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EX-10.1 - EXHIBIT 10.1 - CHANNELADVISOR CORPecom9302015ex101.htm
EX-31.1 - EXHIBIT 31.1 - CHANNELADVISOR CORPecom9302015ex311.htm
EX-31.2 - EXHIBIT 31.2 - CHANNELADVISOR CORPecom9302015ex312.htm
EX-32.1 - EXHIBIT 32.1 - CHANNELADVISOR CORPecom9302015ex321.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     
Commission File Number 001-35940
____________________________________________________
CHANNELADVISOR CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________________________ 
Delaware
 
56-2257867
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
3025 Carrington Mill Boulevard, Morrisville, NC
 
27560
(Address of principal executive offices)
 
(Zip Code)
(919) 228-4700
(Registrant’s telephone number, including area code)
2701 Aerial Center Parkway
Morrisville, NC 27560
(Former name, former address and former
fiscal year, if changed since last report)
____________________________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ¨    No  x



The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of the close of business on October 23, 2015 was 25,148,999.
CHANNELADVISOR CORPORATION
INDEX TO FORM 10-Q
 
  
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ChannelAdvisor Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 

September 30, 2015

December 31, 2014
 
(unaudited)

 
Assets



Current assets:



Cash and cash equivalents
$
58,984


$
68,366

Accounts receivable, net of allowance of $1,050 and $673 as of September 30, 2015 and December 31, 2014, respectively
16,141


14,619

Prepaid expenses and other current assets
7,181


4,940

Total current assets
82,306


87,925

Property and equipment, net
12,565


12,603

Goodwill
21,473


21,518

Intangible assets, net
3,393


4,083

Restricted cash
567


633

Other assets
637


285

Total assets
$
120,941


$
127,047

Liabilities and stockholders’ equity



Current liabilities:



Accounts payable
$
1,851


$
564

Accrued expenses
7,799


7,292

Deferred revenue
19,866


16,840

Other current liabilities
3,535


2,563

Total current liabilities
33,051


27,259

Long-term capital leases, net of current portion
2,151


2,014

Other long-term liabilities
3,913


4,126

Total liabilities
39,115


33,399

Commitments and contingencies





Stockholders’ equity:



Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding as of September 30, 2015 and December 31, 2014

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 25,147,137 and 24,915,510 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
25


25

Additional paid-in capital
237,545


228,370

Accumulated other comprehensive loss
(856
)

(130
)
Accumulated deficit
(154,888
)

(134,617
)
Total stockholders’ equity
81,826


93,648

Total liabilities and stockholders’ equity
$
120,941


$
127,047

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3


ChannelAdvisor Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
24,379

 
$
20,966

 
$
71,151

 
$
61,074

Cost of revenue (excluding depreciation)
4,954

 
5,020

 
15,571

 
15,686

Depreciation - Cost of revenue
1,336

 
998

 
3,536

 
2,483

Gross profit
18,089

 
14,948

 
52,044

 
42,905

Operating expenses:

 
 
 
 
 
 
Sales and marketing
11,879

 
13,595

 
40,790

 
41,475

Research and development
3,874

 
4,157

 
11,955

 
12,308

General and administrative
6,075

 
5,310

 
16,867

 
14,860

Depreciation and amortization
1,005

 
743

 
2,827

 
1,910

Total operating expenses
22,833

 
23,805

 
72,439

 
70,553

Loss from operations
(4,744
)
 
(8,857
)
 
(20,395
)
 
(27,648
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(60
)
 
(55
)
 
(142
)
 
(157
)
Other income (expense), net
14

 
(86
)
 
140

 
(86
)
Total other income (expense)
(46
)
 
(141
)
 
(2
)
 
(243
)
Loss before income taxes
(4,790
)
 
(8,998
)
 
(20,397
)
 
(27,891
)
Income tax (benefit) expense
1

 
6

 
(126
)
 
87

Net loss
$
(4,791
)
 
$
(9,004
)
 
$
(20,271
)
 
$
(27,978
)
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.19
)
 
$
(0.36
)
 
$
(0.81
)
 
$
(1.14
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
25,110,212

 
24,793,869

 
25,020,154

 
24,528,263

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.


4


ChannelAdvisor Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(4,791
)

$
(9,004
)

$
(20,271
)

$
(27,978
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments
95

 
(119
)
 
(726
)
 
184

Total comprehensive loss
$
(4,696
)
 
$
(9,123
)
 
$
(20,997
)
 
$
(27,794
)
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.


5


ChannelAdvisor Corporation and Subsidiaries
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity
(in thousands, except share data)
 
  
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
  
Shares
 
Amount
 
Balance, December 31, 2014
24,915,510

 
$
25

 
$
228,370

 
$
(130
)
 
$
(134,617
)
 
$
93,648

Exercise of stock options and vesting of restricted stock units
287,733

 

 
490

 

 

 
490

Stock-based compensation expense

 

 
9,273

 

 

 
9,273

Statutory tax withholding related to net-share settlement of restricted stock units
(56,106
)
 

 
(588
)
 

 

 
(588
)
Net loss

 

 

 

 
(20,271
)
 
(20,271
)
Foreign currency translation adjustments

 

 

 
(726
)
 

 
(726
)
Balance, September 30, 2015
25,147,137

 
$
25

 
$
237,545

 
$
(856
)
 
$
(154,888
)
 
$
81,826

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.


6


ChannelAdvisor Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net loss
$
(20,271
)
 
$
(27,978
)
Adjustments to reconcile net loss to cash and cash equivalents used in operating activities:
 
 
 
Depreciation and amortization
6,363

 
4,393

Bad debt expense
1,253

 
993

Stock-based compensation expense
9,273

 
5,301

Other items, net
(150
)
 
107

Changes in assets and liabilities:
 
 
 
Accounts receivable
(4,170
)
 
603

Prepaid expenses and other assets
(2,071
)
 
(818
)
Accounts payable and accrued expenses
1,924

 
(1,668
)
Deferred revenue
3,045

 
2,238

Cash and cash equivalents used in operating activities
(4,804
)
 
(16,829
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(3,472
)
 
(5,400
)
Payment of internal-use software development costs
(129
)
 
(820
)
Cash and cash equivalents used in investing activities
(3,601
)
 
(6,220
)
Cash flows from financing activities
 
 
 
Repayment of capital leases
(1,592
)
 
(1,049
)
Proceeds from exercise of stock options
490

 
1,827

Payment of statutory tax withholding related to net-share settlement of restricted stock units
(588
)
 

Cash and cash equivalents (used in) provided by financing activities
(1,690
)
 
778

Effect of currency exchange rate changes on cash and cash equivalents
713

 
145

Net decrease in cash and cash equivalents
(9,382
)
 
(22,126
)
Cash and cash equivalents, beginning of period
68,366

 
104,406

Cash and cash equivalents, end of period
$
58,984

 
$
82,280

Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
143

 
$
228

Cash paid for income taxes, net
$
243

 
$
53

Supplemental disclosure of noncash investing and financing activities
 
 
 
Capital lease obligations entered into for the purchase of fixed assets
$
3,372

 
$
2,431

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

7


ChannelAdvisor Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of the Business
ChannelAdvisor Corporation (“ChannelAdvisor” or the “Company”) was incorporated in the state of Delaware and capitalized in June 2001. The Company began operations in July 2001. ChannelAdvisor is a provider of software-as-a-service, or SaaS, solutions that allow retailers and manufacturers to integrate, manage and monitor their merchandise sales across hundreds of online channels. The Company is headquartered in Morrisville, North Carolina and has international offices in England, Ireland, Germany, Australia, Brazil and China.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Interim Condensed Consolidated Financial Information
The accompanying condensed consolidated financial statements and footnotes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of financial position, the results of operations, comprehensive loss, changes in stockholders’ equity and cash flows. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited interim financial statements should be read in conjunction with the audited financial statements and related footnotes for the year ended December 31, 2014, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2015.
Reclassification
Certain prior period amounts included on the condensed consolidated statements of operations have been reclassified to conform to the current period’s presentation. In order to gain further clarity and understanding of its operating results, the Company will now present depreciation and amortization expense separately on the condensed consolidated statements of operations. Previously, depreciation and amortization expense was included in cost of revenue and operating expenses. These reclassifications had no effect on the Company's reported gross profit and net loss for the three and nine months ended September 30, 2014.
The tables below summarize these reclassifications (in thousands):
 
Three Months Ended September 30, 2014
 
As Previously Reported
 
Reclassification
 
As Reclassified
Cost of revenue (excluding depreciation)
$
6,018

 
$
(998
)
 
$
5,020

Depreciation - Cost of revenue

 
998

 
998

Sales and marketing
13,865

 
(270
)
 
13,595

Research and development
4,263

 
(106
)
 
4,157

General and administrative
5,677

 
(367
)
 
5,310

Depreciation and amortization

 
743

 
743


8


 
Nine Months Ended September 30, 2014
 
As Previously Reported
 
Reclassification
 
As Reclassified
Cost of revenue (excluding depreciation)
$
18,169

 
$
(2,483
)
 
$
15,686

Depreciation - Cost of revenue

 
2,483

 
2,483

Sales and marketing
42,131

 
(656
)
 
41,475

Research and development
12,572

 
(264
)
 
12,308

General and administrative
15,850

 
(990
)
 
14,860

Depreciation and amortization

 
1,910

 
1,910

Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which provides new guidance for revenue recognition. ASU 2014-09 provides that an entity should recognize revenue to depict 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. ASU 2014-09 also requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which resulted in a one year deferral of the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact the adoption of ASU 2014-09 will have on its consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (Topic 805) ("ASU 2015-16"), which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. ASU 2015-16 requires that the cumulative impact of measurement-period adjustments, including prior period amounts, be recognized in the reporting period in which the adjustment is identified. The update is effective for fiscal years beginning after December 15, 2015. The Company has elected to early adopt ASU 2015-16; however, the adoption of this pronouncement did not have a material impact on the Company’s results of operations, financial position or cash flows.
The Company has reviewed other new accounting pronouncements that were issued as of September 30, 2015 and does not believe that these pronouncements are applicable to the Company, or that they will have a material impact on its financial position or results of operations.
Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable allowance, the useful lives of long-lived assets and other intangible assets, income taxes and assumptions used for purposes of determining stock-based compensation, among others. Estimates and assumptions are also required to value assets acquired and liabilities assumed as well as contingent consideration, where applicable, in conjunction with business combinations. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable, the results of which form the basis for making judgments about the carrying value of assets and liabilities.
Revenue Recognition and Deferred Revenue
The majority of the Company’s revenue is derived from subscription fees paid by customers for access to and usage of the Company’s cloud-based SaaS platform for a specified period of time, which is typically one year. A portion of the subscription fee is typically fixed and is based on a specified minimum amount of gross merchandise value (“GMV”) that a customer expects to process through the Company’s platform over the contract term. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMV processed through the Company’s platform in excess of the customer’s specified minimum amount. In addition, other sources of revenue consist primarily of implementation fees, which may include fees for providing launch assistance and training. Implementation services are provided at the customer's option and are not essential to the functionality of the Company's platform, nor is the customer required to purchase these services in

