10-Q 1 a2019q3ecom10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-35940
____________________________________________________
CHANNELADVISOR CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________________________ 
Delaware
 
56-2257867
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
3025 Carrington Mill Boulevard, Morrisville, NC
 
27560
(Address of principal executive offices)
 
(Zip Code)
(919) 228-4700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former
fiscal year, if changed since last report)
____________________________________________________ 

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.001 par value
ECOM
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
  
Smaller reporting company
¨
Emerging growth company

¨


 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ¨    No  x
The number of outstanding shares of the registrant's common stock, par value $0.001 per share, as of the close of business on October 31, 2019 was 28,058,807.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
  
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANNELADVISOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 

September 30, 2019

December 31, 2018
 
(unaudited)

 
Assets



Current assets:



Cash and cash equivalents
$
48,226


$
47,185

Accounts receivable, net of allowance of $848 and $652 as of September 30, 2019 and December 31, 2018, respectively
21,292


23,436

Prepaid expenses and other current assets
8,231


9,248

Total current assets
77,749


79,869

Operating lease right of use assets
12,030

 

Property and equipment, net
10,249


12,007

Goodwill
23,486


23,486

Intangible assets, net
1,438


1,894

Deferred contract costs, net of current portion
12,667

 
11,336

Long-term deferred tax assets, net
3,486

 
4,162

Other assets
784


1,515

Total assets
$
141,889


$
134,269

Liabilities and stockholders' equity



Current liabilities:



Accounts payable
$
1,339


$
1,598

Accrued expenses
8,958


9,358

Deferred revenue
21,803


24,205

Other current liabilities
6,455


3,569

Total current liabilities
38,555


38,730

Long-term operating leases, net of current portion
10,597

 

Long-term finance leases, net of current portion


1,404

Lease incentive obligation

 
2,154

Other long-term liabilities
970


2,343

Total liabilities
50,122


44,631

Commitments and contingencies





Stockholders' equity:



Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding as of September 30, 2019 and December 31, 2018

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 28,058,807 and 27,347,115 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
28


27

Additional paid-in capital
276,211


271,550

Accumulated other comprehensive loss
(2,302
)

(1,707
)
Accumulated deficit
(182,170
)

(180,232
)
Total stockholders' equity
91,767


89,638

Total liabilities and stockholders' equity
$
141,889


$
134,269

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

2


CHANNELADVISOR CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
31,678

 
$
32,324

 
$
95,184

 
$
96,429

Cost of revenue
7,251

 
7,606

 
21,876

 
21,934

Gross profit
24,427

 
24,718

 
73,308

 
74,495

Operating expenses:

 
 
 
 
 
 
Sales and marketing
12,403

 
14,921

 
40,808

 
45,785

Research and development
4,803

 
5,350

 
15,161

 
16,989

General and administrative
5,440

 
6,688

 
19,272

 
19,847

Total operating expenses
22,646

 
26,959

 
75,241

 
82,621

Income (loss) from operations
1,781

 
(2,241
)
 
(1,933
)
 
(8,126
)
Other income (expense):
 
 
 
 
 
 
 
Interest income (expense), net
205

 
120

 
599

 
351

Other income (expense), net
(44
)
 
22

 
(32
)
 
2

Total other income (expense)
161

 
142

 
567

 
353

Income (loss) before income taxes
1,942

 
(2,099
)
 
(1,366
)
 
(7,773
)
Income tax expense
213

 
188

 
572

 
435

Net income (loss)
$
1,729

 
$
(2,287
)
 
$
(1,938
)
 
$
(8,208
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
(0.08
)
 
$
(0.07
)
 
$
(0.30
)
Diluted
$
0.06

 
$
(0.08
)
 
$
(0.07
)
 
$
(0.30
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
28,049,199

 
27,294,134

 
27,824,696

 
27,073,332

Diluted
28,754,679

 
27,294,134

 
27,824,696

 
27,073,332

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.


