stock Performance Graph and Cumulative Total Return
Notwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the
following information relating to the price performance of our common stock shall not be deemed to be “filed” with
the SEC or to be “soliciting material” under the Securities Exchange Act of 1934, as amended, (“Exchange Act”),
and it shall not be deemed to be incorporated by reference into any of our filings under the (“Securities Act”) of
1933, as amended, or the Securities Act, or the Exchange Act, except to the extent we specifically incorporate it by
reference into such filing.
The graph below compares the cumulative total stockholder return of our common stock with that of the
Nasdaq US Benchmark TR Index and the Nasdaq US Benchmark Computer Services TR Index from December 31,
2013 through December 31, 2018, utilizing the last trading day of each respective year. The graph assumes that
$100 was invested in shares of our common stock, the Nasdaq US Benchmark TR Index and the Nasdaq US
Benchmark Computer Services TR Index at the close of market on December 31, 2013, and that dividends, if any,
were reinvested. The comparisons in this graph are based on historical data and are not intended to forecast or be
indicative of future performance of our common stock.
29
Comparison of Cumulative Total Returns of SPS Commerce, Inc., Nasdaq US Benchmark TR Index and
Nasdaq US Benchmark Computer Services TR Index
12/31/2013
12/31/2014
12/31/2015
12/30/2016
12/29/2017
12/31/2018
SPS Commerce
100.0
86.7
107.5
107.0
74.4
126.2
Nasdaq US
Benchmark
TR Index
100.0
112.5
113.0
127.7
155.0
146.6
Nasdaq US
Benchmark Compute
r
Services TR Index
100.0
95.2
93.2
149.3
120.9
110.6
Recent Sales of Unregistered Securities; Use of Proceeds from Sales of Registered Securities
Not applicable.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 2, 2017, our board of directors authorized a program to repurchase up to $50.0 million of
common stock. Under the program, purchases may be made from time to time in the open market over two years.
We repurchased 289,745 shares at a cost of $19.9 million and 122,147 shares at a cost of $5.8 million for the years
ended December 31, 2018 and 2017, respectively. As of December 31, 2018, $24.3 million of the $50.0 million of
the share repurchases authorized was available for future share repurchases.
30
The following table presents the total number of shares of our common stock that we purchased during the
fourth quarter of 2018, the average price paid per share, the number of shares that we purchased as part of our
publicly announced repurchase program and the approximate dollar value of shares that still could be repurchased at
the end of the applicable period.
Period
October 1-31, 2018
November 1-30, 2018
December 1 - 31, 2018
Total fourth quarter 2018
Total
Number of
Shares
Purchased
70,100 $
—
—
70,100 $
Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Approximate
Dollar Value
of Shares that
May Yet be
Purchased
Under the
Program
70,100 $24,300,000
— 24,300,000
— 24,300,000
70,100 $24,300,000
Program
Average
Price Paid
per Share
85.59
—
—
85.59
See Note K to our consolidated financial statements, included in this Annual Report on Form 10-K, for
additional information regarding our stock repurchase program.
Item 6.
Selected Financial Data
The following selected financial data should be read together with our audited consolidated financial
statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” which are included elsewhere in this Annual Report on Form 10-K. Our historical results are
not necessarily indicative of results to be expected for any future period.
The statements of income data for each of the years ended December 31, 2018, 2017 and 2016, the balance
sheet data as of December 31, 2018 and 2017, and the operating data relating to Adjusted EBITDA and non-GAAP
income per diluted share for each of the years ended December 31, 2018, 2017, and 2016 have been derived from
our audited consolidated financial statements, which are included in this Annual Report on Form 10-K.
The statements of income data for the years ended December 31, 2015, and 2014, the balance sheet data as of
December 31, 2016, 2015 and 2014, and the operating data relating to Adjusted EBITDA and non-GAAP income
per diluted share for each of the years ended December 31, 2015 and 2014 have been derived from our audited
consolidated financial statements which are not included in this Annual Report on Form 10-K, but which have been
included in prior Annual Reports on Form 10-K filed with the SEC. These statements do not reflect our adoption of
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and
Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40).
Adjusted EBITDA and non-GAAP income per diluted share 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 of America (“GAAP”).
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 these non-GAAP financial measures to the comparable GAAP financial measures that are
included below.
31
The operating data relating to recurring revenue customers for all periods presented is unaudited and has been
derived from our internal records of our operations.
2018
Year Ended December 31,
2015
2016
2017
(In thousands, except per share data)
2014
Statements of Income Data
Revenues
Cost of revenues (1)
Gross profit
Operating expenses
Sales and marketing (1)
Research and development (1)
General and administrative (1)
Amortization of intangible assets
Total operating expenses
Income from operations
Other income (expense)
Interest income, net
Other income (expense), net
Total other income (expense), net
Income before income taxes
Income tax expense
Net income
Net income per share
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
Balance Sheet Data
Cash and cash equivalents
Working capital
Total assets
Long-term liabilities
Total stockholders' equity
$ 248,240 $ 220,085 $ 193,153 $ 158,518 $ 127,947
39,991
87,956
50,043
166,492 146,460 128,807 108,475
81,748 $ 73,625 $ 64,346
71,719
22,087
41,862
4,093
71,261
23,183
37,461
4,574
55,374
17,954
24,817
3,307
139,761 136,479 122,422 101,452
7,023
66,876
21,981
28,827
4,738
26,731
6,385
9,981
2,329
(720)
1,609
28,340
4,468
$ 23,872 $
1,032
(320)
712
10,693
10,342
351 $
601
732
1,333
7,718
2,755
4,963 $
197
(145)
52
7,075
2,436
4,639 $
46,990
13,494
20,233
2,856
83,573
4,383
187
(458)
(271)
4,112
1,408
2,704
$
$
1.39 $
1.36 $
0.02 $
0.02 $
0.29 $
0.29 $
0.28 $
0.27 $
0.17
0.16
17,196
17,606
17,183
17,356
16,947
17,241
16,565
17,032
16,236
16,814
2018
2017
As of December 31,
2016
(In thousands)
2015
2014
$ 133,859 $ 123,127 $ 115,877 $ 121,538 $ 130,795
193,093 180,386 156,359 142,552 137,634
386,123 339,738 300,080 261,731 243,775
14,124
318,974 288,111 257,767 222,185 205,091
15,312
10,627
8,721
7,682
Operating Data
Adjusted EBITDA (2)
Non-GAAP income per diluted share with tax
adjustments (3)
Recurring revenue customers (4)
________________
(1)
2018
Year Ended December 31,
2016
(Unaudited, adjusted EBITDA in thousands)
2017
2015
2014
$ 51,301 $ 34,170 $ 25,370 $ 22,620 $
18,160
$
1.93 $
1.02 $
0.68 $
0.63 $
0.48
29,308
25,751
24,805
23,410
21,983
See stock-based compensation disclosures in Note L, expense was as follows (in thousands):
32
2018
Year Ended December 31,
2016
2015
2017
Cost of revenues
Sales and marketing
Research and development
General and administrative
Total
$
2,168 $
2,675
1,505
6,162
1,887 $
2,197
949
7,694
$ 12,510 $ 12,727 $
1,309 $
2,412
618
3,684
8,023 $
989 $
1,978
640
2,772
6,379 $
2014
614
1,933
444
2,405
5,396
(2)
Adjusted EBITDA 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. In 2017, the discrete impact from tax law change
included $6.8 million of tax expense related to The Tax Cuts and Jobs Act (“Tax Act”) reduction in the
corporate tax rate to 21.0% resulting in a decrease in our net deferred tax assets. Other adjustments included
the impact of the fair value adjustment for the EDIAdmin earn-out liability in 2018, the fair value adjustment
for the Toolbox Solutions share-based earn-out liability in 2016, a one-time Australian stamp duty tax related
to the Leadtec acquisition in 2014, as well as the impact of use tax refunds in 2015, and 2014 related to items
previously expensed. We use Adjusted EBITDA as a measure of operating performance because it assists us
in comparing performance on a consistent basis, as it removes the impact of our capital structure from our
operating results. 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. The following table provides a reconciliation of net
income to Adjusted EBITDA (in thousands):
2018
Year Ended December 31,
2016
2015
2017
Net income
Depreciation and amortization
Interest income, net
Income tax expense
Discrete impact from tax law change
Stock-based compensation expense
Other
Adjusted EBITDA
$ 23,872 $
12,686
(2,329)
4,468
—
12,510
94
4,639 $
9,572
(197)
2,436
—
6,379
(209)
$ 51,301 $ 34,170 $ 25,370 $ 22,620 $
4,963 $
11,336
(601)
2,755
—
8,023
(1,106)
351 $
11,782
(1,032)
3,544
6,798
12,727
—
2014
2,704
8,570
(187)
1,408
—
5,396
269
18,160
(3)
Non-GAAP income per share 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 in 2018 and the fair value adjustment for the Toolbox Solutions share-based earn-
out liability in 2016.
Pursuant to a Compliance and Disclosure Interpretation published by the U.S. SEC in May 2016, related to the
use of non-GAAP financial measures, in 2017, we began including an adjustment to non-GAAP income to
reflect the income tax effects of the adjustments to GAAP net income (loss). To quantify the tax effects, we
recalculate income tax expense excluding the direct book and tax effects of the specific items constituting the
non-GAAP adjustments. The difference between this recalculated income tax expense and GAAP income tax
expense is presented as the income tax effect of the non-GAAP adjustments.
33
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 to non-GAAP
income per share (in thousands, except per share amounts):
Net income
Stock-based compensation expense
Amortization of intangible assets
Discrete impact from tax law change
Other
Non-GAAP income as historically reported
Income tax effects of adjustments
Non-GAAP income with tax adjustments
Shares used to compute non-GAAP income per
share
Basic
Diluted
Non-GAAP income per share with tax adjustments
$
$
Basic
Diluted
Non-GAAP income per share as historically
reported
Basic
Diluted
2018
Year Ended December 31,
2016
2015
2017
351 $
12,727
4,574
6,798
—
$ 23,872 $
12,510
4,093
—
94
N/A
(6,594)
4,639 $
6,379
3,307
—
—
N/A $ 16,618 $ 14,325 $
(3,566)
$ 33,975 $ 17,675 $ 11,748 $ 10,759 $
4,963 $
8,023
4,738
—
(1,106)
(4,870)
(6,775)
2014
2,704
5,396
2,856
—
—
10,956
(2,891)
8,065
17,196
17,606
17,183
17,356
16,947
17,241
16,565
17,032
16,236
16,814
1.98 $
1.93 $
1.03 $
1.02 $
0.69 $
0.68 $
0.65 $
0.63 $
0.50
0.48
N/A
N/A
N/A $
N/A $
0.98 $
0.96 $
0.86 $
0.84 $
0.67
0.65
(4)
This reflects the number of recurring revenue customers at the end of the period. Recurring revenue
customers are customers with monthly to annual contracts to pay for recurring monthly services. A small
portion of our recurring revenue customers consists of separate units within a larger organization. We treat
each of these units, which may include divisions, departments, affiliates and franchises, as distinct customers.
Our contracts with our recurring revenue customers typically allow the customer to cancel the contract for any
reason with 30 to 90 days’ notice.
34
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read
together with the section titled “Selected Financial Data” and our audited financial statements and related notes
which are included elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially from
those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including,
but not limited to, those discussed in “Risk Factors” included elsewhere in this Annual Report on Form 10-K.
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 years ended December 31, 2018, 2017 and 2016, we generated revenues of $248.2 million, $220.1
million and $193.2 million, respectively. Our fiscal quarter ended December 31, 2018 represented our 72nd
consecutive quarter of increased revenues. Recurring revenues from recurring revenue customers accounted for
93%, 93% and 92% of our total revenues for the years ended December 31, 2018, 2017 and 2016, respectively. Our
revenues are not concentrated with any customer, as our largest customer represented less than 1% of total revenues
for the year ended December 31, 2018 and 2017 and less than 2% of total revenues for the year ended December 31,
2016.
Key Financial Terms and Metrics
Sources of Revenues
Trading Partner Community. Our Community solution provides communication programs based on our best
practices. These programs enable organizations, from large and small retailers and suppliers to emerging providers
of value-added products and services, to establish trading partner relationships with new trading partners to expand
their businesses.
Trading Partner Fulfillment. Our Fulfillment solution provides fulfillment automation and replaces or
augments an organization’s existing trading partner electronic communication infrastructure, enabling suppliers to
have visibility into the journey of an order and comply with retailers’ rule books and enabling the electronic
exchange of information among numerous trading partners through various protocols.
Trading Partner Assortment. Today’s retail marketplace requires the management of numerous individual
attributes associated with each item a retailer or supplier sells today. This information can include digital
images/video, customer facing descriptions and measurements, and warehouse information. Our Assortment
product provides robust, extensible management of this information, enabling accurate orders and rapid fulfillment.
