ChannelAdvisor
Annual Report 2018

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, 2018or☐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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 ☐ Smaller reporting company ☐ Emerging growth company ☐If 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. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No The aggregate market value of ChannelAdvisor Corporation voting and non-voting common equity held by non-affiliates as of June 29, 2018 (the last business day of theregistrant's most recently completed second fiscal quarter) based on the closing sale price of $14.05 as reported on the New York Stock Exchange on that date was $363,889,029.At February 1, 2019, 27,347,115 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 2019 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 Proceedings28Item 4.Mine Safety Disclosures28 PART II Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities29Item 6.Selected Financial Data31Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations33Item 7A.Quantitative and Qualitative Disclosures About Market Risk49Item 8.Financial Statements and Supplementary Data50Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure78Item 9A. Controls and Procedures78Item 9B.Other Information78 PART III Item 10.Directors, Executive Officers and Corporate Governance79Item 11.Executive Compensation79Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters79Item 13.Certain Relationships and Related Transactions, and Director Independence79Item 14.Principal Accounting Fees and Services79 PART IV Item 15. Exhibits and Financial Statement Schedules79Item 16. Summary82 Signatures83 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 proprietarye-commerce cloud platform, which is accessed through a standard web browser, helps brands and retailers worldwide improve their online performance byexpanding sales channels, connecting with consumers around the world, optimizing their operations for peak performance and providing actionable analyticsto improve competitiveness. More specifically, our suite of solutions allows our customers to manage their product listings, inventory availability, pricingoptimization, search terms, orders and fulfillment, and other critical functions across these channels. Our customers utilize our platform to connect with newand existing sources of demand for their products through channels such as Amazon, eBay, Facebook, Google and Walmart. Our fulfillment solution makes iteasier for customers to connect to their supply chain, which could include distributors, manufacturers and third-party logistics providers. We also offersolutions that allow brands to send their web visitors or digital marketing audiences directly to authorized resellers and to gain insight into consumerbehavior. Overall, our platform delivers significant breadth, scalability and flexibility and in 2018, our customers processed approximately $10 billion ingross merchandise value ("GMV") through our platform.We serve customers across a wide range of industries and geographies. Our customers include the online businesses of brands and retailers, as well asadvertising agencies that use our solutions 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 brands and retailers, they also create additional complexity and challenges.Brands and retailers seeking new avenues to expand their online sales must manage product data and transactions across hundreds of highly fragmentedonline channels where data attributes vary, requirements change frequently and the pace of innovation is rapid and increasing. Speed of order fulfillment isbecoming increasingly strategic to winning consumers' business. There are a significant number of possible fulfillment locations around the world, each withdifferent technological capability and communication requirements.We address these challenges by offering brands and retailers SaaS solutions that enable them to integrate, manage and optimize their merchandise salesacross these disparate online channels. In addition, we facilitate improved collaboration between brands and their authorized resellers through solutions thatdeliver high value leads from brands to those resellers. We generate the majority of our revenue from our customers' access to and usage of our SaaS solutions,which are organized into modules. Each module integrates with a particular type of channel, such as third-party marketplaces, digital marketing websites andauthorized reseller websites. Using our solutions, customers can:•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;3Table of Contents•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 brand websites and digital marketing campaigns to the e-commerce sites and physical stores ofauthorized 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 brands and retailers selling onlineE-commerce is a large and global market that continues to expand as brands and retailers continue to increase their online sales. However, it is also anincreasingly complex and fragmented market due to the hundreds of channels available to brands and retailers and the rapid pace of change and innovationacross those channels. Historically, a brand or retailer might have simply established an online storefront and used a basic paid search program to drive trafficto its website. Today, in order to gain consumers' attention in a more crowded and competitive online marketplace, an increasing number of brands and manyretailers sell their merchandise through multiple online channels, each with its own rules, requirements and specifications. In addition, brands and retailersoften seek to sell their products in multiple countries, each with its own local consumer preferences and behaviors.Several significant trends have contributed to this increasing complexity and fragmentation, including:•Emergence and growth of online third-party marketplaces. Third-party marketplaces, which are marketplaces that aggregate 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 Albertsons,Urban Outfitters and Walmart, have incorporated third-party marketplaces into their online storefronts, allowing other brands and retailers tomarket 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 brands and retailers to build additional device-specific optimization and functionality into their websites, increasing the complexity ofmanaging their online presences.4Table of Contents•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 brand websites, have emerged as keyinfluencers 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 brands andretailers to extend their online presence through country- or region-specific marketplaces, such as Alibaba in Asia. Conversely, the growth ofmarketplaces such as Amazon into new countries is driving selling opportunities for brands and retailers to sell to a 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 brands and retailers can connect to consumers.•Increase in brands' participation in direct-to-consumer e-commerce. With the rise of Amazon and the struggles of some traditional retailpartners, more brands are exploring or participating in direct-to-consumer online sales using their own websites and/or third-party marketplaces.The shift to direct-to-consumer online sales is forcing brands to enhance their logistics and fulfillment capabilities compared to the traditionalbrick-and-mortar retail model. However, because those traditional retail partners still represent a majority of revenue for brands, many brandsdesire solutions that allow collaboration with those partners in addition to direct-to-consumer solutions.Challenges with alternative e-commerce solutionsThe fragmentation and increasing complexity of e-commerce channels are placing greater demands on brands and retailers that seek to grow theironline sales. These brands and retailers require solutions that will enable them to easily integrate their product offerings and inventory across multiple onlinechannels. 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, brands and retailers that rely on in-house capabilities are required to invest in and maintain significanttechnological infrastructure, human resources and industry relationships. Successful in-house solutions may typically require longer periods ofsetup 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 forbrands and retailers to help them manage single online channels or a single category of channels, but these point solutions often do not addressthe needs of brands and retailers seeking to manage pricing and inventory across multiple channels through a single, unified platform.•Solutions provided by the channels are not aligned with customers' broader online goals. Most online channels offer their own solutions thathelp brands and retailers connect with their specific channel and provide basic inventory control and data reporting functionality. By their verynature, however, these solutions are not channel independent and cannot help customers coordinate or optimize their online sales across themultiple online avenues available to them. As with point solutions, brands and retailers must work with disparate third-party providers toconnect 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.SaaS 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.5Table of ContentsTHE 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 2018, our customers processed approximately $10 billion in GMV through our platform. The scalability ofour platform allows us to quickly and efficiently support an increasing number of product listings and transactions processed through ourplatform 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 brands with insights about online assortment, product coverage gaps, pricing trends andadherence 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 brands and retailers manage their sales through online channels. Our suite of solutions includes thefollowing 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. Our platform supports fulfillment and logistics capabilities that automate order management for our customers by connectingonline storefronts and marketplaces to distribution, fulfillment and logistics providers around the globe. Our fulfillment features includeautomated inventory updates, cost updates and shipment notifications, automated product mapping, the ability to optimize how an order isfulfilled based on the preferences of our customers and the availability of products at different fulfillment locations, and shipping labelgeneration. Our platform also provides valuable analytics for fulfillment performance such as average fulfillment time by fulfillment vendor.Our fulfillment capabilities are enhanced by strategic partnerships with leading players in logistics and fulfillment, including DHL, FedEx andPitney Bowes. These capabilities are available in a single, unified experience.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, Google, Jet.com,Newegg, Overstock.com, TradeMe, Walmart and Zalando. Our standardized integration API, which we refer to as Access ChannelAdvisor, allowsadditional e-commerce channels to integrate with our platform requiring less support on launch, which we believe will result in a broader arrayof 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, 2018, we supported 118marketplaces and a dozen first-party connections (first-party connections enable our customers to sell their products directly to the marketplace,which then sells 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 and Microsoft's Bing, connects customers to socialcommerce sites such as Facebook, Instagram and Pinterest and supports advertising programs on some marketplaces such as Amazon and eBay.Our Digital Marketing module also allows customers to generate and send customized product data feeds to their partners, such as affiliatenetworks, retargeting vendors, personalization vendors and product review platforms.•Where to Buy. Our Where to Buy solution allows brands to provide their web visitors or digital marketing audiences with up-to-dateinformation about the authorized resellers that carry their products and the availability of those products online, as well as the ability to identifyoffline retailers that generally carry those products. This provides consumers with an easier path to purchase from an authorized reseller of theirchoice. The solution improves the consumer experience and helps brands gain a better understanding of consumer behavior through detaileddata about the flow of traffic between the brand and retailer.•Product Intelligence. Our Product Intelligence solution provides brands with insights about online assortment, product coverage gaps, pricingtrends and adherence by their retailers to content guidelines.OUR CUSTOMERSAs of December 31, 2018, we had 2,833 customers worldwide, including brand and retail customers across many consumer product categories. For theyear ended December 31, 2018, our ten largest customers in the aggregate accounted for 7.0% of our total revenue. No single customer accounted for morethan 1.5% of our total revenue during the year ended December 31, 2018.8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. Incrementalimprovements are generally released daily, with more significant enhancements and capabilities communicated approximately every 90 days. Through oursingle code base and multi-tenant software architecture, our customers benefit from our new capabilities as soon as they are 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 $22.4 million, $21.9 million and $17.7 million during the years ended December 31, 2018, 2017 and2016, respectively. In 2018, we expanded our research and development capabilities with new talent through organic growth, and in 2017, we expanded ourresearch and development capabilities with an acquisition and expanded our operations overseas with the opening of a new research and developmentfacility in Madrid, Spain.COMPETITIONThe market for products that help brands and retailers reach online consumers is competitive. The competitive dynamics of our market areunpredictable because it is in an early stage of development, rapidly evolving, fragmented and subject to potential disruption by new 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 brands and retailers with one or more online channels. We also compete with in-house solutions used by brands and retailers that elect to build andmaintain their own proprietary integrations to online channels. In addition, we compete with the channels themselves, which typically offer software tools,often for free, allowing brands and retailers 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 brands and retailers;•channel independence;•breadth of online channels supported;•integration of capabilities;•reporting and analytic capabilities;•proven and scalable technology; and•brand awareness and reputation.9Table of ContentsWe believe that we compete favorably with respect to all of these factors.INTELLECTUAL 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, 2018 and 2017, our backlog was approximately $73.9 million and $64.5 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 parties10Table of Contentsfrom infringement. Using our automated service, customers can generally upload any content they designate for use with our solutions. We maintain anactive copyright and trademark infringement policy and respond to take-down requests by third-party intellectual property right owners that might resultfrom content posted by our customers using our solutions. As our business expands to other countries, we must also respond to regional and country-specificintellectual property considerations, including take-down and cease and desist notices in foreign languages, and we must build infrastructure to support theseprocesses. The Digital Millennium Copyright Act, or DMCA, also applies to our business. This statute provides relief for claims of circumvention ofcopyright-protected technologies but includes a safe harbor that is intended to reduce the liability of online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights of others. Our copyright and trademark infringement policy is intended to satisfythe 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 (or 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 introduced a number of privacy-related changes for companies operating in the European Union, including greater controlfor 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 went into effect 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, 2018, we had 730 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.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 SEC maintains an internet site thatcontains reports, proxy and information statements and other information that we file electronically with the SEC. The address of the SEC's website iswww.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 $7.6 million and $16.6 million during the years ended December 31, 2018 and 2017, respectively, and we had anaccumulated deficit of $180.2 million as of December 31, 2018. 