9


order to access the Company's platform. The Company also generates revenue from fixed subscription fees from its Where to Buy solution. These contacts are generally one year in duration. The Company recognizes revenue when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is reasonably assured and the amount of the fee to be paid by the customer is fixed or determinable. The Company’s contractual arrangements include performance, termination and cancellation provisions, but do not provide for refunds. Customers do not have the contractual right to take possession of the Company’s software at any time.
The Company’s arrangements generally contain multiple elements comprised of subscription and implementation services. The Company evaluates each element in an arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within the Company’s control. The Company’s implementation services are not sold separately from the subscription and there is no alternative use for them. As such, the Company has determined the implementation services do not have standalone value. Accordingly, subscription and implementation services are combined and recognized as a single unit of accounting.
The Company generally recognizes the fixed portion of subscription fees and implementation fees ratably over the contract term. Recognition begins when the customer has access to the Company’s platform or Where to Buy solution and transactions can be processed, provided all other revenue recognition criteria have been met. Some customers elect a managed-service solution and contract with the Company to manage some or all aspects of the Company’s SaaS solutions on the customer’s behalf for a specified period of time, which is typically one year. Under these managed-service arrangements, customer transactions cannot be processed through the Company’s platform until the completion of the implementation services. As such, revenue is contingent upon the Company’s completion of the implementation services and recognition commences when transactions can be processed on the Company’s platform, provided all other revenue recognition criteria have been satisfied. At that time, the Company recognizes a pro-rata portion of the fees earned since the inception of the arrangement. The balance of the fees is recognized ratably over the remaining contract term.
The Company recognizes the variable portion of subscription fee revenue in the period in which the related GMV is processed, provided all other revenue recognition criteria have been met.
Sales taxes collected from customers and remitted to government authorities are excluded from revenue.
Deferred revenue represents the unearned portion of fixed subscription fees and implementation fees. Deferred amounts are generally recognized within one year. Those amounts that are expected to be recognized in greater than one year are recorded in other long-term liabilities in the accompanying condensed consolidated balance sheets.
Cost of Revenue
Cost of revenue primarily consists of personnel and related costs, including salaries, bonuses, payroll taxes and stock-based compensation, co-location facility costs for the Company’s data centers, depreciation expense for computer equipment directly associated with generating revenue, credit card transaction fees and infrastructure maintenance costs. In addition, the Company allocates a portion of overhead, such as rent and employee benefits costs, to cost of revenue based on headcount.
Fair Value of Financial Instruments
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows:
Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions.
The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their respective fair values due to their short-term nature.
The acquisition of E-Tale Holdings Limited ("E-Tale") on October 31, 2014 included a contingent consideration arrangement that allows for adjustment of payments based upon achievement of specified quarterly revenue targets through June 2017. Contingent consideration was measured at fair value at the acquisition date and is remeasured to fair value at each reporting date until the contingency is resolved. The fair value is reported within current and non-current liabilities on the

10


condensed consolidated balance sheets. Increases or decreases in any valuation inputs in isolation may result in a significantly lower or higher fair value measurement in the future. Subsequent changes in the fair value of contingent consideration are recognized within general and administrative expenses in the Company’s condensed consolidated statements of operations.
The fair value of contingent consideration related to the E-Tale acquisition is based on a probability-weighted model in which the Company developed various scenarios for E-Tale’s projected quarterly revenue targets through June 2017. The Company discounted the expected future earn-out payment of each scenario to net present value using Level 3 inputs and assigned probabilities to achieving each scenario. Key assumptions used in the measurement of fair value of contingent consideration include a discount rate of 24% as of September 30, 2015 and December 31, 2014. The Company believes the discount rate used to discount the earn-out payments reflects market participant assumptions. Projected revenue is based on the Company’s internal projections and analysis of the current customer base and expected customer growth, target market and sales potential.
The following table presents changes to the Company’s liability for acquisition-related contingent consideration for the nine months ended September 30, 2015 (in thousands):
Balance as of January 1, 2015
$
618

Change in contingent consideration fair value
14

Balance as of September 30, 2015
$
632

Concentration of Credit Risk
Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. The Company’s cash and cash equivalents accounts exceed federally insured limits. The Company has not experienced any losses on its cash and cash equivalents accounts to date. To manage accounts receivable risk, the Company maintains an allowance for doubtful accounts.
The Company did not have any customers that individually comprised a significant concentration of its accounts receivable as of September 30, 2015 and December 31, 2014, or a significant concentration of its revenue for the three and nine months ended September 30, 2015 and 2014.
Accounts Receivable and Allowance for Doubtful Accounts
The Company extends credit to customers without requiring collateral. Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts. The Company utilizes the allowance method to provide for doubtful accounts based on management’s evaluation of the collectability of amounts due. The Company’s estimate is based on historical collection experience and a review of the current status of accounts receivable. Historically, actual write-offs for uncollectible accounts have not significantly differed from the Company’s estimates.
Other Receivables
Under certain customer arrangements, the Company collects and remits monthly activity-based fees incurred on specific channels on the customers’ behalf. The Company records the amounts due from customers as a result of these arrangements as other receivables.
Other receivables of $2.9 million and $1.3 million are included in prepaid expenses and other current assets on the condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively.
Identifiable Intangible Assets
The Company acquired intangible assets in connection with its business acquisitions. These assets were recorded at their estimated fair values at the acquisition date and are being amortized over their respective estimated useful lives using the straight-line method. The estimated useful lives and amortization methodology used in computing amortization are as follows:
 
Estimated Useful Lives
Amortization Methodology
Customer relationships
7 years
Straight-line
Acquired technology
7 years
Straight-line
Trade names
3 years
Straight-line

11


Amortization expense associated with the Company's intangible assets was $0.2 million and $0.1 million for the three months ended September 30, 2015 and 2014, respectively, and $0.7 million and $0.3 million for the nine months ended September 30, 2015 and 2014, respectively.
Software Development Costs
The Company capitalizes certain internal-use software development costs, consisting primarily of direct labor associated with creating the internally developed software and third-party consulting fees associated with implementing software purchased for internal use. Software development projects generally include three stages: the preliminary project stage (in which all costs are expensed as incurred), the application development stage (in which certain costs are capitalized) and the post-implementation/operation stage (in which all costs are expensed as incurred). The costs incurred during the application development stage primarily include the costs of designing the application, coding and testing of the system. Capitalized costs are amortized using the straight-line method over the estimated useful life of the software once it is ready for its intended use.
Software development costs of $0.1 million and $0.4 million related to creating internally developed software and implementing software purchased for internal use were capitalized during the nine months ended September 30, 2015 and the year ended December 31, 2014, respectively, and are included in property and equipment in the accompanying condensed consolidated balance sheets. Amortization expense related to capitalized internally developed software was $0.1 million for each of the three months ended September 30, 2015 and 2014 and $0.2 million and $0.1 million for the nine months ended September 30, 2015 and 2014, respectively, and is included in cost of revenue or general and administrative expense in the accompanying condensed consolidated statements of operations, depending upon the nature of the software development project. The net book value of capitalized internally developed software was $0.5 million and $0.6 million as of September 30, 2015 and December 31, 2014, respectively.
Software development costs of $0.3 million related to configuring and implementing hosted third-party software applications that the Company will use in its business operations were capitalized during the year ended December 31, 2014. There were no amounts capitalized during the nine months ended September 30, 2015. These costs are included in property and equipment in the accompanying condensed consolidated balance sheets. Amortization expense related to hosted third-party software applications was $0.2 million for each of the three months ended September 30, 2015 and 2014 and $0.5 million for each of the nine months ended September 30, 2015 and 2014 and is included in general and administrative expense in the accompanying condensed consolidated statements of operations. The net book value of hosted third-party software applications was $0.8 million and $1.4 million as of September 30, 2015 and December 31, 2014, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method of accounting. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company applies the accounting guidance for uncertainties in income taxes, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken, in a tax return. Additionally, the guidance also prescribes the treatment for accounting in interim periods, derecognition, classification and disclosure requirements for uncertain tax positions. The Company accrues for the estimated amount of taxes for uncertain tax positions if it is more likely than not that the Company would be required to pay such additional taxes. An uncertain tax position will be recognized if it is not more likely than not to be sustained.
The Company’s income tax provision for the three and nine months ended September 30, 2015 and 2014 reflects its estimates of the effective tax rates expected to be applicable for the full fiscal years, adjusted for any discrete events that are recorded in the period in which they occur. For the three and nine months ended September 30, 2015 and 2014, the Company’s effective tax rate differs from the federal statutory rate primarily due to changes in the valuation allowance and nondeductible expenses.
For the three and nine months ended September 30, 2015 and 2014, the Company had net operating loss (“NOL”) carryforwards, the benefit of which is dependent on the Company’s ability to generate sufficient taxable income prior to the expiration of the NOL carryforwards. In addition, the maximum annual use of the NOL carryforwards is limited in certain situations, such as a change in stock ownership.

12


Stock-Based Compensation
The Company accounts for stock-based compensation awards, which include stock options and restricted stock units ("RSUs"), based on the fair value of the award as of the grant date. The Company recognizes stock-based compensation expense using the accelerated attribution method, net of estimated forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche.
The Company uses the Black-Scholes option pricing model for estimating the fair value of stock options. The use of the option valuation model requires the input of the Company's stock price, as well as highly subjective assumptions, including the expected life of the option and the expected stock price volatility based on peer companies. The fair value of the Company's common stock, for purposes of determining the grant date fair value of option and RSU awards, has been determined by using the closing market price per share of common stock as quoted on the New York Stock Exchange on the date of grant. The recognition of expense requires the estimation of the number of awards that will ultimately vest and the number of awards that will ultimately be forfeited.
3. Business Combination
On October 31, 2014, the Company’s wholly owned subsidiary, ChannelAdvisor UK Limited (“ChannelAdvisor UK”), entered into a Securities Purchase Agreement (the “Purchase Agreement”) pursuant to which ChannelAdvisor UK acquired all of the issued and outstanding shares of E-Tale, a UK-based company that offers a global Where to Buy solution (the "E-Tale Acquisition").
The initial aggregate purchase price associated with the E-Tale Acquisition totaled $9.0 million, which was comprised of $8.2 million of cash, $0.6 million for contingent consideration and $0.2 million of other items. During the nine months ended September 30, 2015, the aggregate purchase price of the E-Tale Acquisition was adjusted by less than $0.1 million for post-closing working capital adjustments, in accordance with the Purchase Agreement.
Comparative pro forma financial information for the E-Tale Acquisition has not been presented because the acquisition is not material to the Company’s consolidated results of operations.
4. Goodwill
The following table shows the changes in the carrying amount of goodwill for the nine months ended September 30, 2015 (in thousands):
Balance as of January 1, 2015
$
21,518

Adjustment to E-Tale Acquisition purchase price
(45
)
Balance as of September 30, 2015
$
21,473

5. Guarantee
In June 2014, the Company assigned its previous lease of office space in London, England to a third party pursuant to an assignment agreement and a transfer agreement. In accordance with the assignment agreement, the Company is not required to collect any payments from the third party and therefore will not recognize any revenue associated with this assignment. All payments associated with the assigned lease will be made directly by the third party to the lessor and appropriate regulatory authorities. However, the Company has guaranteed the lease payments through the remainder of the lease term, which is until February 2022. As of September 30, 2015, the remaining lease payments under this lease totaled £2.2 million ($3.4 million based on the exchange rate as of September 30, 2015). This amount represents the maximum potential liability for future payments under the guarantee and will decrease over time as payments are made by the third party. In the event of default, the indemnity clauses in the transfer agreement govern the Company's ability to pursue and recover damages incurred. As of September 30, 2015, the Company does not anticipate any default by the third party. Therefore, no liability associated with this transaction has been recorded on the Company's condensed consolidated balance sheet as of September 30, 2015.

