News Column

CHANNELADVISOR CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 27, 2014

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review Item 1A. "Risk Factors" and "Special Note Regarding Forward-Looking Statements" in this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a leading provider of software-as-a-service, or SaaS, solutions that enable our retailer and manufacturer customers to integrate, manage and optimize their merchandise sales across hundreds of online channels. Through our platform, we enable our customers to connect with new and existing sources of demand for their products, including e-commerce marketplaces, such as eBay, Amazon and Newegg, search engines and comparison shopping websites, such as Google, Bing, Nextag and Sears, and emerging channels, such as Facebook and Pinterest. Our suite of solutions, accessed through a standard web browser, provides our customers with a single, integrated user interface to manage their product listings, inventory availability, pricing optimization, search terms, data analytics and other critical functions across these channels. Our proprietary cloud-based technology platform delivers significant breadth, scalability and flexibility to our customers. In 2013, our customers processed approximately $4.4 billion in gross merchandise value, or GMV, through our platform. As of December 31, 2013, our customers managed over 150 million stock-keeping units, or SKUs, of their inventory on our platform. We sell subscriptions to our SaaS solutions primarily through our direct sales force. Our customers include the online businesses of traditional retailers, online retailers and brand manufacturers, as well as advertising agencies that use our solutions on behalf of their retailer clients. As of December 31, 2013, we had over 2,400 core customers worldwide, including 27% of the top 500 U.S. internet retailers, as identified by Internet Retailer magazine based on their 2012 online sales. We operate in one segment and derive our revenue from our customers' access to and usage of our SaaS solutions, which are organized into modules. Each module integrates with a particular type of channel, such as third-party marketplaces, paid search or comparison shopping websites, or supports a specific online functionality, such as creating webstores or employing rich media solutions on their websites. The majority of our revenue is derived from subscription fees paid to us by our customers for access to and usage of our SaaS solutions for a specified contract term, which is usually one year. A portion of the subscription fee is typically fixed and is based on a specified minimum amount of GMV that a customer expects to process through our platform. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMV processed through our platform in excess of the customer's specified minimum GMV amount. We also receive implementation fees, which may include fees for providing launch assistance and training. We have grown our total revenue from $43.6 million for the year ended December 31, 2011 to $68.0 million for the year ended December 31, 2013, a compound annual growth rate of 24.9%. Our revenue growth has been driven primarily by an increase in the number of core customers utilizing our solutions and an increase in the average revenue per core customer, as well as by an increase in the amount of our customers' GMV processed through our platform. During 2013, approximately 20% of our core revenue was derived from customers located outside of the United States. We currently offer the same solutions internationally as we do in the United States, and we intend to continue expanding our international operations. We do not take title to any of the merchandise processed through our platform and we generally do not collect payments on behalf of our customers. We do not hold any inventory of merchandise and we are not involved in the physical logistics of shipping merchandise to buyers, which is handled by our customers. We plan to grow our revenue by adding new customers, helping our existing customers increase their GMV processed through our platform by taking full advantage of its functionality and selling additional module subscriptions to existing customers to allow them to sell merchandise through new channels. We face a variety of challenges and risks, which we will need to address and manage as we pursue our growth strategy. In particular, we will need to continue to innovate in the face of a rapidly changing e-commerce landscape if we are to remain competitive, and we will need to effectively manage our growth, especially related to our international expansion. Our senior management continuously focuses on these and other challenges, and we believe that our culture of innovation and our history 30



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of growth and expansion will contribute to the success of our business. We cannot, however, assure you that we will be successful in addressing and managing the many challenges and risks that we face. Key Financial and Operating Performance Metrics We regularly monitor a number of financial and operating metrics in order to measure our performance and project our future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions. We discuss revenue, gross margin and the components of net income in the section below entitled "-Components of Operating Results." In addition, we utilize other key metrics as described below. Core Revenue Our reported operating results include revenue attributable to the products from two small legacy acquisitions, both of which occurred prior to 2008 and focused on solutions for lower-volume eBay sellers. We do not consider these products to be a core part of our strategic focus going forward. Each of these acquisitions contributed a relatively large number of customers with revenue per customer substantially lower than is characteristic of the rest of our business. We exclude the revenue attributable to these non-core, legacy products in calculating a measure we refer to as core revenue. We anticipate that the revenue associated with these non-core, legacy products will continue to decline over time both in absolute terms and as a percentage of our total revenue. Number of Core Customers The number of customers subscribing to our solutions is a primary determinant of our core revenue. We refer to the customers who subscribe to any of our solutions, other than the non-core, legacy products described above, as our core customers. The number of core customers was 2,429, 1,928 and 1,710 as of December 31, 2013, 2012 and 2011, respectively. Average Revenue per Core Customer The average revenue generated by our core customers is the other primary determinant of our core revenue. We calculate this metric by dividing our total core revenue for a particular period by the average monthly number of core customers during the period, which is calculated by taking the sum of the number of core customers at the end of each month in the period and dividing by the number of months in the period. We typically calculate average revenue per core customer in absolute dollars on a rolling twelve-month basis, but we may also calculate percentage changes in average revenue per core customer on a quarterly basis in order to help us evaluate our period-over-period performance. Our average revenue per core customer was $30,670, $28,050 and $24,240 for the years ended December 31, 2013, 2012 and 2011, respectively. Subscription Dollar Retention Rate We believe that our ability to retain our core customers and expand the revenue they generate for us over time is an important component of our growth strategy and reflects the long-term value of our customer relationships. We measure our performance on this basis using a metric we refer to as our subscription dollar retention rate. We calculate this metric for a particular period by establishing the cohort of core customers that had active contracts as of the end of the prior period. We then calculate our subscription dollar retention rate by taking the amount of fixed subscription revenue we recognized for the cohort in the period for which we are reporting the rate and dividing it by the fixed subscription revenue we recognized for the same cohort in the prior period. For this purpose, we do not include any revenue from the non-core, legacy products described above, any variable subscription fees paid by our customers or any implementation fees. Although some customers in any given period elect not to renew their contracts with us, our customers that do renew their subscriptions often increase their fixed subscription pricing levels to align with their increasing GMV volumes processed through our platform and may subscribe to additional modules as well. If our subscription dollar retention rate for a period is over 100%, this means that the increased subscription revenue we recognized from customers that renewed their contracts during the period, or whose contracts did not come up for renewal during the period, more than offset the subscription revenue we lost from customers that did not renew their contracts. For each of the twelve months ended December 31, 2013, 2012 and 2011, our subscription dollar retention rate exceeded 100%. 31



