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PhunwareUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 _____________________________________FORM 10-K(Mark one)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2013or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ____ to ____Commission file number 001-35940CHANNELADVISOR CORPORATION(Exact name of Registrant as specified in its charter)Delaware 56-2257867(State or other jurisdiction ofincorporation or organization) (IRS EmployerIdentification No.) 2701 Aerial Center ParkwayMorrisville, NC 27560(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (919) 228-4700Securities registered pursuant to Section 12(b) of the Act:Title of Each Class: Name of Each Exchange on which RegisteredCommon Stock, $0.001 par value New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: None_____________________________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x NoIndicate 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 12months (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. x Yes ¨ NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted 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 postsuch files). x Yes ¨ NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ 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 definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer x(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 Exchange Act). ¨ Yes x No The aggregate market value of ChannelAdvisor Corporation voting and non-voting common equity held by non-affiliates as of June 28, 2013 (the last business day of the registrant'smost recently completed second fiscal quarter) based on the closing sale price of $15.73 as reported on the New York Stock Exchange on that date was $159,748,028.At January 31, 2014, 24,326,101 shares of ChannelAdvisor Corporation Common Stock, $0.001 par value, were outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Company's definitive proxy statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, for its 2014 Annual Meeting ofStockholders are incorporated by reference in Part III of this Form 10-K. Table of ContentsSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K (this "Annual Report") contains forward-looking statements within the meaning of Section 27A of the Securities Actof 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve substantial risks anduncertainties. The forward-looking statements are contained principally in Part I, Item 1. "Business," Part I, Item 1A. "Risk Factors,” and Part II, Item 7."Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere in this Annual Report. In somecases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,”“objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparableterminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that maycause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution youthat these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot becertain. Forward-looking statements include statements about:•the growth of the e-commerce industry and the software-as-a-service, or SaaS, enterprise application software market in general;•the expected growth of advertising dollars spent on paid search and gross merchandise value, or GMV, sold on comparison shopping websites;•consumer adoption of mobile devices and usage for commerce;•the growth of social networking and commerce applications;•our growth strategy; and•our beliefs about our capital expenditure requirements and that our capital resources will be sufficient to meet our anticipated cash requirementsthrough at least the next 12 months.You should refer to Item 1A. "Risk Factors” section of this Annual Report for a discussion of important factors that may cause our actual results todiffer materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy maybe material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warrantyby us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly updateany forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore, not relyon these forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report.1 Table of ContentsTABLE OF CONTENTS Page PART I Item 1. Business3Item 1A. Risk Factors13Item 1B.Unresolved Staff Comments25Item 2.Properties25Item 3.Legal Matters25Item 4.Mine Safety Disclosures25 PART II Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities26Item 6.Selected Financial Data28Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations30Item 7A.Quantitative and Qualitative Disclosure About Market Risk45Item 8.Financial Statements and Supplementary Data46Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure71Item 9A. Controls and Procedures71Item 9B.Other Information71 PART III Item 10.Directors, Executive Officers and Corporate Governance72Item 11.Executive Compensation72Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters72Item 13.Certain Relationships and Related Transactions, and Director Independence72Item 14.Principal Accountant Fees and Services72 PART IV Item 15. Exhibits and Financial Statement Schedules73 Signatures77 2 Table of ContentsPART IITEM 1. BUSINESSOverviewWe are a leading provider of SaaS solutions that enable our retailer and manufacturer customers to integrate, manage and optimize their merchandisesales across hundreds of online channels. Through our platform, we enable our customers to connect with new and existing sources of demand for theirproducts, including e-commerce marketplaces, such as eBay, Amazon, Newegg and Sears, search engines and comparison shopping websites, such asGoogle, Microsoft’s Bing, and Nextag, and emerging channels, such as Facebook and Pinterest. Our suite of solutions, accessed through a standard webbrowser, provides our customers with a single, integrated user interface to manage their product listings, inventory availability, pricing optimization, searchterms, data analytics and other critical functions across these channels. Our proprietary cloud-based technology platform delivers significant breadth,scalability and flexibility. In 2013, our customers processed approximately $4.4 billion in GMV through our platform. As of December 31, 2013, ourcustomers managed over 150 million stock-keeping units, or SKUs, of their inventory on our platform.We serve customers across a wide range of industries and geographies. As of December 31, 2013, we had over 2,400 customers worldwide, including27% of the top 500 U.S. internet retailers, as ranked by Internet Retailer magazine based on 2012 sales, up from 16% of the top 500 U.S. internet retailers,based on 2007 sales, as of December 31, 2007. Our customers include both traditional and online retailers, such as Ann Taylor, eBags.com, J&R Electronicsand Jos. A. Bank Clothiers, as well as manufacturers of consumer goods, such as Dell, Dooney and Bourke, Lenovo, Sony and Under Armour.E-commerce has grown significantly over the last several years, as consumers have increasingly shifted their retail purchases from traditional brick-and-mortar stores to online stores and marketplaces. This growth has been due to a number of factors, including:•the availability of a broader selection of merchandise online;•consumer convenience and ease of use;•more competitive and transparent pricing;•increased functionality and reliability of e-commerce websites;•the emergence of mobile connected devices and specialized websites; and•the proliferation of online distribution channels.As a result of these factors, consumers today have more options than ever before to discover, research and purchase products online.While these e-commerce growth drivers create significant opportunity for retailers and manufacturers, they also create additional complexity andchallenges. Retailers and manufacturers seeking new avenues to expand their online sales must manage product data and transactions across hundreds ofhighly fragmented online channels where data attributes vary, requirements change frequently and the pace of innovation is rapid and increasing.We address these challenges by offering retailers and manufacturers SaaS solutions that enable them to integrate, manage and optimize theirmerchandise sales on a unified platform across these disparate online channels. We generate revenue from our customers’ access to and usage of our SaaSsolutions, which are organized into modules. Each module integrates with a particular type of channel, such as third-party marketplaces, paid search orcomparison shopping websites, or supports specific online functionality aimed at customers wanting to establish their own e-commerce presence or enhancethe effectiveness of their existing storefronts, such as creating webstores or employing rich media solutions on their websites. Using our solutions, customerscan:•connect with new channels and more easily integrate with channels they already use;•access emerging online sources of consumer demand, such as social networks and mobile devices;•adapt to the frequently changing policies and requirements of each channel;•manage real-time inventory allocation and availability across channels;3 Table of Contents•implement dynamic pricing and promotion strategies across channels;•efficiently manage, evaluate and optimize customer traffic to their own e-commerce websites;•more easily sell into new geographic territories worldwide;•reduce dependence on in-house information technology staff and avoid significant up-front capital expenses; and•access in real-time the latest product and software upgrades that we regularly release on our SaaS platform to keep up with the rapid pace ofchange and innovation in the market.We derive our revenue primarily from subscription fees paid to us by our customers for access to and usage of our SaaS solutions for a specifiedcontract term, which is usually one year. A portion of the subscription fee is typically fixed and is based on a specified minimum amount of GMV that acustomer expects to process through our platform. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMVprocessed through our platform in excess of the customer’s specified minimum GMV amount. We believe that our subscription fee pricing model aligns ourinterests with those of our customers. We also receive implementation fees, which may include fees for providing launch assistance and training.Our reported operating results include revenue attributable to the products from two small legacy acquisitions prior to 2008. We do not consider theseproducts to be a core part of our strategic focus going forward. In this Annual Report, we may refer to core revenue, which is our revenue excluding revenueattributable to these non-core, legacy products, and core customers, which are customers who subscribe to any of our solutions other than these non-core,legacy products. These metrics are described in more detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-KeyOperating and Financial Performance Metrics.”Industry BackgroundIncreasing complexity and fragmentation for retailers and manufacturers selling onlineE-commerce is a large and global market that continues to expand as retailers and manufacturers continue to increase their online sales. However, it isalso an increasingly complex and fragmented market due to the hundreds of channels available to retailers and manufacturers and the rapid pace of changeand innovation across those channels. Historically, a retailer or manufacturer might have simply established an online storefront and used a basic paid searchprogram to drive traffic to its website. Today, in order to gain consumers’ attention in a more crowded and competitive online marketplace, many retailers andan increasing number of manufacturers sell their merchandise through multiple online channels, each with its own rules, requirements and specifications. Inaddition, retailers and manufacturers often seek to sell their products in multiple countries, each with its own local consumer preferences and behaviors.Several significant trends have contributed to this increasing complexity and fragmentation, including:•Emergence and growth of online third-party marketplaces. Third-party marketplaces, which are marketplaces that aggregate manysellers, are an increasingly important driver of growth for a number of large online retailers. Some of these marketplaces, such as Amazon, offerproducts from their own inventory, known as first-party products, as well as products sold by others, known as third-party products; othermarketplaces, such as eBay, offer only third-party products. In addition, several of the largest traditional brick-and-mortar retailers, includingWalmart, Best Buy, Sears and Tesco, have incorporated third-party marketplaces into their online storefronts, allowing other retailers andmanufacturers to market their products to consumers they might not otherwise reach.•Mainstream adoption of mobile devices for e-commerce. Mobile internet-enabled devices, such as smartphones and tablets, enable newconsumer shopping behaviors, such as in-store barcode scanning to find online promotions, better pricing or alternative products, a practicecommonly known as “showrooming.” While benefiting consumers by increasing the transparency and accessibility of e-commerce, theproliferation of mobile devices and mobile commerce requires retailers and manufacturers to build additional device-specific optimization andfunctionality into their sites, increasing the complexity of managing their online presences.•Growth of additional online consumer touch points. As consumers have moved more of their shopping and product discovery online,paid search and comparison shopping sites have emerged as key influencers and important points of product research for consumers makingpurchase decisions.4 Table of Contents•Global growth in e-commerce driving opportunities for international selling. The growth in e-commerce globally presents anopportunity for retailers and manufacturers to engage in international sales. However, country-specific marketplaces are often the market shareleaders in their regions, as is the case for MercadoLibre in much of Latin America and Alibaba in Asia. Retailers and manufacturers seeking toincrease international e-commerce often need to extend their online presence to include a variety of these international channels.•Widespread use of social networking and commerce applications. The rapid growth of social networking and commerce applicationsprovides a nascent but potentially valuable channel through which retailers and manufacturers can connect to consumers.Challenges with alternative e-commerce solutionsThe fragmentation and increasing complexity of e-commerce channels is placing greater demands on retailers and manufacturers that seek to grow theironline sales. These retailers and manufacturers need solutions that will enable them to easily integrate their product offerings and inventory across multipleonline channels. Traditional solutions, however, typically suffer from several limitations, including the following:•In-house solutions are costly and may be slow to adapt to industry change and innovation. To keep up with the pace of change andinnovation of online channels, retailers and manufacturers that rely on in-house capabilities are required to invest in and maintain significanttechnological infrastructure, human resources and industry relationships. Successful in-house solutions typically require long periods of setuptime, substantial up-front capital expenditures and significant ongoing maintenance expense.•Point solutions are limited in functionality and channels supported. There are numerous narrowly tailored, or point, solutions availablefor retailers and manufacturers to help them manage single online channels or a single category of channels, but these point solutions often donot address the needs of retailers and manufacturers seeking to manage pricing and inventory across multiple channels through a single, unifiedplatform.•Solutions provided by the channels are not aligned with customers’ broader online goals. Most online channels offer their ownsolutions that help retailers and manufacturers connect with their specific channel and provide basic inventory control and data reportingfunctionality. By their very nature, however, these solutions are not channel independent and cannot help customers coordinate or optimize theironline sales across the multiple online avenues available to them. As with point solutions, retailers and manufacturers must work with disparatethird-party providers to connect with a broad array of channels, which requires significant time and costs.SaaS solutions generally offer customers several distinct advantages over traditional in-house models, known as on-premises solutions, including lowerupfront and ongoing costs, faster speed of implementation and less reliance on internal IT staff.The ChannelAdvisor SolutionOur suite of SaaS solutions allows our customers to more easily integrate, manage and optimize their online sales across hundreds of available channelsthrough a single, integrated platform. Our suite of solutions includes a number of individual offerings, or modules. Each module integrates with a particulartype of channel, such as third-party marketplaces, paid search or comparison shopping websites, or supports specific online functionality aimed at customerswanting to establish their own e-commerce presence or enhance the effectiveness of their existing online storefronts, such as creating webstores or employingrich media solutions on their websites. Using our cloud-based platform, customers can connect to multiple, disparate channels through a single, user-friendlysolution instead of separately integrating with each channel. We provide a single code base and multi-tenant architecture, which means that all of our customersoperate on the same version of our software and we do not customize our products for individual customers. We provide our customers with access to new andexisting online channels and new sources of demand for their products, which can ultimately lead to increased revenue for our customers.We believe our suite of solutions offers the following key benefits for our customers:•Single, fully integrated solution. Through our SaaS platform, we provide our customers with a single web-based interface as the centrallocation for them to control, analyze and manage their online sales across hundreds of available channels and multiple geographies. This unifiedview enables our customers to more cost-effectively manage product listings, inventory availability, pricing optimization, search terms, dataanalytics and other critical functions across channels based on the customer’s specified rules and performance metrics in order to drive trafficand increase revenue.5 Table of Contents•Reduced integration costs, time to market and dependence on in-house resources. Customers can more easily and quickly introducetheir products, both to channels on which they already have a presence and to new channels, without the costs related to installing andmaintaining their own hardware and software infrastructure. A customer’s initial installation and integration of our solutions can often becompleted in less than two months, with additional modules of our software generally available immediately without incurring significantadditional resources to integrate. We manage and host our solutions on behalf of our customers, thereby reducing the customer’s cost anddependency on dedicated IT staff or on-premises systems.•Scalable technology platform. In 2013, our customers processed approximately $4.4 billion in GMV through our platform and as ofDecember 31, 2013, our customers managed over 150 million SKUs of their inventory on our platform. We believe that the scalability of ourplatform allows us to quickly and efficiently support an increasing number of product listings and transactions processed through our platformas we add new customers, integrate new channels and accommodate seasonal surges in consumer demand.•Flexibility to adapt and instantaneous access to our most up-to-date capabilities. Channels are frequently updating their productinformation requirements, policies, merchandising strategies and integration specifications, requiring customers to frequently revise theirproduct listings, attributes, business rules and possibly even their overall online business strategies. Without the ability to quickly adapt tothese changes, customers risk losing revenue. Through our single code base and multi-tenant architecture, we provide the latest channel updatesthrough regular product upgrades. When we develop and deploy new features, functions and capabilities, or make changes to keep up with thechanging priorities and requirements of each channel, our customers simultaneously benefit from those new capabilities and changes.•Robust data and reporting analytics. Through our robust data and reporting analytics, we provide our customers with insight into the latestchannel and consumer trends and general product performance. Our dashboards highlight sales trends, top performing products, sellerreputation and repricing activity, among other key performance indicators, and alert customers to issues and errors in product listings. Thesecapabilities provide actionable insights that allow customers to evaluate and, if necessary, improve the efficiency of their business rules onexisting or new channels.Our ProductsKey Elements of the ChannelAdvisor PlatformWe automate the workflow through which retailers and manufacturers manage their sales through online channels. Our suite of solutions includes thefollowing key capabilities:•Inventory and order management. We provide a single, unified platform for our customers to upload and modify their product catalogdata, monitor inventory stock levels and create a single inventory feed that serves multiple available online channels. Managing inventory andorder data is the foundation for much of the customer activity on our platform. We offer a variety of ways for customers to enter and modifyproduct data, including through a sophisticated user interface, file exchange and application programming interfaces, or APIs. Our inventorysystem is capable of scaling across thousands of customers during critical selling periods, such as the year-end holiday season. The flexibilityof the system allows each customer to customize the inventory data specific to its products, such as size, color, height and width, and to varythe format of the data to meet the specific requirements of each channel. Our platform provides various features that allow a customer to listproducts on multiple channels while mitigating the risk of overselling. These features include the ability to allocate inventory across channels,set buffer quantities to avoid overselling and receive automatic updates based on changes to the customer’s inventory.•Product matching. Once inventory is loaded into the platform, we provide features that improve our customer’s ability to successfully list itsproducts on the various channels. Depending on the needs of the particular channel, we are able to pre-validate the customer’s data and formatsbefore sending them to the channel, reducing errors caused by poor data quality and thus reducing the time it takes to list products on thatchannel. On some channels, we employ advanced product-matching algorithms that are designed to accurately place the customer’s productofferings within the channel’s product classification taxonomy.•Business rules and templates. Our platform offers tools that enable a customer to develop and manage sophisticated business rules andproduct listing templates that automatically determine how and when the product will be displayed in each channel. Through a single interface, acustomer can utilize these tools to customize product listing descriptions across various channels using different attributes, such as price, timeof day and competitive dynamics. For example, a consumer electronics retailer can automatically advertise tens of thousands6 Table of Contentsof products on multiple channels while ensuring real-time accuracy of product availability, optimizing price and managing to specific marginthresholds, all at an individual product level.•Price optimization. Our platform provides customers the ability to dynamically price their products across some of our available channelsbased on a number of factors, such as prices of competitors, margin thresholds and promotions. Prices can vary by channel and, using oursophisticated technology, a customer can automatically update pricing based on the competitive environment. The customer avoids the manualeffort of monitoring the competition and changing prices, while preserving the ability to remain price competitive.•Proprietary reporting and analytics. We provide proprietary reporting and analytics capabilities that allow our customers to view generalproduct performance and trends affecting their consumer base across multiple channels and to obtain detailed performance data at a channel orSKU level that can be used in a particular online sales campaign. Our dashboards highlight sales trends, top performing products, sellerreputation and repricing activity, among other key performance indicators. The dashboards also alert customers to issues or errors, such as datathat is in a form inconsistent with the requirements of a particular channel. These capabilities provide actionable insights that allow customers torevise their business rules and listings on a real-time basis with the goal of improving their sales and profitability.•Developer ecosystem. We offer third-party developers of complementary e-commerce solutions access to our platform through APIs. TheseAPIs enable these third-party developers to build connections to our platform that meet their specific needs without requiring us to offercustomized software code to them. We currently provide APIs to approximately 150 third-party developers who have integrated their solutionswith ours. For example, our API integrates our platform with online storefronts provided by Demandware, another provider of SaaS e-commercesolutions, to further streamline our joint customers’ e-commerce operations.Individual ModulesWe offer our software suite to customers through a series of modules. Generally, each of our modules is priced individually and is integrated with ourplatform’s underlying inventory management system, templates, rules and reporting systems. The primary modules we offer are:•Marketplaces. Our Marketplaces module connects customers to third-party marketplaces, including Amazon, Best Buy, eBay, Groupon, LaRedoute, Newegg, Sears.com, Tesco and TradeMe.•Comparison Shopping. Our Comparison Shopping module connects customers to over 100 comparison shopping websites, includingGoogle Shopping, Nextag, PriceGrabber, Shopping.com, TheFind, LeGuide and Kelkoo.•Paid Search. Our Paid Search module allows customers to advertise products on search engines such as Google, Bing and Yahoo!. Thismodule utilizes data from our inventory management system and also provides an automated search-term bidding capability so that customerscan better manage their online marketing spending.•Social Campaigns. Our Social Campaigns module allows customers to publish customized promotional campaigns on Facebook. With thismodule, customers can promote featured products, seasonal specials, daily deals and new products to educate consumers, increase brandawareness and drive traffic back to their own e-commerce websites.•Flex Feeds. Our Flex Feeds module allows customers to generate and send customized product data feeds to their partners, such as affiliatenetworks, retargeting vendors, personalization vendors and product review platforms.We also offer two additional modules aimed at customers that want to establish their own e-commerce storefronts or to enhance the effectiveness of theirexisting storefronts.•Webstores Amplifier. Our Webstores Amplifier module allows customers to connect their product data to a webstore platform such asShopify. This connection enables product data on their website to be synchronized with the product catalog data entered in ChannelAdvisor.Additionally, order and post-transaction information is synchronized with their ChannelAdvisor account.