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 for brandsand retailers to be able to sell their merchandise on particular channels, as well as developments in technologies that can impede the display and tracking ofadvertisements. Our ability to retain existing customers and attract new customers depends in large part on our ability to enhance and improve our existingsolutions and introduce new solutions that can adapt quickly to these technological changes. To achieve market acceptance for our solutions, we musteffectively anticipate and offer solutions that meet frequently changing channel requirements in a timely manner. If our solutions fail to do so, our ability torenew 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 brands and retailers to connect to them, may decideto 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 brands and retailersseeking to sell online otherwise diminish, demand for our solutions could decline.Our solutions enable brands and retailers to manage their merchandise sales through hundreds of disparate online channels. One of the key attractionsof our solutions to brands and retailers is the ability to help address the complexity and fragmentation of selling online. Although the number and variety ofonline channels available to brands and retailers have been increasing, at the same time the share of online sales made through a small number of largerchannels, particularly Amazon, has also been increasing. If the trend toward consolidation around a few large online channels accelerates, the difficultiesfaced by brands and retailers could decline, which might make our solutions less important to brands and retailers and could cause demand for our solutionsto 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 processed throughour platform over the term of their agreement with us, and errors in our software or human error could cause transactions to be incorrectly processed thatwould 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:16Table of Contents•seasonal patterns in consumer spending;•the addition of new customers or the loss of existing customers;•changes in demand for our software;•the timing and amount of sales and marketing expenses;•changes in the prospects of the economy generally, which could alter current or prospective customers' spending priorities, or couldincrease the time it takes us to close sales;•changes in our pricing policies or the pricing policies of our competitors;•costs necessary to improve and maintain our software platform; and•costs related to acquisitions of other businesses.Our operating results may fall below the expectations of market analysts and investors in some future periods, which could cause the market price ofour common stock to decline substantially.The seasonality of our business creates significant variance in our quarterly revenue, which makes it difficult to compare our financial results on asequential quarterly basis.Our customers are brands and retailers that typically realize a significant portion of their online sales in the fourth quarter of each year during theholiday season. As a result of this seasonal variation, our subscription revenue fluctuates, with the variable portion of our subscription fees being higher inthe fourth quarter than in other quarters and with revenue generally declining in the first quarter sequentially from the fourth quarter. Our business is thereforenot necessarily comparable on a sequential quarter-over-quarter basis and you should not rely solely on quarterly comparisons to analyze our growth.Failure to adequately manage our growth could impair our ability to deliver high-quality solutions to our customers, hurt our reputation 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.Following the U.S. Supreme Court's decision in South Dakota v. Wayfair, some states have begun to enact, and others may choose to enact in the future,new legislation and increase enforcement efforts of existing legislation requiring online retailers to collect and remit sales tax. If there is increasedlegislative or enforcement action, e-commerce in general could decline, and any additional taxes may increase the costs we and/or our customers will haveto pay to sell their goods through our platform, thereby making our solutions less attractive and potentially resulting in a lower amount of GMV processedthrough our platform. As a result, our revenue could decline.An increasing number of states have considered or adopted laws that require out-of-state retailers to collect sales taxes on their behalf. The U.S.Supreme Court recently reversed its prior decision that prohibited states from requiring online retailers without a physical presence to collect and remit salestax. In its decision, the Supreme Court upheld a South Dakota statute that imposed a sales tax collection obligation on remote sellers with sales exceedingspecified thresholds. A number of states have already begun, or have positioned themselves to begin, requiring sales and use tax collection by remotevendors and/or by online marketplaces. The details and effective dates of these collection requirements vary from state to state. This is a rapidly evolvingarea and we cannot predict what legislative or enforcement action might be taken by the states or Congress. Increased taxation of online sales could result inonline shopping losing some of its current advantage over traditional retail models, which could diminish its appeal to consumers. This could cause e-commerce growth to slow, which would, in turn, hurt the business of our customers, potentially make our products less attractive and cause the amount ofGMV processed through our platform, and ultimately our revenue, to decline.In addition, it is possible that one or more states or the federal government or foreign countries may seek to impose a tax collection, reporting orrecord-keeping obligation on companies like us that facilitate e-commerce, even though we are not an online retailer. Similar issues exist outside of theUnited States, where the application of value-added tax or other indirect taxes on online retailers and companies like us that facilitate e-commerce isuncertain and evolving. A successful assertion by one or more states requiring us to collect taxes where we presently do not do so, or to collect more taxes ina jurisdiction in which we18Table of Contentscurrently do collect some taxes, could result in substantial tax liabilities, including taxes on past sales, as well as penalties and interest. The imposition ofsales tax collection obligations on out-of-state customers could also create additional administrative burdens for us, put us at a competitive disadvantage ifthey do not impose similar obligations on our competitors and decrease our future sales, which could have a material adverse impact on our business andoperating results. In addition, the imposition of sales taxes on our customers who did not collect such taxes in the past could result in them charging higherrates for their products, potentially resulting in lower sales and a lower amount of GMV processed through our platform, which would negatively impact ourrevenue. Additionally, new legislation could require us to incur substantial costs in order to comply, including costs associated with tax calculation,collection, remittance and audit requirements, any of which could make our platform solutions less attractive.We 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 described in this Annual Reporton Form 10-K, we previously 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. Through December 31, 2018, we paid an aggregate of $2.5 million under theterms of completed VDAs and as a settlement with one jurisdiction that rejected our VDA application and conducted a sales tax audit. We do not currentlyhave any unresolved VDA applications or ongoing sales tax audits, though any successful assertion that we should be collecting additional sales, use, valueadded or other taxes in those jurisdictions where we have not historically done so and do not accrue for such taxes could result in substantial tax liabilitiesand related penalties for past sales, discourage customers from purchasing our application or otherwise harm our business and operating results.Changes to U.S. tax laws could adversely affect our business and financial condition.On December 22, 2017, the Tax Cuts and Jobs Act went into effect that significantly revises the Internal Revenue Code of 1986, as amended. This Act,among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flatrate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deductionfor net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings atreduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediatedeductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions andcredits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Act is uncertain and our business and financial conditioncould be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the Act. The impact of this tax reform on holders ofour common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to thislegislation and the potential tax consequences of investing in or holding our common 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 c19Table of Contentslassification of IP addresses, machine identification, location data and other information, may limit or inhibit our ability to operate or expand our business.Such laws and regulations require or may require us or our customers to implement privacy and security policies, permit consumers to access, correct 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 contained in an email message. Such laws and regulations could restrict our customers' ability to collect and use web browsing data and personalinformation, which may 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.The European Union adopted a new General Data Protection Regulation (or GDPR), which went into effect in May 2018, to unify data protectionwithin the European Union under a single law. The GDPR is likely to result in significantly greater compliance burdens and costs for companies withcustomers or operations in the European Union. The GDPR creates a range of new compliance obligations and increases financial penalties for non-compliance, and extends the scope of the European Union data protection law to all companies processing personal data of European Union residents,regardless of the company's location. These laws apply not only to third-party transactions, but also to transfers of information between us and oursubsidiaries, including employee information. We will continue to follow developments and work to maintain conforming means of transferring data fromEurope, but despite our efforts to address the changes, we may be unsuccessful in establishing conforming means of transferring data from Europe. There issignificant uncertainty related to the manner in which data protection authorities will seek to enforce compliance with GDPR. For example, it is not clear ifthe authorities will conduct random audits of companies doing business in the European Union, or if the authorities will wait for complaints to be filed byindividuals who claim their rights have been violated. Enforcement uncertainty and the costs associated with ensuring GDPR compliance could be onerousand adversely affect our business, financial condition, results of operations and prospects. While we do not currently believe that our compliance with theGDPR will have a material effect on our business, we will continue to monitor regulation and enforcement under this new law.Changing industry standards and industry self-regulation regarding the collection, use and disclosure of data may have similar effects. Existing andfuture privacy and data protection laws and increasing sensitivity of consumers to unauthorized disclosures and use of personal information may alsonegatively affect the public's perception of our customers' sales practices. If our solutions are perceived to cause, or are otherwise unfavorably associated with,invasions of privacy, whether or not illegal, we or our customers may be subject to public criticism. Public concerns regarding data collection, privacy andsecurity may also cause some consumers to be less likely to visit our customers' websites or otherwise interact with our customers, which could limit thedemand for our solutions and inhibit the growth of our business.Any failure on our part to comply with applicable privacy and data protection laws, regulations, policies and standards or any inability to adequatelyaddress privacy concerns associated with our solutions, even if unfounded, could subject us to liability, damage our reputation, impair our sales and 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, targeted at us or our third-party contractors or consultants, andcould involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corruptingdata or causing operational disruption. Such disruptions may be caused by events such as computer hacking, phishing attacks, ransomware, dissemination ofcomputer viruses, worms and other destructive or disruptive software, denial of service attacks and other malicious activity, as well as power outages, naturaldisasters (including extreme weather), terrorist attacks or other similar events. We believe that we take reasonable steps to protect the security, integrity andconfidentiality of the information we collect, use, store, and disclose, but there is no guarantee that inadvertent or unauthorized data access will not occurdespite our efforts. For example, our system redundancy may be ineffective or inadequate, or we could be impacted by software bugs or other technical20Table of Contentsmalfunctions, as well as employee error or malfeasance. In addition, while we believe we have adequate insurance coverage to compensate for any lossesassociated with such events, the coverage may in fact not be adequate to cover all potential losses. The development and maintenance of these systems,controls and processes is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures becomeincreasingly sophisticated. Any unauthorized access or use of information, virus or similar breach or disruption to our, our customers', or our partners' systemsand security measures could result in disrupted operations, loss of information, damage to our reputation and customer relationships, early termination of ourcontracts and other business losses, indemnification of our customers, misstated or unreliable financial data, liability for stolen assets or information,increased cybersecurity protection and insurance costs, financial penalties, litigation, regulatory investigations, and other significant liabilities, any of whichcould materially harm our business.Global economic conditions could materially adversely impact demand for our solutions.Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about global economic conditions could resultin customers postponing purchases of our solutions in response to tighter credit, unemployment, negative financial news or declines in income or asset valuesand other macroeconomic factors, or the perception that any of these may occur, any of which could have a material negative effect on demand for oursolutions and, accordingly, on our business, results of operations or financial condition. For example, the United States has recently imposed increased tariffson certain imports from China and has expressed a willingness for further tariffs on goods imported from China. Any economic uncertainty caused by theUnited States tariffs imposed on goods from China, among other potential countries, and any retaliatory counter-measures imposed by countries subject tosuch tariffs, could have a negative impact on consumer spending for discretionary items, which in turn could hurt our brand and retailer customers in amanner that might cause them to spend less on our solutions. Any such outcome could impair our revenues and results of operations.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.We 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.21Table of ContentsRISKS 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;•compliance with changing foreign privacy, data protection and information security laws and regulations and the risks and costs ofnoncompliance;•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;•tariffs, customs, trade sanctions, trade embargoes and other barriers to importing or exporting materials and products in a cost-effective andtimely manner, or changes in applicable tariffs or customs rules;•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; and•overall higher costs of doing business internationally.If our revenue from our international operations does not exceed the expense of establishing and maintaining these operations, our business andoperating results will suffer.Our European operations could be disrupted due to the United Kingdom's planned exit from the European Union, commonly referred to as “Brexit.”Our European headquarters are located in England, and we have offices in Germany, Ireland and Spain supporting brands and retailers throughoutEurope. Currently, the United Kingdom is scheduled to leave the European Union effective March 29, 2019, but the relationship between the UnitedKingdom and the European Union following a United Kingdom departure has not been determined yet. As a result, the impact of Brexit is not yet known anddepends on any agreements the United Kingdom and European Union may make to retain access to each other's markets, either during a transition period ormore permanently. The measures or lack of any agreement could disrupt the markets we serve and may increase costs for European consumers and ourcustomers, which may cause consumers to reduce spending on products that our solutions serve and may cause customers to reduce their spending on oursolutions. In addition, Brexit could lead to legal uncertainly and potentially divergent national laws and regulations, including with respect to data privacy.It is unclear what financial, trade, legal and employment implications the withdraw of the United Kingdom from the European Union would have and how thew22Table of Contentsithdrawal would affect us. Adverse consequences such as reduced consumer spending, deterioration in economic conditions, volatility in exchange rates, andprohibitive laws and regulations could have a negative impact on our business, operating results and financial condition.