S-1/A 1 d419074ds1a.htm FORM S-1 AMENDMENT NO. 2 Form S-1 Amendment No. 2
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As filed with the Securities and Exchange Commission on May 9, 2013

Registration No. 333-187865

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CHANNELADVISOR CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   56-2257867

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

2701 Aerial Center Parkway

Morrisville, NC 27560

(919) 228-4700

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

 

M. Scot Wingo

Chief Executive Officer

ChannelAdvisor Corporation

2701 Aerial Center Parkway

Morrisville, NC 27560

(919) 228-4700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Brent B. Siler, Esq.

Ryan E. Naftulin, Esq.

Brian F. Leaf, Esq.

Cooley LLP

11951 Freedom Drive

Reston, VA 20190-5656

Telephone: (703) 456-8000

Fax: (703) 456-8100

 

S. Scott Alridge, Esq.

General Counsel and Secretary

ChannelAdvisor Corporation

2701 Aerial Center Parkway

Morrisville, NC 27560

Telephone: (919) 228-4700

Fax: (866) 225-3085

 

Mark G. Borden, Esq.

Wilmer Cutler Pickering Hale and Dorr LLP

60 State Street

Boston, MA 02109

Telephone: (617) 526-6000

Fax: (617) 526-5000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 under the Securities Exchange Act of 1934. (Check one):

 

Large Accelerated Filer  ¨    Accelerated Filer   ¨    Non-accelerated Filer   x    Smaller Reporting Company  ¨

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated May 9, 2013

5,750,000 Shares

 

LOGO

Common Stock

 

 

This is an initial public offering of shares of common stock of ChannelAdvisor Corporation. All of the 5,750,000 shares of common stock are being sold by us.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00. We have applied to list our common stock on the New York Stock Exchange under the symbol “ECOM.”

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements.

 

 

See “Risk Factors” beginning on page 11 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount

   $         $     

Proceeds, before expenses, to ChannelAdvisor

   $         $     

To the extent that the underwriters sell more than 5,750,000 shares of common stock, the underwriters have the option to purchase up to an additional 862,500 shares from us at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2013.

 

Goldman, Sachs & Co.    Stifel        

Pacific Crest Securities

 

BMO Capital Markets   Needham & Company      Raymond James   

 

 

Prospectus dated                     , 2013


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     28   

Industry and Market Data

     29   

Use of Proceeds

     30   

Dividend Policy

     30   

Capitalization

     31   

Dilution

     33   

Selected Consolidated Financial Data

     35   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     38   

Business

     69   

Management

     86   

Executive Compensation

     94   

Certain Relationships and Related Party Transactions

     102   

Principal Stockholders

     105   

Description of Capital Stock

     108   

Shares Eligible for Future Sale

     114   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     117   

Underwriting

     121   

Legal Matters

     125   

Experts

     125   

Where You Can Find Additional Information

     125   

Index to Consolidated Financial Statements

     F-1   

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside the United States: We have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons who come into possession of this prospectus and any applicable free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes thereto and the information set forth under the sections “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included in this prospectus. Unless the context otherwise requires, we use the terms “ChannelAdvisor,” “company,” “we,” “us” and “our” in this prospectus to refer to ChannelAdvisor Corporation and, where appropriate, our consolidated subsidiaries.

Company 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, Microsoft’s Bing, and Nextag, and emerging channels, such as Facebook and Groupon. 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 2012, our customers processed over $3.5 billion in gross merchandise value, or GMV, through our platform. As of March 31, 2013, our customers managed over 100 million stock-keeping units, or SKUs, of their inventory on our platform.

We serve customers across a wide range of industries and geographies. As of March 31, 2013, we had nearly 2,000 customers worldwide, including 27% of the top 500 U.S. Internet retailers, as ranked by Internet Retailer magazine based on 2012 sales, up from 16% of the top 500 U.S. Internet retailers, based on 2007 sales, as of December 31, 2007. Our customers include both traditional and online retailers, such as Ann Taylor, eBags.com, J&R Electronics and Jos. A. Bank Clothiers, as well as manufacturers of consumer goods, such as Dell, Dooney and Bourke, Lenovo, Sony and Under Armour. We derive revenue primarily from subscription fees paid to us by our customers for access to our cloud-based solutions. We generally structure our contracts to include both a fixed subscription fee and a variable subscription fee that allows us to participate in a share of our customers’ GMV processed through our platform. We believe this contract structure aligns our interests with those of our customers.

The e-commerce market 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 trend has created many opportunities for retailers and manufacturers, but at the same time has resulted in additional complexity and challenges. Retailers and manufacturers seeking new avenues to expand their online sales must manage product data and transactions across hundreds of highly fragmented online channels where data attributes vary, requirements change frequently and the pace of innovation is rapid and increasing.

In response to these challenges, we offer retailers and manufacturers SaaS solutions that enable them to integrate, manage and optimize their merchandise sales across disparate online channels on a unified platform. As channels frequently update their product information requirements, policies, merchandising strategies and integration specifications, retailers and manufacturers must revise their

 

 

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online business strategies, product listings and attributes, and business rules, which can be resource-intensive and time-consuming. Through our SaaS platform, which is delivered using a single code base and multi-tenant architecture, our customers have real-time access to our most up-to-date capabilities for listing and managing their products on new and existing online channels.

From 2010 to 2012, our total revenue increased from $36.7 million to $53.6 million, a compound annual growth rate of 20.9%. Our core revenue increased from $32.7 million in 2010 to $51.2 million in 2012, a compound annual growth rate of 25.1%. Our core revenue excludes revenue attributable to the products from two small acquisitions that we completed prior to 2008 and that are no longer part of our strategic focus, as discussed further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Financial Performance Metrics.” For the three months ended March 31, 2013 as compared to the same period in 2012, we grew our total revenue from $12.2 million to $14.9 million, an increase of 22.1%, and our core revenue from $11.5 million to $14.4 million, an increase of 25.2%. Our gross margin, based on total revenue, expanded from 66.8% in 2010 to 72.5% in 2012, and from 73.3% in the first quarter of 2012 to 73.5% in the first quarter of 2013.

Industry Background

According to Forrester Research, Inc., or Forrester, an industry research firm, e-commerce consumer spending in the United States, Europe, Asia-Pacific and Latin America is expected to increase from $534 billion in 2011 to $1.1 trillion in 2016, a compound annual growth rate of 15%.

E-commerce is an increasingly complex and fragmented market due to the hundreds of channels available to retailers and manufacturers and the rapid pace of change and innovation across those channels. Several significant trends have contributed to this increasing complexity and fragmentation, including:

 

  Ÿ  

the emergence and growth of online third-party marketplaces;

 

  Ÿ  

mainstream adoption of mobile devices for e-commerce;

 

  Ÿ  

the increased use of search engines and comparison shopping websites;

 

  Ÿ  

global growth in e-commerce driving opportunities for international sales; and

 

  Ÿ  

the increasing use of social networks and other specialty websites as e-commerce channels.

The increasing complexity and fragmentation of e-commerce channels is placing greater demands on retailers and manufacturers that want to grow their online sales. They need solutions that will enable them to easily integrate their product offerings and inventory across multiple online channels. Traditionally, retailers and manufacturers built in-house solutions, purchased channel-specific solutions, known as point solutions, or used the channels’ individual capabilities. However, in-house solutions can be costly and difficult to adapt to industry change and innovation, and point solutions, as well as channels’ individual solutions, can be narrowly tailored and can limit retailers and manufacturers to managing single online channels or a single category of channels.

SaaS platforms generally offer customers several distinct advantages over these types of traditional models, including lower upfront and ongoing costs, faster speed of implementation and less reliance on internal IT staff. Gartner Inc., or Gartner, an industry research firm, estimates that the total worldwide cloud SaaS market will grow from $13.4 billion in 2011 to $32.2 billion in 2016, a compound annual growth rate of 19%, and that sales of e-commerce enablement services will grow from $4.8 billion in 2011 to $9.0 billion in 2016, a compound annual growth rate of 13%.

 

 

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Our Solutions

Our suite of SaaS solutions allows our customers to more easily integrate, manage and optimize their online sales across hundreds of available channels through a single, integrated platform. Our suite of solutions includes a number of individual offerings, or modules. Each module integrates with a particular type of channel, such as third-party marketplaces, paid search or comparison shopping websites, or supports specific online functionality, such as creating webstores or employing rich media solutions on their websites. We believe our suite of solutions offers the following key benefits for our customers:

 

  Ÿ  

Single, fully integrated solution.    We provide our customers with a single web-based interface as the central location for them to control, analyze and manage their online sales across hundreds of available channels and multiple geographies. This unified view enables our customers to more easily and cost-effectively manage product listings, inventory availability, pricing optimization, search terms, data analytics and other critical functions.

 

  Ÿ  

Reduced integration costs, time to market and dependence on in-house resources.    Customers can more easily and quickly introduce their products, both to channels on which they already have a presence and to new channels, without incurring the costs related to installing and maintaining their own hardware and software infrastructure.

 

  Ÿ  

Scalable technology platform.    In 2012, our customers processed over $3.5 billion in GMV through our platform, and as of March 31, 2013, our customers managed over 100 million SKUs of their inventory on our platform. We believe that the scalability of our platform allows our customers to quickly and efficiently increase the number of product listings and transactions processed through our platform.

 

  Ÿ  

Flexibility to adapt and instantaneous access to our most up-to-date capabilities.    When we develop and deploy new features, functions and capabilities, or make changes to keep up with the changing priorities and requirements of each channel, our customers simultaneously benefit from those new capabilities and changes.

 

  Ÿ  

Robust data and reporting analytics.    We provide our customers with actionable insights across the latest channel and consumer trends and general product performance, which enables them to evaluate and, if necessary, improve the efficiency of their business rules on existing or new channels.

Our Competitive Strengths

We believe we have the following competitive strengths:

 

  Ÿ  

Industry leadership.    We believe that we are regarded as a trusted expert on the e-commerce industry. We have thousands of customers and we also maintain close working relationships with the major channels, including Amazon, eBay and Google. These relationships often provide us early visibility into upcoming changes that are important to our customers.

 

  Ÿ  

Channel independence.    Unlike the integration and listings management solutions offered by individual channels or third-party solutions that support only one channel or category of channel, our solutions do not favor any one channel over others. This channel independence enables our customers to optimize their online sales regardless of the specific channels they choose.

 

  Ÿ  

Network effects.    We believe the breadth of channels that we support attracts customers to our solutions. As our customer base has grown, we have experienced increased demand from

 

 

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channels seeking to be integrated with our platform. We believe the demands of our customers for access to new online channels, and the demands of online channels for access to new retailers and manufacturers, reinforce each other and enhance the value of our solutions.

 

  Ÿ  

Economies of scale.    With nearly 2,000 customers subscribing to our solutions that generate core revenue, which we refer to as core customers, we believe that we have achieved economies of scale across our customer base that enable us to provide services more cost-effectively than retailers and manufacturers who develop and manage their own in-house systems.

 

  Ÿ  

Established global presence.    As of March 31, 2013, we had over 500 core customers outside of the United States. Core customers outside the United States accounted for over 20% of our core revenue during the year ended December 31, 2012 and the three months ended March 31, 2013. With international offices in the United Kingdom, Ireland, Germany, Australia and Hong Kong, we believe that our international presence enhances our ability to connect customers with demand for their products from a global audience.

Our Growth Strategy

We seek to strengthen our position as a leading provider of solutions that connect retailers and manufacturers with established and emerging online sources of demand for their products. The key elements of our growth strategy include:

 

  Ÿ  

Expanding our sales force to acquire new customers.    We intend to increase our sales force in order to reach and acquire new customers in existing and new geographies. By increasing investment in our sales and marketing capabilities, we believe that we will be able to further expand our brand among new potential customers, grow our revenue and achieve greater economies of scale.

 

  Ÿ  

Broadening and deepening existing customer relationships.    We intend to expand our sales, marketing and services efforts to help our customers increase their overall GMV processed through our platform by taking full advantage of the functionality of our suite of solutions. As our customer service team works with our customers to optimize usage of their existing modules, our customers’ online businesses often improve, and customers look to expand into additional modules within our suite of solutions.

 

  Ÿ  

Increasing our global market presence.    We intend to continue our international expansion to attract new international customers and help our existing multinational customers grow their online sales. We plan to expand our existing presence in Europe and the Asia-Pacific region and to establish new operations in Latin America.

 

  Ÿ  

Expanding the number of channels supported by our platform.    We intend to continue to integrate our solutions with additional channels both within the United States and abroad, such as MercadoLibre in Latin America and Alibaba in Asia. We believe that by selectively adding more channels, we will grow both our customer base and the potential GMV that customers are able to process through our platform.

 

  Ÿ  

Maintaining innovation leadership.    We intend to continue to develop and introduce new features and improved functionality to our platform. Key initiatives include developing increased workflow automation, enhanced data analytics and expanded foreign language support.

 

  Ÿ  

Opportunistically pursuing strategic acquisitions.    We may pursue acquisitions of complementary businesses and technologies that are consistent with our overall growth strategy. We believe that a selective acquisition strategy could enable us to enhance our product capabilities, gain new customers and accelerate our expansion into new markets.

 

 

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Risks Related to our Business

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include, among others:

 

  Ÿ  

We have incurred significant net losses since inception, and we expect our operating expenses to increase significantly in the foreseeable future, which may make it more difficult for us to achieve profitability.

 

  Ÿ  

A significant portion of our revenue is attributable to sales by our customers on the Amazon and eBay marketplaces and through advertisements on Google. Our inability to continue to integrate our solutions with these channels would make our solutions less appealing to existing and potential new customers and could significantly reduce our revenue.

 

  Ÿ  

We may not be able to respond to rapid changes in channel technologies or requirements, which could cause us to lose customers and revenue and make it more difficult to achieve profitability.

 

  Ÿ  

We may not be able to compete successfully against current and future competitors, which could include the channels themselves.

 

  Ÿ  

We currently rely on two non-redundant data centers to deliver our SaaS solutions. Any disruption of service at these facilities could harm our business.

 

  Ÿ  

We rely in part on a pricing model under which a portion of the subscription fees we receive from customers is variable, based upon the amount of GMV that those customers process through our platform, and any change in the attractiveness of that model or any decline in our customers’ sales could adversely affect our financial results.