Trading Partner Analytics. Our Analytics solution consists of data analytics applications that enable our
customers to improve their visibility across, and analysis of, their supply chains. When focused on point-of-sale
data, for example, retailers and suppliers can ensure inventory is located where demand is highest. Retailers
improve their visibility into supplier performance and their understanding of product sell-through.
Trading Partner Sourcing. Through Retail Universe, our social network for the retail industry, retailers can
source providers of new items, suppliers can connect with new retailers and the broader retailing community can
make connections to expand their business networks and grow.
Other Trading Partner Solutions. We provide a number of peripheral solutions such as barcode labeling,
planogram services and our scan and pack application, which helps trading partners process information to
streamline the picking and packaging process.
35
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues consist primarily of personnel costs for our customer success and
implementation teams, customer support personnel and application support personnel. Cost of revenues also
includes our cost of network services, which is primarily data center costs for the locations where we keep the
equipment that serves our customers and connectivity costs that facilitate electronic data transmission between our
customers and their trading partners.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of personnel costs for our
sales, marketing and product management teams, commissions earned by our sales personnel and marketing costs.
Research and Development Expenses. Research and development expenses consist primarily of personnel
costs for development of new and maintenance of existing solutions, net of amounts capitalized as developed
software. Our research and development group is also responsible for enhancing existing solutions and applications,
internal tools, and developing new information maps that integrate our customers to their trading partners in
compliance with those trading partners’ requirements.
General and Administrative Expenses. General and administrative expenses consist primarily of personnel
costs for finance, human resources and internal information technology support, as well as legal, accounting and
other fees, such as credit card processing fees.
Overhead Allocation. We allocate overhead expenses such as rent, certain employee benefit costs, office
supplies and depreciation of general office assets to cost of revenues and operating expenses categories based on
headcount.
Other Metrics
Recurring Revenue Customers. As of December 31, 2018, we had approximately 29,000 customers with
contracts to pay us monthly fees, which we refer to as recurring revenue customers. We report recurring revenue
customers as of the end of a period. A small portion of our recurring revenue customers consist of separate units
within a larger organization. We treat each of these units, which may include divisions, departments, affiliates and
franchises, as distinct customers.
Average Recurring Revenues Per Recurring Revenue Customer. We calculate average recurring revenues per
recurring revenue customer, which we also refer to as wallet share, by dividing the recurring revenues from
recurring revenue customers for the period by the average of the beginning and ending number of recurring revenue
customers for the period. For interim periods, we annualize this number by multiplying the quotient calculated
above by the quotient of 12 divided by the number of months in the period. We anticipate that average recurring
revenues per recurring revenue customer will continue to increase as we increase the number of solutions we offer
and increase the penetration of those solutions across our customer base.
Non-GAAP Financial Measures. 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 GAAP. 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.”
36
Critical Accounting Policies and Estimates
The discussion of our financial condition and results of operations is based upon our financial statements,
which are prepared in accordance with GAAP. 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.
We believe that our significant accounting policies, which are described in the notes to our financial
statements, involve a greater degree of judgment and complexity and are material to our financial statement
presentation. 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, these are the policies we believe are the
most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
Revenues are recognized when our services are made available to our customers, in an amount that reflects the
consideration we are contractually and legally entitled to in exchange for those services. Our set-up fees from
customers are one-time revenues that are specific for each connection a customer has with a trading partner and
many of our customers have connections with numerous trading partners. Set-up fees related to our cloud-based
supply chain management solutions are nonrefundable upfront fees that are necessary for our customers to utilize
our cloud-based services. These set-up fees do not provide any standalone value to our customers.
Except for our Analytics solution, we have determined that the set-up fees represent a material renewal option
right to our customers as they will not be incurred again upon renewal. These set-up fees and related costs are
deferred and recognized ratably over two years, which is the estimated period for which a material right is present
for our customers.
For our Analytics solution, we have determined that the set-up fees do not represent a material customer
renewal right and, as such, are deferred and recognized ratably over the estimated initial contract term, which is one
year.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and
intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration
over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require
management to make significant estimates and assumptions, especially with respect to intangible assets.
Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash
flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives,
and discount rates. Significant estimates in valuing liabilities for contingent consideration include, but are not
limited to, discount rates, projected financial results of the acquired businesses based on our most recent internal
forecasts, and factors indicating the probability of achieving the forecasted results.
Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are
inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the
measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the
assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the
measurement period, any subsequent adjustments are recorded to earnings.
37
Results of Operations
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table presents our results of operations for the periods indicated (dollars in thousands):
Year Ended December 31,
2018
2017
Change
Revenues
Cost of revenues
Gross profit
Operating expenses
Sales and marketing
Research and development
General and administrative
Amortization of intangible assets
Total operating expenses
Income from operations
Other income (expense)
Interest income, net
Other expense, net
Total other income, net
Income before income taxes
Income tax expense
Net income
% of revenu
e
100.0% $220,085
73,625
32.9
146,460
67.1
% of revenu
e
100.0% $ 28,155
33.5
8,123
20,032
66.5
$248,240
81,748
166,492
%
12.8%
11.0
13.7
71,719
22,087
41,862
4,093
139,761
26,731
2,329
(720)
1,609
28,340
4,468
$ 23,872
28.9
8.9
16.9
1.6
56.3
10.8
71,261
23,183
37,461
4,574
136,479
9,981
0.9
(0.3)
0.6
11.4
1.8
9.6% $
1,032
(320)
712
10,693
10,342
351
32.4
10.5
17.0
2.1
62.0
4.5
458
(1,096)
4,401
(481)
3,282
16,750
0.6
(4.7)
11.7
(10.5)
2.4
167.8
125.7
1,297
0.5
(125.0)
(400)
(0.1)
126.0
897
0.3
165.0
17,647
4.9
4.7
(56.8)
(5,874)
0.2% $ 23,521 6,701.1%
Revenues. The increase in revenues resulted from two primary factors: the increase in recurring revenue
customers, which is driven by continued business growth and by business acquisitions, and the increase in average
recurring revenues per recurring revenue customer, which we also refer to as wallet share.
•
•
The number of recurring revenue customers increased 14% to 29,308 at December 31, 2018 from
25,751 at December 31, 2017.
Wallet share increased 4% to $8,378 at December 31, 2018 from $8,067 at December 31, 2017. This
was primarily attributable to increased usage of our solutions by our recurring revenue customers.
Recurring revenues from recurring revenue customers increased 13% in 2018, as compared to 2017 and
accounted for 93% of our total revenues for 2018 and 2017. 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 was primarily due to a $6.6 million increase in personnel-
related costs, driven by increased salaries and benefits due to business growth and by increased contract labor.
Additionally, computer depreciation expense increased $1.4 million due to continued investment in the
infrastructure supporting our platform.
Sales and Marketing Expenses. The slight increase in sales and marketing was primarily due to an increase of
$2.0 million from commissions offset by a net $1.8 million decrease in personnel-related costs and stock-based
compensation. The increase in commissions was a result of new business and increased referral partnerships. The
decrease in personnel-related costs was driven by decreased headcount which was partially offset by increased
salaries, benefits, and stock-based compensation expense.
Research and Development Expenses. The decrease in research and development expenses was primarily due
to a $4.3 million decrease in personnel-related costs related to an increase in internally developed capitalized
software, driven by our continued investment in our technology. The decrease was offset by a $3.0 million increase
from other personnel-related expenses, driven by continued business growth which led to increased headcount and
increases to expenses for consulting, salaries, benefits, and stock-based compensation.
38
General and Administrative Expenses. The increase in general and administrative expenses was primarily due
to continued business growth which drove a $2.8 million increase in personnel-related costs (headcount, salaries and
benefits) and a $2.2 million increase in software subscriptions, credit card fees, and bad debt expense. Additionally,
charitable contributions increased $0.5 million and acquisition-related costs increased $0.3 million, due to the
acquisitions of EDIAdmin and CovalentWorks. These increases were offset by a $1.5 million decrease in stock-
based compensation expenses, which normalized compared to the prior year increase which was driven by a
modification to our Chief Executive Officer’s employment agreement resulting in immediate vesting, and
expensing, of his outstanding stock-based compensation awards based on his retirement eligibility.
Amortization of Intangible Assets. The decrease in amortization of intangible assets was driven by certain
intangible assets being fully amortized in 2018, reducing the amortization expense in the current year, and was offset
by a slight increase due to amortization of acquired intangible assets.
Other Income, net. The increase in other income was primarily due to a $1.0 million increase in investment
income, driven by an increase in the average amount invested throughout 2018 compared to 2017, offset by a $0.1
million decrease in income, net, due to the fair value earn-out adjustment in 2018 related to the EDIAdmin
acquisition.
Income Tax Expense. Our provisions for income taxes for 2018 and 2017 were $4.5 million and $10.3
million, respectively. The decrease in income tax expense was primarily due to a reduction in the corporate tax rate
enacted in the Tax Act, and an increase in our federal research and development credit, partially offset by the
increase in pre-tax net income. Further, the 2017 provision included a one-time discrete tax expense of $6.8 million
from the Tax Act. Finally, the discrete tax benefit from stock-based compensation was $2.5 million in 2018 as
compared to $0.9 million in 2017. See Note M to our consolidated financial statements, included in this Annual
Report on Form 10-K, for additional information regarding our income taxes.
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 an earn-out adjustment related to the EDIAdmin acquisition
in 2018. The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):
Net income
Depreciation and amortization
Interest income, net
Income tax expense
Discrete impact from tax law change
Stock-based compensation expense
Other
Adjusted EBITDA
Year Ended December 31,
2017
2018
$
$
23,872 $
12,686
(2,329)
4,468
—
12,510
94
51,301 $
351
11,782
(1,032)
3,544
6,798
12,727
—
34,170
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 share-based earn-out liability in
2018.
Pursuant to a Compliance and Disclosure Interpretation published by the U.S. Securities and Exchange
Commission in May 2016, related to the use of non-GAAP financial measures, in 2017, we began including an
adjustment to non-GAAP income to reflect the income tax effects of the adjustments to GAAP net income. To
quantify the tax effects, we recalculated income tax expense excluding the direct book and tax effects of the specific
items constituting the non-GAAP adjustments. The difference between this recalculated income tax expense and
GAAP income tax expense is presented as the income tax effect of the non-GAAP adjustments.
39
The following table provides a reconciliation of net income to non-GAAP income per share (in thousands,
except per share amounts):
Net income
Stock-based compensation expense
Amortization of intangible assets
Discrete impact from tax law change
Other
Income tax effects of adjustments
Non-GAAP income
Shares used to compute non-GAAP income per share
Basic
Diluted
Non-GAAP income per share
Basic
Diluted
Year Ended December 31,
2017
2018
23,872 $
12,510
4,093
—
94
(6,594)
33,975 $
17,196
17,606
1.98 $
1.93 $
351
12,727
4,574
6,798
—
(6,775)
17,675
17,183
17,356
1.03
1.02
$
$
$
$
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following table presents our results of operations for the periods indicated (dollars in thousands):
Year Ended December 31,
2017
2016
Change
% of revenu
e
100.0% $193,153
64,346
33.5
128,807
66.5
% of revenu
e
100.0% $ 26,932
33.3
9,279
17,653
66.7
$220,085
73,625
146,460
%
Revenues
Cost of revenues
Gross profit
Operating expenses
Sales and marketing
Research and development
General and administrative
Amortization of intangible assets
Total operating expenses
Income from operations
Other income (expense)
Interest income, net
Other income (expense)
Total other income, net
Income before income taxes
Income tax expense
Net income
71,261
23,183
37,461
4,574
136,479
9,981
1,032
(320)
712
10,693
10,342
351
$
32.4
10.5
17.0
2.1
62.0
4.5
66,876
21,981
28,827
4,738
122,422
6,385
0.5
(0.1)
0.3
4.9
4.7
0.2% $
601
732
1,333
7,718
2,755
4,963
13.9%
14%
14%
7%
5%
30%
-3%
11%
56%
34.6
11.4
14.9
2.5
63.4
3.3
4,385
1,202
8,634
(164)
14,057
3,596
431
0.3
(1,052)
0.4
(621)
0.7
2,975
4.0
7,587
1.4
2.6% $ (4,612)
72%
-144%
-47%
39%
275%
(92.9)%
Revenues. The increase in revenues resulted from two primary factors: the increase in recurring revenue
customers and the increase in average recurring revenues per recurring revenue customer, which we also refer to as
wallet share.
•
•
The number of recurring revenue customers increased 4% to 25,751 at December 31, 2017 from 24,805
at December 31, 2016.
Wallet share increased 10% to $8,067 for 2017 from $7,344 for 2016. This increase in wallet share was
primarily attributable to increased fees resulting from increased usage of our solutions by our recurring
revenue customers.
40
Recurring revenues from recurring revenue customers increased 15% in 2017, as compared to 2016, and
accounted for 93% of our total revenues for 2017 and 92% for 2016.