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;•require technology changes to our software that would cause us to incur substantial cost;23Table of Contents•subject us to significant liabilities; and•require us to cease some or all of our activities.In addition to liability for monetary damages against us, which may be tripled and may include attorneys' fees, or, in some circumstances, damagesagainst our customers, we may be prohibited from developing, commercializing or continuing to provide some or all of our software solutions unless 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. Effective trade secret, copyright, trademark, domain name and patent protection isexpensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. We may be requiredto protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may notpursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could beexpensive and time-consuming.We have licensed in the past, and expect to license in the future, some of our proprietary rights, such as trademarks or copyrighted material, to thirdparties. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation.Monitoring unauthorized use of our intellectual property is difficult and costly. Our efforts to protect our proprietary rights may not be adequate toprevent misappropriation of our intellectual property. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, ourintellectual property rights. Our competitors may also independently develop similar technology. In addition, the laws of many countries, such as China andIndia, do not protect our proprietary rights to as great an extent as do the laws of European countries and the United States. Further, the laws in the UnitedStates and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect ourintellectual property could result in competitors offering services that incorporate our most technologically advanced features, which could seriously reducedemand for our software solutions. In addition, we may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff 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. In addition,there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As aresult, we could be subject to suits by parties claiming ownership of what we believe24Table of Contentsto be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition and require usto devote additional research and development resources to change our products.RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCKAn active trading market for our common stock may not continue to develop or be sustained.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, andwe have limited research coverage by equity research analysts. Equity research analysts may elect not to initiate or continue to provide research coverage ofour common stock, and such lack of research coverage may adversely affect the market price of our common stock. Even if we have equity research analystcoverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could decline if one ormore equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceasescoverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or tradingvolume to decline.25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.If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.We are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall 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 maintain appropriate and necessary accounting and finance functions and that we expendsignificant management efforts.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.26Table of ContentsIf 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 ceased to be an "emerging growth company" under the JOBS Act on January 1, 2019. These additional costs could negatively affect ourfinancial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulationsimplemented by the SEC and stock exchanges, may increase legal and financial compliance costs and make some activities more time consuming. Theselaws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance isprovided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investmentmay result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities tocompliance activities. If notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities mayinitiate legal proceedings against 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 nexttwelve months, we may need to raise additional capital to fund operations in the future or to meet various objectives, including developing futuretechnologies and services, increasing working capital, acquiring businesses and responding to competitive pressures. If we seek to raise additional capital, itmay not be available on favorable terms or may not be available at all. Lack of sufficient capital resources could significantly limit our ability to manage ourbusiness and to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with anequity component would dilute our stock ownership. If adequate additional funds are not available, we may be required to delay, reduce the scope of oreliminate 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 110,000 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.27Table of ContentsWe 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.28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."STOCK 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, 2018, 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 that such information be treated as soliciting material or specificallyincorporate it by reference into a filing under the Securities Act of 1933, as amended, or a filing under the Securities Exchange Act of 1934, as amended.STOCKHOLDERSAs of February 1, 2019, there were 72 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 in29Table of Contentsstreet name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by otherentities.RECENT SALES OF UNREGISTERED SECURITIESNone.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PARTIESNone.30Table of ContentsITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 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, 2018 2017 2016 2015 2014 (in thousands, except share and per share data)Consolidated statements of operations data: Revenue$131,218 $122,535 $113,200 $100,585 $84,901Gross profit (1)101,717 93,433 82,130 71,695 57,970Loss from operations(7,506) (16,578) (13,837) (21,193) (34,008)Other income (expense)519 305 172 57 (465)Net loss$(7,601) $(16,557) $(8,007) $(20,951) $(34,514)Net loss per share—basic and diluted$(0.28) $(0.63) $(0.31) $(0.84) $(1.40)Weighted average shares of common stock outstanding used incomputing net loss per share—basic and diluted27,138,274 26,366,748 25,604,893 25,062,610 24,619,714Other financial data: Adjusted EBITDA (2)$9,782 $4,569 $7,436 $1,443 $(19,532) ____________________________ (1)Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no impact on reported loss from operations or net lossfor the period. Refer to Note 2, "Significant Accounting Policies," for further detail.(2)We define adjusted EBITDA as net loss plus or (minus): income tax expense (benefit); interest (income) expense, net; depreciation and amortization and stock-basedcompensation. For some periods, we have also excluded non-recurring costs, such as severance and related costs; a one-time charge for VDAs and settlement of an audit relatedto sales taxes; headquarters relocation and related costs; or acquisition-related costs. Please see "—Adjusted EBITDA" below for more information and for a reconciliation ofadjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the UnitedStates, or GAAP. As of December 31, 2018 2017 2016 2015 2014 (in thousands)Consolidated balance sheets data: Cash and cash equivalents$47,185 $53,422 $65,420 $60,474 $68,366Accounts receivable, net23,436 27,452 19,445 18,949 14,619Total assets134,269 140,511 139,158 130,956 127,047Total liabilities44,631 58,600 52,161 47,032 33,399Additional paid-in capital271,550 262,805 252,158 240,360 228,370Total stockholders' equity89,638 81,911 86,997 83,924 93,648ADJUSTED 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.31Table of ContentsOur use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of ourresults as reported under GAAP. Some of these limitations are:•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in thefuture, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditurerequirements;•adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;•adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;•adjusted EBITDA does not reflect interest or income 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 loss and our other GAAP results. The following table presents a reconciliation of net loss to adjusted EBITDA foreach of the periods indicated: Year Ended December 31, 2018 2017 2016 2015 2014 (in thousands)Net loss$(7,601) $(16,557) $(8,007) $(20,951) $(34,514)Adjustments: Interest (income) expense, net(510) (222) 1 184 209Income tax expense (benefit)614 284 (5,658) (185) 41Depreciation and amortization expense6,094 6,578 7,838 8,793 6,264Total adjustments, net6,198 6,640 2,181 8,792 6,514EBITDA(1,403) (9,917) (5,826) (12,159) (28,000)Stock-based compensation expense10,598 11,947 13,262 11,837 7,981Non-recurring severance and related costs587 — — 656 —One-time charge for VDAs related to sales taxes— 2,539 — — —Headquarters relocation and related costs— — — 1,109 —Acquisition-related costs— — — — 487Adjusted EBITDA$9,782 $4,569 $7,436 $1,443 $(19,532)32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 $131.2 million for the year ended December 31, 2018 increased 7.1% from the prior year;•Average revenue per customer of $46,286 for the year ended December 31, 2018 increased 8.4% compared with $42,693 for the prior year;•Revenue was comprised of 76.3% and 23.7% fixed and variable subscription fees, respectively, for both of the years ended December 31, 2018 and2017;•Revenue derived from customers located outside of the United States as a percentage of total revenue was 23.9% for the year ended December 31,2018 compared with 21.9% for the prior year;•Gross margin of 77.5% for the year ended December 31, 2018 improved by 120 basis points compared with gross margin of 76.3% for the prior year;•Operating margin of (5.7)% for the year ended December 31, 2018 improved 780 basis points compared with operating margin of (13.5)% for theprior year;•Net loss of $7.6 million for the year ended December 31, 2018 improved compared with net loss of $16.6 million for the prior year;•Adjusted EBITDA of $9.8 million for the year ended December 31, 2018 increased 114.1% compared with adjusted EBITDA of $4.6 million for theprior year;•Cash and cash equivalents was $47.2 million at December 31, 2018 compared with $53.4 million at December 31, 2017; and•Operating cash flow was $1.2 million for the year ended December 31, 2018 compared with $(3.0) 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. In 2017, we expanded our research and development capabilities with new talent through organic growth, an acquisition andexpanding our operations overseas with the opening of a new research and development facility in Madrid, Spain. In 2018, we continued to enhanceour product offering by increasing online shopping marketplace channel integrations, including first-party retail programs, and improving ouranalytics capabilities and fulfillment features.•Growth in Mobile Usage. We believe the shift toward mobile commerce will increasingly favor aggregators such as Amazon, eBay and Google, allof which are focal points of our platform. These systems understand the identity of the buyer, helping to reduce friction in the mobile commerceprocess, while offering a wide selection of merchandise in a single location. The growth in mobile commerce may result in increased revenue for us.33Table of Contents•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.•Evolving Fulfillment Landscape. Consumers have been conditioned to expect fast, efficient delivery of products. We believe that determining andexecuting on a strategy to more expeditiously receive, process and deliver online orders, which we refer to collectively as fulfillment, is critical tosuccess for online sellers. Therefore, it will be increasingly important for us to facilitate and optimize fulfillment services on behalf of our customers,which in turn may result in additional research and development investment.•Focus on Employees. We strive to provide competitive compensation and benefits programs to help attract and retain employees who are focused onfacilitating the success of our customers.•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 need to continue to innovate in the face of a rapidly changing e-commerce landscape if we are to remaincompetitive. We also need to effectively manage our growth, especially related to our international expansion.•Brands and Retailers. As consumer preferences potentially shift from smaller retailers, we need to continue to add brands and large retailers asprofitable customers. These customers generally pay a lower percentage of GMV as fees to us based on the relatively higher volume of their GMVprocessed through our platform. To help drive our future growth, we have made significant investments in our sales force and allocated resourcesfocused on growing our customer base of brands and large retailers. We continue to focus our efforts on increasing value for our customers to supporthigher rates.•Strategic Partnerships. Our business development team's mission is to expand our sales and market opportunities through strategic partnerrelationships. We plan to continue to invest in initiatives to expand our strategic partnership base to further enhance our offerings for brands andretailers.•Increasing Complexity of E-commerce. Although e-commerce continues to expand as brands and retailers continue to increase their online sales, itis also becoming more complex due to the hundreds of channels available to brands and retailers and the rapid pace of change and innovation acrossthose channels. In order to gain consumers' attention in a more crowded and competitive online marketplace, an increasing number of brands andmany retailers sell their merchandise through multiple online channels, each with its own rules, requirements and specifications. In particular, third-party marketplaces are an increasingly important driver of growth for a number of brands and large online retailers. As a result, we need to continueto support multiple channels in a variety of geographies in order to support our targeted revenue growth. As of December 31, 2018, we supported118 marketplaces, up from 89 at December 31, 2017.•Global Growth in E-commerce. We believe the growth in e-commerce globally presents an opportunity for brands and retailers to engage ininternational sales. However, country-specific marketplaces are often the market share leaders in their regions, as is the case for Alibaba in Asia. Inorder to help our customers capitalize on this potential market opportunity, and to address our customers' needs with respect to cross-border trade, weintend to continue to invest in our international operations. Doing business overseas involves substantial challenges, including managementattention and resources needed to adapt to multiple languages, cultures, laws and commercial infrastructure, as further described in this report underthe 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.34Table of ContentsKEY FINANCIAL AND OPERATING METRICS The average revenue generated per customer 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.The number of customers decreased slightly. We continue our focuson obtaining brands and large retailers as customers, which may represent asmaller number of total customers, but a potentially larger source ofpredictable or sustainable recurring revenue. Adjusted EBITDA represents our earnings before interest (income)expense, income tax expense (benefit) and depreciation and amortization,adjusted to eliminate stock-based compensation expense, which is a non-cash item, as well as non-recurring severance and related costs for 2018 anda one-time charge of $2.5 million in 2017 for VDAs and settlement of anaudit related to sales taxes (refer to Note 6, "Commitments andContingencies," to our consolidated financial statements includedelsewhere in this Annual Report for additional information regarding thisone-time charge). Adjusted EBITDA for the year ended December 31, 2018was favorably impacted by our adoption of Accounting Standards UpdateNo. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC606") due to our capitalization of contract costs that had been expensed asincurred in periods prior to January 1, 2018. We believe that adjustedEBITDA provides useful information to management and others inunderstanding and evaluating our operating results. However, adjustedEBITDA is not a measure calculated in accordance with GAAP and shouldnot be considered as an alternative to any measure of financial performancecalculated and presented in accordance with GAAP. In addition, adjustedEBITDA may not be comparable to similarly titled measures of othercompanies because other companies may not calculate adjusted EBITDA inthe same manner that we do. Please refer to Item 6. "Selected Financial Data—Adjusted EBITDA" in this Annual Report for a discussion of thelimitations of adjusted EBITDA and a reconciliation of adjusted EBITDAto net loss, the most comparable GAAP measurement.35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 201820172016 2018 to 2017 2017 to 2016(dollars in thousands) Revenue$131,218 $122,535 $113,200 $8,6837.1 % $9,3358.2 %Cost of revenue (1)29,501 29,102 31,070 3991.4 (1,968)(6.3)Gross profit101,717 93,433 82,130 8,2848.9 11,30313.8Operating expenses: Sales and marketing (1)60,080 60,343 53,152 (263)(0.4) 7,19113.5Research and development22,359 21,868 17,736 4912.2 4,13223.3General and administrative26,784 27,800 25,079 (1,016)(3.7) 2,72110.8Total operating expenses109,223 110,011 95,967 (788)(0.7) 14,04414.6Loss from operations(7,506) (16,578) (13,837) 9,072(54.7) (2,741)19.8Other income (expense): Interest income (expense), net510 222 (1) 288129.7 223*Other income (expense), net9 83 173 (74)(89.2) (90)(52.0)Total other income (expense)519 305 172 21470.2 13377.3Loss before income taxes(6,987) (16,273) (13,665) 9,286(57.1) (2,608)19.1Income tax expense (benefit)614 284 (5,658) 330116.2 5,942(105.0)Net loss$(7,601) $(16,557) $(8,007) $8,956(54.1) $(8,550)106.8* Not meaningful. Year Ended December 31, 201820172016 (as a percentage of revenue)Revenue100.0 % 100.0 % 100.0 %Cost of revenue (1)22.5 23.7 27.4Gross profit77.5 76.3 72.6Operating expenses: Sales and marketing (1)45.8 49.2 47.0Research and development17.0 17.8 15.7General and administrative20.4 22.7 22.2Total operating expenses83.2 89.8 84.8Loss from operations(5.7) (13.5) (12.2)Other income (expense): Interest income (expense), net0.4 0.2 —Other income (expense), net— 0.1 0.2Total other income (expense)0.4 0.2 0.2Loss before income taxes(5.3) (13.3) (12.1)Income tax expense (benefit)0.5 0.2 (5.0)Net loss(5.8) (13.5) (7.1)(1) Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no impact on our reported loss from operations or net lossfor the period. Refer to Note 2, "Significant Accounting Policies," to our condensed consolidated financial statements included in this report for further detail.36Table of ContentsREVENUE 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 providing launch assistance and training.Because our customer contracts generally contain both fixed andvariable pricing components, changes in GMV between periods do nottranslate directly or linearly into changes in our revenue. We use customizedpricing structures for each of our customers depending upon the individualsituation of the customer. For example, some customers may commit to ahigher specified minimum GMV amount per month in exchange for a lowerfixed percentage fee on that committed GMV. In addition, the percentage feeassessed on the variable GMV in excess of the committed minimum for eachcustomer is typically higher than the fee on the fixed, committed portion. Asa result, our overall revenue could increase or decrease even without anychange in overall GMV between periods, depending on which customersgenerated the GMV. In addition, changes in GMV from month to month forany individual customer that are below the specified minimum amountwould have no effect on our revenue from that customer, and each customermay alternate between being over the committed amount or under it frommonth to month. For these reasons, while GMV is an important qualitativeand long-term directional indicator, we do notregard it as a useful quantitative measurement of our historic revenues or as apredictor of future revenues. Under ASC 606, we recognize fixed subscription fees and implementationfees ratably over the contract period beginning on the date the customer hasaccess to the software. In determining the amount of revenue to berecognized, we apply the following steps:•Identify the promised services in the contract;•Determine whether the promised services are performanceobligations, including whether they are distinct in the context ofthe contract;•Allocate the transaction price to the performance obligations basedon estimated selling prices; and•Recognize revenue as we satisfy each performanceobligation.37Table of Contents(1) Certain prior period amounts have been reclassified to conform to current periodpresentation. These reclassifications had no impact on our reported total revenue for theperiods. The primary products we offer are:•Marketplaces. Our Marketplaces module connects customers tothird-party marketplaces such as Amazon, Catch, eBay, Google,Jet.com, Newegg, Overstock.com, TradeMe, Walmart and Zalando.•Digital Marketing. Our Digital Marketing module connectscustomers to comparison shopping websites such as GoogleShopping and Shopzilla, and social commerce sites, such asFacebook, Instagram and Pinterest, and supports advertisingprograms on some marketplaces, such as Amazon and eBay.•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 brands to providetheir web visitors or digital marketing audiences with up-to-dateinformation about the authorized resellers that carry their productsand the availability of those products. Our Product Intelligencesolution provides brands with insights about online assortment,product coverage gaps, pricing trends and adherence by theirretailers to content guidelines. We also enter into integrationagreements with certain marketplaces or channels under which thebusiness partner engages us to integrate our platform withtheir marketplace or channel.We generally invoice our customers for the fixed portion of thesubscription fee in advance, in monthly, quarterly, semi-annual or annualinstallments. We invoice our customers for the implementation fee at theinception of the arrangement. Fixed subscription and implementation feesthat have been invoiced are initially recorded as deferred revenue and aregenerally recognized ratably over the contract term.In general, we invoice and recognize revenue from the variableportion of subscription fees in the period in which the related GMV oradvertising spend is processed.Comparison of 2018 to 2017Revenue increased by 7.1%, or $8.7 million, to $131.2 million for theyear ended December 31, 2018 compared with $122.5 million for the prioryear primarily due to an increase in the average revenue per customer.Average revenue per customer increased 8.4%, to $46,286 for the yearended December 31, 2018 compared with $42,693 for the yearended December 31, 2017. The increase in the average revenue per customerwas primarily driven by the growth of revenue derived from our marketplacessolution. This growth was largely attributable to an overall increase intransaction volume. In addition, the increase in average revenue percustomer was due in part to our established customers who have increasedtheir revenue over time on our platform. In general, as customers mature theygenerate a higher amount of GMV from which we derive revenue and insome cases they may subscribe to additional modules on our platform,thereby increasing our subscription revenue.In addition, other revenue increased by 39.7%, or $4.5 million, to$16.0 million for the year ended December 31, 2018 compared with $11.4million for the prior year largely due to growth in revenue derived from ourWhere to Buy solution, attributable to both new and expanded contractualarrangements.38Table of ContentsComparison of 2017 to 2016Revenue increased by 8.2%, or $9.3 million, to $122.5 million for the year ended December 31, 2017 compared with $113.2 million for the prior yearprimarily due to an increase in the average revenue per customer.Average revenue per customer increased 8.5% to $42,693 for the year ended December 31, 2017 compared with $39,339 forthe year ended December 31, 2016. The increase in average revenue per customer was primarily driven by the growth of revenue derived from ourmarketplaces solution.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 2018 to 2017Cost of revenue increased by 1.4%, or $0.4 million, to $29.5 million for theyear ended December 31, 2018 compared with $29.1 million for the prioryear. The change was comprised primarily of an increase in contractor coststo support our services team.Comparison of 2017 to 2016Cost of revenue decreased by 6.3%, or $2.0 million, to $29.1 million for theyear ended December 31, 2017 compared with $31.1 million for the prioryear. The change was comprised primarily of decreases of:•$1.2 million in compensation and employee-related costs,including stock-based compensation expense, due to changes inheadcount; and•$0.5 million in co-location and infrastructure maintenance costsprimarily associated with closing a data center and retiring serversused to support legacy product offerings that are no longer part ofour strategic focus.39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 and stock-based compensation;•Amortization of capitalized sales commissions and related incentivepayments over their expected term of benefit due to our adoption ofASC 606 beginning in 2018, and sales commissions and relatedincentive payments expensed as incurred in periods prior to 2018;•Marketing, advertising and promotional event programs; and•Corporate communications.Comparison of 2018 to 2017Sales and marketing expense decreased by 0.4%, or $0.3 million, to $60.1 million for the year ended December 31, 2018 compared with $60.3 million for theprior year. The change was comprised primarily of (decreases) increases of:•$(6.8) million due to the deferral of sales commissions and a portion of other incentive compensation, referred to collectively as contract costs,which were expensed as incurred prior to our adoption of ASC 606 at the beginning of 2018; and•$(0.3) million in professional fees, including consulting and contractor services; partially offset by•$6.8 million in compensation and employee-related costs, mainly due to additional headcount to support our sales and marketing organization tocontinue to grow our business.Comparison of 2017 to 2016Sales and marketing expense increased by 13.5%, or $7.2 million, to $60.3 million for the year ended December 31, 2017 compared with $53.2 million forthe prior year. The change was comprised primarily of increases of:•$4.4 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.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.40Table of ContentsComparison of 2018 to 2017Research and development expense increased by 2.2%, or $0.5 million, to $22.4 million for the year ended December 31, 2018 compared with $21.9 millionfor the prior year. The change was comprised primarily of an increase in compensation and employee-related costs due to an increase in headcount to supportour growth and the enhancement of our product offerings.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 compared with $17.7million for the prior year. The change was comprised primarily of increases of:•$3.4 million in compensation and employee-related costs, mainly due to additional headcount from our acquisition of HubLogix Commerce Corp.or HubLogix, and the expansion of our research and development footprint with the opening of our engineering office in Madrid, Spain to supportour growth and the enhancement of our product offerings; and•$0.5 million in software, hosting and travel costs to further support our growth and investment in research and development.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;•One-time expense associated with VDAs and settlement of a sales taxaudit;•Bad debt expense; and•Costs associated with compliance with the Sarbanes-Oxley Act andother regulations governing public companies.Comparison of 2018 to 2017General and administrative expense decreased by 3.7%, or $1.0 million, to $26.8 million for the year ended December 31, 2018 compared with $27.8 millionfor the prior year. The change was comprised primarily of (decreases) increases of:•$(2.5) million for the one-time charge during 2017 in connection with entering into VDAs related to sales taxes with certain jurisdictions andsettlement of a sales tax audit; partially offset by•$0.6 million in non-recurring severance and related costs due to our reorganization of our China operations;•$0.5 million in professional fees, including placement and contractor services, to facilitate the support and growth of our operations, and accountingand advisory services in connection with our first year obtaining an audit opinion on the effectiveness of our internal controls over financialreporting; and•$0.4 million in compensation and employee-related costs, mainly due to additional headcount.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 compared with $25.1million for the prior year. The change was comprised primarily of increases of:•$2.5 million for the one-time charge in connection with entering into VDAs related to sales taxes with certain jurisdictions and settlement of a salestax audit; and•$0.2 million in compensation and employee-related costs, mainly due to additional headcount.41Table of ContentsGROSS AND OPERATING MARGINS Comparison of 2018 to 2017Gross margin improved by 120 basis points to 77.5% during the year ended December 31, 2018 compared with 76.3% for the prior year as a result ofthe increase in revenue at a greater rate of growth than cost of revenue. Our improved gross margin was a result of our continuing strategic efforts to scale ourbusiness operations while managing costs.Operating margin improved by 780 basis points to (5.7)% during the year ended December 31, 2018 compared with (13.5)% for the prior year due toour increase in revenue and decrease in operating expenses of 7.1% and (0.7)%, respectively, which exceeded the growth in cost of revenue of 1.4%.Operating margin for the year ended December 31, 2018 was also favorably impacted by our adoption of ASC 606 due to our capitalization of contractcosts that had been expensed as incurred in periods prior to January 1, 2018. Operating margin for the year ended December 31, 2018 would have been(10.9)% had we not adopted ASC 606. Refer to Note 7, "Revenue from Contracts with Customers," for additional information regarding the impact ofadoption and revenue recognition under ASC 606 on our consolidated financial statements.Comparison of 2017 to 2016Gross margin improved by 370 basis points to 76.3% during the year ended December 31, 2017 compared with 72.6% for the prior year as a result ofthe increase in revenue and decrease in cost of revenue noted above. Our improved gross margin was a result of our continuing strategic efforts to achieveincreasing scale in our business operations.Operating margin declined by 130 basis points to (13.5)% during the year ended December 31, 2017 compared with (12.2)% for the prior year due to a14.6% growth in operating expenses, which includes the $2.5 million one-time charge for VDAs related to sales taxes described above and an increase incompensation and employee-related costs driven by additional headcount as we invest in resources to support the growth of our business. These operatingexpenses exceeded the 8.2% year-over-year increase in our revenue and 6.3% decrease in our cost of revenue. Excluding the impact of the one-time chargefor VDAs, operating margin for the year ended December 31, 2017 would have been (11.5)%.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 2018 to 2017Other income (expense) increased by $0.2 million to $0.5 million for the year ended December 31, 2018 compared with $0.3 million for the prior year. Thechange was primarily due to interest income driven by higher interest rates earned on our cash and cash equivalents.42Table of ContentsComparison of 2017 to 2016Other income (expense) increased by $0.1 million to $0.3 million for the year ended December 31, 2017 compared with $0.2 million for the prior year. Thechange was primarily due to interest income driven by higher interest rates earned on our cash and cash equivalents in our money market and savingsaccounts.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.Comparison of 2018 to 2017Income tax expense was $0.6 million for the year ended December 31, 2018 compared with $0.3 million for the prior year. The change was primarilydue to our adoption of ASC 606 which resulted in increased income from certain of our foreign subsidiaries.Comparison of 2017 to 2016Income tax expense was $0.3 million for the year ended December 31, 2017 compared with an income tax benefit of $5.7 million for the prior year.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 our foreign jurisdictionstotaling $5.3 million. The release of the valuation allowance was the result of our evaluation of the likelihood of potential tax benefits related to our foreignsubsidiaries' most recent three years of operating results and projections of future profitability, which primarily resulted from a change in our global transferpricing methodology.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 $2.5 million to $4.5 million, which willprimarily consist of computer hardware, purchased software and facilities build-out and improvements.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, 2018 2017 2016 (in thousands)Cash and cash equivalents$47,185 $53,422 $65,420Accounts receivable, net of allowance23,436 27,452 19,445Working capital41,139 45,862 52,137Our cash at December 31, 2018 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 8% was held outside of the United States at December 31, 2018. 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 income and withholding taxes to repatriate these funds. We currently intend to permanentlyreinvest these foreign 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.43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, 2018 2017 2016 (in thousands)Cash and cash equivalents provided by (used in) operating activities$1,230 $(2,996) $11,571Less: Purchases of property and equipment(2,045) (2,790) (1,755)Free cash flow$(815) $(5,786) $9,816Free cash flow increased by $5.0 million to $(0.8) million for the year ended December 31, 2018 and decreased $15.6 million to $(5.8) million for theyear ended December 31, 2017. The increase in free cash flow for the year ended December 31, 2018 was primarily a result of revenue growth, improved cashcollections and stable operating expenses, as well as a decrease in purchases of property and equipment due to completion of facilities projects initiated in2017. The decrease in free cash flow for the year ended December 31, 2017 was primarily a result of a change in assets and liabilities, net of acquisition,combined with our strategic investment in additional headcount and territorial expansion for our sales and marketing and research and developmentfunctions to support the growth of our business. Further analysis of the components of free cash flow is provided 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 finalizing VDAs related to sales taxes, and in 2018, the amount we paid to settle a sales tax audit.