 

  Ÿ  

If the e-commerce market does not grow, or grows more slowly than we expect, particularly on the channels that our solutions support, demand for our solutions could be adversely affected.

 

  Ÿ  

Our increasing international operations subject us to increased challenges and risks.

 

  Ÿ  

We may need additional capital in the future to meet our financial obligations and to pursue our business objectives. This capital may not be available on favorable terms, or at all.

Ownership of our Capital Stock

Upon the completion of this offering, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 13.9 million shares of our common stock, or approximately 61% of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares of our common stock in this offering.

Corporate Information

We were incorporated under the laws of the State of Delaware in June 2001. Our principal executive offices are located at 2701 Aerial Center Parkway, Morrisville, North Carolina. Our telephone number is (919) 228-4700. The information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

“ChannelAdvisor,” the ChannelAdvisor logo, and other trademarks or service marks of ChannelAdvisor Corporation appearing in this prospectus are the property of ChannelAdvisor Corporation. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners.

 

 

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THE OFFERING

 

Common stock offered by ChannelAdvisor

  

  5,750,000 shares

Common stock to be outstanding after this offering

  

20,467,993 shares

Option to purchase additional shares of common stock

  

The underwriters have an option to purchase a maximum of 862,500 additional shares from us. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

Use of proceeds

   We expect the net proceeds to us from this offering, after expenses, will be approximately $65.6 million, based on an assumed initial public offering price of $13.00 per share, the midpoint of the range set forth on the cover of this prospectus. The principal purposes of this offering are to create a public market for our common stock, facilitate our future access to the public equity markets and obtain additional capital. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including expansion of our sales and marketing capabilities and international operations. In addition, we may use a portion of the proceeds from this offering for opportunistic acquisitions of complementary businesses, technologies or other assets, although we do not have plans for any acquisitions.
   See “Use of Proceeds” on page 30 for additional information.

Risk factors

   See the section titled “Risk Factors” beginning on page 11 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Proposed NYSE symbol

   ECOM

The number of shares of our common stock that will be outstanding after this offering is based on 14,717,993 shares of common stock outstanding as of March 31, 2013 and excludes:

 

  Ÿ  

2,633,717 shares of our common stock issuable upon the exercise of stock options outstanding under our 2001 stock plan as of March 31, 2013, at a weighted average exercise price of $4.96 per share;

 

 

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  Ÿ  

1,854,375 shares of our common stock issuable upon the exercise of warrants outstanding as of March 31, 2013, at a weighted average exercise price of $12.37 per share; and

 

  Ÿ  

1,250,000 shares of our common stock reserved for future issuance under our equity incentive plans following this offering.

Except as otherwise indicated herein, all information in this prospectus, including the number of shares that will be outstanding after this offering, assumes or gives effect to:

 

  Ÿ  

A 1-for-16 reverse stock split of our common stock effected on May 9, 2013;

 

  Ÿ  

the net exercise of warrants that will expire upon the closing of this offering to acquire 148,896 shares of our redeemable convertible preferred stock, assuming an initial public offering price of $13.00 per share, the midpoint of the range set forth on the cover of this prospectus;

 

  Ÿ  

the conversion of all outstanding shares of our redeemable convertible preferred stock, including the shares issuable upon the net exercise of warrants, into an aggregate of 13,384,477 shares of our common stock, which will occur automatically upon the closing of this offering; and

 

  Ÿ  

no exercise by the underwriters of their option to purchase additional shares.

 

 

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Summary Consolidated Financial Data

In the tables below, we provide you with summary consolidated financial data of ChannelAdvisor Corporation for the periods indicated. We have derived the following summary of our consolidated statement of operations data for the years ended December 31, 2010, 2011 and 2012 from our audited consolidated financial statements appearing elsewhere in this prospectus. We have derived the following summary consolidated statement of operations data for the three months ended March 31, 2012 and 2013 and balance sheet data as of March 31, 2013 from our unaudited condensed consolidated interim financial statements appearing elsewhere in this prospectus.

Our historical results are not necessarily indicative of the results to be expected in the future, and our operating results for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2013.

You should read this summary consolidated financial data together with the historical financial statements and related notes to those statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.

 

    Year Ended December 31,     Three Months
Ended March 31,
 
    2010     2011     2012     2012      2013   
    (in thousands, except share and per share data)  

Consolidated statement of operations data:

         

Revenue

  $ 36,688      $ 43,570      $ 53,587      $ 12,166      $ 14,922   

Cost of revenue

    12,164        12,248        14,749        3,246        3,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    24,524        31,322        38,838        8,920        10,975   

Operating expenses:

         

Sales and marketing

    14,867        19,106        24,326        5,390        7,790   

Research and development

    8,416        8,842        10,109        2,551        2,981   

General and administrative

    6,111        6,551        8,252        1,788        2,341   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    29,394        34,499        42,687        9,729        13,112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (4,870     (3,177     (3,849     (809     (2,137

Total other income (expense)

    258        (636     (1,154     (18     (586
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (4,612     (3,813     (5,003     (827     (2,723

Income tax expense (benefit)

    112        51        (70     24        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (4,724   $ (3,864   $ (4,933   $ (851   $ (2,730
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

  $ (4.77     (3.45   $ (4.23   $ (0.74   $ (2.10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share—basic and diluted(1)

      $ (0.34     $ (0.18
     

 

 

     

 

 

 

Weighted average shares of common stock outstanding used in computing net loss per share—basic and diluted

    989,780        1,120,902        1,164,942        1,144,999        1,299,491   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing pro forma net loss per share—basic and diluted

        14,546,609          14,683,968   
     

 

 

     

 

 

 

Stock-based compensation expense included above:

         

Cost of revenue

  $ 21      $ 15      $ 64      $ 4      $ 47   

Sales and marketing

    59        16        224        4        135   

Research and development

    38        58        105        13        70   

General and administrative

    216        111        245        27        177   

Other financial data:

         

Adjusted EBITDA(2)

  $ (422   $ (910   $ (277   $ (174   $ (897

 

 

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(1) Pro forma basic and diluted net loss per share have been calculated assuming (i) the net exercise as of the beginning of the applicable period of warrants that will expire upon the closing of this offering, (ii) the conversion of all outstanding shares of redeemable convertible preferred stock into an aggregate of 13,384,477 shares of common stock as of the beginning of the applicable period or at the time of issuance, if later, and (iii) the reclassification of the remaining outstanding preferred stock warrants from long-term liabilities to additional paid-in capital as of the beginning of the applicable period. The numerator of pro forma net loss per share is derived by adding $5,000 for the year ended December 31, 2012 and $0.1 million for the three months ended March 31, 2013 related to changes in the fair value of the preferred stock warrant liability.
(2) We define adjusted EBITDA, which is a non-GAAP financial measure, as net loss plus: income tax expense, interest expense, depreciation and amortization, and stock-based compensation. Please see “—Adjusted EBITDA” for more information and for a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.

The following table presents our summary balance sheet data:

 

  Ÿ  

on an actual basis as of March 31, 2013;

 

  Ÿ  

on a pro forma basis to give effect to:

 

  Ÿ  

the issuance of 148,896 shares of redeemable convertible preferred stock upon the net exercise of warrants that will expire upon the closing of this offering, assuming an initial public offering price of $13.00 per share, the midpoint of the range set forth on the cover of this prospectus;

 

  Ÿ  

the conversion of the then outstanding shares of our redeemable convertible preferred stock, including the shares issuable upon the net exercise of warrants, into an aggregate of 13,384,477 shares of our common stock, which will occur automatically upon the closing of this offering; and

 

  Ÿ  

the reclassification of the remaining preferred stock warrant liability to additional paid-in-capital upon conversion of the redeemable convertible preferred stock issuable upon exercise of such warrants into common stock; and

 

  Ÿ  

on a pro forma as adjusted basis to give further effect to our sale of 5,750,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information presented in the summary balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease each of cash, total assets and total stockholders’ equity on a pro forma as adjusted basis by approximately $5.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

 

     As of March 31, 2013  
     Actual     Pro forma      Pro forma
as adjusted
 
     (in thousands)  

Consolidated balance sheet data:

       

Cash

   $ 10,958      $ 10,958       $ 76,576   

Accounts receivable, net

     9,161        9,161         9,161   

Restricted cash

     686        686         686   

Total assets

     48,719        48,719         114,337   

Long-term debt, including current portion

     11,090        11,090         11,090   

Series A and Series C warrants liability

     3,352        —           —     

Total liabilities

     36,611        33,259         33,259   

Total redeemable convertible preferred stock

     90,495        —           —     

Additional paid-in capital

     4,166        97,999         163,611   

Total stockholders’ (deficit) equity

     (78,387     15,460         81,078   

 

 

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Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have provided within this prospectus adjusted EBITDA, a financial measure that is not calculated in accordance with generally accepted accounting principles, or GAAP. We have provided below a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of some expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that adjusted EBITDA provides useful information to investors in understanding and evaluating our operating results.

Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

  Ÿ  

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

  Ÿ  

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

  Ÿ  

adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;

 

  Ÿ  

adjusted EBITDA does not reflect interest or tax payments that may represent a reduction in cash available to us; and

 

  Ÿ  

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, you should consider adjusted EBITDA together with 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 for each of the periods indicated:

 

     Year Ended December 31,     Three Months
Ended March 31,
 
     2010     2011     2012     2012     2013  
     (in thousands)  

Net loss

   $ (4,724   $ (3,864   $ (4,933   $ (851   $ (2,730

Adjustments:

          

Interest expense

     486        642        1,185        22        597   

Income tax expense (benefit)

     112        51        (70     24        7   

Depreciation and amortization expense

     3,370        2,061        2,903        583        800   

Stock-based compensation expense

     334        200        638        48        429   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net adjustments

     4,302        2,954        4,656        677        1,833   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (422   $ (910   $ (277   $ (174   $ (897
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should carefully consider the following risks, as well as general economic and business risks, and all of the other information contained in this prospectus. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto.

Risks Related to Our Business

We have incurred significant net losses since inception, and we expect our operating expenses to increase significantly in the foreseeable future, which may make it more difficult for us to achieve profitability.

We incurred net losses of $3.9 million, $4.9 million and $2.7 million in 2011, 2012 and the three months ended March 31, 2013, respectively, and we had an accumulated deficit of $82.2 million as of March 31, 2013. We anticipate that our operating expenses will increase substantially in the foreseeable future as we invest in increased sales and marketing and research and development efforts. As a result, we can provide no assurance as to whether or when we will achieve profitability. In addition, as a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. To achieve profitability, we will need to either increase our revenue sufficiently to offset these higher expenses or significantly reduce our expense levels. Our recent revenue growth may not be sustainable, and if we are forced to reduce our expenses, our growth strategy could be compromised. If we are not able to achieve and maintain profitability, the value of our company and our common stock could decline significantly.

A significant portion of our revenue is attributable to sales by our customers on the Amazon and eBay marketplaces and through advertisements on Google. Our inability to continue to integrate our solutions with these channels would make our solutions less appealing to existing and potential new customers and could significantly reduce our revenue.

A substantial majority of the gross merchandise value, or GMV, that our customers process through our platform is derived from merchandise sold on the Amazon and eBay marketplaces or advertised on Google, and a similar portion of our variable subscription fees is attributable to sales by our customers through these channels. These channels, and the other channels with which our solutions are integrated, have no obligation to do business with us or to allow us access to their systems, and they may decide at any time and for any reason to significantly curtail or inhibit our ability to integrate our solutions with their channels. Additionally, Amazon, eBay or Google may decide to make significant changes to their respective business models, policies, systems or plans, and those changes could impair or inhibit our customers’ ability to use our solutions to sell their products on those channels, or may adversely affect the volume of GMV that our customers can sell on those channels or reduce the desirability of selling on those channels. Further, Amazon, eBay or Google could decide to compete with us more vigorously. Any of these results could cause our customers to reevaluate the value of our products and services and potentially terminate their relationships with us and significantly reduce our revenue.

We may not be able to respond to rapid changes in channel technologies or requirements, which could cause us to lose revenue and make it more difficult to achieve profitability.

The e-commerce market is characterized by rapid technological change and frequent changes in rules, specifications and other requirements for retailers and manufacturers to be able to sell their

 

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merchandise on particular channels. Our ability to retain existing customers and attract new customers depends in large part on our ability to enhance and improve our existing solutions and introduce new solutions that can adapt quickly to these technological changes on the part of channels. To achieve market acceptance for our solutions, we must effectively anticipate and offer solutions that meet frequently changing channel requirements in a timely manner. If our solutions fail to do so, our ability to renew our contracts with existing customers and our ability to create or increase demand for our solutions will be impaired.

If we are unable to retain our existing customers, our revenue and results of operations could be adversely affected.

We sell our solutions pursuant to contractual arrangements that generally have one-year terms. Therefore, our revenue growth depends to a significant degree upon subscription renewals. Our customers have no obligation to renew their subscriptions after the subscription term expires, and these subscriptions may not be renewed or, if renewed, may not be renewed on the same or more favorable terms for us. We may not be able to accurately predict future trends in customer renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including their satisfaction or dissatisfaction with our solutions, the cost of our solutions, the cost of solutions offered by our competitors and reductions in our customers’ spending levels. If our customers do not renew their subscriptions, renew on less favorable terms or for fewer modules, or do not purchase additional modules, our revenue may grow more slowly than expected or decline, and our ability to become profitable may be compromised.

We may not be able to compete successfully against current and future competitors. If we do not compete successfully, we could experience lower sales volumes and pricing pressure, which could cause us to lose revenues, impair our ability to pursue our growth strategy and compromise our ability to achieve profitability.

We face intense competition in the market for online channel management solutions and services, and we expect competition to intensify in the future. We have competitors, including some of the channels themselves, with longer operating histories, larger customer bases and greater financial, technical, marketing and other resources than we do. Increased competition may result in reduced pricing for our solutions, longer sales cycles or a decrease in our market share, any of which could negatively affect our revenue and future operating results and our ability to grow our business.