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Adjusted EBITDA Adjusted EBITDA represents our earnings before interest expense, income tax expense (benefit) and depreciation and amortization, adjusted to eliminate stock-based compensation expense and loss on extinguishment of debt. We believe that excluding these expenses in calculating adjusted EBITDA provides our management with a useful measure for period-to-period comparisons of our business. However, adjusted EBITDA is not a measure calculated in accordance with GAAP. Please refer to Item 6. "Selected Financial Data-Adjusted EBITDA" in this Annual Report for a discussion of the limitations of adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most comparable GAAP measurement, for the years ended December 31, 2013, 2012, 2011, 2010 and 2009. Adjusted EBITDA should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. In addition, adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA in the same manner that we do. We prepare adjusted EBITDA to eliminate the impact of stock-based compensation expense and loss on extinguishment of debt, which we do not consider indicative of our operating performance. We encourage you to evaluate these adjustments, the reasons we consider them appropriate and the material limitations of using non-GAAP measures as described in Item 6. "Selected Financial Data-Adjusted EBITDA." Components of Operating Results Revenue We derive the majority of our revenue from subscription fees paid to us by our customers for access to and usage of our SaaS solutions for a specified contract term, which is usually one year. A portion of the subscription fee is typically fixed and based on a specified minimum amount of GMV that a customer expects to process through our platform. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMV processed through our platform in excess of the customer's specified minimum GMV. In most cases, the specified percentage of excess GMV on which the variable portion of the subscription is based is fixed and does not vary depending on the amount of the excess. We also receive implementation fees, which may include fees for providing launch assistance and training. Because our customer contracts contain both fixed and variable pricing components, changes in GMV between periods do not translate directly or linearly into changes in our revenue. We use customized pricing structures for each of our customers depending upon the individual situation of the customer. For example, some customers may commit to a higher specified minimum GMV amount per month in exchange for a lower fixed percentage fee on that committed GMV. In addition, the percentage fee assessed on the variable GMV in excess of the committed minimum for each customer is typically higher than the fee on the fixed, committed portion. As a result, our overall revenue could increase or decrease even without any change in overall GMV between periods, depending on which customers generated the GMV. In addition, changes in GMV from month to month for any individual customer that are below the specified minimum amount would have no effect on our revenue from that customer, and each customer may alternate between being over the committed amount or under it from month to month. For these reasons, while GMV is an important qualitative and long-term directional indicator, we do not regard it as a useful quantitative measurement of our historic revenues or as a predictor of future revenues. The following table shows the percentage of our total revenue attributable to fixed subscription fees plus implementation fees, as compared to the percentage attributable to variable subscription fees, for each of the periods indicated. Year Ended December 31, 2013 2012 2011 (as a percentage of total revenue) Fixed subscription fees plus implementation fees 66.8 % 61.4 % 55.0 % Variable subscription fees 33.2 38.6 45.0 Total revenue 100.0 % 100.0 % 100.0 % We recognize fixed subscription fees and implementation fees ratably over the contract period once four conditions have been satisfied: •the contract has been signed by both parties; •the customer has access to our platform and transactions can be processed; 32