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; and•Tax withholdings related to the net-share settlement of restricted stock units.44Table of Contents2018Operating ActivitiesOur cash provided by operating activities consisted of a net loss of $(7.6) million adjusted for certain non-cash items totaling $17.3 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 corporate headquarters.The net decrease in cash resulting from changes in assets and liabilities of $(8.5) million primarily consisted of:•a $10.9 million decrease in accounts payable and accrued expenses, driven by the timing of payments to our vendors, payments for certain customerarrangements for which we collect and remit monthly activity-based fees incurred for specific channels on behalf of our customers (referred to as"agency of record" activities) and a $1.0 million payment to settle a sales tax audit;•a $6.7 million increase in deferred contract costs as a result of our adoption of ASC 606 (sales commissions and a portion of other incentivecompensation are now deferred and amortized to expense over the expected period of benefit); and•a $3.8 million net decrease in deferred revenue as a result of our adoption of ASC 606 and the timing of revenue recognition for managed-servicecontracts (we now recognize revenue for subscription and implementation fees ratably, beginning on the launch date, through the term of thecontract). These decreases in cash were partially offset by increases in cash due to•a $10.3 million decrease in prepaid expenses and other assets, primarily related to agency of record receipts (we record the amounts due fromcustomers as a result of these arrangements as other receivables); and•a $2.6 million decrease in accounts receivable as a result of increased cash collections during the period.Investing ActivitiesOur cash used in investing activities consisted of:•$2.0 million of capital expenditures primarily related to the purchase of computer equipment; and•$0.9 million of capitalized software development costs.Financing ActivitiesOur cash used in financing activities consisted of:•$3.0 million used for the payment of taxes related to the net-share settlement of restricted stock units; and•$2.2 million used for the repayment of capital leases; partially offset by•$1.1 million in cash received upon the exercise of stock options.2017Operating 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 new 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 agency of record receipts (we record the amounts due fromcustomers as a result of these arrangements 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.45Table of ContentsInvesting 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 capitalized 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.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, 2018. 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$20,546 $5,063 $10,076 $5,407 $—Capital lease obligations3,666 2,159 1,507 — —Purchase commitments1,702 1,527 175 — —Total$25,914 $8,749 $11,758 $5,407 $—Operating lease obligations reflected above exclude future sublease income from certain space that we have subleased to a third party. We anticipatereceiving $0.2 million in annual rental payments during the term of the sublease agreement, which is through August 2022.Off-Balance Sheet ArrangementsAs of December 31, 2018, 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, whichhave been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and thereported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and onvarious other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptionsor conditions, and to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financialcondition, results of operations and cash flows will be affected.While our significant accounting policies are more fully described in Note 2, "Significant Accounting Policies," to our consolidated financialstatements appearing elsewhere in this Annual Report, we believe the following accounting policies are critical to the process of making significantjudgments and estimates in the preparation of our consolidated financial statements.46Table of ContentsRevenue Recognition and Deferred RevenueOn January 1, 2018, we adopted ASC 606. Refer to Note 7, "Revenue from Contracts with Customers," to our consolidated financial statementsappearing elsewhere in this Annual Report for a description of changes to our revenue recognition policies as a result of our adoption of ASC 606.We derive the majority of our revenue from subscription fees paid to us by our customers for access to and usage of our SaaS solutions for a 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. Customers do not havethe contractual right to take possession of our software at any time.We recognize fixed subscription fees and implementation fees ratably over the contract period beginning on the date the customer has access to thesoftware. In general, we invoice and recognize revenue from the variable portion of subscription fees in the period in which the related GMV or advertisingspend is processed.Customers may elect to purchase a subscription to multiple modules, multiple modules with multiple service levels, or, for certain of our solutions,multiple brands or geographies. We evaluate such contracts to determine whether the services to be provided are distinct and accordingly should beaccounted for as separate performance obligations. If we determine that a contract has multiple performance obligations, the transaction price, which is thetotal price of the contract, is allocated to each performance obligation based on a relative standalone selling price method. We estimate standalone sellingprice based on observable prices in past transactions for which the product offering subject to the performance obligation has been sold separately.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 beyond 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, 2018, our allowance for doubtful accounts was 2.7% ofour gross accounts receivable. A hypothetical 1% increase or decrease in the value of our allowance for doubtful accounts receivable as of December 31,2018 would have resulted in an increase or decrease of $0.2 million to our pre-tax net loss for the year ended December 31, 2018.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.We test goodwill for impairment annually on October 1 or more frequently if events or changes in business circumstances indicate the asset might beimpaired.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, 2018 and 2017, we concluded there was no impairment of goodwill.47Table of ContentsStock-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 annually over afour-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 9, "EquityIncentive Plans and Stock-Based Compensation," to our consolidated financial statements appearing elsewhere in this Annual Report for the assumptionsused for estimating the fair value of stock options granted to employees.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 $0.4 million decrease in stock-based compensation expense for the year ended December 31, 2018. A hypothetical decrease of 1% in our forfeiture rateassumption would have resulted in a $0.4 million increase in stock-based compensation expense for the year ended December 31, 2018.Income TaxesWe account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as foroperating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in theyears in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilitiesin the results of operations in the period that includes the enactment date. We reduce the measurement of a deferred tax asset, if necessary, by a valuationallowance if it is more likely than not that we will not realize some or all of the deferred tax asset.We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it 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.48Table of ContentsThe 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. Please refer to Note 8, "Income Taxes," to our consolidated financial statements appearing elsewhere in thisAnnual Report for additional information regarding the Tax Act and its impact on our financial results as of and for the year ended December 31, 2018.Recent Accounting PronouncementsRefer to Note 2, "Significant Accounting Policies," to our consolidated financial statements appearing elsewhere in this Annual Report for a fulldescription of recent accounting pronouncements.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, 2018.INTEREST 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 STATEMENTSReports of Independent Registered Public Accounting Firm51Consolidated Balance Sheets as of December 31, 2018 and 201753Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 201654Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018, 2017 and 201655Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2018, 2017 and 201656Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 201657Notes to Consolidated Financial Statements5850Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and the 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, 2018and 2017, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for each of the threeyears in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financialstatements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidatedresults of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally acceptedaccounting principles.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sinternal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 13, 2019 expressed an unqualifiedopinion thereon.Adoption of ASC Topic 606, Revenue from Contracts with CustomersAs discussed in Note 7 to the consolidated financial statements, the Company changed its method of accounting for revenue and deferred contract costs in2018 due to the adoption of ASC Topic 606, Revenue from Contracts with Customers.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 PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing proceduresto assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. 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, NCFebruary 13, 201951Table of ContentsReport of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of ChannelAdvisor Corporation and SubsidiariesOpinion on Internal Control over Financial ReportingWe have audited ChannelAdvisor Corporation and Subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteriaestablished in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013framework), (the COSO criteria). In our opinion, ChannelAdvisor Corporation and Subsidiaries (the Company) maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2018, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedbalance sheets of the Company as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, changes instockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated February13, 2019 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ Ernst & Young LLPRaleigh, NCFebruary 13, 201952Table of ContentsCHANNELADVISOR CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2018 2017Assets Current assets: Cash and cash equivalents$47,185 $53,422Accounts receivable, net of allowance of $652 and $609 as of December 31, 2018 and 2017, respectively23,436 27,452Prepaid expenses and other current assets9,248 16,462Total current assets79,869 97,336Property and equipment, net12,007 10,877Goodwill23,486 23,486Intangible assets, net1,894 2,503Deferred contract costs, net of current portion11,336 —Long-term deferred tax assets, net4,162 5,550Other assets1,515 759Total assets$134,269 $140,511Liabilities and stockholders' equity Current liabilities: Accounts payable$1,598 $7,243Accrued expenses9,358 12,611Deferred revenue24,205 27,143Other current liabilities3,569 4,477Total current liabilities38,730 51,474Long-term capital leases, net of current portion1,404 641Lease incentive obligation2,154 3,328Other long-term liabilities2,343 3,157Total liabilities44,631 58,600Commitments 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, 2018and 2017, respectively— —Common stock, $0.001 par value, 100,000,000 shares authorized, 27,347,115 and 26,601,626 shares issued and outstandingas of December 31, 2018 and 2017, respectively27 27Additional paid-in capital271,550 262,805Accumulated other comprehensive loss(1,707) (789)Accumulated deficit(180,232) (180,132)Total stockholders' equity89,638 81,911Total liabilities and stockholders' equity$134,269 $140,511The accompanying notes are an integral part of these consolidated financial statements.53Table of ContentsCHANNELADVISOR CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share and per share data) Year Ended December 31,2018 2017 2016Revenue$131,218$122,535$113,200Cost of revenue (1)29,50129,10231,070Gross profit101,717 93,433 82,130Operating expenses: Sales and marketing (1)60,08060,34353,152Research and development22,35921,86817,736General and administrative26,78427,80025,079Total operating expenses109,223 110,011 95,967Loss from operations(7,506) (16,578) (13,837)Other income (expense): Interest income (expense), net510222(1)Other income (expense), net983173Total other income (expense)519 305 172Loss before income taxes(6,987) (16,273) (13,665)Income tax expense (benefit)614284(5,658)Net loss$(7,601) $(16,557) $(8,007)Net loss per share: Basic and diluted$(0.28)$(0.63)$(0.31)Weighted average common shares outstanding: Basic and diluted27,138,27426,366,74825,604,893(1) Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no impact on reported Loss from operations or Net lossfor the period. Refer to Note 2, "Significant Accounting Policies," for further detail.The accompanying notes are an integral part of these consolidated financial statements.54Table of ContentsCHANNELADVISOR CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands) Year Ended December 31, 2018 2017 2016Net loss$(7,601)$(16,557)$(8,007)Other comprehensive (loss) income:Foreign currency translation adjustments(918)823(719)Total comprehensive loss$(8,519) $(15,734) $(8,726)The accompanying notes are an integral part of these consolidated financial statements.55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, 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) 81,911Cumulative effect of accounting change(1)— — — — 7,501 7,501Exercise of stock options and vesting ofrestricted stock units1,034,146 — 1,106 — — 1,106Stock-based compensation expense— — 10,598 — — 10,598Statutory tax withholding related to net-share settlement of restricted stock units(288,657) — (2,959) — — (2,959)Net loss— — — — (7,601) (7,601)Foreign currency translation adjustments— — — (918) — (918)Balance, December 31, 201827,347,115 $27 $271,550 $(1,707) $(180,232) $89,638(1) Refer to Note 7, "Revenue from Contracts with Customers," for additional information regarding the effect of the adoption of ASC 606 and adjustments to accumulated deficit uponadoption.The accompanying notes are an integral part of these consolidated financial statements.56Table of ContentsCHANNELADVISOR CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2018 2017 2016Cash flows from operating activities Net loss$(7,601) $(16,557) $(8,007)Adjustments to reconcile net loss to cash and cash equivalents provided by (used in) operating activities: Depreciation and amortization6,094 6,578 7,838Bad debt expense991 727 528Stock-based compensation expense10,598 11,947 13,262Deferred income taxes493 130 (5,649)Other items, net(851) (869) (875)Changes in assets and liabilities, net of effects from acquisition: Accounts receivable2,634 (8,261) (1,885)Prepaid expenses and other assets10,303 (5,514) (2,014)Deferred contract costs(6,730) — —Accounts payable and accrued expenses(10,936) 5,242 3,697Deferred revenue(3,765) 3,581 4,676Cash and cash equivalents provided by (used in) operating activities1,230 (2,996) 11,571 Cash flows from investing activities Purchases of property and equipment(2,045) (2,790) (1,755)Payment of software development costs(894) (293) (208)Acquisition, net of cash acquired— (2,177) —Cash and cash equivalents used in investing activities(2,939) (5,260) (1,963) Cash flows from financing activities Repayment of capital leases(2,241) (2,840) (2,096)Proceeds from exercise of stock options1,106 1,428 930Payment of contingent consideration— — (338)Payment of statutory tax withholding related to net-share settlement of restricted stock units(2,959) (2,727) (2,394)Cash and cash equivalents used in financing activities(4,094) (4,139) (3,898) Effect of currency exchange rate changes on cash and cash equivalents(434) 397 (764)Net (decrease) increase in cash and cash equivalents(6,237) (11,998) 4,946Cash and cash equivalents, beginning of year53,422 65,420 60,474Cash and cash equivalents, end of year$47,185 $53,422 $65,420 Supplemental disclosure of cash flow information Cash paid for interest$30 $111 $127Cash paid for income taxes, net$113 $196 $115Supplemental disclosure of non-cash investing and financing activities Accrued capital expenditures$68 $80 $233Capital lease obligations entered into for the purchase of fixed assets$4,217 $567 $1,771The accompanying notes are an integral part of these consolidated financial statements.57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 brands and retailers worldwide improve their online performance by expandingsales channels, connecting with consumers around the world, optimizing their operations for peak performance and providing actionable analytics toimprove competitiveness. The Company is headquartered in Morrisville, North Carolina and maintains sales, service, support and research and developmentoffices in various domestic and international locations.