Cost of Revenues. The increase in cost of revenue was primarily due to increased personnel-related costs of
approximately $7.3 million, driven by increased headcount. Compared to 2016, stock-based compensation expense
increased $0.6 million and direct network costs decreased $0.2 million. We also incurred higher expense for
software and cloud-based subscriptions of $0.9 million and depreciation expense of $0.7 million for continued
investment in the infrastructure supporting our solutions.
Sales and Marketing Expenses. The increase in sales and marketing expense was primarily due to increased
headcount in 2017, which resulted in higher personnel-related costs of $3.0 million and increased commissions of
approximately $1.4 million earned by sales personnel and referral partners from generating new business. We also
incurred $0.4 million in increased promotional expenses, $0.2 million in software and cloud-based subscriptions,
offset by lower expense of $0.3 for depreciation and $0.2 million in stock-based compensation expense as compared
to 2016.
Research and Development Expenses. The increase in research and development expenses was primarily due
to higher expenses for software and cloud-based subscriptions of $0.7 million, higher personnel-related costs of $0.2
million and higher stock-based compensation of $0.3 million in 2017 compared to 2016.
General and Administrative Expenses. The increase in general and administrative expenses was primarily due
to a $4.0 million increase in stock-based compensation driven by the immediate expensing of $3.6 million of equity
awards due to a modification to our Chief Executive Officer’s employment agreement in 2017 which resulted in
immediate vesting, and expensing, of his outstanding stock-based compensation awards based on his retirement
eligibility. Increased headcount in 2017 resulted in higher personnel-related costs of $3.3 million. These increases
were offset by lower charitable contributions, hardware not capitalized, and hardware maintenance costs in 2017 as
compared to 2016.
Amortization of Intangible Assets. The decrease in amortization of intangible assets was due to certain
intangible assets becoming fully amortized during 2017.
Other Income (Expense), net. Other income (expense), net for 2016 included a $1.0 million adjustment to the
fair value of the Toolbox Solutions share-based earn-out liability due to a change in our estimate of probability of
attainment. There was no similar charge during 2017 as the contingent consideration arrangement had been resolved.
Income Tax Expense. Our provisions for income taxes for 2017 and 2016 were $10.3 million and $2.8
million, respectively. The provision in 2017 included $6.8 million in income tax expense primarily driven by the
reduction in the corporate income tax rate to 21% offset by $0.9 million of discrete tax benefits from the adoption of
ASU 2016-09 relating to stock-based compensation. See Note M to our consolidated financial statements, included
in this Annual Report on Form 10-K, for additional information regarding our income taxes.
Adjusted EBITDA. Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of
net income plus depreciation and amortization, interest expense, interest income, income tax expense, stock-based
compensation expense and other adjustments as necessary for a fair presentation. Other adjustments included the
impact of an earn-out adjustment related to the Toolbox acquisition in 2016. The following table provides a
reconciliation of net income to Adjusted EBITDA (in thousands):
Net income
Depreciation and amortization
Interest income, net
Income tax expense
Stock-based compensation expense
Other
Adjusted EBITDA
Year Ended December 31,
2016
2017
$
$
351 $
11,782
(1,032)
10,342
12,727
—
34,170 $
4,963
11,336
(601)
2,755
8,023
(1,106)
25,370
41
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 and amortization expense related to
intangible assets, the discrete impact from tax law change and other adjustments 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 Toolbox Solutions share-based earn-out liability
in 2016.
Pursuant to a Compliance and Disclosure Interpretation published by the U.S. Securities and Exchange
Commission in May 2016, related to the use of non-GAAP financial measures, in 2017, we began including an
adjustment to non-GAAP income to reflect the income tax effects of the adjustments to GAAP net income. To
quantify the tax effects, we recalculated income tax expense excluding the direct book and tax effects of the specific
items constituting the non-GAAP adjustments. The difference between this recalculated income tax expense and
GAAP income tax expense is presented as the income tax effect of the non-GAAP adjustments.
The following table provides a reconciliation of net income to non-GAAP income per share (in thousands,
except per share amounts):
Net income
Stock-based compensation expense
Amortization of intangible assets
Discrete impact from tax law change
Other
Non-GAAP income as historically reported
Income tax effects of adjustments
Non-GAAP income with tax adjustments
Shares used to compute non-GAAP income per share
Basic
Diluted
Non-GAAP income per share with tax adjustments
Basic
Diluted
Non-GAAP income per share as historically reported
Basic
Diluted
Liquidity and Capital Resources
$
$
$
$
Year Ended December 31,
2016
2017
351 $
12,727
4,574
6,798
—
N/A $
(6,775)
17,675 $
17,183
17,356
1.03 $
1.02 $
N/A $
N/A $
4,963
8,023
4,738
—
(1,106)
16,618
(4,870)
11,748
16,947
17,241
0.69
0.68
0.98
0.96
At December 31, 2018, our principal sources of liquidity were cash and cash equivalents, certificates of
deposit and marketable securities totaling $178.4 million and accounts receivable, net of allowance for doubtful
accounts, of $27.5 million compared to cash and cash equivalents and marketable securities totaling $168.5 million
and accounts receivable, net of allowance for doubtful accounts, of $24.9 million at December 31, 2017. 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.
Net Cash Flows from Operating Activities
Cash flows from operating activities was $55.0 million in 2018, compared to $31.1 million in 2017, an
increase of $23.9 million. This is primarily driven by a $23.5 million increase in net income, with the remaining net
increase of $0.4 million relating to increases due to continued business growth offset by a decrease to deferred
income taxes.
42
Net cash provided by operating activities was $31.1 million for 2017 compared to $18.8 million for 2016.
The increase in operating cash flows as compared to 2016 was driven by a $19.1 million increase in non-cash
expenses and a $1.3 million increase in changes in assets and liabilities, primarily due to increases in deferred
revenues, accrued expenses and accounts payable, partially offset by increases in deferred costs and deferred rent.
Cash Flows from Investing Activities
Net cash used in investing activities was $40.5 million for 2018 compared to $22.6 million for 2017. The
increase was primarily due to $27.3 million used for acquisitions of business and intangible assets, driven by the
acquisitions of EDIAdmin and CovalentWorks. Additionally, capital expenditures increased by $6.4 million, due to
our business growth and continued investment in our technology. These increases were offset by a $15.3 million
decrease in cash used compared to 2017, driven by minimal change in investments in 2018 compared to significant
increases in investments in 2017.
Net cash used in investing activities was $22.6 million for 2017 compared to $34.1 million for 2016. The
decrease in cash used was due to the 2016 acquisition of Toolbox Solutions for $18.0 million, partially offset by a
$6.8 million increase in cash used for investments in 2017.
Net Cash Flows from Financing Activities
Net cash used in financing activities for 2018 was $3.8 million compared to $2.5 million in 2017, a $1.3
million increase. This increase is due to a $14 million increase in cash used for repurchases of common stock and
offset by a $12.9 million increase in cash provided by proceeds from the exercise of options to purchase common
stock, driven by the significant increase in the company’s stock price which increased option exercises.
Net cash provided by financing activities was $2.5 million for 2017, which consisted of $5.8 million of
repurchases of our common stock, partially offset by $1.4 million and $1.9 million of proceeds from the exercise of
stock options and the net proceeds from our employee stock purchase plan.
Effect of Foreign Currency Exchange Rate Changes
Our results of operations and cash flows were not materially affected by fluctuation in foreign currency
exchange rates. We maintained 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 U.S. 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 personnel, and we anticipate that our expenditures will continue to increase as we expand our business.
We believe our cash, cash equivalents, marketable securities 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.
During the last three years, inflation and changing prices have not had a material effect on our business and
we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
43
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 December 31, 2018 are summarized below:
Payments Due By Period (in thousands)
Contractual Obligations
Operating lease obligations
Less Than
1 Year
Total
1-3 Years 3-5 Years
More Than
5 Years
$ 24,878 $
4,209 $
7,956 $
7,896 $
4,817
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from
Contracts with Customers (Topic 606) and Other Assets and Deferred Costs – Contracts with Customers (Subtopic
340-40), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. This guidance replaced most existing revenue
recognition guidance in GAAP. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs –
Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer.
Collectively, we refer to Topic 606 and Subtopic 340-40 as the “new standard”. These requirements are effective for
annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods.
We adopted the new standard effective January 1, 2018, on a retrospective basis. The new standard did not
impact our recognition of the recurring revenue received from customers for our cloud-based supply chain solutions;
however, the adoption of the new standard impacted our accounting for certain upfront set-up fees, the periods over
which the related revenues are recognized and the timing of revenue recognition for these set-up fees. The adoption
of the new standard also impacted our accounting for certain costs to obtain our contracts, specifically related to the
periods over which commissions are recognized. Additional information regarding the adoption of this standard is
contained in Note A and Note C.
In January 2018, we adopted FASB ASU 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as business acquisitions or as an asset
acquisition. The new standard specifies the required inputs and processes that are necessary to be a business. The
adoption of this standard impacted our accounting for business combinations. See Note B for additional information
regarding business combinations.
In March 2018, we adopted FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC
Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates the income tax accounting in U.S.
GAAP to reflect the SEC interpretive guidance released on December 22, 2017, when the Tax Act was signed into
law. Additional information regarding the adoption of this standard is contained in Note M.
In October 2018, we early adopted FASB ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use
Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs
incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation
costs incurred to develop or obtain internal-use software. The standard is effective for interim and annual reporting
periods beginning after December 15, 2019 and can be applied either prospectively to implementation costs incurred
after the date of adoption or retrospectively to all arrangements, with early adoption permitted. Additional
information regarding the adoption of this standard is contained in Note I.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede existing lease guidance and
will require all leases with a term greater than 12 months to be recognized in the statements of financial position and
eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for
distinguishing between finance leases and operating leases. This standard is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.
44
We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application.
Consequently, financial information will not be updated and the disclosures required under the new standard will not
be provided for dates and periods before January 1, 2019.
The new standard provides several optional practical expedients in transition. For the fiscal period beginning
January 1, 2019, we have made the following elections. We elected the “package of practical expedients,” which
permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification
and initial direct costs. We did not elect the use-of hindsight or the practical expedient pertaining to land easements;
the latter not being applicable to us. The new standard also provided practical expedients for an entity’s ongoing
accounting. We elected the short-term lease recognition exemption for all leases that qualify, which means we have
not recognized right-of-use (“ROU”) assets or lease liabilities for these leases, and this included not recognizing
ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the
practical expedient to not separate lease and non-lease components for all leases.
This standard has a material effect on our financial statements beginning January 1, 2019. The most
significant effects relate to the recognition of approximately $15.0 million in ROU assets and $15.0 million
additional lease liabilities on our balance sheet for our existing operating leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326),
Measurement of Credit Losses on Financial Instruments. The amendment in this update replaces the incurred loss
impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments
within its scope, including trade receivables. This update is intended to provide financial statement users with more
decision-useful information about the expected credit losses. This ASU is effective for annual periods and interim
periods for those annual periods beginning after December 15, 2019. Entities may early adopt beginning after
December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated
financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income
(Topic 220), which allows a reclassification from accumulated other comprehensive income to retained earnings for
stranded tax effects resulting from the Tax Act and requires certain disclosures regarding stranded tax effects in
accumulated other comprehensive income. This guidance is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018, with early adoption permitted during interim or annual
periods. We believe the adoption of this standard will not have a material impact on our consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 December 31, 2018 and 2017. We therefore 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 December 31, 2018,
we maintained 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. 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.
45
Item 8.
Financial Statements and Supplementary Data
SPS Commerce, Inc. and Subsidiaries Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
47
49
50
51
52
53
46
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
SPS Commerce, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of SPS Commerce, Inc. and subsidiaries (the
Company) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the
related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal
control over financial reporting as of December 31, 2018, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note A to the financial statements, the Company has changed its method of accounting for revenue
on January 1, 2018 due to the full retrospective adoption of FASB Accounting Standards Update No. 2014-09
(Topic 606), Revenue from Contracts with Customers.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the
Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting
was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
47
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
SPS Commerce, Inc. acquired the net assets of EDIAdmin and the net assets of CovalentWorks during the fourth
quarter of 2018, and management excluded from its assessment of the effectiveness of internal control over financial
reporting as of December 31, 2018, EDIAdmin’s and CovalentWorks’ internal control over financial reporting
associated with approximately two and six percent of total assets, respectively, and each represents less than one
percent of total revenues, in the consolidated financial statements of SPS Commerce, Inc. as of and for the year
ended December 31, 2018. Our audit of internal control over financial reporting of SPS Commerce, Inc. also
excluded an evaluation of the internal control over financial reporting of EDIAdmin and CovalentWorks.
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.
