ChannelAdvisor
Annual Report 2017

Plain-text annual report

UNITED 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, 2017or☐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.) 3025 Carrington Mill BoulevardMorrisville, 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 andpost such 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. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growthcompany. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.Large accelerated filer ☐ Accelerated filer xNon-accelerated filer ☐(Do not check if a smaller reporting company) Smaller reporting company ☐ Emerging growth company xIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. xIndicate 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 30, 2017 (the last business day of theregistrant's most recently completed second fiscal quarter) based on the closing sale price of $11.55 as reported on the New York Stock Exchange on that date was $290,341,405.At February 1, 2018, 26,605,346 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 2018 Annual Meeting ofStockholders are incorporated by reference in Part III of this Form 10-K. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This 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 comparable terminologyintended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause ouractual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-lookingstatements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you thatthese statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain.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 and particularlyin our markets;•the expected growth of gross merchandise value, or GMV, sold on marketplaces and comparison shopping websites and advertising dollarsspent on paid search;•consumer adoption of mobile devices and usage for commerce;•the growth of social networking and commerce applications;•sellers' online sales strategies and fulfillment models;•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 inaccuracymay be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation orwarranty by 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 publiclyupdate any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore,not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report.1TABLE OF CONTENTS Page PART I Item 1. Business3Item 1A. Risk Factors13Item 1B.Unresolved Staff Comments27Item 2.Properties27Item 3.Legal Proceedings27Item 4.Mine Safety Disclosures27 PART II Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities28Item 6.Selected Financial Data30Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations32Item 7A.Quantitative and Qualitative Disclosures About Market Risk48Item 8.Financial Statements and Supplementary Data50Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure75Item 9A. Controls and Procedures75Item 9B.Other Information76 PART III Item 10.Directors, Executive Officers and Corporate Governance76Item 11.Executive Compensation76Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters76Item 13.Certain Relationships and Related Transactions, and Director Independence76Item 14.Principal Accounting Fees and Services77 PART IV Item 15. Exhibits and Financial Statement Schedules77Item 16. Summary79 Signatures80 2Table of ContentsPART IITEM 1. BUSINESS OVERVIEWWe are a leading provider of software-as-a-service, or SaaS, solutions and our mission is to connect and optimize the world's commerce. Our e-commerce cloud platform helps retailers and branded manufacturers worldwide improve their online performance by expanding sales channels, connectingwith consumers around the world, optimizing their operations for peak performance and providing actionable analytics to improve competitiveness. Throughour platform, we enable our customers to connect with new and existing sources of demand for their products, including e-commerce marketplaces, such asAmazon, eBay, Jet.com, Newegg, Sears and Walmart, search engines and comparison shopping websites, such as Google, Microsoft’s Bing and Shopzilla, andsocial channels, such as Facebook, Instagram and Pinterest. Our fulfillment solution makes it easier for customers to connect to their supply chain, whichcould include distributors, manufacturers and third-party logistic providers. Our suite of solutions, accessed through a standard web browser, provides ourcustomers with a single, integrated user interface to manage their product listings, inventory availability, pricing optimization, search terms, data analyticsand other critical functions across these channels. We also offer solutions that allow branded manufacturers to send their web visitors or digital marketingaudiences directly to authorized resellers and to gain insight into consumer behavior. Our proprietary cloud-based technology platform delivers significantbreadth, scalability and flexibility. In 2017, our customers processed approximately $8.9 billion in gross merchandise value ("GMV") through our platform.We serve customers across a wide range of industries and geographies. Our customers include the online businesses of traditional retailers, onlineretailers and branded manufacturers (manufacturers that market the products they produce under their own name), as well as advertising agencies that use oursolutions on behalf of their clients.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:•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;•convenience and speed of order fulfillment;•broad use of mobile connected devices for e-commerce; and•proliferation of specialized websites and 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 branded manufacturers, they also create additional complexityand challenges. Retailers and branded manufacturers seeking new avenues to expand their online sales must manage product data and transactions acrosshundreds of highly fragmented online channels where data attributes vary, requirements change frequently and the pace of innovation is rapid andincreasing. Speed of order fulfillment is becoming increasingly strategic to winning consumers' business. There are a significant number of possiblefulfillment locations around the world, each with different technological capability and communication requirements.We address these challenges by offering retailers and branded manufacturers SaaS solutions that enable them to integrate, manage and optimize theirmerchandise sales across these disparate online channels. In addition, we facilitate improved collaboration between branded manufacturers and theirauthorized resellers through solutions that deliver high value leads from branded manufacturers to those resellers. We generate the majority of our revenuefrom 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, digital marketing websites and authorized reseller websites. Using our solutions, customers can:3Table of Contents•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;•implement dynamic pricing and promotion strategies across channels;•efficiently manage, evaluate and optimize customer traffic to their own e-commerce websites;•connect to fulfillment and logistics providers on a global scale;•more easily sell into new geographic territories worldwide;•provide a seamless consumer journey from branded manufacturer websites and digital marketing campaigns to the e-commerce sites andphysical stores of authorized resellers;•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. The majority of our subscription fee is based on the amount of a customer's GMV processed on our platform. Oursubscription fee may also be based on the amount of advertising spend processed on our platform. A portion of the GMV-based or advertising spend-basedsubscription fee is typically fixed and is based on a specified minimum amount of GMV or advertising spend that a customer expects to process through ourplatform. The remaining portion of GMV-based or advertising spend-based subscription fee is typically variable and is based on a specified percentage ofGMV or advertising spend processed through our platform that exceeded the customer’s specified minimum GMV or advertising spend amount. We believethat our subscription fee pricing model aligns our interests with those of our customers. We also receive implementation fees, which may include fees forproviding launch assistance and training.INDUSTRY BACKGROUNDIncreasing complexity and fragmentation for retailers and branded manufacturers selling onlineE-commerce is a large and global market that continues to expand as retailers and branded manufacturers continue to increase their online sales.However, it is also an increasingly complex and fragmented market due to the hundreds of channels available to retailers and branded manufacturers and therapid pace of change and innovation across those channels. Historically, a retailer or branded manufacturer might have simply established an onlinestorefront and used a basic paid search program to drive traffic to its website. Today, in order to gain consumers’ attention in a more crowded and competitiveonline marketplace, many retailers and an increasing number of branded manufacturers sell their merchandise through multiple online channels, each with itsown rules, requirements and specifications. In addition, retailers and branded manufacturers often seek to sell their products in multiple countries, each withits 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 many sellers, arean increasingly important driver of growth for a number of large online retailers. Some of these marketplaces, such as Amazon, offer productsfrom their own inventory, known as first-party products, as well as products sold by others, known as third-party products; other marketplaces,such as eBay, offer only third-party products. In addition, several of the largest traditional brick-and-mortar retailers, including La Redoute,Sears, Tesco and Walmart, have incorporated third-party marketplaces into their online storefronts, allowing other retailers and brandedmanufacturers 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. Whilebenefiting consumers by increasing the transparency and accessibility of e-commerce, the proliferation of mobile devices and mobile commercerequires retailers and4Table of Contentsbranded manufacturers to build additional device-specific optimization and functionality into their websites, increasing the complexity ofmanaging their online presences.•Growth of additional online consumer touch points. As consumers have moved more of their shopping and product discovery online, searchengines, social networks and certain comparison shopping sites such as Google Shopping, as well as branded manufacturer websites, haveemerged as key influencers and important points of product research for consumers making purchase decisions.•Expansion of the global e-commerce ecosystem. The increasingly global e-commerce ecosystem presents opportunities for retailers andbranded manufacturers to extend their online presence through country- or region-specific marketplaces, such as Alibaba in Asia. Conversely,the growth of marketplaces such as Amazon into new countries is driving selling opportunities for retailers and branded manufacturers to sell toa broader, global audience.•Widespread use of social networking and commerce applications. The rapid growth of social networking and commerce applicationsprovides a valuable channel through which retailers and branded manufacturers can connect to consumers.•Increase in branded manufacturers’ participation in direct-to-consumer e-commerce. With the rise of Amazon and the struggles of sometraditional retail partners, more branded manufacturers are exploring or participating in direct-to-consumer online sales using their own websitesand/or third-party marketplaces. The shift to direct-to-consumer online sales is forcing branded manufacturers to enhance their logistics andfulfillment capabilities compared to the traditional brick-and-mortar retail model. However, because those traditional retail partners stillrepresent a majority of revenue for branded manufacturers, many branded manufacturers desire solutions that allow collaboration with thosepartners in addition to direct-to-consumer solutions.Challenges with alternative e-commerce solutionsThe fragmentation and increasing complexity of e-commerce channels is placing greater demands on retailers and branded manufacturers that seek togrow their online sales. These retailers and branded manufacturers require solutions that will enable them to easily integrate their product offerings andinventory across multiple online 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 maintain pace with the speed of change andinnovation of online channels, retailers and branded manufacturers that rely on in-house capabilities are required to invest in and maintainsignificant technological infrastructure, human resources and industry relationships. Successful in-house solutions may typically require longerperiods of setup time, 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 available forretailers and branded manufacturers to help them manage single online channels or a single category of channels, but these point solutions oftendo not address the needs of retailers and branded manufacturers seeking to manage pricing and inventory across multiple channels through asingle, unified platform.•Solutions provided by the channels are not aligned with customers’ broader online goals. Most online channels offer their own solutions thathelp retailers and branded 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 optimizetheir online sales across the multiple online avenues available to them. As with point solutions, retailers and branded manufacturers must workwith disparate third-party providers to connect with a broad array of channels, which requires significant time and costs.•Neither in-house nor point solutions adequately address fulfillment requirements, leading to error-prone processes. In-house and pointsolutions tend to focus on point-to-point connectivity from channels to enterprise resource planning, with separate resources focusing onenterprise resource planning to fulfillment. This design leads to a disconnected experience, decreasing speed of fulfillment and increasing riskof product being out of stock. Slower fulfillment and delayed shipments negatively impact customer satisfaction and online sales.5Table of ContentsSaaS solutions generally offer customers several distinct advantages over traditional in-house models, known as on-premises solutions, includinglower upfront 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 availablechannels through a single, integrated platform. Our suite of solutions includes a number of individual offerings, or modules. Each module integrates with aparticular type of channel, such as third-party marketplaces, digital marketing websites or authorized reseller websites, or supports specific onlinefunctionality aimed at customers wanting to enhance the effectiveness of their existing online storefronts or employing rich media solutions on theirwebsites.Using our cloud-based platform, customers can connect to multiple, disparate channels through a single, user-friendly solution instead of separatelyintegrating with each channel. We provide a single code base and multi-tenant architecture for our platform customers, which means that all platformcustomers operate on the same version of our software and we do not customize our products for individual platform customers. We provide our customerswith access to new and existing online channels and new sources of demand for their products, which can ultimately lead to increased revenue for ourcustomers.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 platform customers with a single web-based interface as thecentral location for them to control, analyze and manage their online sales across hundreds of available channels and multiple geographies. Thisunified view enables our customers to more cost-effectively manage product listings, inventory availability, pricing optimization, fulfillment,search terms, data analytics and other critical functions across channels based on the customer’s specified rules and performance metrics in orderto drive traffic and increase revenue.•Reduced integration costs, time to market and dependence on in-house resources. Customers can more easily and quickly introduce theirproducts, both to channels on which they already have a presence and to new channels, without the costs related to installing and maintainingtheir own hardware and software infrastructure. A customer’s initial installation and integration of our solutions can often be completed in lessthan two months, with additional modules of our software generally available immediately without incurring significant additional resources tointegrate. We manage and host our solutions on behalf of our customers, thereby reducing the customer’s cost and dependency on dedicated ITstaff or on-premises systems.•Scalable technology platform. In 2017, our customers processed approximately $8.9 billion in GMV through our platform. We believe thatthe scalability of our platform allows us to quickly and efficiently support an increasing number of product listings and transactions processedthrough our platform as 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 frequently update their product informationrequirements, policies, merchandising strategies and integration specifications, requiring customers to frequently revise their product listings,attributes, business rules and possibly even their overall online business strategies. Without the ability to quickly adapt to these changes,customers risk losing revenue. Through our single code base and multi-tenant architecture, we provide platform customers the latest channelupdates through regular product upgrades. When we develop and deploy new features, functions and capabilities, or make changes to keep upwith the changing priorities and requirements of each channel, our customers simultaneously benefit from those new capabilities and changes.•Data and reporting analytics. Through our data and reporting analytics, we provide our customers with insight into the latest channel andconsumer trends and general product performance. Our dashboards highlight sales trends, top performing products, seller reputation andrepricing activity, among other key performance indicators, and alert customers to issues and errors in product listings. These capabilitiesprovide actionable insights that allow customers to evaluate and, if necessary, improve the efficiency of their business rules on existing or newchannels. Additionally, our solution provides branded manufacturers with insights about online assortment, product coverage gaps, pricingtrends and adherence by their retailers to content guidelines.We offer our platform customers the choice of self-service accounts or managed-service accounts. Self-service customers operate our softwarethemselves, while managed-service customers generally outsource most or all of the management of one or more channels to our professional services team,which then operates our software on the customer’s behalf based on the customer's instructions.6Table of ContentsOUR PRODUCTSThe ChannelAdvisor PlatformWe automate the workflow through which retailers and branded manufacturers manage their sales through online channels. Our suite of solutionsincludes the following key capabilities:•Product catalog, inventory and order management. We provide a platform for our customers to upload and modify their product catalog data,monitor inventory stock levels and create a single inventory feed that serves multiple available online channels. Managing inventory and orderdata is the foundation for much of the customer activity on our platform. We offer a variety of ways for customers to enter and modify productdata, including through a sophisticated user interface, file exchange and application programming interfaces, or APIs. Our platform is capable ofscaling to support thousands of customers during critical selling periods, such as the year-end holiday season. The flexibility of the systemallows each customer to customize the product catalog data specific to its products, such as size, color, height and width, and to vary the formatof the data to meet the specific requirements of each channel. Our platform provides various features that allow a customer to list products onmultiple channels while mitigating the risk of overselling. These features include the ability to allocate inventory across channels, set bufferquantities 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 a product will be displayed and when it will be available for purchase in eachchannel. Through a single interface, a platform customer can utilize these tools to customize product listing descriptions across variouschannels using different attributes, such as price, brand, category and shipping weight. Features such as these allow customers to automaticallyadvertise millions of products on multiple channels while ensuring accuracy of product availability, optimizing price and managing to specificmargin thresholds, 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, historical product sales and current promotions. Prices can varyby channel and, using our sophisticated technology, a customer can automatically update pricing based on the competitive environment. Thecustomer avoids the manual effort of monitoring the competition and changing prices, while preserving the ability to remain price competitive.Our Algorithmic Repricer offers predictive analytics and machine learning that may help our customers make more sales while maximizingmargin.•Advertising management. Our platform provides customers the ability to create, manage and evaluate advertising across multiple channels.Advertising formats, which can vary and often change, are associated with numerous channels including search engines, social networks andmarketplaces. By providing a unified platform to manage advertising, our customers are able to manage advertisements across a large number ofchannels more efficiently. Additionally, features such as an automated bid manager provide automation that updates bids based on thecustomer’s goals and performance.•Fulfillment. In 2017, we acquired a fulfillment and logistics platform that automates order management by connecting online storefronts andmarketplaces to distribution and fulfillment centers, which we believe will further enhance our fulfillment network offering and capabilities.With this acquisition and through organic development, our platform provides customers the ability to connect to multiple fulfillment andlogistics providers around the globe. These features include the ability to optimize how an order is fulfilled based on the preferences of ourcustomers and the availability of products at different fulfillment locations. Fulfillment-centric functionality provides automated, near real-timeinventory updates, cost updates and shipment notifications. Our solution also allows customers to generate shipping labels. In addition, oursolution enables our customers to visualize fulfillment performance using analytics. These capabilities are available in a single, unifiedexperience.7Table of Contents•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 orstock-keeping unit level that can be used in a particular online sales campaign. Our dashboards highlight sales trends, top performing products,seller reputation and repricing activity, among other key performance indicators. The dashboards also alert customers to issues or errors, such asdata that is in a form inconsistent with the requirements of a particular channel. These capabilities provide actionable insights that allowcustomers to revise 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 hundreds of third-party developers who have integrated their solutions withours. For example, our API integrates our platform with business software provided by NetSuite, a provider of SaaS enterprise resource planning,customer relationship management and e-commerce solutions, 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, Catch, eBay, Jet.com, LaRedoute, Newegg, Sears, Tesco, TradeMe, Walmart and Zalando. Our standardized integration API, which we refer to as Access ChannelAdvisor,allows additional e-commerce channels to integrate with our platform requiring less support on launch, which we believe will result in a broaderarray of channels available to our customers. In addition, our platform provides our customers with access to advertising programs and advancedcompetitive features on major marketplaces to allow them to compete more effectively. As of December 31, 2017, we supported 89 marketplacesand a dozen first-party connections (first-party connections enable our customers to sell their products directly to the marketplace, which thensells the products to the consumer).•Digital Marketing. Our Digital Marketing module connects customers to comparison shopping websites such as Google Shopping andShopzilla, allows customers to advertise products on search engines such as Google, Microsoft's Bing and Yahoo! and connects customers tosocial commerce sites such as Facebook, Instagram and Pinterest. Our Digital Marketing module also allows customers to generate and sendcustomized product data feeds to their partners, such as affiliate networks, retargeting vendors, personalization vendors and product reviewplatforms.•Where to Buy. Our Where to Buy solution allows branded manufacturers to provide their web visitors or digital marketing audiences with up-to-date information about the authorized resellers that carry their products and the availability of those products online, as well as the ability toidentify offline retailers that generally carry those products. This provides consumers with an easier path to purchase from an authorized resellerof their choice. The solution improves the consumer experience and helps branded manufacturers gain a better understanding of consumerbehavior through detailed data about the flow of traffic between the branded manufacturer and retailer.