A number of competitive factors could cause us to lose potential sales or to sell our solutions at lower prices or at reduced margins, including:

 

  Ÿ  

Potential customers may choose to continue using or to develop applications in-house, rather than pay for our solutions;

 

  Ÿ  

The channels themselves, which typically offer software tools, often for free, that allow retailers and manufacturers to connect to them, may decide to compete more vigorously with us;

 

  Ÿ  

Competitors may adopt more aggressive pricing policies and offer more attractive sales terms, adapt more quickly to new technologies and changes in customer requirements, and devote greater resources to the promotion and sale of their products and services than we can;

 

  Ÿ  

Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance their products and expand their markets, and consolidation in our industry is likely to intensify. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share;

 

  Ÿ  

Current and potential competitors may offer software that addresses one or more online channel management functions at a lower price point or with greater depth than our solutions and may be able to devote greater resources to those solutions than we can; and

 

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  Ÿ  

Software vendors could bundle channel management solutions with other solutions or offer such products at a lower price as part of a larger product sale.

We may not be able to compete successfully against current and future competitors, including any channels that decide to compete against us more vigorously. In addition, competition may intensify as our competitors raise additional capital and as established companies in other market segments or geographic markets expand into our market segments or geographic markets. If we cannot compete successfully against our competitors, our business and our operating and financial results could be adversely affected.

If the e-commerce industry consolidates around a limited number of online channels, or if the complexities and challenges faced by retailers and manufacturers seeking to sell online otherwise diminish, demand for our solutions could decline.

Our solutions enable retailers and manufacturers to manage their merchandise sales through hundreds of disparate online channels. One of the key attractions of our solutions to retailers and manufacturers is the ability to help address the complexity and fragmentation of selling online. Although the number and variety of online channels available to retailers and manufacturers have been increasing, at the same time the share of online sales made through a small number of larger channels, particularly Amazon and eBay, has also been increasing. If the trend toward consolidation around a few large online channels accelerates, the difficulties faced by retailers and manufacturers could decline, which might make our solutions less important to retailers and manufacturers and could cause demand for our solutions to decline.

Software failures or human error could cause our solutions to oversell our customers’ inventory or misprice their offerings, which would hurt our reputation and reduce customer demand.

Our customers rely on our solutions to automate the allocation of their inventory simultaneously across multiple online channels, as well as to ensure that their sales comply with the policies of each channel and sometimes to dynamically determine product pricing at any given moment. Some customers subscribe to our solutions on a managed-service basis, in which case our personnel operate our solutions on behalf of the customer. In the event that our solutions do not function properly, or if there is human error on the part of our service staff, our customers might inadvertently sell more inventory than they actually have in stock, make sales that violate channel policies or underprice or overprice their offerings. Overselling their inventory could force our customers to cancel orders at rates that violate channel policies. Underpricing would result in lost revenue to our customers and overpricing could result in lost sales. In addition, our pricing policies with our customers are largely based upon our customers’ expectations of the levels of their GMV that will be processed through our platform over the term of their agreement with us, and errors in our software or human error could cause transactions to be incorrectly processed that would cause GMV to be in excess of our customers’ specified minimum amounts, in which case our variable subscription fee-based revenue could be overstated. Any of these results could reduce demand for our solutions and hurt our business reputation. Customers could also seek recourse against us in these cases and, while our contractual arrangements with customers typically provide that we are not liable for damages such as these, it is possible that these provisions would not be sufficient to protect us.

We rely on two non-redundant data centers to deliver our SaaS solutions. Any disruption of service at these facilities could harm our business.

We manage our platform and serve all of our customers from two third-party data center facilities that are non-redundant, meaning that neither facility serves as backup for the other. While we engineer and architect the actual computer and storage systems upon which our platform runs, we do not control the operation of the facilities at which they are deployed.

 

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The owners of our data facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to transfer to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so.

Any changes in third-party service levels at our data centers or any errors, defects, disruptions or other performance problems with our solutions could harm our reputation and damage our customers’ businesses. Interruptions in our services could reduce our revenue, require us to issue credits to customers, subject us to potential liability, cause our existing customers to not renew their agreements or adversely affect our ability to attract new customers.

Our data centers 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 other unanticipated problems could result in lengthy interruptions in the availability of our SaaS solutions or impair their functionality. Our business, growth prospects and operating results would also be harmed if our customers and potential customers are not confident that our solutions are reliable.

We rely in part on a pricing model under which a variable portion of the subscription fees we receive from customers is based upon the amount of GMV that those customers process through our platform, and any change in the attractiveness of that model or any decline in our customers’ sales could adversely affect our financial results.

We have adopted a pricing model under which a portion of the subscription fees we receive from our customers is variable, based on the amount of our customers’ GMV processed through our platform that exceeds a specified amount established by contract, which we refer to as variable subscription fees. Substantially all of our customer contracts include this variable subscription fee component. If sales by our customers processed through our platform were to decline, or if our customers were to demand fully fixed pricing terms that do not provide for any variability based on their GMV processed through our platform, our revenue and margins could decline.

Our quarterly operating results have fluctuated in the past and may do so in the future, which could cause our stock price to decline.

Our operating results have historically fluctuated due to changes in our business, and our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You should not rely on period-to-period comparisons of our operating results as an indication of our future performance. Factors that may cause fluctuations in our quarterly operating results include, but are not limited to, the following:

 

  Ÿ  

seasonal patterns in consumer spending;

 

  Ÿ  

the addition of new customers or the loss of existing customers;

 

  Ÿ  

changes in demand for our software;

 

  Ÿ  

the timing and amount of sales and marketing expenses;

 

  Ÿ  

changes in the prospects of the economy generally, which could alter current or prospective customers’ spending priorities, or could increase the time it takes us to close sales;

 

  Ÿ  

changes in our pricing policies or the pricing policies of our competitors;

 

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  Ÿ  

costs necessary to improve and maintain our software platform; and

 

  Ÿ  

costs related to acquisitions of other businesses.

Our operating results may fall below the expectations of market analysts and investors in some future periods, which could cause the market price of our common stock to decline substantially.

The seasonality of our business creates significant variance in our quarterly revenue, which makes it difficult to compare our financial results on a sequential quarterly basis.

Our customers are retailers and manufacturers that typically realize a significant portion of their online sales in the fourth quarter of each year during the holiday season. As a result of this seasonal variation, our subscription revenue fluctuates, with the variable portion of our subscription fees being higher in the fourth quarter than in other quarters and with revenue generally declining in the first quarter sequentially from the fourth quarter. Our business is therefore not necessarily comparable on a sequential quarter-over-quarter basis and you should not rely solely on quarterly comparisons to analyze our growth.

Failure to adequately manage our growth could impair our ability to deliver high-quality solutions to our customers, hurt our reputation and compromise our ability to become profitable.

We have experienced, and may continue to experience, significant growth in our business. If we do not effectively manage our growth, the quality of service of our solutions may suffer, which could negatively affect our reputation and demand for our solutions. Our growth has placed, and is expected to continue to place, a significant strain on our managerial, operational and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. This will require us to, among other things:

 

  Ÿ  

hire additional personnel, both domestically and internationally;

 

  Ÿ  

implement additional management information systems;

 

  Ÿ  

maintain close coordination among our engineering, operations, legal, finance, sales and marketing and client service and support organizations; and

 

  Ÿ  

further develop our operating, administrative, legal, financial and accounting systems and controls.

Moreover, if our sales continue to increase, we may be required to concurrently deploy our hosting infrastructure at multiple additional locations or provide increased levels of customer service. Failure to accomplish any of these requirements could impair our ability to continue to deliver our solutions in a timely fashion, fulfill existing customer commitments or attract and retain new customers.

If we do not retain our senior management team and key employees, or if we fail to attract additional sales talent, we may not be able to sustain our growth or achieve our business objectives.

Our future success is substantially dependent on the continued service of our senior management team, particularly Scot Wingo, our chief executive officer, Aris Buinevicius, our chief technology officer, David Spitz, our president and chief operating officer, and John Baule, our chief financial officer. Our future success also depends on our ability to continue to attract, retain and motivate highly skilled technical, sales and administrative employees. Competition for these employees in our industry is intense. As a result, we may be unable to attract or retain these management and other key personnel that are critical to our success, resulting in harm to our key client relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs. The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and pursue our business goals.

 

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Our strategy of pursuing opportunistic acquisitions or investments may be unsuccessful and may divert our management’s attention and consume significant resources.

A part of our growth strategy is to opportunistically pursue acquisitions of, or investments in, other complementary businesses or individual technologies. Any acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition, acquisitions involve numerous risks, any of which could harm our business, including:

 

  Ÿ  

difficulties in integrating the operations, technologies, services and personnel of acquired businesses, especially if those businesses operate outside of our core competency of providing e-commerce software solutions;

 

  Ÿ  

cultural challenges associated with integrating employees from acquired businesses into our organization;

 

  Ÿ  

ineffectiveness or incompatibility of acquired technologies or services;

 

  Ÿ  

failure to successfully further develop the acquired technology in order to recoup our investment;

 

  Ÿ  

potential loss of key employees of acquired businesses;

 

  Ÿ  

inability to maintain the key business relationships and the reputations of acquired businesses;

 

  Ÿ  

diversion of management’s attention from other business concerns;

 

  Ÿ  

litigation for activities of acquired businesses, including claims from terminated employees, customers, former stockholders or other third parties;

 

  Ÿ  

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

 

  Ÿ  

costs necessary to establish and maintain effective internal controls for acquired businesses; and

 

  Ÿ  

increased fixed costs.

If current efforts to allow states to require online retailers to collect sales tax on their behalf are successful, e-commerce in general could decline, our solutions could become less attractive and the amount of GMV processed through our platform, and our related revenue, could decline.

Although current U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales taxes with respect to remote sales, an increasing number of states have considered or adopted laws that attempt to require out-of-state retailers to collect sales taxes on their behalf. In addition, legislation currently moving through the U.S. Senate and the U.S. House of Representatives, called the Marketplace Fairness Act, would override the Supreme Court rulings and enable states to require that online retailers collect sales tax from the states’ residents. Some larger online retailers, including Amazon, have announced their support for legislation along these lines. This is a rapidly evolving area and we cannot predict whether this or other similar legislation will ultimately be adopted or what form it might take if adopted. For example, while the current Senate and House legislation includes an exception for small retailers, some of the state efforts do not and there can be no assurance that any legislation ultimately adopted would include such an exception. If the states or Congress are successful in these attempts to require online retailers to collect state or local income taxes on out-of-state purchases, buying online would lose some of its current advantage over traditional retail models and could become less attractive to consumers. This could cause e-commerce to decline, which would, in turn, hurt the business of our customers, potentially make our products less

 

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attractive and cause the amount of GMV processed through our platform, and ultimately our revenue, to decline. In addition, it is possible that one or more states or the federal government or foreign countries may seek to impose a tax collection, reporting or record-keeping obligation on companies like us that facilitate e-commerce, even though we are not an online retailer. Similar issues exist outside of the United States, where the application of value-added tax or other indirect taxes on online retailers and companies like us that facilitate e-commerce is uncertain and evolving.

If the e-commerce market does not grow, or grows more slowly than we expect, particularly on the channels that our solutions support, demand for our online channel management solutions could be adversely affected.

For our existing customers and potential customers to be willing to subscribe to our solutions, the internet must continue to be accepted and widely used for selling merchandise. If consumer utilization of our primary e-commerce channels, such as Amazon, eBay and Google, does not grow or grows more slowly than we expect, demand for our solutions would be adversely affected, our revenue would be negatively impacted and our ability to pursue our growth strategy and become profitable would be compromised.

Evolving domestic and international data privacy regulations may restrict our ability, and that of our customers, to solicit, collect, process, disclose and use personal information or may increase the costs of doing so, which could harm our business.

Federal, state and foreign governments and supervising authorities have enacted, and may in the future enact, laws and regulations concerning the solicitation, collection, processing, disclosure or use of consumers’ personal information. Evolving regulations regarding personal data and personal information, in the European Union and elsewhere, especially relating to classification of IP addresses, machine identification, location data and other information, may limit or inhibit our ability to operate or expand our business. Such laws and regulations require or may require us or our customers to implement privacy and security policies, permit consumers to access, correct or delete personal information stored or maintained by us or our customers, inform individuals of security incidents that affect their personal information, and, in some cases, obtain consent to use personal information for specified purposes. Other proposed legislation could, if enacted, impose additional requirements and prohibit the use of specific technologies, such as those that track individuals’ activities on web pages or record when individuals click on a link contained in an email message. Such laws and regulations could restrict our customers’ ability to collect and use web browsing data and personal information, which may reduce our customers’ demand for our solutions.

Changing industry standards and industry self-regulation regarding the collection, use and disclosure of data may have similar effects. Existing and future privacy and data protection laws and increasing sensitivity of consumers to unauthorized disclosures and use of personal information may also negatively affect the public’s perception of our customers’ sales practices. If our solutions are perceived to cause, or are otherwise unfavorably associated with, invasions of privacy, whether or not illegal, we or our customers may be subject to public criticism. Public concerns regarding data collection, privacy and security may also cause some consumers to be less likely to visit our customers’ websites or otherwise interact with our customers, which could limit the demand for our solutions and inhibit the growth of our business.

Any failure on our part to comply with applicable privacy and data protection laws, regulations, policies and standards or any inability to adequately address privacy concerns associated with our solutions, even if unfounded, could subject us to liability, damage our reputation, impair our sales and harm our business. Furthermore, the costs to our customers of compliance with, and other burdens imposed by, such laws, regulations, policies and standards may limit adoption of and demand for our solutions.

 

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Risks Related to the Software-as-a-Service (SaaS) Model

If we fail to manage and increase the capacity of our hosted infrastructure, our customers may be unable to process transactions through our platform, which could harm our reputation and demand for our solutions.

We have experienced significant growth in the number of users, transactions and data that our hosting infrastructure supports. We seek to maintain sufficient excess capacity in our hosted infrastructure to be sufficiently flexible and scalable to meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments and to handle spikes in usage. However, the provision of new hosting infrastructure requires significant lead time. If we do not accurately predict our infrastructure capacity requirements, particularly in the fourth quarter when we typically experience significant increases in the volume of customer transactions processed through our platform, our customers could experience service outages that may subject us to financial penalties or other liabilities, result in customer losses, harm our reputation and adversely affect our ability to grow our revenue.

We derive most of our revenue from annual subscription agreements, as a result of which a significant downturn in our business may not be immediately reflected in our operating results.