Minneapolis, Minnesota
February 22, 2019
48
SPS COMMERCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
ASSETS
December 31,
2018
2017
CURRENT ASSETS
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Deferred costs
Other current assets
Total current assets
PROPERTY AND EQUIPMENT, net
GOODWILL
INTANGIBLE ASSETS, net
INVESTMENTS
OTHER ASSETS
Deferred costs
Deferred income tax asset
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Accrued compensation
Accrued expenses
Deferred revenue
Deferred rent
Total current liabilities
OTHER LIABILITIES
Deferred revenue
Deferred rent
Deferred income tax liability
Other non-current liabilities
Total liabilities
COMMITMENTS and CONTINGENCIES
STOCKHOLDERS’ EQUITY
$
$
$
133,859 $
44,537
27,488
34,502
9,229
249,615
20,957
69,658
22,741
—
10,973
10,456
1,723
386,123 $
4,440 $
20,415
4,558
25,328
1,781
56,522
2,512
5,371
1,376
1,368
67,149
123,127
40,192
24,897
29,966
6,149
224,331
16,856
51,613
16,529
5,206
9,967
13,697
1,539
339,738
4,463
15,228
4,712
17,863
1,679
43,945
2,731
3,064
1,887
—
51,627
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and
outstanding
Common stock, $0.001 par value; 55,000,000 shares authorized; 17,757,628 and
17,249,153 shares issued; and 17,345,736 and 17,127,006 outstanding,
respectively
Treasury stock, at cost; 411,892 and 122,147 shares, respectively
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive (loss) income
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
—
—
18
(25,679)
332,592
15,261
(3,218)
318,974
386,123 $
17
(5,815)
301,863
(8,611)
657
288,111
339,738
See accompanying notes to these consolidated financial statements.
49
SPS COMMERCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share amounts)
Revenues
Cost of revenues
Gross profit
Operating expenses
Sales and marketing
Research and development
General and administrative
Amortization of intangible assets
Total operating expenses
Income from operations
Other income (expense)
Interest income, net
Other income (expense), net
Total other income, net
Income before income taxes
Income tax expense
Net income
Net income per share
Basic
Diluted
$
Year Ended December 31,
2017
220,085 $
73,625
146,460
2018
248,240 $
81,748
166,492
71,719
22,087
41,862
4,093
139,761
26,731
2,329
(720)
1,609
28,340
4,468
23,872 $
71,261
23,183
37,461
4,574
136,479
9,981
1,032
(320)
712
10,693
10,342
351 $
1.39 $
1.36 $
0.02 $
0.02 $
$
$
$
2016
193,153
64,346
128,807
66,876
21,981
28,827
4,738
122,422
6,385
601
732
1,333
7,718
2,755
4,963
0.29
0.29
Weighted average common shares used to compute net income per
share
Basic
Diluted
Other comprehensive income
Foreign currency translation adjustments
Unrealized gain (loss) on investments, net of tax of $132, $0
and ($5)
Reclassification of unrealized (gain) loss on investments into
earnings, net of tax of ($91), $24 and $0
Comprehensive income
17,196
17,606
17,183
17,356
16,947
17,241
(3,999)
3,944
397
-
336
(9)
(273)
19,997 $
39
4,334 $
-
5,290
$
See accompanying notes to these consolidated financial statements.
50
SPS COMMERCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
Balances, December 31, 2015
Stock-based compensation
Exercise of stock options and
issuance of restricted stock
Excess tax benefit of stock options
exercised
Employee stock purchase plan
Stock issued for acquisition
Net income
Foreign currency translation
adjustments
Reclassification of loss on
investments into earnings
Unrealized loss on investments
Balances, December 31, 2016
Stock-based compensation
Exercise of stock options and
issuance of restricted stock
Cumulative-effect adjustment for
previously unrecognized excess tax
benefits
Employee stock purchase plan
Retirement of escrow shares
Repurchases of common stock
Net income
Foreign currency translation
adjustments
Reclassification of loss on
investments into earnings
Balances, December 31, 2017
Stock-based compensation
Exercise of stock options and
issuance of restricted stock
Employee stock purchase plan
Repurchases of common stock
Stock issued for acquisition
Net income
Foreign currency translation
adjustments
Reclassification of gain on
investments into earnings
Unrealized gain on investments, net
of tax
Balances, December 31, 2018
Retained
Additional Earnings
Accumulated
Other
Total
Treasury Stock Paid-in (Accumulated Comprehensive Stockholders'
Common Stock
Shares
16,723,994
—
Amount Shares Amount Capital
—
—
—
—
265,265
8,023
17
—
Deficit)
Income (Loss)
(3,648)
—
(30,202)
—
—
4,303
—
4,070
1,732
2,922
—
—
—
—
4,963
279,841
—
33,357
43,953
—
—
—
—
17,081,145
—
135,906
—
—
—
—
—
—
—
—
17
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
336
336
—
—
286,315
12,728
—
—
(25,239)
—
18
(32)
(3,326)
—
18
(32)
257,767
12,728
—
1,410
—
—
1,410
Equity
231,432
8,023
4,303
4,070
1,732
2,922
4,963
—
—
—
—
—
—
40,968
(8,866)
(122,147)
—
—
—
—
—
—
—
— 122,147
—
—
—
—
—
(5,815)
—
—
1,933
(523)
—
—
16,277
—
—
—
351
—
—
—
—
—
16,277
1,933
(523)
(5,815)
351
—
—
—
—
—
—
3,944
3,944
—
17,127,006
—
—
—
17 122,147
—
—
—
(5,815)
—
—
301,863
11,270
433,199
34,798
(289,745)
40,478
—
—
—
1
—
—
—
— 289,745 (19,864)
—
—
—
—
—
—
14,343
1,745
—
3,371
—
—
—
—
—
—
—
—
—
—
—
—
(8,611)
—
—
—
—
—
23,872
—
—
39
657
—
—
—
—
—
—
39
288,111
11,270
14,344
1,745
(19,864)
3,371
23,872
(3,999)
(3,999)
(273)
(273)
—
17,345,736 $
—
—
18 411,892 $(25,679) $ 332,592 $
—
—
—
15,261 $
397
(3,218) $
397
318,974
See accompanying notes to these consolidated financial statements.
51
SPS COMMERCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net income
Reconciliation of net income to net cash provided by operating
activities
Deferred income taxes
Earn-out liability
Depreciation and amortization of property and equipment
Amortization of intangible assets
Provision for doubtful accounts
Stock-based compensation
Other, net
Changes in assets and liabilities, net of effects of
acquisition
Accounts receivable
Deferred costs
Other current and non-current assets
Accounts payable
Accrued compensation
Accrued expenses
Deferred revenue
Deferred rent
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property and equipment
Purchases of investments
Maturities of investments
Acquisition of business and intangible assets, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Repurchases of common stock
Net proceeds from exercise of options to purchase common
stock
Excess tax benefit from exercise of options to purchase
common stock
Net proceeds from employee stock purchase plan
Net cash (used in) provided by financing activities
Effect of foreign currency exchange rate changes
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information
Cash paid for income taxes, net
Non-cash financing activities:
Net purchases of property and equipment on account
Common stock issued for business acquisitions
Year Ended December 31,
2017
2016
2018
$
23,872 $
351 $
4,963
2,798
94
8,593
4,093
2,592
12,510
(364)
(4,569)
(5,564)
(3,333)
937
3,957
(135)
7,094
2,440
55,015
(13,750)
(81,666)
82,224
(27,273)
(40,465)
9,616
—
7,208
4,574
1,705
12,728
(15)
(5,586)
(7,813)
393
832
1,304
1,192
5,588
(1,027)
31,050
(7,271)
(47,878)
33,029
(500)
(22,620)
(2,083)
(1,103)
6,598
4,738
1,375
8,023
—
(3,735)
(4,085)
(1,911)
(382)
2,291
990
2,852
234
18,765
(8,008)
(23,135)
15,018
(18,032)
(34,157)
(19,864)
(5,815)
—
14,344
1,410
4,303
—
1,745
(3,775)
(43)
10,732
123,127
133,859 $
—
1,933
(2,472)
1,292
7,250
115,877
123,127 $
4,070
1,732
10,105
(374)
(5,661)
121,538
115,877
1,534 $
1,068 $
722
405 $
3,371 $
1,335 $
— $
—
2,922
$
$
$
$
See accompanying notes to these consolidated financial statements.
52
SPS COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – General
Business Description
SPS Commerce is a leading provider of cloud-based supply chain management solutions that make it easier
for retailers, suppliers, distributors, and logistics firms to orchestrate the management of item data, order fulfillment,
inventory control and sales analytics across all channels. Implementing and maintaining a suite of supply chain
management capabilities is resource intensive and is not a core competency for most businesses. 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. The solutions SPS Commerce provides allow our customers to increase their supply cycle
agility, optimize their inventory levels and sell-through, reduce operational costs and gain increased visibility into
customer orders, ensuring that suppliers, distributors, and logistics firms can satisfy exacting retailer requirements.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) and include the accounts of SPS
Commerce, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
Foreign Currency Translation
Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the
exchange rates in effect at the balance sheet date, with the resulting translation adjustments recorded as a separate
component of accumulated other comprehensive loss. Income and expense accounts are translated at the average
exchange rates during the year. Foreign currency transaction gains and losses, if any, are included in net income.
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 recognize the fair value of the assets acquired and the liabilities assumed at the acquisition date, separately
from goodwill. 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 use estimates and assumptions that we believe are
reasonable as a part of the purchase price allocation, which includes the process to determine the value and useful
lives of purchased intangible assets and the process to determine the value of any contingent consideration liabilities.
We recorded the acquisition-date fair value of any contingent liabilities, such as earn-out provisions, as part of the
consideration transferred. The earn-out liability fair value is subsequently remeasured at each reporting date. The
Company evaluates each contingent consideration to determine the valuation approach. See Note B for valuation
methods utilized in the fair value measurement as of the acquisition date and see Note E for valuation methods
utilized in the fair value remeasurement as of the reporting date.
53
While we believe these estimates and assumptions are reasonable, 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. 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 consolidated
statements of comprehensive income.
Segment Information
We operate in and report on one segment, which is supply chain management solutions.
Risk and Uncertainties
We rely on hardware and software licensed from third parties to offer our on-demand solutions. Our
management believes alternate sources are available; however, disruption or termination of these relationships could
adversely affect our operating results in the near term.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and
cash equivalents in financial institutions in excess of federally insured limits and trade accounts receivable. Cash
investments are held with financial institutions that we believe are subject to minimal risk.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with original maturities of less than
90 days. Cash and cash equivalents are stated at fair value.
Investments
Management determines the appropriate classification of certificates of deposit and marketable securities at
the time of purchase and reevaluates such determination at each balance sheet date. Securities are classified as
available for sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as
a separate component on the consolidated statements of comprehensive income. Fair value is determined based on
quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates
and yield curves. When a determination has been made that an other-than-temporary decline in fair value has
occurred, the amount of the decline that is related to a credit loss is realized and is included in other income
(expense), net in the consolidated statements of comprehensive income.
Fair Value of Financial Instruments
The carrying amounts of our financial instruments, which include cash, cash equivalents, accounts receivable,
accounts payable and other accrued expenses, approximates fair value due to their short maturities. Marketable
securities are recorded at fair value as further described in Note E.
Accounts Receivable
Accounts receivable are initially recorded upon the sale of solutions to customers. Credit is granted in the
normal course of business without collateral. Accounts receivable are stated net of allowances for doubtful
accounts, which represent estimated losses resulting from the inability of certain customers to make the required
payments. When determining the allowances for doubtful accounts, we take several factors into consideration
including the overall composition of the accounts receivable aging, our prior history of accounts receivable write-
offs, the type of customers and our experience with specific customers. We write-off accounts receivable when they
are determined to be uncollectible. Changes in the allowances for doubtful accounts are recorded as bad debt
expense and are included in general and administrative expense in our consolidated statements of comprehensive
income.
54
Property and Equipment
Property and equipment, including assets acquired under capital lease obligations, are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives when placed in service, which are:
Computer equipment and software: 2 to 3 years
Office equipment and furniture: 5 to 7 years
Leasehold improvements: the shorter of the useful life of the asset or the remaining term of the lease
Significant additions or improvements extending asset lives beyond one year are capitalized, while repairs and
maintenance are charged to expense as incurred. We also capitalize and amortize eligible costs to acquire or
develop external-use software that are incurred after technological feasibility has been established. The assets and
related accumulated depreciation and amortization are adjusted for asset retirements and disposals with the resulting
gain or loss included in our consolidated statements of comprehensive income.
Research and Development
Research and development costs primarily include maintenance and data conversion activities related to our
cloud-based supply chain management solutions and are expensed as incurred.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in
business combinations. We test goodwill for impairment annually at November 30, 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 the testing date. 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.
Intangible Assets
Assets acquired in business combinations may include identifiable intangible assets such as subscriber
relationships and non-competition agreements. 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 using certain estimates and assumptions that we believe are reasonable.
The purchased intangible assets are being amortized on a straight-line basis over their estimated useful lives,
which are three to ten years for subscriber relationships, two to five years for non-competition agreements and one
to ten years for technology and other.
Internal-use Software Implementation Assets
Internal-use software implementation costs are capitalized assets included in Other Assets and relate to costs
incurred during the application development stage for various internal-use software from hosting arrangements.