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. The Company has revised the classification of certain employee-related and other operating expenses to better align the statement of operationsline items with departmental responsibilities and the management of operations. These reclassifications had no effect on the Company's reported loss fromoperations or net loss for the years ended December 31, 2017 and 2016.The tables below summarize the financial statement line items impacted by these reclassifications (in thousands): Year Ended December 31, 2017 As PreviouslyReported Reclassification As ReclassifiedCost of revenue$25,950 $3,152 $29,102Gross profit96,585 (3,152) 93,433Sales and marketing63,495 (3,152) 60,343Total operating expenses113,163 (3,152) 110,011 Year Ended December 31, 2016 As PreviouslyReported Reclassification As ReclassifiedCost of revenue$27,620 $3,450 $31,070Gross profit85,580 (3,450) 82,130Sales and marketing56,602 (3,450) 53,152Total operating expenses99,417 (3,450) 95,967Depreciation and AmortizationDepreciation and amortization expense is included in the following line items in the accompanying consolidated statements of operations for the yearsended December 31, 2018, 2017 and 2016 (in thousands):58Table of Contents 2018 2017 2016Cost of revenue (1)$3,610 $4,019 $4,756Sales and marketing (1)884 998 1,012Research and development371 424 458General and administrative1,229 1,137 1,612 $6,094 $6,578 $7,838(1) As noted above, certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no impact on reported loss fromoperations or net loss for the period.Recent Accounting PronouncementsStandardDescriptionEffect on the Financial Statements or Other Significant MattersStandards that the Company has not yet adopted as of December 31, 2018Financial 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.Intangibles:ASU 2018-15, Intangibles -Goodwill andOther - Internal-Use Software (Subtopic350-40)Effective date:January 1, 2020This standard aligns the requirements forcapitalizing implementation costs incurredin a hosting arrangement that is a servicecontract with the requirements forcapitalizing implementation costs incurredto develop or obtain internal-use software.The Company is currently evaluating the impact the adoption ofthis standard will have on its consolidated financial statements.Standards that the Company adopted effective January 1, 2019Leases:ASU 2016-02, Leases (Topic 842)ASU 2018-11, Leases (Topic 842) -Targeted Improvements The 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.This standard provides an alternate adoptionmethod for ASU 2016-02 by allowing forinitial application of the standard as of theadoption date and recognition of acumulative-effect adjustment to the openingbalance of retained earnings in the period ofadoption.The Company adopted this standard effective January 1, 2019using the alternate adoption method allowed by ASU 2018-11.The Company elected to use the package of three practicalexpedients, as well as the practical expedient to apply hindsight indetermining lease terms. The adoption of this standard as ofJanuary 1, 2019 will result in an increase in total assets and totalliabilities on the Company's consolidated balance sheet ofapproximately $15 million.59Table of ContentsStandards that the Company adopted effective January 1, 2018Cash Flow:ASU 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:Accounting Standards Update ("ASU")2014-09, Revenue from Contracts withCustomers (Topic 606) This standard replaces 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 requiresenhanced 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 adopted this standard effective January 1, 2018using the modified retrospective transition method. Refer to Note7, "Revenue from Contracts with Customers," for additionalinformation regarding the impact of adoption and revenuerecognition under ASC 606 on the Company's consolidatedfinancial statements.The Company has reviewed other new accounting pronouncements that were issued as of December 31, 2018 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.Use 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, assumptions used for purposes of determining stock-based compensation and revenue recognition, includingstandalone selling prices for contracts with multiple performance obligations and the expected period of benefit for deferred contract costs, among others.Estimates and assumptions are also required to value assets acquired and liabilities assumed in conjunction with business combinations. The Company basesits estimates on historical experience and on various other assumptions that it believes to be reasonable, the results of which form the basis for makingjudgments 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.60Table of ContentsRevenue RecognitionOn January 1, 2018, the Company adopted ASC 606. Refer to Note 7, "Revenue from Contracts with Customers" for a detailed discussion ofaccounting policies related to revenue recognition, including deferred revenue and sales commissions.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.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, 2018and 2017, or a significant concentration of its revenue for the years ended December 31, 2018, 2017 and 2016.Accounts Receivable and Allowance for Doubtful AccountsThe Company extends credit to customers without requiring collateral. Accounts receivable are stated at realizable value, net of an allowance fordoubtful accounts. The Company utilizes the allowance method to provide for doubtful accounts based on management's evaluation of the collectability ofamounts due. The Company's estimate is based on historical 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.61Table of ContentsThe following table presents the changes in the Company's allowance for doubtful accounts during the years ended December 31, 2018, 2017 and2016 (in thousands): Balance atBeginningof Period AdditionsCharged ToExpense/AgainstRevenue Deductions Balance atEnd ofPeriodAllowance for doubtful accounts: Year ended December 31, 2018$609 991 (948) $652Year ended December 31, 2017$594 727 (712) $609Year ended December 31, 2016$785 528 (719) $594Other 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 $0.8 million and $10.6 million are included in Prepaid expenses and other current assets on the consolidated balance sheets as ofDecember 31, 2018 and 2017, 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 capitalized software development costs3 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-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 is measured by a comparison of the carrying amount of the asset orasset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If such assets are not recoverable, the impairment to berecognized, if any, is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets or asset group. Assetsheld for sale are reported at the lower of the carrying amount or fair value, less costs to sell. As of December 31, 2018 and 2017, management does not believeany long-lived assets are impaired and has not identified any assets as being held for sale.62Table of ContentsGoodwillGoodwill 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.The Company performs its annual goodwill impairment testing as of October 1, the first day of the fourth quarter. This provides the Company withadditional time to complete its testing in advance of its year-end reporting and results in better alignment with the Company's strategic planning andforecasting process. As a result of the Company's annual impairment tests as of October 1, 2018 and 2017, goodwill was not considered impaired and, as such,no impairment charges were recorded.Advertising CostsThe Company expenses advertising costs as incurred. The amount expensed during the years ended December 31, 2018, 2017 and 2016 was $5.7million, $5.3 million and $4.1 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. Anuncertain tax position will be recognized if it is more likely than not to be sustained. The Company did not have any accrued interest or penalties associatedwith unrecognized tax positions as of December 31, 2018 and 2017.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 income (expense).63Table of ContentsStock-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. Based onmanagement's assessment of the acquisition-date fair value of the assets acquired and liabilities assumed, the purchase price of $2.3 million was allocated tothe Company's assets and liabilities as follows: $1.9 million to goodwill, $0.5 million to identifiable intangible assets and $0.1 million to working capital asa net current liability.The 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, 2017.64Table of Contents4. PROPERTY AND EQUIPMENTProperty and equipment consisted of the following as of December 31, 2018 and 2017 (in thousands): 2018 2017Purchased software, including capitalized software development costs$16,239 $14,813Computer hardware12,292 12,129Furniture and office equipment2,518 2,583Leasehold improvements7,396 7,819Construction in process457 22138,902 37,565Less: accumulated depreciation(26,895) (26,688)Property and equipment, net$12,007 $10,877Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $5.5 million, $6.0 million and $7.3 million, respectively. During theyear ended December 31, 2018, the Company disposed of computer hardware, furniture and office equipment and leasehold improvements with a cost of $4.9million and accumulated depreciation of $4.9 million. The Company recognized a de minimis loss in the consolidated statements of operations for the yearended December 31, 2018 related to these disposals. As a result of an amendment to the Company's corporate headquarters lease agreement, the Companydisposed of leasehold improvements with a cost of $0.8 million and accumulated depreciation of $0.3 million and recorded a $0.5 million reduction to itslease incentive obligation.5. GOODWILL AND INTANGIBLE ASSETSThere were no changes to the Company's goodwill during the year ended December 31, 2018. The following table shows the changes in the carryingamount 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$23,486Intangible assets consisted of the following as of December 31, 2018 and 2017 (in thousands): December 31, 2018 Gross CarryingAmount AccumulatedAmortization Net CarryingAmount Weighted AverageUseful Life (in years)Customer relationships$2,230$(1,279)$951 7.0Acquired technology2,030(1,087)943 7.0Total$4,260$(2,366)$1,894 7.0 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 7.0Amortization expense was $0.6 million for each of the years ended December 31, 2018, 2017 and 2016. As of December 31, 2018, expectedamortization expense over the remaining intangible asset lives is as follows (in thousands):65Table of ContentsYear Ending December 31, 2019$60920206092021518202265202365Thereafter28Total$1,8946. 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, 2019$5,063 $2,15920205,171 1,50720214,905 —20224,213 —20231,194 —Total minimum lease payments$20,546 3,666Less: imputed interest (314)Less: current portion (1,948)Capital lease obligations, net of current portion $1,404The gross book value of fixed assets under capital leases as of December 31, 2018 and 2017 was $12.4 million and $8.2 million, respectively. The netbook value of fixed assets under capital leases as of December 31, 2018 and 2017 was $3.7 million and $1.4 million, respectively. Capital lease obligationsare included in Other current liabilities and Long-term capital leases, net of current portion in the accompanying consolidated balance sheets. Theamortization of fixed assets under capital leases is included in depreciation expense within Cost of revenue and Operating expenses in the accompanyingconsolidated 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 and Other long-term liabilities in the accompanying consolidated balance sheets. As ofDecember 31, 2018 and 2017, deferred rent related to these leases totaled $0.7 million and $1.1 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.Total rent expense for the years ended December 31, 2018, 2017 and 2016 was $4.8 million, $4.3 million and $3.9 million, respectively.66Table of ContentsLitigation 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's potentialsales tax liability. VDAs generally provide for a maximum look-back period, a waiver of penalties and, at times, interest as well as payment arrangements. TheCompany's estimated aggregate VDA liability of $2.5 million was recorded as a one-time charge in General and Administrative expense in the accompanyingconsolidated statements of operations for the year ended December 31, 2017. This amount represented the Company's estimate of its potential unpaid salestax liability through the anticipated look-back periods including interest, where applicable, in all jurisdictions in which the Company had entered intoVDAs. During the third quarter of 2017, one jurisdiction rejected the Company's VDA application and conducted a sales tax audit, which was completed inMay 2018.Through December 31, 2018, the Company has paid an aggregate of $2.5 million under the terms of the VDAs and to settle the sales tax audit. TheCompany has no other unresolved VDA applications or ongoing sales tax audits as of December 31, 2018.7. REVENUE FROM CONTRACTS WITH CUSTOMERSFinancial Statement Impact of Adopting ASC 606, "Revenue from Contracts with Customers"On January 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method and applied this method to all contracts thatwere not complete as of the date of adoption. The reported results as of December 31, 2018 and for the year ended December 31, 2018 in the accompanyingconsolidated financial statements are presented under ASC 606, while prior period results have not been adjusted and are reported in accordance withhistorical accounting guidance in effect for those periods.The most significant impacts of this standard relate to the timing of revenue recognition of fixed fees under the Company's contracts, as well as theaccounting for costs to obtain contracts. Under ASC 606, for the Company's managed-service contracts, revenue recognition for subscription andimplementation fees begins on the launch date and is recognized over time through the term of the contract. Before the adoption of this standard, theCompany deferred the recognition of revenue until the completion of the implementation services, at which point the Company recognized a cumulativecatch-up adjustment equal to the revenue earned during the implementation period that had been deferred. The Company then recognized the remainingbalance of the fixed fees ratably over the remaining term of the contract. Additionally, under ASC 606, the Company now defers recognition of expense forsales commissions and a portion of other incentive compensation ("contract costs"). These contract costs are amortized to expense over the expected period ofbenefit. Before the adoption of ASC 606, the Company expensed these contract costs as incurred.The adoption of ASC 606 under the modified retrospective transition method resulted in a net adjustment reducing the accumulated deficit by $7.5million at January 1, 2018. The adjustment consisted of $8.7 million related to the deferral of contract costs that were historically expensed as incurred, $(0.6)million related to the timing of revenue recognition for managed-service contracts, and $(0.6) million related to the tax impact of the contract costs andrevenue adjustments.Revenue RecognitionIn accordance with ASC 606, revenue is recognized when a customer obtains control of promised services, in an amount that reflects the considerationthe Company expects to be entitled to receive in exchange for those services. In determining the amount of revenue to be recognized, the Company performsthe following steps: (i) identification of the contract with a customer; (ii) identification of the promised services in the contract and determination of whetherthe promised services are performance obligations, including whether they are distinct in the context of the contract; (iii) determination of the transactionprice; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) theCompany satisfies each performance obligation.67Table of ContentsDisaggregation of RevenueThe Company derives the majority of its revenue from subscription fees paid for access to and usage of its SaaS solutions for a specified period of time,typically one year. A portion of the subscription fee is typically fixed and is based on a specified minimum amount of gross merchandise value ("GMV") oradvertising spend that a customer expects to process through the Company's platform over the contract term. The remaining portion of the subscription fee isvariable and is based on a specified percentage of GMV or advertising spend processed through the Company's platform in excess of the customer's specifiedminimum GMV or advertising spend amount. In addition to subscription fees, contracts with customers may include implementation fees for launchassistance and training. Fixed subscription and implementation fees are billed in advance of the subscription term and are due in accordance with contractterms, which generally provide for payment within 30 days. Variable fees are subject to the same payment terms, although they are generally billed the monthafter they are incurred. The Company also generates revenue from its solutions that allow brands to direct potential consumers from their websites and digitalmarketing campaigns to authorized resellers. The Company's contracts typically have a one year term. The Company's contractual arrangements includeperformance, termination and cancellation provisions, but do not provide for refunds. Customers do not have the contractual right to take possession of theCompany's software at any time. Sales taxes collected from customers and remitted to government authorities are excluded from revenue.The following table summarizes revenue disaggregation by product for the years ended December 31, 2018, 2017 and 2016 (in thousands): 2018 2017 (1) (2) 2016 (1) (2) Marketplaces$96,321 $93,020 $86,161Digital Marketing18,919 18,076 19,367Other15,978 11,439 7,672 $131,218 $122,535 $113,200(1) As noted above, prior periods have not been adjusted for the adoption of ASC 606 and are presented in accordance with historical accounting guidance in effect for thoseperiods.