•Product Intelligence. Our Product Intelligence solution provides branded manufacturers with insights about online assortment, productcoverage gaps, pricing trends and adherence by their retailers to content guidelines.OUR CUSTOMERSAs of December 31, 2017, we had 2,840 customers worldwide, including retail and branded manufacturer customers across many consumer productcategories. For the year ended December 31, 2017, our ten largest customers in the aggregate accounted for 7.9% of our total revenue. No single customeraccounted for more than 1.7% of our total revenue during the year ended December 31, 2017.8Table of ContentsOUR TECHNOLOGY PLATFORMWe have developed our proprietary technology platform 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 ourcustomers to download, install or upgrade software.We develop our software using rapid iterations through small, incremental changes that are continuously integrated into our code base. We generallyrelease new versions of our software approximately every 30 days, except during certain holiday seasons. Incremental improvements may be released on dailyand weekly schedules. Through our single code base and multi-tenant software architecture, our customers benefit from our new capabilities as soon as theyare made available.Our platform uses a hybrid cloud architecture in which we utilize secure third-party data center facilities located in North America, as well as cloud-based infrastructure in North America and Europe. In the data center facilities, we deploy hardware we own and lease, including servers, networking systemsand storage systems. We use virtualization to maximize the utilization we achieve from our hardware systems. The data center facilities are biometricallysecured, environmentally controlled and redundantly powered. We employ system security, including firewalls, encryption technology and antivirussoftware, and we conduct regular system tests and vulnerability and intrusion assessments. In the event of failure, we have engineered our systems withbackup and recovery capabilities designed to provide for business continuity. We also make use of additional third-party cloud-based systems, such ascontent delivery networks, to augment the capabilities of our platform.RESEARCH 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 wesupport. We incurred research and development costs of $21.9 million, $17.7 million and $16.6 million during the years ended December 31, 2017, 2016 and2015, respectively. In 2017, we expanded our research and development capabilities with new talent through organic growth, an acquisition and expandingour operations overseas with the opening of a new research and development facility in Madrid, Spain.COMPETITIONThe market for products that help retailers and branded manufacturers reach online consumers is competitive. The competitive dynamics of our marketare unpredictable because it is in an early stage of development, rapidly evolving, fragmented and subject to potential disruption by new technologicalinnovations and 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 branded manufacturers with one or more online channels. We also compete with in-house solutions used by retailers and brandedmanufacturers that elect to build and maintain their own proprietary integrations to online channels. In addition, we compete with the channels themselves,which typically offer software tools, often for free, allowing retailers and branded 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 branded manufacturers;•channel independence;•breadth of online channels supported;•integration of capabilities;•reporting and analytic capabilities;•proven and scalable technology; and•brand awareness and reputation.We believe that we compete favorably with respect to all of these factors.9Table of ContentsINTELLECTUAL PROPERTYOur ability to protect our intellectual property, including our technology, is an important factor in the success and continued growth of our business.We protect our intellectual property through trade secrets law, patents, copyrights, trademarks and contracts. Some of our technology relies upon third-partylicensed intellectual property.We have received patent protection for some of our technologies in the United States and expect to apply for additional patents to protect ourintellectual property as appropriate. We own trademark registrations in the U.S., the European Union, Australia, China, Hong Kong and Brazil forChannelAdvisor and expect to apply for additional trademark registrations as appropriate.In addition to the foregoing, we have established business procedures designed to maintain the confidentiality of our proprietary information,including the use of confidentiality agreements and assignment-of-inventions agreements with employees, independent contractors, consultants andcompanies with which we conduct business.BACKLOGBacklog represents the total committed subscription fees to be received under our customer contracts that have not yet been invoiced or recognized asrevenue. As of December 31, 2017 and 2016, our backlog was approximately $64.5 million and $55.2 million, respectively.Our customer contracts usually have a term of one year, and therefore the substantial majority of our backlog is expected to be recognized as revenuewithin the one-year contract term. Revenue for any period is a function of revenue recognized from deferred revenue, backlog under contracts in existence atthe beginning of the period, as well as contract renewals and new customer contracts during the period. As a result, our backlog at the beginning of anyperiod is not necessarily indicative of our future performance. Our presentation of backlog may differ from other companies in our industry.GOVERNMENT REGULATIONThe legal environment of the internet is evolving rapidly in the United States and elsewhere. The manner in which existing laws and regulations willbe applied 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 alsounclear how the laws that do reference the internet will be interpreted by courts, which may impact their applicability and scope. Compliance may be costlyand may require us to modify our business practices and product offerings. In addition, it is possible that governments of one or more countries may seek tocensor content available on the websites of our customers or may even attempt to completely block access to those websites. Noncompliance or perceivednoncompliance could also subject us to significant penalties and negative publicity. Accordingly, adverse legal or regulatory developments couldsubstantially 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 orintellectual property rights related to the content loaded onto our platform. Both in the United States and internationally, we must monitor and comply with ahost of legal concerns regarding the content loaded onto our platform. The scope of our liability for third-party content loaded to our platform for delivery tovarious online e-commerce channels may vary from jurisdiction to jurisdiction and may vary depending on the type of claim, such as privacy, infringementor defamation claims. Our ability to employ processes to quickly remove infringing or offending content from our platform, for example, is an important toolin protecting us from exposure for the potentially infringing activities of our users worldwide. We also incorporate protections in customer contracts thatallow 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 our10Table of Contentssolutions. We maintain an active copyright and trademark infringement policy and respond to take-down requests by third-party intellectual property rightowners that might result from content posted by our customers using our solutions. As our business expands to other countries, we must also respond toregional and country-specific intellectual property considerations, including take-down and cease and desist notices in foreign languages, and we must buildinfrastructure to support these processes. The Digital Millennium Copyright Act, or DMCA, also applies to our business. This statute provides relief forclaims of circumvention of copyright-protected technologies but includes a safe harbor that is intended to reduce the liability of online service providers forlisting or linking to third-party websites that include materials that infringe copyrights or other rights of others. Our copyright and trademark infringementpolicy is intended to satisfy the DMCA safe harbor in order to reduce our liability for customer-generated materials 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 various states that require online services to report breaches of thesecurity of personal data, and to report to customers when their personal data might be disclosed to direct marketers. In the European Union, U.S. companiesmust protect personal data in accordance with the Data Protection Directive (and local implementing legislation in relevant jurisdictions), which requirescomprehensive information privacy and security protections for consumers with respect to information collected about them. Compliance requirementsinclude disclosures, consents, transfer restrictions, notice and access provisions for which we may in the future need to build further infrastructure to support.To comply with the Data Protection Directive, we have registered with the E.U.-U.S. Privacy Shield, which was approved by the European Commission onJuly 8, 2016.In addition, in April 2016, the European Union adopted a new General Data Protection Regulation (the "GDPR") to unify data protection within theEuropean Union under a single law, which may result in significantly greater compliance burdens and costs for companies with customers and operations inthe European Union. The GDPR will introduce a number of privacy-related changes for companies operating in the European Union, including greatercontrol for data subjects (e.g., the "right to be forgotten"), increased data portability for European Union consumers, data breach notification requirements andincreased fines. In particular, under the GDPR, fines of up to 20 million euros or up to 4% of the annual global revenue of the non-compliant company,whichever is greater, could be imposed for violations of certain of the GDPR’s requirements. This government action is typically intended to protect theprivacy of personal data that is collected, processed and transmitted in or from the governing jurisdiction. These laws apply not only to third-partytransactions, but also to transfers of information between us and our subsidiaries, including employee information. The GDPR will go into effect and apply tous beginning in May 2018.We will continue to follow developments and work to maintain conforming means of transferring data from Europe, but despite our efforts to addressthe changes, we may be unsuccessful in establishing conforming means of transferring data from Europe.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 our postedprivacy policies, U.S. Federal Trade Commission, or FTC, requirements or other privacy-related laws and regulations could result in proceedings bygovernmental 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 cannotpredict how any new laws will apply to us or our business. Similar "do not track" legislative proposals have been considered in the United States at the federallevel, although none have been enacted to date. If enacted, such legislative proposals could prohibit or restrict the use of certain technologies, includingtracking 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 to11Table of Contentscomply with rules relating to advertising or marketing practices that the FTC may deem misleading or deceptive. The European Union also maintainsstandards and regulations with respect to communications with consumers that we must comply with as we expand our marketing practices into thosecountries or with which our customers, utilizing our solutions, must comply. Some ways we seek to comply with these measures include requiring ourcustomers to communicate with their consumers in order to comply with laws concerning spam and unsolicited emails and establishing processes to allowdirect receivers of e-mail marketing communications from us to opt out of future communications.Credit card protections. Several major credit card companies have formed the Payment Card Industry Council, or PCI Council, in order to establishand implement security standards for companies that transmit, store or process credit card data. The PCI Council has created the Payment Card Industry DataSecurity Standard, or PCI DSS. Though the PCI DSS is not law, merchants using PCI Council members to process transactions are required to comply with thePCI DSS, with associated fines and penalties for non-compliance. Elements of the PCI DSS have begun to emerge as law in some states, however, and weexpect the trend to continue as to further laws and restrictions in collecting and using credit card information. We do not receive, process, or store any creditcard information. We utilize a third-party processor to collect credit card data in processing the fees paid to us by our customers. The third-party is certified asPCI DSS compliant for internet / e-commerce payment processing.EMPLOYEESAs of December 31, 2017, we had 737 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 10 - 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 3025 Carrington MillBoulevard, Suite 500, 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 FACTORS Our business is subject to numerous risks. You should carefully consider the following risks, as well as general economic and business risks, and all ofthe other information contained in this Annual Report, together with any other documents we file with the SEC. Any of the following risks could have amaterial adverse effect on our business, operating results and financial condition and cause the trading price of our common stock to decline.RISKS RELATED TO OUR BUSINESSWe have incurred significant net losses since inception, and it is possible that our operating expenses will increase in the foreseeable future, which maymake it more difficult for us to achieve profitability.We incurred net losses of $16.6 million and $8.0 million during the years ended December 31, 2017 and 2016, respectively, and we had anaccumulated deficit of $180.1 million as of December 31, 2017. It is possible that our operating expenses will increase in the foreseeable future as we investin increased sales and marketing and research and development efforts. To achieve profitability, we will need to either increase our revenue sufficiently tooffset increasing expenses or reduce our expense levels. Our recent revenue growth may not be sustainable, and if we are forced to reduce our expenses, ourgrowth strategy could be compromised. If we are not able to achieve and maintain profitability, the value of our company and our common stock coulddecline significantly.A significant portion of our revenue is attributable to sales by our customers on the Amazon and eBay marketplaces and through advertisements onGoogle. Our inability to continue to integrate our solutions with these channels would make our solutions less appealing to existing and potential newcustomers and could significantly reduce our revenue.A substantial majority of the GMV that our customers process through our platform is derived from merchandise sold on the Amazon and eBaymarketplaces or advertised on Google, and a similar portion of our variable subscription fees is attributable to sales by our customers through these channels.These channels, and the other channels with which our solutions are integrated, have no obligation to do business with us or to allow us access to theirsystems, and they may decide at any time and for any reason to significantly curtail or inhibit our ability to integrate our solutions with their channels.Additionally, Amazon, eBay or Google may decide to make significant changes to their respective business models, policies, systems or plans, and thosechanges 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 potentiallyterminate their 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 more difficultto achieve profitability.The e-commerce market is characterized by rapid technological change and frequent changes in rules, specifications and other requirements forretailers and branded manufacturers to be able to sell their merchandise on particular channels, as well as developments in technologies that can impede thedisplay and tracking of advertisements. Our ability to retain existing customers and attract new customers depends in large part on our ability to enhance andimprove our existing solutions and introduce new solutions that can adapt quickly to these technological changes. To achieve market acceptance for oursolutions, we must effectively anticipate and offer solutions that meet frequently changing channel requirements in a timely manner. If our solutions fail todo so, our ability to renew our contracts with existing customers and our ability to create or increase demand for our solutions will be impaired.If we are unable to retain our existing customers, our revenue and results of operations could be adversely affected.We sell our solutions pursuant to contractual arrangements that generally have one-year terms. Therefore, our revenue growth depends to a 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 with oursolutions, the cost of our solutions, the cost of solutions offered by our competitors and reductions in our customers’ spending levels. If our customers do notrenew their subscriptions, renew on less favorable terms or for fewer modules, or do not purchase additional modules, our revenue may grow more slowly thanexpected or decline, and our ability to become profitable may be compromised.13Table of ContentsAs more of our sales efforts are targeted at larger customers, our sales cycle may become more time-consuming and expensive, and we may encounterpricing pressure, which could harm our business and operating results.The cost and length of our sales cycle varies by customer. As we target more of our sales efforts at selling to larger customers, we may face greater costs,longer sales cycles and less predictability in completing some of our sales. These types of sales often require us to provide greater levels of educationregarding our solutions. In addition, larger customers may demand more training and other professional services. As a result of these factors, these salesopportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required tocomplete sales and diverting sales and professional services resources to a smaller number of larger transactions.We may not be able to compete successfully against current and future competitors. If we do not compete successfully, we could experience lower salesvolumes and pricing pressure, which could cause us to lose revenues, impair our ability to pursue our growth strategy and compromise our ability toachieve 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 branded manufacturers to connect tothem, 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 pricepoint or with greater depth than our solutions and may be able to devote greater resources to those solutions than we can; and•Software vendors could bundle channel management solutions with other solutions or offer such products at a lower price as part of a 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 and brandedmanufacturers seeking to sell online otherwise diminish, demand for our solutions could decline.Our solutions enable retailers and branded manufacturers to manage their merchandise sales through hundreds of disparate online channels. One of thekey attractions of our solutions to retailers and branded manufacturers is the ability to help address the complexity and fragmentation of selling online.Although the number and variety of online channels available to retailers and branded manufacturers have been increasing, at the same time the share ofonline sales made through a small number of larger channels, particularly Amazon, has also been increasing. If the trend toward consolidation around a fewlarge online channels accelerates, the difficulties faced by retailers and branded manufacturers could decline, which might make our solutions less importantto retailers and branded manufacturers and could cause demand for our solutions to decline.14Table of ContentsOur growth depends in part on the success of our strategic relationships with third parties.We anticipate that we will continue to depend on our relationships with various third parties, including marketplaces and technology, content andlogistics providers, in order to grow our business. Identifying, negotiating and documenting relationships with these third parties may require significant timeand resources as does integrating their content and technology with our solutions. If the third-party content or technology integrated with our solutions is notwell received by our customers, our brand and reputation could be negatively affected. Our agreements with third-party business partners are typically non-exclusive and do not prohibit them from working with our competitors or from offering competing services. If and to the extent that any of these third partiescompete with us, it could hurt our growth prospects.If the e-commerce market does not grow, or grows more slowly than we expect, particularly on the channels that our solutions support, demand for ouronline 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 widelyused for selling merchandise. As e-commerce continues to evolve, regulation by federal, state or foreign agencies may increase. Any regulation imposinggreater fees for internet use or restricting information exchanged over the internet could result in a decline in the use of the internet, which could harm ourbusiness.In addition, if consumer utilization of our primary e-commerce channels, such as Amazon, eBay and Google, does not grow or grows more slowly thanwe 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.Software errors, defects or failures or human error could cause our solutions to oversell our customers’ inventory or misprice their offerings or could causeother errors, which would hurt our reputation and reduce customer demand.Complex software applications such as ours may contain errors or defects, particularly when first introduced or when new versions or enhancements arereleased. 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 ofeach channel and sometimes to dynamically determine product pricing at any given moment. Some customers subscribe to our solutions on a managed-service basis, in which case our personnel operate our solutions on behalf of the customer. In the event that our solutions do not function properly, or if thereis human error on the part of our service staff, errors could occur, including that our customers might inadvertently sell more inventory than they actuallyhave in stock, make sales that violate channel policies or underprice or overprice their offerings. Overselling their inventory could force our customers tocancel orders at rates that violate channel policies. Underpricing would result in lost revenue to our customers and overpricing could result in lost sales. Inaddition, our pricing policies with our customers are largely based upon our customers’ expectations of the levels of their GMV that will be processedthrough our platform over the term of their agreement with us, and errors in our software or human error could cause transactions to be incorrectly processedthat would cause GMV to be in excess of our customers’ specified minimum amounts, in which case our variable subscription fee-based revenue could beoverstated. Any of these results or other errors could reduce demand for our solutions and hurt our business reputation. Customers could also seek recourseagainst us in these cases and, while our contractual arrangements with customers typically provide that we are not liable for damages such as these, it ispossible that these provisions would not be sufficient to protect us.If the use of "cookie" tracking technologies is restricted, regulated or otherwise blocked, or if changes in our industry cause cookies to become lessreliable or acceptable as a means of tracking consumer behavior, the amount or accuracy of GMV processed on our platform, and our related revenue,could decrease.Cookies are small data files that are sent by websites and stored locally on an internet user's computer or mobile device. Our customers enable cookieson their sites and monitor internet user activity, such as viewing pages and completing transactions. We collect data via cookies that we ultimately use toreport GMV, which translates to revenue. However, internet users can easily disable, delete and block cookies directly through browser settings or throughother software, browser extensions or hardware platforms that physically block cookies from being created and stored.Third-party cookies are downloaded from domains not associated with the address currently being viewed in an internet user's browser. Cookies can bespecifically blocked by browser settings, and, for example, the Safari internet browser blocks third-party cookies by default. Internet users can also downloadfree or paid "ad blocking" software that prevents third-party cookies from being stored on a user's device. On the other hand, first-party cookies aredownloaded directly from the address domain of an internet user, and are generally considered safer by privacy concerns. We currently collect data from bothfirst-party and third-party cookie implementations. Our customers currently implementing our third-party cookie solution might be slow to migrate their sitesto first-party cookie technologies, which could result in less cookie data that we can collect, and therefore less reported revenue data that we can store.15Table of ContentsPrivacy 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 cookiedata. In addition, third parties may develop technology or policies to harvest user data including through next-generation web browsers or other means,which could subsequently prevent us from directly importing data to our systems. We may not be able to develop adequate alternatives to cookie datacollection, which could negatively impact our ability to reliably measure GMV.We rely on non-redundant data centers and cloud computing providers to deliver our SaaS solutions. Any disruption of service from these providers couldharm our business.We manage our platform and serve all of our customers from third-party data center facilities and cloud computing providers that are non-redundant,meaning that the data centers and providers are currently not configured as backup for each other. While we engineer and architect the actual computer andstorage systems upon which our platform runs, we do not control the operation of the facilities at which they are deployed.The owners of our data facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable 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.Our data centers and cloud computing providers are vulnerable to damage or interruption from human error, intentional bad acts, earthquakes,hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures, cyber-attacks and similar events.The occurrence of a natural disaster or an act of terrorism, or vandalism or other misconduct, a decision to close the facilities without adequate notice or otherunanticipated problems could result in lengthy interruptions in the availability of our SaaS solutions or impair their functionality. Our business, growthprospects and operating results would also be harmed if our customers and potential customers are not confident that our solutions are reliable.We rely in part on a pricing model under which a variable portion of the subscription fees we receive from customers is based upon the amount of GMV oradvertising spend that those customers process through our platform, and any change in the attractiveness of that model or any decline in our customers’sales could adversely affect our financial results.We have adopted a pricing model under which a portion of the subscription fees we receive from most of our customers is variable, based on theamount of our customers’ GMV or advertising spend processed through our platform that exceeds a specified amount established by contract, which we referto as variable subscription fees. Most of our customer contracts include this variable subscription fee component. If sales or advertising spend by ourcustomers processed through our platform were to decline, or if more of our customers require fully fixed pricing terms that do not provide for any variabilitybased on their GMV or advertising spend processed through our platform, our revenue and margins could decline.Our quarterly operating results have fluctuated in the past and may do so in the future, which could cause our stock price to decline.Our operating results have historically fluctuated due to changes in our business, and our future operating results may vary significantly from 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;16Table of Contents•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 on asequential quarterly