3


CHANNELADVISOR CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
1,729


$
(2,287
)
 
$
(1,938
)
 
$
(8,208
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(530
)
 
(250
)
 
(595
)
 
(732
)
Total comprehensive income (loss)
$
1,199

 
$
(2,537
)
 
$
(2,533
)
 
$
(8,940
)
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.


4


CHANNELADVISOR CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(1,938
)
 
$
(8,208
)
Adjustments to reconcile net loss to cash and cash equivalents provided by operating activities:
 
 
 
Depreciation and amortization
4,806

 
4,509

Bad debt expense
911

 
1,036

Stock-based compensation expense
7,000

 
8,023

Deferred income taxes
513

 
373

Other items, net
43

 
(667
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
1,007

 
4,451

Prepaid expenses and other assets
2,282

 
10,588

Deferred contract costs
(2,661
)
 
(5,325
)
Accounts payable and accrued expenses
(2,112
)
 
(11,164
)
Deferred revenue
(2,337
)
 
(2,514
)
Cash and cash equivalents provided by operating activities
7,514

 
1,102

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(755
)
 
(1,586
)
Payment of software development costs
(1,972
)
 
(579
)
Cash and cash equivalents used in investing activities
(2,727
)
 
(2,165
)
Cash flows from financing activities
 
 
 
Repayment of finance leases
(2,357
)
 
(2,092
)
Proceeds from exercise of stock options
968

 
1,086

Payment of statutory tax withholding related to net-share settlement of restricted stock units
(2,101
)
 
(2,130
)
Cash and cash equivalents used in financing activities
(3,490
)
 
(3,136
)
Effect of currency exchange rate changes on cash and cash equivalents
(256
)
 
(333
)
Net increase (decrease) in cash and cash equivalents
1,041

 
(4,532
)
Cash and cash equivalents, beginning of period
47,185

 
53,422

Cash and cash equivalents, end of period
$
48,226

 
$
48,890

Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
215

 
$
26

Cash paid for income taxes, net
$
64

 
$
81

Supplemental disclosure of noncash investing and financing activities
 
 
 
Accrued statutory tax withholding related to net-share settlement of restricted stock units
$
1,206

 
$
635

Accrued capital expenditures
$
35

 
$
361

Finance lease obligations entered into for the purchase of fixed assets
$

 
$
4,217

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

5


CHANNELADVISOR CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
1. DESCRIPTION OF THE BUSINESS
ChannelAdvisor Corporation ("ChannelAdvisor" or the "Company") was incorporated in the state of Delaware and capitalized in June 2001. The Company began operations in July 2001. ChannelAdvisor is a provider of software-as-a-service, or SaaS, solutions and its mission is to connect and optimize the world's commerce. ChannelAdvisor's e-commerce cloud platform helps brands and retailers worldwide improve their online performance by expanding sales channels, connecting with consumers around the world, optimizing their operations for peak performance and providing actionable analytics to improve competitiveness. The Company is headquartered in Morrisville, North Carolina and maintains sales, service, support and research and development offices in various domestic and international locations.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Interim Condensed Consolidated Financial Information
The accompanying condensed consolidated financial statements and footnotes have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") as contained in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") for interim financial information. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of financial position, the results of operations, comprehensive loss and cash flows. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited interim financial statements should be read in conjunction with the audited financial statements and related footnotes for the year ended December 31, 2018 ("fiscal 2018"), which are included in the Company's Annual Report on Form 10-K for fiscal 2018. Except for the adoption of Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASC 842"), there have been no material changes to the Company's significant accounting policies from those described in the footnotes to the audited financial statements contained in the Company's Annual Report on Form 10-K for fiscal 2018. Refer to Note 5, "Leases," for additional information regarding the Company's adoption of ASC 842.
Recent Accounting Pronouncements
Standard
Description
Effect on the Financial Statements or Other Significant Matters
Standards that the Company has not yet adopted as of September 30, 2019
Financial Instruments:
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326)

Effective date:
January 1, 2020

This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more useful information about expected credit losses.
The Company has formed a project team to prepare for the adoption of this standard by its effective date. The project team has developed an adoption plan and is evaluating the impact of this guidance on the Company's consolidated financial statements.
Intangibles:
ASU 2018-15, Intangibles -Goodwill and Other - Internal-Use Software (Subtopic 350-40)