•Rich Media. Our Rich Media module provides enhanced media asset management, image zoom, color swatching and video capabilities and istargeted to customers seeking to enhance product merchandising and their consumers’ online experience on their e-commerce websites, therebyimproving conversion rates.7 Table of ContentsOur CustomersAs of December 31, 2013, we had over 2,400 core customers worldwide, including retail and manufacturer customers across many consumer productcategories, and served 27% of the Internet Retailer Top 500 based on 2012 sales. For the year ended December 31, 2013, our ten largest customers in theaggregate accounted for 6.9% of our total revenue. No single customer accounted for more than 2% of our total revenue during the year ended December 31,2013.The following chart provides a breakdown of our core customer base as of December 31, 2013 by retail category:8 Table of ContentsThe following chart shows the breakdown of our core customer base as of December 31, 2013 by geography:The percentages in the charts above reflect the number of core customers in the specified categories. We assign each customer to one of the retailcategories shown in the first chart based on the primary category of merchandise it sells online, even though some customers may sell merchandise in morethan one category. We categorize U.S. and international customers based on their billing address.We also classify our customers into self-service accounts and managed-service accounts. Self-service customers operate our software themselves, whilemanaged-service customers generally outsource most or all of the management of one or more channels to our professional services team, which then operatesour software on the customer’s behalf based on instructions provided to us by the customer. Our self-service customers account for a substantial majority ofour revenue.Our Technology PlatformWe have developed our proprietary technology platform over more than a decade with a focus on delivering industry-leading breadth, scalability,reliability and flexibility. Our platform has always been cloud-based and SaaS, with a single code base and multi-tenant software architecture. Because of this,there is no need for our customers to download, install or upgrade software.We develop our software using agile software development methodologies, which allow us to rapidly iterate by developing small, incremental changesthat are continuously integrated into our code base. We generally release new versions of our software approximately every 30 days, except during the year-endholiday season. Through our single code base and multi-tenant software architecture, our customers benefit from our new capabilities simultaneously. We donot need to maintain multiple versions of our software code for different customers.We physically host our platform in two secure third-party data center facilities located in North America. We deploy both hardware we own andhardware we lease, including servers, networking systems and storage systems, in these data center facilities. We use hardware and software virtualization tomaximize the utilization we achieve from our hardware systems. The data center facilities are biometrically secured, environmentally controlled andredundantly powered. We employ system security, including firewalls, encryption technology and antivirus software, and we conduct regular system tests andvulnerability and intrusion assessments. In the event of failure, we have engineered our systems with backup and recovery capabilities designed to provide forbusiness continuity within each data center. We also make use of third-party cloud-based systems, such as content delivery networks, to push some of ourstorage and processing into the cloud.9 Table of ContentsResearch and DevelopmentOur research and development efforts are focused on enhancing the architecture of our technology platform, creating additional functionality for ourcustomers, enhancing our external developer APIs and maintaining and extending the various points of integration we have to the online channels we support.As of December 31, 2013, we had a total of 93 employees engaged in research and development functions.CompetitionThe market for products that help retailers and manufacturers reach online consumers is competitive. The competitive dynamics of our market areunpredictable because it is in an early stage of development, rapidly evolving, fragmented and subject to potential disruption by new technological innovationsand the ability of channels to compete with us or make changes to which we need to rapidly adapt.Several competitors provide solutions that compete with some of the capabilities of our platform, including those who provide software or services toconnect retailers and manufacturers with one or more online channels. We also compete with in-house solutions used by retailers and manufacturers that electto build and maintain their own proprietary integrations to online channels. In addition, we compete with the channels themselves, which typically offersoftware tools, often for free, allowing retailers and manufacturers to connect to them.We believe the principal competitive factors in our industry include:•industry expertise and thought leadership;•relationships with leading online channels;•relationships with leading retailers and manufacturers;•channel independence;•breadth of online channels supported;•integration of capabilities;•proven and scalable technology; and•brand awareness and reputation.We believe that we compete favorably with respect to all of these factors.Intellectual PropertyOur ability to protect our intellectual property, including our technology, will be an important factor in the success and continued growth of ourbusiness. We protect our intellectual property through trade secrets law, patents, copyrights, trademarks and contracts. Some of our technology relies uponthird-party licensed intellectual property.We have two patent applications pending in the United States and one patent application pending in Brazil. We expect to apply for additional patents toprotect our intellectual property and will review whether pursuing patent protection in other countries is appropriate. We own U.S., European Union andAustralian trademark registrations for ChannelAdvisor and have trademark registrations pending in many other countries.In addition to the foregoing, we have established business procedures designed to maintain the confidentiality of our proprietary information, includingthe use of confidentiality agreements and assignment-of-inventions agreements with employees, independent contractors, consultants and companies withwhich we conduct business.Government RegulationThe legal environment of the internet is evolving rapidly in the United States and elsewhere. The manner in which existing laws and regulations will beapplied to the internet in general, and how they will relate to our business in particular, both in the United States and internationally, are often unclear. Forexample, we often cannot be certain how existing laws will apply in the e-commerce and online context, including with respect to such topics as privacy,pricing, credit card fraud, advertising, taxation, content regulation, quality of products and services and intellectual property ownership and infringement.Furthermore, it is not clear how existing laws governing issues such as sales and other taxes and personal privacy will apply to the internet, as many of theselaws were adopted prior to the advent of the internet and do not contemplate or address the unique issues raised by the internet or e-commerce. It is also unclearhow the laws that do reference the internet will be interpreted by courts, which may impact their applicability and scope. Compliance may be costly and mayrequire us to modify10 Table of Contentsour business practices and product offerings. In addition, it is possible that governments of one or more countries may seek to censor content available on thewebsites of our customers or may even attempt to completely block access to those websites. Noncompliance or perceived noncompliance could also subject usto significant penalties and negative publicity. Accordingly, adverse legal or regulatory developments could substantially harm our business.Customers load product information and other content onto our platform, generally without any control or oversight by us, at which point we maylegally be considered to be the distributor of that content. This presents legal challenges to our business and operations, such as rights of privacy or intellectualproperty rights related to the content loaded onto our platform. Both in the United States and internationally, we must monitor and comply with a host of legalconcerns regarding the content loaded onto our platform. The scope of our liability for third-party content loaded to our platform for delivery to various onlinee-commerce channels may vary from jurisdiction to jurisdiction and may vary depending on the type of claim, such as privacy, infringement or defamationclaims. Our ability to employ processes to quickly remove infringing or offending content from our platform, for example, is an important tool in protecting usfrom exposure for the potentially infringing activities of our users worldwide. We also incorporate protections in customer contracts that allow us to take steps,if needed, to limit our risk regarding much of the content loaded onto, and collected by, our platform and solutions.Numerous laws and regulatory schemes have been adopted at the national and state level in the United States and internationally that have a directimpact on our business and operations. These laws include, but are not limited to, the following:Copyright and trademark. The Copyright Act of 1976 and the statutes and regulations associated with copyrights and trademarks and enforced bythe United States Patent and Trademark Office are intended to protect the rights of third parties from infringement. Using our automated service, customerscan generally upload any content they designate for use with our solutions. We maintain an active copyright and trademark infringement policy and respond totake-down requests by third-party intellectual property right owners that might result from content posted by our customers using our solutions. As ourbusiness expands to other countries, we must also respond to regional and country-specific intellectual property considerations, including take-down and ceaseand desist notices in foreign languages, and we must build infrastructure to support these processes. The Digital Millennium Copyright Act, or DMCA, alsoapplies to our business. This statute provides relief for claims of circumvention of copyright-protected technologies but includes a safe harbor that is intendedto reduce the liability of online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights ofothers. Our copyright and trademark infringement policy is intended to satisfy the DMCA safe harbor in order to reduce our liability for customer-generatedmaterials incorporated into our platform.Data privacy and security. Data privacy and security with respect to the collection of personally identifiable information continues to be a focus ofworldwide legislation and compliance review. Examples include statutes adopted by the State of California that require online services to report breaches of thesecurity of personal data, and to report to California customers when their personal data might be disclosed to direct marketers. In the European Union, whereU.S. companies must meet specified privacy and security standards, the Data Protection Directive requires comprehensive information privacy and securityprotections for consumers with respect to information collected about them. Compliance requirements include disclosures, consents, transfer restrictions,notice and access provisions for which we may in the future need to build further infrastructure to support. We adhere to the Data Protection Directive’s SafeHarbor Privacy Principles and comply with the U.S.-E.U. Safe Harbor Framework as agreed to and set forth by the U.S. Department of Commerce and theEuropean Union concerning U.S. companies doing business in Europe and collecting personal information from European citizens. Under the Safe HarborFramework, we post on our website our privacy policies and practices concerning the use and disclosure of user data. Any failure by us to comply with ourposted privacy policies, the Safe Harbor Framework, U.S. Federal Trade Commission, or FTC, requirements or other privacy-related laws and regulationscould result in proceedings by governmental or regulatory bodies that could potentially harm our business, results of operations and financial condition.In this regard, there are a large number of legislative proposals before the U.S. Congress and various state legislative bodies regarding privacy issuesthat could affect our business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could harm ourbusiness through a decrease in customers and revenue. These decreases could be caused by, among other possible provisions, the required use of disclaimersor other requirements before prospective buyers can interact with our customers. For example, we have had to work with our customers to comply with thePrivacy and Electronic Communications (EC Directive) (Amendment) Regulations 2011 instituted by the United Kingdom, commonly referred to as the UKCookie Law, which was designed to protect computer users from technologies identifying their computers and specified activities conducted on thosecomputers without the users’ consent. We use tracking technology to track purchases from our customers through our platform, in order to calculate variablesubscription fees owed by our customers, among other things. Prohibiting or inhibiting such tracking could make it difficult or impossible to monitor ourvariable subscription fees. The interpretation and implementation of processes to comply with the UK Cookie Law continues to evolve, and we cannot predicthow any new laws will apply to us or our business. Similar “do not track” legislative proposals11 Table of Contentshave been considered in the United States at the federal level, although none have been enacted to date. If enacted, such legislative proposals could prohibit orrestrict the use of certain technologies, including tracking technology.Unsolicited e-mails and communications. The CAN-SPAM Act of 2003 and similar laws adopted by a number of states regulate unsolicitedcommercial e-mails, create criminal penalties for unmarked sexually-oriented material and e-mails containing fraudulent headers and control other abusiveonline marketing practices. Similarly, FTC guidelines impose responsibilities upon us and our customers for communications with consumers and imposefines and liability for any failure to comply with rules relating to advertising or marketing practices that the FTC may deem misleading or deceptive. TheEuropean Union also maintains standards and regulations with respect to communications with consumers that we must comply with as we expand ourmarketing practices into those countries or with which our customers, utilizing our solutions, must comply. Some ways we seek to comply with thesemeasures include requiring our customers to communicate with their consumers in order to comply with laws concerning spam and unsolicited emails andestablishing processes to allow direct receivers of e-mail marketing communications from us to opt out of future communications.Credit card protections. We collect credit card data in processing the fees paid to us by our customers, as well as consumer credit card informationwhen our customers use some of our solutions. Several major credit card companies have formed the Payment Card Industry Council, or PCI Council, inorder to establish and implement security standards for companies that transmit, store or process credit card data. The PCI Council has created the PaymentCard Industry Data Security Standard, or PCI DSS. Though the PCI DSS is not law, merchants using PCI Council members to process transactions arerequired to comply with the PCI DSS, with associated fines and penalties for non-compliance. Elements of the PCI DSS have begun to emerge as law in somestates, however, and we expect the trend to continue as to further laws and restrictions in collecting and using credit card information. All of our solutions, tothe extent they involve the collection of consumer credit card information, are PCI DSS compliant. We have also engaged a third-party compliance adviser toassess our compliance with the PCI DSS on an annual basis.EmployeesAs of December 31, 2013, we had 594 employees, most of whom are located in the United States. Certain of our employees in various countries outsideof the United States are subject to laws providing representation rights. We consider our relationship with our employees to be good.Information about Segment and Geographic RevenueInformation about segment and geographic revenue is set forth in Part II, Item 8. "Note 12 - Segment and Geographic Information" of this AnnualReport.Corporate InformationWe were incorporated under the laws of the State of Delaware in June 2001. Our principal executive offices are located at 2701 Aerial Center Parkway,Morrisville, North Carolina. Our telephone number is (919) 228-4700.Available InformationOur internet website address is www.channeladvisor.com. In addition to the information about us and our subsidiaries contained in this Annual Report,information about us can be found on our website. Our website and information included in or linked to our website are not part of this Annual Report.Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through our website as soon as reasonablypracticable after they are electronically filed with or furnished to the Securities and Exchange Commission, or SEC. The public may read and copy thematerials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally the SEC maintains an internet site that contains reports, proxyand information statements and other information. The address of the SEC's website is www.sec.gov.12 Table of ContentsITEM 1A. RISK FACTORSOur 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 Annual Report, together with any other documents we file with the SEC. Any of the following riskscould have a material adverse effect on our business, operating results and financial condition and cause the trading price of our common stock todecline.Risks Related to Our BusinessWe have incurred significant net losses since inception, and we expect our operating expenses to increase significantly in the foreseeable future,which may make it more difficult for us to achieve profitability.We incurred net losses of $20.6 million and $4.9 million during the years ended December 31, 2013 and 2012, respectively, and we had anaccumulated deficit of $100.1 million as of December 31, 2013. We anticipate that our operating expenses will increase substantially in the foreseeable futureas 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 willachieve profitability. In addition, as a newly public company, we have begun, and will continue, to incur significant accounting, legal and other expenses thatwe did not incur as a private company. To achieve profitability, we will need to either increase our revenue sufficiently to offset these higher expenses orsignificantly reduce our expense levels. Our recent revenue growth may not be sustainable, and if we are forced to reduce our expenses, our growth strategycould 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 advertisementson Google. Our inability to continue to integrate our solutions with these channels would make our solutions less appealing to existing andpotential 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 onthe Amazon and eBay marketplaces or advertised on Google, and a similar portion of our variable subscription fees is attributable to sales by our customersthrough these channels. These channels, and the other channels with which our solutions are integrated, have no obligation to do business with us or to allowus 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 theirchannels. Additionally, Amazon, eBay or Google may decide to make significant changes to their respective business models, policies, systems or plans, andthose 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 ofGMV that our customers can sell on those channels or reduce the desirability of selling on those channels. Further, Amazon, eBay or Google could decide tocompete with us more vigorously. Any of these results could cause our customers to reevaluate the value of our products and services and potentially terminatetheir relationships with us and significantly reduce our revenue.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 moredifficult to achieve profitability.The e-commerce market is characterized by rapid technological change and frequent changes in rules, specifications and other requirements for retailersand manufacturers to be able to sell their merchandise on particular channels. Our ability to retain existing customers and attract new customers depends inlarge part on our ability to enhance and improve our existing solutions and introduce new solutions that can adapt quickly to these technological changes on thepart of channels. To achieve market acceptance for our solutions, we must effectively anticipate and offer solutions that meet frequently changing channelrequirements 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 increasedemand 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 significantdegree upon subscription renewals. Our customers have no obligation to renew their subscriptions after the subscription term expires, and these subscriptionsmay 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 incustomer renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including their satisfaction or dissatisfaction withour solutions, the cost of our solutions, the cost of solutions offered by our competitors and reductions in our customers’ spending levels. If our customers donot renew their subscriptions, renew on less favorable terms or for fewer modules, or do not purchase additional modules, our revenue may grow more slowlythan expected or decline, and our ability to become profitable may be compromised.13 Table of ContentsWe may not be able to compete successfully against current and future competitors. If we do not compete successfully, we could experience lowersales volumes and pricing pressure, which could cause us to lose revenues, impair our ability to pursue our growth strategy and compromise ourability 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 ourmarket 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 andchanges 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 toenhance their products and expand their markets, and consolidation in our industry is likely to intensify. Accordingly, new competitors oralliances among competitors may emerge and rapidly acquire significant market share;•Current and potential competitors may offer software that addresses one or more online channel management functions at a lower price pointor 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 largerproduct sale.We may not be able to compete successfully against current and future competitors, including any channels that decide to compete against us morevigorously. In addition, competition may intensify as our competitors raise additional capital and as established companies in other market segments orgeographic markets expand into our market segments or geographic markets. If we cannot compete successfully against our competitors, our business and ouroperating 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 andmanufacturers 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 keyattractions of our solutions to retailers and manufacturers is the ability to help address the complexity and fragmentation of selling online. Although the numberand variety of online channels available to retailers and manufacturers have been increasing, at the same time the share of online sales made through a smallnumber of larger channels, particularly Amazon and eBay, has also been increasing. If the trend toward consolidation around a few large online channelsaccelerates, the difficulties faced by retailers and manufacturers could decline, which might make our solutions less important to retailers and manufacturersand could cause demand for our solutions to decline.Software errors, defects or failures or human error could cause our solutions to oversell our customers’ inventory or misprice their offerings orcould 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 enhancementsare released. Despite our testing and testing by our customers, our current and future products may contain defects. Our customers rely on our solutions toautomate the allocation of their inventory simultaneously across multiple online channels, as well as to ensure that their sales comply with the policies of eachchannel and sometimes to dynamically determine product pricing at any given moment. Some customers subscribe to our solutions on a managed-servicebasis, in which case our personnel operate our solutions on behalf of the customer. In the event that our solutions do not14 Table of Contentsfunction properly, or if there is human error on the part of our service staff, errors could occur, including that our customers might inadvertently sell moreinventory than they actually have in stock, make sales that violate channel policies or underprice or overprice their offerings. Overselling their inventory couldforce our customers to cancel orders at rates that violate channel policies. Underpricing would result in lost revenue to our customers and overpricing couldresult 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 willbe processed through our platform over the term of their agreement with us, and errors in our software or human error could cause transactions to beincorrectly processed that would cause GMV to be in excess of our customers’ specified minimum amounts, in which case our variable subscription fee-basedrevenue could be overstated. Any of these results or other errors could reduce demand for our solutions and hurt our business reputation. Customers could alsoseek recourse against us in these cases and, while our contractual arrangements with customers typically provide that we are not liable for damages such asthese, 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 becomeless reliable or acceptable as a means of tracking consumer behavior, the amount or accuracy of GMV processed on our platform, and our relatedrevenue, 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 cookieson their sites and monitor internet user activity, such as viewing pages and completing transactions. We collect data via cookies that we ultimately use to reportGMV, which translates to revenue. However, internet users can easily disable, delete and block cookies directly through browser settings or through othersoftware, 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. Third-partycookies can be specifically blocked by browser settings, and, for example, the Safari internet browser blocks third-party cookies by default. On the otherhand, first-party cookies are downloaded directly from the address domain of an internet user, and are generally considered safer by privacy concerns. Wecurrently collect data from both first-party and third-party cookie implementations. Our customers currently implementing our third-party cookie solutionmight 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 reportedrevenue 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 internetusers that choose to proactively disable cookies on their systems. In the European Union, the Directive on Privacy and Electronic Communications requiresusers 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 mayhave 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 (via next generation browsers or other means) and subsequently prevent usfrom directly importing data to our systems. We may not be able to develop adequate alternatives to cookie data collection.We rely on two non-redundant data centers to deliver our SaaS solutions. Any disruption of service at these facilities could harm our business.We manage our platform and serve all of our customers from two third-party data center facilities that are non-redundant, meaning that neither facilityserves as backup for the other. While we engineer and architect the actual computer and storage systems upon which our platform runs, we do not control theoperation 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 torenew these agreements on commercially reasonable terms, we may be required to transfer to new data center facilities, and we may incur significant costs andpossible 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 couldharm 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.15 Table of ContentsOur data centers are vulnerable to damage or interruption from human error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terroristattacks, power losses, hardware failures, systems failures, telecommunications failures, cyber attacks and similar events. The occurrence of a naturaldisaster or an act of terrorism, or vandalism or other misconduct, a decision to close the facilities without adequate notice or other unanticipated problemscould result in lengthy interruptions in the availability of our SaaS solutions or impair their functionality. Our business, growth prospects and operatingresults 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 ofGMV 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 our customers is variable, based on the amount of ourcustomers’ GMV processed through our platform that exceeds a specified amount established by contract, which we refer to as variable subscription fees.Substantially all of our customer contracts include this variable subscription fee component. If sales by our customers processed through our platform were todecline, or if our customers were to demand fully fixed pricing terms that do not provide for any variability based on their GMV processed through ourplatform, 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 quarterto 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 asan 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 couldincrease 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 ofour 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 ona 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 duringthe holiday season. As a result of this seasonal variation, our subscription revenue fluctuates, with the variable portion of our subscription fees being higher inthe fourth quarter than in other quarters and with revenue generally declining in the first quarter sequentially from the fourth quarter. Our business is thereforenot 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 andcompromise 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 ofservice of our solutions may suffer, which could negatively affect our reputation and demand for our solutions. Our growth has placed, and is expected tocontinue 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;16 Table of Contents•implement additional management information systems;•maintain close coordination among our engineering, operations, legal, finance, sales and marketing and client service and supportorganizations; 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 orprovide increased levels of customer service. Failure to accomplish any of these requirements could impair our ability to continue to deliver our solutions in atimely 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 maynot 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, particularly Scot Wingo, our chief executiveofficer, Aris Buinevicius, our chief technology officer, David Spitz, our president and chief operating officer, and John Baule, our chief financial officer. Ourfuture 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 arecritical to our success, resulting in harm to our key client relationships, loss of key information, expertise or know-how and unanticipated recruitment andtraining costs. The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business andpursue our business goals.Our strategy of pursuing opportunistic acquisitions or investments may be unsuccessful and may divert our management’s attention andconsume significant resources.A part of our growth strategy is to opportunistically pursue acquisitions of, or investments in, other complementary businesses or individualtechnologies. Any acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. Inaddition, 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 operateoutside 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 thirdparties;•in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particulareconomic, 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. House of Representatives, called the Marketplace Fairness Act, would override the SupremeCourt rulings and enable states to require that online retailers collect sales tax from the states’ residents. Some larger online retailers, including Amazon, haveannounced their support for legislation along these lines. This is a rapidly evolving area and we cannot predict whether this or17 Table of Contentsother similar legislation will ultimately be adopted or what form it might take if adopted. For example, while the current Senate and House legislation includesan 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 anexception. 