basis.Our customers are retailers and branded manufacturers that typically realize a significant portion of their online sales in the fourth quarter of each yearduring the holiday season. As a result of this seasonal variation, our subscription revenue fluctuates, with the variable portion of our subscription fees beinghigher in the fourth quarter than in other quarters and with revenue generally declining in the first quarter sequentially from the fourth quarter. Our business istherefore not necessarily comparable on a sequential quarter-over-quarter basis and you should not rely solely on quarterly comparisons to analyze ourgrowth.Failure to adequately manage our growth could impair our ability to deliver high-quality solutions to our customers, hurt our reputation and compromiseour 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;•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 ina timely fashion, fulfill existing customer commitments or attract and retain new customers.If we do not retain our senior management team and key employees, or if we fail to attract and retain additional highly skilled sales talent, we may not beable to sustain our growth or achieve our business objectives.Our future success is substantially dependent on the continued service of our senior management team. Our future success also depends on our abilityto continue to attract, retain, integrate and motivate highly skilled technical, sales and administrative employees. Competition for these employees in ourindustry is intense. As a result, we may be unable to attract or retain these management and other key personnel that are critical to our success, resulting inharm to our key client relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs. The loss of the servicesof our senior management or other key employees could make it more difficult to successfully operate our business and pursue our business goals.17Table of ContentsOur business and growth objectives also may be hindered if our efforts to expand our sales team do not generate a corresponding increase in revenue.In particular, if we are unable to hire, develop and retain talented sales personnel or if our new sales personnel are unable to achieve expected productivitylevels in a reasonable period of time, we may not be able to significantly increase our revenue and grow our business.Our strategy of pursuing opportunistic acquisitions or investments may be unsuccessful and may divert our management’s attention and consumesignificant 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, oursolutions 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. The U.S.Supreme Court recently agreed to hear a case challenging a South Dakota law that permits the state to tax online sales where a remote seller has sales abovean economic threshold in the state. In addition, the U.S. Senate and the U.S. House of Representatives are currently considering a variety of legislation, mostnotably the Marketplace Fairness Act, which would override the Supreme Court rulings and enable states to require that online retailers collect sales tax fromthe states’ residents. Some larger online retailers, including Amazon, have announced their support for legislation along these lines. This is a rapidlyevolving area and we cannot predict whether this or other similar legislation will ultimately be adopted or what form it might take if adopted. For example,the current Senate and House legislation includes an exception for small retailers, although there can be no assurance that any legislation ultimately adoptedwould include such an exception. If the states or Congress are successful in these attempts to require online retailers to collect state or local sales taxes onout-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 theamount of GMV processed through our platform, and ultimately our revenue, to decline. In addition, it is possible that one or more states or the federalgovernment or foreign countries may seek to impose a tax collection, reporting or record-keeping obligation on companies like us that facilitate e-commerce,even though we are not an online retailer. Similar issues exist outside of the United States, where the application of value-added tax or other indirect taxes ononline retailers and companies like us that facilitate e-commerce is uncertain and evolving.18Table of ContentsWe may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales, whichcould harm our business.State, local and foreign jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules andregulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our platform in variousjurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus are complex and vary significantly. As a result, we could face the possibility oftax assessments and audits, and our liability for these taxes and associated penalties could exceed our original estimates. As further described in this AnnualReport on Form 10-K, we have entered into voluntary disclosure agreements, or VDAs, with certain jurisdictions and recorded a $2.5 million one-time chargein general and administrative expense for the year ended December 31, 2017. If the VDAs do not resolve all potential unpaid sales tax obligations, then it ispossible that the actual aggregate unpaid sales tax liability may be higher than our estimate. Through December 31, 2017, we have paid approximately $1.5million under terms of the VDAs that we have completed with certain jurisdictions. During the third quarter of 2017, one jurisdiction rejected our VDAapplication and will conduct a sales tax audit. We believe the scope of the audit will be limited and similar in principle to the VDA program. Any successfulassertion that we should be collecting additional sales, use, value added or other taxes in those jurisdictions where we have not historically done so and donot accrue for such taxes could result in substantial tax liabilities and related penalties for past sales, discourage customers from purchasing our applicationor otherwise harm our business and operating results.The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.On December 22, 2017, new legislation went into effect that significantly revises the Internal Revenue Code of 1986, as amended. The newly enactedfederal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a topmarginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain smallbusinesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, onetime taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certainimportant exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying orrepealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax lawis uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conformto the newly enacted federal tax law. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. We urge ourstockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding ourcommon stock.Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.We are subject to taxation in numerous countries, states and local tax jurisdictions. As a result, our effective tax rate is derived from a combination ofapplicable tax rates in the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable ineach of such places. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including passage of the newlyenacted federal income tax law, changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our taxfilings, our inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any ofthese factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in taxobligations in excess of amounts accrued in our financial statements.Evolving domestic and international data privacy regulations may restrict our ability, and that of our customers, to solicit, collect, process, disclose anduse 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 to implement privacy and security policies, permit consumers to access, correct ordelete personal information stored or maintained by us or our customers, inform individuals of security incidents that affect their personal information, and,in some cases, obtain consent to use personal information for specified purposes. Other proposed legislation could, if enacted, impose additionalrequirements and prohibit the use of specific technologies, such as those that track individuals’ activities on web pages or record when individuals click on alink contained19Table of Contentsin an email message. Such laws and regulations could restrict our customers’ ability to collect and use web browsing data and personal information, whichmay reduce our customers’ demand for our solutions.The laws in this area are complex and developing rapidly. In the United States, many state legislatures have adopted legislation that regulates howbusinesses operate online, including measures relating to privacy, data security and data breaches. Laws in 48 states require businesses to provide notice tocustomers whose personally identifiable information has been disclosed as a result of a data breach. The laws are not consistent, and compliance in the eventof a widespread data breach is costly. Further, states are constantly amending existing laws, requiring attention to frequently changing regulatoryrequirements.In April 2016, the European Union adopted a new General Data Protection Regulation (the "GDPR") to unify data protection within the EuropeanUnion under a single law, which may result in significantly greater compliance burdens and costs for companies with customers and operations in theEuropean Union. The GDPR creates a range of new compliance obligations and increases financial penalties for non-compliance, and extends the scope ofthe European Union data protection law to all companies processing data of European Union residents, regardless of the company’s location. The GDPR willgo into effect on May 25, 2018. We have not yet assessed the full effect of the GDPR on our business and operations.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 associatedwith, invasions of privacy, whether or not illegal, we or our customers may be subject to public criticism. Public concerns regarding data collection, privacyand security 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 harm ourbusiness. Furthermore, the costs to our customers of compliance with, and other burdens imposed by, such laws, regulations, policies and standards may limitadoption of and demand for our solutions.Cybersecurity incidents could harm our business and negatively impact our financial results.Cybersecurity incidents could endanger the confidentiality, integrity and availability of our information resources and the information we collect, use,store and disclose. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our informationsystems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. We believe that we takereasonable steps to protect the security, integrity and confidentiality of the information we collect, use, store, and disclose, but there is no guarantee thatinadvertent or unauthorized data access will not occur despite our efforts. For example, we could be impacted by software bugs or other technicalmalfunctions, as well as employee error or malfeasance. Any unauthorized access or use of information, virus or similar breach or disruption to our, ourcustomers’, or our partners’ systems and security measures could result in disrupted operations, loss of information, damage to our reputation and customerrelationships, early termination of our contracts and other business losses, indemnification of our customers, misstated or unreliable financial data, liabilityfor stolen assets or information, increased cybersecurity protection and insurance costs, financial penalties, litigation, regulatory investigations, and othersignificant liabilities, any of which could materially harm our business.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 our platform,which could harm our reputation and demand for our solutions.We have experienced significant growth in the number of users, transactions and data that our hosting infrastructure supports. We seek to 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 tomaintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments and to handlespikes in usage. However, the provision of new hosting infrastructure requires significant lead time. If we do not accurately predict our infrastructure capacityrequirements, 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.20Table of ContentsWe derive most of our revenue from annual subscription agreements, as a result of which a significant downturn in our business may not be immediatelyreflected 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 subscriptionsin any one quarter may not be reflected in our financial performance in that quarter but might negatively affect our revenue in future quarters. Accordingly,the effect of significant declines in sales and market acceptance of our solutions may not be reflected in our short-term results of operations.Our business is substantially dependent upon the continued growth of the market for on-demand SaaS solutions. If this market does not continue to grow,demand for our solutions could decline, which in turn could cause our revenues to decline and impair our ability to become profitable.We derive, and expect to continue to derive, substantially all of our revenue from the sale of our solutions, which are delivered under a SaaS model. 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 generallypredisposed to maintaining control of their information technology systems and infrastructure, there may be resistance to the concept of accessing softwarefunctionality as a service provided by a third party. In addition, the market for SaaS solutions is still evolving, and existing and new market participants mayintroduce new types of solutions and different approaches to enable organizations to address their needs. If the market for SaaS solutions fails to grow orgrows more slowly than we currently anticipate, demand for our solutions and our revenue, gross margin and other operating results could be negativelyimpacted.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.We have expanded, and expect to further expand, our operations internationally by opening offices in new countries and regions worldwide. However,our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to theparticular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, taxation systems, alternativedispute systems, regulatory systems and commercial infrastructures. International expansion will require us to invest significant funds and other resources.Expanding internationally may subject us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:•recruiting and retaining employees in foreign countries;•increased competition from local providers;•compliance with applicable foreign laws and regulations;•longer sales or collection cycles in some countries;•credit risk and higher levels of payment fraud;•compliance with anti-bribery laws, such as the Foreign Corrupt Practices Act;•currency exchange rate fluctuations;•foreign exchange controls that might prevent us from repatriating cash earned outside the United States;•economic and political instability in some countries, including terrorist attacks and civil unrest;•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; and21Table of Contents•overall higher costs of doing business internationally.If our revenue from our international operations does not exceed the expense of establishing and maintaining these operations, our business 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 licensing requirementsand 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 andtrade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our solutions must be made incompliance with these laws. If we fail to comply with these U.S. export control laws and import laws, including U.S. Customs regulations, we could be subjectto substantial 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 inresponse to changes in export and import regulations, which could lead to delays in the introduction and sale of our solutions in international markets,prevent our customers with international operations from deploying our solutions or, in some cases, prevent the export or import of our solutions to somecountries, governments or persons altogether. Any decreased use of our solutions or limitation on our ability to export our solutions or sell them ininternational markets would 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 byextensive intellectual property litigation. Although our industry is rapidly evolving, many companies that own, or claim to own, intellectual property haveaggressively asserted their rights. From time to time, we have been subject to legal proceedings and claims relating to the intellectual property rights ofothers, and we expect that third parties will continue to assert intellectual property claims against us, particularly as we expand the complexity and scope ofour business. In addition, most of our subscription agreements require us to indemnify our customers against claims that our solutions infringe the intellectualproperty rights of third parties.Future litigation may be necessary to defend ourselves or our customers by determining the scope, enforceability and validity of third-partyproprietary rights or to establish our proprietary rights. Some of our competitors have substantially greater resources than we do and are able to sustain thecosts of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies thatfocus solely on extracting royalties and settlements by enforcing patent rights may target us. Regardless of whether claims that we are infringing patents orother intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend and could:•hurt our reputation;•adversely affect our relationships with our current or future customers;•cause delays or stoppages in providing our services;•divert management’s attention and resources;22Table of Contents•require technology changes to our software that would cause us to incur substantial cost;•subject us to significant liabilities; and•require us to cease some or all of our activities.In addition to liability for monetary damages against us, which may be tripled and may include attorneys’ fees, or, in some circumstances, damagesagainst our customers, we may be prohibited from developing, commercializing or continuing to provide some or all of our software solutions unless weobtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commerciallyfavorable terms, or at all.Our failure to protect our intellectual property rights could diminish the value of our services, weaken our competitive position and reduce our revenue.We regard the protection of our intellectual property, which includes trade secrets, copyrights, trademarks, domain names and patent applications, 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 withparties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractualarrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information ordeter independent development of similar technologies by others.We have received patent protection for some of our technologies and are seeking patent protection for other of our technologies but there can be noassurance that any patents will ultimately be issued. We have registered domain names, trademarks and service marks in the United States and in jurisdictionsoutside the United States and are also pursuing additional registrations both in and outside the United States. Effective trade secret, copyright, trademark,domain name and patent protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs ofdefending our rights. We may be required to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and maynot be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our intellectual property throughadditional patent filings that could be expensive and time-consuming.We have licensed in the past, and expect to license in the future, some of our proprietary rights, such as trademarks or copyrighted material, to 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 ora defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business,whether or not such litigation results in a determination that is unfavorable to us. In addition, litigation is inherently uncertain, and thus we may not be ableto stop our competitors from infringing upon our intellectual property rights.Our use of "open source" software could negatively affect our ability to sell our solutions and subject us to possible litigation.A portion of our technology platform and our solutions incorporates so-called "open source" software, and we may incorporate additional open 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. In23Table of Contentsaddition, there have been claims challenging the ownership of open source software against companies that incorporate open source software into theirproducts. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly forus to defend, have a negative effect on our operating results and financial condition and require us to devote additional research and development resourcesto 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.Although our common stock is listed on the New York Stock Exchange, or NYSE, we cannot assure you that an active trading market for our shareswill continue to develop or be sustained. If an active market for our common stock does not continue to develop or is not sustained, it may be difficult forinvestors in our common stock to sell shares without depressing the market price for the shares or to sell the shares at all.The trading price of the shares of our common stock has been and is likely to continue to be volatile.Our stock price has been volatile. The stock market in general and the market for technology companies in particular have experienced extremevolatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to selltheir common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:•actual or anticipated variations in our operating results;•changes in financial estimates by us or by any securities analysts who might cover our stock;•conditions or trends in our industry;•stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the software industry;•announcements by us or our competitors of new product or service offerings, significant acquisitions, strategic partnerships or divestitures;•announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;•capital commitments;•investors’ general perception of our company and our business;•recruitment or departure of key personnel; and•sales of our common stock, including sales by our directors and officers or specific stockholders.In addition, in the past, stockholders have initiated class action lawsuits against technology companies following periods of volatility in the marketprices of these companies’ stock. In 2015, two purported class action complaints were filed alleging violations of the federal securities laws against a group ofdefendants including us and certain of our executive officers. The consolidated case was dismissed in April 2016, and the dismissal was affirmed by the U.S.Court of Appeals for the Fourth Circuit in November 2016. New litigation, if instituted against us, could cause us to incur substantial costs and divertmanagement’s attention and resources 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 stockprice 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. Asa newly public company, we have only limited research coverage by equity research analysts. Equity research analysts may elect not to initiate or continue toprovide research coverage of our common stock, and such lack of research coverage may adversely affect the market price of our common stock. Even if wehave 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.24Table of ContentsThe issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plans or otherwise will dilute all otherstockholders.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 our common stock from time to time in connection with a financing, acquisition, investment, our stockincentive plans or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our commonstock to decline.Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our managementand 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.We are an "emerging growth company" and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies,our common stock may be less attractive to investors.We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to 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-OxleyAct, 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 expect to remain an emerging growth company until December 31,2018.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.25Table of ContentsIf we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.We are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall StreetReform and Consumer Protection Act of 2010, and the rules and regulations of the NYSE. The Sarbanes-Oxley Act requires, among other things, that wemaintain effective disclosure controls and procedures and internal controls over financial reporting and perform system and process evaluation and testing ofour internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting. This requiresthat we incur substantial professional fees and internal costs to expand our accounting and finance functions and that we expend significant managementefforts.