Effective date:
January 1, 2020

This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

6


Standard
Description
Effect on the Financial Statements or Other Significant Matters
Standards that the Company adopted as of January 1, 2019
Leases:
ASU 2016-02, Leases (Topic 842)



This standard requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position. This standard also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases.
The Company adopted this standard effective January 1, 2019 using the alternate adoption method which allows for the initial application of the standard as of the adoption date. The reported results as of and for the three and nine months ended September 30, 2019 in the accompanying unaudited condensed consolidated financial statements are presented under ASC 842, while prior period results have not been adjusted and are reported in accordance with historical accounting guidance in effect for those periods. The Company elected to use the package of three practical expedients, as well as the practical expedient to apply hindsight in determining lease terms. Refer to Note 5, "Leases," for additional information regarding the impact of adoption under ASC 842 on the Company's consolidated financial statements.


The Company has reviewed new accounting pronouncements that were issued during the nine months ended September 30, 2019 and does not believe that these pronouncements are applicable to the Company, or that they will have a material impact on its financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable allowance, the useful lives of long-lived assets and other intangible assets, income taxes, assumptions used for purposes of determining stock-based compensation, leases, including estimating lease terms and extensions, and revenue recognition, including standalone selling prices for contracts with multiple performance obligations and the expected period of benefit for deferred contract costs, among others. Estimates and assumptions are also required to value assets acquired and liabilities assumed in conjunction with business combinations. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable, the results of which form the basis for making judgments about the carrying value of assets and liabilities.

7


3. STOCKHOLDERS' EQUITY
The following table summarizes quarterly stockholders' equity activity for the nine month period ended September 30, 2019 and 2018 (in thousands, except share data):
 
Quarterly Activity For The Nine Months Ended September 30, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
 
Balance, December 31, 2018
27,347,115

 
$
27

 
$
271,550

 
$
(1,707
)
 
$
(180,232
)
 
$
89,638

Exercise of stock options and vesting of restricted stock units
681,944

 
1

 
936

 

 

 
937

Stock-based compensation expense

 

 
3,398

 

 

 
3,398

Statutory tax withholding related to net-share settlement of restricted stock units
(178,071
)
 

 
(2,277
)
 

 

 
(2,277
)
Net loss

 

 

 

 
(2,329
)
 
(2,329
)
Foreign currency translation adjustments

 

 

 
78

 

 
78

Balance, March 31, 2019
27,850,988

 
28

 
273,607

 
(1,629
)
 
(182,561
)
 
89,445

Exercise of stock options and vesting of restricted stock units
290,346

 

 
15

 

 

 
15

Stock-based compensation expense

 

 
2,801

 

 

 
2,801

Statutory tax withholding related to net-share settlement of restricted stock units
(98,975
)
 

 
(981
)
 

 

 
(981
)
Net loss

 

 

 

 
(1,338
)
 
(1,338
)
Foreign currency translation adjustments

 

 

 
(143
)
 

 
(143
)
Balance, June 30, 2019
28,042,359

 
28

 
275,442

 
(1,772
)
 
(183,899
)
 
89,799

Exercise of stock options and vesting of restricted stock units
21,958

 

 
17

 

 

 
17

Stock-based compensation expense

 

 
801

 

 

 
801

Statutory tax withholding related to net-share settlement of restricted stock units
(5,510
)
 

 
(49
)
 

 

 
(49
)
Net income

 

 

 

 
1,729

 
1,729

Foreign currency translation adjustments

 

 

 
(530
)
 

 
(530
)
Balance, September 30, 2019
28,058,807

 
$
28

 
$
276,211

 
$
(2,302
)
 
$
(182,170
)
 
$
91,767


8


 
Quarterly Activity For The Nine Months Ended September 30, 2018
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
 
Balance, December 31, 2017
26,601,626

 
$
27

 
$
262,805

 
$
(789
)
 