13


6. Equity Incentive Plan and Stock-Based Compensation
Stock-based compensation expense is included in the following line items in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Cost of revenue (excluding depreciation)
$
238

 
$
183

 
$
777

 
$
373

Sales and marketing
1,190

 
922

 
3,766

 
1,833

Research and development
397

 
286

 
1,295

 
584

General and administrative
1,272

 
1,143

 
3,435

 
2,511

 
$
3,097

 
$
2,534

 
$
9,273

 
$
5,301


Stock Option Awards

The following table summarizes the stock option activity for the nine months ended September 30, 2015:
 
Number of
Options
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
 
Aggregate
Intrinsic
Value
 
 
 
 
 
(in years)
 
(in thousands)
Outstanding options as of January 1, 2015
1,425,357

 
$
9.12

 
 
 
 
Granted
456,871

 
10.59

 
 
 
 
Exercised
(98,700
)
 
4.79

 
 
 
 
Forfeited
(152,125
)
 
15.39

 
 
 
 
Expired
(36,896
)
 
25.66

 
 
 
 
Outstanding options as of September 30, 2015
1,594,507

 
$
8.83

 
7.45
 
$
4,044

Exercisable as of September 30, 2015
908,554

 
$
6.82

 
6.37
 
$
3,778

Vested and expected to vest as of September 30, 2015
1,489,014

 
$
8.64

 
7.35
 
$
3,995


The total compensation cost related to nonvested stock options not yet recognized as of September 30, 2015 was $1.6 million and will be recognized over a weighted average period of approximately 2.0 years.

Restricted Stock Units

The following table summarizes the RSU activity for the nine months ended September 30, 2015:
 
Number of RSUs
 
Weighted Average Grant-Date Fair Value
Unvested RSUs as of January 1, 2015
944,734

 
$
22.76

Granted
1,520,780

 
10.22

Vested
(186,286
)
 
26.23

Forfeited
(196,980
)
 
15.55

Unvested RSUs as of September 30, 2015
2,082,248

 
$
13.98


The total unrecognized compensation cost related to the unvested RSUs as of September 30, 2015 was $15.1 million and will be recognized over a weighted average period of approximately 1.9 years.



14



7. Net Loss Per Share
Diluted loss per share is the same as basic loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss. The following securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutive for the three and nine months ended September 30, 2015 and 2014:
 
Three and Nine Months Ended September 30,
 
2015
 
2014
Warrants to purchase common stock

 
3,743

Stock options
1,594,507

 
1,518,737

RSUs
2,082,248

 
691,864

8. Segment and Geographic Information
Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance. The Company’s CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company’s operations constitute a single operating segment and one reportable segment.
Substantially all assets were held in the United States during the nine months ended September 30, 2015 and 2014. The following table summarizes revenue by geography for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Domestic
$
18,429

 
$
16,222

 
$
54,652

 
$
47,220

International
5,950

 
4,744

 
16,499

 
13,854

Total revenue
$
24,379

 
$
20,966

 
$
71,151

 
$
61,074



15


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II – Item 1A, “Risk Factors,” and our other filings with the Securities and Exchange Commission. Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, 2014, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2015.
Overview
We are a leading provider of software-as-a-service, or SaaS, solutions that enable our retailer and manufacturer customers to integrate, manage and optimize their merchandise sales across hundreds of online channels. Through our platform, we enable our customers to connect with new and existing sources of demand for their products, including e-commerce marketplaces, such as eBay, Amazon, Newegg and Sears, search engines and comparison shopping websites, such as Google, Microsoft's Bing and Nextag, and emerging channels, such as Facebook and Pinterest. Our suite of solutions, accessed through a standard web browser, provides our customers with a single, integrated user interface to manage their product listings, inventory availability, pricing optimization, search terms, data analytics and other critical functions across these channels. We also offer a Where to Buy solution that allows branded manufacturers to send visitors to their website directly to authorized resellers and to gain insight into consumer behavior. Our proprietary cloud-based technology platform delivers significant breadth, scalability and flexibility to our customers.
We sell subscriptions to our SaaS solutions primarily through our direct sales force. Our customers include the online businesses of traditional retailers, online retailers and branded manufacturers, as well as advertising agencies that use our solutions on behalf of their retailer clients. As of September 30, 2015, we had over 2,900 customers worldwide, including 34% of the top 500 U.S. internet retailers, as identified by Internet Retailer magazine based on their 2014 online sales.
The majority of our revenue is derived from subscription fees paid to us by our customers for access to and usage of our SaaS solutions for a specified contract term, which is usually one year. A portion of the subscription fee is typically fixed and is based on a specified minimum amount of gross merchandise value, or GMV, that a customer expects to process through our platform. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMV processed through our platform in excess of the customer’s specified minimum GMV amount.
We do not take title to any of the merchandise processed through our platform and we generally do not collect payments on behalf of our customers. We do not hold any inventory of merchandise and we are not involved in the physical logistics of shipping merchandise to buyers, which is handled by our customers.
We face a variety of challenges and risks, which we will need to address and manage as we pursue our growth strategy. In particular, we will need to continue to innovate in the face of a rapidly changing e-commerce landscape if we are to remain competitive, and we will need to effectively manage our growth, especially related to our international expansion. In addition, as consumer preferences potentially shift from smaller retailers, we need to continue to add large retailers and branded manufacturers as profitable customers. These customers generally pay a lower percentage of GMV as fees to us based on the relatively higher volume of their GMV processed through our platform. We continue to focus our efforts on increasing value for our customers to support higher rates.


16


Although e-commerce continues to expand as retailers and manufacturers continue to increase their online sales, it is also becoming more complex and fragmented due to the hundreds of channels available to retailers and manufacturers and the rapid pace of change and innovation across those channels. In order to gain consumers’ attention in a more crowded and competitive online marketplace, many retailers and an increasing number of manufacturers sell their merchandise through multiple online channels, each with its own rules, requirements and specifications. In particular, third-party marketplaces are an increasingly important driver of growth for a number of large online retailers, and as a result we need to continue to support multiple channels in a variety of geographies in order to support our targeted revenue growth. As of September 30, 2015, we supported 51 marketplaces, up from 41 at December 31, 2014.

We believe the growth in e-commerce globally presents an opportunity for retailers and manufacturers to engage in international sales. However, country-specific marketplaces are often the market share leaders in their regions, as is the case for Alibaba in Asia and MercadoLibre in much of Latin America. In order to help our customers capitalize on this potential market opportunity, and to address our customers’ needs with respect to cross-border trade, over the past few years, we have expanded our presence in the Asia-Pacific and Latin America regions through the opening of two offices in China and an office in Brazil. Doing business overseas involves substantial challenges, including management attention and resources needed to adapt to multiple languages, cultures, laws and commercial infrastructure, as further described in this report under the caption “Risks Related to our International Operations.”

Our senior management continuously focuses on these and other trends and challenges, and we believe that our culture of innovation and our history of growth and expansion will contribute to the success of our business. We cannot, however, assure you that we will be successful in addressing and managing the many challenges and risks that we face.
Key Financial and Operating Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our performance and project our future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions.
Number of Customers
The number of customers subscribing to our solutions is a primary determinant of our revenue. The number of customers was 2,910 and 2,781 as of September 30, 2015 and 2014, respectively.  For these purposes, we include all customers who subscribe to at least one of our solutions, but we exclude customers who subscribe only to one of our legacy product offerings from prior to 2008 that are focused on solutions for lower-volume eBay sellers and which are no longer part of our strategic focus.
Average Revenue per Customer
The average revenue generated by our customers is the other primary determinant of our revenue. We calculate this metric by dividing our revenue for a particular period by the average monthly number of customers during the period, which is calculated by taking the sum of the number of customers at the end of each month in the period and dividing by the number of months in the period. We typically calculate average revenue per customer in absolute dollars on a rolling twelve-month basis, but we may also calculate percentage changes in average revenue per customer on a quarterly basis in order to help us evaluate our period-over-period performance. Our average revenue per customer increased 4.4% to $32,748 for the twelve months ended September 30, 2015 as compared to $31,375 for the twelve months ended September 30, 2014.
Subscription Dollar Retention Rate
We believe that our ability to retain our customers and expand the revenue they generate for us over time is an important component of our growth strategy and reflects the long-term value of our customer relationships. We measure our performance on this basis using a metric we refer to as our subscription dollar retention rate. We calculate this metric for a particular period by establishing the cohort of customers that had active contracts as of the end of the prior period. We then calculate our subscription dollar retention rate by taking the amount of fixed subscription revenue we recognized for the cohort in the period for which we are reporting the rate and dividing it by the fixed subscription revenue we recognized for the same cohort in the prior period. For this purpose, we do not include any variable subscription fees paid by our customers or any implementation fees.

17


Although some customers in any given period elect not to renew their contracts with us, our customers that do renew their subscriptions often increase their fixed subscription pricing levels to align with their increasing GMV volumes processed through our platform and may subscribe to additional modules as well. If our subscription dollar retention rate for a period is over 100%, this means that the increased subscription revenue we recognized from customers that renewed their contracts during the period, or whose contracts did not come up for renewal during the period, more than offset the subscription revenue we lost from customers that did not renew their contracts.
For each of the twelve months ended September 30, 2015 and 2014, our subscription dollar retention rate exceeded 100%.
Adjusted EBITDA
Adjusted EBITDA represents our earnings before interest expense, income tax (benefit) expense and depreciation and amortization, adjusted to eliminate stock-based compensation expense, which is a non-cash item, and, for the nine months ended September 30, 2015, one-time severance and related costs. We believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results. However, adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with U.S. GAAP.
Adjusted EBITDA eliminates the impact of stock-based compensation expense and, for the nine months ended September 30, 2015, one-time severance and related costs, which we do not consider indicative of our operating performance. Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;
adjusted EBITDA does not reflect interest or tax payments that may represent a reduction in cash available to us; and
other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider adjusted EBITDA together with U.S. GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our other U.S. GAAP results. The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(4,791
)

$
(9,004
)

$
(20,271
)

$
(27,978
)
Adjustments:







Interest expense, net
60


55


142


157

Income tax (benefit) expense
1


6


(126
)

87

Depreciation and amortization expense
2,341


1,741


6,363


4,393

Total adjustments
2,402


1,802


6,379


4,637

EBITDA
(2,389
)

(7,202
)

(13,892
)

(23,341
)
Stock-based compensation expense
3,097


2,534


9,273


5,301

One-time severance and related costs

 

 
656

 

Adjusted EBITDA
$
708


$
(4,668
)

$
(3,963
)

$
(18,040
)

18


Components of Operating Results
Revenue
We derive the majority of our revenue from subscription fees paid to us by our customers for access to and usage of our SaaS solutions for a specified contract term, which is usually one year. A portion of the subscription fee is typically fixed and based on a specified minimum amount of GMV that a customer expects to process through our platform. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMV processed through our platform in excess of the customer’s specified minimum GMV. In most cases, the specified percentage of excess GMV on which the variable portion of the subscription is based is fixed and does not vary depending on the amount of the excess. We also receive implementation fees, which may include fees for providing launch assistance and training.
The following table shows the percentage of our total revenue attributable to fixed subscription fees plus implementation fees, as compared to the percentage attributable to variable subscription fees, for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(as a percentage of total revenue)
Fixed subscription fees plus implementation fees
79.5
%
 
78.6
%
 
78.6
%
 
75.8
%
Variable subscription fees
20.5

 
21.4

 
21.4

 
24.2

Total revenue
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

Because our customer contracts generally contain both fixed and variable pricing components, changes in GMV between periods do not translate directly or linearly into changes in our revenue. We use customized pricing structures for each of our customers depending upon the individual situation of the customer. For example, some customers may commit to a higher specified minimum GMV amount per month in exchange for a lower fixed percentage fee on that committed GMV. In addition, the percentage fee assessed on the variable GMV in excess of the committed minimum for each customer is typically higher than the fee on the fixed, committed portion. As a result, our overall revenue could increase or decrease even without any change in overall GMV between periods, depending on which customers generated the GMV. In addition, changes in GMV from month to month for any individual customer that are below the specified minimum amount would have no effect on our revenue from that customer, and each customer may alternate between being over the committed amount or under it from month to month. For these reasons, while GMV is an important qualitative and long-term directional indicator, we do not regard it as a useful quantitative measurement of our historic revenues or as a predictor of future revenues.
We recognize fixed subscription fees and implementation fees ratably over the contract period once the contract has been signed by both parties, the customer has access to our platform and transactions can be processed, the fees are fixed or determinable and collection is reasonably assured.
We generally invoice our customers for the fixed portion of the subscription fee in advance, in monthly, quarterly, semi-annual or annual installments. We invoice our customers for the implementation fee at the inception of the arrangement. Fixed subscription and implementation fees that have been invoiced are initially recorded as deferred revenue and are generally recognized ratably over the contract term.
We invoice and recognize revenue from the variable portion of subscription fees in the period in which the related GMV is processed, assuming that the four conditions specified above have been met.
Cost of Revenue (excluding depreciation)
Cost of revenue (excluding depreciation) primarily consists of salaries and personnel-related costs for employees providing services to our customers and supporting our platform infrastructure, including benefits, bonuses and stock-based compensation. Additional expenses include co-location facility costs for our data centers, infrastructure maintenance costs, fees we pay to credit card vendors in connection with our customers’ payments to us and other direct costs.  
Depreciation - Cost of Revenue
Depreciation expense related to cost of revenue consists primarily of depreciation for computer equipment directly associated with generating revenue.