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•the fees are fixed or determinable; and •collection is reasonably assured. We generally invoice our customers for the fixed portion of the subscription fee in advance, in monthly, quarterly, semi-annual or annual installments. We invoice our customers for the implementation fee at the inception of the arrangement. Fixed subscription and implementation fees that have been invoiced are initially recorded as deferred revenue and are generally recognized ratably over the contract term. We invoice and recognize revenue from the variable portion of subscription fees in the period in which the related GMV is processed, assuming that the four conditions specified above have been met. Cost of Revenue Cost of revenue primarily consists of salaries and personnel-related costs for employees providing services to our customers and supporting our platform infrastructure, including benefits, bonuses and stock-based compensation. Additional expenses include co-location facility costs for our data centers, depreciation expense for computer equipment directly associated with generating revenue, infrastructure maintenance costs, fees we pay to credit card vendors in connection with our customers' payments to us and other direct costs. We plan to continue to expand our capacity to support our growth, which will result in higher cost of revenue in absolute dollars. Operating Expenses Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries and personnel-related costs are the most significant component of each of these expense categories. Sales and marketing expense. Sales and marketing expense consists primarily of salaries and personnel-related costs for our sales and marketing and customer support employees, including benefits, bonuses, stock-based compensation and commissions. We record expense for commissions at the time of contract signing. Additional expenses include marketing, advertising and promotional event programs, corporate communications and travel. Research and development expense. Research and development expense consists primarily of salaries and personnel-related costs for our research and development employees, including benefits, bonuses and stock-based compensation. Additional expenses include costs related to the development, quality assurance and testing of new technology and enhancement of our existing platform technology, consulting and travel. General and administrative expense. General and administrative expense consists primarily of salaries and personnel-related costs for administrative, finance and accounting, information systems, legal and human resource employees, including benefits, bonuses and stock-based compensation. Additional expenses include consulting and professional fees, insurance, other corporate expenses and travel, as well as costs associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies, directors' and officers' liability insurance, increased professional services and an enhanced investor relations function now that we are a public company. Other Income (Expense) Other income (expense) consists primarily of the loss on the extinguishment of our subordinated loan for the year ended December 31, 2013, interest income and interest expense. Interest income represents interest received on our cash and cash equivalents. Interest expense consists primarily of the interest incurred on outstanding borrowings, the accretion of the debt discount on our subordinated loan prior to extinguishment, the amortization of deferred financing costs and, prior to the closing of our IPO on May 29, 2013, changes in the fair value of our preferred stock warrant liability. Income Tax Expense (Benefit) Income tax expense (benefit) consists of U.S. federal, state and foreign income taxes. We incurred an income tax expense for the years ended December 31, 2013 and 2011 and an income tax benefit for the year ended December 31, 2012. 33



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Results of Operations Comparison of Years Ended December 31, 2013 and 2012 Year Ended December 31, 2013 2012 Percentage of Percentage of Period-to-Period Change Amount Revenue Amount Revenue Amount Percentage (dollars in thousands) Revenue $ 68,004 100.0 % $ 53,587 100.0 % $ 14,417 26.9 % Cost of revenue 18,088 26.6 14,749 27.5 3,339 22.6 Gross profit 49,916 73.4 38,838 72.5 11,078 28.5 Operating expenses: Sales and marketing 37,458 55.1 24,326 45.4 13,132 54.0 Research and development 12,669 18.6 10,109 18.9 2,560 25.3 General and administrative 14,154 20.8 8,252 15.4 5,902 71.5 Total operating expenses 64,281 94.5 42,687 79.7 21,594 50.6 Loss from operations (14,365 ) (21.1 ) (3,849 ) (7.2 ) (10,516 ) 273.2 Other (expense) income: Loss on extinguishment of debt (3,112 ) (4.6 ) - - (3,112 ) * Interest expense, net (2,960 ) (4.4 ) (1,185 ) (2.2 ) (1,775 ) 149.8 Other income, net 12 0.0 31 0.1 (19 ) (61.3 )



Total other (expense) income (6,060 ) (9.0 ) (1,154 )

(2.1 ) (4,906 ) 425.1



Loss before income taxes (20,425 ) (30.1 ) (5,003 )

(9.3 ) (15,422 ) 308.3 Income tax expense (benefit) 203 0.3 (70 ) (0.1 ) 273 * Net loss $ (20,628 ) (30.4 )% $ (4,933 ) (9.2 )% $ (15,695 ) 318.2 * = not meaningful Revenue Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands) Revenue $ 68,004$ 53,587$ 14,417 26.9 % Revenue for the year ended December 31, 2013 increased by $14.4 million, or 26.9%, compared to the year ended December 31, 2012. The increase in revenue for the year ended December 31, 2013 was mainly driven by the expansion of our international operations and an increase in our core revenue, which is discussed below. This growth in core revenue was partially offset by a $0.6 million, or 24.3%, decrease in our non-core revenue over the same period, as the products associated with our non-core, legacy acquisitions became a less significant part of our overall business focus. Our revenue from international operations of $14.2 million, or 20.8% of total revenue, for the year ended December 31, 2013 increased from $11.4 million, or 21.4% of total revenue, for the year ended December 31, 2012. The increase in revenue from our international operations was primarily attributable to an increase in the number of international customers. During 2013, we expanded our presence in the Asia-Pacific and Latin America regions. 34