Capitalized implementation costs are recognized on a straight-line basis beginning when the application is
ready for its intended use and ending on the expected termination date of the hosting arrangement, including
consideration of the noncancelable contractual term and reasonably certain renewals.
The terms are between four and five years for our current hosting arrangements. Recognized expense is
reported in general and administrative expense, which is where the hosting arrangement subscriptions are reported.
55
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if the
carrying amount of an asset group exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the assets at the date it is tested for recoverability, whether in use or under development.
An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair
value.
Revenue Recognition
Revenues are recognized when our services are made available to our customers, in an amount that reflects the
consideration we are contractually and legally entitled to in exchange for those services.
We determine revenue recognition through the following steps:
-
-
-
-
-
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
See Note C for further descriptions of our revenue recognition policy.
Deferred Costs
Deferred costs consist of costs to obtain customer contracts, such as commissions paid to sales personnel and
to third-party partners for customer referrals, and costs to fulfill customer contracts, such as customer
implementation costs.
Sales commissions relating to recurring revenues are considered incremental and recoverable costs of
obtaining a contract with our customer. These commissions are calculated based on estimated annual recurring
revenue to be generated over the customer’s initial contract year. These costs are deferred and amortized over the
expected period of benefit which we have determined to be two years. Amortization expense is included in sales
and marketing expenses in the accompanying condensed consolidated statements of comprehensive income.
Stock-Based Compensation
We recognize the cost of all share-based payments to employees, including grants of employee stock options,
in the financial statements based on the grant date fair value of those awards. This cost is recognized over the period
for which an employee is required to provide service in exchange for the award.
In valuing share-based awards, judgment is required in determining the expected volatility of common stock
and the expected term individuals will hold their share-based awards prior to exercising. The expected volatility of
the options is based on the historical volatility of our common stock. The expected term of the options is based on
the simplified method which does not consider historical employee exercise behavior. The valuation does not
include a forfeiture estimate as we recognize forfeitures as they occur.
56
Income Taxes
We account for income taxes using the asset and liability method, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in our
judgement, there is a less than a 50% likelihood that the deferred tax asset will be utilized.
We assess our ability to realize our deferred tax assets at the end of each reporting period. Realization of our
deferred tax assets is contingent upon future taxable earnings. Accordingly, this assessment requires estimates and
judgment. If the estimates of future taxable income vary from actual results, our assessment regarding the
realization of these deferred tax assets could change. Future changes in the estimated amount of deferred taxes
expected to be realized will be reflected in our consolidated financial statements in the period the estimate is
changed, with a corresponding adjustment to our operating results.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax
authority would “more likely than not” sustain the position following an audit. For tax positions meeting the “more
likely than not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
Net Income Per Share
Basic net income per share has been computed using the weighted average number of shares of common stock
outstanding during each period. Diluted net income per share also includes the impact of our outstanding potential
common shares, including options, restricted stock units and restricted stock awards. Potential common shares that
are anti-dilutive are excluded from the calculation of diluted net income per share.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and
Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40), which requires an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. This guidance replaced most existing revenue recognition guidance in GAAP. Topic 606
also includes Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers, which requires the
deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to Topic 606 and
Subtopic 340-40 as the “new standard”. These requirements are effective for annual reporting periods beginning
after December 15, 2017, and interim periods within those annual periods.
We adopted the new standard effective January 1, 2018, on a retrospective basis. The new standard did not
impact our recognition of the recurring revenue received from customers for our cloud-based supply chain solutions;
however, the adoption of the new standard impacted our accounting for certain upfront set-up fees, the periods over
which the related revenues are recognized and the timing of revenue recognition for these set-up fees. The adoption
of the new standard also impacted our accounting for certain costs to obtain our contracts, specifically related to the
periods over which commissions are recognized.
57
Selected audited consolidated balance sheet line items, which reflect the adoption of ASU 2014-09 are as
follows (in thousands):
ASSETS
Deferred costs
Deferred costs, non-current
Deferred income tax asset
LIABILITIES
Accrued compensation
Deferred revenue
Deferred revenue, non-current
STOCKHOLDERS’ EQUITY
Accumulated deficit
December 31, 2017
As previously
reported
Adjustments
As adjusted
$
25,091 $
6,770
17,551
15,886
16,407
10,602
$
4,875
3,197
(3,854)
(658)
1,456
(7,871)
29,966
9,967
13,697
15,228
17,863
2,731
(19,902)
11,291
(8,611)
Selected audited consolidated statement of operations line items, which reflect the adoption of ASU 2014-09
are as follows (in thousands):
For the twelve months ended December 31, 2016
Revenues
Operating expenses
Sales and marketing
Income from operations
Income tax expense
Net income
Net income per share
Basic
Diluted
Revenues
Operating expenses
Sales and marketing
Income from operations
Income tax expense
Net income (loss)
Net income (loss) per share
Basic
Diluted
As previously
reported
Adjustments
$
193,295 $
As adjusted
193,153
(142) $
65,886
7,517
3,140
5,710 $
990
(1,132)
(385)
(747) $
66,876
6,385
2,755
4,963
0.34
0.33
(0.05) $
(0.04) $
0.29
0.29
$
$
$
For the twelve months ended December 31, 2017
As previously
reported
Adjustments
$
220,566 $
As adjusted
220,085
(481) $
73,295
8,428
11,580
(2,440) $
(2,034)
1,553
(1,238)
$
2,791
71,261
9,981
10,342
351
(0.14)
(0.14)
0.16
0.16
$
$
0.02
0.02
$
$
$
58
Selected audited consolidated statement of cash flows line items, which reflect the adoption of ASU 2014-09
are as follows (in thousands):
Cash flows from operating activities
Net income
Reconciliation of net income to net cash provided by operating
activities
For the twelve months ended December 31, 2016
As previously
reported
Adjustments
As adjusted
$
5,710 $
(747) $
4,963
Deferred income taxes
Changes in assets and liabilities
Deferred costs
Accrued compensation
Deferred revenue
Net cash provided by operating activities
(1,698)
(385)
(2,083)
(4,964)
2,180
2,710
18,765
879
111
142
—
(4,085)
2,291
2,852
18,765
For the twelve months ended December 31, 2017
As previously
reported
Adjustments
As adjusted
Cash flows from operating activities
Net income (loss)
Reconciliation of net income to net cash provided by operating
activities
$
Deferred income taxes
Changes in assets and liabilities
Deferred costs
Accrued compensation
Deferred revenue
Net cash provided by operating activities
(2,440) $
2,791
$
351
10,854
(1,238)
9,616
(6,548)
2,073
5,107
31,050
(1,265)
(769)
481
—
(7,813)
1,304
5,588
31,050
In January 2018, we adopted FASB ASU 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as business acquisitions or as an asset
acquisition. The new standard specifies the required inputs and processes that are necessary to be a business. The
adoption of this standard impacted our accounting for business combinations. See Note B for additional information
regarding business combinations.
In March 2018, we adopted FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC
Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates the income tax accounting in U.S.
GAAP to reflect the SEC interpretive guidance released on December 22, 2017, when the Tax Act was signed into
law. Additional information regarding the adoption of this standard is contained in Note M.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to
develop or obtain internal-use software. The standard is effective for interim and annual reporting periods beginning
after December 15, 2019 and can be applied either prospectively to implementation costs incurred after the date of
adoption or retrospectively to all arrangements, with early adoption permitted.
We early adopted ASU 2018-15 as of October 1, 2018, under the prospective method. Additional disclosure
regarding capitalized implementation costs is included within Note I.
59
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede existing lease guidance and
will require all leases with a term greater than 12 months to be recognized in the statements of financial position and
eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for
distinguishing between finance leases and operating leases. This standard is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.
We adopted the new standard on January 1, 2019 and used the effective date as our date of initial application.
Consequently, financial information will not be updated and the disclosures required under the new standard will not
be provided for dates and periods before January 1, 2019.
The new standard provides several optional practical expedients in transition. For the fiscal period beginning
January 1, 2019, we have made the following elections. We elected the “package of practical expedients,” which
permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification
and initial direct costs. We did not elect the use-of hindsight or the practical expedient pertaining to land easements;
the latter not being applicable to us. The new standard also provided practical expedients for an entity’s ongoing
accounting. We elected the short-term lease recognition exemption for all leases that qualify which means we have
not recognized right-of-use (“ROU”) assets or lease liabilities for these leases, and this included not recognizing
ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the
practical expedient to not separate lease and non-lease components for all leases.
This standard has a material effect on our financial statements beginning January 1, 2019. The most
significant effects relate to the recognition of approximately $15.0 million in ROU assets and $15.0 million
additional lease liabilities on our balance sheet for our existing operating leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326),
Measurement of Credit Losses on Financial Instruments. The amendment in this update replaces the incurred loss
impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments
within its scope, including trade receivables. This update is intended to provide financial statement users with more
decision-useful information about the expected credit losses. This ASU is effective for annual periods and interim
periods for those annual periods beginning after December 15, 2019. Entities may early adopt beginning after
December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated
financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income
(Topic 220), which allows a reclassification from accumulated other comprehensive income to retained earnings for
stranded tax effects resulting from the Tax Act and requires certain disclosures regarding stranded tax effects in
accumulated other comprehensive income. This guidance is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018, with early adoption permitted during interim or annual
periods. We believe the adoption of this standard will not have a material impact on our consolidated financial
statements.
NOTE B – Business Acquisitions
EDIAdmin
On October 3, 2018, we completed our asset acquisition of EDIAdmin, a privately held company providing
end-to-end integration solutions, featuring a dedicated Integration Platform as a Service (“iPaaS”) called Cloud
Hybrid Integration Platform (“CHIP”) and collaborative managed services for leading systems and applications,
both cloud and on-premise. Pursuant to the asset purchase agreement, we paid $7.5 million in cash to the owner of
EDIAdmin. The purchase agreement also allowed the seller to receive up to $1.7 million in cash, which becomes
payable in first quarter 2020 and 2021 contingent upon the completion of certain revenue milestones at December
31, 2019 and December 31, 2020. During the year ended December 31, 2018, we recognized other expense of $0.1
million in our consolidated statements of comprehensive income due to the remeasurement of the contingent
liability. See Note E for further disclosures on the remeasurement of the contingent liability. The purchase
accounting for the EDIAdmin acquisition is complete as of December 31, 2018.
60
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 a third-party valuation firm to assist us in the determination of the value of the
purchased intangible assets and of the earn-out liability. 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, which
are not included in the fair values of identifiable assets.
The purchase price consisted of the following (in thousands):
Cash
Fair value of earn-out liability
$
$
7,461
1,274
8,735
The final purchase price is subject to a net working capital adjustment to be determined by the sellers and us,
pursuant to the terms of the purchase agreement.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the
acquisition date (in thousands):
Current assets
Goodwill
Intangible assets
Current liabilities
Deferred revenue
Purchased Intangible Assets
$
$
631
4,871
3,400
(57)
(110)
8,735
The following table summarizes the estimated fair value of the purchased intangible assets and their estimated
useful lives:
Purchased Intangible Assets
Subscriber relationships
Developed technology
Total
Estimated
Fair Value
(in thousands)
Estimated
Life
(in years)
$
$
600
2,800
3,400
10
10
The purchased intangible assets are being amortized on a straight-line basis over their estimated useful lives.
Amortization expense for the period from October 3, 2018 through December 31, 2018 was $0.1 million.
CovalentWorks
On December 18, 2018, we completed our asset acquisition of CovalentWorks, a privately held company
providing cloud-based EDI solutions to small- and medium-sized businesses. Pursuant to the asset purchase
agreement, we paid $19.4 million in cash and issued $3.4 million in common stock, or 40,478 shares, to the owners
of CovalentWorks. The purchase accounting for the CovalentWorks acquisition has not been finalized as of
December 31, 2018. Provisional amounts are primarily related to intangible assets. We expect to finalize the
allocation of purchase price within the one-year measurement-period following the acquisition.
61
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 a 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 buyer-specific value resulting from
expected synergies, including long-term cost savings, which are not included in the fair values of identifiable assets.
The purchase price consisted of the following (in thousands):
Cash
SPS Commerce, Inc. common stock
$
$
19,431
3,371
22,802
The final purchase price is subject to a net working capital adjustment to be determined by the sellers and us,
pursuant to the terms of the purchase agreement.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the
acquisition date (in thousands):
Current assets
Property and equipment
Goodwill
Intangible assets
Current liabilities
Deferred revenue
Purchased Intangible Assets
$
$
244
44
15,402
7,210
(56)
(42)
22,802
The following table summarizes the estimated fair value of the purchased intangible assets and their estimated
useful lives:
Purchased Intangible Assets
Subscriber relationships
Developed technology
Trade names
Total
Estimated
Fair Value
(in thousands)
Estimated
Life
(in years)
$
$
7,100
100
10
7,210
7
3
1
The purchased intangible assets are being amortized on a straight-line basis over their estimated useful lives.
Amortization expense for the period from December 18, 2018 through December 31, 2018 was not material.