$
(180,132
)
 
$
81,911

Cumulative effect of accounting change (1)

 

 

 

 
7,501

 
7,501

Exercise of stock options and vesting of restricted stock units
691,415

 

 
159

 

 

 
159

Stock-based compensation expense

 

 
2,733

 

 

 
2,733

Statutory tax withholding related to net-share settlement of restricted stock units
(209,154
)
 

 
(1,963
)
 

 

 
(1,963
)
Net loss

 

 

 

 
(3,157
)
 
(3,157
)
Foreign currency translation adjustments

 

 

 
109

 

 
109

Balance, March 31, 2018
27,083,887

 
27

 
263,734

 
(680
)
 
(175,788
)
 
87,293

Exercise of stock options and vesting of restricted stock units
247,664

 

 
845

 

 

 
845

Stock-based compensation expense

 

 
2,316

 

 

 
2,316

Statutory tax withholding related to net-share settlement of restricted stock units
(52,902
)
 

 
(673
)
 

 

 
(673
)
Net loss

 

 

 

 
(2,764
)
 
(2,764
)
Foreign currency translation adjustments

 

 

 
(591
)
 

 
(591
)
Balance, June 30, 2018
27,278,649

 
27

 
266,222

 
(1,271
)
 
(178,552
)
 
86,426

Exercise of stock options and vesting of restricted stock units
42,565

 

 
82

 

 

 
82

Stock-based compensation expense

 

 
2,974

 

 

 
2,974

Statutory tax withholding related to net-share settlement of restricted stock units
(9,745
)
 

 
(129
)
 

 

 
(129
)
Net loss

 

 

 

 
(2,287
)
 
(2,287
)
Foreign currency translation adjustments

 

 

 
(250
)
 

 
(250
)
Balance, September 30, 2018
27,311,469

 
$
27

 
$
269,149

 
$
(1,521
)
 
$
(180,839
)
 
$
86,816

(1) The Company recorded a reduction to accumulated deficit at January 1, 2018 as a result of its adoption of ASC 606, Revenue from Contracts with Customers.
4. GOODWILL AND INTANGIBLE ASSETS
The Company has acquired intangible assets in connection with its business acquisitions. These assets were recorded at their estimated fair values at the acquisition date and are being amortized over their respective estimated useful lives using the straight-line method. The estimated useful lives and amortization methodology used in computing amortization are as follows:
 
Estimated Useful Life
Amortization Methodology
Customer relationships
7 years
Straight-line
Acquired technology
7 years
Straight-line
Amortization expense associated with the Company's intangible assets was $0.2 million for each of the three months ended September 30, 2019 and 2018, and $0.5 million for each of the nine months ended September 30, 2019 and 2018.
There were no changes to the Company's goodwill during the nine months ended September 30, 2019.

9


5. LEASES
Financial Statement Impact of Adopting ASC 842, "Leases"
On January 1, 2019, the Company adopted ASC 842. The most significant impact of this standard relates to the Company's recognition of right of use (“ROU”) assets and lease liabilities for its operating leases. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company's accounting for finance leases, classified as capital leases under historical accounting guidance, was unchanged.
The following table summarizes the financial statement line items impacted by the Company's adoption of ASC 842 at January 1, 2019 (in thousands):
Balance Sheet - select financial statement line items
Ending balance
 
Effect of the adoption of
 
Beginning balance
 
December 31, 2018
 
ASC 842
 
January 1, 2019
Operating lease right of use assets
$

 
$
15,099

 
$
15,099

Other assets
1,515

 
(504
)
(1)
1,011

Total assets
134,269

 
14,595

 
148,864

Other current liabilities
3,569

 
3,116

(2)
6,685

Total current liabilities
38,730

 
3,116

 
41,846

Long-term operating leases, net of current portion


 
14,310

 
14,310

Lease incentive obligation
2,154

 
(2,154
)
 

Other long-term liabilities
2,343

 
(657
)
(3)
1,686

Total liabilities
44,631

 
14,615

 
59,246

Accumulated other comprehensive loss
(1,707
)
 