19


Operating Expenses
Sales and marketing expense. Sales and marketing expense consists primarily of salaries and personnel-related costs for our sales and marketing and customer support employees, including benefits, bonuses, stock-based compensation and commissions. We record expense for commissions at the time of contract signing. Additional expenses include marketing, advertising and promotional event programs, corporate communications and travel.
Research and development expense. Research and development expense consists primarily of salaries and personnel-related costs for our research and development employees, including benefits, bonuses and stock-based compensation. Additional expenses include costs related to the development, quality assurance and testing of new technology and enhancement of our existing platform technology, consulting and travel.
General and administrative expense. General and administrative expense consists primarily of salaries and personnel-related costs for administrative, finance and accounting, information systems, legal and human resource employees, including benefits, bonuses and stock-based compensation. Additional expenses include consulting and professional fees, insurance, bad debt expense, investor relations, directors' and officers' liability insurance, other corporate expenses and travel, as well as costs associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies.
Depreciation and amortization expense. Depreciation and amortization expense consists primarily of depreciation from property and equipment, equipment leased under capital leases and amortization of software development costs and intangible assets.
Other Income (Expense)
Other income (expense) consists primarily of interest income and interest expense. Interest income represents interest received on our cash and cash equivalents. Interest expense consists primarily of interest on our capital leases.
Other income (expense) also includes the net effect of foreign currency revaluation gains and losses.
Seasonality
Our revenue fluctuates as a result of seasonal variations in our business, principally due to the peak consumer demand and related increased volume of our customers’ GMV during the year-end holiday season. As a result, we have historically had higher revenue in our fourth quarter than other quarters in a given year due to increased GMV processed through our platform, resulting in higher variable subscription fees. Along with the seasonally higher revenue we have experienced in the fourth quarter, we have also experienced higher gross margins in the fourth quarter. Our cost to run our platform infrastructure is generally fixed. Therefore, when applied against our generally fixed costs, the higher revenue in the fourth quarter has resulted in higher overall gross margins for us.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, and to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. During the nine months ended September 30, 2015, there were no material changes to our critical accounting policies and use of estimates, which are disclosed in our audited consolidated financial statements for the year ended December 31, 2014 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2015.

20


Recent Accounting Pronouncements
Refer to Note 2 to our condensed consolidated financial statements for a full description of recent accounting pronouncements.


Results of Operations
Comparison of the Three Months Ended September 30, 2015 and 2014
The following table presents our results of operations for the three months ended September 30, 2015 and 2014:
 
Three Months Ended September 30,
 
 
 
 
 
2015
 
2014
 
Period-to-Period  Change
 
Amount
 
Percentage of
Revenue
 
Amount
 
Percentage of
Revenue
 
 
Amount
 
Percentage
 
(dollars in thousands)
Revenue
$
24,379

 
100.0
 %
 
$
20,966

 
100.0
 %
 
$
3,413

 
16.3
 %
Cost of revenue (excluding depreciation)
4,954

 
20.3

 
5,020

 
23.9

 
(66
)
 
(1.3
)
Depreciation - Cost of revenue
1,336

 
5.5

 
998

 
4.8

 
338

 
33.9

Gross profit
18,089

 
74.2

 
14,948

 
71.3

 
3,141

 
21.0

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
11,879

 
48.7

 
13,595

 
64.8

 
(1,716
)
 
(12.6
)
Research and development
3,874

 
15.9

 
4,157

 
19.8

 
(283
)
 
(6.8
)
General and administrative
6,075

 
24.9

 
5,310

 
25.3

 
765

 
14.4

Depreciation and amortization
1,005

 
4.1

 
743

 
3.5

 
262

 
35.3

Total operating expenses
22,833

 
93.6

 
23,805

 
113.4

 
(972
)
 
(4.1
)
Loss from operations
(4,744
)
 
(19.4
)
 
(8,857
)
 
(42.1
)
 
4,113

 
(46.4
)
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
(60
)
 
(0.2
)
 
(55
)
 
(0.3
)
 
(5
)
 
9.1

Other income (expense), net
14

 
0.1

 
(86
)
 
(0.4
)
 
100

 
*

Total other income (expense)
(46
)
 
(0.1
)
 
(141
)
 
(0.7
)
 
95

 
(67.4
)
Loss before income taxes
(4,790
)
 
(19.5
)
 
(8,998
)
 
(42.8
)
 
4,208

 
(46.8
)
Income tax expense
1

 

 
6

 

 
(5
)
 
(83.3
)
Net loss
$
(4,791
)
 
(19.5
)%
 
$
(9,004
)
 
(42.8
)%
 
$
4,213

 
(46.8
)

* = not meaningful

Revenue
 
 
Three Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Revenue
$
24,379

 
$
20,966

 
$
3,413

 
16.3
%

The increase in revenue for the three months ended September 30, 2015 was mainly driven by an increase in the average revenue per customer, an increase in the number of customers and the continued expansion of our international operations.
We experienced a 9.8% increase in the average revenue per customer during the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. The increase in the average revenue per customer during the three months ended September 30, 2015 accounted for 60.8% of the increase in revenue during the period. The increase in the average revenue per customer was primarily attributable to an overall increase in transaction volume and, to a lesser extent, to modest overall increases in the percentage fees assessed on the fixed and variable portions of GMV under our contractual arrangements with some of our customers during the year. Because we generally enter into annual contracts with our

21


customers, we may renegotiate either or both of the fixed and variable components of the pricing structure of a customer’s contract each year. In addition, the increase in average revenue per customer was due in part to our established customers who have increased their revenue over time on our platform. In general, as customers mature they generate a higher amount of GMV from which we derive revenue and in some cases they may subscribe to additional modules on our platform, thereby increasing our subscription revenue.
In addition, we experienced a 4.6% increase in the number of customers at September 30, 2015 as compared to September 30, 2014. The increase in customers accounted for 39.2% of the increase in revenue during the three months ended September 30, 2015.
Our revenue from international operations of $6.0 million, or 24.4% of total revenue, for the three months ended September 30, 2015 increased from $4.7 million, or 22.6% of total revenue, for the three months ended September 30, 2014. The increase in revenue from our international operations was primarily attributable to an increase in the number of international customers.
Cost of Revenue (excluding depreciation)

 
Three Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Cost of revenue (excluding depreciation)
$
4,954

 
$
5,020

 
$
(66
)
 
(1.3
)%
Percentage of total revenue
20.3
%
 
23.9
%
 
 
 
 

Cost of revenue (excluding depreciation) remained relatively stable during the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. The decrease in cost of revenue (excluding depreciation) as a percentage of revenue reflects the implementation of our strategy to manage expenses and drive the business towards sustainable profitability.

Depreciation - Cost of revenue
 
 
Three Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Depreciation - cost of revenue
$
1,336

 
$
998

 
$
338

 
33.9
%
Percentage of total revenue
5.5
%
 
4.8
%
 
 
 
 

The increase in depreciation expense was attributable to an increase in capital expenditures associated with equipment for our data centers.
Operating Expenses
Sales and marketing

 
Three Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Sales and marketing
$
11,879

 
$
13,595

 
$
(1,716
)
 
(12.6
)%
Percentage of total revenue
48.7
%
 
64.8
%
 
 
 
 
The decrease in sales and marketing expense was primarily attributable to a $1.0 million decrease in our marketing and advertising expenses, promotional event programs, and travel costs and a $0.6 million decrease in salaries and personnel-related costs. The decrease in sales and marketing expense as a percentage of revenue reflects the implementation of our strategy to manage expenses and drive the business towards sustainable profitability.

22


Research and development
 
 
Three Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Research and development
$
3,874

 
$
4,157

 
$
(283
)
 
(6.8
)%
Percentage of total revenue
15.9
%
 
19.8
%
 
 
 
 

The decrease in research and development expense was primarily attributable to a $0.6 million decrease in salaries and personnel-related costs, partially offset by a $0.2 million increase in software and hosting expenses. The decrease in research and development expense as a percentage of revenue reflects the implementation of our strategy to manage expenses and drive the business towards sustainable profitability.
General and administrative
 
 
Three Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
General and administrative
$
6,075

 
$
5,310

 
$
765

 
14.4
%
Percentage of total revenue
24.9
%
 
25.3
%
 
 
 
 

The increase in general and administrative expense was primarily attributable to a $0.4 million increase in professional fees related to legal and consulting services and a $0.3 million increase in bad debt expense driven by customer growth and the associated increase in our revenue.
Depreciation and amortization
 
 
Three Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Depreciation and amortization
$
1,005

 
$
743

 
$
262

 
35.3
%
Percentage of total revenue
4.1
%
 
3.5
%
 
 
 
 

The increase in depreciation and amortization expense was primarily attributable to amortization expense associated with intangible assets acquired as a result of the E-Tale acquisition in October 2014. In addition, depreciation expense has risen due to an increase in capital expenditures during the fourth quarter of 2014 and the nine months ended September 30, 2015.
Additional Information
Stock-based compensation
 
Three Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Stock-based compensation
$
3,097

 
$
2,534

 
$
563

 
22.2
%
Percentage of total revenue
12.7
%
 
12.1
%
 
 
 
 

The increase in stock-based compensation expense was primarily attributable to our issuance of approximately 1.8 million RSUs subsequent to September 30, 2014 with grant date fair values ranging from $8.76 to $18.50. The expense associated with these RSUs accounted for approximately 94% of our stock-based compensation expense for the three months ended September 30, 2015.