We derive most of our revenue from subscription agreements, which are typically one year in length. As a result, a significant portion of the revenue we report in each quarter is generated from customer agreements entered into during previous periods. Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in our financial performance in that quarter but might negatively affect our revenue in future quarters. Accordingly, the effect of significant declines in sales and market acceptance of our solutions may not be reflected in our short-term results of operations.

Our business is substantially dependent upon the continued growth of the market for on-demand SaaS solutions. If this market does not continue to grow, demand for our solutions could decline, which in turn could cause our revenues to decline and impair our ability to become profitable.

We derive, and expect to continue to derive, substantially all of our revenue from the sale of our solutions, which are delivered under a SaaS model. As a result, widespread use and acceptance of this business model is critical to our future growth and success. Under the more traditional license model for software procurement, users of the software typically run the applications in-house on their own hardware. Because many companies are generally predisposed to maintaining control of their information technology systems and infrastructure, there may be resistance to the concept of accessing software functionality as a service provided by a third party. In addition, the market for SaaS solutions is still evolving, and existing and new market participants may introduce new types of solutions and different approaches to enable organizations to address their needs. If the market for SaaS solutions fails to grow or grows more slowly than we currently anticipate, demand for our solutions and our revenue, gross margin and other operating results could be negatively impacted.

 

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Risks Related to Our International Operations

Our increasing international operations subject us to increased challenges and risks. If we do not successfully manage the risks associated with international operations, we could experience a variety of costs and liabilities and the attention of our management could be diverted.

Since launching our international operations in 2004, we have expanded, and expect to further expand, our operations internationally by opening offices in new countries and regions worldwide. However, our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, taxation systems, alternative dispute systems, regulatory systems and commercial infrastructures. International expansion will require us to invest significant funds and other resources. Expanding internationally may subject us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:

 

  Ÿ  

recruiting and retaining employees in foreign countries;

 

  Ÿ  

increased competition from local providers;

 

  Ÿ  

compliance with applicable foreign laws and regulations;

 

  Ÿ  

longer sales or collection cycles in some countries;

 

  Ÿ  

credit risk and higher levels of payment fraud;

 

  Ÿ  

compliance with anti-bribery laws, such as the Foreign Corrupt Practices Act;

 

  Ÿ  

currency exchange rate fluctuations;

 

  Ÿ  

foreign exchange controls that might prevent us from repatriating cash earned outside the United States;

 

  Ÿ  

economic and political instability in some countries;

 

  Ÿ  

less protective intellectual property laws;

 

  Ÿ  

compliance with the laws of numerous foreign taxing jurisdictions in which we conduct business, potential double taxation of our international earnings and potentially adverse tax consequences due to changes in applicable U.S. and foreign tax laws;

 

  Ÿ  

increased costs to establish and maintain effective controls at foreign locations; and

 

  Ÿ  

overall higher costs of doing business internationally.

If our revenue from our international operations does not exceed the expense of establishing and maintaining these operations, our business and operating results will suffer.

We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in full compliance with applicable laws.

Our solutions are subject to export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our solutions must be made in compliance with these laws. If we fail to comply with these U.S. export control laws and import laws, including U.S. Customs regulations, we could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers, and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a

 

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particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities.

Furthermore, the U.S. export control laws and economic sanctions laws prohibit the shipment or export of specified products and services to U.S. embargoed or sanctioned countries, governments and persons. Even though we take precautions to prevent our solutions from being provided to U.S. sanctions targets, if our solutions and services were to be exported to those prohibited countries despite such precautions, we could be subject to government investigations, penalties, reputational harm or other negative consequences.

Any change in export or import regulations, economic sanctions or related laws, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions, or in our decreased ability to export or sell our solutions to existing or potential customers with international operations. Additionally, changes in our solutions may be required in response to changes in export and import regulations, which could lead to delays in the introduction and sale of our solutions in international markets, prevent our customers with international operations from deploying our solutions or, in some cases, prevent the export or import of our solutions to some countries, governments or persons altogether. Any decreased use of our solutions or limitation on our ability to export our solutions or sell them in international markets would hurt our revenue and compromise our ability to pursue our growth strategy.

Risks Related to Intellectual Property

We operate in an industry with extensive intellectual property litigation. Claims of infringement against us may hurt our business.

Our success depends, in part, upon non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement without major financial expenditures or adverse consequences. The internet-related software field generally is characterized by extensive intellectual property litigation. Although our industry is rapidly evolving, many companies that own, or claim to own, intellectual property have aggressively asserted their rights. From time to time, we have been subject to legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties will continue to assert intellectual property claims against us, particularly as we expand the complexity and scope of our business. In addition, most of our subscription agreements require us to indemnify our customers against claims that our solutions infringe the intellectual property rights of third parties.

Future litigation may be necessary to defend ourselves or our customers by determining the scope, enforceability and validity of third-party proprietary rights or to establish our proprietary rights. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus solely on extracting royalties and settlements by enforcing patent rights may target us. Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend and could:

 

  Ÿ  

hurt our reputation;

 

  Ÿ  

adversely affect our relationships with our current or future customers;

 

  Ÿ  

cause delays or stoppages in providing our services;

 

  Ÿ  

divert management’s attention and resources;

 

  Ÿ  

require technology changes to our software that would cause us to incur substantial cost;

 

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  Ÿ  

subject us to significant liabilities; and

 

  Ÿ  

require us to cease some or all of our activities.

In addition to liability for monetary damages against us, which may be tripled and may include attorneys’ fees, or, in some circumstances, damages against our customers, we may be prohibited from developing, commercializing or continuing to provide some or all of our software solutions unless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially favorable terms, or at all.

Our failure to protect our intellectual property rights could diminish the value of our services, weaken our competitive position and reduce our revenue.

We regard the protection of our intellectual property, which includes trade secrets, copyrights, trademarks, domain names and patent applications, as critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.

We have sought patent protection for some of our technologies and currently have two U.S. patent applications and one international patent application on file, although there can be no assurance that these patents will ultimately be issued. We are also pursuing the registration of our domain names, trademarks and service marks in the United States and in jurisdictions outside the United States. Effective trade secret, copyright, trademark, domain name and patent protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. We may be required to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could be expensive and time-consuming.

We have licensed in the past, and expect to license in the future, some of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation.

Monitoring unauthorized use of our intellectual property is difficult and costly. Our efforts to protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual property. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Our competitors may also independently develop similar technology. In addition, the laws of many countries, such as China and India, do not protect our proprietary rights to as great an extent as do the laws of European countries and the United States. Further, the laws in the United States and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect our intellectual property could result in competitors offering services that incorporate our most technologically advanced features, which could seriously reduce demand for our software solutions. In addition, we may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination that is unfavorable to us. In addition, litigation is inherently uncertain, and thus we may not be able to stop our competitors from infringing upon our intellectual property rights.

 

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Our use of “open source” software could negatively affect our ability to sell our solutions and subject us to possible litigation.

A portion of our technology platform and our solutions incorporates so-called “open source” software, and we may incorporate additional open source software in the future. Open source software is generally licensed by its authors or other third parties under open source licenses. If we fail to comply with these licenses, we may be subject to specified conditions, including requirements that we offer our solutions that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of the particular open source license. If an author or other third party that distributes open source software we use were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, including being enjoined from the sale of our solutions that contained the open source software and required to comply with the foregoing conditions, which could disrupt the sale of the affected solutions. In addition, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition and require us to devote additional research and development resources to change our products.

Risks Related to this Offering, Ownership of Our Common Stock and Our Status as a Public Company

An active trading market for our common stock may not develop and you may not be able to resell your shares of our common stock at or above the initial offering price, if at all.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters and may not be indicative of the price at which our common stock will trade upon completion of this offering. Although we have applied to list our common stock on the New York Stock Exchange, or NYSE, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop or is not sustained, it may be difficult for you to sell shares you purchased in this offering at an attractive price or at all.

The trading price of the shares of our common stock may be volatile, and purchasers of our common stock could incur substantial losses.

Our stock price may be volatile. The stock market in general and the market for technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:

 

  Ÿ  

actual or anticipated variations in our operating results;

 

  Ÿ  

changes in financial estimates by us or by any securities analysts who might cover our stock;

 

  Ÿ  

conditions or trends in our industry;

 

  Ÿ  

stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the software industry;

 

  Ÿ  

announcements by us or our competitors of new product or service offerings, significant acquisitions, strategic partnerships or divestitures;

 

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  Ÿ  

announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

 

  Ÿ  

capital commitments;

 

  Ÿ  

investors’ general perception of our company and our business;

 

  Ÿ  

recruitment or departure of key personnel; and

 

  Ÿ  

sales of our common stock, including sales by our directors and officers or specific stockholders.

In addition, in the past, stockholders have initiated class action lawsuits against technology companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’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 stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that equity research analysts publish about us and our business. We do not currently have and may never obtain research coverage by equity research analysts. Equity research analysts may elect not to provide research coverage of our common stock after the completion of this offering, and such lack of research coverage may adversely affect the market price of our common stock. In the event we do have equity research analyst coverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

If you purchase shares of our common stock in this offering, you will suffer immediate dilution of your investment.

We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our pro forma net tangible book value per share after this offering. Based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $9.88 per share, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to this offering and the assumed initial public offering price.

In addition, after this offering, based on shares outstanding as of March 31, 2013, we will have outstanding:

 

  Ÿ  

stock options to purchase an aggregate of 2,633,717 shares of common stock at a weighted average exercise price of $4.96 per share; and

 

  Ÿ  

warrants to purchase an aggregate of 1,854,375 shares of our common stock at a weighted average exercise price of $12.37 per share.

To the extent these outstanding options and warrants are exercised, there will be further dilution to investors in this offering.

 

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A significant portion of our total outstanding shares is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline significantly.

Upon completion of this offering, we will have outstanding 20,467,993 shares of common stock, assuming no exercise of outstanding options or warrants. Of these shares, the 5,750,000 shares sold in this offering and 15,605 additional shares will be freely tradable immediately, and the remaining 14,702,388 shares of common stock will be available for sale in the public market beginning 180 days after the date of this prospectus following the expiration of lock-up agreements between some of our stockholders and the underwriters. The representatives of the underwriters may release these stockholders from their lock-up agreements with the underwriters at any time and without notice, which would allow for earlier sales of shares in the public market.

In addition, promptly following the completion of this offering, we intend to file one or more registration statements on Form S-8 registering the issuance of approximately 3.9 million shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans. Shares registered under these registration statements on Form S-8 will be available for sale in the public market subject to vesting arrangements and exercise of options, the lock-up agreements described above and the restrictions of Rule 144 in the case of our affiliates.

Additionally, after this offering, the holders of an aggregate of 13,384,477 shares of our common stock and 1,854,375 shares of our common stock issuable upon the exercise of outstanding warrants, or their transferees, will have rights, subject to specified conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares, they could be freely sold in the public market. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.

There are provisions in our certificate of incorporation and bylaws as they will be in effect following this offering that may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control was considered favorable by you and other stockholders. For example, our board of directors will have the authority to issue up to 5,000,000 shares of preferred stock. The board of directors can fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. As a result, the market price of our common stock and the voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferred stock may result in the loss of voting control to other stockholders.

Our charter documents will also contain other provisions that could have an anti-takeover effect, including:

 

  Ÿ  

only one of our three classes of directors will be elected each year;

 

  Ÿ  

stockholders will not be entitled to remove directors other than by a 66 2/3% vote and only for cause;

 

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  Ÿ  

stockholders will not be permitted to take actions by written consent;

 

  Ÿ  

stockholders cannot call a special meeting of stockholders; and

 

  Ÿ  

stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings.

In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions by prohibiting Delaware corporations from engaging in specified business combinations with particular stockholders of those companies. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that investors are willing to pay for our stock.

Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

Upon completion of this offering, our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respective affiliates will, in the aggregate, beneficially own approximately 61% of our outstanding common stock. As a result, these persons, acting together, would be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors, any merger, consolidation, sale of all or substantially all of our assets or other significant corporate transactions.

Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a longer period, they may be more interested in selling our company to an acquirer than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders.

We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

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Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.

After the completion of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act and the rules and regulations of the NYSE. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Commencing with our fiscal year ending December 31, 2014, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. This will require that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. Prior to this offering, we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.

We may discover weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. For example, in 2011, we identified a material weakness in our methodology for the accounting of our warrants to purchase redeemable convertible preferred stock. While we believe that this weakness has now been successfully remediated, we may in the future discover additional weaknesses that require improvement. In addition, our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the NYSE, the Securities and Exchange Commission, or SEC, or other regulatory authorities.

We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not increase the value of your investment.

We will have broad discretion over the use of proceeds from this offering. You may not agree with our decisions, and our use of the proceeds may not yield any return on your investment. As described elsewhere in this prospectus, we expect to use the net proceeds to us from this offering for working capital and general corporate purposes, including further expansion of our international operations and sales and marketing capabilities. Our failure to apply the net proceeds of this offering effectively could compromise our ability to pursue our growth strategy and we might not be able to yield a significant return, if any, on our investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

 

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Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains and you may never receive a return on your investment.

You should not rely on an investment in our common stock to provide dividend income. We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any existing or future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Investors seeking cash dividends should not purchase our common stock.

We will incur increased costs and demands upon management as a result of being a public company.

As a public company listed in the United States, we will incur significant additional legal, accounting and other costs. These additional costs could negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and stock exchanges, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate 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 liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact 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 our board 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 be available 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 availability under our existing credit facility, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to meet various objectives, including developing future technologies and services, increasing working capital, acquiring businesses and responding to competitive pressures. If we seek to raise additional capital, it may not be available on favorable terms or may not be available at all. In addition, pursuant to the terms of our credit facility, we may be restricted from using the net proceeds of financing transactions for our operating objectives. Lack of sufficient capital resources could significantly limit our ability to manage our business and to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with an equity component would dilute our stock ownership. If adequate additional funds are not available, we may be required to delay, reduce the scope of or eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, 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 terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about:

 

  Ÿ  

the growth of the e-commerce industry and the SaaS enterprise application software market in general;

 

  Ÿ  

the expected growth of advertising dollars spent on paid search and GMV sold on comparison shopping websites;

 

  Ÿ  

consumer adoption of mobile devices and usage for commerce;

 

  Ÿ  

the growth of social networking and commerce applications; and

 

  Ÿ  

our growth strategy.