62
NOTE C – Revenue
We derive our revenues primarily from the following revenue streams (in thousands):
Recurring revenues:
Fulfillment
Analytics
Other
Recurring Revenues
One-time revenues
Year Ended December 31,
2018
2017
2016
$
$
190,783
34,447
5,424
230,654
17,586
248,240
$
$
164,682 $
34,260
4,978
203,920
16,165
220,085 $
139,645
32,938
4,474
177,057
16,096
193,153
Revenues are recognized when our services are made available to our customers, in an amount that reflects the
consideration we are contractually and legally entitled to in exchange for those services.
We determine revenue recognition through the following steps:
-
-
-
-
-
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
Recurring Revenues
Recurring revenues consists of recurring subscriptions from customers that utilize our Fulfillment, Analytics
and Other cloud-based supply chain management solutions. Revenue for these solutions is generally recognized on
a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our
contracts with our recurring revenue customers are recurring in nature, ranging from monthly to annual, and
generally allow the customer to cancel the contract for any reason with 30 to 90 days’ notice. Timing of billings
varies by customer and by contract type and are either in advance or within 30 days of the service being performed.
The deferred revenue liabilities for recurring revenue contracts are for one year or less and recognized on a
ratable basis over the contract term. We have applied the optional exemption under ASC 606-10-50-14(a) and will
not disclose information about the remaining performance obligations for contracts which have original durations of
one year or less.
One-time Revenues
One-time revenues consist of set-up fees from customers and miscellaneous one-time fees.
Set-up fees are specific for each connection a customer has with a trading partner and many of our customers
have connections with numerous trading partners. Set-up fees related to our cloud-based supply chain management
solutions are nonrefundable upfront fees that are necessary for our customers to utilize our cloud-based services.
These set-up fees do not provide any standalone value to our customers. Except for our Analytics solution, we have
determined that the set-up fees represent a material renewal option right to our customers as they will not be
incurred again upon renewal. These set-up fees and related costs are deferred and recognized ratably over two
years, which is the estimated period for which a material right is present for our customers. For our Analytics
solution, we have determined that the set-up fees do not represent a material customer renewal right and, as such, are
deferred and recognized ratably over the estimated initial contract term, which is one year.
63
The table below presents the activity of the portion of the deferred revenue liability relating to set-up fees (in
thousands):
Balances, at beginning of period
Invoiced set-up fees
Amortized set-up fees
Balances, at end of period
Year Ended December 31,
2018
2017
$
$
10,031 $
10,271
(10,445)
9,857 $
9,995
10,625
(10,589)
10,031
The entire balance of set-up fees will be recognized within two years and, as such, current amounts will be
recognized in the next 1-12 months and long-term amounts will be recognized in the next 13-24 months.
Miscellaneous one-time fees consist of professional services and testing and certification. The deferred
revenue liability for these one-time fees are for one year or less and recognized at the time service is provided. We
have applied the optional exemption under ASC 606-10-50-14(a) and will not disclose information about the
remaining performance obligations for contracts which have original durations of one year or less.
NOTE D – Deferred Costs
Deferred costs consist of costs to obtain customer contracts, such as commissions paid to sales personnel and
to third-party partners for customer referrals, and costs to fulfill customer contracts, such as customer
implementation costs.
Sales commissions relating to recurring revenues are considered incremental and recoverable costs of
obtaining a contract with our customer. These commissions are calculated based on estimated annual recurring
revenue to be generated over the customer’s initial contract year. These costs are deferred and amortized over the
expected period of benefit which we have determined to be two years. Amortization expense is included in sales
and marketing expenses in the accompanying condensed consolidated statements of operations.
The table below presents the activity of deferred costs and amortization of deferred costs (in thousands):
Balances, at beginning of period
Incurred deferred costs
Amortized deferred costs
Balances, at end of period
NOTE E – Financial Instruments
Year Ended December 31,
2018
2017
$
$
39,933 $
49,583
(44,041)
45,475 $
32,117
44,628
(36,812)
39,933
We invest primarily in money market funds, certificates of deposit, highly liquid debt instruments of the U.S.
government and U.S. corporate debt securities. All highly liquid investments with original maturities of 90 days or less
are classified as cash equivalents. All investments with original maturities greater than 90 days and remaining
maturities less than one year from the balance sheet date are classified as short-term investments. Investments with
remaining maturities of more than one year from the balance sheet date are classified as long-term investments.
Our short- and long-term marketable securities are classified as available-for-sale. We intend to hold marketable
securities until maturity; however, we may sell these securities at any time for use in current operations or for other
purposes. Consequently, we may or may not keep securities with stated holding periods to maturity.
64
Our marketable securities are carried at fair value and unrealized gains and losses on these investments, net of
taxes, are included in accumulated other comprehensive loss in the consolidated balance sheets. Realized gains or
losses are included in other income (expense), net in the consolidated statements of comprehensive income. When a
determination has been made that an other-than-temporary decline in fair value has occurred, the amount of the
decline that is related to a credit loss is realized and is included in other income (expense), net in the consolidated
statements of comprehensive income.
Cash equivalents and short- and long-term investments consisted of the following (in thousands):
Cash equivalents:
Money market funds
Certificate of deposit
Marketable securities:
Corporate bonds
Commercial paper
U.S. treasury securities
Due within one year
Due within two years
Total
December 31,
2018
2017
Amortized Unrealized
Fair
Amortized Unrealized
Fair
Cost
Gains (Losses
)
Value
Cost
Gains (Losses
)
Value
$109,265 $
7,000
15,194
9,889
12,300
$153,648 $
— $109,265 $104,544 $
—
7,814
7,000
— $104,544
—
7,814
9,965
40 15,234 17,758
76
7,456
38 12,338 12,381
154 $153,802 $149,953 $
$153,802
—
$153,802
(57) 17,701
20
7,476
26 12,407
(11) $149,942
$144,736
5,206
$149,942
We do not believe any of the unrealized losses represent an other-than-temporary impairment based on our
assessment of available evidence as of December 31, 2018. We expect to receive the full principal and interest on
all of these cash equivalents and investments.
Fair Value Measurements
We measure certain financial assets at fair value on a recurring basis based on a fair value hierarchy that requires
us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. The three levels of inputs that may be used to measure fair value are:
•
•
•
Level 1 – quoted prices in active markets for identical assets or liabilities.
Level 2 – observable inputs other than Level 1 prices, such as (a) quoted prices for similar assets or
liabilities, (b) quoted prices in markets with insufficient volume or infrequent transactions (less active
markets), or (c) model-derived valuations in which all significant inputs are observable or can be
derived principally from or corroborated by observable market data for substantially the full term of the
assets or liabilities. We obtain the fair values of our level 2 available-for-sale securities from a
professional pricing service.
Level 3 – unobservable inputs to the valuation methodology that are significant to the measurement of
fair value of assets or liabilities.
For the earn-out liability related to the EDIAdmin acquisition, the Company utilized the Monte Carlo
simulation method to estimate the fair value of this contingent liability as of the reporting date. Thousands of
iterations of the simulation were performed using forecasted revenues to develop a distribution of future values of
recurring revenue which, in turn, provide indicated earn-out payments. The total estimated fair value equals the sum
of the average present values of the indicated earn-out payments. Changes in assumptions described above could
have an impact on the payout of contingent consideration with a maximum payout being $1.7 million. The earn-out
liability has been measured as Level 3 given the unobservable inputs that are significant to the measurement of the
liability.
65
The following table presents information about our financial assets that are measured at fair value on a
recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value
(in thousands):
Assets at December 31, 2018:
Cash equivalents:
Money market funds
Certificate of deposit
Marketable securities:
Corporate bonds
Commercial paper
U.S. treasury securities
Liabilities at December 31, 2018:
Earn-out liability
Assets at December 31, 2017:
Cash equivalents:
Money market funds
Certificate of deposit
Marketable securities:
Corporate bonds
Commercial paper
U.S. treasury securities
Level 1
Level 2
Level 3
Total
$
109,265 $
7,000
— $
—
— $
—
109,265
7,000
—
—
—
116,265 $
15,234
9,965
12,338
37,537 $
—
—
—
— $
15,234
9,965
12,338
153,802
— $
— $
— $
— $
1,368 $
1,368 $
1,368
1,368
$
$
$
$
104,544 $
7,814
— $
—
— $
—
104,544
7,814
—
—
—
112,358 $
17,701
7,476
12,407
37,584 $
$
—
—
—
— $
17,701
7,476
12,407
149,942
NOTE F – Allowance for Doubtful Accounts
The allowance for doubtful accounts activity, included in accounts receivable, net, was as follows (in
thousands):
Balances, January 1
Provision for doubtful accounts
Write-offs, net of recoveries
Balances, December 31
2018
2017
2016
$
$
763 $
2,590
(1,961)
1,392 $
515 $
1,705
(1,457)
763 $
446
1,375
(1,306)
515
66
NOTE G – Property and Equipment, net
Property and equipment, net included the following (in thousands):
Computer equipment and software
Office equipment and furniture
Leasehold improvements
Less: accumulated depreciation and amortization
December 31,
2018
2017
$
$
44,781 $
7,985
9,366
62,132
(41,175)
20,957 $
35,326
7,439
8,042
50,807
(33,951)
16,856
At December 31, 2018 and 2017, property and equipment, net included approximately $1.7 million and
$2.2 million, respectively, of assets held at subsidiary and office locations outside of the U.S.
NOTE H – Goodwill and Intangible Assets, net
The changes in the net carrying amount of goodwill for the years ended December 31, 2018 and 2017 are as
follows (in thousands):
Balances, January 1
Additions from business acquisitions
Foreign currency translation
Balances, December 31
Intangible assets, net included the following (in thousands):
2018
2017
$
$
51,613 $
20,272
(2,227)
69,658 $
49,777
—
1,836
51,613
Subscriber relationships
Non-competition agreements
Technology and other
Subscriber relationships
Non-competition agreements
Technology and other
December 31, 2018
Carrying
Amount
Accumulated
Amortization
Foreign
Currency
Translation
43,212 $
2,560
5,199
50,971 $
(23,284) $
(2,247)
(2,012)
(27,543) $
(623) $
(28)
(36)
(687) $
December 31, 2017
Carrying
Amount
Accumulated
Amortization
Foreign
Currency
Translation
34,350 $
2,499
2,130
38,979 $
(19,592) $
(2,058)
(1,518)
(23,168) $
614 $
45
59
718 $
$
$
$
$
Net
19,305
285
3,151
22,741
Net
15,372
486
671
16,529
67
Amortization expense was $4.1 million, $4.6 million and $4.7 million for the years ended December 31, 2018,
2017 and 2016, respectively. At December 31, 2018, future amortization expense for intangible assets was as
follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
5,026
4,679
3,845
2,742
2,668
3,781
22,741
NOTE I – Other Assets
The changes in the net amount of capitalized implementation costs for internal-use software from hosting
arrangements for the years ended December 31, 2018 and 2017 are as follows (in thousands):
Balances, January 1
Capitalized implementation fees
Amortization of implementation fees
Balances, December 31
2018
2017
$
$
— $
455
—
455 $
—
—
—
—
There were no impairment losses in relation to the capitalized implementation costs for the periods presented.
NOTE J – Commitments and Contingencies
Operating Leases
We are obligated under non-cancellable operating leases primarily for office space. Rent expense for all
operating leases, which includes minimum lease payments and other charges such as common area maintenance
fees, charged to operations was $5.6 million, $4.9 million and $5.0 million for the years ended December 31, 2018,
2017 and 2016, respectively.
On December 20, 2017, we executed the fourth amendment to our lease agreement for our current
headquarters located in Minneapolis, Minnesota where we lease approximately 189,000 square feet under an
agreement that expires on April 30, 2025. We have agreed to expand our headquarters premises by approximately
25,000 square feet during 2020. Our lease agreement also includes a further expansion right and a right of first offer
to lease certain additional space and two options to extend the term of the lease for five years at a market rate
determined in accordance with the lease. We received $3.2 million in incentives upon execution of the amendment
and we are owed an additional $2.1 million in incentives upon expansion of our square footage in 2018, both of
which have been incorporated into our deferred rent calculation.
At December 31, 2018, our future minimum payments under operating leases were as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
4,209
3,542
4,414
4,042
3,854
4,817
24,878
68
Other Contingencies
We may be involved in various claims and legal actions in the normal course of business. Our management
believes that the outcome of any such claims and legal actions will not have a material effect on our financial
position, results of operations or cash flows.
NOTE K – Stockholders’ Equity
Common Stock Issued
In connection with the acquisition of CovalentWorks (see Note B), we issued 40,478 shares of SPS common
stock as calculated according to the terms of the purchase agreement. The fair value of the shares we issued of
approximately $3.4 million was determined using the closing price of our common stock on December 18, 2018, the
closing date of the transaction.
Stock Repurchase Program
On November 2, 2017, our board of directors authorized a program to repurchase up to $50.0 million of
common stock. Under the program, purchases may be made from time to time in the open market over two years.