23


Results of Operations
Comparison of the Nine Months Ended September 30, 2015 and 2014
The following table presents our results of operations for the nine months ended September 30, 2015 and 2014:

 
Nine Months Ended September 30,
 
 
 
 
 
2015
 
2014
 
Period-to-Period Change
 
Amount
 
Percentage of
Revenue
 
Amount
 
Percentage of
Revenue
 
 
Amount
 
Percentage
 
(dollars in thousands)
Revenue
$
71,151

 
100.0
 %
 
$
61,074

 
100.0
 %
 
$
10,077

 
16.5
 %
Cost of revenue (excluding depreciation)
15,571

 
21.9

 
15,686

 
25.7

 
(115
)
 
(0.7
)
Depreciation - Cost of revenue
3,536

 
5.0

 
2,483

 
4.1

 
1,053

 
42.4

Gross profit
52,044

 
73.1

 
42,905

 
70.2

 
9,139

 
21.3

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
40,790

 
57.3

 
41,475

 
67.9

 
(685
)
 
(1.7
)
Research and development
11,955

 
16.8

 
12,308

 
20.2

 
(353
)
 
(2.9
)
General and administrative
16,867

 
23.7

 
14,860

 
24.3

 
2,007

 
13.5

Depreciation and amortization
2,827

 
4.0

 
1,910

 
3.1

 
917

 
48.0

Total operating expenses
72,439

 
101.8

 
70,553

 
115.5

 
1,886

 
2.7

Loss from operations
(20,395
)
 
(28.7
)
 
(27,648
)
 
(45.3
)
 
7,253

 
(26.2
)
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
(142
)
 
(0.2
)
 
(157
)
 
(0.3
)
 
15

 
(9.6
)
Other income (expense), net
140

 
0.2

 
(86
)
 
(0.1
)
 
226

 
*

Total other income (expense)
(2
)
 

 
(243
)
 
(0.4
)
 
241

 
(99.2
)
Loss before income taxes
(20,397
)
 
(28.7
)
 
(27,891
)
 
(45.7
)
 
7,494

 
(26.9
)
Income tax (benefit) expense
(126
)
 
(0.2
)
 
87

 
0.1

 
(213
)
 
*

Net loss
$
(20,271
)
 
(28.5
)%
 
$
(27,978
)
 
(45.8
)%
 
$
7,707

 
(27.5
)

* = not meaningful


Revenue

 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Revenue
$
71,151

 
$
61,074

 
$
10,077

 
16.5
%

The increase in revenue for the nine months ended September 30, 2015 was mainly driven by an increase in the number of customers, an increase in the average revenue per customer and the continued expansion of our international operations.
We experienced a 4.6% increase in the number of customers at September 30, 2015 as compared to September 30, 2014. The increase in customers accounted for 61.2% of the increase in revenue during the nine months ended September 30, 2015.
In addition, we experienced a 6.1% increase in the average revenue per customer during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. The increase in the average revenue per customer during the nine months ended September 30, 2015 accounted for 38.8% of the increase in revenue during the period.



24


Our revenue from international operations of $16.5 million, or 23.2% of total revenue, for the nine months ended September 30, 2015 increased from $13.9 million, or 22.7% of total revenue, for the nine months ended September 30, 2014. The increase in revenue from our international operations was primarily attributable to an increase in the number of international customers.
Cost of Revenue (excluding depreciation) 

 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Cost of revenue
$
15,571

 
$
15,686

 
$
(115
)
 
(0.7
)%
Percentage of total revenue
21.9
%
 
25.7
%
 
 
 
 

Cost of revenue (excluding depreciation) remained relatively stable during the nine months ended September 30, 2015. The decrease in cost of revenue (excluding depreciation) was attributable to a $0.6 million charge incurred during the nine months ended September 30, 2014 for translation costs associated with a short-term initiative designed to expand our customers' presence in certain European countries. We did not incur any translation costs during the nine months ended September 30, 2015. The absence of the translation costs in the nine months ended September 30, 2015 was partially offset by a $0.4 million increase in salaries and personnel-related costs, mainly due to stock-based compensation, and a $0.2 million increase in co-location facility and website maintenance costs.
Depreciation - Cost of revenue
 
 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Depreciation - cost of revenue
$
3,536

 
$
2,483

 
$
1,053

 
42.4
%
Percentage of total revenue
5.0
%
 
4.1
%
 
 
 
 

The increase in depreciation expense was attributable to an increase in capital expenditures associated with equipment for our data centers.
Operating Expenses
Sales and marketing
 
 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Sales and marketing
$
40,790

 
$
41,475

 
$
(685
)
 
(1.7
)%
Percentage of total revenue
57.3
%
 
67.9
%
 
 
 
 

The decrease in sales and marketing expense was primarily attributable to a $2.1 million decrease in our marketing and advertising expenses, promotional event programs, and travel costs, as well as a $0.4 million decrease in recruiting and consulting costs, partially offset by a $1.8 million increase in salaries and personnel-related costs, mainly due to stock-based compensation. The decrease in sales and marketing expense as a percentage of revenue reflects the implementation of our strategy to manage expenses and drive the business towards sustainable profitability.


25


Research and development
 
 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Research and development
$
11,955

 
$
12,308

 
$
(353
)
 
(2.9
)%
Percentage of total revenue
16.8
%
 
20.2
%
 
 
 
 

The decrease in research and development expense was primarily attributable to a $0.4 million decrease in salaries and personnel-related costs and a $0.1 million decrease in recruiting costs, partially offset by a $0.1 million increase in software and hosting expenses. The decrease in research and development expense as a percentage of revenue reflects the implementation of our strategy to manage expenses and drive the business towards sustainable profitability.
General and administrative
 
 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
General and administrative
$
16,867

 
$
14,860

 
$
2,007

 
13.5
%
Percentage of total revenue
23.7
%
 
24.3
%
 
 
 
 

The increase in general and administrative expense was primarily attributable to one-time severance and related costs totaling $0.7 million recognized in the second quarter of 2015. We also experienced a $0.6 million increase in professional fees related to legal, consulting and audit and tax services, a $0.3 million increase in bad debt expense driven by customer growth and the associated increase in our revenue, a $0.3 million increase in general corporate expenses and a $0.2 million increase in salaries and personnel-related costs.
Depreciation and amortization
 
 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Depreciation and amortization
$
2,827

 
$
1,910

 
$
917

 
48.0
%
Percentage of total revenue
4.0
%
 
3.1
%
 
 
 
 

The increase in depreciation and amortization expense was primarily attributable to amortization expense associated with intangible assets acquired as a result of the E-Tale acquisition in October 2014. In addition, depreciation expense has risen due to an increase in capital expenditures during the fourth quarter of 2014 and the nine months ended September 30, 2015.
Additional Information
Stock-based compensation
 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2015
 
2014
 
Amount
 
Percentage
 
(dollars in thousands)
Stock-based compensation
$
9,273

 
$
5,301

 
$
3,972

 
74.9
%
Percentage of total revenue
13.0
%
 
8.7
%
 
 
 
 

The increase in stock-based compensation expense was primarily attributable to our issuance of approximately 1.8 million RSUs subsequent to September 30, 2014, which accounted for approximately 94% of our stock-based compensation expense for the nine months ended September 30, 2015.


26


Liquidity and Capital Resources
Prior to our initial public offering, or IPO, in May 2013, we funded our operations primarily through cash from operating activities, bank and subordinated debt borrowings and private placements of our redeemable convertible preferred stock. In May 2013, we closed our IPO in which we sold an aggregate of 6,612,500 shares of common stock, including the full exercise of the underwriters' option to purchase additional shares, for net proceeds of $82.0 million after deducting underwriting discounts and offering-related expenses. In November 2013, we closed a public offering in which we sold 1,000,000 shares of common stock for net proceeds of $31.9 million, after deducting underwriting discounts and offering-related expenses. Subsequent to our IPO, we have funded our operations primarily through cash from operating activities and the proceeds from our public offerings.
We have a loan and security agreement with a bank, which was last amended on September 17, 2014. Under the loan and security agreement, as amended, we have a borrowing capacity under a revolving line of credit in the amount of $10.0 million. The revolving line of credit has a term through September 17, 2016 and requires interest-only payments to be made monthly on any outstanding advances at the bank's prime rate, which was 3.25% at September 30, 2015, plus 0.25%. We are also obligated to pay an unused facility fee in the amount of 0.15% per year on any unused borrowing capacity. At September 30, 2015, we did not have any amounts outstanding under the revolving line of credit.
The revolving line of credit is collateralized by all of our assets, excluding our intellectual property, although we may not encumber our intellectual property without the consent of the bank. Under the terms of the loan and security agreement, we are required to meet and maintain specified financial and nonfinancial covenants. As of September 30, 2015, we were in compliance with all such covenants.
Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities and our existing cash balances will be sufficient to meet our cash requirements for at least the next 12 months.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
 
Nine Months Ended September 30,
 
2015
 
2014
 
(in thousands)
Cash (used in) provided by:
 
 
 
Operating activities
$
(4,804
)
 
$
(16,829
)
Investing activities
(3,601
)
 
(6,220
)
Financing activities
(1,690
)
 
778


Operating Activities
Our cash flows from operating activities are largely driven by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business, the increase in the amount of customers and the amount and timing of customer payments. Our cash flows from operations are affected by the seasonality of our business as noted above. As a result, we experience variations in the timing of invoicing and the receipt of payments from our customers.

For the nine months ended September 30, 2015, our cash used in operating activities of $4.8 million consisted of a net loss of $20.3 million and $1.3 million of cash used as a result of changes in working capital, partially offset by $16.7 million for non-cash items. Non-cash items primarily consisted of non-cash stock compensation expense of $9.3 million, depreciation and amortization expense of $6.4 million and bad debt expense of $1.3 million. The decrease in cash resulting from changes in working capital primarily consisted of an increase in accounts receivable of $4.2 million as a result of customer growth generating increased billings and revenue, and an increase in prepaid expenses and other assets of $2.1 million due to prepayments of general corporate expenses in 2015 that we did not incur in 2014. These decreases in cash were partially offset by an increase in deferred revenue of $3.0 million as a result of an increased number of customers prepaying for subscription services and an increase in accounts payable and accrued expenses of $1.9 million, primarily driven by timing of payments to our vendors and increased operating costs during the period.


27


For the nine months ended September 30, 2014, our cash used in operating activities of $16.8 million consisted of a net loss of $28.0 million, partially offset by $10.8 million in adjustments for non-cash items and $0.4 million of cash provided by changes in working capital. Adjustments for non-cash items primarily consisted of non-cash stock compensation expense of $5.3 million, depreciation and amortization expense of $4.4 million and bad debt expense of $1.0 million. The increase in cash resulting from changes in working capital primarily consisted of an increase in deferred revenue of $2.2 million as a result of an increased number of customers prepaying for subscription services, and a decrease in accounts receivable of $0.6 million as a result of increased cash collections during the period. These increases were partially offset by decreases in operating cash flow due to a decrease in accounts payable and accrued expenses of $1.7 million, primarily driven by timing of payments to our vendors and accrued bonuses and commissions related to the year ended December 31, 2013 that were paid in the first quarter of 2014, and an increase in prepaid expenses and other assets of $0.8 million.

Investing Activities
Our cash flows from investing activities generally consist of capitalized expenditures to create internally developed software and implement software purchased for internal use, and purchases of property and equipment to support the expansion of our infrastructure.

For the nine months ended September 30, 2015, cash used in investing activities was $3.6 million, consisting of $3.5 million for the purchase of property and equipment and $0.1 million for the payment of internal-use software development costs.
For the nine months ended September 30, 2014, cash used in investing activities was $6.2 million, consisting of $5.4 million for the purchase of property and equipment and $0.8 million for the payment of internal-use software development costs.

Financing Activities
Our cash flows from financing activities consist of proceeds from the exercises of stock options as well as payments on capital lease obligations and tax withholdings related to the net-share settlement of restricted stock units.

For the nine months ended September 30, 2015, cash used in financing activities was $1.7 million, consisting of $1.6 million used for the repayment of capital leases and $0.6 million used for the payment of taxes related to the net-share settlement of restricted stock units, partially offset by $0.5 million in cash received upon the exercise of stock options.

For the nine months ended September 30, 2014, cash provided by financing activities was $0.8 million, consisting of $1.8 million in cash received upon the exercise of stock options, partially offset by $1.0 million used for the repayment of capital leases.