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Table of Contents Core Revenue Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands) Core revenue $ 66,215$ 51,224$ 14,991 29.3 % Percentage of total revenue 97.4 % 95.6 % Non-core revenue $ 1,789$ 2,363$ (574 ) (24.3 )% Percentage of total revenue 2.6 % 4.4 % Total revenue $ 68,004$ 53,587$ 14,417 26.9 % Core revenue for the year ended December 31, 2013 increased by $15.0 million, or 29.3%, compared to the year ended December 31, 2012. This growth was primarily attributable to a 26.0% increase in the number of core customers using our platform at December 31, 2013 as compared to December 31, 2012. The increase in core customers accounted for 62.3% of the increase in core revenue during the year ended December 31, 2013. In addition, we experienced a 9.3% increase in the average revenue per core customer during the year ended December 31, 2013 as compared to the year ended December 31, 2012, which accounted for 37.7% of the increase in core revenue during the period. The increase in the average revenue per core customer was primarily attributable to an overall increase in transaction volume and, to a lesser extent, to modest overall increases in the percentage fees assessed on the fixed and variable portions of GMV under our contractual arrangements with some of our customers during the year. Because we generally enter into annual contracts with our customers, we may renegotiate either or both of the fixed and variable components of the pricing structure of a customer's contract each year. In addition, the increase in average revenue per core customer was due in part to a general shift in our customer base toward a greater proportion of larger enterprise customers, all of which are core customers. Our enterprise customers generally commit to a higher specified minimum amount of GMV per month, which results in a higher proportion of fixed subscription fees. Cost of revenue Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands) Cost of revenue $ 18,088$ 14,749$ 3,339 22.6 % Percentage of total revenue 26.6 % 27.5 % Cost of revenue for the year ended December 31, 2013 increased by $3.3 million, or 22.6%, compared to the year ended December 31, 2012. The increase in cost of revenue was primarily attributable to a $2.2 million increase in salaries and personnel-related costs, as we increased the number of employees providing services to our expanding customer base and supporting our platform infrastructure from 110 at December 31, 2012 to 144 at December 31, 2013. In addition, we experienced a $0.7 million increase in depreciation expense associated with equipment for our data centers and a $0.3 million increase in credit card vendor transaction fees. As a percentage of revenue, cost of revenue declined from 27.5% for the year ended December 31, 2012 to 26.6% for the year ended December 31, 2013. Operating Expenses Sales and marketing Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands) Sales and marketing $ 37,458$ 24,326$ 13,132 54.0 % Percentage of total revenue 55.1 % 45.4 % Sales and marketing expense for the year ended December 31, 2013 increased by $13.1 million, or 54.0%, compared to the year ended December 31, 2012. The increase in sales and marketing expense was primarily attributable to a $9.6 million increase in salaries and personnel-related costs, as we increased the number of sales and marketing and customer support 35



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personnel to continue driving revenue growth. The number of full-time sales and marketing employees increased from 189 at December 31, 2012 to 301 at December 31, 2013. In addition, we experienced a $3.1 million increase in our marketing and advertising expenses, promotional event programs and travel costs. The increase in sales and marketing expense as a percentage of revenue for the year ended December 31, 2013 reflects the implementation of our strategy of hiring new sales and marketing professionals and expanding our marketing activities in order to continue to grow our business. Research and development Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands)



Research and development $ 12,669$ 10,109$ 2,560

25.3 % Percentage of total revenue 18.6 % 18.9 % Research and development expense for the year ended December 31, 2013 increased by $2.6 million, or 25.3%, compared to the year ended December 31, 2012. The increase in research and development expense was primarily attributable to a $2.1 million increase in salaries and personnel-related costs associated with an increase in research and development personnel. The number of full-time research and development employees increased from 70 at December 31, 2012 to 93 at December 31, 2013. In addition, we experienced a $0.2 million increase in contractor and consulting expenses primarily related to translation services for our products as we expanded our international operations. General and administrative Year Ended December 31, Period-to-Period Change 2013 2012 Amount Percentage (dollars in thousands)



General and administrative $ 14,154$ 8,252 $

5,902 71.5 % Percentage of total revenue 20.8 % 15.4 % General and administrative expense for the year ended December 31, 2013 increased by $5.9 million, or 71.5%, compared to the year ended December 31, 2012. The increase in general and administrative expense was primarily attributable to a $2.9 million increase in salaries and personnel-related costs associated with an increase in general and administrative personnel to support our growing business and fulfill our obligations as a newly public company. The number of full-time general and administrative employees increased from 36 at December 31, 2012 to 56 at December 31, 2013. We also experienced a $1.5 million increase in professional fees related to legal, consulting and audit and tax services and a $0.8 million increase in insurance and tax costs. In addition, we incurred a $0.6 million increase in other general corporate costs necessary to support the overall growth in our business. Loss on Extinguishment of Debt During the year ended December 31, 2013, we recognized a loss on extinguishment of debt of $3.1 million as a result of the prepayment of our subordinated loan, representing the difference between the par value and payoff amount of the subordinated loan, increased by the write-off of unamortized debt issuance costs and accelerated amortization of the remaining debt discount. 36



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Comparison of Years Ended December 31, 2012 and 2011

Year Ended December 31, 2012 2011 Percentage of Percentage of Period-to-Period Change Amount Revenue Amount Revenue Amount Percentage (dollars in thousands) Revenue $ 53,587 100.0 % $ 43,570 100.0 % $ 10,017 23.0 % Cost of revenue 14,749 27.5 12,248 28.1 2,501 20.4 Gross profit 38,838 72.5 31,322 71.9 7,516 24.0 Operating expenses: Sales and marketing 24,326 45.4 19,106 43.9 5,220 27.3 Research and development 10,109 18.9 8,842 20.3 1,267 14.3 General and administrative 8,252 15.4 6,551 15.0 1,701 26.0 Total operating expenses 42,687 79.7 34,499 79.2 8,188 23.7 Loss from operations (3,849 ) (7.2 ) (3,177 ) (7.3 ) (672 ) 21.2 Other (expense) income: Interest expense, net (1,185 ) (2.2 ) (642 ) (1.5 ) (543 ) 84.6 Other income, net 31 0.1 6 0.0 25 416.7 Total other (expense) income (1,154 ) (2.1 ) (636 ) (1.5 ) (518 ) 81.4



Loss before income taxes (5,003 ) (9.3 ) (3,813 )