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 unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that wereto happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the NYSE, the 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 incur significant costs and demands upon management as a result of being a public company.As a public company listed in the United States, we incur significant additional legal, accounting and other costs, which we expect to increase,particularly after we cease to be an "emerging growth company" under the JOBS Act. These additional costs could negatively affect our financial results. Inaddition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SECand stock exchanges, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations andstandards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatoryand governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increasedgeneral and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. Ifnotwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedingsagainst us and our business 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.We 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, will be sufficient to fund our operations for at least the next 12months, we may need to raise additional capital to fund operations in the future or to meet various objectives, including developing future technologies andservices, increasing working capital, acquiring businesses and responding to competitive pressures. If we seek to raise additional capital, it may not beavailable on favorable terms or may not be available at all. Lack of sufficient capital resources could significantly limit our ability to manage our businessand to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities26Table of Contentswith an equity component would dilute our stock ownership. If adequate additional funds are not available, we may be required to delay, reduce the scope ofor eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies.ITEM 1B. UNRESOLVED STAFF COMMENTS None.ITEM 2. PROPERTIES Our principal offices occupy approximately 130,000 square feet of leased office space in Morrisville, North Carolina pursuant to a lease agreement thatexpires in October 2022.We also maintain sales, service, support and research and development offices in various domestic and international locations. Please refer to ourwebsite www.channeladvisor.com for a complete list of our domestic and international office locations.We believe that our current facilities are suitable and adequate to meet our current needs. We intend to add new facilities or expand existing facilitiesas we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of ouroperations.ITEM 3. LEGAL PROCEEDINGS The information required by this item is set forth under Note 6, "Commitments and Contingencies," in our consolidated financial statements includedin Item 8 of this Annual Report, and is incorporated herein by reference.ITEM 4. MINE SAFETY DISCLOSURES Not applicable.27Table of ContentsPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES MARKET INFORMATION FOR COMMON STOCKOur common stock is listed on the NYSE under the symbol "ECOM." The following table sets forth, for the periods indicated, the high and lowreported sales prices of our common stock as reported on the NYSE: 2017 2016 High Low High LowFirst quarter$15.00 $10.35 $14.30 $10.28Second quarter$12.20 $10.90 $15.00 $11.03Third quarter$11.75 $9.85 $15.91 $11.61Fourth quarter$12.50 $8.40 $15.85 $10.50STOCK 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 NYSE, and December 31, 2017, with the comparative cumulative total return of suchamount on (i) the Dow Jones Industrial Average Total Return and (ii) the NASDAQ Computer Index over the same period. We have not paid any cashdividends and, therefore, the cumulative total return calculation for us is based solely upon our stock price appreciation or depreciation and does not includeany 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 our common 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. The 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 that28Table of Contentssuch information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act of 1933, as amended, or afiling 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.STOCKHOLDERSAs of February 1, 2018, there were 77 holders of record of our common stock. The actual number of stockholders is greater than this number of recordholders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holdersof record also does not include stockholders whose shares may be held in trust by other entities.RECENT SALES OF UNREGISTERED SECURITIESNone.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PARTIESNone.29Table of ContentsITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data as of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 is derived from ouraudited consolidated financial statements. Our historical results are not necessarily indicative of the results to be expected in the future. The selectedconsolidated 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, 2017 2016 2015 2014 2013 (in thousands, except share and per share data)Consolidated statements of operations data: Revenue$122,535 $113,200 $100,585 $84,901 $68,004Gross profit96,585 85,580 74,751 60,681 49,916Loss from operations(16,578) (13,837) (21,193) (34,008) (14,365)Other income (expense)305 172 57 (465) (6,060)Net loss$(16,557) $(8,007) $(20,951) $(34,514) $(20,628)Net loss per share—basic and diluted$(0.63) $(0.31) $(0.84) $(1.40) $(1.51)Weighted average shares of common stock outstanding used incomputing net loss per share—basic and diluted26,366,748 25,604,893 25,062,610 24,619,714 13,695,804Other financial data: Adjusted EBITDA (1)$4,569 $7,436 $1,443 $(19,532) $(8,532) ____________________________ (1)We define adjusted EBITDA as net loss plus or (minus): income tax expense (benefit), interest expense, net, depreciation and amortization, stock-based compensation, one-timecharge for VDAs related to sales taxes in 2017, headquarters relocation and related costs in 2015, one-time severance and related costs in 2015, acquisition-related costs in 2014and loss on extinguishment of debt in 2013. Please see "—Adjusted EBITDA" below for more information and for a reconciliation of adjusted EBITDA to net loss, the mostdirectly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States, or GAAP. As of December 31, 2017 2016 2015 2014 2013 (in thousands)Consolidated balance sheets data: Cash and cash equivalents$53,422 $65,420 $60,474 $68,366 $104,406Accounts receivable, net27,452 19,445 18,949 14,619 13,951Total assets140,511 139,158 130,956 127,047 148,786Total liabilities58,600 52,161 47,032 33,399 31,006Additional paid-in capital262,805 252,158 240,360 228,370 218,330Total stockholders’ equity81,911 86,997 83,924 93,648 117,780ADJUSTED 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:30Table of Contents•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, 2017 2016 2015 2014 2013 (in thousands)Net loss$(16,557) $(8,007) $(20,951) $(34,514) $(20,628)Adjustments: Interest (income) expense, net(222) 1 184 209 2,960Income tax expense (benefit)284 (5,658) (185) 41 203Depreciation and amortization expense6,578 7,838 8,793 6,264 3,722Total adjustments, net6,640 2,181 8,792 6,514 6,885EBITDA(9,917) (5,826) (12,159) (28,000) (13,743)Stock-based compensation expense11,947 13,262 11,837 7,981 2,099One-time charge for VDAs related to sales taxes2,539 — — — —Headquarters relocation and related costs— — 1,109 — —One-time severance and related costs— — 656 — —Acquisition-related costs— — — 487 —Loss on extinguishment of debt— — — — 3,112Adjusted EBITDA$4,569 $7,436 $1,443 $(19,532) $(8,532)31Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financialstatements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained in thisdiscussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includesforward-looking statements that involve risks and uncertainties. You should review Item 1A. "Risk Factors" and "Special Note Regarding Forward-LookingStatements" in this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in orimplied by the forward-looking statements contained in the following discussion and analysis.EXECUTIVE OVERVIEW FINANCIAL RESULTS•Total revenue of $122.5 million for the year ended December 31, 2017 increased 8.2% year over year;•Average revenue per customer of $42,693 for the year ended December 31, 2017 increased 8.5% compared to $39,339 for the prior year;•Revenue was comprised of 76.3% and 23.7% fixed and variable subscription fees, respectively, for the year ended December 31, 2017 compared tofixed and variable subscription fees of 76.0% and 24.0%, respectively, for the year ended December 31, 2016;•Revenue derived from customers located outside of the United States as a percentage of total revenue was 21.9% for the year ended December 31,2017 compared to 21.7% for the prior year;•Gross margin of 78.8% for the year ended December 31, 2017 improved by 320 basis points compared to gross margin of 75.6% for the prior year;•Operating margin of (13.5)% for the year ended December 31, 2017 declined 130 basis points compared to operating margin of (12.2)% for the prioryear;•Net loss for the year ended December 31, 2017 was $16.6 million compared to net loss of $8.0 million for the prior year;•Adjusted EBITDA of $4.6 million for the year ended December 31, 2017 decreased 38.6% compared to adjusted EBITDA of $7.4 million for theprior year;•Cash and cash equivalents was $53.4 million at December 31, 2017 compared to $65.4 million at December 31, 2016; and•Operating cash flow was $(3.0) million for the year ended December 31, 2017 compared to $11.6 million for the prior year.TRENDS IN OUR BUSINESSThe following trends have contributed to the results of our consolidated operations, and we anticipate that they will continue to impact our future results:•Growth in Online Shopping. Consumers continue to move more of their retail spending from offline to online retail. The continuing shift to onlineshopping and overall growth has contributed to our historical growth and we expect that this online shift will continue to benefit our business.•Product Offering Expansion. As online shopping evolves, we continue to expand our product offerings to reflect the needs of companies seeking toattract consumers. This expansion may result in additional research and development investment.•Growth in Mobile Usage. We believe the shift toward mobile commerce will increasingly favor aggregators such as Amazon, eBay and GoogleShopping, all of which are focal points of our platform. The systems understand the identity of the buyer, helping to reduce friction in the mobilecommerce process, while offering a wide selection of merchandise in a single location. The growth in mobile commerce may result in increasedrevenue for us.•Shift to Larger Customers. We believe that the growth in online shopping increasingly favors larger enterprises. This move impacts our businessboth in longer sales cycles as well as increased average revenue per customer.32Table of Contents•Evolving Fulfillment Landscape. Consumers have been conditioned to expect fast, efficient delivery of products. We believe that determining andexecuting on a strategy to receive, process and deliver online orders, which we refer to collectively as fulfillment, is critical to success for onlinesellers. Therefore, it will be increasingly important for us to facilitate and optimize fulfillment services on behalf of our customers, which in turn mayresult in additional research and development investment. We believe our 2017 acquisition of a fulfillment platform will further enhance ourfulfillment offering and strategy.•Focus on Employees. None of our success would be possible without our team. We strive to provide our employees competitive compensation andbenefits programs to help drive the success of our customers. We increased headcount by 5.7% from December 31, 2016 to December 31, 2017 tohelp drive revenue growth and support our overall operations.•Shifts in Foreign Currency. Our operations in the United Kingdom were impacted by the 4.5% decline in the average exchange rate of the BritishPound Sterling against the U.S. Dollar for the year ended December 31, 2017 as compared to the prior year. The decline of the British Pound Sterlingagainst the U.S. Dollar resulted in a $0.7 million decrease in revenue for the year ended December 31, 2017 as compared to the year endedDecember 31, 2016.•Seasonality. Our revenue fluctuates as a result of seasonal variations in our business, principally due to the peak consumer demand and relatedincreased volume of our customers’ GMV during the year-end holiday season. As a result, we have historically had higher revenue in our fourthquarter than other quarters due to increased GMV processed through our platform, resulting in higher variable subscription fees.OPPORTUNITIES AND RISKS•Dynamic E-commerce Landscape. We will need to continue to innovate in the face of a rapidly changing e-commerce landscape if we are to remaincompetitive, and we will need to effectively manage our growth, especially related to our international expansion.•Retailers and Branded Manufacturers. As consumer preferences potentially shift from smaller retailers, we need to continue to add large retailersand branded manufacturers as profitable customers. These customers generally pay a lower percentage of GMV as fees to us based on the relativelyhigher volume of their GMV processed through our platform. To help drive our future growth, we have made significant investments in our salesforce and allocated resources focused on growing our customer base of large retailers and branded manufacturers. We continue to focus our efforts onincreasing value for our customers to support higher rates.•Increasing Complexity and Fragmentation of E-commerce. Although e-commerce continues to expand as retailers and branded manufacturerscontinue to increase their online sales, it is also becoming more complex and fragmented due to the hundreds of channels available to retailers andbranded manufacturers and the rapid pace of change and innovation across those channels. In order to gain consumers’ attention in a more crowdedand competitive online marketplace, many retailers and an increasing number of branded manufacturers sell their merchandise through multipleonline channels, each with its own rules, requirements and specifications. In particular, third-party marketplaces are an increasingly important driverof growth for a number of large online retailers and branded manufacturers, and as a result we need to continue to support multiple channels in avariety of geographies in order to support our targeted revenue growth. As of December 31, 2017, we supported 89 marketplaces, up from over 70 atDecember 31, 2016.•Global Growth in E-commerce. We believe the growth in e-commerce globally presents an opportunity for retailers and branded manufacturers toengage in international sales. However, country-specific marketplaces are often the market share leaders in their regions, as is the case for Alibaba inAsia. In order to help our customers capitalize on this potential market opportunity, and to address our customers’ needs with respect to cross-bordertrade, we intend to continue to invest in our international operations, specifically in the Asia Pacific region. Doing business overseas involvessubstantial challenges, including management attention and resources needed to adapt to multiple languages, cultures, laws and commercialinfrastructure, as further described in this report under the caption "Risks Related to our International Operations."Our senior management continuously focuses on these and other trends and challenges, and we believe that our culture of innovation and our historyof 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.33Table of ContentsKEY FINANCIAL AND OPERATING METRICS The average revenue generated by our customers is a primarydeterminant of our revenue. We calculate this metric by dividing ourrevenue for a particular period by the average monthly number ofcustomers during the period, which is calculated by taking the sum of thenumber of customers at the end of each month in the period and dividingby the number of months in the period. We typically calculate averagerevenue per customer in absolute dollars on a rolling twelve-month basis,but we may also calculate percentage changes in average revenue percustomer on a quarterly basis in order to help us evaluate our period-over-period performance. For purposes of this metric and the number ofcustomers metric described below, we include all customers who subscribeto at least one of our solutions, excluding the approximately 50 net newcustomers acquired from our 2017 acquisition of HubLogix CommerceCorp., or HubLogix (renamed ChannelAdvisor Fulfillment, Inc.), andcustomers subscribing only to certain legacy product offerings that are nolonger part of our strategic focus.The number of customers decreased slightly in 2017. We continueour focus on obtaining large retailer and branded manufacturer customers,which may represent a smaller number of customers, but a potentially largersource of predictable or sustaining recurring revenue. Adjusted EBITDA represents our earnings before interest expense,income tax expense (benefit) and depreciation and amortization, adjustedto eliminate stock-based compensation expense, which is a non-cash item,a one-time charge of $2.5 million in 2017 for VDAs related to sales taxes,headquarters relocation and related costs in 2015 and one-time severanceand related costs in 2015 (refer to Note 6 to our consolidated financialstatements included elsewhere in this Annual Report for additionalinformation regarding the one-time charge for VDAs related to sales taxesin 2017). Accordingly, we believe that adjusted EBITDA provides usefulinformation to management and others in understanding and evaluatingour operating results. However, adjusted EBITDA is not a measurecalculated in accordance with GAAP and should not be considered as analternative to any measure of financial performance calculated andpresented in accordance with GAAP. In addition, adjusted EBITDA maynot be comparable to similarly titled measures of other companies becauseother companies may not calculate adjusted EBITDA in the same mannerthat we do. Please refer to Item 6. "Selected Financial Data—AdjustedEBITDA" in this Annual Report for a discussion of the limitations ofadjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, themost comparable GAAP measurement.34Table of ContentsRESULTS OF OPERATIONS The following tables set forth our consolidated statement of operations data and such data expressed as a percentage of revenues for each of the periodsindicated. Year Ended December 31, Period-to-Period Change 201720162015 2017 to 2016 2016 to 2015(dollars in thousands) Revenue$122,535 $113,200 $100,585 $9,3358.2 % $12,61512.5 %Cost of revenue25,950 27,620 25,834 (1,670)(6.0) 1,7866.9Gross profit96,585 85,580 74,751 11,00512.9 10,82914.5Operating expenses: Sales and marketing63,495 56,602 53,770 6,89312.2 2,8325.3Research and development21,868 17,736 16,566 4,13223.3 1,1707.1General and administrative27,800 25,079 25,608 2,72110.8 (529)(2.1)Total operating expenses113,163 99,417 95,944 13,74613.8 3,4733.6Loss from operations(16,578) (13,837) (21,193) (2,741)19.8 7,356(34.7)Other income (expense): Interest income (expense), net222 (1) (184) 223* 183(99.5)Other income (expense), net83 173 241 (90)(52.0) (68)(28.2)Total other income (expense)305 172 57 13377.3 115201.8Loss before income taxes(16,273) (13,665) (21,136) (2,608)19.1 7,471(35.3)Income tax expense (benefit)284 (5,658) (185) 5,942(105.0) (5,473)*Net loss$(16,557) $(8,007) $(20,951) $(8,550)106.8 $12,944(61.8)* Not meaningful. Year Ended December 31, 201720162015 (as a percentage of revenue)Revenue100.0 % 100.0 % 100.0 %Cost of revenue21.2 24.4 25.7Gross profit78.8 75.6 74.3Operating expenses: Sales and marketing51.8 50.0 53.5Research and development17.8 15.7 16.5General and administrative22.7 22.2 25.5Total operating expenses92.4 87.8 95.4Loss from operations(13.5) (12.2) (21.1)Other income (expense): Interest expense, net0.2 — (0.2)Other income (expense), net0.1 0.2 0.2Total other income (expense)0.2 0.2 0.1Loss before income taxes(13.3) (12.1) (21.0)Income tax expense (benefit)0.2 (5.0) (0.2)Net loss(13.5) (7.1) (20.8)ReclassificationIn 2015 and prior, we presented depreciation and amortization expense as a separate component, both of cost of revenue and of operating expenses, inour consolidated statements of operations. Beginning with the first quarter of 2016, we include35Table of Contentsdepreciation and amortization expense in cost of revenue and the applicable line items of operating expenses. Since the first quarter of 2016, we have alsodisclosed the depreciation and amortization expense amounts included in each financial statement line item in the notes to our consolidated financialstatements. In addition, we revised the classification of certain operating expenses to better align the income statement line items with how operations aremanaged. The financial results for the year ended December 31, 2015 shown in this management’s discussion and analysis reflect the reclassification ofrelevant items to conform to the new presentation, and the specific reclassifications are shown in Note 2 to our audited consolidated financial statementsincluded elsewhere in this report. All reclassifications had no effect on our reported gross profit or net loss for the year ended December 31, 2015.REVENUE We derive the majority of our revenue from subscription fees paid tous by our customers for access to and usage of our SaaS solutions for aspecified contract term, which is usually one year. A portion of thesubscription fee is typically fixed and based on a specified minimum amountof GMV or advertising spend that a customer expects to process through ourplatform. The remaining portion of the subscription fee is variable and isbased on a specified percentage of GMV or advertising spend processedthrough our platform in excess of the customer’s specified minimum GMV oradvertising spend amount. In most cases, the specified percentage of excessGMV or advertising spend on which the variable portion of the subscriptionis based is fixed and does not vary depending on the amount of the excess.We also receive implementation fees, which may include fees for providinglaunch assistance and training.Because our customer contracts generally contain both fixed and variable pricing components, changes in GMV between periods do not translatedirectly or linearly into changes in our revenue. We use customized pricing structures for each of our customers depending upon the individual situation ofthe customer. For example, some customers may commit to a higher specified minimum GMV amount per month in exchange for a lower fixed percentage feeon that committed GMV. In addition, the percentage fee assessed on the variable GMV in excess of the committed minimum for each customer is typicallyhigher than the fee on the fixed, committed portion. As a result, our overall revenue could increase or decrease even without any change in overall GMVbetween periods, depending on which customers generated the GMV. In addition, changes in GMV from month to month for any individual customer that arebelow the specified minimum amount would have no effect on our revenue from that customer, and each customer may alternate between being over thecommitted amount or under it from month to month. For these reasons, while GMV is an important qualitative and long-term directional indicator, we do notregard it as a useful quantitative measurement of our historic revenues or as a predictor of future revenues. We recognize fixed subscription fees and implementation fees ratably overthe 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 beprocessed;•The fees are fixed or determinable; and•Collection is reasonably assured.36Table of Contents The primary products we offer are:•Marketplaces. Our Marketplaces module connects customers tothird-party marketplaces such as Amazon, eBay, Jet.com, LaRedoute, Newegg, Sears, Tesco, TradeMe, Walmart and Zalando.•Digital Marketing. Our Digital Marketing module connectscustomers to search engines and comparison shopping websites,such as Google, Microsoft's Bing and Shopzilla, and socialchannels, such as Facebook, Instagram and Pinterest.•Other. Other revenue is derived from our Where to Buy and ProductIntelligence solutions, as well as from channel integrationagreements. Our Where to Buy solution allows brandedmanufacturers to provide their web visitors or customers of theirdigital marketing initiatives with up-to-date information about theauthorized resellers that carry their products and the availability ofthose products. Our Product Intelligence solution provides brandedmanufacturers with insights about online assortment, productcoverage gaps, pricing trends, and adherence by their retailers tocontent guidelines. We also enter into integration agreements withcertain marketplaces or channels under which the partner engagesus to integrate our platform with their marketplace or channel.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 beeninvoiced are initially recorded as deferred revenue and are generally recognized ratably over the contract term.We invoice and recognize revenue from the variable portion of subscription fees in the period in which the related GMV or advertising spend isprocessed, assuming that the four conditions specified above have been met.Comparison of 2017 to 2016Revenue increased by 8.2%, or $9.3 million, to $122.5 million for the year ended December 31, 2017 due to an increase in the average revenue percustomer.On a trailing twelve-month basis, average revenue per customer increased 8.5%, to $42,693 for the year ended December 31, 2017 as comparedto $39,339 for the year ended December 31, 2016. The increase in the average revenue per customer was primarily driven by revenue growth of 8.3% from ourmarketplaces solution. The growth of our marketplaces solution was largely attributable to an overall increase in transaction volume and, to a lesser extent, tomodest overall increases in the percentage fees assessed on the fixed and variable portions of GMV under our contractual arrangements with some of ourcustomers during the period. Because we generally enter into annual contracts with our customers, we may renegotiate either or both of the fixed and variablecomponents of the pricing structure of a customer’s contract each year. In addition, the increase in average revenue per customer was due in part to ourestablished customers who have increased their revenue over time on our platform. In general, as customers mature they generate a higher amount of GMVfrom which we derive revenue and in some cases they may subscribe to additional modules on our platform, thereby increasing our subscription revenue.37Table of ContentsComparison of 2016 to 2015Revenue increased by 12.5%, or $12.6 million, to $113.2 million for the year ended December 31, 2016 due to an increase in the average revenue percustomer.On a trailing twelve-month basis, average revenue per customer increased 14.0% to $39,339 for the year ended December 31, 2016 as compared to$34,513 for the year ended December 31, 2015. The increase in the average revenue per customer was primarily driven by revenue growth of 16.3% from ourmarketplaces solution from 2015 to 2016.COST OF REVENUE Cost of revenue primarily consists of:•Salaries and personnel-related costs for employees providing services toour customers and supporting our platform infrastructure, includingbenefits, bonuses and stock-based compensation;•Co-location facility costs for our data centers;•Infrastructure maintenance costs; and•Fees we pay to credit card vendors in connection with our customers’payments to us.Comparison of 2017 to 2016Cost of revenue decreased by 6.0%, or $1.7 million, to $26.0 million for the year ended December 31, 2017, with the change being comprised primarily ofdecreases of:•$1.1 million in compensation and employee-related costs, including stock-based compensation expense, due to changes in headcount; and•$0.5 million in co-location and infrastructure maintenance costs primarily associated with closing a data center and retiring servers used to supportlegacy product offerings that are no longer part of our strategic focus.Comparison of 2016 to 2015Cost of revenue increased by 6.9%, or $1.8 million, to $27.6 million for the year ended December 31, 2016, with the change being comprised of increases(decreases) of:•$1.7 million in compensation and employee-related costs mainly due to additional headcount to support our customers;•$0.4 million in contractor costs primarily to support our international services team; and•$0.2 million in rent and facilities costs due to the relocation of our corporate headquarters in the fourth quarter of 2015; partially offset by•$0.4 million reduction in hosting, co-location and infrastructure maintenance costs primarily due to our migration to a public cloud infrastructure.38Table of ContentsOPERATING EXPENSESSALES AND MARKETING EXPENSE Sales and marketing expense consists primarily of:•Salaries and personnel-related costs for our sales and marketing andcustomer support employees, including benefits, bonuses, stock-basedcompensation and commissions;•Marketing, advertising and promotional event programs; and•Corporate communications.Comparison of 2017 to 2016Sales and marketing expense increased by 12.2%, or $6.9 million, to $63.5 million for the year ended December 31, 2017 with the change being comprisedprimarily of increases of:•$4.5 million in compensation and employee-related costs, mainly due to additional headcount in our sales organization; and•$2.1 million in marketing and advertising expenses, promotional event programs and travel costs