You should refer to the “Risk Factors” section of this prospectus for a discussion of important factors that may cause our actual results to differ 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 prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty 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 publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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INDUSTRY AND MARKET DATA

Some of the industry and market data contained in this prospectus are based on independent industry publications, including those generated by Gartner Inc., or Gartner, Forrester Research, Inc., or Forrester, International Data Corporation and ZenithOptimedia, as well as other publicly available information. This information involves a number of assumptions and limitations. Although we believe that each source is reliable as of its respective date, neither we nor the underwriters have independently verified the accuracy or completeness of this information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications.

The Gartner report from which market data included in this prospectus has been derived, “Forecast Overview: Public Cloud Services, Worldwide, 2011-2016”, E. Anderson, Y. Dharmasthira, November 12, 2012, represents data, research opinion or viewpoints published as part of a syndicated subscription service by Gartner and are not representations of fact. The Gartner report speaks as of its original publication date, and not as of the date of this prospectus, and the opinions expressed in the Gartner report are subject to change without notice.

The Forrester reports described in this prospectus represent data, research opinion or viewpoints published as part of a syndicated subscription service, by Forrester and are not representations of fact. Each Forrester report speaks as of its original publication date, and not as of the date of this prospectus, and the opinions expressed in the Forrester reports are subject to change without notice. The Forrester reports consist of:

 

  Ÿ  

“The eCommerce Juggernaut Dominates Retail,” Forrester Research, Inc., November 12, 2012; and

 

  Ÿ  

“Mobile Commerce Forecast: 2011 To 2016,” Forrester Research, Inc., June 17, 2011.

We have also included in this prospectus industry and market data derived from International Data Corporation, “Worldwide Smartphone 2012-2016 Forecast Update: September 2012”, doc #236736, September 2012.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 5,750,000 shares of our common stock in this offering will be approximately $65.6 million, or approximately $76.0 million if the underwriters exercise in full their option to purchase additional shares, based upon an assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $5.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The principal purposes of this offering are to create a public market for our common stock and to facilitate our future access to the public equity markets, as well as to obtain additional capital. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including further expansion of our international operations and sales and marketing capabilities. We may also use a portion of the net proceeds from this offering for the future acquisition of, or investment in, complementary businesses, products or technologies. However, we do not have agreements or commitments for any specific acquisitions or investments and we have not allocated specific amounts of net proceeds for any of these purposes.

Our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the net proceeds of this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending these uses, we plan to invest these net proceeds in short-term, interest bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States.

DIVIDEND POLICY

We have never declared or paid any dividends on our common stock. We anticipate that we will retain all of our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions under the terms of the agreements governing our credit facility.

 

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CAPITALIZATION

The following table sets forth our cash and our capitalization as of March 31, 2013:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to give effect to:

 

  Ÿ  

the issuance of 148,896 shares of redeemable convertible preferred stock upon the net exercise of warrants that will expire upon the closing of this offering, assuming an initial public offering price of $13.00 per share, the midpoint of the range set forth on the cover of this prospectus;

 

  Ÿ  

the conversion of the then outstanding shares of our redeemable convertible preferred stock, including the shares issuable upon the net exercise of warrants, into an aggregate of 13,384,477 shares of our common stock, which will occur automatically upon the closing of this offering; and

 

  Ÿ  

the reclassification of the remaining preferred stock warrant liability to additional paid-in-capital upon the automatic conversion of our preferred stock issuable upon exercise of such warrants into common stock; and

 

  Ÿ  

on a pro forma as adjusted basis to give further effect to our sale of 5,750,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following information is illustrative only of our cash and capitalization following the completion of this offering and will change based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

 

    As of March 31, 2013  
    Actual      Pro forma      Pro forma
as adjusted
 
    (in thousands)  

Cash

  $ 10,958       $ 10,958       $ 76,576   
 

 

 

    

 

 

    

 

 

 

Series A and Series C warrants liability

  $ 3,352         —           —     

Redeemable convertible preferred stock:

       

Convertible Series A preferred stock, $0.001 par value; 94,069,793 shares authorized, 93,821,393 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    18,887         —           —     

Convertible Series B preferred stock, $0.001 par value; 40,641,227 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    18,000         —           —     

Convertible Series B-1 preferred stock, $0.001 par value; 5,660,378 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    3,000         —           —     

Convertible Series C preferred stock, $0.001 par value; 80,000,000 shares authorized, 73,880,351 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    50,608         —           —     
 

 

 

    

 

 

    

 

 

 

Total redeemable convertible preferred stock

    90,495         —           —     

 

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     As of March 31, 2013  
     Actual     Pro forma     Pro forma
as adjusted
 
     (in thousands)  

Stockholders’ (deficit) equity:

      

Preferred stock, $0.001 per share; no shares authorized, issued or outstanding, actual or pro forma; 5,000,000 shares authorized, no shares issued or outstanding, pro forma as adjusted

     —          —          —     

Common stock, $0.001 par value; 303,500,000 shares authorized, 1,333,516 shares issued and outstanding, actual; 303,500,000 shares authorized, 14,717,993 shares issued and outstanding, pro forma; 100,000,000 shares authorized, 20,467,993 shares issued and outstanding, pro forma as adjusted

     1        15        21   

Additional paid-in-capital

     4,166        97,999        163,611   

Accumulated other comprehensive loss

     (349     (349     (349

Accumulated deficit

     (82,205     (82,205     (82,205 )
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (78,387     15,460        81,078   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 15,460      $ 15,460      $ 81,078   
  

 

 

   

 

 

   

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the pro forma as adjusted amount of each of cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $5.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The number of shares of common stock outstanding in the table above excludes:

 

  Ÿ  

2,633,717 shares of our common stock issuable upon the exercise of stock options outstanding under our 2001 stock plan as of March 31, 2013, at a weighted average exercise price of $4.96 per share;

 

  Ÿ  

1,854,375 shares of our common stock issuable upon the exercise of warrants outstanding as of March 31, 2013, at a weighted average exercise price of $12.37 per share; and

 

  Ÿ  

1,250,000 shares of our common stock reserved for future issuance under our equity incentive plans.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share is determined by dividing our total tangible assets less total liabilities and redeemable convertible preferred stock by the number of outstanding shares of our common stock.

As of March 31, 2013, we had a deficit in net tangible book value of $(95.6) million, or approximately $(71.65) per share of common stock. On a pro forma basis, after giving effect to the net exercise of warrants that will expire upon the closing of this offering, the conversion of the outstanding shares of our redeemable convertible preferred stock into shares of our common stock and the reclassification of the preferred stock warrant liability to stockholders’ equity upon the closing of this offering, our net tangible book value would have been a deficit of approximately $(1.7) million, or approximately $(0.12) per share of common stock.

Investors participating in this offering will incur immediate and substantial dilution. After giving effect to the issuance and sale of 5,750,000 shares of our common stock in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2013 would have been approximately $63.9 million, or approximately $3.12 per share of common stock. This represents an immediate increase in the pro forma net tangible book value of $3.24 per share to existing stockholders, and an immediate dilution in the pro forma net tangible book value of $9.88 per share to investors purchasing shares of our common stock in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $ 13.00   

Actual net tangible book value per share as of March 31, 2013

   $ (71.65  

Increase per share attributable to net exercise of warrants, conversion of redeemable convertible preferred stock and reclassification of preferred stock warrant liability

     71.53     
  

 

 

   

Pro forma net tangible book value (deficit) per share before this offering

     (0.12  

Increase in pro forma net tangible book value per share attributable to new investors participating in this offering

     3.24     
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

       3.12   
    

 

 

 

Dilution per share to investors participating in this offering

     $ 9.88   
    

 

 

 

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share would increase or decrease our pro forma as adjusted net tangible book value by approximately $5.3 million, or approximately $0.26 per share, and the dilution per share to investors participating in this offering by approximately $0.74 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

If the underwriters exercise their option in full to purchase 862,500 additional shares of common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $3.49 per share, the increase in the pro forma net tangible book value per share to existing stockholders would be $3.61 per share and the dilution to new investors purchasing common stock in this offering would be $9.51 per share.

 

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The following table sets forth as of March 31, 2013, on the pro forma basis described above, the differences between the number of shares of common stock purchased from us, the total consideration paid and the weighted average price per share paid by existing stockholders and by investors purchasing shares of our common stock in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page on this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares purchased     Total consideration     Weighted average
price per share
 
      Number      Percent     Amount      Percent    

Existing stockholders

     14,717,993         71.9   $ 94,952,530         56.0   $ 6.45   

New investors

     5,750,000         28.1        74,750,000         44.0        13.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     20,467,993         100.0   $ 169,702,530         100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $5.8 million, and increase or decrease the percent of total consideration paid by new investors by 1.8 percentage points, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The table above also excludes:

 

  Ÿ  

2,633,717 shares of our common stock issuable upon the exercise of stock options outstanding under our 2001 stock plan as of March 31, 2013, at a weighted average exercise price of $4.96 per share;

 

  Ÿ  

1,854,375 shares of our common stock issuable upon the exercise of warrants outstanding as of March 31, 2013, at a weighted average exercise price of $12.37 per share; and

 

  Ÿ  

1,250,000 shares of our common stock reserved for future issuance under our equity incentive plans.

The shares of our common stock reserved for future issuance under our equity benefit plans may be subject to automatic annual increases in accordance with the terms of the plans. To the extent that options or warrants are exercised, new options are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth selected consolidated financial data of ChannelAdvisor Corporation for the periods indicated. The following selected consolidated financial data for the years ended December 31, 2010, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2011 and 2012 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2010 is derived from audited financial statements not included in this prospectus. The data should be read together with “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 prospectus. The selected consolidated statement of operations data for the three months ended March 31, 2012 and 2013 and the selected consolidated balance sheet data as of March 31, 2013 are derived from unaudited condensed consolidated financial statements.

The unaudited condensed consolidated financial data include all adjustments, consisting of normal recurring adjustments, which management considers necessary for a fair presentation of the financial position and the results of operations for these periods. Our historical results are not necessarily indicative of the results to be expected in the future, and our operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2013.

 

    Year Ended December 31,     Three Months
Ended March 31,
 
        2010             2011         2012     2012     2013  
    (in thousands, except share and per share data)  

Consolidated statement of operations data:

         

Revenue

  $ 36,688      $ 43,570      $ 53,587      $ 12,166      $ 14,922   

Cost of revenue

    12,164        12,248        14,749        3,246        3,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    24,524        31,322        38,838        8,920        10,975   

Operating expenses:

         

Sales and marketing

    14,867        19,106        24,326        5,390        7,790   

Research and development

    8,416        8,842        10,109        2,551        2,981   

General and administrative

    6,111        6,551        8,252        1,788        2,341   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    29,394        34,499        42,687        9,729        13,112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (4,870     (3,177     (3,849     (809     (2,137

Total other income (expense)

    258        (636     (1,154     (18     (586
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (4,612     (3,813     (5,003     (827     (2,723

Income tax expense (benefit)

    112        51        (70     24        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (4,724   $ (3,864   $ (4,933   $ (851   $ (2,730
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted

  $ (4.77   $ (3.45   $ (4.23   $ (0.74   $ (2.10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share—basic and diluted(1)

      $ (0.34     $ (0.18
     

 

 

     

 

 

 

Weighted average shares of common stock outstanding used in computing net loss per share—basic and diluted

    989,780        1,120,902        1,164,942        1,144,999        1,299,491   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing pro forma net loss per share—basic and diluted

     

 

14,546,609

  

      14,683,968   
     

 

 

     

 

 

 

Stock-based compensation expense included above:

         

Cost of revenue

  $ 21      $ 15      $ 64      $ 4      $ 47   

Sales and marketing

    59        16        224        4        135   

Research and development

    38        58        105        13        70   

General and administrative

    216        111        245        27        177   

Other financial data:

         

Adjusted EBITDA(2)

  $ (422   $ (910   $ (277   $ (174   $ (897

 

(1)

Pro forma basic and diluted net loss per share have been calculated assuming (i) the net exercise at the beginning of the applicable period of warrants that will expire upon the closing of this offering, (ii) the conversion of all outstanding shares of

 

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redeemable convertible preferred stock into an aggregate of 13,384,477 shares of common stock as of the beginning of the applicable period or at the time of issuance, if later, and (iii) the reclassification of the remaining outstanding preferred stock warrants from long-term liabilities to additional paid-in capital as of the beginning of the applicable period. The numerator of pro forma net loss per share is derived by adding $5,000 for the year ended December 31, 2012 and $0.1 million for the three months ended March 31, 2013 related to changes in the fair value of the preferred stock warrant liability.

(2) We define adjusted EBITDA as net loss plus: income tax expense, interest expense, depreciation and amortization, and stock-based compensation. Please see “—Adjusted EBITDA” for more information and for a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

     As of December 31,     As of
March 31,
2013
 
     2010     2011     2012    
     (in thousands)  

Consolidated balance sheet data:

        

Cash

   $ 6,939      $ 4,998      $ 10,865      $ 10,958   

Accounts receivable, net

     6,235        7,677        9,571        9,161   

Restricted cash

     890        886        687        686   

Total assets

     36,029        35,777        48,022        48,719   

Long-term debt, including current portion

     5,330        4,826        10,972        11,090   

Series A and Series C warrants liability

     331        592        3,235        3,352   

Total liabilities

     13,973        17,217        33,706        36,611   

Total redeemable convertible preferred stock

     90,363        90,413        90,495        90,495   

Additional paid-in capital

     2,684        2,932        3,584        4,166   

Total stockholders’ deficit

     (68,307     (71,853     (76,179     (78,387

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have provided within this prospectus adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of some expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that adjusted EBITDA provides useful information to investors in understanding and evaluating our operating results.

Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

  Ÿ  

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

  Ÿ  

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

  Ÿ  

adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;

 

  Ÿ  

adjusted EBITDA does not reflect interest or tax payments that may represent a reduction in cash available to us; and

 

  Ÿ  

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

 

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Because of these and other limitations, you should consider adjusted EBITDA together with other GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated:

 

     Year Ended December 31,     Three Months
    Ended March 31,    
 
     2010     2011     2012     2012     2013  
     (in thousands)  

Net loss

   $ (4,724   $ (3,864   $ (4,933   $ (851   $ (2,730

Adjustments:

          

Interest expense

     486        642        1,185        22        597   

Income tax expense (benefit)

     112        51        (70     24        7   

Depreciation and amortization expense

     3,370        2,061        2,903        583        800   

Stock-based compensation expense

     334        200        638        48        429   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net adjustments

     4,302        2,954        4,656        677        1,833   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (422   $ (910   $ (277   $ (174   $ (897
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus 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 and Nextag, and emerging channels, such as Facebook and Groupon. 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 2012, our customers processed over $3.5 billion in gross merchandise value, or GMV, through our platform. As of March 31, 2013, our customers managed over 100 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 March 31, 2013, we had nearly 2,000 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 $36.7 million for the year ended December 31, 2010 to $53.6 million for the year ended December 31, 2012, a compound annual growth rate of 20.9%. Our total revenue increased from $12.2 million for the three months ended March 31, 2012 to $14.9 million for the three months ended March 31, 2013, an increase of 22.1%. 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’

 

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GMV processed through our platform. During 2012 and the three months ended March 31, 2013, over 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 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.

We commenced operations in 2001. From 2001 through 2008, we invested heavily in product development, sales and marketing and acquisitions to drive growth. During this period, we generated substantial losses and raised several rounds of financing from venture capital investors to fund our operations. In late 2008, in an effort to better focus our business model on our current market opportunity and to improve our profitability, we implemented a number of cost reduction measures, including a reduction in headcount. In 2009 and 2010, having substantially improved our cost structure as a result of this restructuring of our operations, we began reinvesting in sales and marketing in order to grow our business, and from 2009 through 2012, we experienced increasing rates of revenue growth.

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.

 

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The following tables summarize our core and non-core revenue and the percentage of total revenue represented by each over the periods indicated.

 

     Year Ended December 31,      Three Months
Ended March 31,
 
     2010      2011      2012      2012      2013  
     (in thousands)  

Core revenue

   $ 32,707       $ 40,557       $ 51,224       $ 11,467       $ 14,401   

Non-core revenue

     3,981         3,013         2,363         699         521   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,688       $ 43,570       $ 53,587       $ 12,166       $ 14,922   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Year Ended December 31,     Three Months
Ended March 31,
 
     2010     2011     2012     2012     2013  
     (as a percentage of total revenue)  

Core revenue

     89.1     93.1     95.6     94.3     96.5

Non-core revenue

     10.9        6.9        4.4        5.7        3.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 1,673, 1,710 and 1,928 as of December 31, 2010, 2011 and 2012, respectively, and 1,750 and 1,997 as of March 31, 2012 and 2013, 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 $20,456, $24,240 and $28,050 for the years ended December 31, 2010, 2011 and 2012, respectively, and $25,299 and $28,730 for the twelve months ended March 31, 2012 and 2013, 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.

 

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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 years ended December 31, 2010, 2011 and 2012 and the three months ended March 31, 2012 and 2013, our subscription dollar retention rate exceeded 100%.

Adjusted EBITDA

Adjusted EBITDA represents our earnings before net interest and other expense, taxes, depreciation and amortization, adjusted to eliminate stock-based compensation expense. Adjusted EBITDA is not a measure calculated in accordance with GAAP. Please refer to “Selected Consolidated Financial Data—Adjusted EBITDA” in this prospectus 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, 2010, 2011 and 2012 and the three months ended March 31, 2012 and 2013.

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, 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 “Selected Consolidated 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

 

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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 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,     Three Months
Ended March 31,
 
         2010             2011             2012             2012             2013      
     (as a percentage of total revenue)  

Fixed subscription fees plus implementation fees

     48.7     55.0     61.4     59.8     65.3

Variable subscription fees

     51.3        45.0        38.6        40.2        34.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0     100.0     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:

 

  Ÿ  

the contract has been signed by both parties;

 

  Ÿ  

the customer has access to our platform and transactions can be processed;

 

  Ÿ  

the fees are fixed or determinable; and

 

  Ÿ  

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

 

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each of these expense categories. The number of employees related to these expense categories grew from 208 at December 31, 2010 to 327 at March 31, 2013, and we expect to continue to hire new employees in order to support our anticipated revenue growth.

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. The number of employees in our sales and marketing functions grew from 128 at December 31, 2010 to 216 at March 31, 2013, and we expect our sales and marketing expense to increase in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities in order to continue to grow our business.

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. The number of employees in research and development functions increased from 51 at December 31, 2010 to 71 at March 31, 2013. We believe continuing to invest in research and development efforts is essential to maintaining our competitive position.

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. The number of employees in general and administrative functions grew from 29 at December 31, 2010 to 40 at March 31, 2013, and we expect our general and administrative expenses to increase in absolute terms as a result of our preparation to become and operate as a public company. After the completion of this offering, these expenses will also include 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.

Other Income / Expense

Other income and expense consists primarily of interest income and expense and changes in the fair value of our preferred stock warrant liability. Interest income represents interest received on our cash. Interest expense consists primarily of the interest incurred on outstanding borrowings under our credit facilities.

The fair value of our preferred stock warrant liability is re-measured at the end of each reporting period and any changes in fair value are recognized in other income or expense. Upon completion of this offering, the preferred stock warrants will automatically, in accordance with their terms, become warrants to purchase common stock, which will result in the reclassification of the preferred stock warrant liability to additional paid-in capital, and no further changes in fair value will be recognized in other income or expense.

Income Tax Expense

Income tax expense consists of U.S. federal, state and foreign income taxes. We incurred minimal income tax expense for the years ended December 31, 2010, 2011 and 2012.

 

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Results of Operations

The following table sets forth selected consolidated statement of operations data for each of the periods indicated.

 

     Year Ended December 31,     Three Months
Ended March 31,
 
           2010                 2011                 2012                 2012                 2013        
     (in thousands)  

Revenue

   $ 36,688      $ 43,570      $ 53,587      $ 12,166      $ 14,922   

Cost of revenue

     12,164        12,248        14,749        3,246        3,947   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     24,524        31,322        38,838        8,920        10,975   

Operating expenses:

          

Sales and marketing

     14,867        19,106        24,326        5,390        7,790   

Research and development

     8,416        8,842        10,109        2,551        2,981   

General and administrative

     6,111        6,551        8,252        1,788        2,341   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     29,394        34,499        42,687        9,729        13,112   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (4,870     (3,177     (3,849     (809     (2,137

Other income (expense):

          

Interest expense

     (486     (642     (1,185     (22     (597

Other income, net

     744        6        31        4        11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     258        (636     (1,154     (18     (586
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,612     (3,813     (5,003     (827     (2,723

Income tax expense (benefit)

     112        51        (70     24        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,724   $ (3,864   $ (4,933   $ (851   $ (2,730
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth our consolidated statement of operations data as a percentage of revenue for each of the periods indicated.

 

     Year Ended December 31,     Three Months
Ended March 31,
 
           2010                 2011                 2012                 2012                 2013        
     (as a percentage of revenue)  

Revenue

     100.0     100.0     100.0     100.0     100.0

Cost of revenue

     33.2        28.1        27.5        26.7        26.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     66.8        71.9        72.5        73.3        73.5   

Operating expenses:

          

Sales and marketing

     40.5        43.9        45.4        44.3        52.2   

Research and development

     22.9        20.3        18.9        21.0        20.0   

General and administrative

     16.7        15.0        15.4        14.7        15.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     80.1        79.2        79.7        80.0        87.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (13.3     (7.3     (7.2     (6.7     (14.4

Other income (expense):

          

Interest expense

     (1.3     (1.5     (2.2     (0.2     (4.0

Other income, net

     2.0        0.0        0.1        0.0        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     0.7        (1.5     (2.1     (0.2     (3.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (12.6     (8.8     (9.3     (6.9     (18.3

Income tax expense (benefit)

     0.3        0.1        (0.1     0.2        0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (12.9 )%      (8.9 )%      (9.2 )%      (7.1 )%      (18.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparison of Three Months Ended March 31, 2012 and 2013

 

    Three Months Ended March 31,        
    2012     2013     Period-to-Period Change   
    Amount     Percentage of
Revenue
    Amount     Percentage of
Revenue
             
            Amount     Percentage  
    (dollars in thousands)  

Revenue

  $ 12,166        100.0   $ 14,922        100.0   $ 2,756        22.7

Cost of revenue

    3,246        26.7        3,947        26.5        701        21.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross profit

    8,920        73.3        10,975        73.5        2,055        23.0   

Operating expenses:

           

Sales and marketing

    5,390        44.3        7,790        52.2        2,400        44.5   

Research and development

    2,551        21.0        2,981        20.0        430        16.9   

General and administrative

    1,788        14.7        2,341        15.7        553        30.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total operating expenses

    9,729        80.0        13,112        87.9        3,383        34.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Loss from operations

    (809     (6.7     (2,137     (14.4     (1,328     164.2   

Other (expense) income:

           

Interest expense

    (22     (0.2     (597     (4.0     (575     *   

Other income, net

    4        0.0        11        0.1        7        175.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total other (expense) income

    (18     (0.2     (586     (3.9     (568     *   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Loss before income taxes

    (827     (6.9     (2,723     (18.3     (1,896     229.3   

Income tax expense

    24        0.2        7        0.0        (17     (70.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net loss

  $ (851     (7.1 )%    $ (2,730     (18.3 )%    $ (1,879     220.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

* = not meaningful

Revenue.    Revenue increased by $2.7 million, or 22.7%, from $12.2 million for the three months ended March 31, 2012 to $14.9 million for the three months ended March 31, 2013. Our core revenue increased $2.9 million, or 25.6%, during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012.

This growth was primarily attributable to a 10.5% increase in the average revenue per core customer during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, which accounted for 46.8% 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. 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.

In addition, we experienced a 14.1% increase in the number of core customers using our platform during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, which accounted for 53.2% of the increase in core revenue during the period. This growth in core revenue was partially offset by a $0.2 million, or 25.5%, decrease in our non-core revenue over the same period.

Our revenue from international operations increased from $2.7 million, or 21.8% of total revenue, for the three months ended March 31, 2012, to $3.2 million, or 21.6% of total revenue, for the three months ended March 31, 2013. The increase in revenue from our international operations was primarily attributable to an increase in the number of international customers.

 

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Cost of revenue.    Cost of revenue increased by $0.7 million, or 21.6%, from $3.2 million for the three months ended March 31, 2012 to $3.9 million for the three months ended March 31, 2013. The increase in cost of revenue was primarily attributable to a $0.3 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 89 at March 31, 2012 to 105 at March 31, 2013. In addition, we experienced a $0.2 million increase in depreciation expense associated with equipment for our data centers and a $0.1 million increase in credit card vendor transaction fees. As a percentage of revenue, cost of revenue declined from 26.7% for the three months ended March 31, 2012 to 26.5% for the three months ended March 31, 2013.

Sales and marketing.    Sales and marketing expense increased by $2.4 million, or 44.5%, from $5.4 million, or 44.3% of revenue, for the three months ended March 31, 2012, to $7.8 million, or 52.2% of revenue, for the three months ended March 31, 2013. The increase in sales and marketing expense was primarily attributable to a $1.7 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 151 at March 31, 2012 to 216 at March 31, 2013. In addition, we experienced a $0.4 million increase in our marketing, advertising and promotional event programs and travel. The increase in sales and marketing expense as a percentage of revenue for the three months ended March 31, 2013 reflects our strategy of adding sales and marketing professionals and expanding our marketing activities in order to continue to grow our business.

Research and development.    Research and development expense increased by $0.4 million, or 16.9%, from $2.6 million, or 21.0% of revenue, for the three months ended March 31, 2012, to $3.0 million, or 20.0% of revenue, for the three months ended March 31, 2013. The increase in research and development expense was primarily attributable to a $0.4 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 66 at March 31, 2012 to 71 at March 31, 2013.

General and administrative.    General and administrative expense increased by $0.6 million, or 30.9%, from $1.8 million, or 14.7% of revenue, for the three months ended March 31, 2012, to $2.4 million, or 15.7% of revenue, for the three months ended March 31, 2013. The increase in general and administrative expense was primarily attributable to a $0.5 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 32 at March 31, 2012 to 40 at March 31, 2013. In addition, we experienced a $0.1 million increase in information systems and consulting costs.

 

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Comparison of Years Ended December 31, 2011 and 2012

 

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

Revenue

  $ 43,570        100.0   $ 53,587        100.0   $ 10,017        23.0

Cost of revenue

    12,248        28.1        14,749        27.5        2,501        20.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross profit

    31,322        71.9        38,838        72.5        7,516        24.0   

Operating expenses:

           

Sales and marketing

    19,106        43.9        24,326        45.4        5,220        27.3   

Research and development

    8,842        20.3        10,109        18.9        1,267        14.3   

General and administrative

    6,551        15.0        8,252        15.4        1,701        26.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total operating expenses

    34,499        79.2        42,687        79.7        8,188        23.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Loss from operations

    (3,177     (7.3     (3,849     (7.2     (672     21.2   

Other (expense) income:

           

Interest expense

    (642     (1.5     (1,185     (2.2     (543     84.6   

Other income, net

    6        0.0        31        0.1        25        416.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total other (expense) income

    (636     (1.5     (1,154     (2.1     (518     81.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Loss before income taxes

    (3,813     (8.8     (5,003     (9.3     (1,190     31.2   

Income tax expense (benefit)

    51        0.1        (70     (0.1     (121     *   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net loss

  $ (3,864     (8.9 )%    $ (4,933     (9.2 )%    $ (1,069     27.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

* = not applicable

Revenue.    Revenue increased by $10.0 million, or 23.0%, from $43.6 million for the year ended December 31, 2011 to $53.6 million for year ended December 31, 2012. Our core revenue increased $10.7 million, or 26.3%, during the year ended December 31, 2012 as compared to the year ended December 31, 2011.

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. 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.

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. This growth in core revenue was partially offset by a $0.7 million, or 21.5%, decrease in our non-core revenue over the same period.

 

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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.

Cost of revenue.    Cost of revenue increased by $2.5 million, or 20.4%, from $12.2 million for the year ended December 31, 2011 to $14.7 million for the year ended December 31, 2012. 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.