(8.8 ) (1,190 ) 31.2 Income tax (benefit) expense (70 ) (0.1 ) 51 0.1 (121 ) * Net loss $ (4,933 ) (9.2 )% $ (3,864 ) (8.9 )% $ (1,069 ) 27.7 * = not meaningful Revenue Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands) Revenue $ 53,587$ 43,570$ 10,017 23.0 % Revenue for the year ended December 31, 2012 increased by $10.0 million, or 23.0%, compared to the year ended December 31, 2011. The increase in revenue for the year ended December 31, 2012 was mainly driven by the expansion of our international operations and an increase in our core revenue, which is discussed below. This growth in core revenue was partially offset by a $0.7 million, or 21.6%, decrease in our non-core revenue over the same period, as the products associated with our non-core, legacy acquisitions became a less significant part of our overall business focus. Our revenue from international operations increased from $8.8 million, or 20.1% of total revenue, for the year ended December 31, 2011, to $11.4 million, or 21.4% of total revenue, for the year ended December 31, 2012. The increase in revenue from our international operations was primarily attributable to an increase in the number of international customers. Core Revenue Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands) Core revenue $ 51,224$ 40,557$ 10,667 26.3 % Percentage of total revenue 95.6 % 93.1 % Non-core revenue $ 2,363$ 3,013$ (650 ) (21.6 )% Percentage of total revenue 4.4 % 6.9 % Total revenue $ 53,587$ 43,570$ 10,017 23.0 %



Core revenue for the year ended December 31, 2012 increased by $10.7 million, or 26.3%, compared to the year ended December 31, 2011.

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This growth was primarily attributable to a 15.7% increase in the average revenue per core customer during the year ended December 31, 2012 as compared to the year ended December 31, 2011, which accounted for 65.2% of the increase in core revenue during the period. The increase in the average revenue per core customer was primarily attributable to an overall increase in transaction volume and, to a lesser extent, to modest overall increases in the percentages assessed on the fixed and variable portions of GMV under our contractual arrangements with some of our customers during the year. In addition, the increase in average revenue per core customer was due in part to a general shift in our customer base toward a greater proportion of larger enterprise customers, all of which are core customers. Our enterprise customers generally commit to a higher specified minimum amount of GMV per month. In addition, we experienced a 12.7% increase in the number of core customers using our platform during the year ended December 31, 2012 as compared to the year ended December 31, 2011, which accounted for 34.8% of the increase in core revenue during the period. Cost of revenue Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands) Cost of revenue $ 14,749$ 12,248$ 2,501 20.4 % Percentage of total revenue 27.5 % 28.1 % Cost of revenue for the year ended December 31, 2012 increased by $2.5 million, or 20.4%, compared to the year ended December 31, 2011. The increase in cost of revenue was primarily attributable to a $1.8 million increase in salaries and personnel-related costs, as we increased the number of employees providing services to our expanding customer base and supporting our platform infrastructure from 90 at December 31, 2011 to 110 at December 31, 2012. In addition, we experienced a $0.8 million increase in depreciation expense associated with equipment for our data centers. These increases were partially offset by a $0.2 million decrease in co-location facility costs resulting from efficiencies gained through virtualization. As a percentage of revenue, cost of revenue declined from 28.1% for the year ended December 31, 2011 to 27.5% for the year ended December 31, 2012. Operating Expenses Sales and marketing Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands) Sales and marketing $ 24,326$ 19,106$ 5,220 27.3 % Percentage of total revenue 45.4 % 43.9 % Sales and marketing expense for the year ended December 31, 2012 increased by $5.2 million, or 27.3%, compared to the year ended December 31, 2011. The increase in sales and marketing expense was primarily attributable to a $5.4 million increase in salaries and personnel-related costs, as we increased the number of sales and marketing and customer support personnel to continue driving revenue growth. The number of full-time sales and marketing employees increased from 148 at December 31, 2011 to 189 at December 31, 2012.



Research and development

Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands)



Research and development $ 10,109$ 8,842 $

1,267 14.3 % Percentage of total revenue 18.9 % 20.3 % Research and development expense for the year ended December 31, 2012 increased by $1.3 million, or 14.3%, compared to the year ended December 31, 2011. The increase in research and development expense was primarily attributable to a $1.5 million increase in salaries and personnel-related costs associated with an increase in research and development personnel. The number of full-time research and development employees increased from 57 at December 31, 2011 to 70 at December 31, 2012. 38



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Table of Contents General and administrative Year Ended December 31, Period-to-Period Change 2012 2011 Amount Percentage (dollars in thousands)