to support expanding marketing activities tocontinue to grow our business.Comparison of 2016 to 2015Sales and marketing expense increased by 5.3%, or $2.8 million, to $56.6 million for the year ended December 31, 2016 with the change being comprised ofincreases of:•$2.5 million in compensation and employee-related costs, mainly due to additional headcount in our sales organization, stock-based compensationand the payment of increased sales commissions; and•$0.3 million in recruiting fees, namely for expanding our international sales personnel, and consulting fees.RESEARCH AND DEVELOPMENT EXPENSE Research and development expense consists primarily of:•Salaries and personnel-related costs for our research and developmentemployees, including benefits, bonuses and stock-based compensation;•Costs related to the development, quality assurance and testing of newtechnology and enhancement of our existing platform technology; and•Consulting expenses.Comparison of 2017 to 2016Research and development expense increased by 23.3%, or $4.1 million, to $21.9 million for the year ended December 31, 2017, with the change beingcomprised primarily of increases of:•$3.4 million in compensation and employee-related costs, mainly due to additional headcount from our acquisition of HubLogix and the expansionof our R&D footprint with the opening of our engineering office in Madrid, Spain to support our growth and the enhancement of our productofferings; and39Table of Contents•$0.5 million in software, hosting and travel costs to further support our growth and investment in research and development.Comparison of 2016 to 2015Research and development expense increased by 7.1%, or $1.2 million, to $17.7 million for the year ended December 31, 2016, with the change drivenprimarily by an increase of $1.0 million in compensation and employee-related costs, mainly due to additional headcount and stock-based compensation.GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense consists primarily of:•Salaries and personnel-related costs for administrative, finance andaccounting, information systems, legal and human resource employees,including benefits, bonuses and stock-based compensation;•Consulting and professional fees;•Insurance;•Bad debt expense; and•Costs associated with compliance with the Sarbanes-Oxley Act andother regulations governing public companies.Comparison of 2017 to 2016General and administrative expense increased by 10.8%, or $2.7 million, to $27.8 million for the year ended December 31, 2017, with the change beingcomprised primarily of:•a $2.5 million one-time charge in connection with entering into VDAs related to sales taxes with certain jurisdictions; and•increases of $0.2 million in compensation and employee-related costs, mainly due to additional headcount.Comparison of 2016 to 2015General and administrative expense decreased by 2.1%, or $0.5 million, to $25.1 million for the year ended December 31, 2016 with the change beingcomprised of (decreases) increases of:•$(1.1) million due to headquarters relocation and related expenses charged in the fourth quarter of 2015;•$(0.7) million due to one-time severance and related costs charged in the second quarter of 2015 to support our strategic effort to strengthen marginsin our business and identify operating efficiencies;•$(0.7) million in bad debt expense driven by lower bad debt write-offs and reductions to our allowance for doubtful accounts based on collectionsactivities; and•$(0.6) million due to indirect taxes charged in the fourth quarter of 2015; partially offset by•$2.7 million in compensation and employee-related costs, mainly due to additional headcount, incentive bonuses and stock-based compensation,all to support growth in our business.40Table of ContentsGROSS AND OPERATING MARGINS Comparison of 2017 to 2016Gross margin improved by 320 basis points to 78.8% during the year ended December 31, 2017 as a result of the increase in revenue and decrease incost of revenue noted above. Our improved gross margin is a result of our continuing strategic efforts to achieve increasing scale in our business operations.Operating margin declined by 130 basis points to (13.5)% during the year ended December 31, 2017 due to a 13.8% growth in operating expenseswhich includes the $2.5 million one-time charge for VDAs related to sales taxes described above and an increase in compensation and employee-related costsdriven by additional headcount as we invest in resources to support the growth of our business. These operating expenses exceeded the 8.2% year-over-yearincrease in our revenue and 6.0% decrease in our cost of revenue.Comparison of 2016 to 2015Gross margin improved by 130 basis points to 75.6% during the year ended December 31, 2016 as a result of the increase in revenue, only partiallyoffset by a slower rate of growth in cost of revenue noted above. Our improved gross margin is a result of our strategic efforts to achieve increasing scale inour business operations.Operating margin improved by 890 basis points to (12.2)% during the year ended December 31, 2016 due to our 12.5% increase in revenue, whichexceeded the increases in our cost of revenue and operating expenses of 6.9% and 3.6%, respectively, as a result of a strategic effort to strengthen margins inour business.TOTAL OTHER INCOME (EXPENSE)Other income (expense) consists primarily of:•Interest received on our cash and cash equivalents;•Interest expense on our capital leases; and•The net effect of foreign currency revaluation gains and losses.Comparison of 2017 to 2016Other income (expense) increased by $0.1 million to $0.3 million for the year ended December 31, 2017 primarily due to interest income on our cash andcash equivalents.Comparison of 2016 to 2015Other income (expense) increased by $0.1 million to $0.2 million for the year ended December 31, 2016 primarily due to interest income on our cash andcash equivalents.INCOME TAX EXPENSE (BENEFIT)Our provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment withoperations in various locations outside of the United States. Accordingly, our combined income tax rate is a composite rate reflecting our operating results invarious locations and the applicable rates.41Table of ContentsComparison of 2017 to 2016Income tax expense was $0.3 million for the year ended December 31, 2017 compared to an income tax benefit of $5.7 million for the year endedDecember 31, 2016. The change was primarily due to the release of a valuation allowance in the fourth quarter of 2016 on deferred tax assets in several of ourforeign jurisdictions totaling $5.3 million. The release of the valuation allowance was the result of our evaluation of the likelihood of potential tax benefitsrelated to our foreign subsidiaries' most recent three years of operating results and projections of future profitability, which primarily resulted from a changein our global transfer pricing methodology.Comparison of 2016 to 2015Income tax benefit was $5.7 million for the year ended December 31, 2016 compared to an income tax benefit of $0.2 million for the year endedDecember 31, 2015 primarily due to the release of a valuation allowance in the fourth quarter of 2016 on deferred tax assets in several of our foreignjurisdictions totaling $5.3 million noted above.LIQUIDITY AND CAPITAL RESOURCES We derive our liquidity and operating capital primarily from cash flows from operations. Based on our current level of operations and anticipatedgrowth, we believe our future cash flows from operating activities and our existing cash balances will be sufficient to meet our cash requirements for at leastthe next 12 months. During this period, we expect our capital expenditure requirements to approximate a range of $2.0 million to $4.0 million, which willprimarily consist of computer hardware and purchased software.WORKING CAPITALThe following table summarizes our cash and cash equivalents, accounts receivable and working capital as of the end of each of the last three years: December 31, 2017 2016 2015 (in thousands)Cash and cash equivalents$53,422 $65,420 $60,474Accounts receivable, net of allowance27,452 19,445 18,949Working capital45,862 52,137 52,413Our cash at December 31, 2017 was held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policyis to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly,our cash is invested primarily in demand deposit accounts and short-term money market accounts.Of our total cash and cash equivalents, approximately 10% was held outside of the United States at December 31, 2017. Our international operationsprimarily consist of selling and marketing and research and development functions supported by our U.S. operations, and we are dependent on our U.S.operations for our international working capital needs. If our cash and cash equivalents held outside of the United States were ever needed for our operationsinside the United States, we could be required to accrue and pay U.S. taxes to repatriate these funds. We currently intend to permanently reinvest theseforeign amounts outside the United States, and our current plans do not demonstrate a need to repatriate the foreign amounts to fund our U.S. operations.42Table of ContentsCASH FLOWSFree Cash FlowWe view free cash flow as an important financial metric as it demonstrates our ability to generate cash and can allow us to pursue opportunities thatenhance shareholder value. Free cash flow is a non-GAAP financial measure that should be considered in addition to, not as a substitute for, measures of ourfinancial performance prepared in accordance with GAAP. The following table presents a reconciliation of cash (used in) provided by operating activities, themost directly comparable GAAP measure, to free cash flow for each of the periods indicated: Year Ended December 31, 2017 2016 2015 (in thousands)Cash (used in) provided by operating activities$(2,996) $11,571 $(1,459)Less: Purchases of property and equipment(2,790) (1,755) (4,062)Free cash flow$(5,786) $9,816 $(5,521)Free cash flow decreased by $15.6 million to $(5.8) million for the year ended December 31, 2017 and increased $15.3 million to $9.8 million for theyear ended December 31, 2016. The decrease in free cash flow for the year ended December 31, 2017 is primarily a result of a $(4.9) million change in assetsand liabilities, net of acquisition, combined with our strategic investment in additional headcount and territorial expansion for our sales and marketing andresearch and development functions to support the growth of our business. Further analysis on the increases (decreases) in the components of free cash flow isprovided below.Operating activities cash flows are largely driven by:•The amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business;•The amount and timing of customer payments;•The seasonality of our business, as noted above, which results in variations in the timing of invoicing and the receipt of payments from ourcustomers; and•In 2017, the amounts paid in connection with entering into VDAs related to sales taxes.Investing activities cash flows are largely driven by:•Acquisitions, net of cash acquired;•Purchases of property and equipment to support the expansion of our infrastructure and acquisitions; and•Capitalized expenditures to create internally developed software and implement software purchased for internal use.Financing activities cash flows are largely driven by:•Proceeds from the exercises of stock options;•Payments on capital lease obligations;•Tax withholdings related to the net-share settlement of restricted stock units; and•In 2016, acquisition-related contingent consideration.43Table of Contents2017Operating ActivitiesOur cash used in operating activities consisted of a net loss of $(16.6) million adjusted for certain non-cash items totaling $18.5 million, which consisted ofstock-based compensation expense, depreciation and amortization expense, bad debt expense and other non-cash items, principally the amortization of alease incentive obligation related to our corporate headquarters.The net decrease in cash resulting from changes in assets and liabilities, net of acquisition, of $(4.9) million primarily consisted of:•a $8.3 million increase in accounts receivable as a result of increased billings, primarily driven by an increase in average contract size as well asmore semi-annual and annual contracts being invoiced; and•a $5.5 million increase in prepaid expenses and other assets, primarily related to certain customer arrangements for which we collect and remitmonthly activity-based fees incurred for specific channels on behalf of our customers (we record the amounts due from customers as a result of thesearrangements as other receivables). These decreases in cash were partially offset by increases in cash due to•a $5.2 million increase in accounts payable and accrued expenses, primarily driven by timing of payments to our vendors and a one-time charge inconnection with our decision to enter into VDAs related to our potential unpaid sales tax obligations; and•a $3.6 million increase in deferred revenue as a result of an increased number of customers prepaying for subscription services invoiced on a semi-annual and annual basis.Investing ActivitiesOur cash used in investing activities consisted of:•$2.8 million of capital expenditures primarily related to the purchase of computer equipment;•$2.2 million for the acquisition of HubLogix, net of cash acquired; and•$0.3 million of internal-use software development costs.Financing ActivitiesOur cash used in financing activities consisted of:•$2.8 million used for the repayment of capital leases;•$2.7 million used for the payment of taxes related to the net-share settlement of restricted stock units; partially offset by•$1.4 million in cash received upon the exercise of stock options.2016Operating ActivitiesOur cash provided by operating activities consisted of a net loss of $(8.0) million adjusted for certain non-cash items totaling $15.1 million, which consistedof stock-based compensation expense, depreciation and amortization expense, bad debt expense and other non-cash items, principally the amortization of alease incentive obligation related to our new corporate headquarters.The net increase in cash resulting from changes in assets and liabilities of $4.5 million primarily consisted of:•a $4.7 million increase in deferred revenue as a result of an increased number of customers prepaying for subscription services invoiced on a semi-annual and annual basis; and•a $3.7 million increase in accounts payable and accrued expenses, primarily related to activity-based fees incurred for specific channels on behalf ofour customers. These increases in cash were partially offset by decreases in cash due to•a $2.0 million increase in prepaid expenses and other assets, primarily related to certain customer arrangements for which we collect and remitmonthly activity-based fees incurred for specific channels on behalf of our customers (we record the amounts due from customers as a result of thesearrangements as other receivables). The increase is partially offset by the receipt of cash for a lease incentive related to our new corporateheadquarters; and•a $1.9 million increase in accounts receivable as a result of increased billings, primarily driven by an increase in average contract size as well asmore semi-annual and annual contracts being invoiced.44Table of ContentsInvesting ActivitiesOur cash used in investing activities consisted of:•$1.8 million of capital expenditures primarily related to the purchase of computer equipment; and•$0.2 million for the payment of internal-use software development costs.Financing ActivitiesOur cash used in financing activities consisted of:•$2.4 million used for the payment of taxes related to the net-share settlement of restricted stock units;•$2.1 million used for the repayment of capital leases;•$0.3 million used for the payment of our acquisition-related contingent consideration; partially offset by•$0.9 million in cash received upon the exercise of stock options.CONTRACTUAL OBLIGATIONS Our 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, as well as commitments related to our annual marketing events. The following table summarizes these contractualobligations at December 31, 2017. Future events could cause actual payments to differ from these estimates. Payment due by periodTotal Less than 1year 1-3 years 3-5 years More than 5years (in thousands)Operating lease obligations$25,511 $5,893 $9,816 $8,806 $996Capital lease obligations1,679 1,027 652 — —Purchase commitments4,422 2,909 1,513 — —Total$31,612 $9,829 $11,981 $8,806 $996Operating lease obligations reflected above exclude future sublease income from certain spaces that we have subleased to third parties. We anticipatereceiving $0.5 million, based on the exchange rate as of December 31, 2017, and $0.2 million in annual rental payments during the terms of the subleaseagreements, which are through December 2018 and August 2022, respectively.Off-Balance Sheet ArrangementsAs of December 31, 2017, 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 Our 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.45Table of ContentsWhile our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in thisAnnual Report, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation ofour consolidated financial statements.Revenue Recognition and Deferred RevenueThe following discussion of our revenue recognition and deferred revenue accounting policies is based on the accounting principles that were used toprepare the audited consolidated financial statements included in this Annual Report on Form 10-K. On January 1, 2018, we adopted Accounting StandardsUpdate ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). This standard replaces existing revenue recognitionrules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. Refer to Note 2 to our consolidatedfinancial statements appearing elsewhere in this Annual Report for a discussion of ASU 2014-09 and other recently issued accounting pronouncements.We derive the majority of our revenue from subscription fees paid to us by our customers for access to and usage of our SaaS platform 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 oradvertising spend that a customer expects to process through our platform over the contract term. The remaining portion of the subscription fee is variableand is based on a specified percentage of GMV or advertising spend processed through our platform in excess of the customer’s specified minimum GMV oradvertising spend amount. We also receive implementation fees, which may include fees for providing launch assistance and training. We recognize revenuewhen there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is reasonably assured and theamount of the fee to be paid by the customer is fixed or determinable. Our contractual arrangements include performance, termination and cancellationprovisions, but do not provide for refunds. Customers do not have the contractual right to take possession of our software at any time.We generally recognize the fixed portion of subscription fees and implementation fees ratably over the contract term. Recognition begins when thecustomer has access to the Company's platform or to its solutions for branded manufacturers and transactions can be processed, provided all other revenuerecognition criteria has been met. For customers that elect a managed-service solution, customer transactions cannot be processed through our platform untilthe completion of implementation services. As such, revenue is contingent upon our completion of the implementation services and recognition commenceswhen transactions can be processed on our platform, provided all other revenue recognition criteria have been met. At that time, we recognize a pro-rataportion of the fees earned since the inception of the arrangement. The balance of the fees is recognized 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, provided all other revenuerecognition criteria have been met.Deferred revenue represents the unearned portion of fixed subscription fees and implementation fees. Deferred amounts are generally recognizedwithin one year. Amounts that are expected to be recognized in greater than one year are recorded in other long-term liabilities.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 resultfrom the inability of some customers to make payments as they become due. Our estimate is based on historical collection experience and a review of thecurrent status of accounts receivable. Historically, our actual collection experience has not varied significantly from our estimates, due primarily to ourcollection policies and the financial strength of our customers. However, adverse changes in general economic conditions could affect our allowanceestimates, collectability of accounts receivable, cash flows and results of operations. At December 31, 2017, our allowance for doubtful accounts was 2.2% ofour gross accounts receivable. A hypothetical 1% increase or decrease in the value of our allowance for doubtful accounts receivable as of December 31,2017 would have resulted in an increase or decrease of $0.3 million to our pre-tax net loss for the year ended December 31, 2017.GoodwillGoodwill arises from business combinations and is measured as the excess of the cost of the business acquired over the sum of the acquisition-date fairvalue of tangible and identifiable intangible assets acquired, less any liabilities assumed. In connection with the acquisition of HubLogix in May 2017, werecorded a $1.9 million increase in goodwill.46Table of ContentsWe test goodwill for impairment annually or more frequently if events or changes in business circumstances indicate the asset might be impaired.During 2016, we changed the date of our annual impairment testing from December 31 to October 1. Refer to Note 2 to our consolidated financial statementsappearing elsewhere in this Annual Report for information regarding our voluntary change in the date of our annual goodwill impairment testing.To perform our impairment testing, we first assess qualitative factors to determine whether it is more likely than not that the fair value of our singlereporting unit is less than its carrying amount. The qualitative factors we consider include, but are not limited to, macroeconomic conditions, industry andmarket conditions, company-specific events, changes in circumstances and after-tax cash flows. If the qualitative factors indicate that the fair value of thereporting unit is greater than the carrying value of the net assets assigned to the reporting unit, then we do not consider the assigned goodwill to be impaired.We are only required to perform the two-step impairment test if the qualitative factors indicate that it is more likely than not that the fair value of thereporting unit is less than its carrying amount. We may elect to perform the two-step impairment test without considering such qualitative factors. As ofDecember 31, 2017 and 2016, we concluded there was no impairment of goodwill.Stock-Based CompensationStock-based compensation awards, which include stock options and restricted stock units, or RSUs, are measured at fair value at each grant date. Werecognize stock-based compensation expense using the accelerated attribution method, net of estimated forfeitures, in which compensation cost for eachvesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche. Options generally vest either quarterly orannually over a four-year period. RSUs generally vest annually over a four year period.The determination of the fair value of stock options is affected by a number of variables, including estimates of the fair value 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-pricingmodel, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Black-Scholesand other option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Refer to Note 8 to ourconsolidated financial statements appearing elsewhere in this Annual Report for the assumptions used for estimating the fair value of stock options granted toemployees.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 thesimplified method. Under the simplified method, the expected life of an option is presumed to be the midpoint between the vesting date and the end of thecontractual term. We used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwiseestimate the expected life of the stock options. Expected volatility is estimated based on the historical volatility of our stock. Prior to the fourth quarter of2017, expected volatility was estimated based on volatilities of publicly traded stock for comparable companies over the estimated expected life of the stockoptions.The fair value of our common stock, for purposes of determining the grant date fair value of option and RSU awards, has been determined by using theclosing market price per share of our common stock as quoted on the New York Stock Exchange on the date of grant.Our estimate of pre-vesting forfeitures, or forfeiture rate, is based on our historical experience and is reviewed on an annual basis, at a minimum. Theestimated forfeiture rate is applied to the total estimated fair value of the awards to compute the stock-based compensation expense, net of pre-vestingforfeitures, to be recognized in our consolidated statements of operations. A hypothetical increase of 1% in our forfeiture rate assumption would have resultedin a $0.5 million decrease in stock-based compensation expense for the year ended December 31, 2017. A hypothetical decrease of 1% in our forfeiture rateassumption would have resulted in a $0.5 million increase in stock-based compensation expense for the year ended December 31, 2017.Stock-based compensation expense is expected to increase in 2018 compared to 2017 as a result of our existing unrecognized stock-basedcompensation and as we issue additional stock-based awards to continue to attract and retain employees.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 tax47Table of Contentsassets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporarydifferences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes theenactment date. We reduce the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that we will not realizesome 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 ismore likely than not that the position will be sustained upon examination. We recognize potential accrued interest and penalties associated withunrecognized tax positions within our global operations in income tax expense.Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are manytransactions and calculations where the ultimate tax outcome is uncertain. Our judgments, assumptions and estimates relative to the provision for incometaxes take into account current tax laws, our interpretation of current tax laws, and possible outcomes of future audits conducted by foreign and domestic taxauthorities. Although we believe that our estimates are reasonable, the final tax outcome of matters could be different from that which is reflected in ourhistorical income tax provision and accruals. Such differences, if identified in future periods, could have a material effect on the amounts recorded in ourconsolidated financial statements.The Tax Cuts and Jobs Act of 2017 ("Tax Act"), which went into effect on December 22, 2017, significantly revises the Internal Revenue Code of1986, as amended ("IRC"). The Tax Act contains, among other things, significant changes to corporate taxation, including reduction of the corporate tax ratefrom a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain smallbusinesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, onetime taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certainimportant exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time and modifying orrepealing many business deductions and credits. The Tax Act is complex and it will take time to assess the implications thoroughly. Please refer to Note 7 toour consolidated financial statements appearing elsewhere in this Annual Report for additional information regarding the recently enacted Tax Act and itsexpected impact on our financial results as of and for the year ended December 31, 2017.Recent Accounting PronouncementsRefer to Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report for a full description of recent accountingpronouncements.