Off-Balance Sheet Arrangements
As of September 30, 2015, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We are exposed to market risk related to changes in foreign currency exchange rates and interest rates. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we may enter into exchange rate hedging arrangements to manage the risks described below.
Foreign Currency Exchange Risk
With international operations, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and if our exposure increases, adverse movement in foreign currency exchange rates could have a material adverse impact on our financial results. Our primary exposures are related to non-U.S. dollar denominated revenue and operating expenses in the United Kingdom, Europe, Australia, Brazil, China and Hong Kong. As a result, we would experience increased revenue and operating expenses at our non-U.S. operations if there were a decline in the value of the U.S. dollar relative to these foreign currencies. Conversely, we would experience decreased

28


revenue and operating expenses at our non-U.S. operations if there were an increase in the value of the U.S. dollar relative to these foreign currencies. However, based on the size of our international operations and the amount of our revenue and expenses denominated in foreign currencies, a 10% change in foreign exchange rates would have had only an immaterial impact on our results of operations for the three and nine months ended September 30, 2015.
Interest Rate Risk
We are only marginally exposed to interest rate risk through our portfolio of cash and cash equivalents. Interest rates that may affect these items in the future will depend on market conditions and may differ from the rates we have experienced in the past.
We may be subject to interest rate risk in connection with borrowings under our revolving line of credit, which are subject to a variable interest rate. As of September 30, 2015, we did not have any borrowings outstanding under our revolving line of credit. Any debt we incur in the future may also bear interest at variable rates.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Security and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date at the reasonable assurance level.
(b) Changes in Internal Controls Over Financial Reporting
There have not been any changes in our internal controls over financial reporting during our fiscal quarter ended September 30, 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

29


PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In re ChannelAdvisor Securities Litigation. On January 23, 2015, plaintiff Justin Dice filed a purported class action complaint in the U.S. District Court for the Southern District of New York (S.D.N.Y.), Dice v. ChannelAdvisor Corporation et al., alleging violations of the federal securities laws against us and certain of our executive officers. Plaintiff Dice alleges that the defendants engaged in a fraudulent scheme to artificially inflate the price of our common stock by making false and misleading statements to investors concerning our financial guidance for the fourth quarter of 2014. On January 26, 2015, plaintiff David Gracia also filed a purported class action complaint in the S.D.NY., Gracia v. ChannelAdvisor Corporation et al., in which Plaintiff Gracia brings the same claims, against the same named defendants, as in the action brought by Plaintiff Dice. On May 5, 2015, the S.D.N.Y. consolidated the Dice and Gracia actions, captioned the actions as In re ChannelAdvisor Securities Litigation, and appointed Plaintiff Dice as lead plaintiff for the putative class. On July 2, 2015, the S.D.N.Y. granted the defendants’ motion to transfer the case to the U.S. District Court for the Eastern District of North Carolina. On September 28, 2015, the defendants moved to dismiss the case. The motion is not yet fully briefed. We dispute these claims and intend to defend the matter vigorously.
In addition, from time to time, we are subject to litigation and claims arising in the ordinary course of business but except as stated above, we are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial condition.

Item 1A. Risk Factors
Our business is subject to numerous risks. You should carefully consider the following risks, as well as general economic and business risks, and all of the other information contained in this Quarterly Report on Form 10-Q, together with any other documents we file with the SEC. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our common stock to decline.
Risks Related to Our Business
We have incurred significant net losses since inception, and it is possible that our operating expenses will increase in the foreseeable future, which may make it more difficult for us to achieve profitability.
We incurred net losses of $34.5 million and $20.3 million during the year ended December 31, 2014 and the nine months ended September 30, 2015, respectively, and we had an accumulated deficit of $154.9 million as of September 30, 2015. It is possible that our operating expenses will increase in the foreseeable future as we invest in increased sales and marketing and research and development efforts. As a result, we can provide no assurance as to whether or when we will achieve profitability. In addition, as we became a public company in 2013, we will continue to incur accounting, legal and other expenses that we did not incur as a private company. To achieve profitability, we will need to either increase our revenue sufficiently to offset these higher expenses or reduce our expense levels. Our recent revenue growth may not be sustainable, and if we are forced to reduce our expenses, our growth strategy could be compromised. If we are not able to achieve and maintain profitability, the value of our company and our common stock could decline significantly.
A significant portion of our revenue is attributable to sales by our customers on the Amazon and eBay marketplaces and through advertisements on Google. Our inability to continue to integrate our solutions with these channels would make our solutions less appealing to existing and potential new customers and could significantly reduce our revenue.
A substantial majority of the gross merchandise value, or GMV, that our customers process through our platform is derived from merchandise sold on the Amazon and eBay marketplaces or advertised on Google, and a similar portion of our variable subscription fees is attributable to sales by our customers through these channels. These channels, and the other channels with which our solutions are integrated, have no obligation to do business with us or to allow us access to their systems, and they may decide at any time and for any reason to significantly curtail or inhibit our ability to integrate our solutions with their channels. Additionally, Amazon, eBay or Google may decide to make significant changes to their respective business models, policies, systems or plans, and those changes could impair or inhibit our customers’ ability to use our solutions to sell their products on those channels, or may adversely affect the volume of GMV that our customers can sell on those channels or reduce the desirability of selling on those channels. Further, Amazon, eBay or Google could decide to compete with us more vigorously. Any of these results could cause our customers to reevaluate the value of our products and services and potentially terminate their relationships with us and significantly reduce our revenue.

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We may not be able to respond to rapid changes in channel technologies or requirements, which could cause us to lose revenue and make it more difficult to achieve profitability.
The e-commerce market is characterized by rapid technological change and frequent changes in rules, specifications and other requirements for retailers and manufacturers to be able to sell their merchandise on particular channels, as well as developments in technologies that can impede the display and tracking of advertisements. Our ability to retain existing customers and attract new customers depends in large part on our ability to enhance and improve our existing solutions and introduce new solutions that can adapt quickly to these technological changes. To achieve market acceptance for our solutions, we must effectively anticipate and offer solutions that meet frequently changing channel requirements in a timely manner. If our solutions fail to do so, our ability to renew our contracts with existing customers and our ability to create or increase demand for our solutions will be impaired.
If we are unable to retain our existing customers, our revenue and results of operations could be adversely affected.
We sell our solutions pursuant to contractual arrangements that generally have one-year terms. Therefore, our revenue growth depends to a significant degree upon subscription renewals. Our customers have no obligation to renew their subscriptions after the subscription term expires, and these subscriptions may not be renewed or, if renewed, may not be renewed on the same or more favorable terms for us. We may 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 satisfaction or dissatisfaction with our solutions, the cost of our solutions, the cost of solutions offered by our competitors and reductions in our customers’ spending levels. If our customers do not renew their subscriptions, renew on less favorable terms or for fewer modules, or do not purchase additional modules, our revenue may grow more slowly than expected or decline, and our ability to become profitable may be compromised.
As more of our sales efforts are targeted at larger enterprise customers, our sales cycle may become more time-consuming and expensive, and we may encounter pricing pressure, which could harm our business and operating results.
The cost and length of our sales cycle varies by customer. As we target more of our sales efforts at selling to larger enterprise customers, we may face greater costs, longer sales cycles and less predictability in completing some of our sales. These types of sales often require us to provide greater levels of education regarding our solutions. In addition, larger customers may demand more training and other professional services. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting sales and professional services resources to a smaller number of larger transactions.
We may not be able to compete successfully against current and future competitors. If we do not compete successfully, we could experience lower sales volumes and pricing pressure, which could cause us to lose revenues, impair our ability to pursue our growth strategy and compromise our ability to achieve profitability.
We face intense competition in the market for online channel management solutions and services, and we expect competition to intensify in the future. We have competitors, including some of the channels themselves, with longer operating histories, larger customer bases and greater financial, technical, marketing and other resources than we do. Increased competition may result in reduced pricing for our solutions, longer sales cycles or a decrease in our market share, any of which could negatively affect our revenue and future operating results and our ability to grow our business.
A number of competitive factors could cause us to lose potential sales or to sell our solutions at lower prices or at reduced margins, including:
Potential customers may choose to continue using or to develop applications in-house, rather than pay for our solutions;
The channels themselves, which typically offer software tools, often for free, that allow retailers and manufacturers to connect to them, may decide to compete more vigorously with us;
Competitors may adopt more aggressive pricing policies and offer more attractive sales terms, adapt more quickly to new technologies and changes in customer requirements, and devote greater resources to the promotion and sale of their products and services than we can;
Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance their products and expand their markets, and consolidation in our industry is likely to intensify. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share;

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Current and potential competitors may offer software that addresses one or more online channel management functions at a lower price point or with greater depth than our solutions and may be able to devote greater resources to those solutions than we can; and
Software vendors could bundle channel management solutions with other solutions or offer such products at a lower price as part of a larger product sale.
We may not be able to compete successfully against current and future competitors, including any channels that decide to compete against us more vigorously. In addition, competition may intensify as our competitors raise additional capital and as established companies in other market segments or geographic markets expand into our market segments or geographic markets. If we cannot compete successfully against our competitors, our business and our operating and financial results could be adversely affected.
If the e-commerce industry consolidates around a limited number of online channels, or if the complexities and challenges faced by retailers and manufacturers seeking to sell online otherwise diminish, demand for our solutions could decline.
Our solutions enable retailers and manufacturers to manage their merchandise sales through hundreds of disparate online channels. One of the key attractions of our solutions to retailers and manufacturers is the ability to help address the complexity and fragmentation of selling online. Although the number and variety of online channels available to retailers and manufacturers have been increasing, at the same time the share of online sales made through a small number of larger channels, particularly Amazon and eBay, has also been increasing. If the trend toward consolidation around a few large online channels accelerates, the difficulties faced by retailers and manufacturers could decline, which might make our solutions less important to retailers and manufacturers and could cause demand for our solutions to decline.
Our growth depends in part on the success of our strategic relationships with third parties.
We anticipate that we will continue to depend on our relationships with various third parties, including marketplaces and technology and content providers, in order to grow our business. Identifying, negotiating and documenting relationships with these third parties may require significant time and resources as does integrating their content and technology with our solutions. If the third-party content or technology integrated with our solutions is not well received by our customers, our brand and reputation could be negatively affected. Our agreements with third-party business partners are typically non-exclusive and do not prohibit them from working with our competitors or from offering competing services. If and to the extent that any of these third parties compete with us, it could hurt our growth prospects.
If the e-commerce market does not grow, or grows more slowly than we expect, particularly on the channels that our solutions support, demand for our online channel management solutions could be adversely affected.
For our existing customers and potential customers to be willing to subscribe to our solutions, the internet must continue to be accepted and widely used for selling merchandise. As e-commerce continues to evolve, regulation by federal, state or foreign agencies may increase. Any regulation imposing greater fees for internet use or restricting information exchanged over the internet could result in a decline in the use of the internet, which could harm our business.
In addition, if consumer utilization of our primary e-commerce channels, such as Amazon, eBay and Google, does not grow or grows more slowly than we expect, demand for our solutions would be adversely affected, our revenue would be negatively impacted and our ability to pursue our growth strategy and become profitable would be compromised.
Software errors, defects or failures or human error could cause our solutions to oversell our customers’ inventory or misprice their offerings or could cause other errors, which would hurt our reputation and reduce customer demand.

Complex software applications such as ours may contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Despite our testing and testing by our customers, our current and future products may contain defects. Our customers rely on our solutions to automate the allocation of their inventory simultaneously across multiple online channels, as well as to ensure that their sales comply with the policies of each channel and sometimes to dynamically determine product pricing at any given moment. Some customers subscribe to our solutions on a managed-service basis, in which case our personnel operate our solutions on behalf of the customer. In the event that our solutions do not function properly, or if there is human error on the part of our service staff, errors could occur, including that our customers might inadvertently sell more inventory than they actually have in stock, make sales that violate channel policies or underprice or overprice their offerings. Overselling their inventory could force our customers to cancel orders at rates that violate channel policies. Underpricing would result in lost revenue to our customers and overpricing could result in lost sales. In addition, our pricing policies with our customers are largely based upon our customers’ expectations of the levels of their GMV that will be processed through our platform over the term of their agreement with us, and errors in our software or human error could cause

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transactions to be incorrectly processed that would cause GMV to be in excess of our customers’ specified minimum amounts, in which case our variable subscription fee-based revenue could be overstated. Any of these results or other errors could reduce demand for our solutions and hurt our business reputation. Customers could also seek recourse against us in these cases and, while our contractual arrangements with customers typically provide that we are not liable for damages such as these, it is possible that these provisions would not be sufficient to protect us.