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 GMVprocessed through our platform, and ultimately our revenue, to decline. In addition, it is possible that one or more states or the federal government or foreigncountries 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 anonline retailer. Similar issues exist outside of the United States, where the application of value-added tax or other indirect taxes on online retailers andcompanies like us that facilitate e-commerce is uncertain and evolving.If the e-commerce market does not grow, or grows more slowly than we expect, particularly on the channels that our solutions support, demandfor 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 usedfor selling merchandise. If consumer utilization of our primary e-commerce channels, such as Amazon, eBay and Google, does not grow or grows more slowlythan we expect, demand for our solutions would be adversely affected, our revenue would be negatively impacted and our ability to pursue our growth strategyand become profitable would be compromised.Evolving domestic and international data privacy regulations may restrict our ability, and that of our customers, to solicit, collect, process, discloseand 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 thesolicitation, collection, processing, disclosure or use of consumers’ personal information. Evolving regulations regarding personal data and personalinformation, in the European Union and elsewhere, especially relating to classification of IP addresses, machine identification, location data and otherinformation, may limit or inhibit our ability to operate or expand our business. Such laws and regulations require or may require us or our customers toimplement 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 specifiedpurposes. Other proposed legislation could, if enacted, impose additional requirements and prohibit the use of specific technologies, such as those that trackindividuals’ activities on web pages or record when individuals click on a link contained in an email message. Such laws and regulations could restrict ourcustomers’ 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 andfuture privacy and data protection laws and increasing sensitivity of consumers to unauthorized disclosures and use of personal information may alsonegatively 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 andsecurity may also cause some consumers to be less likely to visit our customers’ websites or otherwise interact with our customers, which could limit thedemand 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 adequatelyaddress privacy concerns associated with our solutions, even if unfounded, could subject us to liability, damage our reputation, impair our sales and harmour business. Furthermore, the costs to our customers of compliance with, and other burdens imposed by, such laws, regulations, policies and standards maylimit adoption of and demand for our solutions.Risks Related to the Software-as-a-Service (SaaS) ModelIf we fail to manage and increase the capacity of our hosted infrastructure, our customers may be unable to process transactions through ourplatform, 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 maintainsufficient 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 maintainexcess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments and to handle spikes inusage. However, the provision of new hosting infrastructure requires significant lead time. If we do not accurately predict our infrastructure capacity18 Table of Contentsrequirements, particularly in the fourth quarter when we typically experience significant increases in the volume of customer transactions processed throughour platform, our customers could experience service outages that may subject us to financial penalties or other liabilities, result in customer losses, harm ourreputation 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 beimmediately 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 wereport in each quarter is generated from customer agreements entered into during previous periods. Consequently, a decline in new or renewed subscriptions inany one quarter may not be reflected in our financial performance in that quarter but might negatively affect our revenue in future quarters. Accordingly, theeffect 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 notcontinue to grow, demand for our solutions could decline, which in turn could cause our revenues to decline and impair our ability to becomeprofitable.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. Asa result, widespread use and acceptance of this business model is critical to our future growth and success. Under the more traditional license model forsoftware procurement, users of the software typically run the applications in-house on their own hardware. Because many companies are generally predisposedto maintaining control of their information technology systems and infrastructure, there may be resistance to the concept of accessing software functionality asa service provided by a third party. In addition, the market for SaaS solutions is still evolving, and existing and new market participants may introduce newtypes of solutions and different approaches to enable organizations to address their needs. If the market for SaaS solutions fails to grow or grows more slowlythan 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 OperationsOur increasing international operations subject us to increased challenges and risks. If we do not successfully manage the risks associated withinternational 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 officesin new countries and regions worldwide. However, our ability to manage our business and conduct our operations internationally requires considerablemanagement attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiplelanguages, cultures, customs, taxation systems, alternative dispute systems, regulatory systems and commercial infrastructures. International expansion willrequire us to invest significant funds and other resources. Expanding internationally may subject us to new risks that we have not faced before or increaserisks 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;•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 ourinternational 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.19 Table of ContentsIf our revenue from our international operations does not exceed the expense of establishing and maintaining these operations, our business andoperating results will suffer.We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensingrequirements 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 tradesanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our solutions must be made in compliancewith 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 tosubstantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsibleemployees or managers, and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including anyrequired 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 governmentinvestigations, 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 inthe countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions, or in our decreased ability toexport or sell our solutions to existing or potential customers with international operations. Additionally, changes in our solutions may be required in responseto changes in export and import regulations, which could lead to delays in the introduction and sale of our solutions in international markets, prevent ourcustomers 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 marketswould hurt our revenue and compromise our ability to pursue our growth strategy.Risks Related to Intellectual PropertyWe 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 intellectualproperty infringement without major financial expenditures or adverse consequences. The internet-related software field generally is characterized by extensiveintellectual property litigation. Although our industry is rapidly evolving, many companies that own, or claim to own, intellectual property have aggressivelyasserted 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 expectthat third parties will continue to assert intellectual property claims against us, particularly as we expand the complexity and scope of our business. Inaddition, most of our subscription agreements require us to indemnify our customers against claims that our solutions infringe the intellectual property rightsof third parties.Future litigation may be necessary to defend ourselves or our customers by determining the scope, enforceability and validity of third-party proprietaryrights or to establish our proprietary rights. Some of our competitors have substantially greater resources than we do and are able to sustain the costs ofcomplex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus solelyon extracting royalties and settlements by enforcing patent rights may target us. Regardless of whether claims that we are infringing patents or other intellectualproperty 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;20 Table of Contents•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, damagesagainst our customers, we may be prohibited from developing, commercializing or continuing to provide some or all of our software solutions unless we obtainlicenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially favorableterms, or at all.Our failure to protect our intellectual property rights could diminish the value of our services, weaken our competitive position and reduce ourrevenue.We regard the protection of our intellectual property, which includes trade secrets, copyrights, trademarks, domain names and patent applications, ascritical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractualrestrictions. We enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with partieswith whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangementsand the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independentdevelopment of similar technologies by others.We have sought patent protection for some of our technologies and currently have two U.S. patent applications and one international patent applicationon file, although there can be no assurance that these patents will ultimately be issued. We are also pursuing the registration of our domain names, trademarksand service marks in the United States and in jurisdictions outside the United States. Effective trade secret, copyright, trademark, domain name and patentprotection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. We may berequired to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we maynot pursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could beexpensive 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 thirdparties. 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 toprevent misappropriation of our intellectual property. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, ourintellectual property rights. Our competitors may also independently develop similar technology. In addition, the laws of many countries, such as China andIndia, 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 UnitedStates and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect ourintellectual property could result in competitors offering services that incorporate our most technologically advanced features, which could seriously reducedemand 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 adefendant, 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 tostop 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 sourcesoftware 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 withthese licenses, we may be subject to specified conditions, including requirements that we offer our solutions that incorporate the open source software for nocost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and thatwe license such modifications or derivative works under the terms of the particular open source license. If an author or other third party that distributes opensource 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 significantlegal expenses defending against such allegations and could be subject to significant damages, including being enjoined from the sale of our solutions thatcontained 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 aresult, we could be subject to suits by parties claiming ownership of what we believe21 Table of Contentsto 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 todevote additional research and development resources to change our products.Risks Related to Ownership of Our Common StockAn 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 onthe 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 anactive 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 shareswithout 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 experiencedextreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able tosell 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 ordivestitures;•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 marketprices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention andresources from our business.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 continueto provide research coverage of our common stock, and such lack of research coverage may adversely affect the market price of our common stock. Even ifwe 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 ourstock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equityresearch analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could causeour 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 allother 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 withsuch rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue ourshares of common stock or securities convertible into our22 Table of Contentscommon stock from time to time in connection with a financing, acquisition, investment, our stock incentive plans or otherwise. Any such issuance couldresult 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 ourmanagement 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, controlof 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 authorityto 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 stockwithout 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 aresult, 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 preferredstock 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 corporateacquisitions by prohibiting Delaware corporations from engaging in specified business combinations with particular stockholders of those companies. Theseprovisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect ofdiscouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may alsoprevent changes in our management or limit the price that investors are willing to pay for our stock.Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent newinvestors from influencing significant corporate decisions.As of December 31, 2013, our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respectiveaffiliates, in the aggregate, beneficially owned approximately 41% of our outstanding common stock. As a result, these persons, acting together, would be ableto significantly influence all matters requiring stockholder approval, including the election and removal of directors, any merger, consolidation, sale of all orsubstantially all of our assets or other significant corporate transactions. The interests of this group of stockholders may not coincide with our interests or theinterests of other stockholders.We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growthcompanies, 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 takeadvantage 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 ofholding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Wecannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock lessattractive 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 ofthese reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) December31, 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 weare deemed to be a large accelerated filer, which means the market value of our common stock that23 Table of Contentsis 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-convertibledebt 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 thosestandards 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 beimpaired.We are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act 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 financialreporting. Commencing with our fiscal year ending December 31, 2014, we must perform system and process evaluation and testing of our internal controlsover financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 10-K filing for thatyear, as required by Section 404 of the Sarbanes-Oxley Act. This will require that we incur substantial additional professional fees and internal costs to expandour accounting and finance functions and that we expend significant management efforts. Prior to our IPO, we were never required to test our internal controlswithin a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.We may discover weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement ofour financial statements, and we may in the future discover additional weaknesses that require improvement. In addition, our internal control over financialreporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, notabsolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls canprovide 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 not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain properand 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 stockcould decline and we could be subject to sanctions or investigations by the NYSE, the Securities and Exchange Commission, or SEC, or other regulatoryauthorities.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 thedevelopment and growth of our business. In addition, the terms of any existing or future debt agreements may preclude us from paying dividends. There is noguarantee 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 bemaintained.We will incur increased costs and demands upon management as a result of being a public company.As a newly public company listed in the United States, we have begun, and will continue, particularly after we cease to be an "emerging growthcompany," to incur significant additional legal, accounting and other costs. These additional costs could negatively affect our financial results. In addition,changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and stockexchanges, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards aresubject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governingbodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general andadministrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If notwithstanding ourefforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and ourbusiness may be harmed.Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance, including director and officer liabilityinsurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. Theimpact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of ourboard of directors or as members of senior management.24 Table of ContentsWe may need additional capital in the future to meet our financial obligations and to pursue our business objectives. Additional capital may not beavailable on favorable terms, or at all, which could compromise our ability to meet our financial obligations and grow our business.While we anticipate that our existing cash, together with our cash flow from operations, availability under our existing credit facility and net proceedsfrom our public offerings, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operationsin the future or to meet various objectives, including developing future technologies and services, increasing working capital, acquiring businesses andresponding to competitive pressures. If we seek to raise additional capital, it may not be available on favorable terms or may not be available at all. In addition,pursuant to the terms of our credit facility, we may be restricted from using the net proceeds of financing transactions for our operating objectives. Lack ofsufficient capital resources could significantly limit our ability to manage our business and to take advantage of business and strategic opportunities. Anyadditional capital raised through the sale of equity or debt securities with an equity component would dilute our stock ownership. If adequate additional fundsare not available, we may be required to delay, reduce the scope of or eliminate material parts of our business strategy, including potential additionalacquisitions or development of new technologies.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur principal offices occupy approximately 67,000 square feet of leased office space in Morrisville, North Carolina pursuant to a lease agreement thatexpires in September 2021. We also maintain sales, service, support or research and development offices in New York, New York; Seattle, Washington;London, England; Limerick, Ireland; Berlin, Germany; Melbourne, Australia; Hong Kong; and Sao Paulo, Brazil. We believe that our current facilities aresuitable and adequate to meet our current needs. We intend to add new facilities or expand existing facilities as we add employees, and we believe that suitableadditional or substitute space will be available as needed to accommodate any such expansion of our operations.ITEM 3. LEGAL MATTERSFrom time to time, we are subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legalproceedings 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 4. MINE SAFETY DISCLOSURESNot applicable.25 Table of ContentsPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket Information for Common StockOur common stock commenced trading on the NYSE under the symbol "ECOM" on May 23, 2013. Prior to our IPO, there was no public market forour common stock.The following table sets forth, for the periods indicated, the high and low reported sales prices of our common stock as reported on the NYSE: 2013 High LowSecond quarter (from May 23, 2013)$19.77 $14.25Third quarter$41.25 $15.16Fourth quarter$44.08 $31.90Stock Performance GraphThe graph set forth below compares the cumulative total stockholder return on an initial investment of $100 in our common stock between May 23,2013, the date on which our common stock began trading on the New York Stock Exchange, and December 31, 2013, with the comparative cumulative totalreturn of such amount on (i) the Dow Jones Industrial Average Total Return and (ii) the NASDAQ Computer Index over the same period. We have not paid anycash dividends and, therefore, the cumulative total return calculation for us is based solely upon our stock price appreciation or depreciation and does notinclude any reinvestment of cash dividends. The graph assumes our closing sales price on May 23, 2013 of $18.44 per share as the initial value of ourcommon stock.The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below isnot necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. 26 Table of ContentsThe information presented above in the stock performance graph shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subjectto Regulation 14A or 14C, except to the extent that we subsequently specifically request that such information be treated as soliciting material or specificallyincorporate it by reference into a filing under the Securities Act of 1933, as amended, or a filing under the Securities Exchange Act of 1934, as amended.Dividend PolicyWe have never declared or paid any dividends on our common stock. We anticipate that we will retain all of our future earnings, if any, for use in theoperation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Additionally, our ability to pay dividends onour common stock is limited by restrictions under the terms of the agreements governing our credit facility.StockholdersAs of January 31, 2014, there were 164 holders of record of our common stock. The actual number of stockholders is greater than this number ofrecord holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number ofholders of record also does not include stockholders whose shares may be held in trust by other entities.Use of Proceeds from Initial Public Offering of Common StockOn May 22, 2013, our Registration Statement on Form S-1, as amended (File No. 333-187865) was declared effective in connection with our IPO,pursuant to which we sold 6,612,500 shares of our common stock, including the full exercise of the underwriters’ option to purchase additional shares, at aprice to the public of $14.00 per share. The offering closed on May 29, 2013, and, as a result, we received net proceeds of approximately $82.0 million (afterunderwriters’ discounts and commissions of approximately $6.5 million and additional offering related costs of approximately $4.1 million). The jointmanaging underwriters of the offering were Goldman Sachs & Co. and Stifel, Nicolaus & Company, Incorporated.No expenses incurred by us in connection with our IPO were paid directly or indirectly to (i) any of our officers or directors or their associates, (ii) anypersons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates, other than payments in the ordinary course of business toofficers for salaries and to non-employee directors as compensation for board or board committee service.There has been no material change in the planned use of proceeds from our IPO from that described in the final prospectus filed by us with theSecurities and Exchange Commission on May 23, 2013. During the period from the closing of the IPO through December 31, 2013, we used the proceeds fromthe IPO as follows: approximately $14.8 million in debt and capital lease payments, approximately $6.4 million to fund operations and approximately $4.1million in capital expenditures.Recent Sales of Unregistered SecuritiesIn November 2013, in connection with our registered public offering, the holders of certain warrants executed cashless exercises and received 317,011shares of common stock in exchange for the warrants. The issuances of these securities were exempt from registration under Section 3(a)(9) of the SecuritiesAct.In addition, in November and December 2013, three holders of warrants exercised their warrants to purchase an aggregate of 143,955 shares ofcommon stock for an aggregate exercise price of $1.6 million. The issuance of these securities was exempt from registration under Section 4(a)(2) of theSecurities Act.Purchases of Equity Securities by the Issuer and Affiliated PartiesNone.27 Table of ContentsITEM 6. SELECTED FINANCIAL DATAThe following selected consolidated financial data as of and for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 is derived from ouraudited consolidated financial statements, which have been audited by Ernst & Young LLP, independent registered public accounting firm. Our historicalresults are not necessarily indicative of the results to be expected in the future. The selected consolidated financial data should be read together with Item 7."Management's Discussion and Analysis of Financial Condition and Results of Operations" and in conjunction with the consolidated financial statements,related notes, and other financial information included elsewhere in this Annual Report. Year Ended December 31, 2013 2012 2011 2010 2009 (in thousands, except share and per share data)Consolidated statement of operations data: Revenue$68,004 $53,587 $43,570 $36,688 $35,739Cost of revenue18,088 14,749 12,248 12,164 11,630Gross profit49,916 38,838 31,322 24,524 24,109Operating expenses: Sales and marketing37,458 24,326 19,106 14,867 10,597Research and development12,669 10,109 8,842 8,416 9,719General and administrative14,154 8,252 6,551 6,111 5,919Total operating expenses64,281 42,687 34,499 29,394 26,235Loss from operations(14,365) (3,849) (3,177) (4,870) (2,126)Total other (expense) income(6,060) (1,154) (636) 258 (414)Loss before income taxes(20,425) (5,003) (3,813) (4,612) (2,540)Income tax expense (benefit)203 (70) 51 112 236Net loss$(20,628) $(4,933) $(3,864) $(4,724) $(2,776)Net loss per share—basic and diluted$(1.51) $(4.23) $(3.45) $(4.77) $(2.89)Weighted average shares of common stock outstanding used incomputing net loss per share—basic and diluted13,695,804 1,164,942 1,120,902 989,780 960,761Stock-based compensation expense included above: Cost of revenue$204 $64 $15 $21 $23Sales and marketing607 224 16 59 56Research and development348 105 58 38 24General and administrative940 245 111 216 93Other financial data: Adjusted EBITDA(1)$(8,532) $(277) $(910) $(422) $829 ____________________________ (1)We define adjusted EBITDA as net loss plus or (minus): income tax expense (benefit), interest expense, depreciation and amortization, stock-based compensation and loss onextinguishment of debt. Please see “—Adjusted EBITDA” for more information and for a reconciliation of adjusted EBITDA to net loss, the most directly comparable financialmeasure calculated and presented in accordance with accounting principles generally accepted in the United States, or GAAP. As of December 31, 2013 2012 2011 2010 2009 (in thousands)Consolidated balance sheet data: Cash and cash equivalents$104,406 $10,865 $4,998 $6,939 $9,901Accounts receivable, net13,951 9,571 7,677 6,235 5,046Restricted cash685 687 886 890 890Total assets148,786 48,022 35,777 36,029 39,645Long-term debt, including current portion— 10,972 4,826 5,330 6,516Series A and Series C warrants liability— 3,235 592 331 284Total liabilities31,006 33,706 17,217 13,973 13,207Total redeemable convertible preferred stock— 90,495 90,413 90,363 90,311Additional paid-in capital218,330 3,584 2,932 2,684 2,298Total stockholders’ equity (deficit)117,780 (76,179) (71,853) (68,307) (63,873)28 Table of ContentsAdjusted EBITDATo provide investors with additional information regarding our financial results, we have provided within this Annual Report adjusted EBITDA, anon-GAAP financial measure. We have provided a reconciliation below of adjusted EBITDA to net loss, the most directly comparable GAAP financialmeasure.We have included adjusted EBITDA in this Annual Report because it is a key measure used by our management and board of directors to understandand evaluate our operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. Inparticular, the exclusion of some expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business.Accordingly, we believe that adjusted EBITDA provides useful information to investors in understanding and evaluating our operating results.