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in the price of a financial instrument. 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.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. Our primary exposures are related to non-U.S. dollar denominated revenue and operating expenses transacted in British Pounds Sterling,Euros, Australian dollars, Brazilian reals, Chinese yuan renminbi and Hong Kong dollars. As a result, we would experience increased revenue and operatingexpenses at our non-U.S. operations if there were a decline in the value of the U.S. dollar relative to these foreign currencies. Conversely, we wouldexperience decreased revenue and operating expenses at our non-U.S. operations if there were an increase in the value of the U.S. dollar relative to theseforeign currencies. However, based on the size of our international operations and the amount of our revenue and expenses denominated in foreigncurrencies, a 10% change in foreign exchange rates would not have had a material impact on our results of operations for the year ended December 31, 2017.48Table of ContentsINTEREST RATE RISKWe are only marginally exposed to interest rate risk through our portfolio of cash and cash equivalents. Interest rates that may affect these items in thefuture will depend on market conditions and may differ from the rates we have experienced in the past.INFLATION RISKWe do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor theimpact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to becomesubject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do socould harm our business, financial condition and results of operations.49Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm51Consolidated Balance Sheets as of December 31, 2017 and 201652Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 201553Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017, 2016 and 201554Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 201555Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 201556Notes to Consolidated Financial Statements5750Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and Board of Directors of ChannelAdvisor Corporation and SubsidiariesOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of ChannelAdvisor Corporation and Subsidiaries (the “Company“) as of December 31, 2017and 2016, the related consolidated statements of operations, comprehensive loss, changes in stockholders‘ equity, and cash flows, for each of the three yearsin the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements“). In our opinion, theconsolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with US generallyaccepted accounting principles.Basis for OpinionThese financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financialstatements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB“)and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations ofthe Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we were required to obtain an understanding ofinternal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control overfinancial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in thefinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLPWe have served as the Company‘s auditor since 2001.Raleigh, North CarolinaFebruary 13, 201851Table of ContentsCHANNELADVISOR CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2017 2016Assets Current assets: Cash and cash equivalents$53,422 $65,420Accounts receivable, net of allowance of $609 and $594 as of December 31, 2017 and 2016, respectively27,452 19,445Prepaid expenses and other current assets16,462 10,972Total current assets97,336 95,837Property and equipment, net10,877 13,252Goodwill23,486 21,632Intangible assets, net2,503 2,660Long-term deferred tax assets, net5,550 5,244Other assets759 533Total assets$140,511 $139,158Liabilities and stockholders’ equity Current liabilities: Accounts payable$7,243 $4,709Accrued expenses12,611 11,067Deferred revenue27,143 23,474Other current liabilities4,477 4,450Total current liabilities51,474 43,700Long-term capital leases, net of current portion641 1,262Lease incentive obligation3,328 4,206Other long-term liabilities3,157 2,993Total liabilities58,600 52,161Commitments and contingencies (Note 6) Stockholders’ equity: Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding as of December 31, 2017and 2016, respectively— —Common stock, $0.001 par value, 100,000,000 shares authorized, 26,601,626 and 25,955,759 shares issued and outstandingas of December 31, 2017 and 2016, respectively27 26Additional paid-in capital262,805 252,158Accumulated other comprehensive loss(789) (1,612)Accumulated deficit(180,132) (163,575)Total stockholders’ equity81,911 86,997Total liabilities and stockholders’ equity$140,511 $139,158The accompanying notes are an integral part of these consolidated financial statements.52Table of ContentsCHANNELADVISOR CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share and per share data) Year Ended December 31,2017 2016 2015Revenue$122,535$113,200$100,585Cost of revenue25,95027,62025,834Gross profit96,585 85,580 74,751Operating expenses: Sales and marketing63,49556,60253,770Research and development21,86817,73616,566General and administrative27,80025,07925,608Total operating expenses113,163 99,417 95,944Loss from operations(16,578) (13,837) (21,193)Other income (expense): Interest income (expense), net222(1)(184)Other income (expense), net83173241Total other income (expense)305 172 57Loss before income taxes(16,273) (13,665) (21,136)Income tax expense (benefit)284(5,658)(185)Net loss$(16,557) $(8,007) $(20,951)Net loss per share: Basic and diluted$(0.63)$(0.31)$(0.84)Weighted average common shares outstanding: Basic and diluted26,366,74825,604,89325,062,610The accompanying notes are an integral part of these consolidated financial statements.53Table of ContentsCHANNELADVISOR CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands) Year Ended December 31, 2017 2016 2015Net loss$(16,557)$(8,007)$(20,951)Other comprehensive income (loss):Foreign currency translation adjustments823(719)(763)Total comprehensive loss$(15,734) $(8,726) $(21,714)The accompanying notes are an integral part of these consolidated financial statements.54Table of ContentsCHANNELADVISOR CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY(in thousands, except share data) Common Stock AdditionalPaid-InCapital AccumulatedOtherComprehensiveLoss AccumulatedDeficit TotalStockholders’Equity Shares Amount Balance, December 31, 201424,915,510 $25 $228,370 $(130) $(134,617) $93,648Exercise of stock options and vesting ofrestricted stock units386,654 — 892 — — 892Stock-based compensation expense— — 11,837 — — 11,837Statutory tax withholding related to net-share settlement of restricted stock units(71,206) — (739) — — (739)Net loss— — — — (20,951) (20,951)Foreign currency translation adjustments— — — (763) — (763)Balance, December 31, 201525,230,958 25 240,360 (893) (155,568) 83,924Exercise of stock options and vesting ofrestricted stock units924,196 1 930 — — 931Stock-based compensation expense— — 13,262 — — 13,262Statutory tax withholding related to net-share settlement of restricted stock units(199,395) — (2,394) — — (2,394)Net loss— — — — (8,007) (8,007)Foreign currency translation adjustments— — — (719) — (719)Balance, December 31, 201625,955,759 26 252,158 (1,612) (163,575) 86,997Exercise of stock options and vesting ofrestricted stock units893,843 1 1,427 — — 1,428Stock-based compensation expense— — 11,947 — — 11,947Statutory tax withholding related to net-share settlement of restricted stock units(247,976) — (2,727) — — (2,727)Net loss— — — — (16,557) (16,557)Foreign currency translation adjustments— — — 823 — 823Balance, December 31, 201726,601,626 $27 $262,805 $(789) $(180,132) $81,911The accompanying notes are an integral part of these consolidated financial statements.55Table of ContentsCHANNELADVISOR CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2017 2016 2015Cash flows from operating activities Net loss$(16,557) $(8,007) $(20,951)Adjustments to reconcile net loss to net cash and cash equivalents (used in) provided by operating activities: Depreciation and amortization6,578 7,838 8,793Bad debt expense727 528 1,236Stock-based compensation expense11,947 13,262 11,837Deferred income taxes130 (5,649) (244)Other items, net(869) (875) (85)Changes in assets and liabilities, net of effects from acquisition: Accounts receivable(8,261) (1,885) (5,833)Prepaid expenses and other assets(5,514) (2,014) (2,921)Accounts payable and accrued expenses5,242 3,697 3,608Deferred revenue3,581 4,676 3,101Net cash and cash equivalents (used in) provided by operating activities(2,996) 11,571 (1,459) Cash flows from investing activities Purchases of property and equipment(2,790) (1,755) (4,062)Payment of internal-use software development costs(293) (208) (190)Acquisition, net of cash acquired(2,177) — —Net cash and cash equivalents used in investing activities(5,260) (1,963) (4,252) Cash flows from financing activities Repayment of capital leases(2,840) (2,096) (1,745)Proceeds from exercise of stock options1,428 930 892Payment of contingent consideration— (338) —Payment of statutory tax withholding related to net-share settlement of restricted stock units(2,727) (2,394) (739)Net cash and cash equivalents used in financing activities(4,139) (3,898) (1,592) Effect of currency exchange rate changes on cash and cash equivalents397 (764) (589)Net (decrease) increase in cash and cash equivalents(11,998) 4,946 (7,892)Cash and cash equivalents, beginning of year65,420 60,474 68,366Cash and cash equivalents, end of year$53,422 $65,420 $60,474 Supplemental disclosure of cash flow information Cash paid for interest$111 $127 $155Cash paid for income taxes, net$196 $115 $170Supplemental disclosure of non-cash investing and financing activities Accrued capital expenditures$80 $233 $563Capital lease obligations entered into for the purchase of fixed assets$567 $1,771 $2,207Non-cash leasehold improvements$— $— $5,263The accompanying notes are an integral part of these consolidated financial statements.56Table of ContentsCHANNELADVISOR CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. 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, or SaaS, solutions and its mission is to connect and optimizethe world's commerce. ChannelAdvisor's e-commerce cloud platform helps retailers and branded manufacturers worldwide improve their online performanceby expanding sales channels, connecting with consumers around the world, optimizing their operations for peak performance and providing actionableanalytics to improve competitiveness. The Company is headquartered in Morrisville, North Carolina and has international offices in England, Ireland,Germany, Australia, Brazil, China and Spain.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.ReclassificationCertain prior period amounts included in the consolidated statements of operations have been reclassified to conform to the current period’spresentation. In 2015 and prior, depreciation and amortization expense was presented separately from cost of revenue and operating expenses in theconsolidated statements of operations. Beginning with the first quarter of 2016, the Company now includes depreciation and amortization expense in cost ofrevenue and operating expenses in the consolidated statements of operations and separately discloses the amounts reflected in each financial statement lineitem in the notes to its consolidated financial statements. In addition, the Company has revised the classification of certain operating expenses to better alignthe income statement line items with how operations are managed. All reclassifications had no effect on the Company's reported gross profit and net loss forthe year ended December 31, 2015.The tables below summarize these reclassifications (in thousands): Year Ended December 31, 2015 As PreviouslyReported Reclassification As ReclassifiedCost of revenue$20,848 $4,986 $25,834Depreciation - Cost of revenue4,986 (4,986) —Sales and marketing51,941 1,829 53,770Research and development16,060 506 16,566General and administrative24,136 1,472 25,608Depreciation and amortization3,807 (3,807) —Depreciation and amortization expense is included in the following line items in the accompanying consolidated statements of operations for the yearsended December 31, 2017, 2016 and 2015 (in thousands):57Table of Contents 2017 2016 2015Cost of revenue$3,955 $4,632 $4,986Sales and marketing1,062 1,136 1,264Research and development424 458 506General and administrative1,137 1,612 2,037 $6,578 $7,838 $8,793Recent Accounting PronouncementsStandardDescriptionEffect on the Financial Statements or Other Significant MattersStandards that are not yet adoptedLeases:ASU 2016-02, Leases (Topic 842)Effective date: January 1, 2019The standard requires that lessees recognizeassets and liabilities for leases with leaseterms greater than twelve months in thestatement of financial position. The standardalso requires improved disclosures to helpusers of financial statements betterunderstand the amount, timing anduncertainty of cash flows arising from leases.The Company has formed a project team to prepare for theadoption of the standard by its effective date. The project team hasidentified a preliminary population of leases and is evaluating theimpact that adjustments to them under ASU 2016-02 will have toits consolidated financial statements.Financial Instruments:ASU 2016-13, Financial Instruments -Credit Losses (Topic 326)Effective date: January 1, 2020The standard replaces the incurred lossimpairment methodology in current U.S.GAAP (defined below) with a methodologythat reflects expected credit losses. Theupdate is intended to provide financialstatement users with more usefulinformation about expected credit losses.The Company is currently evaluating the impact the adoption ofthe standard will have on its consolidated financial statements.Standards adopted effective January 1, 2017Stock-Based Compensation:ASU 2016-09, Improvements to EmployeeShare-Based Payment Accounting (Topic718)The standard is intended to simplify severalaspects of the accounting for share-basedpayment transactions, including theaccounting for income taxes, forfeitures, andstatutory tax withholding requirements, aswell as classification in the statement ofcash flows.The Company adopted the standard effective January 1, 2017. Asa result of this adoption, the Company recognized $8.2 million ofdeferred tax assets attributable to accumulated excess tax benefitsthat under the previous guidance could not be recognized untilthe benefits were realized through a reduction in income taxespayable. This adjustment was applied using a modifiedretrospective method with a cumulative-effect adjustment to theaccumulated deficit for the excess tax benefits not previouslyrecognized. However, given the full valuation allowance of $8.2million placed on the additional deferred tax assets, therecognition upon adoption had no impact on the Company'saccumulated deficit as of January 1, 2017. Further, the Companyhas elected to continue to estimate forfeitures to determine theamount of compensation cost to be recognized in each period.Standards adopted effective January 1, 2018Cash Flow:58Table of ContentsASU 2016-18, Restricted CashThe standard requires that entities show thechanges in the total of cash, cashequivalents and restricted cash in thestatement of cash flows. Transfers betweencash, cash equivalents and restricted cashshould not be presented as cash flowactivities on the statement of cash flows.The Company adopted this standard effective January 1, 2018.The adoption did not have a material impact on its consolidatedfinancial statements.Revenue Recognition:59Table of ContentsAccounting Standards Update ("ASU")2014-09, Revenue from Contracts withCustomers (Topic 606) The standard will replace existing revenuerecognition standards and provides that anentity should recognize revenue to depictthe transfer of promised goods or services tocustomers in an amount that reflects theconsideration to which the entity expects tobe entitled in exchange for those goods orservices. ASU 2014-09 also requiresimproved disclosures to help users offinancial statements better understand thenature, amount, timing, and uncertainty ofrevenue that is recognized. Entities have theoption of using either a full retrospective ormodified retrospective approach for theadoption of the standard.The Company formed a project team to evaluate and direct theimplementation of the new revenue recognition standard andrelated amendments. The project team developed animplementation plan centered around specific functional areasexpected to be impacted by the standard and its amendments,including accounting and reporting, information technology("IT"), internal audit and contracts and legal, among others. As partof the adoption process, findings and progress of theimplementation plan have been reported to management and tothe Audit Committee on a frequent basis over the last two years.The Company adopted this standard effective January 1, 2018using the modified retrospective transition method. The mostsignificant impacts of the new standard upon adoption relate tothe timing of revenue recognition of fixed fees for the Company’scontracts, as well as the accounting for costs to obtain contracts.Under the new standard, for managed-service contracts, revenuerecognition for the managed-service subscription andimplementation fees will begin on the launch date and will berecognized over time through the contract end date. The Companycurrently defers revenue until the completion of theimplementation services, at which point the Company recognizesa cumulative catch-up adjustment equal to the revenue earnedduring the implementation period but previously deferred. Theremaining balance of these fixed fees is recognized ratably overthe remaining term of the contract. Additionally, under the newstandard, the Company will defer and amortize sales commissionsand a portion of other incentive compensation. The Companycurrently expenses these contract costs as incurred.The adoption of the standard as of January 1, 2018 will result in anadjustment to accumulated deficit of between $8.0 million and$9.0 million related to the deferral of contract costs and anadjustment to accumulated deficit of less than $1.0 million relatedto the timing of revenue recognition.For the year ending December 31, 2018, the Company expects anet benefit to operating income on its consolidated statement ofoperations of between $5.0 million and $7.0 million related todeferring contract costs and a net benefit of less than $1.0 millionrelated to the timing of revenue recognition resulting from theadoption of the standard.ASU 2016-08, Principal Versus AgentConsiderations (Reporting Revenue GrossVersus Net)The standard clarifies implementationguidance on principal versus agentconsiderations in ASU 2014-09.ASU 2016-10, Identifying PerformanceObligations and LicensingThe standard clarifies implementationguidance on the identification ofperformance obligations and the licensingimplementation guidance in ASU 2014-09.ASU 2016-12, Narrow-ScopeImprovements and Practical ExpedientsThe standard clarifies the guidance onassessing collectability, presentation ofsales taxes, noncash consideration andcompleted contracts and contractmodifications at transition.ASU 2016-20, Technical Corrections andImprovements to Topic 606The standard clarifies certain narrow aspectsof ASU 2014-09.The Company has reviewed other new accounting pronouncements that were issued as of December 31, 2017 and does not believe that thesepronouncements are applicable to the Company, or that they will have a material impact on its financial position or results of operations.60Table of ContentsUse of EstimatesThe preparation of financial statements in conformity with United States generally accepted accounting principles ("U.S. GAAP") requires managementto make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results coulddiffer from those estimates.On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable allowance, the useful lives of long-livedassets and other intangible assets, income taxes and assumptions used for purposes of determining stock-based compensation, among others. Estimates andassumptions are also required to value assets acquired and liabilities assumed as well as contingent consideration, where applicable, in conjunction withbusiness combinations. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable, theresults of which form the basis for making judgments about the carrying value 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.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") or advertising spend that a customer expects to process through the Company’s platform over thecontract term. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMV or advertising spend processedthrough the Company’s platform in excess of the customer’s specified minimum amount. In addition, other sources of revenue consist primarily ofimplementation fees, which may include fees for providing launch assistance and training. Implementation services are provided at the customer's option andare not essential to the functionality of the Company's platform, nor is the customer required to purchase these services in order to access the Company'splatform. The Company also generates revenue from its solutions that allow branded manufacturers to direct potential consumers from their websites anddigital marketing campaigns to authorized resellers. These contracts are generally one year in duration. The Company recognizes revenue when there ispersuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is reasonably assured and the amount of thefee to be paid by the customer is fixed or determinable. The Company’s contractual arrangements include performance, termination and cancellationprovisions, but do not provide for refunds. Customers do not have the contractual right to take possession of the Company’s software at any time.The Company’s arrangements generally contain multiple elements comprised of subscription and implementation services. The Company evaluateseach element in an arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting whenthe delivered item has standalone value and delivery of the undelivered element is probable and within the Company’s control. The Company’simplementation services are not sold separately from the subscription and there is no alternative use for them. As such, the Company has determined theimplementation services do not have standalone value. Accordingly, subscription and implementation services are combined and recognized as a single unitof 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 or to its solutions for branded manufacturers and transactions can be processed, provided all otherrevenue recognition criteria have been met. Some customers elect a managed-service solution and contract with the Company to manage some or all aspectsof the Company’s SaaS solutions on the customer’s behalf for a specified period of time, which is typically one year. Under these managed-servicearrangements, customer transactions cannot be processed through the Company’s platform until the completion of the implementation services. As such,revenue is contingent upon the Company’s completion of the implementation services and recognition commences when transactions can be processed onthe Company’s platform, provided all other revenue recognition criteria have been satisfied. At that time, the Company recognizes a pro-rata portion of thefees earned since the inception of the arrangement. The balance of the fees is recognized ratably over the remaining contract term.The Company recognizes the variable portion of subscription fee revenue in the period in which the related GMV is processed, provided all otherrevenue recognition criteria have been met.61Table of ContentsSales taxes collected from customers and remitted to government authorities are excluded from revenue.Deferred revenue represents the unearned portion of fixed subscription fees and implementation fees. Deferred amounts are generally 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 accompanyingcondensed consolidated 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-based compensation, co-locationfacility costs for the Company’s data centers, depreciation expense for computer equipment directly associated with generating revenue, credit cardtransaction fees and infrastructure maintenance costs. In addition, the Company allocates a portion of overhead, such as rent, additional depreciation andamortization and employee benefits costs, to cost of revenue based on headcount.Fair Value of Financial InstrumentsThe 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.The 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.In 2014, the Company, through its wholly owned subsidiary ChannelAdvisor UK Limited ("ChannelAdvisor UK"), acquired the issued andoutstanding shares of E-Tale Holdings Limited ("E-Tale"), renamed ChannelAdvisor Brands UK Limited. The acquisition of E-Tale included a contingentconsideration arrangement that allowed for adjustment of payments based upon achievement of specified quarterly revenue targets through June 2017.Contingent consideration was measured at fair value at the acquisition date and was remeasured to fair value at each reporting date until the contingency wasresolved. The fair value is reported within Other current liabilities and Other long-term liabilities on the consolidated balance sheets at December 31, 2016.Changes in the fair value of contingent consideration have been recognized within general and administrative expenses in the Company’s consolidatedstatements of operations.The fair value of contingent consideration related to the E-Tale acquisition was based on projected quarterly revenue targets for E-Tale through June2017. As of December 31, 2016, the Company's liability for acquisition-related contingent consideration was $0.2 million. The contingent considerationarrangement concluded in June 2017.Concentration of Credit RiskFinancial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accountsreceivable. All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. TheCompany’s cash and cash equivalents accounts exceed federally insured limits. The Company has not experienced any losses on its cash and cashequivalents accounts to date. To manage accounts receivable risk, the Company maintains an allowance for doubtful accounts.The Company did not have any customers that individually comprised a significant concentration of its accounts receivable as of December 31, 2017and 2016, or a significant concentration of its revenue for the years ended December 31, 2017, 2016 and 2015.62Table of ContentsAccounts 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 collection experience and a review of the current status of accounts receivable. Historically,actual write-offs for uncollectible accounts have not significantly differed from the Company’s estimates.The following table presents the changes in the Company’s allowance for doubtful accounts during the years ended December 31, 2017, 2016 and2015 (in thousands): Balance atBeginningof Period AdditionsCharged ToExpense/AgainstRevenue Deductions Balance atEnd ofPeriodAllowance for doubtful accounts: Year ended December 31, 2017$594 727 (712) $609Year ended December 31, 2016$785 528 (719) $594Year ended December 31, 2015$673 1,236 (1,124) $785Other 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 $10.6 million and $7.6 million are included in Prepaid expenses and other current assets on the consolidated balance sheets as ofDecember 31, 2017 and 2016, respectively.