If the use of "cookie" tracking technologies is restricted, regulated or otherwise blocked, or if changes in our industry cause cookies to become less reliable or acceptable as a means of tracking consumer behavior, the amount or accuracy of GMV processed on our platform, and our related revenue, could decrease.

Cookies are small data files that are sent by websites and stored locally on an internet user's computer or mobile device. Our customers enable cookies on their sites and monitor internet user activity, such as viewing pages and completing transactions. We collect data via cookies that we ultimately use to report GMV, which translates to revenue. However, internet users can easily disable, delete and block cookies directly through browser settings or through other software, browser extensions or hardware platforms that physically block cookies from being created and stored.

Third-party cookies are downloaded from domains not associated with the address currently being viewed in an internet user's browser. Cookies can be specifically blocked by browser settings, and, for example, the Safari internet browser blocks third-party cookies by default. Internet users can also download free or paid “ad blocking” software that prevents third-party cookies from being stored on a user’s device. On the other hand, first-party cookies are downloaded directly from the address domain of an internet user, and are generally considered safer by privacy concerns. We currently collect data from both first-party and third-party cookie implementations. Our customers currently implementing our third-party cookie solution might be slow to migrate their sites to first-party cookie technologies, which could result in less cookie data that we can collect, and therefore less reported revenue data that can we can store.

Privacy regulations might also restrict how our customers deploy our cookies on their sites, and this could potentially increase the number of internet users that choose to proactively disable cookies on their systems. In the European Union, the Directive on Privacy and Electronic Communications requires users to give their consent before cookie data can be stored on their local computer or mobile device. Users can decide to opt out of any cookie data creation, which could negatively impact the revenue we might recognize.

There have been efforts within our industry to replace cookies with alternative tracking technologies. To the extent these efforts are successful, we may have difficulty adapting to those new tracking technologies and we may become dependent on third parties for access to tracking data.

We may have to develop alternative systems to collect user revenue data if users block cookies or regulations introduce barriers to collecting cookie data. In addition, third parties may develop technology or policies to harvest user data including through next-generation web browsers or other means, which could subsequently prevent us from directly importing data to our systems. We may not be able to develop adequate alternatives to cookie data collection, which could negatively impact our ability to reliably measure GMV.
We rely on non-redundant data centers and cloud computing providers to deliver our SaaS solutions. Any disruption of service from these providers could harm our business.
We manage our platform and serve all of our customers from third-party data center facilities and cloud computing providers that are non-redundant, meaning that the data centers and providers are currently not configured as backup for each other. While we engineer and architect the actual computer and storage systems upon which our platform runs, we do not control the operation of the facilities at which they are deployed.
The owners of our data facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to transfer to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so.
Any changes in third-party service levels at our data centers or any errors, defects, disruptions or other performance problems with our solutions could harm our reputation and damage our customers’ businesses. Interruptions in our services could reduce our revenue, require us to issue credits to customers, subject us to potential liability, cause our existing customers to not renew their agreements or adversely affect our ability to attract new customers.
Our data centers and cloud computing providers are vulnerable to damage or interruption from human error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures,

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telecommunications failures, cyber-attacks and similar events. The occurrence of a natural disaster or an act of terrorism, or vandalism or other misconduct, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in the availability of our SaaS solutions or impair their functionality. Our business, growth prospects and operating results would also be harmed if our customers and potential customers are not confident that our solutions are reliable.
We rely in part on a pricing model under which a variable portion of the subscription fees we receive from customers is based upon the amount of GMV that those customers process through our platform, and any change in the attractiveness of that model or any decline in our customers’ sales could adversely affect our financial results.
We have adopted a pricing model under which a portion of the subscription fees we receive from most of our customers is variable, based on the amount of our customers’ GMV processed through our platform that exceeds a specified amount established by contract, which we refer to as variable subscription fees. Most of our customer contracts include this variable subscription fee component. If sales by our customers processed through our platform were to decline, or if more of our customers require fully fixed pricing terms that do not provide for any variability based on their GMV processed through our platform, our revenue and margins could decline.
Our quarterly operating results have fluctuated in the past and may do so in the future, which could cause our stock price to decline.
Our operating results have historically fluctuated due to changes in our business, and our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You should not rely on period-to-period comparisons of our operating results as an indication of our future performance. Factors that may cause fluctuations in our quarterly operating results include, but are not limited to, the following:
seasonal patterns in consumer spending;
the addition of new customers or the loss of existing customers;
changes in demand for our software;
the timing and amount of sales and marketing expenses;
changes in the prospects of the economy generally, which could alter current or prospective customers’ spending priorities, or could increase the time it takes us to close sales;
changes in our pricing policies or the pricing policies of our competitors;
costs necessary to improve and maintain our software platform; and
costs related to acquisitions of other businesses.

Our operating results may fall below the expectations of market analysts and investors in some future periods, which could cause the market price of our common stock to decline substantially.
The seasonality of our business creates significant variance in our quarterly revenue, which makes it difficult to compare our financial results on a sequential quarterly basis.
Our customers are retailers and manufacturers that typically realize a significant portion of their online sales in the fourth quarter of each year during the holiday season. As a result of this seasonal variation, our subscription revenue fluctuates, with the variable portion of our subscription fees being higher in the fourth quarter than in other quarters and with revenue generally declining in the first quarter sequentially from the fourth quarter. Our business is therefore not necessarily comparable on a sequential quarter-over-quarter basis and you should not rely solely on quarterly comparisons to analyze our growth.
Failure to adequately manage our growth could impair our ability to deliver high-quality solutions to our customers, hurt our reputation and compromise our ability to become profitable.
We have experienced, and may continue to experience, significant growth in our business. If we do not effectively manage our growth, the quality of service of our solutions may suffer, which could negatively affect our reputation and demand for our solutions. Our growth has placed, and is expected to continue to place, a significant strain on our managerial, operational and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. This will require us to, among other things:
hire additional personnel, both domestically and internationally;
implement additional management information systems;

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maintain close coordination among our engineering, operations, legal, finance, sales and marketing and client service and support organizations; and
further develop our operating, administrative, legal, financial and accounting systems and controls.
Moreover, if our sales continue to increase, we may be required to concurrently deploy our hosting infrastructure at multiple additional locations or provide increased levels of customer service. Failure to accomplish any of these requirements could impair our ability to continue to deliver our solutions in a timely fashion, fulfill existing customer commitments or attract and retain new customers.
If we do not retain our senior management team and key employees, or if we fail to attract and retain additional highly skilled sales talent, we may not be able to sustain our growth or achieve our business objectives.
Our future success is substantially dependent on the continued service of our senior management team. Our future success also depends on our ability to continue to attract, retain, integrate and motivate highly skilled technical, sales and administrative employees. Competition for these employees in our industry is intense. As a result, we may be unable to attract or retain these management and other key personnel that are critical to our success, resulting in harm to our key client relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs. The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and pursue our business goals.
Our business and growth objectives also may be hindered if our efforts to expand our sales team do not generate a corresponding increase in revenue. In particular, if we are unable to hire, develop and retain talented sales personnel or if our new sales personnel are unable to achieve expected productivity levels in a reasonable period of time, we may not be able to significantly increase our revenue and grow our business.
Our strategy of pursuing opportunistic acquisitions or investments may be unsuccessful and may divert our management’s attention and consume significant resources.
A part of our growth strategy is to opportunistically pursue acquisitions of, or investments in, other complementary businesses or individual technologies. Any acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition, acquisitions involve numerous risks, any of which could harm our business, including:
difficulties in integrating the operations, technologies, services and personnel of acquired businesses, especially if those businesses operate outside of our core competency of providing e-commerce software solutions;
cultural challenges associated with integrating employees from acquired businesses into our organization;
ineffectiveness or incompatibility of acquired technologies or services;
failure to successfully further develop the acquired technology in order to recoup our investment;
potential loss of key employees of acquired businesses;
inability to maintain the key business relationships and the reputations of acquired businesses;
diversion of management’s attention from other business concerns;
litigation for activities of acquired businesses, including claims from terminated employees, customers, former stockholders or other third parties;
in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;
costs necessary to establish and maintain effective internal controls for acquired businesses; and
increased fixed costs.
If current efforts to allow states to require online retailers to collect sales tax on their behalf are successful, e-commerce in general could decline, our solutions could become less attractive and the amount of GMV processed through our platform, and our related revenue, could decline.
Although current U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales taxes with respect to remote sales, an increasing number of states have considered or adopted laws that attempt to require out-of-state retailers to collect sales taxes on their behalf. In addition, legislation currently moving through the U.S. Senate and the U.S.

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House of Representatives, called the Marketplace Fairness Act, would override the Supreme Court rulings and enable states to require that online retailers collect sales tax from the states’ residents. Some larger online retailers, including Amazon, have announced their support for legislation along these lines. This is a rapidly evolving area and we cannot predict whether this or other similar legislation will ultimately be adopted or what form it might take if adopted. For example, while the current Senate and House legislation includes an exception for small retailers, some of the state efforts do not and there can be no assurance that any legislation ultimately adopted would include such an exception. If the states or Congress are successful in these attempts to require online retailers to collect state or local income taxes on out-of-state purchases, buying online would lose some of its current advantage over traditional retail models and could become less attractive to consumers. This could cause e-commerce to decline, which would, in turn, hurt the business of our customers, potentially make our products less attractive and cause the amount of GMV processed through our platform, and ultimately our revenue, to decline. In addition, it is possible that one or more states or the federal government or foreign countries may seek to impose a tax collection, reporting or record-keeping obligation on companies like us that facilitate e-commerce, even though we are not an online retailer. Similar issues exist outside of the United States, where the application of value-added tax or other indirect taxes on online retailers and companies like us that facilitate e-commerce is uncertain and evolving.
Evolving domestic and international data privacy regulations may restrict our ability, and that of our customers, to solicit, collect, process, disclose and use personal information or may increase the costs of doing so, which could harm our business.
Federal, state and foreign governments and supervising authorities have enacted, and may in the future enact, laws and regulations concerning the solicitation, collection, processing, disclosure or use of consumers’ personal information. Evolving regulations regarding personal data and personal information, in the European Union and elsewhere, especially relating to classification of IP addresses, machine identification, location data and other information, may limit or inhibit our ability to operate or expand our business. Such laws and regulations require or may require us or our customers to implement privacy and security policies, permit consumers to access, correct or delete personal information stored or maintained by us or our customers, inform individuals of security incidents that affect their personal information, and, in some cases, obtain consent to use personal information for specified purposes. Other proposed legislation could, if enacted, impose additional requirements and prohibit the use of specific technologies, such as those that track individuals’ activities on web pages or record when individuals click on a link contained in an email message. Such laws and regulations could restrict our customers’ ability to collect and use web browsing data and personal information, which may reduce our customers’ demand for our solutions.
Changing industry standards and industry self-regulation regarding the collection, use and disclosure of data may have similar effects. Existing and future privacy and data protection laws and increasing sensitivity of consumers to unauthorized disclosures and use of personal information may also negatively affect the public’s perception of our customers’ sales practices. If our solutions are perceived to cause, or are otherwise unfavorably associated with, invasions of privacy, whether or not illegal, we or our customers may be subject to public criticism. Public concerns regarding data collection, privacy and security may also cause some consumers to be less likely to visit our customers’ websites or otherwise interact with our customers, which could limit the demand for our solutions and inhibit the growth of our business.
Any failure on our part to comply with applicable privacy and data protection laws, regulations, policies and standards or any inability to adequately address privacy concerns associated with our solutions, even if unfounded, could subject us to liability, damage our reputation, impair our sales and harm our business. Furthermore, the costs to our customers of compliance with, and other burdens imposed by, such laws, regulations, policies and standards may limit adoption of and demand for our solutions.
Cybersecurity incidents could harm our business and negatively impact our financial results.
Cybersecurity incidents could endanger the confidentiality, integrity and availability of our information resources and the information we collect, use, store and disclose. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. We believe that we take reasonable steps to protect the security, integrity and confidentiality of the information we collect, use, store, and disclose, but there is no guarantee that inadvertent or unauthorized data access will not occur despite our efforts. For example, we could be impacted by software bugs or other technical malfunctions, as well as employee error or malfeasance. Any unauthorized access or use of information, virus or similar breach or disruption to our, our customers’, or our partners’ systems and security measures could result in disrupted operations, loss of information, damage to our reputation and customer relationships, early termination of our contracts and other business losses, indemnification of our customers, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, financial penalties, litigation, regulatory investigations, and other significant liabilities, any of which could materially harm our business.