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 ourresults as reported under 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 thefuture, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditurerequirements;•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 acomparative measure.Because of these and other limitations, you should consider adjusted EBITDA together with other GAAP-based financial performance measures,including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of net loss to adjustedEBITDA for each of the periods indicated: Year Ended December 31, 2013 2012 2011 2010 2009 (in thousands)Net loss$(20,628) $(4,933) $(3,864) $(4,724) $(2,776)Adjustments: Interest expense, net2,960 1,185 642 486 446Income tax expense (benefit)203 (70) 51 112 236Depreciation and amortization expense3,722 2,903 2,061 3,370 2,727Total adjustments, net6,885 4,018 2,754 3,968 3,409EBITDA(13,743) (915) (1,110) (756) 633Stock-based compensation expense2,099 638 200 334 196Loss on extinguishment of debt3,112 — — — —Adjusted EBITDA$(8,532) $(277) $(910) $(422) $82929 Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion and analysis of our financial condition and results of operations together with our consolidatedfinancial statements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information containedin this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for ourbusiness, includes forward-looking statements that involve risks and uncertainties. You should review Item 1A. “Risk Factors” and "Special NoteRegarding Forward-Looking Statements" in this Annual Report for a discussion of important factors that could cause actual results to differ materiallyfrom the results described in or implied by the forward-looking statements contained in the following discussion and analysis.OverviewWe are a leading provider of software-as-a-service, or SaaS, solutions that enable our retailer and manufacturer customers to integrate, manage andoptimize their merchandise sales across hundreds of online channels. Through our platform, we enable our customers to connect with new and existingsources of demand for their products, including e-commerce marketplaces, such as eBay, Amazon and Newegg, search engines and comparison shoppingwebsites, such as Google, Bing, Nextag and Sears, and emerging channels, such as Facebook and Pinterest. Our suite of solutions, accessed through astandard web browser, provides our customers with a single, integrated user interface to manage their product listings, inventory availability, pricingoptimization, search terms, data analytics and other critical functions across these channels. Our proprietary cloud-based technology platform deliverssignificant breadth, scalability and flexibility to our customers. In 2013, our customers processed approximately $4.4 billion in gross merchandise value, orGMV, through our platform. As of December 31, 2013, our customers managed over 150 million stock-keeping units, or SKUs, of their inventory on ourplatform.We sell subscriptions to our SaaS solutions primarily through our direct sales force. Our customers include the online businesses of traditionalretailers, online retailers and brand manufacturers, as well as advertising agencies that use our solutions on behalf of their retailer clients. As of December 31,2013, we had over 2,400 core customers worldwide, including 27% of the top 500 U.S. internet retailers, as identified by Internet Retailer magazine based ontheir 2012 online sales.We operate in one segment and derive our revenue from our customers’ access to and usage of our SaaS solutions, which are organized into modules.Each module integrates with a particular type of channel, such as third-party marketplaces, paid search or comparison shopping websites, or supports aspecific online functionality, such as creating webstores or employing rich media solutions on their websites. The majority of our revenue is derived fromsubscription 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 portionof the subscription fee is typically fixed and is based on a specified minimum amount of GMV that a customer expects to process through our platform. Theremaining 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’sspecified minimum GMV amount. We also receive implementation fees, which may include fees for providing launch assistance and training.We have grown our total revenue from $43.6 million for the year ended December 31, 2011 to $68.0 million for the year ended December 31, 2013, acompound annual growth rate of 24.9%. Our revenue growth has been driven primarily by an increase in the number of core customers utilizing our solutionsand an increase in the average revenue per core customer, as well as by an increase in the amount of our customers’ GMV processed through our platform.During 2013, approximately 20% of our core revenue was derived from customers located outside of the United States. We currently offer the same solutionsinternationally as we do in the United States, and we intend to continue expanding our international operations.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. Wedo not hold any inventory of merchandise and we are not involved in the physical logistics of shipping merchandise to buyers, which is handled by ourcustomers.We plan to grow our revenue by adding new customers, helping our existing customers increase their GMV processed through our platform by takingfull advantage of its functionality and selling additional module subscriptions to existing customers to allow them to sell merchandise through new channels.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 tocontinue 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. Our senior management continuously focuses on these and other challenges, and we believe that our culture ofinnovation and our history30 Table of Contentsof growth and expansion will contribute to the success of our business. We cannot, however, assure you that we will be successful in addressing andmanaging the many challenges and risks that we face.Key Financial and Operating Performance MetricsWe regularly monitor a number of financial and operating metrics in order to measure our performance and project our future performance. Thesemetrics aid us in developing and refining our growth strategies and making strategic decisions. We discuss revenue, gross margin and the components of netincome in the section below entitled “—Components of Operating Results.” In addition, we utilize other key metrics as described below.Core RevenueOur reported operating results include revenue attributable to the products from two small legacy acquisitions, both of which occurred prior to 2008 andfocused on solutions for lower-volume eBay sellers. We do not consider these products to be a core part of our strategic focus going forward. Each of theseacquisitions contributed a relatively large number of customers with revenue per customer substantially lower than is characteristic of the rest of our business.We exclude the revenue attributable to these non-core, legacy products in calculating a measure we refer to as core revenue. We anticipate that the revenueassociated with these non-core, legacy products will continue to decline over time both in absolute terms and as a percentage of our total revenue.Number of Core CustomersThe number of customers subscribing to our solutions is a primary determinant of our core revenue. We refer to the customers who subscribe to any ofour solutions, other than the non-core, legacy products described above, as our core customers. The number of core customers was 2,429, 1,928 and 1,710as of December 31, 2013, 2012 and 2011, respectively.Average Revenue per Core CustomerThe average revenue generated by our core customers is the other primary determinant of our core revenue. We calculate this metric by dividing our totalcore revenue for a particular period by the average monthly number of core customers during the period, which is calculated by taking the sum of the numberof core 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 corecustomer in absolute dollars on a rolling twelve-month basis, but we may also calculate percentage changes in average revenue per core customer on a quarterlybasis in order to help us evaluate our period-over-period performance. Our average revenue per core customer was $30,670, $28,050 and $24,240 for theyears ended December 31, 2013, 2012 and 2011, respectively.Subscription Dollar Retention RateWe believe that our ability to retain our core customers and expand the revenue they generate for us over time is an important component of our growthstrategy and reflects the long-term value of our customer relationships. We measure our performance on this basis using a metric we refer to as oursubscription dollar retention rate. We calculate this metric for a particular period by establishing the cohort of core customers that had active contracts as of theend of the prior period. We then calculate our subscription dollar retention rate by taking the amount of fixed subscription revenue we recognized for the cohortin 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 thispurpose, we do not include any revenue from the non-core, legacy products described above, any variable subscription fees paid by our customers or anyimplementation fees.Although some customers in any given period elect not to renew their contracts with us, our customers that do renew their subscriptions often increasetheir fixed subscription pricing levels to align with their increasing GMV volumes processed through our platform and may subscribe to additional modules aswell. If our subscription dollar retention rate for a period is over 100%, this means that the increased subscription revenue we recognized from customers thatrenewed their contracts during the period, or whose contracts did not come up for renewal during the period, more than offset the subscription revenue we lostfrom customers that did not renew their contracts.For each of the twelve months ended December 31, 2013, 2012 and 2011, our subscription dollar retention rate exceeded 100%.31 Table of ContentsAdjusted EBITDAAdjusted EBITDA represents our earnings before interest expense, income tax expense (benefit) and depreciation and amortization, adjusted to eliminatestock-based compensation expense and loss on extinguishment of debt. We believe that excluding these expenses in calculating adjusted EBITDA provides ourmanagement with a useful measure for period-to-period comparisons of our business. However, adjusted EBITDA is not a measure calculated in accordancewith GAAP. Please refer to Item 6. "Selected Financial Data—Adjusted EBITDA” in this Annual Report for a discussion of the limitations of adjustedEBITDA and a reconciliation of adjusted EBITDA to net loss, the most comparable GAAP measurement, for the years ended December 31, 2013, 2012,2011, 2010 and 2009.Adjusted EBITDA should not be considered as an alternative to any measure of financial performance calculated and presented in accordance withGAAP. In addition, adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculateadjusted EBITDA in the same manner that we do. We prepare adjusted EBITDA to eliminate the impact of stock-based compensation expense and loss onextinguishment of debt, which we do not consider indicative of our operating performance. We encourage you to evaluate these adjustments, the reasons weconsider them appropriate and the material limitations of using non-GAAP measures as described in Item 6. "Selected Financial Data—Adjusted EBITDA.”Components of Operating ResultsRevenueWe 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 specifiedcontract 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 acustomer expects to process through our platform. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMVprocessed through our platform in excess of the customer’s specified minimum GMV. In most cases, the specified percentage of excess GMV on which thevariable portion of the subscription is based is fixed and does not vary depending on the amount of the excess. We also receive implementation fees, whichmay include fees for providing launch assistance and training.Because our customer contracts contain both fixed and variable pricing components, changes in GMV between periods do not translate directly orlinearly 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 thatcommitted GMV. In addition, the percentage fee assessed on the variable GMV in excess of the committed minimum for each customer is typically higher thanthe 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 thespecified minimum amount would have no effect on our revenue from that customer, and each customer may alternate between being over the committedamount 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 asa useful quantitative measurement of our historic revenues or as a predictor of future revenues.The following table shows the percentage of our total revenue attributable to fixed subscription fees plus implementation fees, as compared to thepercentage attributable to variable subscription fees, for each of the periods indicated. Year Ended December 31, 2013 2012 2011 (as a percentage of total revenue)Fixed subscription fees plus implementation fees66.8% 61.4% 55.0%Variable subscription fees33.2 38.6 45.0Total revenue100.0% 100.0% 100.0%We recognize fixed subscription fees and implementation fees ratably over the contract period once four conditions have been satisfied:•the contract has been signed by both parties;•the customer has access to our platform and transactions can be processed;32 Table of Contents•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 invoicedare 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 thefour conditions specified above have been met.Cost of RevenueCost of revenue primarily consists of salaries and personnel-related costs for employees providing services to our customers and supporting ourplatform infrastructure, including benefits, bonuses and stock-based compensation. Additional expenses include co-location facility costs for our data centers,depreciation expense for computer equipment directly associated with generating revenue, infrastructure maintenance costs, fees we pay to credit card vendorsin connection with our customers’ payments to us and other direct costs. We plan to continue to expand our capacity to support our growth, which will resultin higher cost of revenue in absolute dollars.Operating ExpensesOperating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries and personnel-relatedcosts are the most significant component of each of these expense categories.Sales and marketing expense. Sales and marketing expense consists primarily of salaries and personnel-related costs for our sales and marketingand customer support employees, including benefits, bonuses, stock-based compensation and commissions. We record expense for commissions at the time ofcontract 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 researchand development employees, including benefits, bonuses and stock-based compensation. Additional expenses include costs related to the development, qualityassurance 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 foradministrative, finance and accounting, information systems, legal and human resource employees, including benefits, bonuses and stock-basedcompensation. Additional expenses include consulting and professional fees, insurance, other corporate expenses and travel, as well as costs associated withcompliance with the Sarbanes-Oxley Act and other regulations governing public companies, directors’ and officers’ liability insurance, increased professionalservices and an enhanced investor relations function now that we are a public company.Other Income (Expense)Other income (expense) consists primarily of the loss on the extinguishment of our subordinated loan for the year ended December 31, 2013, interestincome and interest expense. Interest income represents interest received on our cash and cash equivalents. Interest expense consists primarily of the interestincurred on outstanding borrowings, the accretion of the debt discount on our subordinated loan prior to extinguishment, the amortization of deferred financingcosts and, prior to the closing of our IPO on May 29, 2013, changes in the fair value of our preferred stock warrant liability.Income Tax Expense (Benefit)Income tax expense (benefit) consists of U.S. federal, state and foreign income taxes. We incurred an income tax expense for the years endedDecember 31, 2013 and 2011 and an income tax benefit for the year ended December 31, 2012.33 Table of ContentsResults of OperationsComparison of Years Ended December 31, 2013 and 2012 Year Ended December 31, 2013 2012 Period-to-Period Change Amount Percentage ofRevenue Amount Percentage ofRevenue Amount Percentage (dollars in thousands)Revenue$68,004 100.0 % $53,587 100.0 % $14,417 26.9 %Cost of revenue18,088 26.6 14,749 27.5 3,339 22.6Gross profit49,916 73.4 38,838 72.5 11,078 28.5Operating expenses: Sales and marketing37,458 55.1 24,326 45.4 13,132 54.0Research and development12,669 18.6 10,109 18.9 2,560 25.3General and administrative14,154 20.8 8,252 15.4 5,902 71.5Total operating expenses64,281 94.5 42,687 79.7 21,594 50.6Loss from operations(14,365) (21.1) (3,849) (7.2) (10,516) 273.2Other (expense) income: Loss on extinguishment of debt(3,112) (4.6) — — (3,112) *Interest expense, net(2,960) (4.4) (1,185) (2.2) (1,775) 149.8Other income, net12 0.0 31 0.1 (19) (61.3)Total other (expense) income(6,060) (9.0) (1,154) (2.1) (4,906) 425.1Loss before income taxes(20,425) (30.1) (5,003) (9.3) (15,422) 308.3Income tax expense (benefit)203 0.3 (70) (0.1) 273 *Net loss$(20,628) (30.4)% $(4,933) (9.2)% $(15,695) 318.2* = not meaningfulRevenue Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands)Revenue$68,004 $53,587 $14,417 26.9%Revenue for the year ended December 31, 2013 increased by $14.4 million, or 26.9%, compared to the year ended December 31, 2012. The increase inrevenue for the year ended December 31, 2013 was mainly driven by the expansion of our international operations and an increase in our core revenue, whichis discussed below. This growth in core revenue was partially offset by a $0.6 million, or 24.3%, decrease in our non-core revenue over the same period, as theproducts associated with our non-core, legacy acquisitions became a less significant part of our overall business focus.Our revenue from international operations of $14.2 million, or 20.8% of total revenue, for the year ended December 31, 2013 increased from $11.4million, or 21.4% of total revenue, for the year ended December 31, 2012. The increase in revenue from our international operations was primarily attributableto an increase in the number of international customers. During 2013, we expanded our presence in the Asia-Pacific and Latin America regions.34 Table of ContentsCore Revenue Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands)Core revenue$66,215 $51,224 $14,991 29.3 %Percentage of total revenue97.4% 95.6% Non-core revenue$1,789 $2,363 $(574) (24.3)%Percentage of total revenue2.6% 4.4% Total revenue$68,004 $53,587 $14,417 26.9 %Core revenue for the year ended December 31, 2013 increased by $15.0 million, or 29.3%, compared to the year ended December 31, 2012.This growth was primarily attributable to a 26.0% increase in the number of core customers using our platform at December 31, 2013 as compared toDecember 31, 2012. The increase in core customers accounted for 62.3% of the increase in core revenue during the year ended December 31, 2013.In addition, we experienced a 9.3% increase in the average revenue per core customer during the year ended December 31, 2013 as compared to the yearended December 31, 2012, which accounted for 37.7% of the increase in core revenue during the period. The increase in the average revenue per core customerwas primarily attributable to an overall increase in transaction volume and, to a lesser extent, to modest overall increases in the percentage fees assessed on thefixed and variable portions of GMV under our contractual arrangements with some of our customers during the year. Because we generally enter into annualcontracts with our 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 core customer was due in part to a general shift in our customer base toward a greater proportion of largerenterprise customers, all of which are core customers. Our enterprise customers generally commit to a higher specified minimum amount of GMV per month,which results in a higher proportion of fixed subscription fees.Cost of revenue Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands)Cost of revenue$18,088 $14,749 $3,339 22.6%Percentage of total revenue26.6% 27.5% Cost of revenue for the year ended December 31, 2013 increased by $3.3 million, or 22.6%, compared to the year ended December 31, 2012. Theincrease in cost of revenue was primarily attributable to a $2.2 million increase in salaries and personnel-related costs, as we increased the number ofemployees providing services to our expanding customer base and supporting our platform infrastructure from 110 at December 31, 2012 to 144 atDecember 31, 2013. In addition, we experienced a $0.7 million increase in depreciation expense associated with equipment for our data centers and a $0.3million increase in credit card vendor transaction fees. As a percentage of revenue, cost of revenue declined from 27.5% for the year ended December 31, 2012to 26.6% for the year ended December 31, 2013.Operating ExpensesSales and marketing Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands)Sales and marketing$37,458 $24,326 $13,132 54.0%Percentage of total revenue55.1% 45.4% Sales and marketing expense for the year ended December 31, 2013 increased by $13.1 million, or 54.0%, compared to the year ended December 31,2012. The increase in sales and marketing expense was primarily attributable to a $9.6 million increase in salaries and personnel-related costs, as weincreased the number of sales and marketing and customer support35 Table of Contentspersonnel to continue driving revenue growth. The number of full-time sales and marketing employees increased from 189 at December 31, 2012 to 301 atDecember 31, 2013. In addition, we experienced a $3.1 million increase in our marketing and advertising expenses, promotional event programs and travelcosts. The increase in sales and marketing expense as a percentage of revenue for the year ended December 31, 2013 reflects the implementation of our strategyof hiring new sales and marketing professionals and expanding our marketing activities in order to continue to grow our business.Research and development Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands)Research and development$12,669 $10,109 $2,560 25.3%Percentage of total revenue18.6% 18.9% Research and development expense for the year ended December 31, 2013 increased by $2.6 million, or 25.3%, compared to the year endedDecember 31, 2012. The increase in research and development expense was primarily attributable to a $2.1 million increase in salaries and personnel-relatedcosts associated with an increase in research and development personnel. The number of full-time research and development employees increased from 70 atDecember 31, 2012 to 93 at December 31, 2013. In addition, we experienced a $0.2 million increase in contractor and consulting expenses primarily related totranslation services for our products as we expanded our international operations.General and administrative Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands)General and administrative$14,154 $8,252 $5,902 71.5%Percentage of total revenue20.8% 15.4% General and administrative expense for the year ended December 31, 2013 increased by $5.9 million, or 71.5%, compared to the year endedDecember 31, 2012. The increase in general and administrative expense was primarily attributable to a $2.9 million increase in salaries and personnel-relatedcosts associated with an increase in general and administrative personnel to support our growing business and fulfill our obligations as a newly publiccompany. The number of full-time general and administrative employees increased from 36 at December 31, 2012 to 56 at December 31, 2013. We alsoexperienced a $1.5 million increase in professional fees related to legal, consulting and audit and tax services and a $0.8 million increase in insurance and taxcosts. In addition, we incurred a $0.6 million increase in other general corporate costs necessary to support the overall growth in our business.Loss on Extinguishment of DebtDuring the year ended December 31, 2013, we recognized a loss on extinguishment of debt of $3.1 million as a result of the prepayment of oursubordinated loan, representing the difference between the par value and payoff amount of the subordinated loan, increased by the write-off of unamortizeddebt issuance costs and accelerated amortization of the remaining debt discount.36 Table of ContentsComparison of Years Ended December 31, 2012 and 2011 Year Ended December 31, 2012 2011 Period-to-Period Change Amount Percentage ofRevenue Amount Percentage ofRevenue Amount Percentage (dollars in thousands)Revenue$53,587 100.0 % $43,570 100.0 % $10,017 23.0%Cost of revenue14,749 27.5 12,248 28.1 2,501 20.4Gross profit38,838 72.5 31,322 71.9 7,516 24.0Operating expenses: Sales and marketing24,326 45.4 19,106 43.9 5,220 27.3Research and development10,109 18.9 8,842 20.3 1,267 14.3General and administrative8,252 15.4 6,551 15.0 1,701 26.0Total operating expenses42,687 79.7 34,499 79.2 8,188 23.7Loss from operations(3,849) (7.2) (3,177) (7.3) (672) 21.2Other (expense) income: Interest expense, net(1,185) (2.2) (642) (1.5) (543) 84.6Other income, net31 0.1 6 0.0 25 416.7Total other (expense) income(1,154) (2.1) (636) (1.5) (518) 81.4Loss before income taxes(5,003) (9.3) (3,813) (8.8) (1,190) 31.2Income tax (benefit) expense(70) (0.1) 51 0.1 (121) *Net loss$(4,933) (9.2)% $(3,864) (8.9)% $(1,069) 27.7* = not meaningfulRevenue Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands)Revenue$53,587 $43,570 $10,017 23.0%Revenue for the year ended December 31, 2012 increased by $10.0 million, or 23.0%, compared to the year ended December 31, 2011. The increase inrevenue for the year ended December 31, 2012 was mainly driven by the expansion of our international operations and an increase in our core revenue, whichis discussed below. This growth in core revenue was partially offset by a $0.7 million, or 21.6%, decrease in our non-core revenue over the same period, asthe products associated with our non-core, legacy acquisitions became a less significant part of our overall business focus.Our revenue from international operations increased from $8.8 million, or 20.1% of total revenue, for the year ended December 31, 2011, to $11.4million, or 21.4% of total revenue, for the year ended December 31, 2012. The increase in revenue from our international operations was primarily attributableto an increase in the number of international customers.Core Revenue Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands)Core revenue$51,224 $40,557 $10,667 26.3 %Percentage of total revenue95.6% 93.1% Non-core revenue$2,363 $3,013 $(650) (21.6)%Percentage of total revenue4.4% 6.9% Total revenue$53,587 $43,570 $10,017 23.0 %Core revenue for the year ended December 31, 2012 increased by $10.7 million, or 26.3%, compared to the year ended December 31, 2011.37 Table of ContentsThis growth was primarily attributable to a 15.7% increase in the average revenue per core customer during the year ended December 31, 2012 ascompared to the year ended December 31, 2011, which accounted for 65.2% of the increase in core revenue during the period. The increase in the averagerevenue per core customer was primarily attributable to an overall increase in transaction volume and, to a lesser extent, to modest overall increases in thepercentages assessed on the fixed and variable portions of GMV under our contractual arrangements with some of our customers during the year. In addition,the increase in average revenue per core customer was due in part to a general shift in our customer base toward a greater proportion of larger enterprisecustomers, all of which are core customers. Our enterprise customers generally commit to a higher specified minimum amount of GMV per month.In addition, we experienced a 12.7% increase in the number of core customers using our platform during the year ended December 31, 2012 ascompared to the year ended December 31, 2011, which accounted for 34.8% of the increase in core revenue during the period.Cost of revenue Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands)Cost of revenue$14,749 $12,248 $2,501 20.4%Percentage of total revenue27.5% 28.1% Cost of revenue for the year ended December 31, 2012 increased by $2.5 million, or 20.4%, compared to the year ended December 31, 2011. Theincrease in cost of revenue was primarily attributable to a $1.8 million increase in salaries and personnel-related costs, as we increased the number ofemployees providing services to our