General and administrative $ 8,252$ 6,551 $

1,701 26.0 % Percentage of total revenue 15.4 % 15.0 % General and administrative expense for the year ended December 31, 2012 increased by $1.7 million, or 26.0%, compared to the year ended December 31, 2011. The increase in general and administrative expense was primarily attributable to a $0.7 million increase in salaries and personnel-related costs associated with an increase in general and administrative personnel to support our growing business. The number of full-time general and administrative employees increased from 30 at December 31, 2011 to 36 at December 31, 2012. In addition, we experienced a $0.5 million increase in information systems and consulting costs and a $0.2 million increase in recruiting costs. Seasonality Our revenue fluctuates as a result of seasonal variations in our business, principally due to the peak consumer demand and related increased volume of our customers' GMV during the year-end holiday season. As a result, we have historically had higher revenue in our fourth quarter than other quarters in a given year due to increased GMV processed through our platform, resulting in higher variable subscription fees. Liquidity and Capital Resources Sources of Liquidity Prior to our IPO in May 2013, we funded our operations primarily through cash from operating activities, bank and subordinated debt borrowings and private placements of our redeemable convertible preferred stock. In December 2009, we entered into a loan and security agreement with a lender, which was most recently amended in September 2013. The agreement, as amended, includes a revolving line of credit of up to $6.0 million and an equipment line of credit of up to $1.0 million. Under the terms of this agreement, we are required to meet and maintain specified financial and nonfinancial covenants. As of December 31, 2013, we were in compliance with all such covenants. The revolving line of credit has a current term through September 2014 and requires interest-only payments to be made monthly on any outstanding advances at the lender's prime rate, which was 3.25% at December 31, 2013, plus 1%. Borrowings under the equipment line of credit accrue interest at a rate of 6.5% per annum and are payable in 36 monthly installments from the date of each respective borrowing. The equipment line of credit matures on June 1, 2014. The loans are collateralized by all of our assets, excluding our intellectual property, although we may not encumber our intellectual property without the consent of the lender. At December 31, 2013, we did not have any amounts outstanding under either the revolving line of credit or the equipment line of credit. In March 2012, we entered into a loan and security agreement with a subordinated lender, which was amended in October 2013. Under the agreement, we borrowed $5.0 million in March 2012 and an additional $5.0 million in December 2012. Borrowings under the agreement accrued interest at an annual rate of 10.5%. We were required to make interest-only payments on outstanding balances through March 1, 2015, after which the debt was payable in monthly installments of both principal and interest through February 2017. In November 2013, we entered into a payoff agreement with the lender pursuant to which we paid all amounts due and owing under the agreement and terminated the agreement. Under the payoff agreement, we paid the lender approximately $11.3 million, of which $1.2 million represented a fixed prepayment fee and other extinguishment costs. Public Offerings of Common Stock On May 29, 2013, we closed our IPO in which we sold an aggregate of 6,612,500 shares of common stock, including the full exercise of the underwriters' option to purchase additional shares, for net proceeds of $82.0 million after deducting underwriting discounts and offering-related expenses. Upon closing of the IPO, all of the convertible preferred stock then outstanding automatically converted into 13,401,499 shares of common stock. In addition, outstanding warrants to purchase Series C convertible preferred stock automatically converted into warrants to purchase 206,038 shares of common stock, and our preferred stock warrant liability of $3.6 million as of May 29, 2013 was reclassified to additional paid-in capital. 39



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On November 12, 2013, we closed a public offering in which we sold 1,000,000 shares of common stock for net proceeds of $31.9 million after deducting underwriting discounts and offering-related expenses. Working Capital The following table summarizes our cash and cash equivalents, accounts receivable, working capital and cash flows for the periods indicated: As of and for the Year Ended December 31, 2013 2012 2011 (in thousands) Cash and cash equivalents $ 104,406$ 10,865$ 4,998 Accounts receivable, net of allowance 13,951 9,571



7,677

Working capital 94,383 3,006 (1,317 ) Cash (used in) provided by: Operating activities (5,314 ) 1,191 161 Investing activities (5,218 ) (2,094 ) (1,723 ) Financing activities 104,164 6,806 (443 ) Our cash at December 31, 2013 was held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash is invested primarily in demand deposit accounts and short-term money market accounts that are currently providing only a minimal return. Of our total cash and cash equivalents, approximately 2% was held outside of the United States at December 31, 2013. Our international operations primarily consist of selling and marketing 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 operations inside the United States, we would be required to accrue and pay U.S. taxes to repatriate these funds. We currently intend to permanently reinvest 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. Cash Flows Operating Activities For the year ended December 31, 2013, our net cash used in operating activities of $5.3 million consisted of a net loss of $20.6 million, partially offset by $11.1 million in adjustments for non-cash items and $4.2 million of cash provided by changes in working capital. Adjustments for non-cash items primarily consisted of depreciation and amortization expense of $3.7 million, loss on extinguishment of debt of $3.1 million, non-cash stock compensation expense of $2.1 million, change in fair value of preferred stock warrants of $1.1 million, which was reclassified to additional paid-in capital upon the closing of our IPO, accretion of debt discount of $0.5 million and bad debt expense of $0.5 million. The increase in cash resulting from changes in working capital primarily consisted of an increase in accounts payable and accrued expenses of $5.7 million, primarily driven by increased operating costs during the period, and an increase in deferred revenue of $4.5 million as a result of an increased number of customers prepaying for subscription services. These increases were partially offset by decreases in operating cash flow due to a $4.9 million increase in accounts receivable, primarily driven by increased revenue during the year as we continued to expand our operations, both domestically and internationally, and an increase in prepaid expenses and other assets of $1.0 million. For the year ended December 31, 2012, our net cash provided by operating activities of $1.2 million consisted of a net loss of $4.9 million, offset by $1.4 million of cash provided by changes in working capital and $4.7 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of depreciation and amortization expense of $2.9 million, non-cash stock compensation expense of $0.6 million, non-cash rent expense of $0.5 million and accretion of debt discount of $0.4 million. The increase in cash resulting from changes in working capital primarily consisted of an increase in deferred revenue of $3.9 million as a result of an increased number of customers prepaying for subscription services and an increase in accounts payable and accrued expenses of $0.4 million, primarily driven by increased operating costs during the period. These increases were partially offset by decreases in operating cash flow due to a $2.0 million increase in accounts receivable, 40