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Risks Related to the Software-as-a-Service (SaaS) Model
If we fail to manage and increase the capacity of our hosted infrastructure, our customers may be unable to process transactions through our platform, which could harm our reputation and demand for our solutions.
We have experienced significant growth in the number of users, transactions and data that our hosting infrastructure supports. We seek to maintain sufficient excess capacity in our hosted infrastructure to be sufficiently flexible and scalable to meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments and to handle spikes in usage. However, the provision of new hosting infrastructure requires significant lead time. If we do not accurately predict our infrastructure capacity requirements, particularly in the fourth quarter when we typically experience significant increases in the volume of customer transactions processed through our platform, our customers could experience service outages that may subject us to financial penalties or other liabilities, result in customer losses, harm our reputation and adversely affect our ability to grow our revenue.
We derive most of our revenue from annual subscription agreements, as a result of which a significant downturn in our business may not be immediately reflected in our operating results.
We derive most of our revenue from subscription agreements, which are typically one year in length. As a result, a significant portion of the revenue we report in each quarter is generated from customer agreements entered into during previous periods. Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in our financial performance in that quarter but might negatively affect our revenue in future quarters. Accordingly, the effect of significant declines in sales and market acceptance of our solutions may not be reflected in our short-term results of operations.
Our business is substantially dependent upon the continued growth of the market for on-demand SaaS solutions. If this market does not continue to grow, demand for our solutions could decline, which in turn could cause our revenues to decline and impair our ability to become profitable.
We derive, and expect to continue to derive, substantially all of our revenue from the sale of our solutions, which are delivered under a SaaS model. As a result, widespread use and acceptance of this business model is critical to our future growth and success. Under the more traditional license model for software procurement, users of the software typically run the applications in-house on their own hardware. Because many companies are generally predisposed to maintaining control of their information technology systems and infrastructure, there may be resistance to the concept of accessing software functionality as a service provided by a third party. In addition, the market for SaaS solutions is still evolving, and existing and new market participants may introduce new types of solutions and different approaches to enable organizations to address their needs. If the market for SaaS solutions fails to grow or grows more slowly than we currently anticipate, demand for our solutions and our revenue, gross margin and other operating results could be negatively impacted.
Risks Related to Our International Operations
Our increasing international operations subject us to increased challenges and risks. If we do not successfully manage the risks associated with international operations, we could experience a variety of costs and liabilities and the attention of our management could be diverted.
Since launching our international operations in 2004, we have expanded, and expect to further expand, our operations internationally by opening offices in new countries and regions worldwide. However, our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, taxation systems, alternative dispute systems, regulatory systems and commercial infrastructures. International expansion will require us to invest significant funds and other resources. Expanding internationally may subject us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:
recruiting and retaining employees in foreign countries;
increased competition from local providers;
compliance with applicable foreign laws and regulations;
longer sales or collection cycles in some countries;
credit risk and higher levels of payment fraud;
compliance with anti-bribery laws, such as the Foreign Corrupt Practices Act;
currency exchange rate fluctuations;

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foreign exchange controls that might prevent us from repatriating cash earned outside the United States;
economic and political instability in some countries;
less protective intellectual property laws;
compliance with the laws of numerous foreign taxing jurisdictions in which we conduct business, potential double taxation of our international earnings and potentially adverse tax consequences due to changes in applicable U.S. and foreign tax laws;
increased costs to establish and maintain effective controls at foreign locations; and
overall higher costs of doing business internationally.
If our revenue from our international operations does not exceed the expense of establishing and maintaining these operations, our business and operating results will suffer.
We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in full compliance with applicable laws.
Our solutions are subject to export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our solutions must be made in compliance with these laws. If we fail to comply with these U.S. export control laws and import laws, including U.S. Customs regulations, we could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers, and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities.
Furthermore, the U.S. export control laws and economic sanctions laws prohibit the shipment or export of specified products and services to U.S. embargoed or sanctioned countries, governments and persons. Even though we take precautions to prevent our solutions from being provided to U.S. sanctions targets, if our solutions and services were to be exported to those prohibited countries despite such precautions, we could be subject to government investigations, penalties, reputational harm or other negative consequences.
Any change in export or import regulations, economic sanctions or related laws, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions, or in our decreased ability to export or sell our solutions to existing or potential customers with international operations. Additionally, changes in our solutions may be required in response to changes in export and import regulations, which could lead to delays in the introduction and sale of our solutions in international markets, prevent our customers with international operations from deploying our solutions or, in some cases, prevent the export or import of our solutions to some countries, governments or persons altogether. Any decreased use of our solutions or limitation on our ability to export our solutions or sell them in international markets would hurt our revenue and compromise our ability to pursue our growth strategy.
Risks Related to Intellectual Property
We operate in an industry with extensive intellectual property litigation. Claims of infringement against us may hurt our business.
Our success depends, in part, upon non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement without major financial expenditures or adverse consequences. The internet-related software field generally is characterized by extensive intellectual property litigation. Although our industry is rapidly evolving, many companies that own, or claim to own, intellectual property have aggressively asserted their rights. From time to time, we have been subject to legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties will continue to assert intellectual property claims against us, particularly as we expand the complexity and scope of our business. In addition, most of our subscription agreements require us to indemnify our customers against claims that our solutions infringe the intellectual property rights of third parties.
Future litigation may be necessary to defend ourselves or our customers by determining the scope, enforceability and validity of third-party proprietary rights or to establish our proprietary rights. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus solely on extracting royalties and

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settlements by enforcing patent rights may target us. Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend and could:
hurt our reputation;
adversely affect our relationships with our current or future customers;
cause delays or stoppages in providing our services;
divert management’s attention and resources;
require technology changes to our software that would cause us to incur substantial cost;
subject us to significant liabilities; and
require us to cease some or all of our activities.
In addition to liability for monetary damages against us, which may be tripled and may include attorneys’ fees, or, in some circumstances, damages against our customers, we may be prohibited from developing, commercializing or continuing to provide some or all of our software solutions unless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially favorable terms, or at all.
Our failure to protect our intellectual property rights could diminish the value of our services, weaken our competitive position and reduce our revenue.
We regard the protection of our intellectual property, which includes trade secrets, copyrights, trademarks, domain names and patent applications, as critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.
We have sought patent protection for some of our technologies but there can be no assurance that any patents will ultimately be issued. We are also pursuing the registration of our domain names, trademarks and service marks in the United States and in jurisdictions outside the United States. Effective trade secret, copyright, trademark, domain name and patent protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. We may be required to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could be expensive and time-consuming.
We have licensed in the past, and expect to license in the future, some of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation.
Monitoring unauthorized use of our intellectual property is difficult and costly. Our efforts to protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual property. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Our competitors may also independently develop similar technology. In addition, the laws of many countries, such as China and India, do not protect our proprietary rights to as great an extent as do the laws of European countries and the United States. Further, the laws in the United States and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect our intellectual property could result in competitors offering services that incorporate our most technologically advanced features, which could seriously reduce demand for our software solutions. In addition, we may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination that is unfavorable to us. In addition, litigation is inherently uncertain, and thus we may not be able to stop our competitors from infringing upon our intellectual property rights.
Our use of “open source” software could negatively affect our ability to sell our solutions and subject us to possible litigation.
A portion of our technology platform and our solutions incorporates so-called “open source” software, and we may incorporate additional open source software in the future. Open source software is generally licensed by its authors or other third parties under open source licenses. If we fail to comply with these licenses, we may be subject to specified conditions,

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including requirements that we offer our solutions that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of the particular open source license. If an author or other third party that distributes open source software we use 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, including being enjoined from the sale of our solutions that contained the open source software and required to comply with the foregoing conditions, which could disrupt the sale of the affected solutions. In addition, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition and require us to devote additional research and development resources to change our products.
Risks Related to Ownership of Our Common Stock
An active trading market for our common stock may not continue to develop or be sustained.

Prior to our initial public offering, or IPO, in May 2013, there was no public market for our common stock. Although our common stock is listed on the New York Stock Exchange, or NYSE, we cannot assure you that an active trading market for our shares will continue to develop or be sustained. If an active market for our common stock does not continue to develop or is not sustained, it may be difficult for investors in our common stock to sell shares without depressing the market price for the shares or to sell the shares at all.
The trading price of the shares of our common stock has been and is likely to continue to be volatile.
Since our IPO, our stock price has been volatile. The stock market in general and the market for technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:
actual or anticipated variations in our operating results;
changes in financial estimates by us or by any securities analysts who might cover our stock;
conditions or trends in our industry;
stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the software industry;
announcements by us or our competitors of new product or service offerings, significant acquisitions, strategic partnerships or divestitures;
announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
capital commitments;
investors’ general perception of our company and our business;
recruitment or departure of key personnel; and
sales of our common stock, including sales by our directors and officers or specific stockholders.
In addition, in the past, stockholders have initiated class action lawsuits against technology companies following periods of volatility in the market prices of these companies’ stock. In January 2015, two purported class action complaints were filed alleging violations of the federal securities laws against a group of defendants including us and certain of our current executive officers. We dispute the claims asserted and intend to defend the matter vigorously. In the third quarter of 2015, we moved to dismiss the case and the outcome of our motion is pending. These cases, and additional litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources from our business.

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If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about us, our business or our market, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that equity research analysts publish about us and our business. As a newly public company, we have only limited research coverage by equity research analysts. Equity research analysts may elect not to initiate or continue to provide research coverage of our common stock, and such lack of research coverage may adversely affect the market price of our common stock. Even if we have equity research analyst coverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.
The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plans or otherwise will dilute all other stockholders.
Our certificate of incorporation authorizes us to issue up to 100,000,000 shares of common stock and up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investment, our stock incentive plans or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.
Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.
There are provisions in our certificate of incorporation and bylaws that may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control was considered favorable by some or all of our stockholders. For example, our board of directors has the authority to issue up to 5,000,000 shares of preferred stock. The board of directors can fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. As a result, the market price of our common stock and the voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferred stock may result in the loss of voting control to other stockholders.
Our charter documents also contain other provisions that could have an anti-takeover effect, including:
only one of our three classes of directors is elected each year;
stockholders are not entitled to remove directors other than by a 66 2/3% vote and only for cause;
stockholders are not permitted to take actions by written consent;
stockholders cannot call a special meeting of stockholders; and
stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings.
In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions by prohibiting Delaware corporations from engaging in specified business combinations with particular stockholders of those companies. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that investors are willing to pay for our stock.
We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments

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not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) December 31, 2018, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.0 billion, (3) the last day of the fiscal year in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (4) any date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the rules and regulations of the NYSE. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting and perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting. This requires that we incur substantial professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts.
We may discover weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements, and we may in the future discover additional weaknesses that require improvement. In addition, our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
If we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the NYSE, the Securities and Exchange Commission, or SEC, or other regulatory authorities.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future and our stock may not appreciate in value.
We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any existing or future debt agreements may preclude us from paying dividends. There is no guarantee that shares of our common stock will appreciate in value or that the price at which our stockholders have purchased their shares will be able to be maintained.
We will incur increased costs and demands upon management as a result of being a public company.