Sales and marketing.    Sales and marketing expense increased by $5.2 million, or 27.3%, from $19.1 million, or 43.9% of revenue, for the year ended December 31, 2011, to $24.3 million, or 45.4% of revenue, for the year ended December 31, 2012. 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.    Research and development expense increased by $1.3 million, or 14.3%, from $8.8 million, or 20.3% of revenue, for the year ended December 31, 2011, to $10.1 million, or 18.9% of revenue, for the year ended December 31, 2012. 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.

General and administrative.    General and administrative expense increased by $1.7 million, or 26.0%, from $6.6 million, or 15.0% of revenue, for the year ended December 31, 2011, to $8.3 million, or 15.4% of revenue, for the year ended December 31, 2012. 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.

 

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Comparison of Years Ended December 31, 2010 and 2011

 

    Years Ended December 31,        
    2010     2011     Period-to-Period Change  
    Amount     Percentage of
Revenue
    Amount     Percentage of
Revenue
   
            Amount     Percentage  
    (dollars in thousands)  

Revenue

  $ 36,688        100.0   $ 43,570        100.0   $ 6,882        18.8

Cost of revenue

    12,164        33.2        12,248        28.1        84        0.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross profit

    24,524        66.8        31,322        71.9        6,798        27.7   

Operating expenses:

           

Sales and marketing

    14,867        40.5        19,106        43.9        4,239        28.5   

Research and development

    8,416        22.9        8,842        20.3        426        5.1   

General and administrative

    6,111        16.7        6,551        15.0        440        7.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total operating expenses

    29,394        80.1        34,499        79.2        5,105        17.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Loss from operations

    (4,870     (13.3     (3,177     (7.3     1,693        (34.8

Other income (expense):

           

Interest expense

    (486     (1.3     (642     (1.5     (156     32.1   

Other income, net

    744        2.0        6        0.0        (738     (99.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total other income (expense)

    258        0.7        (636     (1.5     (894     *   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Loss before income taxes

    (4,612     (12.6     (3,813     (8.8     799        (17.3

Income tax expense

    112        0.3        51        0.1        (61     (54.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net loss

  $ (4,724     (12.9 )%    $ (3,864     (8.9 )%    $ 860        (18.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

* = not applicable

Revenue.    Revenue increased by $6.9 million, or 18.8%, from $36.7 million for the year ended December 31, 2010 to $43.6 million for the year ended December 31, 2011. Our core revenue increased $7.9 million, or 24.0%, during the year ended December 31, 2011 as compared to the year ended December 31, 2010.

This growth was primarily attributable to an 18.5% increase in the average revenue per core customer during the year ended December 31, 2011 as compared to the year ended December 31, 2010, which accounted for 80.7% 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 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.

In addition, we experienced a 2.2% increase in the number of core customers using our platform during the year ended December 31, 2011 as compared to the year ended December 31, 2010, which accounted for 19.3% of the increase in core revenue during the period. This growth in core revenue was offset by a $1.0 million, or 24.3%, decrease in our non-core revenue over the same period.

Our revenue from international operations increased from $7.0 million, or 19.1% of total revenue, for the year ended December 31, 2010, to $8.8 million, or 20.1% of total revenue, for the year ended December 31, 2011. The revenue growth in our international operations was primarily attributable to an increase in the number of international customers.

 

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Cost of revenue.    Cost of revenue increased by $0.1 million, or 0.7%, from $12.2 million for the year ended December 31, 2010 to $12.3 million for the year ended December 31, 2011. The increase in cost of revenue was primarily attributable to a $0.7 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 79 at December 31, 2010 to 90 at December 31, 2011. In addition, we experienced a $0.4 million increase in infrastructure maintenance costs to support our platform and a $0.1 million increase in credit card vendor transaction fees. These increases were partially offset by a $0.7 million decrease in co-location facility costs resulting from efficiencies gained through virtualization and a $0.4 million decrease in depreciation expense associated with equipment for our data centers. As a percentage of revenue, cost of revenue declined from 33.2% for the year ended December 31, 2010 to 28.1% for the year ended December 31, 2011.

Sales and marketing.    Sales and marketing expense increased by $4.2 million, or 28.5%, from $14.9 million, or 40.5% of revenue, for the year ended December 31, 2010, to $19.1 million, or 43.9% of revenue, for the year ended December 31, 2011. The increase in sales and marketing expense was primarily attributable to a $2.8 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 128 at December 31, 2010 to 148 at December 31, 2011. In addition, we experienced a $1.0 million increase in our marketing, advertising and promotional event programs and travel.

Research and development.    Research and development expense increased by $0.4 million, or 5.1%, from $8.4 million, or 22.9% of revenue, for the year ended December 31, 2010, to $8.8 million, or 20.3% of revenue, for the year ended December 31, 2011. The increase in research and development expense was primarily attributable to a $0.4 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 51 at December 31, 2010 to 57 at December 31, 2011.

General and administrative.    General and administrative expense increased by $0.5 million, or 7.2%, from $6.1 million, or 16.7% or revenue, for the year ended December 31, 2010, to $6.6 million, or 15.0% of revenue, for the year ended December 31, 2011. The increase in general and administrative expense was primarily attributable to a $0.4 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 slightly from 29 at December 31, 2010 to 30 at December 31, 2011.

Other income, net.    During the year ended December 31, 2010, we recognized other income, net, of $0.7 million primarily related to the sale of four patents to a third party.

Quarterly Results of Operations

The following tables show our unaudited consolidated quarterly statement of operations data for each of our eight most recently completed quarters, as well as the percentage of revenue for each line item shown. This information has been derived from our unaudited financial statements, which, in the opinion of management, have been prepared on the same basis as our audited financial statements and include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the financial information for the quarters presented. Historical results are not necessarily indicative of the results to be expected in future periods, and operating results for a quarterly period are not necessarily indicative of the operating results for a full year. This information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus.

 

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    Three Months Ended  
    June 30,
2011
    Sept. 30,
2011
    Dec. 31,
2011
    March 31,
2012
    June 30,
2012
    Sept. 30,
2012
    Dec. 31,
2012
    March 31,
2013
 
    (in thousands)  

Revenue

  $ 10,222      $ 10,489      $ 12,801      $ 12,166      $ 12,408      $ 13,020      $ 15,993      $ 14,922   

Cost of revenue

    3,104        3,208        2,918        3,246        3,630        3,831        4,042        3,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    7,118        7,281        9,883        8,920        8,778        9,189        11,951        10,975   

Operating expenses:

               

Sales and marketing

    5,214        5,358        4,549        5,390        6,616        6,159        6,161        7,790   

Research and development

    2,081        2,139        2,357        2,551        2,523        2,459        2,576        2,981   

General and administrative

    1,755        1,626        1,702        1,788        1,986        2,088        2,390        2,341   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    9,050        9,123        8,608        9,729        11,125        10,706        11,127        13,112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (1,932     (1,842     1,275        (809     (2,347     (1,517     824        (2,137

Other (expense) income:

               

Interest expense

    (91     (165     (286     (22     (399     (407     (357     (597

Other income, net

    2        —          2        4        12        9        6        11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income

    (89     (165     (284     (18     (387     (398     (351     (586
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (2,021     (2,007     991        (827     (2,734     (1,915     473        (2,723

Income tax (benefit) expense

    (64     (87     170        24        16        43        (153     7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (1,957   $ (1,920   $ 821      $ (851   $ (2,750   $ (1,958   $ 626      $ (2,730
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Three Months Ended  
    June 30,
2011
    Sept. 30,
2011
    Dec. 31,
2011
    March 31,
2012
    June 30,
2012
    Sept. 30,
2012
    Dec. 31,
2012
    March 31,
2013
 
    (as a percentage of revenue)  

Revenue

    100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Cost of revenue

    30.4        30.6        22.8        26.7        29.3        29.4        25.3        26.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    69.6        69.4        77.2        73.3        70.7        70.6        74.7        73.5   

Operating expenses:

               

Sales and marketing

    51.0        51.1        35.5        44.3        53.3        47.3        38.5        52.2   

Research and development

    20.4        20.4        18.4        21.0        20.3        18.9        16.1        20.0   

General and administrative

    17.2        15.5        13.3        14.7        16.0        16.0        14.9        15.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    88.6        87.0        67.2        80.0        89.6        82.2        69.5        87.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (19.0     (17.6     10.0        (6.7     (18.9     (11.6     5.2        (14.4

Other (expense) income:

               

Interest expense

    (0.9     (1.6     (2.2     (0.2     (3.2     (3.1     (2.2     (4.0

Other income, net

    0.0        —          0.0        0.0        0.1        0.1        0.0        0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income

    (0.9     (1.6     (2.2     (0.2     (3.1     (3.0     (2.2     (3.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (19.9     (19.2     7.8        (6.9     (22.0     (14.6     3.0        (18.3

Income tax (benefit) expense

    (0.6     (0.8     1.3        0.2        0.1        0.3        (1.0     0.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (19.3 )%      (18.4 )%      6.5     (7.1 )%      (22.1 )%      (14.9 )%      4.0     (18.3 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Trends and Seasonality

Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, some of which are outside our control. In general, our revenue has increased as a result of an increase in the number of core customers using our platform and an increase in average revenue per core customer, driven in part by an increase in the amount of GMV processed through our platform. In most of the quarters presented, we added sales and marketing personnel to focus on adding new customers and increasing penetration within our existing customer base and added technical support, services, research and development and administrative personnel to support our growth. Our historical results should not be considered a reliable indicator of our future results of operations.

 

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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. For example, our revenue in the fourth quarter of 2012 exceeded revenue in each of the preceding three quarters.

Along with the seasonally higher revenue we have experienced in the fourth quarter, we have also experienced higher gross margins in the fourth quarter. Our cost to run our platform infrastructure is generally fixed. Therefore, when applied against our generally fixed costs, the higher revenue in the fourth quarter has resulted in higher overall gross margins for us.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have funded our operations primarily through cash from operating activities, bank and subordinated debt borrowings and private placements of redeemable convertible preferred stock. We have raised $90.4 million from the sale of redeemable convertible preferred stock to third parties.

In December 2009, we entered into a loan and security agreement with a lender, which was most recently amended in July 2012. 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.

The revolving line of credit has a current term through June 2013 and requires interest-only payments to be made monthly on any outstanding advances at the lender’s prime rate plus 1%, which was 4.25% at March 31, 2013. Borrowings under the equipment line of credit accrue interest at a rate of 7.25% 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.

In March 2012, we entered into a loan and security agreement with a subordinated lender. Under the agreement, we borrowed $5.0 million in March 2012 and an additional $5.0 million in December 2012. Borrowings under the agreement accrue interest at an annual rate of 10.5%. We are required to make interest-only payments on outstanding balances through March 1, 2015, after which the debt will be payable in monthly installments of both principal and interest through February 2017.

Under the terms of both loan and security agreements, we are required to meet and maintain specified financial and nonfinancial covenants. As of March 31, 2013, we were in compliance with all such covenants.

The following table summarizes the outstanding principal balances of our debt as of March 31, 2013 (in thousands):

 

     Outstanding Principal
Balance
 

Revolving line of credit

   $ 3,300   

Equipment line of credit

     47   

Subordinated loan

     10,000   
  

 

 

 

Total

   $ 13,347   
  

 

 

 

 

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Working Capital

The following table summarizes our cash, accounts receivable, working capital and cash flows for the periods indicated:

 

     As of and for the Year Ended
December 31,
    As of and for the Three
Months Ended March 31,
 
     2010     2011     2012         2012             2013      
     (in thousands)  

Cash

   $ 6,939      $ 4,998      $ 10,865      $ 10,635      $ 10,958   

Accounts receivable, net of allowance

     6,235        7,677        9,571        7,517        9,161   

Working capital

     2,579        (1,317     3,006        1,888        617   

Cash (used in) provided by:

          

Operating activities

     (783     161        1,191        2,135        1,577   

Investing activities

     (912     (1,723     (2,094     (1,045     (351

Financing activities

     (1,219     (443     6,806        4,526        (1,049

Our cash at March 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 that are currently providing only a minimal return.

Cash Flows

Operating Activities

For the three months ended March 31, 2013, our net cash provided by operating activities of $1.6 million consisted of a net loss of $2.7 million, offset by $2.8 million of cash provided by changes in working capital and $1.5 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of depreciation and amortization expense of $0.8 million, non-cash stock compensation expense of $0.4 million, accretion of debt discount of $0.1 million and change in fair value of preferred stock warrants of $0.1 million. The increase in cash resulting from changes in working capital primarily consisted of an increase in deferred revenue of $2.2 million as a result of an increased number of customers prepaying for subscription services, a $0.3 million decrease in accounts receivable, primarily driven by increased cash collections during the period, and a decrease in prepaid expenses and other assets of $0.3 million.

For the three months ended March 31, 2012, our net cash provided by operating activities of $2.1 million consisted of a net loss of $0.9 million, offset by $2.3 million of cash provided by changes in working capital and $0.7 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of depreciation and amortization expense of $0.6 million and non-cash rent expense of $0.2 million. The increase in cash resulting from changes in working capital primarily consisted of an increase in deferred revenue of $1.8 million as a result of an increased number of customers prepaying for subscription services and an increase in accounts payable and accrued expenses of $0.5 million, primarily driven by increased operating costs during the period.

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

 

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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, 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.

For the year ended December 31, 2010, our net cash used in operating activities of $0.8 million consisted of a net loss of $4.7 million, offset by cash of $0.1 million provided by changes in working capital and $3.8 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of depreciation and amortization expense of $3.4 million and non-cash stock compensation expense of $0.3 million. The increase in cash resulting from changes in working capital primarily consisted of an increase in deferred revenue of $1.5 million as a result of an increased number of customers prepaying for subscription services. These increases were offset by decreases in operating cash flow due to a $1.3 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 a decrease in accounts payable and accrued expenses of $0.1 million.

Investing Activities

For the three months ended March 31, 2012 and 2013, net cash used in investing activities was $1.0 million and $0.4 million, respectively, for the purchase of property and equipment.

For the years ended December 31, 2010, 2011 and 2012, net cash used in investing activities was $0.9 million, $1.7 million and $2.1 million, respectively, for the purchase of property and equipment.

Financing Activities

For the three months ended March 31, 2013, net cash used in financing activities was $1.0 million, consisting of $0.9 million in payments of costs in connection with this offering that have been deferred and $0.3 million in repayments of debt and capital leases, offset by $0.2 million in cash received upon the exercise of stock options.