expanding customer base and supporting our platform infrastructure from 90 at December 31, 2011 to 110 atDecember 31, 2012. In addition, we experienced a $0.8 million increase in depreciation expense associated with equipment for our data centers. These increaseswere partially offset by a $0.2 million decrease in co-location facility costs resulting from efficiencies gained through virtualization. As a percentage of revenue,cost of revenue declined from 28.1% for the year ended December 31, 2011 to 27.5% for the year ended December 31, 2012.Operating ExpensesSales and marketing Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands)Sales and marketing$24,326 $19,106 $5,220 27.3%Percentage of total revenue45.4% 43.9% Sales and marketing expense for the year ended December 31, 2012 increased by $5.2 million, or 27.3%, compared to the year ended December 31,2011. The increase in sales and marketing expense was primarily attributable to a $5.4 million increase in salaries and personnel-related costs, as weincreased the number of sales and marketing and customer support personnel to continue driving revenue growth. The number of full-time sales andmarketing employees increased from 148 at December 31, 2011 to 189 at December 31, 2012.Research and development Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands)Research and development$10,109 $8,842 $1,267 14.3%Percentage of total revenue18.9% 20.3% Research and development expense for the year ended December 31, 2012 increased by $1.3 million, or 14.3%, compared to the year endedDecember 31, 2011. The increase in research and development expense was primarily attributable to a $1.5 million increase in salaries and personnel-relatedcosts associated with an increase in research and development personnel. The number of full-time research and development employees increased from 57 atDecember 31, 2011 to 70 at December 31, 2012.38 Table of ContentsGeneral and administrative Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands)General and administrative$8,252 $6,551 $1,701 26.0%Percentage of total revenue15.4% 15.0% General and administrative expense for the year ended December 31, 2012 increased by $1.7 million, or 26.0%, compared to the year endedDecember 31, 2011. The increase in general and administrative expense was primarily attributable to a $0.7 million increase in salaries and personnel-relatedcosts associated with an increase in general and administrative personnel to support our growing business. The number of full-time general and administrativeemployees increased from 30 at December 31, 2011 to 36 at December 31, 2012. In addition, we experienced a $0.5 million increase in information systemsand consulting costs and a $0.2 million increase in recruiting costs.SeasonalityOur revenue fluctuates as a result of seasonal variations in our business, principally due to the peak consumer demand and related increased volume ofour 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 agiven year due to increased GMV processed through our platform, resulting in higher variable subscription fees.Liquidity and Capital ResourcesSources of LiquidityPrior to our IPO in May 2013, we funded our operations primarily through cash from operating activities, bank and subordinated debt borrowings andprivate placements of our redeemable convertible preferred stock.In December 2009, we entered into a loan and security agreement with a lender, which was most recently amended in September 2013. The agreement,as amended, includes a revolving line of credit of up to $6.0 million and an equipment line of credit of up to $1.0 million. Under the terms of this agreement,we are required to meet and maintain specified financial and nonfinancial covenants. As of December 31, 2013, we were in compliance with all suchcovenants.The revolving line of credit has a current term through September 2014 and requires interest-only payments to be made monthly on any outstandingadvances at the lender’s prime rate, which was 3.25% at December 31, 2013, plus 1%. Borrowings under the equipment line of credit accrue interest at a rateof 6.5% per annum and are payable in 36 monthly installments from the date of each respective borrowing. The equipment line of credit matures on June 1,2014. The loans are collateralized by all of our assets, excluding our intellectual property, although we may not encumber our intellectual property without theconsent of the lender. At December 31, 2013, we did not have any amounts outstanding under either the revolving line of credit or the equipment line of credit.In March 2012, we entered into a loan and security agreement with a subordinated lender, which was amended in October 2013. Under the agreement,we borrowed $5.0 million in March 2012 and an additional $5.0 million in December 2012. Borrowings under the agreement accrued interest at an annual rateof 10.5%. We were required to make interest-only payments on outstanding balances through March 1, 2015, after which the debt was payable in monthlyinstallments of both principal and interest through February 2017. In November 2013, we entered into a payoff agreement with the lender pursuant to whichwe paid all amounts due and owing under the agreement and terminated the agreement. Under the payoff agreement, we paid the lender approximately $11.3million, of which $1.2 million represented a fixed prepayment fee and other extinguishment costs.Public Offerings of Common StockOn May 29, 2013, we closed our IPO in which we sold an aggregate of 6,612,500 shares of common stock, including the full exercise of theunderwriters' option to purchase additional shares, for net proceeds of $82.0 million after deducting underwriting discounts and offering-related expenses.Upon closing of the IPO, all of the convertible preferred stock then outstanding automatically converted into 13,401,499 shares of common stock. In addition,outstanding warrants to purchase Series C convertible preferred stock automatically converted into warrants to purchase 206,038 shares of common stock,and our preferred stock warrant liability of $3.6 million as of May 29, 2013 was reclassified to additional paid-in capital.39 Table of ContentsOn November 12, 2013, we closed a public offering in which we sold 1,000,000 shares of common stock for net proceeds of $31.9 million afterdeducting underwriting discounts and offering-related expenses.Working CapitalThe following table summarizes our cash and cash equivalents, accounts receivable, working capital and cash flows for the periods indicated: As of and for the Year Ended December 31, 2013 2012 2011 (in thousands)Cash and cash equivalents$104,406 $10,865 $4,998Accounts receivable, net of allowance13,951 9,571 7,677Working capital94,383 3,006 (1,317)Cash (used in) provided by: Operating activities(5,314) 1,191 161Investing activities(5,218) (2,094) (1,723)Financing activities104,164 6,806 (443)Our cash at December 31, 2013 was held for working capital purposes. We do not enter into investments for trading or speculative purposes. Ourpolicy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity.Accordingly, our cash is invested primarily in demand deposit accounts and short-term money market accounts that are currently providing only a minimalreturn.Of our total cash and cash equivalents, approximately 2% was held outside of the United States at December 31, 2013. Our international operationsprimarily consist of selling and marketing functions supported by our U.S. operations, and we are dependent on our U.S. operations for our internationalworking capital needs. If our cash and cash equivalents held outside of the United States were ever needed for our operations inside the United States, wewould be required to accrue and pay U.S. taxes to repatriate these funds. We currently intend to permanently reinvest these foreign amounts outside the UnitedStates, and our current plans do not demonstrate a need to repatriate the foreign amounts to fund our U.S. operations.Cash FlowsOperating ActivitiesFor the year ended December 31, 2013, our net cash used in operating activities of $5.3 million consisted of a net loss of $20.6 million, partially offsetby $11.1 million in adjustments for non-cash items and $4.2 million of cash provided by changes in working capital. Adjustments for non-cash itemsprimarily consisted of depreciation and amortization expense of $3.7 million, loss on extinguishment of debt of $3.1 million, non-cash stock compensationexpense of $2.1 million, change in fair value of preferred stock warrants of $1.1 million, which was reclassified to additional paid-in capital upon the closingof our IPO, accretion of debt discount of $0.5 million and bad debt expense of $0.5 million. The increase in cash resulting from changes in working capitalprimarily consisted of an increase in accounts payable and accrued expenses of $5.7 million, primarily driven by increased operating costs during the period,and an increase in deferred revenue of $4.5 million as a result of an increased number of customers prepaying for subscription services. These increases werepartially offset by decreases in operating cash flow due to a $4.9 million increase in accounts receivable, primarily driven by increased revenue during theyear as we continued to expand our operations, both domestically and internationally, and an increase in prepaid expenses and other assets of $1.0 million.For the year ended December 31, 2012, our net cash provided by operating activities of $1.2 million consisted of a net loss of $4.9 million, offset by$1.4 million of cash provided by changes in working capital and $4.7 million in adjustments for non-cash items. Adjustments for non-cash items primarilyconsisted of depreciation and amortization expense of $2.9 million, non-cash stock compensation expense of $0.6 million, non-cash rent expense of $0.5million and accretion of debt discount of $0.4 million. The increase in cash resulting from changes in working capital primarily consisted of an increase indeferred revenue of $3.9 million as a result of an increased number of customers prepaying for subscription services and an increase in accounts payable andaccrued expenses of $0.4 million, primarily driven by increased operating costs during the period. These increases were partially offset by decreases inoperating cash flow due to a $2.0 million increase in accounts receivable,40 Table of Contentsprimarily driven by increased revenue during the year as we continue to expand our operations, both domestically and internationally, and an increase inprepaid expenses and other assets of $1.1 million.For the year ended December 31, 2011, our net cash provided by operating activities of $0.2 million consisted of a net loss of $3.9 million, offset bycash of $1.0 million provided by changes in working capital and $3.1 million in adjustments for non-cash items. Adjustments for non-cash items primarilyconsisted of depreciation and amortization expense of $2.1 million, non-cash stock compensation expense of $0.2 million, non-cash rent expense of $0.3million and change in fair value of preferred stock warrants of $0.3 million. The increase in cash resulting from changes in working capital primarilyconsisted of an increase in deferred revenue of $1.9 million as a result of an increased number of customers prepaying for subscription services and anincrease in accounts payable and accrued expenses of $1.4 million, primarily driven by increased operating costs during the period. These increases wereoffset by decreases in operating cash flow due to a $1.5 million increase in accounts receivable, primarily driven by increased revenue during the year as wecontinue to expand our operations, both domestically and internationally, and an increase in prepaid expenses and other assets of $0.8 million.Investing ActivitiesFor the year ended December 31, 2013, net cash used in investing activities was $5.2 million, consisting of $3.7 million for the purchase of propertyand equipment and $1.5 million for the payment of internal-use software development costs.For the year ended December 31, 2012, net cash used in investing activities was $2.1 million, consisting of $1.9 million for the purchase of propertyand equipment and $0.2 million for the payment of internal-use software development costs.For the years ended December 31, 2011, net cash used in investing activities was $1.7 million for the purchase of property and equipment.Financing ActivitiesFor the year ended December 31, 2013, net cash provided by financing activities was $104.2 million, consisting of $118.5 million in proceeds fromthe issuance of common stock in two public offerings, net of underwriting discounts and commissions but before offering expenses, $2.4 million in cashreceived upon the exercise of stock options and $1.6 million in cash received upon the exercise of common stock warrants. These amounts were partiallyoffset by $14.2 million in repayments of debt and capital leases, $2.9 million in payments of costs related to our public offerings that had been deferred and$1.2 million in debt extinguishment costs related to the prepayment of our subordinated loan.For the year ended December 31, 2012, net cash provided by financing activities was $6.8 million, consisting of $9.9 million in net borrowings underour subordinated loan and $0.2 million in cash received upon the exercise of stock options, offset by $1.5 million in repayments of debt and capital leases,$1.5 million in payments of costs in connection with our IPO that had been deferred and $0.2 million used to repurchase common stock from two formeremployees.For the year ended December 31, 2011, net cash used in financing activities was $0.4 million, consisting of $1.5 million in repayments of debt andcapital leases, offset by $1.0 million in borrowings under our revolving line of credit and $0.1 million in cash received upon the exercise of stock options.Operating and Capital Expenditure RequirementsBased on our current level of operations and anticipated growth, we believe our future cash flows from operating activities and existing cash balances,which include the net proceeds from our public offerings, will be sufficient to meet our cash requirements for at least the next 12 months. During this period,we expect our capital expenditure requirements to be approximately $9.0 million to $11.0 million, which will primarily consist of computer hardware,purchased software and furniture and office equipment.Contractual ObligationsOur principal commitments consist of non-cancelable leases for our office space and computer equipment and purchase commitments for our co-location and other support services. The following table summarizes these contractual obligations at December 31, 2013. Future events could cause actualpayments to differ from these estimates. 41 Table of ContentsContractual ObligationsPayment due by periodTotal Less than 1year 1-3 years 3-5 years More than 5years (in thousands)Operating lease obligations$15,317 $1,973 $5,707 $5,855 $1,782Capital lease obligations3,196 1,570 1,625 1 —Purchase commitments2,840 2,232 608 — —Total$21,353 $5,775 $7,940 $5,856 $1,782Subsequent to December 31, 2013, we leased additional office space in London, England with total collective future minimum lease payments ofapproximately $15.5 million, based on the exchange rate as of December 31, 2013.Off-Balance Sheet ArrangementsAs of December 31, 2013, 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 useof unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.Critical Accounting Policies and Significant Judgments and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements,which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historicalexperience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates underdifferent assumptions or conditions, and to the extent that there are differences between our estimates and actual results, our future financial statementpresentation, financial condition, results of operations and cash flows will be affected.While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this AnnualReport, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of ourconsolidated financial statements.Revenue Recognition and Deferred RevenueWe 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 specifiedcontract term, which is typically one year. A portion of the subscription fee is typically fixed and is based on a specified minimum amount of GMV that acustomer expects to process through our platform over the contract term. The remaining portion of the subscription fee is variable and is based on a specifiedpercentage of GMV processed through our platform in excess of the customer’s specified minimum GMV amount. We also receive implementation fees, whichmay include fees for providing launch assistance and training. Customers do not have the contractual right to take possession of our software at any time.We recognize revenue when there is persuasive evidence of an arrangement, we have provided the service, the fees to be paid by the customer are fixedand determinable and collectability is reasonably assured. We consider that delivery of our SaaS solutions has commenced once our customer has access toour platform and can process transactions.We generally recognize the fixed portion of our subscription fees and our implementation fees ratably over the contract term once the criteria for revenuerecognition described above have been satisfied. Some of our customers elect a managed-service solution and contract with us to manage some or all aspects ofour SaaS solutions on their behalf. Under these managed-service arrangements, customer transactions cannot be processed through our platform until thecompletion of the implementation services. Therefore, we commence revenue recognition once transactions can be processed on our platform, provided all otherrevenue recognition criteria have been satisfied. At that time, we recognize the portion of the fees earned since the inception of the arrangement. We recognize thebalance of the fees ratably over the remaining contract term.We recognize the variable portion of subscription fee revenue in the period in which the related GMV is processed, as long as all other revenuerecognition criteria have been satisfied.42 Table of ContentsWe record deferred revenue when we receive cash payments from or invoice our customers in advance of when we provide or perform the services underour arrangements with them.Accounts Receivable and Allowances for Doubtful AccountsAccounts receivable are stated at realizable value, net of an allowance for doubtful accounts that we maintain for estimated losses expected to result fromthe inability of some customers to make payments as they become due. Our estimate is based on historical collection experience and a review of the currentstatus of accounts receivable. Historically, our actual collection experience has not varied significantly from our estimates, due primarily to our collectionpolicies and the financial strength of our customers.GoodwillGoodwill represents the excess of the aggregate of the fair value of consideration transferred in a business combination over the fair value of assetsacquired, net of liabilities assumed. Goodwill is not amortized but is subject to an annual impairment test. We test goodwill for impairment annually onDecember 31 or more frequently if events or changes in business circumstances indicate the asset might be impaired. Goodwill is tested for impairment at thereporting unit level. During the year ended December 31, 2012, we adopted new accounting guidance, which gives us the option of performing a qualitativeassessment for testing goodwill for impairment. Under the qualitative assessment, we determine whether the existence of events and circumstances indicate thatit is more likely than not that the goodwill is impaired. The qualitative factors that we consider include, but are not limited to, macroeconomic conditions,industry and market conditions, company-specific events, changes in circumstances and after-tax cash flows.If we determine that the qualitative factors indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount,we would test goodwill for impairment at the reporting unit level using a two-step approach. The first step is to compare the fair value of the reporting unit tothe carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the net assetsassigned to the reporting unit, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unit’s carrying value, step two isperformed to measure the amount of the impairment, if any. In the second step, the fair value of goodwill is determined by deducting the fair value of thereporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if the reporting unit had just been acquired and the fairvalue was being initially allocated. If the carrying value of goodwill exceeds the implied fair value, an impairment charge would be recorded in the period thedetermination is made.We have determined that we have a single, entity-wide reporting unit. To determine the fair value of our reporting unit for the quantitative approach, weprimarily use a discounted cash flow analysis, which requires significant assumptions and estimates about future operations. Significant judgments inherentin this analysis include the determination of an appropriate discount rate, estimated terminal value and the amount and timing of expected future cash flows.We may also determine fair value of our reporting unit using a market approach by applying multiples of earnings of peer companies to our operating results.Based upon the quantitative assessment that we performed as of December 31, 2011, our reporting unit was not considered at risk of failing step one ofthe goodwill impairment test. Accordingly, a qualitative assessment was performed as of December 31, 2013, and we determined, after assessing all relevantevents and circumstances, that the reporting unit did not have a carrying value that was more likely than not to exceed its fair value.Stock-Based CompensationStock options awarded to employees, directors and non-employee third parties are measured at fair value at each grant date. Prior to our IPO, weconsidered what we believed to be comparable publicly traded companies, discounted free cash flows, and an analysis of our enterprise value in estimating thefair value of our common stock. We recognize stock-based compensation expense using the accelerated attribution method, net of estimated forfeitures, inwhich compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche. Optionsgenerally vest quarterly over a four-year period.The determination of the fair value of stock-based compensation arrangements is affected by a number of variables, including estimates of the fairvalue of our common stock, expected stock price volatility, risk-free interest rate and the expected life of the award. We value stock options using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vestingrestrictions. Black-Scholes and other option valuation models require the input of highly subjective assumptions, including the expected stock price volatility.43 Table of ContentsThe following summarizes the assumptions used for estimating the fair value of stock options granted to employees for the periods indicated: Year Ended December 31, 2013 2012 2011Assumptions: Risk-free interest rate0.3% - 1.7% 0.1% - 0.9% 0.4% - 2.0%Expected life (years)5.00 - 6.25 4.00 - 6.25 6.25Expected volatility43% - 59% 49% - 61% 28% - 56%Dividend yield0% 0% 0%We have assumed no dividend yield because we do not expect to pay dividends in the future, which is consistent with our history of not payingdividends. The risk-free interest rate assumption is based on observed interest rates for constant maturity U.S. Treasury securities consistent with the expectedlife of our employee stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplifiedmethod. Under the simplified method, the expected life of an option is presumed to be the midpoint between the vesting date and the end of the contractual term.We used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expectedlife of the stock options. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected lifeof the stock options.Our estimate of pre-vesting forfeitures, or forfeiture rate, is based on our analysis of historical behavior by stock option holders. The estimatedforfeiture rate is applied to the total estimated fair value of the awards, as derived from the Black-Scholes model, to compute the stock-based compensationexpense, net of pre-vesting forfeitures, to be recognized in our consolidated statements of operations.Prior to our IPO in May 2013, we were a private company with no active public market for our common stock. Therefore, in response to Section 409Aof the Internal Revenue Code of 1986, as amended, related regulations issued by the Internal Revenue Service and accounting standards related to stock-basedcompensation, we periodically determined for financial reporting purposes the estimated per share fair value of our common stock at various dates usingcontemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid,“Valuation of Privately-Held Company Equity Securities Issued as Compensation.”Following our IPO, we established a policy of using the closing sale price per share of our common stock as quoted on the New York Stock Exchangeon the date of grant for purposes of determining the exercise price per share of our options to purchase common stock.Income TaxesWe account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as foroperating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in theyears in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities inthe results of operations in the period that includes the enactment date. We reduce the measurement of a deferred tax asset, if necessary, by a valuationallowance if it is more likely than not that we will not realize some or all of the deferred tax asset.We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is morelikely than not that the position will be sustained upon examination. We recognize potential accrued interest and penalties associated with unrecognized taxpositions within our global operations in income tax expense.Recent Accounting PronouncementsWe have reviewed accounting pronouncements that were issued as of December 31, 2013 and do not believe that these pronouncements will have amaterial impact on our financial position or results of operations.44 Table of ContentsITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMarket 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. Thevalue 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 interest rates and foreign currency exchange rates. We do not use derivative financial instruments forspeculative, hedging or trading purposes, although in the future we may enter into exchange rate hedging arrangements to manage the risks described below.Interest Rate SensitivityWe are subject to interest rate risk in connection with borrowings under our revolving line of credit which are subject to a variable interest rate. As ofDecember 31, 2013, we did not have any borrowings outstanding under our revolving line of credit. Any debt we incur in the future may also bear interest atvariable rates.Foreign Currency Exchange RiskWith international operations, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time asbusiness practices evolve, and if our exposure increases, adverse movement in foreign currency exchange rates could have a material adverse impact on ourfinancial results. Historically, our primary exposures have been related to non-U.S. dollar denominated operating expenses in the United Kingdom, Europe andAustralia. As a result, our results of operations would generally be adversely affected by a decline in the value of the U.S. dollar relative to these foreigncurrencies. However, based on the size of our international operations and the amount of our expenses denominated in foreign currencies, a 10% change inforeign exchange rates would have had only a minimal impact on our results of operations for the year ended December 31, 2013. The majority of our salescontracts are currently denominated in U.S. dollars. Therefore, we have minimal foreign currency exchange risk with respect to our revenue.InflationWe do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impactof inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject tosignificant 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 ourbusiness, financial condition and results of operations.45 Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm47Consolidated Balance Sheets as of December 31, 2013 and 201248Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 201149Consolidated Statements of Comprehensive Loss for the years ended December 31, 2013, 2012 and 201150Consolidated Statements of Changes in Stockholders’ (Deficit) Equity for the years ended December 31, 2013, 2012 and 201151Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 201152Notes to Consolidated Financial Statements5346 Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and Stockholders of ChannelAdvisor Corporation and SubsidiariesWe have audited the accompanying consolidated balance sheets of ChannelAdvisor Corporation and Subsidiaries as of December 31, 2013 and 2012,and the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity (deficit), and cash flows for each of the three yearsin the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express anopinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were notengaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ChannelAdvisorCorporation and Subsidiaries at December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three yearsin the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles./s/ Ernst & Young LLPRaleigh, North CarolinaFebruary 27, 201447 Table of ContentsChannelAdvisor Corporation and SubsidiariesConsolidated Balance Sheets(in thousands, except share and per share data) December 31, 2013 2012Assets Current assets: Cash and cash equivalents$104,406 $10,865Accounts receivable, net of allowance of $561 and $191 as of December 31, 2013 and 2012, respectively13,951 9,571Prepaid expenses and other current assets3,571 2,589Total current assets121,928 23,025Property and equipment, net9,088 4,315Goodwill16,106 16,106Intangible assets, net670 1,245Restricted cash685 687Other assets309 2,644Total assets$148,786 $48,022Liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) Current