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 andamortization methodology used in computing amortization are as follows: Estimated Useful LivesAmortization MethodologyCustomer relationships7 yearsStraight-lineAcquired technology7 yearsStraight-lineTrade names3 yearsStraight-lineImpairment 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 is63Table of Contentsmeasured by a comparison of the carrying amount of the asset or asset group to future undiscounted net cash flows expected to be generated by the asset orasset group. If such assets are not recoverable, the impairment to be recognized, if any, is measured by the amount by which the carrying amount of the assetsexceeds the estimated fair value of the assets or asset group. Assets held for sale are reported at the lower of the carrying amount or fair value, less costs to sell.As of December 31, 2017 and 2016, management does not believe any 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. The Company recorded goodwill in connection with its business acquisitions. See Note 3 below for informationregarding goodwill recorded in connection with the acquisition of HubLogix. Goodwill is not amortized, but is subject to an annual impairment test, asdescribed below.The Company has determined that it has a single, entity-wide reporting unit. The Company first assessed qualitative factors to determine whether itwas more likely than not that the fair value of its single reporting unit was less than its carrying amount as a basis for determining whether it is necessary toperform the two-step goodwill impairment test under ASU No. 2011-08, Goodwill and Other (Topic 350): Testing Goodwill for Impairment. If the qualitativefactors had indicated that it was more likely than not that the fair value of the reporting unit was less than its carrying amount, the Company would havetested 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 assignedto 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 is performedto 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 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 wasbeing 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.During the fourth quarter of 2016, the Company voluntarily changed the date of its annual goodwill impairment testing from December 31, the lastday of the fiscal year, to October 1, the first day of the fourth quarter. This change provides the Company with additional time to complete its annualgoodwill impairment testing in advance of its year-end reporting and results in better alignment with the Company’s strategic planning and forecastingprocess. The voluntary change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. Thischange is not being applied retrospectively, as it would require application of significant estimates and assumptions with the use of hindsight. Accordingly,the change will be applied prospectively.As a result of the Company’s annual impairment tests as of October 1, 2017 and 2016, 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, 2017, 2016 and 2015 was $5.3million, $4.1 million and $4.3 million, respectively.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 changein tax rates is recognized in the results of operations in the period that includes the enactment date. The measurement of a deferred tax asset is reduced, 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 processfor recording 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 accruesfor the estimated amount of taxes for uncertain tax positions if it is more likely than not that the Company would be required to pay such additional taxes.64Table of ContentsAn uncertain tax position will be recognized if it is more likely than not to be sustained. The Company did not have any accrued interest or penaltiesassociated with unrecognized tax positions as of December 31, 2017 and 2016.Foreign Currency TranslationThe functional currency of the Company’s non-U.S. operations is the local currency. Monetary assets and liabilities denominated in foreign currenciesare translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Non-monetary assets and liabilities are translated at the historical ratesin effect when the assets were acquired or obligations incurred. Revenue and expenses are translated into U.S. dollars using the average rates of exchangeprevailing during the period. Translation gains or losses are included as a component of accumulated other comprehensive loss in stockholders’ equity. Gainsand losses resulting from foreign currency transactions are recognized as other (expense) income.Stock-Based CompensationThe Company accounts for stock-based compensation awards, which include stock options and restricted stock units ("RSUs"), based on the fair valueof the award as of the grant date. The Company recognizes stock-based compensation expense using the accelerated attribution method, net of estimatedforfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for thattranche.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 the Company's stock price, as well as highly subjective assumptions, including the expected life of the option and the expected stockprice volatility based on peer companies. Additionally, the recognition of expense requires the estimation of the number of awards that will ultimately vestand the number of awards that will ultimately be forfeited. The fair value of the Company's common stock, for purposes of determining the grant date fairvalue of option and RSU awards, has been determined by using the closing market price per share of common stock as quoted on the New York StockExchange on the date of grant.Basic and Diluted Loss per Common 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.3. BUSINESS COMBINATIONHubLogixOn May 26, 2017, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the Company acquired allof the issued and outstanding shares of HubLogix Commerce Corp. ("HubLogix") (renamed ChannelAdvisor Fulfillment, Inc.), a fulfillment and logisticsplatform that automates order management by connecting online storefronts and marketplaces to distribution and fulfillment centers. The Company acquiredHubLogix to further enhance its fulfillment network offering and capabilities.Under the Merger Agreement, the Company paid an aggregate purchase price of $2.3 million for HubLogix, all of which was paid in cash, whichamount was subject to adjustment as set forth in the Merger Agreement. The purchase price includes $0.4 million that has been placed into escrow to securethe indemnification obligations of HubLogix stockholders until November 26, 2018.The acquisition has been accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification Topic 805,Business Combinations ("ASC 805"). Under the acquisition method of accounting, the Company allocated the purchase price to the identifiable assetsacquired and liabilities assumed based on their estimated acquisition-date fair value. The difference between the acquisition-date fair value of theconsideration and the estimated fair value of the net assets acquired is recorded as goodwill. Goodwill represents the future economic benefits expected toarise from other intangible assets acquired that do not qualify for separate recognition, including acquired workforce, as well as expected future synergies.Based on management's assessment of the acquisition-date fair value of the assets acquired and liabilities assumed, the purchase price of $2.3 millionwas allocated to the Company’s assets and liabilities as follows: $1.9 million to goodwill, $0.5 million to identifiable intangible assets and $0.1 million toworking capital as a net current liability.65Table of ContentsThe goodwill of $1.9 million arising from the acquisition of HubLogix consists largely of the acquired workforce, the expected company-specificsynergies and the opportunity to expand the Company’s product offerings to customers. The goodwill recognized is not deductible for income tax purposes.The Company incurred transaction costs in connection with the acquisition of $0.3 million, which are included in General and administrative expensein the accompanying consolidated statements of operations for the year ended December 31, 2017.Comparative pro forma financial information for this acquisition has not been presented because the acquisition is not material to the Company’sconsolidated results of operations.4. PROPERTY AND EQUIPMENTProperty and equipment consisted of the following as of December 31, 2017 and 2016 (in thousands): 2017 2016Purchased software, including internal-use software$14,813 $13,821Computer hardware12,129 11,608Furniture and office equipment2,583 2,767Leasehold improvements7,819 7,642Construction in process221 14937,565 35,987Less: accumulated depreciation(26,688) (22,735)Property and equipment, net$10,877 $13,252Depreciation expense for the years ended December 31, 2017, 2016 and 2015 was $6.0 million, $7.3 million and $7.9 million, respectively. During theyear ended December 31, 2015, the Company recorded $0.7 million of accelerated depreciation expense as a result of relocating the Company's corporateheadquarters to a new facility.5. GOODWILL AND INTANGIBLE ASSETSThe following table shows the changes in the carrying amount of goodwill for the year ended December 31, 2017 (in thousands):Balance as of December 31, 2016$21,632Goodwill attributable to the HubLogix acquisition1,854Balance as of December 31, 2017$23,486There were no changes to the Company's goodwill during the year ended December 31, 2016.Intangible assets consisted of the following (in thousands): December 31, 2017 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Weighted AverageUseful Life (in years)Customer relationships$2,230$(961)$1,269 7.0Acquired technology2,030(796)1,234 7.0Total$4,260$(1,757)$2,503 7.066Table of Contents December 31, 2016 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Weighted AverageUseful Life (in years)Customer relationships$2,100 $(650) $1,450 7.0Acquired technology1,700 (526) 1,174 7.0Trade names130 (94) 36 3.0Total$3,930 $(1,270) $2,660 6.9Amortization expense for the years ended December 31, 2017, 2016 and 2015 was $0.6 million, $0.6 million and $0.9 million, respectively. As ofDecember 31, 2017, expected amortization expense over the remaining intangible asset lives is as follows (in thousands):Year Ending December 31, 2018$609201960920206092021518202265Thereafter93Total$2,5036. 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 oncapital leases and future payments on operating leases with remaining terms in excess of one year are as follows (in thousands): Operating Leases Capital LeasesYear Ending December 31, 2018$5,893 $1,02720194,779 65220205,037 —20214,773 —20224,033 —Thereafter996 —Total minimum lease payments$25,511 1,679Less: imputed interest (45)Less: current portion (993)Capital lease obligations, net of current portion $641The gross book value of fixed assets under capital leases as of December 31, 2017 and 2016 was approximately $8.2 million and $7.6 million,respectively. The net book value of fixed assets under capital leases as of December 31, 2017 and 2016 was approximately $1.4 million and $3.5 million,respectively. Capital lease obligations are included in Other current liabilities and Long-term capital leases, net of current portion in the accompanyingconsolidated balance sheets. The amortization of fixed assets under capital leases is included in depreciation expense within Cost of revenue and operatingexpenses 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.Rent expense 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 and67Table of ContentsOther long-term liabilities in the accompanying consolidated balance sheets. As of December 31, 2017 and 2016, deferred rent related to these leases totaled$1.1 million and $1.0 million, respectively.The Company's lease agreement for its current corporate headquarters commenced in October 2015 and has a term of seven years. The Company mayelect to renew the lease term for two additional five-year periods, subject to certain conditions and notice obligations set forth in the lease agreement.Minimum annual rental payments were $3.2 million the first lease year, and are scheduled to increase in each subsequent lease year by 2.75%. As of January2017, the Company began paying its proportionate share of the landlord's operating expenses for the building, as specified in the lease agreement, subject tocertain limitations.In December 2015, the Company exercised its right to terminate the lease for its previous corporate headquarters effective as of October 1, 2016. Inconjunction with the exercise of its early termination right, the Company paid approximately $1.0 million during the fourth quarter of 2015.Total rent expense for the years ended December 31, 2017, 2016 and 2015 was $4.3 million, $3.9 million and $3.1 million, respectively.Litigation and Other ContingenciesFrom time to time, the Company is subject to litigation and claims arising in the ordinary course of business. It is not currently party to any materiallegal proceedings and it is not aware of any pending or threatened legal proceeding against the Company that it believes could have a material adverse effecton its business, operating results, cash flows or financial condition.During the first quarter of 2017, the Company completed its analysis with regard to potential unpaid sales tax obligations. Based on the results of thisanalysis, the Company made the decision to enter into voluntary disclosure agreements ("VDAs") with certain jurisdictions to reduce the Company’spotential sales tax liability. VDAs generally provide for a maximum look-back period, a waiver of penalties and, at times, interest as well as paymentarrangements. The Company's estimated aggregate VDA liability of $2.5 million was recorded as a one-time charge in General and administrative expense inthe accompanying consolidated statements of operations for the year ended December 31, 2017. This amount represents the Company's estimate of itspotential unpaid sales tax liability through the anticipated look-back periods including interest, where applicable, in all jurisdictions in which the Companyhas entered into VDAs. If the VDAs do not resolve all potential unpaid sales tax obligations, then it is possible that the actual aggregate unpaid sales taxliability may be higher or lower than the Company's estimate.Through December 31, 2017, the Company has paid approximately $1.5 million under terms of the VDA agreements that it has completed with certainjurisdictions. During the third quarter of 2017, one jurisdiction rejected the Company's VDA application and will conduct a sales tax audit. The Companybelieves the scope of the audit will be limited and similar in principle to the VDA program offered by that jurisdiction; as a result, the Company hasdetermined not to revise its estimate of its potential unpaid sales tax liability. The completion date of the sales tax audit has not been determined.7. INCOME TAXESThe components of loss before income taxes for the years ended December 31, 2017, 2016 and 2015 were as follows (in thousands): 2017 2016 2015Domestic$(11,089) $(10,761) $(21,146)Foreign(5,184) (2,904) 10Total loss before income taxes$(16,273) $(13,665) $(21,136)The provision for income tax expense (benefit) included the following for the years ended December 31, 2017, 2016 and 2015 (in thousands):68Table of Contents201720162015Current: Federal$(39) $— $—State— (19) (101)Foreign193 10 160Total154 (9) 59Deferred: Federal(73) 43 37State15 6 15Foreign188 (5,698) (296)Total130 (5,649) (244)Total tax expense (benefit)$284 $(5,658) $(185)The Tax Cuts and Jobs Act of 2017 ("Tax Act"), which went into effect on December 22, 2017, significantly revises the Internal Revenue Code of1986, as amended ("IRC"). The Tax Act contains, among other things, significant changes to corporate taxation, including reduction of the corporate tax ratefrom a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain smallbusinesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, onetime taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certainimportant exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time and modifying orrepealing many business deductions and credits. The Tax Act is complex and it will take time to assess the implications thoroughly. The Company iscurrently evaluating the Tax Act with its professional advisors and has included the effects of the following changes enacted in the Tax Act in this AnnualReport on Form 10-K:•The Company reduced its expected U.S. federal corporate income tax rate used to measure its deferred tax assets and liabilities to 21%from 34%, which had been used as of December 31, 2016. This resulted in a reduction of the Company’s net deferred tax assets of $16.6 million,which was offset by a corresponding reduction in the valuation allowance of $16.7 million that is recorded against its U.S. deferred tax assets, net ofcertain deferred tax liabilities.•The Company incorporated the newly enacted rules relating to IRC Section 162(m), which provide for a limitation on the annualdeduction of excessive executive compensation. The new rules have an impact on the deferred tax asset recorded on stock-based compensation atthe end of 2017. This resulted in a de minimis reduction in the end of year deferred tax asset on stock compensation, which was completely offset bya reduction in the valuation allowance.Other provisions of the law might have a significant impact on the Company, such as the new rules covering net operating loss carryforwards, therepeal of the alternative minimum tax, the new requirement to capitalize research and experimentation expenses, and the creation of the base erosion anti-abuse tax, the global intangible low taxed income inclusion, and the foreign derived intangible income deduction. However, the Company has determinedthat these changes will have no material impact on its financial results as of and for the year ended December 31, 2017. The Company is analyzing the otherchanges enacted in the Tax Act and has made a preliminary determination that they should not have a material impact on the Company's financial statementsbased on current operations. However, new developments such as changes in the Company’s operations or the issuance of additional guidance from theInternal Revenue Service could result in changes to the Company’s initial determination. In addition, it is uncertain if and to what extent various states willconform to the newly enacted federal tax law.On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when aregistrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accountingfor certain income tax effects of the Tax Act. In accordance with SAB 118, we have determined that the $16.6 million reduction to the Company's net deferredtax assets to account for the decrease in the U.S. federal tax rate and the de minimis reduction in the end of year deferred tax asset to account for the changesto IRC Section 162(m) were provisional amounts and a reasonable estimate at December 31, 2017. Additional work is necessary for a more detailed analysisof the impacts of the Tax Act. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis iscomplete.69Table of ContentsDeferred 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. During the first quarter of 2016, the Company elected to early adopt ASU 2015-17, Balance SheetClassification of Deferred Taxes (Topic 740), to present balance sheet classification of deferred income taxes as noncurrent. This adoption was appliedprospectively and, therefore, prior periods were not retrospectively adjusted.The components of the Company’s net deferred tax asset (liability) as of December 31, 2017 and 2016 were as follows (in thousands): 2017 2016Deferred tax assets: Domestic tax loss carryforwards$28,403 $32,539Foreign tax loss carryforwards6,849 5,455Stock-based compensation3,750 4,864Tax credits2,231 1,624Lease incentive obligation1,119 1,978Other assets2,232 2,248Valuation allowance(38,054) (41,926)Total deferred tax assets6,530 6,782Deferred tax liabilities: Fixed assets645 1,328Intangible assets604 566Total deferred tax liabilities1,249 1,894Net deferred tax asset$5,281 $4,888The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718) effective January 1, 2017. As a resultof this adoption, the Company recognized $8.2 million of deferred tax assets attributable to accumulated excess tax benefits that under the previous guidancecould not be recognized until the benefits were realized through a reduction in income taxes payable. This adjustment was applied using a modifiedretrospective method with a cumulative-effect adjustment to the accumulated deficit for the excess tax benefits not previously recognized. However, giventhe full valuation allowance of $8.2 million placed on the additional deferred tax assets, the recognition upon adoption had no impact on the Company'saccumulated deficit as of January 1, 2017. Further, the Company has elected to continue to estimate forfeitures to determine the amount of compensation costto be recognized in each period.At December 31, 2017 and 2016, the Company had federal net operating loss ("NOL") carryforwards of $114.2 million and $109.5 million,respectively, which expire beginning in 2022. At December 31, 2017 and 2016, the Company had state NOL carryforwards of $136.2 million and $128.3million, respectively, which expire beginning in 2018. At December 31, 2017 and 2016, the Company had U.S. federal income tax credit carryforwards of$3.0 million and $2.1 million, respectively, which expire beginning in 2034. The utilization of the NOL and tax credit carryforwards may be subject tolimitation under the rules regarding a change in stock ownership as determined by the Internal Revenue Code and state and foreign tax laws. Prior to theutilization of these tax attributes, the Company will assess any limitations, particularly related to NOL carryforwards from its acquired entities. For each of theperiods ended December 31, 2017 and 2016, the Company also had foreign NOL carryforwards for use against future tax in those jurisdictions of $35.2million and $27.3 million, respectively. The majority of the Company's foreign NOLs can be carried forward indefinitely.A valuation allowance has been recognized to offset deferred tax assets, primarily attributable to NOL carryforwards that the Company has determinedare not more likely than not to be realized. In 2016, the Company released $5.3 million of the valuation allowance on deferred tax assets in several of itsforeign jurisdictions based on the result of the Company's evaluation of the likelihood of potential tax benefits related to the foreign entities’ most recentthree years of operating results and projections of future profitability, which primarily resulted from a change in the Company’s global transfer pricingmethodology. There was a net decrease in valuation allowance of $3.9 million during the year ended December 31, 2017, which was comprised of a netdecrease of $12.6 million that was allocable to current operations (includes the reduction in the valuation allowance of $16.7 million noted above resultingfrom the Tax Act), an increase of $8.2 million from the adoption of ASU 2016-09 that was allocable to accumulated deficit and an increase of $0.5 millionthat was allocable to goodwill as part of the HubLogix acquisition. The Company does not generally consider deferred tax liabilities on indefinite-livedassets as a70Table of Contentssource of future taxable income available to be able to realize deferred tax assets. However, the Company considers the deferred tax liability associated withan indefinite-lived intangible asset as a source of future taxable income available to be able to realize the deferred tax asset recorded for the U.S. federalalternative minimum tax credit, which can be carried forward indefinitely. Since both the deferred tax liability and the deferred tax asset have indefinite lives,they offset each other to arrive at the net deferred tax liability.Undistributed earnings of the Company’s foreign subsidiaries are indefinitely reinvested offshore 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 for the years endedDecember 31, 2017 and 2016 was nominal. The determination of the deferred tax liability, which requires complex analysis of international tax situationsrelated to repatriation, is not practicable at this time. The Company is presently investing in international operations located in Europe, Asia, Australia andSouth America. The Company is funding the working capital needs of its foreign operations through its U.S. operations. In the future, the Company willutilize any foreign undistributed earnings, as well as continued funding from its U.S. operations, to support its continued investment in foreign growth.A reconciliation of the difference between the effective income tax rate and the statutory federal income tax rate for the years ended December 31,2017, 2016 and 2015 is as follows: 2017 2016 2015U.S. statutory federal rate34.0 % 34.0 % 34.0 %Increase (decrease) resulting from: State taxes, net of federal benefit2.5 3.2 4.3Change in U.S. federal statutory rate(102.2) — —Nondeductible expenses(10.5) (1.6) (14.0)Effect of foreign tax rate differential(5.3) (3.8) (0.1)Uncertain tax position(1.6) (0.8) (1.5)Research and development credit5.6 4.1 3.7Change in valuation allowance77.1 11.2 (20.3)Other(1.3) (4.9) (5.2)Effective tax rate(1.7)% 41.4 % 0.9 %The Company's effective tax rates for the years ended December 31, 2017 and 2015 are lower than the U.S. federal statutory rate of 34% primarily dueto operating losses which are subject to a valuation allowance. The Company cannot recognize the tax benefit of operating loss carryforwards generated incertain jurisdictions due to uncertainties relating to future taxable income in those jurisdictions in terms of both its timing and its sufficiency, which wouldenable the Company to realize the benefits of those carryforwards. For the year ended December 31, 2016, the effective tax rate is higher than the U.S. federalstatutory rate of 34% primarily due to the $5.3 million release of the valuation allowance on deferred tax assets in several of its foreign jurisdictions. In 2017,due to the release of the valuation allowance at the end of 2016, the Company recognizes tax expense in most of these foreign jurisdictions. In addition,during 2017 the Company no longer had sufficient deferred tax liabilities in one of its foreign subsidiaries necessary to realize the tax benefit of all of itsdeferred tax assets for that same foreign subsidiary. The Company recorded a valuation allowance against the deferred tax assets of that foreign subsidiary,net of deferred tax liabilities. As a result, the Company is not currently permitted to recognize the tax benefit of that subsidiary’s losses. The remeasurementof the Company’s U.S. net deferred tax assets to reflect the newly enacted U.S. statutory tax rate of 21% resulted in tax expense of $16.6 million, which wasoffset by a corresponding reduction to the valuation allowance of $16.7 million. The net result from the change in the U.S. federal statutory tax rate was a taxbenefit of $0.1 million. The nondeductible expenses during the years ended December 31, 2017, 2016 and 2015 primarily related to stock-basedcompensation expense associated with nondeductible stock awards. Nondeductible stock award expense and share-based compensation shortfalls had alarger impact on the December 31, 2015 tax rate than they did on the tax rate for the years ended December 31, 2017 and 2016. The decrease in the effectivetax rate impact from the effect of foreign tax rate differential for the years ended December 31, 2017 and 2016 compared to the year ended December 31,2015, was primarily due to an increase in the percentage of the Company's worldwide book losses recorded outside the U.S. during these periods. TheCompany's foreign jurisdictions comprise a mix of income and loss making entities. In 2017 and 2016, foreign losses exceeded foreign income.The Company accounts for uncertain tax provisions in accordance with Accounting Standards Codification Topic 740-10, Income Taxes ("ASC 740-10"). This guidance provides a comprehensive model for the recognition, measurement and disclosure in financial statements of uncertain income taxpositions that a company has taken or expects to take on a tax return.71Table of ContentsThe following table shows the changes in unrecognized tax benefits in accordance with ASC 740-10 for the years ended December 31, 2017, 2016 and2015 (in thousands): 2017 2016 2015Balance as of January 1,$766 $681 $782Increases related to current tax positions199 146 345Increases related to prior year tax positions317 — 79Decreases related to prior year tax positions— (42) (411)Decreases related to the expirations of statutes of limitations— (19) (114)Balance as of December 31,$1,282 $766 $681Although the ultimate timing of the resolution and/or closure of audits is highly uncertain, the Company believes it is reasonably possible that a deminimis amount of unrecognized tax benefits could reverse in the next twelve months. If the total unrecognized tax benefit was recognized, there would be ade minimis impact on the effective tax rate. As of December 31, 2017 and 2016, 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 bytax authorities for years prior to 2013, although carryforward attributes that were generated prior to 2013 may still be adjusted upon examination by theInternal Revenue Service if they either have been or will be used in a future period. The Company is no longer subject to examination in foreign taxjurisdictions for tax periods 2013 and prior. No income tax returns are currently under examination by taxing authorities.8. 