For the three months ended March 31, 2012, net cash provided by financing activities was $4.5 million, consisting of $4.9 million in net borrowings under our subordinated loan, partially offset by $0.4 million in repayments of debt and capital leases.

 

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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 this offering that have 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.

For the year ended December 31, 2010, net cash used in financing activities was $1.2 million, consisting of $1.5 million in repayments of debt and capital leases, offset by $0.2 million in borrowings under capital lease agreements and $0.1 million in cash received upon the exercise of stock options.

Operating and Capital Expenditure Requirements

We believe that our existing cash balances, together with the available borrowing capacity under our revolving line of credit, will be sufficient to meet our anticipated cash requirements through at least the next 12 months. During this period, we expect our capital expenditure requirements to be approximately $5.5 million to $6.5 million. If our available cash balances and net proceeds from this offering are insufficient to satisfy our liquidity requirements, we may seek to sell equity or convertible debt securities or enter into an additional credit facility. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of convertible debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.

Contractual Obligations

Our principal commitments consist of obligations under our outstanding debt facilities, 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, 2012. Future events could cause actual payments to differ from these estimates.

 

Contractual Obligations

   Payment due by period  
   Total      Less than 1
year
     1-3 years      3-5 years      More than 5
years
 
     (in thousands)  

Long-term debt:

              

Principal payments

   $ 13,370       $ 3,370       $ 3,914       $ 6,086       $ —     

Interest payments

     3,432         1,043         1,975         414         —     

Operating lease obligations

     11,051         1,484         4,882         2,955         1,730   

Capital lease obligations

     2,439         1,209         1,230         —           —     

Purchase commitments

     3,766         2,074         1,692         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,058       $ 9,180       $ 13,693       $ 9,455       $ 1,730   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subsequent to December 31, 2012, we leased additional office space with total collective future minimum lease payments of $1.0 million. In addition, we entered into a lease for hardware, software licenses and managed services with total collective future minimum lease payments of $0.5 million. We also entered into a lease for the purchase of fixed assets with total collective future minimum lease payments of $1.3 million.

 

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Off-Balance Sheet Arrangements

As of March 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.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this prospectus, 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.

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.

 

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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 estimated allowance is based on our analysis of past due amounts and ongoing credit evaluations. Historically, our actual collection experience has not varied significantly from our estimates, due primarily to our credit and 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, 2012, 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. We consider what we believe to be comparable publicly traded

 

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companies, discounted free cash flows, and an analysis of our enterprise value in estimating the fair value of our common stock. We recognize compensation expense ratably over the requisite service period of the option award. Options generally vest quarterly over a four-year period.

Determination of the Fair Value of Stock-based Compensation Grants

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.

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,   Three Months
Ended March 31,
        2010           2011           2012           2012           2013    

Assumptions:

         

Risk-free interest rate

  0.5% - 3.0%   0.4% - 2.0%   0.1% - 0.9%   *   0.3% - 1.2%

Expected life

  6.25   6.25   4.00 - 6.25   *   5.00 - 6.25

Expected volatility

  39% - 55%   28% - 56%   49% - 61%   *   51% - 59%

Dividend yield

  0%   0%   0%   *   0%

Weighted average grant date fair value

  $0.64   $0.80   $2.88   *   $3.68

* not applicable

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. During the year ended December 31, 2012, we updated and expanded the list of comparable companies used to estimate expected volatility by including companies in our industry that had recently completed initial public offerings, and replacing some of the companies that had been used in prior periods with others that we believed to be more comparable to us in terms of size, business model or stage of development.

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.

Based upon an assumed initial public offering price of $13.00 per share, the midpoint of the range set forth on the cover of this prospectus, the aggregate intrinsic value of outstanding options to purchase shares of our common stock as of March 31, 2013 was $21.1 million, of which $12.3 million related to vested options and $8.8 million to unvested options.

 

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Determination of the Fair Value of Common Stock on Grant Dates

We are 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 have 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,” also known as the Practice Aid. We performed these contemporaneous valuations as of June 30, 2010, June 30, 2011, March 31, 2012, June 30, 2012, September 30, 2012 and December 31, 2012. In conducting the contemporaneous valuations, we considered all objective and subjective factors that we believed to be relevant for each valuation conducted, including management’s best estimate of our business condition, prospects and operating performance at each valuation date. Within the contemporaneous valuations performed by our management, a range of factors, assumptions and methodologies were used. The significant factors included:

 

  Ÿ  

independent third-party valuations performed contemporaneously or shortly before the grant date, as applicable;

 

  Ÿ  

the fact that we are a privately held technology company and our common stock is illiquid;

 

  Ÿ  

the nature and history of our business;

 

  Ÿ  

our historical financial performance;

 

  Ÿ  

our discounted future cash flows, based on our projected operating results;

 

  Ÿ  

valuations of comparable public companies;

 

  Ÿ  

the potential impact on common stock of liquidation preference rights of redeemable convertible preferred stock under different valuation scenarios;

 

  Ÿ  

general economic conditions and the specific outlook for our industry;

 

  Ÿ  

the likelihood of achieving a liquidity event for shares of our common stock, such as an initial public offering, or IPO, or a sale of our company, given prevailing market conditions, or remaining a private company; and

 

  Ÿ  

the state of the IPO market for similarly situated privately held technology companies.

The dates of our contemporaneous valuations have not always coincided with the dates of our stock-based compensation grants. In such instances, management’s estimates have been based on the most recent contemporaneous valuation of our shares of common stock and our assessment of additional objective and subjective factors we believed were relevant as of the grant date. The additional factors considered when determining any changes in fair value between the most recent contemporaneous valuation and the grant dates included our stage of development, our operating and financial performance, current business conditions and the market performance of comparable publicly traded companies.

There are significant judgments and estimates inherent in these contemporaneous valuations. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an IPO or other liquidity event, and the determinations of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per share could have been significantly different.

 

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Common Stock Valuation Methodology

Historically, we prepared our common stock valuations utilizing the probability weighted expected return method, or PWERM, approach to allocate value to our common shares. The PWERM approach employs various market, income or cost approach calculations depending on the likelihood of various liquidation scenarios. For each of the various scenarios, an equity value is estimated and the rights and preferences for each shareholder class are considered to allocate the equity value to common shares. The common share value is then multiplied by a discount factor reflecting the calculated discount rate and the timing of the event. Lastly, the common share value is multiplied by an estimated probability for each scenario. The probability and timing of each scenario are based on discussions between our board of directors and our management team. Under the PWERM, the value of our common stock is based on four possible future events for our company:

 

  Ÿ  

an IPO;

 

  Ÿ  

a strategic merger or sale;

 

  Ÿ  

our remaining a private company; and

 

  Ÿ  

the sale of our technology and the resulting dissolution of our company.

More recently, greater certainty developed regarding our plans for an IPO, and while we continued to use the PWERM approach for allocating our enterprise value to our common stock, we modified the treatment of the non-IPO scenarios within the PWERM beginning with the valuation performed as of December 31, 2012. In particular, in the December 31, 2012 analysis, the PWERM included both a near-term IPO scenario, consistent with the September 30, 2012 analysis, and a non-IPO scenario, corresponding to the sale and stay private scenarios used in the September 30, 2012 analysis. In the non-IPO scenario, the analysis used an Option Pricing Model, or OPM, to reflect the full distribution of possible non-IPO outcomes. We considered this “hybrid” method (PWERM using OPM within one of the scenarios) to be a more appropriate model of the non-IPO scenarios due to uncertainty regarding the timing or likelihood of specific alternative exit events if we do not complete the near-term IPO as planned.

In the OPM scenario, the value of our common stock and our redeemable convertible preferred stock are estimated as call options on the enterprise value, with exercise prices based on the respective liquidation preferences of each series of the redeemable convertible preferred stock. Under the OPM, our common stock has value only if the funds available for distribution to common stockholders exceed the value of the liquidation preference of our redeemable convertible preferred stock at the time of the liquidity event. The characteristics of each class of stock, including the conversion ratio and any liquidation preference of the redeemable convertible preferred stock, determine the class of stock’s claim on the enterprise value. Essentially, the rights of the common stockholders are equivalent to a call option on any value above the redeemable convertible preferred stockholders’ liquidation preferences. Thus, our common stock can be valued by estimating the value of its portion of each of these call option rights.

Market Approach

The market approach uses similar companies or transactions in the marketplace. When using the guideline company method of the market approach in determining the fair value of our common stock under the IPO scenario, we identified companies similar to our business and used these guideline companies to develop relevant market multiples and ratios. We then applied these market multiples and ratios to our financial forecasts to create an indication of total equity value. In selecting the guideline companies used in our analysis, we applied several criteria, including companies in the e-commerce platform industry, companies displaying economic and financial similarity in certain aspects of primary importance in the eyes of the investing public, and businesses that entail a similar

 

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degree of investment risk. When using the similar transaction methodology of the market approach in determining the fair value of our common stock under the strategic merger or sale scenario, we used publicly disclosed data from arm’s-length transactions involving similar companies to develop relationships or value measures between the prices paid for the target companies and the underlying financial performance of those companies. These value measures are then applied to our applicable operating data to create an indication of total equity value.

We used the market approach as the primary method of determining the fair value of our common stock under the IPO scenario and the strategic merger or sale scenario starting with our March 31, 2012 independent valuation and for all subsequent independent valuations. For each of these independent valuations, we performed a discrete assessment of publicly traded comparable companies, including companies that had recently completed initial public offerings, to ensure that we had a representative sample of guideline companies upon which to base the valuations. The guideline companies we used in the market approach for each of these valuations were the same companies we used to estimate our expected volatility for purposes of determining our stock-based compensation expense related to stock options granted during the period from April 1, 2012 to March 31, 2013. While our selection of guideline companies remained the same for each independent valuation in 2012, they may change in the future if we determine that the current guideline companies are no longer comparable.

Income Approach

For the income approach, we used the discounted free cash flow method, which is based on the premise that equity value as of the respective valuation date is equal to the projected future free cash flows and expected terminal value of the business, discounted by a required rate of return that investors would demand given the risks of ownership and the risks associated with achieving the stream of projected future free cash flows.

We used the income approach as the primary method of determining the fair value of our common stock under the IPO scenario, the strategic merger or sale scenario and the remain private scenario for our June 30, 2010 and June 30, 2011 independent valuations.

Cost Approach

The cost approach involves identifying our significant tangible assets, estimating the individual current market values of each and then totaling them to derive the value of the business as a whole. We used the cost approach to value our adjusted net assets available to common shareholders if we were forced to liquidate our assets if our business model failed and we were unable to raise additional financing.

The following table summarizes by grant date the number of shares of common stock subject to stock options granted from January 1, 2011 through the date of this prospectus, as well as the associated per share exercise price and the estimated fair value per share of our common stock on the grant date.

 

Grant Date

   Number of Shares
Underlying
Options Granted
     Exercise Price per
Share
     Estimated Fair
Value per Share
 

February 11, 2011

     291,001       $ 2.24       $ 2.24   

August 29, 2011

     322,005       $ 2.24       $ 2.24   

December 19, 2011

     11,675       $ 2.24       $ 2.24   

June 19, 2012

     170,403       $ 6.88       $ 6.88   

October 18, 2012

     159,602       $ 8.64       $ 8.64   

December 12, 2012

     317,870       $ 8.64       $ 8.64   

March 8, 2013

     572,956       $ 8.80       $ 8.80   

 

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Significant factors contributing to the determination of common stock fair value at the date of each grant beginning in fiscal year 2011 were as follows:

February 2011 Stock Option Grants.    The compensation committee of our board of directors granted options to purchase 291,001 shares of common stock with an exercise price per share of $2.24 on February 11, 2011. In estimating the fair value of our common stock to set the exercise price of such options as of February 11, 2011, the committee reviewed and considered an independent valuation report for our common stock as of June 30, 2010. The independent valuation report reflected a fair value for our common stock of $2.24 as of June 30, 2010. Our compensation committee determined that there were no significant factors affecting the value of our common stock that had occurred between June 30, 2010 and February 11, 2011.

The primary valuation considerations were:

 

  Ÿ  

The liquidity event scenario probabilities and valuation method used for determining the fair value of our common stock were as follows:

 

Scenario

   Probability     Valuation
Method
 
    

IPO

     25     Income   

Strategic merger or sale

     50     Income   

Remain private

     20     Income   

Dissolution / technology sale

     5     Cost   

Our compensation committee determined that the general IPO market for small technology companies was not very strong as reflected by the small number of IPOs in the first half of 2010 and that our operating performance, stock market conditions in general, and the market for IPOs in particular, were such that it was unlikely that we would be able to successfully complete an offering before the end of 2012. The committee considered remaining private to still be possible but less likely, resulting in this scenario being assigned a 20% probability. The dissolution and sale of our technology was deemed unlikely and was assigned only a 5% probability.

 

  Ÿ  

A discount rate of 25%, based on our estimated cost of capital.

 

  Ÿ  

A lack of marketability discount of 25% and a lack of control discount of 20%.

 

  Ÿ  

The macro-economic conditions at the time, with uncertainty as to whether the overall economy would rebound in the near term, and the uncertainty as to the impact of the recession on the purchasing patterns of our customer base, did not warrant a change in valuation as of the February 11, 2011 stock option grant date.

August and December 2011 Stock Option Grants.    Our compensation committee granted options to purchase 322,005 shares of common stock with an exercise price per share of $2.24 on August 29, 2011. In estimating the fair value of our common stock to set the exercise price of such options as of August 29, 2011, the committee reviewed and considered an independent valuation report for our common stock as of June 30, 2011. The independent valuation report reflected a fair value for our common stock of $2.24 as of June 30, 2011. Our compensation committee determined that there were no significant factors affecting the value of our common stock that had occurred between June 30, 2011 and August 29, 2011.

Less than four months later, on December 19, 2011, when our results were similar to prior months, our compensation committee granted options to purchase 11,675 shares of common stock with an exercise price per share of $2.24. Little had changed since the last stock option grant date and, although we finished the third quarter with our revenue on plan, the overall market conditions had not changed significantly. Therefore, the committee determined that the estimated fair value of common stock had not changed since the August 29, 2011 grants.

 

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The primary valuation considerations were:

 

  Ÿ