The number of shares to be purchased and the timing of purchases will be based on the price of our common stock,
general business and market conditions and other investment considerations and factors.
The program does not obligate us to repurchase any specific number of shares and may be suspended or
discontinued at any time without prior notice. We intend to finance the share repurchase program with cash on
hand.
We repurchased 289,745 shares at a cost of $19.9 million and 122,147 shares at a cost of $5.8 million for the
years ended December 31, 2018 and December 31, 2017, respectively. Of the $50.0 million share repurchases
authorized, $24.3 million was available for future share repurchases at December 31, 2018.
NOTE L – Stock-Based Compensation
Our equity compensation plans provide for the grant of incentive and nonqualified stock options, as well as
other stock-based awards including restricted stock and restricted stock units, to employees, non-employee directors
and other consultants who provide services to us. Restricted stock awards result in the issuance of new shares when
granted. For other stock-based awards, new shares are issued when the award is exercised, vested or released
according to the terms of the agreement. In January 2018 and February 2017, 1,027,620 and 1,024,868 additional
shares, respectively, were reserved for future issuance under our 2010 Equity Incentive Plan. At December 31,
2018, there were approximately 5.3 million shares available for grant under approved equity compensation plans.
We recorded stock-based compensation expense of $12.5 million, $12.7 million and $8.0 million for the years
ended December 31, 2018, 2017 and 2016, respectively. During the year ended December 31, 2017, stock-based
compensation expense included a one-time $3.6 million charge due to a modification to our Chief Executive
Officer’s employment agreement which resulted in immediate vesting, and expensing, of his outstanding stock-
based compensation awards based on his retirement eligibility. Stock-based compensation expense was allocated as
follows (in thousands):
Year Ended December 31,
2017
2016
2018
$
2,168 $
1,887 $
1,309
2,675
1,505
6,162
12,510 $
2,197
949
7,694
12,727 $
2,412
618
3,684
8,023
Cost of revenues
Operating expenses
Sales and marketing
Research and development
General and administrative
Total stock-based compensation expense
$
69
Stock-based compensation expense by type was as follows (in thousands):
Stock Options
Performance Share Units
Restricted Stock Units
Restricted Stock Awards
Employee Stock Purchase Plan
401K Stock Match
Total stock-based compensation expense
Year Ended December 31,
2017
2016
2018
$
$
3,355 $
1,034
5,930
487
466
1,238
12,510 $
5,223 $
—
6,526
318
660
—
12,727 $
3,777
—
3,386
308
552
—
8,023
As of December 31, 2018, there was approximately $13.6 million of unrecognized stock-based compensation
expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a
weighted-average period of 2.3 years.
Stock Options
Stock options generally vest over four years and have a contractual term of seven to ten years from the date of
grant. Our stock option activity was as follows:
Outstanding at December 31, 2015
Granted
Exercised
Forfeited
Outstanding at December 31, 2016
Granted
Exercised
Forfeited
Outstanding at December 31, 2017
Granted
Exercised
Forfeited
Outstanding at December 31, 2018
Weighted Average
Exercise Price
Options
(#)
943,103 $
340,609
(221,630)
(46,070)
1,016,012
172,697
(65,502)
(25,876)
1,097,331
181,472
(344,334)
(61,235)
873,234
($/share)
37.91
48.58
19.42
55.58
44.72
55.87
21.53
55.93
47.60
59.88
41.66
56.67
51.86
Of the total outstanding options at December 31, 2018, 576,842 were exercisable with a weighted average
exercise price of $50.10 per share. The total outstanding options had a weighted average remaining contractual life
of 4.0 years.
The fair value of options that vested during the years ended December 31, 2018, 2017 and 2016 was
$3.7 million, $4.2 million and $3.4 million, respectively.
The intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was
$14.9 million, $2.8 million and $8.6 million, respectively. The intrinsic value of outstanding options at
December 31, 2018, 2017 and 2016 was $26.7 million, $7.3 million and $25.6 million, respectively.
70
The weighted-average fair values per share of options granted during the years ended December 31, 2018,
2017 and 2016 were $19.48, $18.85 and $16.13, respectively. The fair values of the options granted were estimated
on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Volatility
Dividend yield
Life (in years)
Risk-free interest rate
Year Ended December 31,
2017
2016
2018
35%
—
4.44
2.54%
38%
—
4.51
1.85%
38%
—
4.54
1.19%
The expected volatility of the options is based on the historical volatility of our common stock. We have not
issued dividends on our common stock and do not expect to do so in the foreseeable future. The expected term of
the options is based on the simplified method which does not consider historical employee exercise behavior. The
risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal
to the expected life at the grant date.
Performance Share Units and Restricted Stock Units and Awards
In February 2018, our executive officers were granted performance share unit (“PSU”) awards with vesting
contingent on the Company’s total shareholder return as compared to indexed total shareholder return over the
course of a three-year performance period (fiscal years 2018 – 2020). The grant date fair value was estimated using
a Monte Carlo simulation that utilizes multiple input variables that determine the probability of satisfying the
performance conditions stipulated in the award and calculates the fair market value for the performance stock units
granted. Expense is recognized on a straight-line basis over the vesting period, regardless of whether the market
condition is satisfied as the likelihood of the market condition being met is included in the fair-value measurement
of the award.
In February 2017, our executive officers were granted PSU awards with vesting contingent on successful
attainment of pre-determined revenue targets over the course of a three-year performance period (fiscal 2017 –
2019). The fair value is measured as the number of performance shares expected to be earned multiplied by the
grant date fair value of our shares. The number of performance shares expected to vest during the current service
period is estimated and the fair value of those shares is recognized over the remaining service period less any
amounts already recognized.
Restricted stock units (“RSU”) vest over four years and, upon vesting, the holder is entitled to receive shares
of our common stock. With restricted stock awards (“RSA”), shares of our common stock are issued when the
award is granted and the restrictions lapse over one year.
71
Our PSU and RSU activity was as follows:
Weighted Average
Grant Date Fair
Value ($/share)
Outstanding at December 31, 2016
Outstanding at December 31, 2015
Granted
Vested and common stock issued
Forfeited
56.88
48.32
48.19
55.48
54.14
55.62
53.64
55.39
55.16
66.03
56.32
55.04
59.90
The number of PSUs and RSUs outstanding at December 31, 2018 included 54,688 units that have vested, but
PSUs and RSUs
(#)
140,565 $
115,896
(52,133)
(15,286)
189,042
211,168
(64,950)
(13,348)
321,912
172,795
(81,561)
(35,811)
377,335
Granted
Vested and common stock issued
Forfeited
Granted
Vested and common stock issued
Forfeited
Outstanding at December 31, 2018
Outstanding at December 31, 2017
the shares of common stock have not yet been issued pursuant to the terms of the agreement.
Our RSA activity was as follows:
Outstanding at December 31, 2015
Restricted common stock issued
Restrictions lapsed
Outstanding at December 31, 2016
Restricted common stock issued
Restrictions lapsed
Outstanding at December 31, 2017
Restricted common stock issued
Restrictions lapsed
Outstanding at December 31, 2018
Employee Stock Purchase Plan
RSAs
(#)
Weighted Average
Grant Date Fair
Value ($/share)
1,032 $
6,078
(5,586)
1,524
5,454
(5,610)
1,368
7,304
(6,840)
1,832
67.39
52.27
55.06
52.28
58.29
56.65
58.29
74.43
71.20
74.44
We have an employee stock purchase plan which allows participating employees to purchase shares of our
common stock at a discount through payroll deductions. The plan is available to all employees subject to certain
eligibility requirements. Participating employees may purchase common stock, on a voluntary after tax basis, at a
price that is the lower of 85% of the fair market value of one share of common stock at the beginning or end of each
stock purchase period. The plan consists of two six-month offering periods, beginning on January 1 and July 1 of
each calendar year. A total of 1.0 million shares of common stock are remaining for issuance under the plan.
For the offering periods in the years ended December 31, 2018, 2017 and 2016, we withheld approximately
$1.7 million, $1.9 million and $1.7 million, respectively, from employees participating in the plan and purchased
34,798 shares, 40,968 shares and 33,357 shares, respectively, on their behalf. For the years ended December 31,
2018, 2017 and 2016, we recorded approximately $0.5 million, $0.7 million and $0.6 million, respectively, of stock-
based compensation expense associated with the employee stock purchase plan. The fair value was estimated based
on the market price of our common stock at the beginning of each offering period and using the Black-Scholes
option pricing model with the following weighted-average assumptions:
72
Volatility
Dividend yield
Life (in years)
Risk-free interest rate
NOTE M – Income Taxes
Year Ended December 31,
2017
2016
2018
26%
—
0.50
1.77%
32%
—
0.50
0.90%
37%
—
0.50
0.42%
Our provisions for income taxes included current federal, foreign and state income tax expense, as well as
deferred tax expense as follows (in thousands):
Current
Federal
State
Foreign
Deferred
Federal
State
Foreign
Year Ended December 31,
2017
2016
2018
$
$
— $
1,103
540
3,011
224
(410)
4,468 $
(184) $
258
652
10,262
(291)
(355)
10,342 $
3,684
555
599
(1,337)
(169)
(577)
2,755
The tax provision for the year ended December 31, 2017 includes a $0.4 million reclass of alternative
minimum tax (“AMT”) credit carryforwards from the deferred federal provision to current federal provision. These
unutilized AMT credit carryforwards become partially refundable in 2019, 2020 and 2021 and fully refundable in
2022.
A reconciliation of the expected federal income tax at the statutory rate to the provision for income taxes was
as follows (in thousands):
Year Ended December 31,
2017
2016
2018
$
3,635
417
(105)
530
268
16
(134)
(227)
6,796
(925)
71
10,342
$
2,662
284
(115)
159
213
(35)
(67)
(261)
—
—
(85)
2,755
Expected federal income tax at statutory rate
State income taxes, net of federal tax effect
Tax impact of foreign activity
Nondeductible executive compensation
Nondeductible expenses
Change in valuation allowance
Change in state deferred rate
Research and development credit
Tax impact of Tax Cuts and Jobs Act
Tax impact of stock activity
Other
Total provision for income taxes
$
$
5,951 $
1,293
57
902
351
(4)
38
(1,843)
—
(2,438)
161
4,468 $
73
The Tax Act, which was enacted on December 22, 2017, reduced the corporate federal income tax rate to
21.0% effective January 1, 2018, resulting in discrete tax expense of $6.8 million for the reduction of deferred tax
assets. Also, the Tax Act expanded the deduction limits on executive compensation and included transition rules for
previously awarded compensation.
Differences between our effective tax rate and statutory tax rates are primarily due to the federal research and
development credit partially offset by permanently non-deductible expense. Additionally, under ASU 2016-09,
excess tax benefits generated upon settlement or exercise of stock awards are now recognized as a reduction to
income tax expense as a discrete tax item in the period that the event occurs creating potentially significant
fluctuation in tax expense by year.
The significant components of our deferred tax assets (liabilities) were as follows (in thousands):
Deferred tax assets
Net operating loss and credit carryforwards
Stock-based compensation expense
Accounts receivable allowances
Accrued expenses
Other
$
Gross deferred tax asset
Less: valuation allowance
Total net deferred tax asset
Deferred tax liability
Deferred operations
Foreign operations
Depreciation and amortization
Other
Total deferred tax liability
Net deferred tax assets
2018
8,356
3,647
464
3,185
180
(797)
(2,787)
(135)
(2,943)
(90)
December 31,
$
15,832
15,035
2017
11,067
4,273
307
2,126
182
(602)
(3,850)
(133)
(1,536)
(24)
17,955
17,353
(5,955)
9,080
$
(5,543)
11,810
$
As of December 31, 2018, we had net operating loss carryforwards of $37.5 million for U.S. federal tax
purposes. We also had $4.1 million of various state net operating loss carryforwards. The loss carryforwards for
federal tax purposes will expire between 2020 and 2038 if not utilized. The loss carryforwards for state tax purposes
will expire between 2019 and 2031 if not utilized.
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 and we believe that
approximately $17.6 million of federal losses will expire unused due to Section 382 limitations. The maximum
annual limitation of federal net operating losses under Section 382 is approximately $1.0 million. This limitation
could be further restricted if any ownership changes occur in future years. Accordingly, our deferred tax assets are
reported net of the Section 382 limitations.
As of December 31, 2018 we had federal research and development credit carryforwards, net of Section 383
limitations, of $3.0 million, which, if not utilized, will begin to expire in 2030. We had state research and
development credit carryforwards of $1.0 million which, if not utilized, will begin to expire in 2025.
As of December 31, 2018, we had a valuation allowance against our deferred tax assets of $0.8 million. The
valuation allowance is established for state credit carryforwards that we do not expect to utilize based on our current
expectations of future state taxable income.
We are subject to income taxes for U.S. federal and various state and international jurisdictions. We are
generally subject to U.S. federal and state tax examinations for all prior tax years due to our net operating loss
carryforwards and the utilization of the carryforwards in years still open under statute.