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 "2013 Plan"),pursuant to which the Company initially reserved 1,250,000 shares of its common stock for issuance to its employees, directors and non-employee thirdparties. The 2013 Plan provides for the grant of incentive stock options to employees, and for the grant of nonqualified stock options, restricted stock awards,restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of stock compensation to the Company’s employees,directors, and non-employee third parties. The number of shares of common stock reserved for issuance under the 2013 Plan will automatically increase onJanuary 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 the Company’s commonstock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Company’s board of directors.Accordingly, on January 1, 2018 the number of shares reserved for issuance under the 2013 Plan increased by 1,330,081 shares. As of December 31, 2017,1,085,091 shares remained available for future grant under the 2013 Plan. As a result of the adoption of the 2013 Plan, no further grants may be made underthe former 2001 Stock Plan, although outstanding awards under the 2001 Stock Plan continue to vest in accordance with their terms until exercised, forfeitedor expired.Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations for the yearsended December 31, 2017, 2016 and 2015 (in thousands): 2017 2016 2015Cost of revenue$807 $1,259 $992Sales and marketing3,971 4,775 4,421Research and development2,260 1,962 1,689General and administrative4,909 5,266 4,735 $11,947 $13,262 $11,837Stock Option Awards72Table of ContentsThe 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 lifeof an 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 tothe lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. Expectedvolatility is estimated based on the historical volatility of the Company's stock. Prior to the fourth quarter of 2017, expected volatility was estimated basedon volatilities of publicly traded stock for comparable companies over the estimated expected life of the stock options. The Company assumed no dividendyield because dividends are not expected to be paid in the near future, which is consistent with the Company’s history of not paying dividends.The following table summarizes the assumptions used for estimating the fair value of stock options granted for the years ended December 31, 2017,2016 and 2015: 2017 2016 2015Risk-free interest rate1.4% - 2.1% 0.8% - 1.8% 0.9% - 1.7%Expected term (years)6.25 6.25 6.25Expected volatility45% - 51% 46% - 50% 45% - 47%Dividend yield0% 0% 0%The following is a summary of the option activity for the year ended December 31, 2017: Number ofOptions Weighted AverageExercise Price WeightedAverageRemainingContractualTerm AggregateIntrinsic Value (in years) (in thousands)Outstanding balance at December 31, 20161,686,095 $9.78 Granted674,245 10.26 Exercised(172,690) 8.29 Forfeited(59,590) 11.90 Expired(19,668) 23.60 Outstanding balance at December 31, 20172,108,392 $9.87 7.26 $1,685Exercisable at December 31, 2017940,485 $9.02 5.49 $1,662Vested and expected to vest at December 31, 20171,924,479 $9.80 7.13 $1,682The weighted average grant date fair value for the Company's stock options granted during the years ended December 31, 2017, 2016, and 2015was $4.17, $4.73 and $4.29 per share, respectively.The total fair value of stock options vested during the years ended December 31, 2017, 2016 and 2015 was $1.2 million, $1.1 million and $1.2million, respectively.The total compensation cost related to nonvested stock options not yet recognized as of December 31, 2017 was $2.1 million and will be recognizedover a weighted average period of approximately 1.9 years.The aggregate intrinsic value of stock options exercised during the years ended December 31, 2017, 2016, and 2015 was $0.5 million, $2.1 millionand $1.2 million, respectively.73Table of ContentsRestricted Stock UnitsThe following table summarizes the RSU activity for the year ended December 31, 2017: Number of RSUs Weighted Average Grant-Date Fair ValueUnvested RSUs as of December 31, 20162,151,658 $12.54Granted1,378,259 10.37Vested(721,495) 13.43Forfeited(327,385) 12.08Unvested RSUs as of December 31, 20172,481,037 $11.14The total unrecognized compensation cost related to the unvested RSUs as of December 31, 2017 was $9.3 million and will be recognized over aweighted average period of approximately 1.7 years.9. NET LOSS PER SHAREThe following securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutivefor the years ended December 31, 2017, 2016 and 2015: 2017 2016 2015Stock options2,108,392 1,686,095 1,470,293RSUs2,481,037 2,151,658 1,949,70210. 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, 2017 and 2016. The following table summarizes revenueby geography and product for the years ended December 31, 2017, 2016 and 2015 (in thousands): 2017 2016 2015Revenue by geography: Domestic$95,722 $88,668 $76,446International26,813 24,532 24,139Total$122,535 $113,200 $100,585 Revenue by product: Marketplaces$93,449 $86,312 $74,210Digital marketing18,076 19,367 20,182Other11,010 7,521 6,193Total$122,535 $113,200 $100,585The Company's revenue from external customers based in the United Kingdom totaled approximately $11.7 million, $12.7 million and $13.6 millionfor the years ended December 31, 2017, 2016 and 2015, respectively.11. RETIREMENT PLANSThe Company provides retirement plans whereby participants may elect to contribute a portion of their annual compensation to the plans, aftercomplying with certain requirements and subject to certain limitations. The Company74Table of Contentscontributed an aggregate of $1.5 million, $1.0 million and $0.8 million to the plans for the years ended December 31, 2017, 2016 and 2015, respectively.12. SELECTED QUARTERLY INFORMATION (UNAUDITED) Three Months Ended, March 31, 2017 June 30, 2017 September 30, 2017 December 31, 2017 (in thousands, except per share amounts)Revenue$28,329 $30,004 $30,097 $34,105Gross profit21,487 23,484 23,548 28,066Loss from operations(8,053) (3,968) (4,121) (436)Net loss(8,056) (3,985) (4,055) (461)Net loss per share: Basic and diluted$(0.31) $(0.15) $(0.15) $(0.02) Three Months Ended, March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 (in thousands, except per share amounts)Revenue$26,347 $27,098 $27,992 $31,763Gross profit19,434 20,235 21,181 24,730(Loss) income from operations(4,639) (6,740) (2,680) 222Net (loss) income(4,563) (6,727) (2,552) 5,835Net (loss) income per share: Basic(0.18) (0.26) (0.10) 0.23Diluted(0.18) (0.26) (0.10) 0.21ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE None.ITEM 9A. CONTROLS AND PROCEDURES Evaluation 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, 2017, 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 procedures75Table of Contentsas of December 31, 2017, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures wereeffective 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, 2017 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 FirmOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with theparticipation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness ofour internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal controlover financial reporting was effective as of December 31, 2017.This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period establishedby the rules of the SEC.ITEM 9B. OTHER INFORMATION Not applicable.PART IIIWe will file a definitive Proxy Statement for our 2018 Annual Meeting of Stockholders (the "2018 Proxy Statement") with the SEC, pursuant to Regulation14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General InstructionG(3) to Form 10-K. Only those sections of the 2018 Proxy Statement that specifically address the items set forth herein are incorporated by reference.ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Item 10 is hereby incorporated by reference to the sections of the 2018 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 COMPENSATION The information required by Item 11 is hereby incorporated by reference to the sections of the 2018 Proxy Statement under the captions "ExecutiveCompensation" and "Director Compensation."ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS The information required by Item 12 is hereby incorporated by reference to the sections of the 2018 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 INDEPENDENCE 76Table of ContentsThe information required by Item 13 is hereby incorporated by reference to the sections of the 2018 Proxy Statement under the captions "Transactionswith Related Persons" and "Independence of the Board of Directors."ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 is hereby incorporated by reference to the sections of the 2018 Proxy Statement under the caption "Ratification ofSelection of Independent Auditors."PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) ExhibitsExhibitNumberDescription of Document 3.1Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Registrant's CurrentReport on Form 8-K (File No. 001-35940), filed with the Securities and Exchange Commission on May 29, 2013). 3.2Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K(File No. 001-35940), filed with the Securities and Exchange Commission on May 29, 2013). 4.1Specimen stock certificate evidencing shares of Common Stock (incorporated herein by reference to Exhibit 4.2 to AmendmentNo. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Securities and ExchangeCommission on May 9, 2013). 10.1+2001 Stock Plan, as amended (incorporated herein by reference to Exhibit 10.12 to the Registrant’s Registration Statement onForm S-1 (File No. 333-187865), filed with the Securities and Exchange Commission on April 11, 2013). 10.2+Form of Stock Option Agreement under 2001 Stock Plan (incorporated herein by reference to Exhibit 10.13 to the Registrant’sRegistration Statement on Form S-1 (File No. 333-187865), filed with the Securities and Exchange Commission on April 11,2013). 10.3+2013 Equity Incentive Plan (incorporated herein by reference to Exhibit 4.6 to the Registrant’s Registration Statement on Form S-8 (File No. 333-188988), filed with the Securities and Exchange Commission on May 31, 2013). 10.4+Form of Stock Option Grant Notice and Stock Option Agreement under 2013 Equity Incentive Plan (incorporated herein byreference to Exhibit 10.15 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-187865),filed with the Securities and Exchange Commission on April 26, 2013). 10.5+Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under 2013 Equity Incentive Plan(incorporated herein by reference to Exhibit 10.17 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1(File No. 333-187865), filed with the Securities and Exchange Commission on April 26, 2013). 10.6+Form of Indemnification Agreement with non-employee directors (incorporated herein by reference to Exhibit 10.19 to theRegistrant’s Registration Statement on Form S-1 (File No. 333-187865), filed with the Securities and Exchange Commission onApril 11, 2013). 10.7+Amended and Restated Executive Severance and Change in Control Letter Agreement, dated as of December 17, 2014, by andbetween the Registrant and David J. Spitz (incorporated herein by reference to Exhibit 10.17 to the Registrant’s Annual Report onForm 10-K (File No. 001-35940), filed with the Securities and Exchange Commission on February 26, 2015). 10.8+Schedule of Compensation for Non-Employee Directors, adopted effective as of February 22, 2017 (incorporated herein byreference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Securities andExchange Commission on May 4, 2017). 77Table of Contents10.9Office lease, dated as of August 15, 2014, by and between the Registrant and SVT Perimeter Four, LP. (as successor in interest toDuke Realty Limited Partnership) (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report onForm 10-Q (File No. 001-35940), filed with the Securities and Exchange Commission on November 6, 2014). 10.10+Executive Severance and Change in Control Letter Agreement, dated as of December 17, 2014, by and between the Registrant andDiana S. Allen (incorporated herein by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K (File No. 001-35940), filed with the Securities and Exchange Commission on February 26, 2015). 10.11First Amendment to Office Lease, dated as of December 10, 2015, by and between the Registrant and SVT Perimeter Four, LP. (assuccessor in interest to Duke Realty Limited Partnership) (incorporated herein by reference to Exhibit 10.22 to the Registrant’sAnnual Report on Form Report on Form 10-K (File No. 001-35940), filed with the SEC on February 25, 2016). 10.12+Executive Severance and Change in Control Letter Agreement, dated as of August 31, 2015, by and between the Registrant andMark E. Cook (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35940), filed with the Securities and Exchange Commission on November 5, 2015). 10.13Second Amendment to Office Lease, dated as of August 25, 2017, by and between the Registrant and SVT Perimeter Four, LP. (assuccessor in interest to Duke Realty Limited Partnership). 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.INSXBRL Instance Document 101.SCHXBRL Taxonomy Extension Schema Document 101.CALXBRL Taxonomy Extension Calculation Linkbase Document 101.DEFXBRL Taxonomy Extension Definition Linkbase Document 101.LABXBRL Taxonomy Extension Label Linkbase Document 101.PREXBRL 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.(b) Financial Statement SchedulesAll schedules are omitted as information required is inapplicable or the information is presented in the consolidated financial statements and therelated notes.78Table of ContentsITEM 16. SUMMARY None.79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/ David J. SpitzFebruary 13, 2018 David J. SpitzChief Executive OfficerKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark E. Cook and Diana S.Allen, jointly and severally, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and inhis or her name, place and stead, in any and all capacities, to sign this Annual Report on Form 10-K of ChannelAdvisor Corporation, and any or allamendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and ExchangeCommission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary tobe done in and about the premises hereby ratifying and confirming all that said attorneys-in-fact and agents, or his, her or their substitute or substitutes, maylawfully do or cause to 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/ David J. Spitz Chief Executive Officer and Director(Principal Executive Officer) February 13, 2018David J. Spitz /s/ Mark E. Cook Chief Financial Officer(Principal Financial Officer) February 13, 2018Mark E. Cook /s/ Richard F. Cornetta Vice President of Finance and Chief Accounting Officer(Principal Accounting Officer) February 13, 2018Richard F. Cornetta /s/ M. Scot Wingo Director February 13, 2018M. Scot Wingo /s/ Timothy J. Buckley Director February 13, 2018Timothy J. Buckley /s/ Joseph L. Cowan Director February 13, 2018Joseph L. Cowan /s/ Janet R. Cowell Director February 13, 2018Janet R. Cowell /s/ Marc E. Huffman Director February 13, 2018Marc E. Huffman /s/ Timothy V. Williams Director February 13, 2018Timothy V. Williams 80Exhibit 10.13SECOND AMENDMENT TO OFFICE LEASETHIS SECOND AMENDMENT TO OFFICE LEASE (this “Second Amendment”) is entered into as of the 25th day ofAugust 2017, (the “Effective Date”), by and between SVT PERIMETER FOUR, LP, a Delaware limited partnership (successor ininterest to DUKE REALTY LIMITED PARTNERSHIP, an Indiana limited partnership) (“Landlord”), and CHANNELADVISORCORPORATION, a Delaware corporation (“Tenant”).BACKGROUND:A. Landlord and Tenant entered into that certain Office Lease dated August 15, 2014, as amended by that certain FirstAmendment to Office Lease dated December 10, 2015 (the “Lease”), for the lease of approximately 136,538 rentable square feet ofspace designated Suites 100, 300, 400 and 500 in the building commonly known as Perimeter Four located at 3025 Carrington MillBoulevard, Morrisville, North Carolina 27560, all as more particularly described in the Lease. B. Landlord and Tenant desire to enter into this Second Amendment to amend the terms of the Lease. C. The defined terms used in this Second Amendment, as indicated by the initial capitalization thereof, shall have the samemeaning ascribed to such terms in the Lease, unless otherwise specifically defined herein.NOW, THEREFORE, for and in consideration of Ten and No/100 Dollars ($10.00) and of the mutual covenants, agreementsand undertakings herein set forth and other valuable considerations, the receipt and sufficiency of which are hereby acknowledged,Landlord and Tenant hereby agree as follows:1. Amenities Space. Landlord, at Landlord’s sole cost and expense, intends to construct certain amenities including two fullyfurnished common conference rooms, one pre-conference area/kitchenette/serving area, and one storage area (collectively, as the samemay be reconfigured or redesigned by Landlord, from time to time, the “Conference Amenities”), to service tenants of the Buildingand other tenants of the Park, which amenities shall be located in Suite 130, consisting of approximately 2,181 square feet of space onthe first floor of the Building in the location depicted on Exhibit A attached hereto (the “Conference Amenities Space”).Provided that the Conference Amenities are constructed and completed within two hundred seventy (270) days after theEffective Date, during the Conference Amenity Period (as defined below) (i) Tenant’s Second Option to Expand, as set forth in Section17.04 of the Lease, shall not be applicable with respect to the Conference Amenities Space and (ii) Tenant’s Right of First Refusal, asset forth in Section 17.05 of the Lease, shall not be applicable to the Conference Amenities Space. As used herein, the “ConferenceAmenity Period” shall be the period of time between the Effective Date and the earliest of (a) the date that the Conference Amenitiesare removed from the Conference Amenities Space (other than during the period of remodeling or repair); (b) the date Landlord marketsthe Conference Amenities Space or otherwise enters into any agreement with a third-party user with respect to the lease, license, use, oroccupancy of the Conference Amenities Space on an exclusive basis (other than reservations or license agreements for special events),or (c) the date that the Conference Amenities Space is primarily used for any purposes other than common conference rooms. For theavoidance of doubt, following the Conference Amenity Period, (y) Tenant’s Second Option to Expand, as set forth in Section 17.04 ofthe Lease, shall once again be applicableExhibit 10.13with respect to the Conference Amenities Space and (z) Tenant’s Right of First Refusal, as set forth in Section 17.05 of the Lease, shallonce again be applicable to the Conference Amenities Space.At all times during the Conference Amenity Period, Tenant and Tenant’s employees, agents, customers, invitees and others shallbe granted, at no cost or expense to Tenant other than usage fees based on actual usage or reservation of the Conference Amenities thatwould be charged to any tenant for such usage or reservation, the right to use the Conference Amenities to the fullest extent that anyother tenant in the Building and their respective employees, agents, customers, invitees and others are allowed to the use theConference Amenities (provided, Landlord shall be entitled to allow tenants of the Park to reserve the common conference room spacewithin the Conference Amenities Space so long as Tenant has the same right to reserve the common conference room space).In the event that the Conference Amenities are not constructed and completed within two hundred seventy (270) days after theEffective Date (subject to extension to the extent completion is being diligently pursued but delayed by force majeure), this Section 1 ofthis Second Amendment shall be terminated and deemed deleted in its entirety.2. Ratification; Miscellaneous. All terms and conditions of the Lease, as amended hereby, are hereby ratified and shall remainin full force and effect. Tenant represents that Tenant is not aware of a default by Landlord or Tenant under the terms of the Lease.Landlord represents that Landlord is not aware of a default by Landlord or Tenant under the terms of the Lease. Landlord and Tenantrepresent that (i) the individuals executing this Second Amendment on behalf of Landlord and Tenant, respectively, have full authorityand power to execute and deliver this Second Amendment, and (ii) this Second Amendment constitutes a valid and binding obligationon the parties hereto. This Second Amendment contains all of the agreements of the parties hereto with respect to the matters containedherein, and no prior agreement, arrangement or understanding pertaining to any such matters shall be effective for any purpose. Ifanything contained in this Second Amendment conflicts with any terms of the Lease, then the terms of this Second Amendment shallgovern and any conflicting terms in the Lease shall be deemed deleted in their entirety. This Second Amendment may be modified onlyby a writing executed by the parties hereto. The invalidity of any portion of this Second Amendment shall not have any effect on thebalance hereof. This Second Amendment shall be binding upon the parties hereto, as well as their successors, heirs, executors andassigns. This Second Amendment shall be governed by, and construed in accordance with, North Carolina law.3. Counterparts. This Second Amendment may be executed in two or more counterparts. Furthermore, the parties agree that (i)this Second Amendment may be transmitted between them by electronic mail and (ii) electronic signatures shall have the effect oforiginal signatures relative to this Second Amendment.[SIGNATURES APPEAR ON FOLLOWING PAGE]Exhibit 10.13IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed as of the Effective Date. LANDLORD: SVT PERIMETER FOUR, L.P., a Delaware limited partnershipBy:VPTC Management Partners, LLC, a Delaware limited liability company, itsAuthorized SignatoryBy: /s/ C. Walker Collier IIIName: C. Walker Collier IIITitle: ManagerTENANT:CHANNELADVISOR CORPORATION, a Delaware corporationBy: /s/ Diana Semel AllenName: Diana Semel Allen Title: VP, General Counsel & Secretary Exhibit 10.13EXHIBIT ADEPICTION OF CONFERENCE AMENITIES SPACESee attached.Exhibit 10.13Exhibit 10.13Exhibit 21.1Subsidiaries of ChannelAdvisor Corporation Name of Subsidiary Jurisdiction of Incorporation or Organization CA Washington, LLC Delaware ChannelAdvisor (Barbados) Ltd Barbados ChannelAdvisor Brasil 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 ChannelAdvisor Brands UK Limited United Kingdom ChannelAdvisor Brands UK Holdings Limited United Kingdom ChannelAdvisor (Shanghai) Information Technology Co., Limited People's Republic of China ChannelAdvisor Spain S.L. Spain ChannelAdvisor Japan K.K. Japan ChannelAdvisor Fulfillment, Inc. DelawareExhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-188988, 333-194188, 333-202321, 333-209708, and 333-216101) pertaining to the 2013 Equity Incentive Plan of ChannelAdvisor Corporation of our report dated February 13, 2018, with respect to the consolidatedfinancial statements of ChannelAdvisor Corporation and Subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2017. /s/ Ernst & Young LLPRaleigh, North CarolinaFebruary 13, 2018Exhibit 31.1CERTIFICATIONI, David J. Spitz, 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 Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) 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 known tous by others within those entities, particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)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; andd)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 13, 2018By:/s/ David J. Spitz David J. Spitz Chief Executive Officer (principal executive officer)Exhibit 31.2CERTIFICATIONI, Mark E. Cook, 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 Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) 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 known tous by others within those entities, particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;c)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; andd)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 13, 2018By:/s/ Mark E. Cook Mark E. Cook 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, 2017, as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers hereby certifies, pursuant to Rule 13a-14(b) ofthe Securities 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-Oxley Act 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/ David J. Spitz /s/ Mark E. CookDavid J. Spitz Mark E. CookChief Executive Officer Chief Financial OfficerFebruary 13, 2018 February 13, 2018The 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 languagecontained in such filing.

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