(2) Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no impact on the reported total revenue for theperiod.Marketplaces and Digital Marketing - The Company's Marketplaces module connects customers to third-party e-commerce marketplaces and providesaccess to advertising programs and advanced competitive features on major marketplaces. The Company's Digital Marketing module allows customers tocreate and optimize advertisements on multiple online shopping channels. Customers may subscribe to each of these modules on a self-service or managed-service basis. Self-service subscriptions allow the customer to manage their own activity on the platform. Launch services are also available, although theyare not required for the customer to access the platform. Revenue from self-service subscriptions, including fixed subscription fees and fees associated withany elected launch services, is recognized ratably over the subscription term, which is typically one year, beginning on the date the customer has access tothe platform. Managed-service subscriptions offer the customer an outsourced, managed platform experience. Implementation services are included withmanaged-service subscriptions and are necessary to launch on the platform. Revenue from managed-service subscriptions, including fixed subscription feesand fees associated with implementation services, is recognized ratably over the subscription term, which is typically one year, beginning onceimplementation services are complete.As noted above, customers incur variable fees when the GMV processed through Marketplaces, or the GMV or advertising spend processed throughDigital Marketing, exceeds the GMV or advertising spend included in their subscriptions. In general, revenue from variable fees is recognized in the period inwhich the related GMV or advertising spend is processed through the platform.Other - Other product offerings include the Company's Where to Buy and Product Intelligence solutions, which provide current information onresellers and product availability and insights on product assortment, gaps, and pricing trends. These solutions are only available on a managed-service basisand include implementation services. The Company also enters into integration agreements with certain marketplaces or channels under which the businesspartner engages the Company to integrate the platform with their marketplace or channel. Revenue from these product offerings is recognized ratably overthe subscription term beginning on the date the implementation or integration is complete.68Table of ContentsContracts with Multiple Performance ObligationsCustomers may elect to purchase a subscription to multiple modules, multiple modules with multiple service levels, or, for certain of the Company'ssolutions, multiple brands or geographies. The Company evaluates such contracts to determine whether the services to be provided are distinct andaccordingly should be accounted for as separate performance obligations. If the Company determines that a contract has multiple performance obligations,the transaction price, which is the total price of the contract, is allocated to each performance obligation based on a relative standalone selling price method.The Company estimates standalone selling price based on observable prices in past transactions for which the product offering subject to the performanceobligation has been sold separately. As the performance obligations are satisfied, revenue is recognized as discussed above in the product descriptions.Transaction Price Allocated to Future Performance ObligationsASC 606 provides certain practical expedients that limit the required disclosure of the aggregate amount of transaction price that is allocated toperformance obligations that have not yet been satisfied. As the Company typically enters into contracts with customers for a twelve-month subscriptionterm, substantially all of its performance obligations that have not yet been satisfied as of December 31, 2018 are part of a contract that has an originalexpected duration of one year or less. For contracts with an original expected duration of greater than one year, for which the practical expedient does notapply, the aggregate transaction price allocated to the unsatisfied performance obligations was $18.7 million as of December 31, 2018, of which $12.0million is expected to be recognized as revenue over the next twelve months.Deferred RevenueDeferred revenue represents the unearned portion of subscription and implementation fees. Deferred revenue is recorded when cash payments arereceived in advance of performance. Deferred amounts are generally recognized within one year. Deferred revenue is included in the accompanyingconsolidated balance sheets under Total current liabilities, net of any long-term portion that is included in Other long-term liabilities. The following tablesummarizes deferred revenue activity for the year ended December 31, 2018 (in thousands): As of January 1, 2018(adjusted) Net additions Revenue recognized As of December 31,2018Deferred revenue$28,982 126,944 (131,218) $24,708Of the $131.2 million of revenue recognized in the year ended December 31, 2018, $25.6 million was included in deferred revenue at January 1, 2018.Costs to Obtain ContractsIn accordance with ASC 606, the Company now capitalizes sales commissions and a portion of other incentive compensation costs that are directlyrelated to obtaining customer contracts and that would not have been incurred if the contract had not been obtained. These costs are included in theaccompanying consolidated balance sheets and are classified as Prepaid expenses and other current assets, net of any long-term portion that is included inDeferred contract costs, net of current portion. Deferred contract costs are amortized to sales and marketing expense over the expected period of benefit,which the Company has determined to be five years based on the estimated customer relationship period. The following table summarizes deferred contractcost activity for the year ended December 31, 2018 (in thousands): As of January 1, 2018(adjusted) Additions Amortized costs (1) As of December 31,2018Deferred contract costs$8,721 9,804 (3,316) $15,209(1) Includes contract costs amortized to sales and marketing expense during the period and the impact from foreign currency exchange rate fluctuations.Financial Statement ImpactThe following tables compare financial statement line items from the reported consolidated balance sheet as of December 31, 2018, the consolidatedstatement of operations for the year ended December 31, 2018 and the consolidated69Table of Contentsstatement of cash flows for the year ended December 31, 2018, to the applicable pro forma amounts, which are the amounts that would have been reportedprior to the adoption of ASC 606 (in thousands):Balance Sheet - select financial statement line items impacted by the adoption of ASC 606As of December 31, 2018 As Reported Pro FormaPrepaid expenses and other current assets$9,248 $5,375Total current assets79,869 75,996Deferred contract costs, net of current portion11,336 —Long-term deferred tax assets, net4,162 5,125Total assets134,269 120,023Deferred revenue24,205 24,264Total current liabilities38,730 38,789Other long-term liabilities2,343 2,206Total liabilities44,631 44,553Accumulated other comprehensive loss(1,707) (1,433)Accumulated deficit(180,232) (194,674)Total liabilities and stockholders' equity$134,269 $120,023Statement of Operations - select financial statement line items impacted by the adoption of ASC 606Year Ended December 31, 2018 As Reported Pro FormaRevenue$131,218 $130,479Gross profit101,717 100,978Sales and marketing60,080 66,568Total operating expenses109,223 115,711Loss from operations(7,506) (14,733)Other income (expense), net9 (233)Total other income (expense)519 277Loss before income taxes(6,987) (14,456)Income tax expense614 86Net loss(7,601) (14,542)Net loss per share, basic and diluted$(0.28) $(0.54)Statement of Cash Flows - select financial statement line items impacted by the adoption of ASC 606Year Ended December 31, 2018 As Reported Pro FormaNet loss$(7,601) $(14,542)Deferred income taxes493 (35)Changes in assets and liabilities: Deferred contract costs(6,730) — Deferred revenue(3,765) (3,026)Cash and cash equivalents provided by operating activities$1,230 $1,23070Table of Contents8. INCOME TAXESThe components of loss before income taxes for the years ended December 31, 2018, 2017 and 2016 were as follows (in thousands): 2018 2017 2016Domestic$(10,552) $(11,089) $(10,761)Foreign3,565 (5,184) (2,904)Total loss before income taxes$(6,987) $(16,273) $(13,665)The provision for income tax expense (benefit) included the following for the years ended December 31, 2018, 2017 and 2016 (in thousands):201820172016Current: Federal$(20) $(39) $—State— — (19)Foreign141 193 10Total121 154 (9)Deferred: Federal(211) (73) 43State12 15 6Foreign692 188 (5,698)Total493 130 (5,649)Total tax expense (benefit)$614 $284 $(5,658)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), repeal of the alternative minimum tax, limitation of the deduction for net operating losses to 80% of current year taxable income, indefinite netoperating loss carryforward period and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless ofwhether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain newinvestments instead of deductions for depreciation expense over time, creation of the base erosion anti-abuse tax, the global intangible low taxed incomeinclusion, which the Company accounts for as a period cost, the foreign derived intangible income deduction and modifying or repealing many businessdeductions and credits.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, the Company determined that the $16.6 million reduction to its net deferred taxassets 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 changes toIRC Section 162(m) were provisional amounts and a reasonable estimate at December 31, 2017. The Company completed its analysis of the Tax Act during2018. There was no impact to income tax expense as a result of the changes to provisional amounts recorded in the consolidated financial statements for theyear ended December 31, 2017.As of December 31, 2018, the IRS is still in the process of issuing guidance to taxpayers to address changes enacted in the Tax Act. The Company hascompleted its analysis and prepared the income tax provision for the year ended December 31, 2018 based on the available guidance. However, if finalguidance is issued that modifies the existing temporary guidance issued by the IRS or if the final guidance contradicts positions taken by the Company in theabsence of any IRS guidance, this could have a material impact on the Company's consolidated financial statements.71Table of ContentsThe components of the Company's net deferred tax asset (liability) as of December 31, 2018 and 2017 were as follows (in thousands): 2018 2017Deferred tax assets: Domestic tax loss carryforwards$31,904 $28,403Foreign tax loss carryforwards6,177 6,849Stock-based compensation3,707 3,750Tax credits3,037 2,231Lease incentive obligation790 1,119Other assets2,242 2,232Valuation allowance(39,040) (38,054)Total deferred tax assets8,817 6,530Deferred tax liabilities: Fixed assets460 645Intangible assets557 604Capitalized contract costs3,898 —Total deferred tax liabilities4,915 1,249Net deferred tax asset$3,902 $5,281The Company adopted ASC 606 effective January 1, 2018. As a result of this adoption, the Company recorded $2.0 million of deferred tax liabilities,partially offset by a $1.4 million reduction to its valuation allowance. This adjustment was applied using a modified retrospective method with a cumulative-effect adjustment to the accumulated deficit. The recognition upon adoption resulted in a $0.6 million increase to accumulated deficit as of January 1, 2018.At December 31, 2018 and 2017, the Company had federal net operating loss ("NOL") carryforwards of $127.2 million and $114.2 million,respectively, which expire beginning in 2022. At December 31, 2018 and 2017, the Company had state NOL carryforwards of $154.5 million and $136.2million, respectively, which expire beginning in 2019. At December 31, 2018 and 2017, the Company had U.S. federal income tax credit carryforwards of$4.0 million and $3.0 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, 2018 and 2017, the Company also had foreign NOL carryforwards for use against future tax in those jurisdictions of $32.6million and $35.2 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 a reduction in the valuation allowance of $16.7 million resulting from the TaxAct), 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 million that wasallocable to goodwill as part of the HubLogix acquisition. There was a net increase in the valuation allowance of $1.0 million during the year endedDecember 31, 2018, which was comprised of a net increase of $2.4 million that was allocable to operations, and a $1.4 million decrease resulting from theCompany's adoption of ASC 606 that was allocable to accumulated deficit. The Company does not generally consider deferred tax liabilities on indefinite-lived assets as a source of future taxable income available to be able to realize deferred tax assets. However, the Company considers the deferred tax liabilityassociated with an indefinite-lived intangible asset as a source of future taxable income available to be able to realize the deferred tax asset recorded for theU.S. federal alternative minimum tax credit and U.S. federal NOL carryforwards generated in years ending after December 31, 2017, which can be carriedforward 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 taxasset, which is offset by a valuation allowance.72Table of ContentsUndistributed 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, 2018 and 2017 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 31,2018, 2017 and 2016 is as follows: 2018 2017 2016U.S. statutory federal rate21.0 % 34.0 % 34.0 %Increase (decrease) resulting from: State taxes, net of federal benefit7.8 2.5 3.2Change in U.S. federal statutory rate— (102.2) —Nondeductible expenses(13.5) (10.5) (1.6)Effect of foreign tax rate differential(0.5) (5.3) (3.8)Uncertain tax positions(3.3) (1.6) (0.8)Research and development credit15.1 5.6 4.1Change in valuation allowance(36.4) 77.1 11.2Other1.0 (1.3) (4.9)Effective tax rate(8.8)% (1.7)% 41.4 %The Company's effective tax rates for the years ended December 31, 2018 and 2017 are lower than the U.S. federal statutory rates of 21% and 34%,respectively, primarily due to operating losses which are subject to a valuation allowance. The Company cannot recognize the tax benefit of operating losscarryforwards generated in certain jurisdictions due to uncertainties relating to future taxable income in those jurisdictions in terms of both its timing and itssufficiency, which would enable the Company to realize the benefits of those carryforwards. For the year ended December 31, 2016, the effective tax rate ishigher than the U.S. federal statutory rate of 34% primarily due to the $5.3 million release of the valuation allowance on deferred tax assets in several of itsforeign jurisdictions. In 2018 and 2017, due to the release of the valuation allowance at the end of 2016, the Company recognizes tax expense in most ofthese foreign jurisdictions. In addition, starting in 2017 and continuing through 2018, the Company no longer had sufficient deferred tax liabilities in one ofits foreign subsidiaries necessary to realize the tax benefit of all of its deferred tax assets for that same foreign subsidiary. In 2017, the Company recorded avaluation allowance against the deferred tax assets of that foreign subsidiary, net of deferred tax liabilities. As a result, the Company is not currentlypermitted to recognize the tax benefit of that subsidiary's losses. The remeasurement of the Company's U.S. net deferred tax assets to reflect the newly enactedU.S. statutory tax rate of 21%, the impact of which was recorded in 2017, resulted in tax expense of $16.6 million, which was offset by a correspondingreduction to the valuation allowance of $16.7 million. The net result from the change in the U.S. federal statutory tax rate was a tax benefit of $0.1 million.The nondeductible expenses during the years ended December 31, 2018, 2017 and 2016 primarily related to stock-based compensation expense associatedwith nondeductible stock awards. Nondeductible stock award expense and share-based compensation shortfalls had a lower impact on the December 31, 2016tax rate than they did on the tax rate for the years ended December 31, 2018 and 2017. The increase in the effective tax rate impact from state taxes, net offederal benefit, and research and development credit and the decrease in the effective tax rate impact from the effect of foreign tax rate differential for theyears ended December 31, 2017 and 2016 compared to the year ended December 31, 2018, was primarily due to the decrease in the U.S. federal statutory taxrate. The Company's foreign jurisdictions comprise a mix of income and loss making entities. In 2018, foreign income exceeded foreign losses and in 2017and 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.The following table shows the changes in unrecognized tax benefits in accordance with ASC 740-10 for the years ended December 31, 2018, 2017 and2016 (in thousands):73Table of Contents 2018 2017 2016Balance as of January 1,$1,282 $766 $681Increases related to current tax positions217 199 146Increases related to prior year tax positions12 317 —Decreases related to prior year tax positions(103) — (42)Decreases related to the expirations of statutes of limitations— — (19)Balance as of December 31,$1,408 $1,282 $766Although 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, 2018 and 2017, 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 2015, although carryforward attributes that were generated prior to 2015 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.9. 