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primarily driven by increased revenue during the year as we continue to expand our operations, both domestically and internationally, and an increase in prepaid expenses and other assets of $1.1 million. For the year ended December 31, 2011, our net cash provided by operating activities of $0.2 million consisted of a net loss of $3.9 million, offset by cash of $1.0 million provided by changes in working capital and $3.1 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of depreciation and amortization expense of $2.1 million, non-cash stock compensation expense of $0.2 million, non-cash rent expense of $0.3 million and change in fair value of preferred stock warrants of $0.3 million. The increase in cash resulting from changes in working capital primarily consisted of an increase in deferred revenue of $1.9 million as a result of an increased number of customers prepaying for subscription services and an increase in accounts payable and accrued expenses of $1.4 million, primarily driven by increased operating costs during the period. These increases were offset by decreases in operating cash flow due to a $1.5 million increase in accounts receivable, primarily driven by increased revenue during the year as we continue to expand our operations, both domestically and internationally, and an increase in prepaid expenses and other assets of $0.8 million. Investing Activities For the year ended December 31, 2013, net cash used in investing activities was $5.2 million, consisting of $3.7 million for the purchase of property and equipment and $1.5 million for the payment of internal-use software development costs. For the year ended December 31, 2012, net cash used in investing activities was $2.1 million, consisting of $1.9 million for the purchase of property and equipment and $0.2 million for the payment of internal-use software development costs. For the years ended December 31, 2011, net cash used in investing activities was $1.7 million for the purchase of property and equipment. Financing Activities For the year ended December 31, 2013, net cash provided by financing activities was $104.2 million, consisting of $118.5 million in proceeds from the issuance of common stock in two public offerings, net of underwriting discounts and commissions but before offering expenses, $2.4 million in cash received upon the exercise of stock options and $1.6 million in cash received upon the exercise of common stock warrants. These amounts were partially offset by $14.2 million in repayments of debt and capital leases, $2.9 million in payments of costs related to our public offerings that had been deferred and $1.2 million in debt extinguishment costs related to the prepayment of our subordinated loan. For the year ended December 31, 2012, net cash provided by financing activities was $6.8 million, consisting of $9.9 million in net borrowings under our subordinated loan and $0.2 million in cash received upon the exercise of stock options, offset by $1.5 million in repayments of debt and capital leases, $1.5 million in payments of costs in connection with our IPO that had been deferred and $0.2 million used to repurchase common stock from two former employees. For the year ended December 31, 2011, net cash used in financing activities was $0.4 million, consisting of $1.5 million in repayments of debt and capital leases, offset by $1.0 million in borrowings under our revolving line of credit and $0.1 million in cash received upon the exercise of stock options. Operating and Capital Expenditure Requirements Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities and existing cash balances, which include the net proceeds from our public offerings, will be sufficient to meet our cash requirements for at least the next 12 months. During this period, we expect our capital expenditure requirements to be approximately $9.0 million to $11.0 million, which will primarily consist of computer hardware, purchased software and furniture and office equipment. Contractual 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. The following table summarizes these contractual obligations at December 31, 2013. Future events could cause actual payments to differ from these estimates. 41



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Table of Contents Payment due by period Less than 1 More than 5 Contractual Obligations Total year 1-3 years



3-5 years years

(in thousands)



Operating lease obligations $ 15,317$ 1,973$ 5,707

$ 5,855$ 1,782 Capital lease obligations 3,196 1,570 1,625 1 - Purchase commitments 2,840 2,232 608 - - Total $ 21,353$ 5,775$ 7,940$ 5,856$ 1,782 Subsequent to December 31, 2013, we leased additional office space in London, England with total collective future minimum lease payments of approximately $15.5 million, based on the exchange rate as of December 31, 2013. Off-Balance Sheet Arrangements As of December 31, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities. Critical Accounting Policies and Significant Judgments and Estimates Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, and to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements. Revenue Recognition and Deferred Revenue We derive the majority of our revenue from subscription fees paid to us by our customers for access to and usage of our SaaS solutions for a specified contract term, which is typically one year. A portion of the subscription fee is typically fixed and is based on a specified minimum amount of GMV that a customer expects to process through our platform over the contract term. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMV processed through our platform in excess of the customer's specified minimum GMV amount. We also receive implementation fees, which may include fees for providing launch assistance and training. Customers do not have the contractual right to take possession of our software at any time. We recognize revenue when there is persuasive evidence of an arrangement, we have provided the service, the fees to be paid by the customer are fixed and determinable and collectability is reasonably assured. We consider that delivery of our SaaS solutions has commenced once our customer has access to our platform and can process transactions. We generally recognize the fixed portion of our subscription fees and our implementation fees ratably over the contract term once the criteria for revenue recognition described above have been satisfied. Some of our customers elect a managed-service solution and contract with us to manage some or all aspects of our SaaS solutions on their behalf. Under these managed-service arrangements, customer transactions cannot be processed through our platform until the completion of the implementation services. Therefore, we commence revenue recognition once transactions can be processed on our platform, provided all other revenue recognition criteria have been satisfied. At that time, we recognize the portion of the fees earned since the inception of the arrangement. We recognize the balance of the fees ratably over the remaining contract term. We recognize the variable portion of subscription fee revenue in the period in which the related GMV is processed, as long as all other revenue recognition criteria have been satisfied. 42