74
As of December 31, 2018, we do not have any unrecognized tax benefits. It is our practice to recognize
interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We do not
expect any material changes in our unrecognized tax positions over the next 12 months.
NOTE N – Net Income Per Share
The following table presents the components of the computation of basic and diluted net income per share for
the periods indicated (in thousands, except per share amounts):
Numerator
Net income
Denominator
Year Ended December 31,
2017
2016
2018
$
23,872 $
351 $
4,963
Weighted average common shares outstanding, basic
Options to purchase common stock
Restricted stock units
Weighted average common shares outstanding, diluted
17,196
306
104
17,606
17,183
150
23
17,356
16,947
267
27
17,241
Net income per share
Basic
Diluted
$
$
1.39 $
1.36 $
0.02 $
0.02 $
0.29
0.29
For the year ended December 31, 2018, 2017 and 2016, the effect of less than 1,000, approximately 283,000
and approximately 5,000 outstanding potential common shares, respectively, were excluded from the calculation of
diluted net income per share as they were anti-dilutive.
NOTE O – Retirement Savings Plan
We sponsor a 401(k) retirement savings plan for our employees. Employees can contribute up to 100% of
their compensation, subject to the limits established by law. In 2018, we increased our match to 50% of the
employee’s contribution up to the first 6% of pre-tax annual compensation. A portion of our match is in company
stock, which is purchased from the open market by our plan provider and immediately deposited into the employee’s
401(k) account, which resulted in $1.2 million of stock-based compensation expense in 2018. Additionally, we make
statutory contributions to retirement plans as required by local foreign government regulations. Our total
contributions to the plan were $2.9 million, $1.6 million and $1.4 million for the years ended December 31, 2018,
2017 and 2016, respectively.
NOTE P – Related Party Transactions
SPS Commerce Foundation (the “Foundation”) is a Minnesota non-profit organization exempt from federal
taxation under Section 501(c)(3) of the Internal Revenue Code. The Foundation was formed in 2015 to engage in,
advance, support, promote and administer charitable activities. The directors of the Foundation are also our officers.
These officers receive no compensation from the Foundation for the management services performed for the
Foundation. The Foundation is not a subsidiary of ours and the financial results of the Foundation are not
consolidated with our financial statements. We made contributions of $0.7 million and $0.2 million to the
Foundation for the years ended December 31, 2018 and 2017, respectively. We have no current legal obligations for
future commitments to the Foundation.
75
NOTE Q – Selected Quarterly Financial Data (Unaudited)
The following table presents our selected unaudited quarterly statements of comprehensive income data (in
thousands, except per share amounts):
2018
2017
Revenues
Gross profit
Income from operations
Net income
Diluted earnings per share
Revenues
Gross profit
Income from operations
Net income (loss)
Diluted earnings per share
Mar 31
$
For the Three Months Ended
Jun 30
Sep 30
Dec 31
59,092 $
39,334
4,300
3,254
0.19 $
61,091 $
40,689
5,965
5,416
0.31 $
62,868 $
42,457
8,257
8,061
0.45 $
65,189
44,012
8,209
7,141
0.40
$
Mar 31
$
For the Three Months Ended
Jun 30
Sep 30
Dec 31
51,879 $
34,549
3,379
2,985
0.17 $
54,092 $
35,901
2,956
1,968
0.11 $
56,057 $
37,412
3,354
2,176
0.13 $
58,057
38,598
292
(6,778)
(0.39)
$
76
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of
December 31, 2018, the end of the period covered by this Annual Report on Form 10-K. This evaluation was done
under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”). Disclosure controls and procedures means controls and other procedures that are
designed to provide reasonable assurance that information required to be disclosed in the reports that we file or
submit under Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures
include, without limitation, controls and procedures designed such that information is accumulated and
communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure. Based on this evaluation, our CEO and CFO have concluded that as of December 31, 2018, our
disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act as a process designed by, or under the supervision of, our principal executive and principal financial officer and
effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
GAAP and includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our principal executive and
financial officers, we assessed our internal control over financial reporting as of December 31, 2018, based on
criteria for effective internal control over financial reporting established in the Internal Control — Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on this assessment, management concluded that we maintained effective internal control over financial
reporting as of December 31, 2018 based on the specified criteria.
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 of acquisition.
77
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by
KPMG LLP, our independent registered public accounting firm, as stated in their report, which is included under
Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter
ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. Other Information
None.
78
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item with respect to executive officers is contained in Item 1 of this Annual
Report on Form 10-K under the heading “Executive Officers” and with respect to other information relating to our
directors and executive officers will be set forth in the 2019 Proxy Statement under the caption “Item 1 – Election of
Directors,” which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report
on Form 10-K, and is incorporated herein by reference.
The information required by this item under Item 405 of Regulation S-K is incorporated herein by reference to
the section titled “Section 16(a) Beneficial Ownership Reporting Compliance” of the 2019 Proxy Statement.
The information required by this item under Item 407(d)(4) and (d)(5) of Regulation S-K is incorporated
herein by reference to the section titled “Information Regarding the Board of Directors and Corporate
Governance—Board Committees” of the 2019 Proxy Statement.
The information required by this item under Item 407(c)(3) of Regulation S-K is incorporated herein by
reference to the section titled “Information Regarding the Board of Directors and Corporate Governance—
Procedures for Selecting and Nominating Director Candidates” of the 2019 Proxy Statement.
We have adopted a code of business conduct applicable to our directors, officers (including our principal
executive officer and principal financial officer) and employees. The Code of Conduct is available on our website at
www.spscommerce.com under the Investor Relations section. We plan to post on our website at the address
described above any future amendments or waivers of our Code of Conduct.
Item 11.
Executive Compensation
The information required by this item is incorporated herein by reference to the sections titled “Executive
Compensation,” “Information Regarding the Board of Directors and Corporate Governance—Director
Compensation” and “Certain Relationships and Related Transactions—Compensation Committee Interlocks and
Insider Participation” of the 2019 Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information related to security ownership required by this item is incorporated herein by reference to the
section titled “Security Ownership” of the 2019 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the sections titled “Certain
Relationships and Related Transactions,” and “Information Regarding the Board of Directors and Corporate
Governance—Director Independence” of the 2019 Proxy Statement.
Item 14.
Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the section titled “Audit
Committee Report and Payment of Fees to Our Independent Auditor” of the 2019 Proxy Statement.
79
Item 15.
Exhibits, Financial Statement Schedules
The following documents are filed as a part of this Annual Report on Form 10-K:
PART IV
(a) Financial Statements: The financial statements filed as a part of this report are listed in Part II, Item 8.
(b) Financial Statement Schedules: The schedules are either not applicable or the required information is
presented in the consolidated financial statements or notes thereto.
(c) Exhibits: The exhibits incorporated by reference or filed as a part of this Annual Report on Form 10-K
are listed in the Exhibit Index prior to the signatures to this report.
Item 16.
Form 10-K Summary
None.
80
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
Form
Incorporated By Reference
Date of
First
Filing
File
Number
Exhibit
Number
Filed
Herewith
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Amended and Restated Certificate of
Incorporation
S-3
333-182097
06/13/2012
4.1
Amended and Restated Bylaws
2001 Stock Option Plan**
Form of Incentive Stock Option
Agreement under 2001 Stock Option
Plan**
Form of Non-Statutory Stock Option
Agreement (Director) under 2001
Stock Option Plan**
2010 Equity Incentive Plan, as
amended effective October 29,
2014**
Form of Incentive Stock Option
Agreement under 2010 Equity
Incentive Plan**
Form of Non-Statutory Stock Option
Agreement (Employee) under 2010
Equity Incentive Plan**
Form of Non-Statutory Stock Option
Agreement (Director) under 2010
Equity Incentive Plan**
Form of Restricted Stock Unit
Award Agreement under 2010
Equity Incentive Plan**
Form of Restricted Stock Award
Agreement under 2010 Equity
Incentive Plan**
Form of Performance Stock Unit
Agreement under 2010 Equity
Incentive Plan**
Non-Employee Director
Compensation Policy**
Form of Indemnification Agreement
for Independent Directors
Form of Indemnification Agreement
for Archie C. Black**
Employment Agreement between the
Company and Archie C. Black**
8-K
S-1/A
S-1/A
001-34702
10/17/2017
333-163476
01/11/2010
333-163476
01/11/2010
3.1
10.3
10.4
S-1/A
333-163476
01/11/2010
10.5
10-K
001-34702
02/20/2015
10.6
8-K
001-34702
02/17/2012
10.2
8-K
001-34702
02/17/2012
10.3
8-K
001-34702
02/17/2012
10.4
8-K
001-34702
02/15/2017
99.2
10-Q
001-34702
05/08/2012
10.6
8-K
001-34702
02/18/2018
10.1
10-Q
001-34702
07/27/2018
10.1
S-1/A
333-163476
01/11/2010
10.18
S-1/A
333-163476
01/11/2010
10.19
S-1/A
333-163476
03/05/2010
10.20
81
Incorporated By Reference
Date of
First
Filing
File
Number
Exhibit
Number
Filed
Herewith
001-34702
02/03/2016
10.1
001-34702
02/17/2012
10.1
001-34702
02/03/2016
001-34702
11/17/2017
001-34702
02/22/2019
001-34702
02/22/2019
001-34702
02/22/2019
10.2
10.1
21.1
23.1
24.1
X
X
X
X
Exhibit
Number
Exhibit Description
Form
10.15
10.16
10.17
10.18
21.1
23.1
24.1
31.1
31.2
32.1
Form of Executive Severance and
Change in Control Agreement**
Standard Form Office Lease, dated
as of February 14, 2012, by and
between the registrant and CSDV-
MN Limited Partnership
Management Incentive Plan**
Executive Severance and Change in
Control Agreement**
Subsidiaries of the registrant
Consent of KPMG LLP
Power of Attorney (included on
signature page)
S-K
8-K
8-K
8-K
10-K
10-K
10-K
Certification of Principal Executive
Officer pursuant to Rules 13a-14(a)
under the Securities Exchange Act of
1934, as amended
Certification of Principal Financial
Officer pursuant to Rules 13a-14(a)
under the Securities Exchange Act of
1934, as amended
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
101
Interactive Data Files Pursuant to
Rule 405 of Regulation S-T
**
Indicates management contract or compensatory plan or arrangement.
82
(cid:3)
(cid:896)(cid:100)(cid:44)(cid:47)(cid:94)(cid:3)(cid:87)(cid:4)(cid:39)(cid:28)(cid:3)(cid:47)(cid:69)(cid:100)(cid:28)(cid:69)(cid:100)(cid:47)(cid:75)(cid:69)(cid:4)(cid:62)(cid:122)(cid:3)(cid:62)(cid:28)(cid:38)(cid:100)(cid:3)(cid:17)(cid:62)(cid:4)(cid:69)(cid:60)(cid:897)(cid:3)
(cid:3)
(cid:896)(cid:100)(cid:44)(cid:47)(cid:94)(cid:3)(cid:87)(cid:4)(cid:39)(cid:28)(cid:3)(cid:47)(cid:69)(cid:100)(cid:28)(cid:69)(cid:100)(cid:47)(cid:75)(cid:69)(cid:4)(cid:62)(cid:122)(cid:3)(cid:62)(cid:28)(cid:38)(cid:100)(cid:3)(cid:17)(cid:62)(cid:4)(cid:69)(cid:60)(cid:897)(cid:3)
EXECUTIVE OFFICERS
Archie Black, Chief Executive Officer and President
Kim Nelson, Executive Vice President and Chief Financial Officer
Jim Frome, Executive Vice President and Chief Operating Officer
BOARD OF DIRECTORS
Archie Black
James Ramsey
Marty Leestma
Marty Réaume
Phil Soran
Sven Wehrwein
Tami Reller
CORPORATE HEADQUARTERS
333 South Seventh Street, Suite 1000
Minneapolis, MN 55402 USA
Toll-free phone: 866-245-8100
MARKET LISTING
Nasdaq Global Market Symbol: SPSC
ANNUAL MEETING
Tuesday, May 14, 2019
INDEPENDENT PUBLIC ACCOUNTANTS
KPMG LLP
4200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402 USA
TRANSFER AGENT & REGISTRAR
EQ Shareowner Services
1110 Centre Pointe Curve
Suite 101
Mendota Heights, MN 55120 USA
1-800-468-9716
shareowneronline.com
LEGAL COUNSEL
Faegre Baker Daniels LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402 USA
2018
ANNUAL REPORT
CORPORATE HEADQUARTERS
SPS Commerce
333 South Seventh Street, Suite 1000
Minneapolis, MN 55402 USA
Toll-free: (866) 245-8100
Main: (612) 435-9400
BEIJING: +86 10 5940 1616
HONG KONG: +852 5808 6596
LONDON: +44 808 234 3866
MELBOURNE: +61 3 9847 7000
TORONTO: 888-550-8665
SYDNEY: +61 2 8073 8209
spscommerce.com