liabilities: Accounts payable$4,237 $1,269Accrued expenses7,492 4,650Deferred revenue14,093 9,750Current portion of long-term debt— 3,370Other current liabilities1,723 980Total current liabilities27,545 20,019Long-term debt, net of current portion— 7,602Series A and Series C warrants liability— 3,235Long-term capital leases, net of current portion1,558 1,136Other long-term liabilities1,903 1,714Total liabilities31,006 33,706Commitments and contingencies (Note 5) Redeemable convertible preferred stock: Convertible Series A preferred stock, $0.001 par value, 0 and 94,069,763 shares authorized, 0 and 93,821,393 sharesissued and outstanding as of December 31, 2013 and 2012, respectively— 18,887Convertible Series B preferred stock, $0.001 par value, 0 and 40,641,227 shares authorized, issued and outstanding as ofDecember 31, 2013 and 2012, respectively— 18,000Convertible Series B-1 preferred stock, $0.001 par value, 0 and 5,660,378 shares authorized, issued and outstanding asof December 31, 2013 and 2012, respectively— 3,000Convertible Series C preferred stock, $0.001 par value, 0 and 80,000,000 shares authorized, 0 and 73,880,351 sharesissued and outstanding as of December 31, 2013 and 2012, respectively— 50,608Total redeemable convertible preferred stock— 90,495Stockholders’ equity (deficit): Preferred stock, $0.001 par value, 5,000,000 and 0 shares authorized, no shares issued and outstanding as of December31, 2013 and 2012, respectively— —Common stock, $0.001 par value, 100,000,000 and 303,500,000 shares authorized, 23,643,872 and 1,240,193 sharesissued and outstanding as of December 31, 2013 and 2012, respectively24 1Additional paid-in capital218,330 3,584Accumulated other comprehensive loss(471) (289)Accumulated deficit(100,103) (79,475)Total stockholders’ equity (deficit)117,780 (76,179)Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)$148,786 $48,022The accompanying notes are an integral part of these consolidated financial statements.48 Table of ContentsChannelAdvisor Corporation and SubsidiariesConsolidated Statements of Operations(in thousands, except share and per share data) Year Ended December 31, 2013 2012 2011Revenue$68,004$53,587$43,570Cost of revenue18,08814,74912,248Gross profit49,916 38,838 31,322Operating expenses: Sales and marketing37,45824,32619,106Research and development12,66910,1098,842General and administrative14,1548,2526,551Total operating expenses64,281 42,687 34,499Loss from operations(14,365) (3,849) (3,177)Other (expense) income: Loss on extinguishment of debt(3,112)——Interest expense, net(2,960)(1,185)(642)Other income, net12316Total other (expense) income(6,060) (1,154) (636)Loss before income taxes(20,425) (5,003) (3,813)Income tax expense (benefit)203(70)51Net loss$(20,628) $(4,933) $(3,864)Net loss per share: Basic and diluted$(1.51)$(4.23)$(3.45)Weighted average common shares outstanding: Basic and diluted13,695,8041,164,9421,120,902The accompanying notes are an integral part of these consolidated financial statements.49 Table of ContentsChannelAdvisor Corporation and SubsidiariesConsolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2013 2012 2011Net loss$(20,628)$(4,933)$(3,864)Other comprehensive loss:Foreign currency translation adjustments(182)(45)70Total comprehensive loss$(20,810) $(4,978) $(3,794)The accompanying notes are an integral part of these consolidated financial statements.50 Table of ContentsChannelAdvisor Corporation and SubsidiariesConsolidated Statements of Changes in Stockholders’ (Deficit) Equity (in thousands, except share data) Common Stock AdditionalPaid-InCapital AccumulatedOtherComprehensiveLoss AccumulatedDeficit TotalStockholders’(Deficit) Equity Shares Amount Balance, January 1, 20111,069,305$1$2,684$(314)$(70,678) $(68,307)Exercise of stock options71,264—98—— 98Accretion of issuance costs onredeemable convertible preferredstock——(50)—— (50)Stock-based compensation expense——200—— 200Net loss————(3,864) (3,864)Foreign currency translationadjustments———70— 70Balance, December 31, 20111,140,569 1 2,932 (244) (74,542) (71,853)Repurchase and retirement ofcommon stock(25,000)—(193)—— (193)Exercise of stock options124,624—222—— 222Accretion of issuance costs onredeemable convertible preferredstock——(15)—— (15)Stock-based compensation expense——638—— 638Net loss————(4,933) (4,933)Foreign currency translationadjustments———(45)— (45)Balance, December 31, 20121,240,193 1 3,584 (289) (79,475) (76,179)Conversion of redeemableconvertible preferred stock tocommon stock13,401,4991391,137—— 91,150Conversion of redeemableconvertible preferred stockwarrants to common stockwarrants——3,632—— 3,632Issuance of common stock frompublic offerings, net of issuancecosts7,612,5008113,840—— 113,848Exercise of common stockwarrants662,36211,591—— 1,592Exercise of stock options727,31812,447—— 2,448Stock-based compensation expense——2,099—— 2,099Net loss————(20,628) (20,628)Foreign currency translationadjustments———(182)— (182)Balance, December 31, 201323,643,872 $24 $218,330 $(471) $(100,103) $117,780The accompanying notes are an integral part of these consolidated financial statements.51 Table of ContentsChannelAdvisor Corporation and SubsidiariesConsolidated Statements of Cash Flows(in thousands) Year Ended December 31, 2013 2012 2011Cash flows from operating activities Net loss$(20,628) $(4,933) $(3,864)Adjustments to reconcile net loss to net cash and cash equivalents (used in) provided by operating activities: Depreciation and amortization3,722 2,903 2,061Loss on extinguishment of debt3,112 — —Bad debt expense527 162 71Deferred income taxes(12) 30 49Change in fair value of preferred stock warrants1,052 5 261Accretion of debt discount547 372 9Non-cash stock-based compensation expense2,099 638 200Change in lease incentive obligation(21) (21) 114Amortization of debt issuance costs38 57 29Change in deferred rent51 544 302Gain on disposal of furniture and equipment— — (1)Changes in assets and liabilities: Accounts receivable(4,917) (1,966) (1,537)Prepaid expenses and other assets(1,026) (1,102) (809)Restricted cash(1) 199 —Accounts payable and accrued expenses5,672 381 1,365Deferred revenue4,471 3,922 1,911Net cash and cash equivalents (used in) provided by operating activities(5,314) 1,191 161 Cash flows from investing activities Purchases of property and equipment(3,711) (1,930) (1,723)Payment of internal-use software development costs(1,507) (164) —Net cash and cash equivalents used in investing activities(5,218) (2,094) (1,723) Cash flows from financing activities Proceeds from issuance of common stock, net of underwriting discounts and commissions118,463 — —Proceeds from issuance of debt, net of debt issuance costs— 9,873 1,000Repayment of debt and capital leases(14,230) (1,548) (1,541)Payment of debt extinguishment costs(1,200) — —Payment of deferred offering costs(2,909) (1,548) —Proceeds from exercise of common stock warrants1,592 — —Proceeds from exercise of stock options2,448 222 98Repurchase and retirement of common stock— (193) —Net cash and cash equivalents provided by (used in) financing activities104,164 6,806 (443) Effect of currency exchange rate changes on cash and cash equivalents(91) (36) 64Net increase (decrease) in cash and cash equivalents93,541 5,867 (1,941)Cash and cash equivalents, beginning of year10,865 4,998 6,939Cash and cash equivalents, end of year$104,406 $10,865 $4,998 Supplemental disclosure of cash flow information Cash paid for interest$1,334 $614 $376Cash paid for income taxes, net$92 $64 $18Supplemental disclosure of noncash investing and financing activities Conversion of redeemable convertible preferred stock to common stock$91,150 $— $—Conversion of preferred stock warrants to common stock warrants$3,632 $— $—Accretion of issuance costs on redeemable convertible preferred stock$— $15 $50Deferred offering costs included in accounts payable and accrued expenses$73 $743 $—Accrued capital expenditures$627 $— $433Capital lease obligations entered into for the purchase of fixed assets$1,454 $2,014 $98The accompanying notes are an integral part of these consolidated financial statements. 52 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements1. Description of the BusinessChannelAdvisor Corporation (“ChannelAdvisor” or the “Company”) was incorporated in the state of Delaware and capitalized in June 2001. TheCompany began operations in July 2001. ChannelAdvisor is a provider of software-as-a-service ("SaaS") solutions that allow retailers and manufacturers tointegrate, manage and monitor their merchandise sales across hundreds of online channels. The Company is headquartered in Morrisville, North Carolina andhas offices in England, Ireland, Germany, Australia, Hong Kong and Brazil.2. Significant Accounting PoliciesPrinciples of ConsolidationThe accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompanyaccounts and transactions have been eliminated in consolidation.Reverse Stock SplitOn May 9, 2013, the Company’s amended and restated certificate of incorporation was amended to effect a 1-for-16 reverse stock split of itsoutstanding common stock. The reverse stock split did not cause an adjustment to the par value or the authorized shares of the common stock. As a result ofthe reverse stock split, the share amounts under the Company’s employee incentive plan and common stock warrants were automatically adjusted. Theaccompanying consolidated financial statements and notes to the consolidated financial statements give retroactive effect to the reverse stock split for allperiods presented.Public OfferingsOn May 29, 2013, the Company closed the initial public offering ("IPO") of its common stock pursuant to a registration statement on Form S-1 thatwas declared effective on May 22, 2013. In the IPO, the Company sold an aggregate of 6,612,500 shares of common stock, including the full exercise of theunderwriters’ option to purchase additional shares, at a public offering price of $14.00 per share. Net proceeds were approximately $82.0 million, afterdeducting underwriting discounts and commissions of $6.5 million and offering expenses of $4.1 million. Costs directly associated with the IPO werecapitalized and recorded as deferred offering costs prior to the closing of the IPO. These costs were recorded as a reduction of the IPO proceeds received incalculating the amount to be recorded in additional paid-in capital.Upon the closing of the IPO, certain Series C warrants that would otherwise have expired were automatically net exercised into 206,038 shares ofredeemable convertible preferred stock. All then-outstanding shares of the Company’s redeemable convertible preferred stock were automatically converted into13,401,499 shares of common stock. The remaining warrants to purchase redeemable convertible preferred stock outstanding as of the closing of the IPOautomatically converted into warrants to purchase an aggregate of 216,491 shares of common stock, and the preferred stock warrant liability was reclassifiedto additional paid-in capital as of May 29, 2013.In addition, upon the closing of the IPO, the Company’s certificate of incorporation was amended and restated to authorize 5,000,000 shares ofundesignated preferred stock and 100,000,000 shares of common stock.On November 12, 2013, the Company closed a registered public offering of its common stock pursuant to a registration statement on Form S-1 thatwas declared effective on November 5, 2013. In the registered public offering, the Company sold and issued 1,000,000 shares of common stock at a publicoffering price of $34.00 per share. Net proceeds were approximately $31.9 million, after deducting underwriting discounts and commissions of $1.6 millionand offering expenses of $0.5 million.Recently Adopted Accounting PronouncementsThe Company has reviewed accounting pronouncements that were issued as of December 31, 2013 and does not believe that these pronouncements willhave a material impact on its financial position or results of operations.Use of EstimatesThe preparation of financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requiresmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actualresults could differ from those estimates.53 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable allowance, the useful lives of long-livedassets and other intangible assets, assumptions used for purposes of determining stock-based compensation, income taxes, and the fair value of the Series Aand Series C warrants and the Company’s common stock prior to the closing of the IPO, among others. The Company bases its estimates on historicalexperience and on various other assumptions that it believes to be reasonable, the results of which form the basis for making judgments about the carryingvalue of assets and liabilities.Cash and Cash EquivalentsThe Company considers all highly liquid investments maturing within ninety days or less at the time of purchase to be cash equivalents. Cash andcash equivalents are comprised of cash and money market funds. Due to the short-term nature and liquidity of these financial instruments, the carrying valueof these assets approximates fair value.Restricted CashRestricted cash represents cash that is not readily available for general purpose cash needs. Restricted cash is classified as a long-term asset based onthe timing and nature of when and how the cash is expected to be used or when the restrictions are expected to lapse.As of December 31, 2013 and 2012, the Company had restricted cash of $0.7 million related to its operations in the United States. Of this amount,$0.6 million has been used as collateral for potential chargebacks resulting from the Company’s processing of customers’ credit cards as of December 31,2013 and 2012. The remaining restricted cash at December 31, 2013 and 2012 relates to cash set aside as a requirement for leasing the Company’s operatingsites or for miscellaneous banking activity as required by the Company’s banks.In addition, certain of the Company's foreign subsidiaries had nominal restricted cash balances as of December 31, 2013 and 2012.Revenue Recognition and Deferred RevenueThe majority of the Company’s revenue is derived from subscription fees paid by customers for access to and usage of the Company’s cloud-basedSaaS 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 specifiedminimum amount of gross merchandise value (“GMV”) that a customer expects to process through the Company’s platform over the contract term. Theremaining portion of the subscription fee is variable and is based on a specified percentage of GMV processed through the Company’s platform in excess ofthe customer’s specified minimum GMV amount. In addition, other sources of revenue consist primarily of implementation fees, which may include fees forproviding launch assistance and training. The Company recognizes revenue when there is persuasive evidence of an arrangement, the service has beenprovided 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. TheCompany’s contractual arrangements include performance, termination and cancellation provisions, but do not provide for refunds. Customers do not havethe 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 evaluateseach element in an arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when thedelivered item has standalone value and delivery of the undelivered element is probable and within the Company’s control. The Company’s implementationservices are not sold separately from the subscription and there is no alternative use for them. As such, the Company has determined the implementationservices 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 beginswhen the customer has access to the Company’s platform 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 thecustomer’s behalf for a specified period of time, which is typically one year. Under these managed-service arrangements, customer transactions cannot beprocessed through the Company’s platform until the completion of the implementation services. As such, revenue is contingent upon the Company’scompletion of the implementation services and recognition commences when transactions can be processed on the Company’s platform, provided all otherrevenue recognition criteria have been satisfied. At that time, the54 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)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 theremaining contract term.The Company recognizes the variable portion of subscription fee revenue in the period in which the related GMV is processed, provided all otherrevenue 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 will generally be recognizedwithin one year. Those amounts that are expected to be recognized in greater than one year are recorded in other long-term liabilities in the accompanyingconsolidated balance sheets.Sales CommissionsSales commissions are expensed when the related subscription agreement is executed by the customer.Cost of RevenueCost of revenue primarily consists of personnel and related costs, including salaries, bonuses, payroll taxes and stock compensation, co-locationfacility costs for the Company’s data centers, depreciation expense for computer equipment directly associated with generating revenue, credit card transactionfees and infrastructure maintenance costs. In addition, the Company allocates a portion of overhead, such as rent, additional depreciation and amortizationand employee benefits costs, to cost of revenue based on headcount.Fair Value of Financial InstrumentsThe carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payableand accrued expenses, approximate their respective fair values due to their short-term nature. Prior to the closing of the IPO on May 29, 2013, at which timecertain Series C warrants were automatically net exercised and the remaining warrants converted into common stock warrants, the Company's Series A andSeries C warrants were recorded at fair value. 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 wellas assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires theCompany to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined asfollows:•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.55 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)Assets and Liabilities Measured at Fair Value on a Recurring BasisThe Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level inwhich to classify them for each reporting period. This determination requires significant judgments to be made. The following table summarizes theconclusions reached as of December 31, 2012 (in thousands): Balance as ofDecember 31,2012 Level 1 Level 2 Level 3Liabilities: Series A warrants(1)$88 $— $— $88Series C warrants(1)3,147 — — 3,147 $3,235 $— $— $3,235_______________________(1) In order to determine the fair value of the redeemable convertible preferred stock warrants, the Company used a hybrid of the probability-weightedexpected return method (“PWERM”) and the option pricing model ("OPM"), collectively referred to as the “Hybrid Method,” for the year endedDecember 31, 2012. The Hybrid Method is a PWERM model in which one of the valuation scenarios is modeled using an OPM.Significant inputs for the OPM included an estimate of the fair value of the Series A and Series C redeemable convertible preferred stock, theremaining contractual life of the warrants, an estimate of the timing of a liquidity event, a risk-free rate of interest and an estimate of the Company’sstock volatility using the volatilities of guideline peer companies. Significant inputs for the PWERM included an estimate of the Company’s equityvalue, a weighted average cost of capital and an estimated probability and timing for each valuation scenario.Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable InputsThe following table presents the changes in the Company’s Level 3 instruments measured at fair value on a recurring basis during the years endedDecember 31, 2013, 2012 and 2011 (in thousands): Series A Series C 2013 2012 2011 2013 2012 2011Balance as of January 1 $88 $113 $63 $3,147 $479 $268Issuance of Series C warrant — — — — 2,705 —Cashless exercise of warrants (166) (67) — (489) — —Change in fair value of warrant liability 78 42 50 974 (37) 211Reclassification of warrant liability to equity — — — (3,632) — —Balance as of December 31 $— $88 $113 $— $3,147 $479Concentration of Credit RiskFinancial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents andaccounts 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 equivalent accounts exceed federally insured limits. The Company has not experienced any losses on cash and cashequivalents 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 December 31, 2013and 2012, or a significant concentration of its revenue for the years ended December 31, 2013, 2012 and 2011.Accounts Receivable and Allowance for Doubtful AccountsThe Company extends credit to customers without requiring collateral. Accounts receivable are stated at realizable value, net of an allowance fordoubtful accounts. The Company utilizes the allowance method to provide for doubtful accounts based on management’s evaluation of the collectability ofamounts due. The Company’s estimate is based on historical collection56 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)experience and a review of the current status of accounts receivable. Historically, actual write-offs for uncollectible accounts have not significantly differedfrom the Company’s estimates.The following table presents the changes in the Company’s allowance for doubtful accounts during the years ended December 31, 2013, 2012 and 2011(in thousands): Balance atBeginningof Period AdditionsCharged ToExpense/AgainstRevenue Deductions Balance atEnd ofPeriodAllowance for doubtful accounts: Year ended December 31, 2013$191 $594 $(224) $561Year ended December 31, 2012115 222 (146) 191Year ended December 31, 2011192 202 (279) 115Other ReceivablesUnder 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 $1.7 million and $1.5 million are included in prepaid expenses and other current assets on the consolidated balance sheets as ofDecember 31, 2013 and 2012, respectively.Deferred Offering CostsDeferred offering costs of $2.3 million are included in other assets on the consolidated balance sheet as of December 31, 2012. Upon the completion ofthe IPO, these amounts were offset against the proceeds of the offering and included in stockholders’ equity (deficit). There were no amounts capitalized as ofDecember 31, 2013.Property and EquipmentProperty and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized. Depreciation and amortization isprovided over the estimated useful lives of the related assets using the straight-line method.The estimated useful lives for significant property and equipment categories are generally as follows: Purchased software, including internal-use software3 yearsComputer hardware3 yearsFurniture and office equipment3 to 5 yearsLeasehold improvementsLesser of remaining lease term or useful lifeRepairs and maintenance costs are expensed as incurred.Identifiable Intangible AssetsThe Company acquired intangible assets in connection with its business acquisitions. These assets were recorded at their estimated fair values at theacquisition date and are being amortized over their respective estimated useful lives using the straight-line method. The estimated useful lives used incomputing amortization are as follows: Customer relationships5 to 8 yearsProprietary software8 yearsTrade name5 years57 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)Impairment of Long-Lived AssetsThe Company reviews long-lived assets and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate thecarrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset orasset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If such assets are not recoverable, the impairment to berecognized, if any, is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets or asset group. Assetsheld for sale are reported at the lower of the carrying amount or fair value, less costs to sell. As of December 31, 2013 and 2012, management does not believeany long-lived assets are impaired and has not identified any assets as being held for sale.GoodwillGoodwill represents the excess of the aggregate of the fair value of consideration transferred in a business combination over the fair value of assetsacquired, net of liabilities assumed. Goodwill is not amortized, but is subject to an annual impairment test. The Company tests goodwill for impairmentannually on December 31, or more frequently if events or changes in business circumstances indicate the asset might be impaired. The Company has determined that it has a single, entity-wide reporting unit. Prior to the IPO, the Company determined the fair value of its reportingunit primarily using a discounted cash flow analysis, which required significant assumptions and estimates about future operations. Significant judgmentsinherent in this analysis included the determination of an appropriate discount rate, estimated terminal value and the amount and timing of expected futurecash flows. Subsequent to the IPO, the Company uses market capitalization to determine the fair value of its entity-wide reporting unit.During the year ended December 31, 2012, the Company adopted ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill forImpairment,” which gives entities testing goodwill for impairment the option of performing a qualitative assessment to determine whether it is more likely thannot that the fair value of a reporting unit is less than its carrying amount. During this assessment, the Company first assesses qualitative factors to determinewhether it is more likely than not that the fair value of its reporting unit is less than its carrying amount. Qualitative factors considered include, but are notlimited to, macroeconomic conditions, industry and market conditions, company-specific events, changes in circumstances and after-tax cash flows. As ofDecember 31, 2013, the Company determined that its reporting unit did not have a carrying value that was more likely than not to exceed its fair value.If the qualitative factors indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Companywould test goodwill for impairment at the reporting unit level using a two-step approach. The first step is to compare the fair value of the reporting unit to thecarrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the net assets assigned tothe reporting unit, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unit’s carrying value, step two is performed tomeasure the amount of the impairment, if any. In the second step, the fair value of goodwill is determined by deducting the fair value of the reporting unit’sidentifiable assets and liabilities from the fair value of the reporting unit as a whole, as if the reporting unit had just been acquired and the fair value was beinginitially allocated. If the carrying value of goodwill exceeds the implied fair value, an impairment charge would be recorded in the period the determination ismade.As a result of the Company’s annual impairment test as of December 31, 2013 and 2012, goodwill was not considered impaired and, as such, noimpairment charges were recorded.Advertising CostsThe Company expenses advertising costs as incurred. The amount expensed during the years ended December 31, 2013, 2012 and 2011 was $4.6million, $2.1 million and $1.9 million, respectively.Software Development CostsThe Company capitalizes certain internal-use software development costs, consisting primarily of direct labor associated with creating the internallydeveloped software and third-party consulting fees associated with implementing software purchased for internal use. Software development projects generallyinclude three stages: the preliminary project stage (in which all costs are expensed as incurred), the application development stage (in which certain costs arecapitalized) and the post-implementation/operation stage (in which all costs are expensed as incurred). The costs incurred during the application developmentstage primarily include the costs of designing the application, coding and testing of the system. Capitalized costs are amortized using the straight-line methodover the estimated useful life of the software once it is ready for its intended use.58 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)Software development costs of $0.3 million and $0.2 million related to creating internally developed software and implementing software purchased forinternal use were capitalized during the years ended December 31, 2013 and 2012, respectively, and are included in property and equipment in theaccompanying consolidated balance sheets. Amortization expense related to this capitalized internally developed software was $0.1 million and $20,000 for theyears ended December 31, 2013 and 2012, respectively, and is included in cost of revenue or general and administrative expense in the accompanyingconsolidated statements of operations. The net book value of capitalized internally developed software was $0.3 million and $0.1 million at December 31, 2013and 2012, respectively.Software development costs of $1.8 million related to configuring and implementing hosted third-party software applications that the Company will usein its business operations were capitalized during the year ended December 31, 2013 and are included in property and equipment in the accompanyingconsolidated balance sheets. Amortization expense related to these capitalized assets was $0.1 million for the year ended December 31, 2013 and is included ingeneral and administrative expense in the accompanying consolidated statements of operations. The net book value of these capitalized assets was $1.7 millionand $0 as of December 31, 2013 and 2012, respectively.During the year ended December 31, 2011, the costs incurred during the application development stage were not significant and were charged tooperations in the accompanying consolidated statement of operations.Income TaxesIncome taxes are accounted for under the asset and liability method of accounting. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, aswell as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxableincome 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 intax 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, ifnecessary, 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 forrecording uncertain tax positions taken, or expected to be taken, in a tax return in the financial statements. Additionally, the guidance also prescribes thetreatment for the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The Company accrues forthe 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. Anuncertain tax position will be recognized if it is more likely than not to be sustained. The Company did not have any accrued interest or penalties associatedwith unrecognized tax positions as of December 31, 2013 and 2012.Foreign Currency TranslationThe functional currency of the Company’s non-U.S. operations is the local currency. Assets and liabilities denominated in foreign currencies aretranslated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Revenue and expenses are translated into U.S. dollars using the average ratesof exchange prevailing during the period. Gains or losses resulting from the translation of assets and liabilities are included as a component of accumulatedother comprehensive loss in stockholders’ equity (deficit). Gains and losses resulting from foreign currency transactions are recognized as other (expense)income. The Company did not have any gains or losses resulting from foreign currency transactions during the years ended December 31, 2013, 2012 and2011.Stock-Based CompensationThe Company accounts for stock-based compensation awards based on the fair value of the award as of the grant date. The Company recognizesstock-based compensation expense using the accelerated attribution method, net of estimated forfeitures, in which compensation cost for each vesting tranchein 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 modelrequires the input of highly subjective assumptions, including the fair value of the Company’s common stock prior to the IPO, the expected life of the optionand the expected stock price volatility based on peer companies. Additionally, the recognition of expense requires the estimation of the number of options thatwill ultimately vest and the number of options that will ultimately be forfeited.59 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)Basic and Diluted Loss per Common ShareThe Company uses the two-class method to compute net loss per common share because the Company has issued securities, other than common stock,that contractually entitled the holders to participate in dividends and earnings of the Company. The two-class method requires earnings for the period to beallocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings. Prior to theirconversion to common shares, each series of the Company’s redeemable convertible preferred stock was entitled to participate on an as-if-converted basis indistributions, when and if declared by the board of directors, that were made to common stockholders, and as a result these shares were consideredparticipating securities. During 2013, certain shares issued as a result of the early exercise of stock options, which were subject to repurchase by theCompany, were entitled to receive non-forfeitable dividends during the vesting period and as a result were also considered participating securities.Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable tocommon stockholders by the weighted average number of shares of common stock outstanding during the period. Net income attributable to commonstockholders is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled toreceive pursuant to their dividend rights had all of the year’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss,as the holders of the participating securities have no obligation to fund losses. Diluted net loss per common share is computed under the two-class method byusing the weighted average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, thepotential dilutive effects of stock options and warrants. In addition, the Company analyzes the potential dilutive effect of the outstanding participatingsecurities under the “if-converted” method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securitiesconvert into common stock at the beginning of the period. The Company reports the more dilutive of the approaches (two-class or “if-converted”) as its dilutednet income per share during the period. Due to net losses for the years ended December 31, 2013, 2012 and 2011, basic and diluted loss per share were thesame, as the effect of potentially dilutive securities would have been anti-dilutive.3. Property and EquipmentProperty and equipment consisted of the following as of December 31, 2013 and 2012 (in thousands): 2013 2012Purchased software, including internal-use software$6,103 $3,564Computer hardware12,886 9,346Furniture and office equipment3,012 1,750Leasehold improvements1,507 948 23,508 15,608Less: accumulated depreciation(14,420) (11,293) $9,088 $4,315Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $3.1 million, $2.1 million and $1.2 million, respectively.4. Goodwill and Intangible AssetsIntangible assets consisted of the following at December 31, 2013 and 2012 (in thousands): 2013 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Weighted AverageUseful Life (in years)Customer relationships$4,745 $(4,225) $520 6.5Proprietary software1,010 (860) 150 6.8Trade name400 (400) — 5.0 $6,155 $(5,485) $670 6.560 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued) 2012 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Weighted AverageUseful Life (in years)Customer relationships$4,745 $(3,779) $966 6.5Proprietary software1,010 (771) 239 6.8Trade name400 (360) 40 5.0 $6,155 $(4,910) $1,245 6.5Amortization expense for the years ended December 31, 2013, 2012 and 2011 was $0.6 million, $0.8 million and $0.8 million, respectively. As ofDecember 31, 2013, expected amortization expense over the remaining intangible asset lives is as follows (in thousands): 2014$3952015275Total$670There were no changes to goodwill during the years ended December 31, 2013 and 2012.5. Commitments and ContingenciesOperating and Capital Lease CommitmentsThe Company leases office facilities and certain equipment under non-cancelable operating and capital leases. Future minimum lease payments are asfollows (in thousands): Operating Leases Capital LeasesYear Ending December 31, 2014$1,973 $1,57020151,997 1,17220161,972 45020171,738 320181,827 1Thereafter5,810 —Total minimum lease payments$15,317 3,196Less: imputed interest (251)Less: current portion (1,387)Capital lease obligations, net of current portion $1,558The gross book value of fixed assets under capital leases as of December 31, 2013 and 2012 was approximately $4.2 million and $2.2 million,respectively. The net book value of fixed assets under capital leases as of December 31, 2013 and 2012 was approximately $2.7 million and $1.7 million,respectively. Capital lease obligations are included in other current liabilities and long-term capital leases in the accompanying consolidated balance sheets. Theamortization of fixed assets under capital leases is included in depreciation expense in the accompanying consolidated statements of operations.Future minimum lease payments due under the non-cancelable operating lease arrangements contain fixed rent increases over the term of the lease. Rentexpense on these operating leases is recognized over the term of the lease on a straight-line basis. The excess of rent expense over future minimum leasepayments due has been reported in other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets. As of December 31,2013 and 2012, deferred rent related to these leases totaled $1.2 million and $1.1 million, respectively.In January 2011, the lease agreement for the Company’s headquarters, located in Morrisville, North Carolina (the “Morrisville lease”), was amended toextend the lease through September 2021. This amendment included a one-time cash payment to the Company of $0.2 million to be used at the Company’ssole and absolute discretion. This amount was received61 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)and recorded as a lease incentive obligation that is amortized against rent expense on a straight-line basis through the life of the lease. As of December 31, 2013,total payments for the remaining term of the Morrisville lease were $9.8 million.Total rent expense for the years ended December 31, 2013, 2012 and 2011 was $1.8 million, $1.7 million and $1.1 million, respectively.Legal ContingenciesThe Company is a party to a variety of legal proceedings that arise in the normal course of business. While the results of such normal course legalproceedings cannot be predicted with certainty, management believes, based on current knowledge, that the final outcome of any matters will not have amaterial adverse effect on the Company’s business, financial position, results of operations or cash flows.6. DebtLong-term debt consisted of the following at December 31, 2013 and 2012 (in thousands): 2013 2012Revolving line of credit$— $3,300Equipment line of credit— 70Subordinated loan— 10,000Debt discount— (2,398)Total debt— 10,972Current portion of long-term debt— 3,370Debt, net of current portion$— $7,602In December 2009, the Company entered into a loan and security agreement (the “Loan and Security Agreement”) with a lender. The Loan and SecurityAgreement includes a revolving line of aggregate advances (the “Revolving Line of Credit”) totaling $4.3 million. The Revolving Line of Credit had an initialterm of 364 days and the Company immediately drew $2.3 million, and subsequently drew an additional $1.0 million during 2011. Interest-only paymentsare to be made monthly on any outstanding advances during the term at the greater of: the lender’s prime rate plus 0.75%; or 4.75%. In July 2012, theCompany amended its Loan and Security Agreement with its lender to increase the borrowing capacity under the Revolving Line of Credit by $1.7 million to$6.0 million, and modify the interest rate of the Revolving Line of Credit to be the lender’s prime rate plus 1.0%.The loan is collateralized by all of the Company’s assets, excluding intellectual property. The lender has been granted a negative pledge on all intellectualproperty of the Company. In conjunction with this transaction, the Company issued to the lender a warrant to purchase shares of Series C redeemableconvertible preferred stock (see Note 9, "Warrants"). As of December 31, 2012, all outstanding borrowings under the Revolving Line of Credit were includedin the current portion of long-term debt in the accompanying consolidated balance sheet. Each year, the Company has amended its Loan and SecurityAgreement with its lender to extend the maturity date of the Revolving Line of Credit. In September 2013, the Company amended its Loan and SecurityAgreement to extend the maturity date to September 17, 2014.In June 2010, the Company amended its Loan and Security Agreement with its lender to provide for an equipment line of credit (the “Equipment Line ofCredit”), which matures on June 1, 2014. The Equipment Line of Credit provides for the purchase of up to $1.0 million of fixed assets. Principal plus interestis payable monthly over 36 months. Interest is charged at 6.50%. The Equipment Line of Credit is collateralized by the same assets as the Company’sRevolving Line of Credit, in addition to any fixed assets that were purchased utilizing the Equipment Line of Credit.As of December 31, 2013, the Company had no amounts outstanding under the Loan and Security Agreement.Under the terms of the Loan and Security Agreement, the Company is required to meet and maintain certain monthly and annual financial andnonfinancial covenants. As of December 31, 2013, the Company was in compliance with all such covenants.In March 2012, the Company signed a loan and security agreement (the "Subordinated Loan Agreement") with a subordinated lender, which wasamended in October 2013. The Subordinated Loan Agreement called for the Company to borrow between $5.0 million and $10.0 million through the end of2012. Payments on the debt were interest only through62 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)March 1, 2015 and principal and interest from March 1, 2015 through the maturity date of February 28, 2017. Interest was payable monthly at an annualrate of 10.5%. In March 2012, the Company borrowed $5.0 million under this Subordinated Loan Agreement and as a condition of the loan, the Companyissued to the lender a warrant to purchase shares of Series C redeemable convertible preferred stock (see Note 9, "Warrants"). In December 2012, theCompany borrowed the remaining $5.0 million available under the Subordinated Loan Agreement with the subordinated lender. As a result of this additionalborrowing, the warrant to purchase Series C redeemable convertible preferred stock became exercisable for additional shares. In November 2013, the Companyentered into a payoff agreement with the lender pursuant to which the Company paid all amounts due and owing under the Subordinated Loan Agreement andterminated the Subordinated Loan Agreement. Under the payoff agreement, the Company paid the lender approximately $11.3 million, of which $1.2 millionrepresented a fixed prepayment fee and other extinguishment costs. In connection with this prepayment, the Company recognized a pre-tax loss onextinguishment of debt of $3.1 million during year ended December 31, 2013, representing the difference between the par value and payoff amount of the loan,increased by the write-off of unamortized debt issuance costs and accelerated amortization of the remaining debt discount.7. Income TaxesThe components of loss before income taxes for the years ended December 31 2013, 2012 and 2011 were as follows (in thousands): 2013 2012 2011Domestic$(7,222) $1,821 $1,061Foreign(13,203) (6,824) (4,874)Total loss before income taxes$(20,425) $(5,003) $(3,813)The provision for income tax expense (benefit) included the following for the years ended December 31, 2013, 2012 and 2011 (in thousands): 2013 2012 2011Current: Federal$22 $46 $4State193 55 (2)Foreign— (201) —Total215 (100) 2Deferred: Federal(26) 28 47State14 2 2Total(12) 30 49Total tax expense (benefit)$203 $(70) $5163 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. The components of the Company’s net deferred tax assets (liabilities) as of December 31, 2013, 2012and 2011 were as follows (in thousands): 2013 2012 2011Current: Deferred tax assets: Other assets$832 $585 $576Valuation allowance(726) (539) (529)Total deferred tax assets106 46 47Deferred tax liabilities: Other liabilities71 11 3Net deferred tax asset, current$35 $35 $44 Noncurrent: Deferred tax assets: Domestic tax loss carryforwards$18,898 $17,288 $18,067Foreign tax loss carryforwards7,673 5,526 4,202Tax credits78 57 11Other assets866 900 1,149Valuation allowance(26,206) (22,040) (21,615)Total deferred tax assets1,309 1,731 1,814Deferred tax liabilities: Fixed assets1,149 1,214 518Other liabilities383 752 1,510Total deferred tax liabilities1,532 1,966 2,028Net deferred tax liability, noncurrent$(223) $(235) $(214)At December 31, 2013, 2012 and 2011, the Company had federal gross operating loss carryforwards of $62.5 million, $46.3 million and $48.8million, respectively, that expire beginning in 2022. At December 31, 2013, 2012 and 2011, the Company had state net economic loss carryforwards of $55.2million, $45.1 million and $44.8 million, respectively, that expire beginning in 2018. The Company’s federal and state net operating losses include $12.0million of excess tax benefits related to deductions from the exercise of nonqualified stock options. The tax benefit of these deductions has not been recognizedin deferred tax assets. If utilized, the benefits from these deductions will be recorded as adjustments to taxes payable and additional paid-in-capital. Theutilization of the net operating loss and tax credit carryforwards may be subject to limitation under the rules regarding a change in stock ownership asdetermined by the Internal Revenue Code and state and foreign tax laws. The Company is in the process of assessing any limitations, particularly related to netoperating loss carryforwards from its acquired entities. At December 31, 2013, 2012 and 2011, the Company also had foreign net operating loss (“NOL”)carryforwards for use against future tax in those jurisdictions of $25.1 million, $16.4 million and $12.4 million, respectively, that expire beginning in 2019.A valuation allowance has been recognized to offset the deferred tax assets related to all NOL carryforwards. The total increase in valuation allowance of$4.4 million during the year ended December 31, 2013 was allocable to current operating activities. Two notable items related to the valuation allowanceanalysis are the deferred tax liability associated with an indefinite-lived intangible asset and the U.S. federal alternative minimum tax credit carryforward.Specifically, the deferred tax liability associated with the tax deductible amortization on the indefinite-lived intangible asset cannot be netted against otherdeferred tax assets in arriving at the valuation allowance to be recorded. In addition, the deferred tax asset related to the alternative minimum tax creditcarryforward has no expiration date under federal tax law. Since both the deferred tax liability and the deferred tax asset have indefinite lives, they offset eachother to arrive at the net deferred tax liability.The utilization of the loss carryforwards to reduce future income taxes will depend on the Company’s ability to generate sufficient taxable income priorto the expiration of the NOL carryforwards. In addition, the maximum annual use of NOL carryforwards is limited in certain situations after changes in stockownership occur. There were no recognized tax benefits64 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)related to NOL carryforwards for the year ended December 31, 2013. Income tax expense (benefit) for the years ended December 31 2013, 2012 and 2011 was$0.2 million, $(0.1) million and $0.1 million, respectively.Undistributed earnings of the Company’s foreign subsidiaries are considered permanently reinvested and, accordingly, no provision for U.S. federal orstate income taxes has been provided thereon. The cumulative amount of undistributed earnings of the Company’s non-U.S. subsidiaries was approximately$0.8 million for each of the years ended December 31, 2013, 2012 and 2011. The determination of the deferred tax liability, which requires complex analysisof international tax situations related to repatriation, is not practicable at this time. The Company is presently investing in international operations located inEurope, Asia, Australia and South America. The Company is funding the working capital needs of its foreign operations through its U.S. operations. In thefuture, the Company will utilize its foreign undistributed earnings, as well as continued funding from its U.S. operations, to support its continued foreigninvestment.A reconciliation of the difference between the effective income tax rate and the statutory federal income tax rate for the years ended December 31, 2013,2012 and 2011 is as follows: 2013 2012 2011U.S. statutory federal rate34.0 % 34.0 % 34.0 %Increase (decrease) resulting from: State taxes, net of federal benefit1.6 (0.8) 0.5Nondeductible expenses(5.2) (9.2) (6.2)Effect of foreign tax rate differential(8.0) (13.3) (10.8)NOL adjustment— — (35.1)Change in valuation allowance(22.4) (6.6) 15.8Other(1.0) (2.7) 0.6Effective tax rate(1.0)% 1.4 % (1.2)%The nondeductible expenses during the year ended December 31, 2013 primarily related to stock compensation expense associated with incentive stockoptions and nondeductible interest expense.Effective January 1, 2009, the Company adopted the provisions of the Financial Accounting Standards Board ("FASB") guidance on accounting foruncertainty in income taxes. These provisions provide a comprehensive model for the recognition, measurement and disclosure in financial statements ofuncertain income tax positions that a company has taken or expects to take on a tax return.As a result of implementing these provisions, the Company did not identify any material tax positions that would be required for inclusion in thefinancial statements under this accounting guidance. As of December 31, 2013 and 2012, the Company had no accrued interest or penalties related to the taxcontingencies. The Company’s policy for recording interest and penalties is to record them as a component of provision for income taxes.The Company has analyzed its filing positions in all significant federal, state and foreign jurisdictions where it is required to file income tax returns, aswell as open tax years in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state and local tax examinations by taxauthorities for years prior to 2010, although carryforward attributes that were generated prior to 2010 may still be adjusted upon examination by the InternalRevenue Service if they either have been or will be used in a future period. The Company is no longer subject to examination in foreign tax jurisdictions for taxperiods 2008 and prior. No income tax returns are currently under examination by taxing authorities.8. Stockholders’ Equity (Deficit) and Redeemable Convertible Preferred StockThe following table summarizes the issuances of redeemable convertible preferred stock prior to the IPO: Name Price perShare Number ofShares ConversionPrice per ShareSeries A $0.20 93,966,024 $3.20Series B $0.44 40,641,227 $7.04Series B-1 $0.53 5,660,378 $8.48Series C $0.69 74,156,709 $10.9665 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)Series A, Series B, Series B-1 and Series C redeemable convertible preferred stock are collectively referred to as the “Preferred Stock” and individuallyas the “Series A,” “Series B,” “Series B-1” and “Series C.” Each of the prices per share above is referred to as the Original Issue Price, and excludes the costof issuance.The following table presents a summary of activity for the Preferred Stock issued and outstanding for the years ended December 31, 2013, 2012 and2011 (in thousands): Redeemable Convertible Preferred Stock Series A Series B Series B-1 Series C TotalAmountBalance, January 1, 201118,805 17,989 2,998 50,571 90,363Accretion of issuance costs on Preferred Stock11 8 1 30 50Balance, December 31, 201118,816 17,997 2,999 50,601 90,413Cashless exercise of warrants67 — — — 67Accretion of issuance costs on Preferred Stock4 3 1 7 15Balance, December 31, 2012$18,887 $18,000 $3,000 $50,608 $90,495Cashless exercise of warrants166 — — 489 655Conversion of Preferred Stock into common stock(19,053) (18,000) (3,000) (51,097) (91,150)Balance, December 31, 2013$— $— $— $— $—Upon the closing of the IPO, certain Series C warrants that would otherwise have terminated were automatically net exercised into 206,038 shares ofredeemable convertible preferred stock. All then-outstanding shares of the Company’s redeemable convertible preferred stock were automatically converted into13,401,499 shares of common stock. The remaining warrants to purchase redeemable convertible preferred stock outstanding as of the closing of the IPOautomatically converted into warrants to purchase an aggregate of 216,491 shares of common stock.In addition, upon the closing of the IPO, the Company’s certificate of incorporation was amended and restated to authorize 5,000,000 shares ofundesignated preferred stock and 100,000,000 shares of common stock. Both the common stock and undesignated preferred stock have a par value of $0.001per share.9. WarrantsPreferred Stock WarrantsIn conjunction with previous long-term debt borrowings, the Company issued warrants to purchase shares of Series A and Series C. As ofDecember 31, 2012, the holders of the Series A and Series C warrants were entitled to purchase a total of 175,000 shares of Series A and 4,586,121 shares ofSeries C. The warrants could be exercised in whole or in part at any time and included a cashless exercise feature, allowing the holder to receive fewer shares ofSeries A or Series C in exchange for the warrant, rather than paying cash to exercise. The warrants were classified as a liability as of December 31, 2012 in theaccompanying consolidated balance sheet.The fair values of the Series A warrants and Series C warrants were estimated to be $0.1 million and $3.1 million, respectively, at December 31, 2012.The inputs into the fair value model for the warrants, which are discussed in Note 2, "Significant Accounting Policies - Fair Value of Financial Instruments,"were considered Level 3 inputs under ASC 820, "Fair Value Measurements and Disclosures." Prior to the closing of the IPO, all changes in the fair value of thewarrants were recorded in interest expense in the accompanying consolidated statements of operations. The Company recorded interest expense of $1.1 million,$5,000 and $0.3 million for the years ended December 31, 2013, 2012 and 2011, respectively, related to the fair value adjustment of the warrants.Certain Series C warrants that would have otherwise terminated upon the closing of the IPO were automatically net exercised for an aggregate of 206,038shares of Series C, which were then automatically converted into 12,874 shares of common stock upon the closing of the IPO. The remaining warrants topurchase redeemable convertible preferred stock converted into warrants to purchase an aggregate of 216,491 shares of common stock, and the relatedpreferred stock warrant liability at its then fair value of $3.6 million was reclassified to additional paid-in capital upon the closing of the IPO.66 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)In May 2013, a holder of Series A and Series C warrants exercised those warrants on a cashless basis and received 144,631 shares of Series A and70,320 shares of Series C, respectively, in exchange for the warrants. These shares of Series A and Series C converted into an aggregate of 13,433 shares ofcommon stock upon the closing of the IPO.Common Stock WarrantsIn 2007 and 2008, in conjunction with the Series C funding, the Company also issued warrants to purchase 1,616,113 shares of common stock, ofwhich 958,019 and 658,094 have exercise prices per share of $16.00 and $10.96, respectively. The 2007 and 2008 warrants expire in 2014 and 2015,respectively. The warrants may be exercised in whole or in part at any time and include a cashless exercise feature, which allows the holder to receive fewershares of common stock in exchange for the warrant rather than paying cash to exercise.In June 2013, the holder of a warrant to purchase common stock executed a cashless exercise and received 194,885 shares of common stock inexchange for the warrant.In September 2013, the holder of a warrant to purchase common stock executed a cashless exercise and received 6,511 shares of common stock inexchange for the warrant.In November 2013, in connection with our registered public offering, the holders of certain warrants to purchase common stock executed cashlessexercises and received 317,011 shares of common stock in exchange for the warrants. In addition, certain holders of warrants to purchase common stockexecuted exercises and received 55,316 shares of common stock in exchange for the warrants.In December 2013, the holder of a warrant to purchase common stock executed an exercise and received 88,639 shares of common stock in exchangefor the warrant.10. Equity Incentive Plans and Stock-Based CompensationIn May 2013, the Company’s board of directors adopted, and the Company’s stockholders approved, the 2013 Equity Incentive Plan (the “2013Plan”), pursuant to which the Company initially reserved 1,250,000 shares of its common stock for issuance to its employees, directors and non-employeethird parties. The 2013 Plan provides for the grant of incentive stock options to employees, and for the grant of nonqualified stock options, restricted stockawards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of stock compensation to the Company’semployees, directors, and non-employee third parties. The number of shares of common stock reserved for issuance under the 2013 Plan will automaticallyincrease on January 1 each year, for a period of ten years, from January 1, 2014 through January 1, 2023, by 5% of the total number of shares of theCompany’s common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Company’sboard of directors. Accordingly, on January 1, 2014 the number of shares reserved for issuance under the 2013 Plan increased by 1,182,194 shares. As aresult of the adoption of the 2013 Plan, no further grants may be made under the 2001 Stock Plan described below (the “2001 Plan”). As of December 31,2013, 1,104,951 shares remained available for future grant under the 2013 Plan.The 2001 Plan provided for the grant of incentive stock options to employees, and for the grant of nonqualified stock options to employees, directorsand non-employee third parties. Stock options were granted at exercise prices not less than the estimated fair market value of the Company’s common stock atthe date of grant. Stock options generally expire ten years from the date of grant. Certain options are eligible for exercise prior to vesting. Shares issued as aresult of early exercise are subject to repurchase by the Company upon termination of employment or services, at the lesser of the price paid or the fair value ofthe shares on the repurchase date. No such shares were outstanding at December 31, 2013 or 2012.Stock-based compensation expense related to stock options is included in the following line items in the accompanying consolidated statements ofoperations for the years ended December 31, 2013, 2012 and 2011 (in thousands): 2013 2012 2011Cost of revenue$204 $64 $15Sales and marketing607 224 16Research and development348 105 58General and administrative940 245 111 $2,099 $638 $20067 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)The Company values stock options using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including therisk-free interest rate, expected life, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interestrates for constant maturity U.S. Treasury securities consistent with the expected term of the Company’s employee stock options. The expected life representsthe period of time the stock options are expected to be outstanding and is based on the “simplified method.” Under the “simplified method,” the expected life ofan option is presumed to be the mid-point between the vesting date and the end of the contractual term. The Company used the “simplified method” due to