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We record deferred revenue when we receive cash payments from or invoice our customers in advance of when we provide or perform the services under our arrangements with them. Accounts Receivable and Allowances for Doubtful Accounts Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts that we maintain for estimated losses expected to result from the inability of some customers to make payments as they become due. Our estimate is based on historical collection experience and a review of the current status of accounts receivable. Historically, our actual collection experience has not varied significantly from our estimates, due primarily to our collection policies and the financial strength of our customers. Goodwill Goodwill represents the excess of the aggregate of the fair value of consideration transferred in a business combination over the fair value of assets acquired, net of liabilities assumed. Goodwill is not amortized but is subject to an annual impairment test. We test goodwill for impairment annually on December 31 or more frequently if events or changes in business circumstances indicate the asset might be impaired. Goodwill is tested for impairment at the reporting unit level. During the year ended December 31, 2012, we adopted new accounting guidance, which gives us the option of performing a qualitative assessment for testing goodwill for impairment. Under the qualitative assessment, we determine whether the existence of events and circumstances indicate that it is more likely than not that the goodwill is impaired. The qualitative factors that we consider include, but are not limited to, macroeconomic conditions, industry and market conditions, company-specific events, changes in circumstances and after-tax cash flows. If we determine that the qualitative factors indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we would test goodwill for impairment at the reporting unit level using a two-step approach. The first step is to compare the fair value of the reporting unit to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the net assets assigned to the reporting unit, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unit's carrying value, step two is performed to measure the amount of the impairment, if any. In the second step, the fair value of goodwill is determined by deducting the fair value of the reporting unit's identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if the reporting unit had just been acquired and the fair value was being initially allocated. If the carrying value of goodwill exceeds the implied fair value, an impairment charge would be recorded in the period the determination is made. We have determined that we have a single, entity-wide reporting unit. To determine the fair value of our reporting unit for the quantitative approach, we primarily use a discounted cash flow analysis, which requires significant assumptions and estimates about future operations. Significant judgments inherent in this analysis include the determination of an appropriate discount rate, estimated terminal value and the amount and timing of expected future cash flows. We may also determine fair value of our reporting unit using a market approach by applying multiples of earnings of peer companies to our operating results. Based upon the quantitative assessment that we performed as of December 31, 2011, our reporting unit was not considered at risk of failing step one of the goodwill impairment test. Accordingly, a qualitative assessment was performed as of December 31, 2013, and we determined, after assessing all relevant events and circumstances, that the reporting unit did not have a carrying value that was more likely than not to exceed its fair value. Stock-Based Compensation Stock options awarded to employees, directors and non-employee third parties are measured at fair value at each grant date. Prior to our IPO, we considered what we believed to be comparable publicly traded companies, discounted free cash flows, and an analysis of our enterprise value in estimating the fair value of our common stock. We recognize stock-based compensation expense using the accelerated attribution method, net of estimated forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche. Options generally vest quarterly over a four-year period. The determination of the fair value of stock-based compensation arrangements is affected by a number of variables, including estimates of the 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-pricing model, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. Black-Scholes and other option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. 43



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The following summarizes the assumptions used for estimating the fair value of stock options granted to employees for the periods indicated:

Year Ended December 31, 2013 2012 2011



Assumptions:

Risk-free interest rate 0.3% - 1.7% 0.1% - 0.9% 0.4% - 2.0% Expected life (years) 5.00 - 6.25 4.00 - 6.25 6.25 Expected volatility 43% - 59% 49% - 61% 28% - 56% Dividend yield

0% 0% 0% We have assumed no dividend yield because we do not expect to pay dividends in the future, which is consistent with our history of not paying dividends. The risk-free interest rate assumption is based on observed interest rates for constant maturity U.S. Treasury securities consistent with the expected life of our employee stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified 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 the contractual term. We used the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options. Our estimate of pre-vesting forfeitures, or forfeiture rate, is based on our analysis of historical behavior by stock option holders. The estimated forfeiture rate is applied to the total estimated fair value of the awards, as derived from the Black-Scholes model, to compute the stock-based compensation expense, net of pre-vesting forfeitures, to be recognized in our consolidated statements of operations. Prior to our IPO in May 2013, we were a private company with no active public market for our common stock. Therefore, in response to Section 409A of the Internal Revenue Code of 1986, as amended, related regulations issued by the Internal Revenue Service and accounting standards related to stock-based compensation, we periodically determined for financial reporting purposes the estimated per share fair value of our common stock at various dates using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, "Valuation of Privately-Held Company Equity Securities Issued as Compensation." Following our IPO, we established a policy of using the closing sale price per share of our common stock as quoted on the New York Stock Exchange on the date of grant for purposes of determining the exercise price per share of our options to purchase common stock. Income Taxes We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in 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 valuation allowance if it is more likely than not that we will not realize some or all of the deferred tax asset. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is more likely than not that the position will be sustained upon examination. We recognize potential accrued interest and penalties associated with unrecognized tax positions within our global operations in income tax expense. Recent Accounting Pronouncements We have reviewed accounting pronouncements that were issued as of December 31, 2013 and do not believe that these pronouncements will have a material impact on our financial position or results of operations. 44



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