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, 2019 the number of shares reserved for issuance under the 2013 Plan increased by 1,367,355 shares. As of December 31, 2018,1,832,395 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.Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations for the yearsended December 31, 2018, 2017 and 2016 (in thousands): 2018 2017 2016Cost of revenue (1)$911 $951 $1,417Sales and marketing (1)3,144 3,827 4,617Research and development2,152 2,260 1,962General and administrative4,391 4,909 5,266 $10,598 $11,947 $13,262(1)Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no impact on reported operating loss or net loss forthe period. Refer to Note 2, "Significant Accounting Policies," for further detail.Stock Option AwardsThe 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 e74Table of Contentsxpected to be outstanding and is based on the "simplified method." Under the "simplified method," the expected life of 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 to the lack of sufficient historicalexercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. Expected volatility is estimated based onthe historical volatility of the Company's stock. Prior to the fourth quarter of 2017, expected volatility was estimated based on volatilities of publicly tradedstock for comparable companies over the estimated expected life of the stock options. The Company assumed no dividend yield because dividends are notexpected 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, 2018,2017 and 2016: 2018 2017 2016Risk-free interest rate2.7% - 2.9% 1.4% - 2.1% 0.8% - 1.8%Expected term (years)6.25 6.25 6.25Expected volatility43% 45% - 51% 46% - 50%Dividend yield0% 0% 0%The following is a summary of the option activity for the year ended December 31, 2018: Number ofOptions Weighted AverageExercise Price WeightedAverageRemainingContractualTerm AggregateIntrinsic Value (in years) (in thousands)Outstanding balance at December 31, 20172,108,392 $9.87 Granted362,415 14.85 Exercised(131,359) 8.38 Forfeited(119,110) 12.24 Expired(12,197) 22.99 Outstanding balance at December 31, 20182,208,141 $10.57 6.79 $3,829Exercisable at December 31, 20181,160,095 $9.44 5.42 $3,148Vested and expected to vest at December 31, 20182,017,915 $10.47 6.66 $3,698The weighted average grant date fair value for the Company's stock options granted during the years ended December 31, 2018, 2017, and 2016was $5.98, $4.17 and $4.73 per share, respectively.The total fair value of stock options vested during the years ended December 31, 2018, 2017 and 2016 was $1.5 million, $1.2 million and $1.1million, respectively.The total compensation cost related to nonvested stock options not yet recognized as of December 31, 2018 was $2.0 million and will be recognizedover a weighted average period of approximately 1.8 years.The aggregate intrinsic value of stock options exercised during the years ended December 31, 2018, 2017, and 2016 was $0.6 million, $0.5 millionand $2.1 million, respectively.75Table of ContentsRestricted Stock UnitsThe following table summarizes the RSU activity for the year ended December 31, 2018: Number of RSUs Weighted Average Grant-Date Fair ValueUnvested RSUs as of December 31, 20172,481,037 $11.14Granted967,367 13.81Vested(901,563) 12.10Forfeited(330,411) 11.44Unvested RSUs as of December 31, 20182,216,430 $11.87The total unrecognized compensation cost related to the unvested RSUs as of December 31, 2018 was $9.8 million and will be recognized over aweighted average period of approximately 1.8 years.10. 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, 2018, 2017 and 2016: 2018 2017 2016Stock options2,208,141 2,108,392 1,686,095RSUs2,216,430 2,481,037 2,151,65811. 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, 2018 and 2017. The following table summarizes revenueby geography for the years ended December 31, 2018, 2017 and 2016 (in thousands): 2018 2017 2016Revenue by geography: Domestic$99,901 $95,722 $88,668International31,317 26,813 24,532Total$131,218 $122,535 $113,200The Company's revenue from external customers based in the United Kingdom totaled $12.3 million, $11.7 million and $12.7 million for the yearsended December 31, 2018, 2017 and 2016, respectively.12. 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 Company contributed an aggregate of $1.7 million, $1.5 million and $1.0million to the plans for the years ended December 31, 2018, 2017 and 2016, respectively.76Table of Contents13. SELECTED QUARTERLY INFORMATION (UNAUDITED)The following tables summarize the Company's quarterly results of operations for the years ended December 31, 2018 and 2017 (in thousands, exceptper share amounts): Three Months Ended, March 31, 2018 June 30, 2018 September 30, 2018 December 31, 2018Revenue$31,445 $32,660 $32,324 $34,789Gross profit24,092 25,685 24,718 27,222(Loss) income from operations(3,151) (2,734) (2,241) 620Net (loss) income(3,157) (2,764) (2,287) 607Net (loss) income per share: Basic$(0.12) $(0.10) $(0.08) $0.02Diluted$(0.12) $(0.10) $(0.08) $0.02 Three Months Ended, March 31, 2017 June 30, 2017 September 30, 2017 December 31, 2017Revenue$28,329 $30,004 $30,097 $34,105Gross profit (1)20,633 22,860 22,788 27,152Loss from operations(8,053) (3,968) (4,121) (436)Net loss(8,056) (3,985) (4,055) (461)Net loss per share: Basic and diluted$(0.31) $(0.15) $(0.15) $(0.02)(1)Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no impact on reported Loss from operations or Netloss for the period. Refer to Note 2, "Significant Accounting Policies," for further detail.77Table of ContentsITEM 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, 2018, the end of the period covered by this Annual Report. The term "disclosure controls and procedures," as set forth inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of acompany that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits underthe Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the Securities andExchange Commission (the "SEC"). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to thecompany's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding requireddisclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance ofachieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.Based on the evaluation of our disclosure controls and procedures as of December 31, 2018, our chief executive officer and chief financial officer concludedthat, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.Changes in Internal Control over Financial ReportingThere was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2018 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 Report of Independent 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, 2018.The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by our independent registered publicaccounting firm, as stated in their attestation report, which is included in Part II, Item 8. of this Annual Report.ITEM 9B. OTHER INFORMATION Not applicable.PART IIIWe will file a definitive Proxy Statement for our 2019 Annual Meeting of Stockholders (the "2019 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 2019 Proxy Statement that specifically address the items set forth herein are incorporated by reference.78Table of ContentsITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Item 10 is hereby incorporated by reference to the sections of the 2019 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 2019 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 2019 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 The information required by Item 13 is hereby incorporated by reference to the sections of the 2019 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 2019 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 Incentive Stock Option Agreement under 2001 Stock Plan (incorporated herein by reference to Exhibit 10.13 to theRegistrant's Registration Statement on Form S-1 (File No. 333-187865), filed with the Securities and Exchange Commission onApril 11, 2013). 79Table of Contents10.3+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 Agreement under 2013 Equity Incentive Plan (incorporatedherein 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 19, 2018 (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 10, 2018). 10.9Office lease, dated as of August 15, 2014, by and between the Registrant and Raleigh 1 LP (as successor in interest to Duke RealtyLimited Partnership) (incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (FileNo. 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 Raleigh 1 LP (as successor ininterest to Duke Realty Limited Partnership) (incorporated herein by reference to Exhibit 10.22 to the Registrant's Annual Reporton 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 Raleigh 1 LP (as successor ininterest to Duke Realty Limited Partnership) (incorporated herein by reference to Exhibit 10.13 to the Registrant's Annual Reporton Form 10-K (File No. 001-35940), filed with the SEC on February 13, 2018). 10.14Third Amendment to Office Lease, dated as of April 5, 2018, by and between the Registrant and Raleigh 1 LP (as successor ininterest to Duke Realty Limited Partnership). (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Reporton Form 10-Q (File No. 001-35940), filed with the Securities and Exchange Commission on August 9, 2018). 10.15+Amendment to Executive Severance and Change in Control Letter Agreement, dated as of December 31, 2018, by and between theRegistrant and David J. Spitz. 10.16+Amendment to Executive Severance and Change in Control Letter Agreement, dated as of December 31, 2018, by and between theRegistrant and Mark E. Cook. 10.17+Amendment to Executive Severance and Change in Control Letter Agreement, dated as of December 31, 2018, by and between theRegistrant and Diana S. Allen. 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). 80Table of Contents31.1Certification 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.81Table of ContentsITEM 16. SUMMARY None.82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, 2019 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, 2019David J. Spitz /s/ Mark E. Cook Chief Financial Officer(Principal Financial Officer) February 13, 2019Mark E. Cook /s/ Richard F. Cornetta Vice President of Finance and Chief Accounting Officer(Principal Accounting Officer) February 13, 2019Richard F. Cornetta /s/ M. Scot Wingo Director February 13, 2019M. Scot Wingo /s/ Timothy J. Buckley Director February 13, 2019Timothy J. Buckley /s/ Joseph L. Cowan Director February 13, 2019Joseph L. Cowan /s/ Janet R. Cowell Director February 13, 2019Janet R. Cowell /s/ Marc E. Huffman Director February 13, 2019Marc E. Huffman /s/ Timothy V. Williams Director February 13, 2019Timothy V. Williams 83Exhibit 10.15AMENDMENT TO EXECUTIVE SEVERANCEAND CHANGE IN CONTROL LETTER AGREEMENTDear David:This Amendment to Executive Severance and Change in Control Letter Agreement (the “Amendment”) to is made and entered intoeffective as of December 31, 2018 (the “Amendment Effective Date”) by and between ChannelAdvisor Corporation(“ChannelAdvisor”) and David Spitz (“You”). This Agreement amends the Amended and Restated Executive Severance andChange in Control Letter Agreement between You and ChannelAdvisor dated December 17, 2014 (the “Agreement”) effective as ofthe Amendment Effective Date. Except as expressly provided in this Amendment, the Agreement, as amended by this Amendment,remains in full force and effect. All capitalized terms not defined in this Amendment have the meaning stated in the Agreement.Section 3 of the Agreement is hereby amended and restated to read as follows:“3. Change in Control with No TerminationIf there is a Change in Control and Your employment has not been terminated for any reason as of the first anniversary of theChange in Control, then You shall receive full acceleration of vesting of all Your Awards that were granted before theAmendment Effective Date and are unvested as of the first anniversary of the Change in Control, with the additional vestingbeing credited on the first anniversary of the Change in Control.”Sincerely,CHANNELADVISOR CORPORATION/s/ Timothy J. Buckley Timothy J. BuckleyChairman, Compensation CommitteeAccepted and agreed to by:/s/ David Spitz David SpitzExhibit 10.16AMENDMENT TO EXECUTIVE SEVERANCEAND CHANGE IN CONTROL LETTER AGREEMENTDear Mark:This Amendment to Executive Severance and Change in Control Letter Agreement (the “Amendment”) to is made and entered intoeffective as of December 31, 2018 (the “Amendment Effective Date”) by and between ChannelAdvisor Corporation(“ChannelAdvisor”) and Mark E. Cook (“You”). This Agreement amends the Executive Severance and Change in Control LetterAgreement between You and ChannelAdvisor dated August 31, 2015 (the “Agreement”) effective as of the Amendment EffectiveDate. Except as expressly provided in this Amendment, the Agreement, as amended by this Amendment, remains in full force andeffect. All capitalized terms not defined in this Amendment have the meaning stated in the Agreement.Section 3 of the Agreement is hereby amended and restated to read as follows:“3. Change in Control with No TerminationIf there is a Change in Control and Your employment has not been terminated for any reason as of the first anniversary of theChange in Control, then You shall receive one (1) year of acceleration of vesting of all Your Awards that were granted beforethe Amendment Effective Date and are unvested as of the first anniversary of the Change in Control, with the additionalvesting being credited on the first anniversary of the Change in Control.”Sincerely,CHANNELADVISOR CORPORATION/s/ David J. Spitz David J. SpitzChief Executive OfficerAccepted and agreed to by:/s/ Mark E. Cook Mark E. CookExhibit 10.17AMENDMENT TO EXECUTIVE SEVERANCEAND CHANGE IN CONTROL LETTER AGREEMENTDear Diana:This Amendment to Executive Severance and Change in Control Letter Agreement (the “Amendment”) to is made and entered intoeffective as of December 31, 2018 (the “Amendment Effective Date”) by and between ChannelAdvisor Corporation(“ChannelAdvisor”) and Diana Semel Allen (“You”). This Agreement amends the Executive Severance and Change in ControlLetter Agreement between You and ChannelAdvisor dated December 17, 2014 (the “Agreement”) effective as of the AmendmentEffective Date. Except as expressly provided in this Amendment, the Agreement, as amended by this Amendment, remains in fullforce and effect. All capitalized terms not defined in this Amendment have the meaning stated in the Agreement.Section 3 of the Agreement is hereby amended and restated to read as follows:“3. Change in Control with No TerminationIf there is a Change in Control and Your employment has not been terminated for any reason as of the first anniversary of theChange in Control, then You shall receive one (1) year of acceleration of vesting of all Your Awards that were granted beforethe Amendment Effective Date and are unvested as of the first anniversary of the Change in Control, with the additionalvesting being credited on the first anniversary of the Change in Control.”Sincerely,CHANNELADVISOR CORPORATION/s/ David J. Spitz David J. SpitzChief Executive OfficerAccepted and agreed to by:/s/ Diana Semel Allen Diana Semel Allen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, 333-216101, 333-223013) pertaining to the 2013 Equity Incentive Plan of ChannelAdvisor Corporation of our reports dated February 13, 2019, with respect tothe consolidated financial statements of ChannelAdvisor Corporation, and the effectiveness of internal control over financial reporting of ChannelAdvisorCorporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2018. /s/ Ernst & Young LLPRaleigh, North CarolinaFebruary 13, 2019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, 2019By:/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, 2019By:/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, 2018, 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, 2019 February 13, 2019The 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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