thelack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. Expectedvolatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options. TheCompany assumed no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company’s history of notpaying dividends.The following table summarizes the assumptions used for estimating the fair value of stock options granted for the years ended December 31, 2013,2012 and 2011: 2013 2012 2011Risk-free interest rate0.3% - 1.7% 0.1% - 0.9% 0.4% - 2.0%Expected term (years)5.00 - 6.25 4.00 - 6.25 6.25Expected volatility43% - 59% 49% - 60% 28% - 56%Dividend yield0% 0% 0%The following is a summary of the option activity for the year ended December 31, 2013: Number ofOptions Weighted AverageExercise Price WeightedAverageRemainingContractualTerm AggregateIntrinsic Value (in years) (in thousands)Outstanding balance at December 31, 20122,202,712 $3.84 Granted722,625 12.74 Exercised(727,318) 3.36 Forfeited(104,042) 8.30 Expired(25,336) 2.67 Outstanding balance at December 31, 20132,068,641 $6.95 7.80 $71,914Exercisable at December 31, 2013938,151 $3.30 6.60 $36,039Vested and expected to vest at December 31, 20131,813,530 $6.62 7.68 $63,636The weighted average grant date fair value for the Company's stock options granted during the years ended December 31, 2013, 2012 and 2011was $5.29, $2.88 and $0.80 per share, respectively. The total fair value of stock options vested during the years ended December 31, 2013, 2012 and 2011was $0.9 million, $0.4 million and $0.2 million, respectively. The total compensation cost related to nonvested awards not yet recognized as of December 31,2013 was $2.2 million and will be recognized over a weighted average period of approximately 1.9 years. The aggregate intrinsic value of stock optionsexercised during the years ended December 31, 2013, 2012, and 2011 was $17.6 million, $0.7 million and $0.1 million, respectively.68 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)11. Net Loss Per ShareDiluted loss per share is the same as basic loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutivegiven the Company’s net loss. The following securities have been excluded from the calculation of weighted average common shares outstanding because theeffect is anti-dilutive for the years ended December 31, 2013, 2012 and 2011: 2013 2012 2011Redeemable convertible preferred stock: Series A— 5,863,825 5,857,864Series B— 2,540,066 2,540,066Series B-1— 353,767 353,767Series C— 4,617,513 4,617,513Warrants to purchase common stock986,784 1,616,113 1,616,113Warrants to purchase Series A redeemable convertible preferred stock— 10,937 21,484Warrants to purchase Series C redeemable convertible preferred stock— 286,625 89,750Stock options2,068,641 2,202,712 1,936,19112. Segment and Geographic InformationOperating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by thechief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance. The Company’s CODM reviewsfinancial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company’soperations constitute a single operating segment and one reportable segment.Substantially all assets were held in the United States during the years ended December 31, 2013 and 2012. The following table summarizes revenueby geography for the years ended December 31, 2013, 2012 and 2011 (in thousands): 2013 2012 2011Revenue: Domestic$53,832 $42,140 $34,805International14,172 11,447 8,765Total$68,004 $53,587 $43,57013. Retirement PlanThe Company established the ChannelAdvisor Corporation 401(k) Profit Sharing Plan (the “Retirement Plan”), a contributory profit sharing plan, tocover all employees who qualify under the terms of the plan. Eligible employees may elect to contribute to the Retirement Plan up to 100% of theircompensation, limited by the IRS-imposed maximum. Prior to April 1, 2011, the Company did not match employee contributions to the Retirement Plan.Effective April 1, 2011, the Company began matching 50% of employee contributions up to 3% of base salary. Employer contributions were $0.3 million,$0.3 million and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.69 Table of ContentsChannelAdvisor Corporation and SubsidiariesNotes to Consolidated Financial Statements (continued)14. Selected Quarterly Information (unaudited) Three Months Ended March 31, 2013 June 30, 2013 September 30, 2013 December 31, 2013 (in thousands, except per share amounts)Revenue$14,922 $15,976 $16,620 $20,486Gross profit10,975 11,507 12,065 15,369Loss from operations(2,137) (3,496) (3,741) (4,991)Net loss(2,730) (4,997) (4,292) (8,609)Net loss per share: Basic and diluted(2.10) (0.56) (0.20) (0.38) Three Months Ended March 31, 2012 June 30, 2012 September 30, 2012 December 31, 2012 (in thousands, except per share amounts)Revenue$12,166 $12,408 $13,020 $15,993Gross profit8,920 8,778 9,189 11,951(Loss) income from operations(809) (2,347) (1,517) 824Net (loss) income(851) (2,750) (1,958) 626Net (loss) income per share: Basic and diluted(0.74) (2.39) (1.68) 0.0415. Subsequent EventsIn January 2014, the holders of certain warrants to purchase common stock executed cashless exercises and received 664,058 shares of common stockin exchange for the warrants.Effective as of January 3, 2014, the Company signed ten-year lease agreements with five-year break options for its office in London, England. Totalcollective future minimum lease payments for the five- and ten-year lease terms are approximately £4.4 million and £9.4 million ($7.3 million and $15.5million, based on the exchange rate as of December 31, 2013), respectively.70 Table of ContentsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresUnder the supervision of and with the participation of our management, including our chief executive officer, who is our principal executive officer,and our chief financial officer, who is our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls andprocedures as of December 31, 2013, the end of the period covered by this Annual Report. The term "disclosure controls and procedures," as set forth inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of acompany that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits underthe Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the Securities andExchange Commission (the “SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to thecompany's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding requireddisclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance ofachieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.Based on the evaluation of our disclosure controls and procedures as of December 31, 2013, our chief executive officer and chief financial officer concludedthat, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.Changes in Internal Control over Financial ReportingThere was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect,our internal control over financial reporting.Management's Report on Internal Control Over Financial Reporting and Attestation Report of the Registered Public Accounting FirmThis Annual Report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report ofour independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.ITEM 9B. OTHER INFORMATIONNot applicable.71 Table of ContentsPART IIIWe will file a definitive Proxy Statement for our 2014 Annual Meeting of Stockholders (the “2014 Proxy Statement”) with the SEC, pursuant toRegulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under GeneralInstruction G(3) to Form 10-K. Only those sections of the 2014 Proxy Statement that specifically address the items set forth herein are incorporated byreference.ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by Item 10 is hereby incorporated by reference to the sections of the 2014 Proxy Statement under the captions "InformationRegarding the Board of Directors and Corporate Governance," "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial OwnershipReporting Compliance."ITEM 11. EXECUTIVE COMPENSATIONThe information required by Item 11 is hereby incorporated by reference to the sections of the 2014 Proxy Statement under the captions "ExecutiveCompensation" and "Non-Employee Director Compensation."ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information required by Item 12 is hereby incorporated by reference to the sections of the 2014 Proxy Statement under the captions "SecurityOwnership of Certain Beneficial Owners and Management" and "Securities Authorized for Issuance under Equity Compensation Plans."ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by Item 13 is hereby incorporated by reference to the sections of the 2014 Proxy Statement under the captions "Transactionswith Related Persons" and "Independence of the Board of Directors."ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by Item 14 is hereby incorporated by reference to the sections of the 2014 Proxy Statement under the caption "Ratification ofSelection of Independent Registered Public Accounting Firm."72 Table of ContentsPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) ExhibitsExhibitNumberDescription of Document 3.1(1)Amended and Restated Certificate of Incorporation. 3.2(2)Amended and Restated Bylaws. 4.1(3)Specimen stock certificate evidencing shares of Common Stock. 10.1(4)Loan and Security Agreement, dated as of December 23, 2009, as amended through July 26, 2012, by and among the Registrant,MerchandisingAdvisor Corporation, CA Marketplaces, Inc., ChannelAdvisor UK Limited, CA Washington LLC and Silicon ValleyBank. 10.2(5)Eighth Amendment to Loan and Security Agreement, dated as of June 17, 2013, by and between the Registrant and Silicon Valley Bank. 10.3(6)Ninth Amendment to Loan and Security Agreement, dated as of July 16, 2013, by and between the Registrant and Silicon Valley Bank. 10.4(7)Tenth Amendment to Loan and Security Agreement, dated as of September 16, 2013, by and between the Registrant and Silicon ValleyBank. 10.5(8)Loan and Security Agreement, dated as of March 21, 2012, by and among the Registrant, MerchandisingAdvisor Corporation, CAMarketplaces, Inc., ChannelAdvisor UK Limited, CA Washington LLC and Gold Hill Capital 2008, L.P. 10.5.1(27)Second Amendment to Loan and Security Agreement, dated as of October 31, 2013, by and among the Registrant, MerchandisingAdvisorCorporation, CA Marketplaces, Inc., ChannelAdvisor UK Limited, CA Washington LLC and Gold Hill Capital 2008, L.P. 10.9(9)Form of Warrant to Purchase Common Stock issued in Series C financing, dated as of April 2007, August 2008 and November 2008. 10.10(10)Third Amended and Restated Investor Rights Agreement, dated as of April 26, 2007, as amended to date, by and among the Registrant andcertain of its stockholders. 10.11(11)Lease, dated as of June 29, 2005 and as amended through January 27, 2011, by and between the Registrant and Pizzagalli Properties,LLC. 10.12(12)Fourth Amendment to Lease Agreement, dated as of January 31, 2013, by and between the Registrant and Aerial Center Realty Corp. 10.13(13)Fifth Amendment to Lease Agreement, dated as of August 13, 2013, by and between the Registrant and Aerial Center Realty Corp. 10.14(14)+2001 Stock Plan, as amended. 10.15(15)+Form of Stock Option Agreement under 2001 Stock Plan. 10.16(16)+2013 Equity Incentive Plan. 10.17(17)+Form of Stock Option Grant Notice and Stock Option Agreement under 2013 Equity Incentive Plan. 10.18(18)+Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under 2013 Equity Incentive Plan. 10.19(19)+Form of Letter Agreement with Timothy Williams and Timothy Buckley relating to accelerated vesting of stock options upon a change ofcontrol. 10.20(20)+Form of Indemnification Agreement with non-employee directors. 10.21(21)+Amended and Restated Executive Severance and Change of Control Letter Agreement, dated as of May 23, 2013, by and between theRegistrant and David J. Spitz. 73 Table of Contents10.22(22)+Amended and Restated Executive Severance and Change of Control Letter Agreement, dated as of May 23, 2013, by and between theRegistrant and S. Scott Alridge. 10.23(23)+Separation Agreement by and between the Registrant and S. Scott Alridge, dated as of October 3, 2013. 10.24(24)+Amended and Restated Executive Severance and Change of Control Letter Agreement, dated as of May 23, 2013, by and between theRegistrant and John F. Baule. 10.25(25)*Master Services Agreement, dated as of June 29, 2005, by and between the Registrant and Hosted Solutions, LLC. 10.26(26)*Master Space Agreement, dated as of January 28, 2011, by and between the Registrant and Quality Investment Properties Suwanee, LLC. 21.1Subsidiaries of the Registrant 23.1Consent of Ernst & Young LLP, independent registered public accounting firm. 24.1Power of Attorney (contained on signature page hereto). 31.1Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act. 31.2Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act. 32.1^Certifications of Principal Executive Officer and Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act. 101.INS**XBRL Instance Document 101.SCH**XBRL Taxonomy Extension Schema Document 101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF**XBRL Taxonomy Extension Definition Linkbase Document 101.LAB**XBRL Taxonomy Extension Label Linkbase Document 101.PRE**XBRL Taxonomy Extension Presentation Linkbase Document _____________________________^These certifications are being furnished solely to accompany this Annual Report pursuant to 18 U.S.C. Section 1350, and are not being filed forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of theregistrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.+Indicates management contract or compensatory plan.*Confidential treatment has been granted with respect to portions of this exhibit (indicated by asterisks) and those portions have been separatelyfiled with the Securities and Exchange Commission.**Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files included in Exhibit 101 hereto are deemed not filed or part of a registrationstatement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.(1)Previously filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K (File No. 001-35940), filed with the Commission on May 29, 2013,and incorporated by reference herein.(2)Previously filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K (File No. 001-35940), filed with the Commission on May 29, 2013,and incorporated by reference herein.(3)Previously filed as Exhibit 4.2 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with theCommission on May 9, 2013, and incorporated by reference herein.(4)Previously filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission on April11, 2013, and incorporated by reference herein.74 Table of Contents(5)Previously filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on August 7,2013, and incorporated by reference herein.(6)Previously filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on August 7,2013, and incorporated by reference herein.(7)Previously filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on October28, 2013, and incorporated by reference herein.(8)Previously filed as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission on April11, 2013, and incorporated by reference herein.(9)Previously filed as Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission on April11, 2013, and incorporated by reference herein.(10)Previously filed as Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(11)Previously filed as Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(12)Previously filed as Exhibit 10.11.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(13)Previously filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on October28, 2013, and incorporated by reference herein.(14)Previously filed as Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(15)Previously filed as Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(16)Previously filed as Exhibit 4.6 to the Registrant’s Registration Statement on Form S-8 (File No. 333-188988), filed with the Commission on May31, 2013, and incorporated by reference herein.(17)Previously filed as Exhibit 10.15 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with theCommission on April 26, 2013, and incorporated by reference herein.(18)Previously filed as Exhibit 10.17 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with theCommission on April 26, 2013, and incorporated by reference herein.(19)Previously filed as Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(20)Previously filed as Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(21)Previously filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on August 7,2013, and incorporated by reference herein.(22)Previously filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on August 7,2013, and incorporated by reference herein.(23)Previously filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on October28, 2013, and incorporated by reference herein.(24)Previously filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on August 7,2013, and incorporated by reference herein.75 Table of Contents(25)Previously filed as Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(26)Previously filed as Exhibit 10.24 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(27)Previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 001-35940), filed with the Commission on October 31,2013, and incorporated by reference herein.(b) Financial Statement SchedulesAll schedules are omitted as information required is inapplicable or the information is presented in the consolidated financial statements and the relatednotes.76 Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized. CHANNELADVISOR CORPORATION By:/s/ M. Scot WingoFebruary 27, 2014 M. Scot WingoChief Executive OfficerKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John F. Baule and DianaS. Allen, jointly and severally, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in hisname, place and stead, in any and all capacities, to sign this Annual Report on Form 10-K of ChannelAdvisor Corporation, and any or all amendmentsthereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, grantingunto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and aboutthe premises hereby ratifying and confirming all that said attorneys-in-fact and agents, or his, her or their substitute or substitutes, may lawfully do or causeto be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated.Signature Title Date /s/ M. Scot Wingo Chief Executive Officer and Director(Principal Executive Officer) February 27, 2014M. Scot Wingo /s/ John F. Baule Chief Financial Officer(Principal Financial Officer) February 27, 2014John F. Baule /s/ Brad R. Schomber Chief Accounting Officer(Principal Accounting Officer) February 27, 2014Brad R. Schomber /s/ Timothy J. Buckley Director February 27, 2014Timothy J. Buckley /s/ Aris A. Buinevicius Director February 27, 2014Aris A. Buinevicius /s/ Robert C. Hower Director February 27, 2014Robert C. Hower /s/ Patrick J. Kerins Director February 27, 2014Patrick J. Kerins /s/ Louis J. Volpe Director February 27, 2014Louis J. Volpe /s/ Timothy V. Williams Director February 27, 2014Timothy V. Williams 77 Table of ContentsEXHIBIT INDEX ExhibitNumberDescription of Document 3.1(1)Amended and Restated Certificate of Incorporation. 3.2(2)Amended and Restated Bylaws. 4.1(3)Specimen stock certificate evidencing shares of Common Stock. 10.1(4)Loan and Security Agreement, dated as of December 23, 2009, as amended through July 26, 2012, by and among the Registrant,MerchandisingAdvisor Corporation, CA Marketplaces, Inc., ChannelAdvisor UK Limited, CA Washington LLC and Silicon ValleyBank. 10.2(5)Eighth Amendment to Loan and Security Agreement, dated as of June 17, 2013, by and between the Registrant and Silicon Valley Bank. 10.3(6)Ninth Amendment to Loan and Security Agreement, dated as of July 16, 2013, by and between the Registrant and Silicon Valley Bank. 10.4(7)Tenth Amendment to Loan and Security Agreement, dated as of September 16, 2013, by and between the Registrant and Silicon ValleyBank. 10.5(8)Loan and Security Agreement, dated as of March 21, 2012, by and among the Registrant, MerchandisingAdvisor Corporation, CAMarketplaces, Inc., ChannelAdvisor UK Limited, CA Washington LLC and Gold Hill Capital 2008, L.P. 10.5.1(27)Second Amendment to Loan and Security Agreement, dated as of October 31, 2013, by and among the Registrant, MerchandisingAdvisorCorporation, CA Marketplaces, Inc., ChannelAdvisor UK Limited, CA Washington LLC and Gold Hill Capital 2008, L.P. 10.9(9)Form of Warrant to Purchase Common Stock issued in Series C financing, dated as of April 2007, August 2008 and November 2008. 10.10(10)Third Amended and Restated Investor Rights Agreement, dated as of April 26, 2007, as amended to date, by and among the Registrant andcertain of its stockholders. 10.11(11)Lease, dated as of June 29, 2005 and as amended through January 27, 2011, by and between the Registrant and Pizzagalli Properties,LLC. 10.12(12)Fourth Amendment to Lease Agreement, dated as of January 31, 2013, by and between the Registrant and Aerial Center Realty Corp. 10.13(13)Fifth Amendment to Lease Agreement, dated as of August 13, 2013, by and between the Registrant and Aerial Center Realty Corp. 10.14(14)+2001 Stock Plan, as amended. 10.15(15)+Form of Stock Option Agreement under 2001 Stock Plan. 10.16(16)+2013 Equity Incentive Plan. 10.17(17)+Form of Stock Option Grant Notice and Stock Option Agreement under 2013 Equity Incentive Plan. 10.18(18)+Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under 2013 Equity Incentive Plan. 10.19(19)+Form of Letter Agreement with Timothy Williams and Timothy Buckley relating to accelerated vesting of stock options upon a change ofcontrol. 10.20(20)+Form of Indemnification Agreement with non-employee directors. 10.21(21)+Amended and Restated Executive Severance and Change of Control Letter Agreement, dated as of May 23, 2013, by and between theRegistrant and David J. Spitz. 10.22(22)+Amended and Restated Executive Severance and Change of Control Letter Agreement, dated as of May 23, 2013, by and between theRegistrant and S. Scott Alridge. 10.23(23)+Separation Agreement by and between the Registrant and S. Scott Alridge, dated as of October 3, 2013. 78 Table of Contents10.24(24)+Amended and Restated Executive Severance and Change of Control Letter Agreement, dated as of May 23, 2013, by and between theRegistrant and John F. Baule. 10.25(25)*Master Services Agreement, dated as of June 29, 2005, by and between the Registrant and Hosted Solutions, LLC. 10.26(26)*Master Space Agreement, dated as of January 28, 2011, by and between the Registrant and Quality Investment Properties Suwanee, LLC. 21.1Subsidiaries of the Registrant 23.1Consent of Ernst & Young LLP, independent registered public accounting firm. 24.1Power of Attorney (contained on signature page hereto). 31.1Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act. 31.2Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act. 32.1^Certifications of Principal Executive Officer and Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act. 101.INS**XBRL Instance Document 101.SCH**XBRL Taxonomy Extension Schema Document 101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF**XBRL Taxonomy Extension Definition Linkbase Document 101.LAB**XBRL Taxonomy Extension Label Linkbase Document 101.PRE**XBRL Taxonomy Extension Presentation Linkbase Document _____________________________^These certifications are being furnished solely to accompany this Annual Report pursuant to 18 U.S.C. Section 1350, and are not being filed forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of theregistrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.+Indicates management contract or compensatory plan.*Confidential treatment has been granted with respect to portions of this exhibit (indicated by asterisks) and those portions have been separatelyfiled with the Securities and Exchange Commission.**Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files included in Exhibit 101 hereto are deemed not filed or part of a registrationstatement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.(1)Previously filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K (File No. 001-35940), filed with the Commission on May 29, 2013,and incorporated by reference herein.(2)Previously filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K (File No. 001-35940), filed with the Commission on May 29, 2013,and incorporated by reference herein.(3)Previously filed as Exhibit 4.2 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with theCommission on May 9, 2013, and incorporated by reference herein.(4)Previously filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission on April11, 2013, and incorporated by reference herein.(5)Previously filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on August 7,2013, and incorporated by reference herein.79 Table of Contents(6)Previously filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on August 7,2013, and incorporated by reference herein.(7)Previously filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on October28, 2013, and incorporated by reference herein.(8)Previously filed as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission on April11, 2013, and incorporated by reference herein.(9)Previously filed as Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission on April11, 2013, and incorporated by reference herein.(10)Previously filed as Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(11)Previously filed as Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(12)Previously filed as Exhibit 10.11.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(13)Previously filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on October28, 2013, and incorporated by reference herein.(14)Previously filed as Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(15)Previously filed as Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(16)Previously filed as Exhibit 4.6 to the Registrant’s Registration Statement on Form S-8 (File No. 333-188988), filed with the Commission on May31, 2013, and incorporated by reference herein.(17)Previously filed as Exhibit 10.15 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with theCommission on April 26, 2013, and incorporated by reference herein.(18)Previously filed as Exhibit 10.17 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with theCommission on April 26, 2013, and incorporated by reference herein.(19)Previously filed as Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(20)Previously filed as Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(21)Previously filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on August 7,2013, and incorporated by reference herein.(22)Previously filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on August 7,2013, and incorporated by reference herein.(23)Previously filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on October28, 2013, and incorporated by reference herein.(24)Previously filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Commission on August 7,2013, and incorporated by reference herein.(25)Previously filed as Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.80 Table of Contents(26)Previously filed as Exhibit 10.24 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Commission onApril 11, 2013, and incorporated by reference herein.(27)Previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 001-35940), filed with the Commission on October 31,2013, and incorporated by reference herein.81 Exhibit 21.1Subsidiaries of ChannelAdvisor Corporation Name of Subsidiary Jurisdiction of Incorporation or Organization CA Marketplaces, Inc. Delaware CA Washington, LLC Delaware ChannelAdvisor (Barbados) Ltd Barbados ChannelAdvisor Brazil Tecnologia Ltda Brazil ChannelAdvisor Europe Limited United Kingdom ChannelAdvisor GmbH Germany ChannelAdvisor Hong Kong Limited Hong Kong ChannelAdvisor Ireland Limited Ireland ChannelAdvisor (AU) Pty Limited Australia ChannelAdvisor UK Limited United Kingdom Marketworks (International) Pty Ltd Australia Marketworks Limited United Kingdom MerchandisingAdvisor Corporation Delaware Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statement (Form S-8 No 333-188988) pertaining to the 2013 Equity Incentive Plan ofChannelAdvisor Corporation of our report dated February 27, 2014, with respect to the consolidated financial statements ChannelAdvisor Corporation in thisAnnual Report (Form 10-K) for the year ended December 31, 2013. /s/ Ernst & Young LLPRaleigh, North CarolinaFebruary 27, 2014 Exhibit 31.1CERTIFICATIONI, M. Scot Wingo, certify that:1.I have reviewed this Annual Report on Form 10-K of ChannelAdvisor Corporation;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered bythis report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in which this report is being prepared;b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; andc)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date:February 27, 2014By:/s/ M. Scot Wingo M. Scot Wingo Chief Executive Officer (principal executive officer) Exhibit 31.2CERTIFICATIONI, John F. Baule, certify that:1.I have reviewed this Annual Report on Form 10-K of ChannelAdvisor Corporation;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered bythis report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in which this report is being prepared;b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; andc)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date:February 27, 2014By:/s/ John F. Baule John F. Baule Chief Financial Officer (principal financial officer) Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of ChannelAdvisor Corporation (the "Company”) for the year ended December 31, 2013, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers hereby certifies, pursuant to Rule 13a-14(b) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, that, to such officer’s knowledge:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of the end of theperiod covered by the Report and results of operations of the Company for the period covered by the Report./s/ M. Scot Wingo /s/ John F. BauleM. Scot Wingo John F. BauleChief Executive Officer Chief Financial OfficerFebruary 27, 2014 February 27, 2014The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, is not being “filed” by the Company as part of the Report or as aseparate disclosure document and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language containedin such filing.
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