(12
)
 
(1,719
)
Total stockholders' equity
89,638

 
(12
)
 
89,626

Total liabilities and stockholders' equity
$
134,269

 
14,595

(4)
148,864

(1) Derecognition of lease inception fees associated with certain leases previously amortized over the respective lives of those leases.
(2) Net effect of derecognizing the Company's current deferred rent and lease incentive obligations as of December 31, 2018 and recognizing current operating lease liabilities.
(3) Derecognition of the Company's long-term deferred rent as of December 31, 2018.
(4) The resulting incremental expense due to the Company's adoption of ASC 842 was not considered significant and is recorded as rent expense in General and administrative expense in the accompanying unaudited condensed consolidated statement of operations for the nine months ended September 30, 2019.
Operating and Finance Lease Commitments
The Company leases office facilities and certain equipment under non-cancelable operating and finance leases. The Company determines if an arrangement is a lease and whether its classification is operating or finance at inception. Leases with an initial term of twelve months or less that are not expected to be renewed are not recorded on the balance sheet. For such leases, lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Certain operating leases include options to renew, with renewal terms extending up to 10 years, subject to certain conditions and notice obligations set forth in the lease agreements. The exercise of lease renewal options is at the Company's discretion.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the Company's best estimate of the collateralized borrowing rate over a similar term at the commencement date of the lease in determining the present value of future payments. The operating lease ROU assets also include any lease payments made and lease incentives and initial direct costs incurred. The lease terms may include options to extend the lease when it is reasonably certain that the Company will exercise that option.
The following table summarizes the Company's lease assets and liabilities as of September 30, 2019 (in thousands):

10


 
As of September 30, 2019
Assets
 
Operating lease right of use assets
$
12,030

Finance lease assets, included in Property and equipment, net (1)
2,273

Total leased assets
$
14,303

Liabilities
 
Current
 
    Operating lease liabilities, included in Other current liabilities
$
4,462

    Finance lease liabilities, included in Other current liabilities
1,404

Long-term
 
    Long-term operating leases, net of current portion
10,597

Total lease liabilities
$
16,463

(1) Finance leases are presented net of accumulated amortization of $5.3 million as of September 30, 2019.
The following table summarizes the components of lease expense for the three and nine months ended September 30, 2019 (in thousands):
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease cost, included in General and administrative expense (1)
$
1,108

 
$
3,418

Finance lease cost:
 
 
 
    Amortization of leased assets, included in General and administrative expense
546

 
1,639

    Interest on lease liabilities, included in Other income (expense), net
26

 
114

Less: sublease income, reducing rent expense in General and administrative expense (2)
(41
)
 
(126
)
Net lease cost
$
1,639

 
$
5,045

(1) Excludes short-term lease costs of $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively.
(2) The Company subleases space to a third party for which it anticipates receiving $0.2 million in annual rental payments during the term of the sublease agreement, which is through August 2022.
The following table summarizes other information related to leases for the nine months ended September 30, 2019 (in thousands):
 
Nine Months Ended September 30, 2019
Supplemental cash flows information
 
Cash paid for amounts included in the measurement of lease liabilities:
 
    Operating cash outflows from operating leases
$
3,594

    Operating cash outflows from finance leases
215

    Financing cash outflows from finance leases
2,357

Weighted-average remaining lease term (years)
 
    Operating leases
3.36

    Finance leases
1.58

Weighted-average discount rate
 
    Operating leases
5.50
%
    Finance leases
7.39
%


11


The following table summarizes maturities of lease liabilities as of September 30, 2019 (in thousands):
 
Operating Leases (1)
 
Finance Leases
2019 (remaining three months)
$
1,297

 
$

2020
5,084

 
1,507

2021
4,842

 

2022
4,153

 

2023
1,151

 

Total lease payments
$
16,527

 
$
1,507

Less: imputed interest
(1,468
)
 
(103
)
Present value of lease liabilities
$
15,059

 
$
1,404

(1) Excludes future minimum lease payments for short-term operating leases of $0.1 million.
As of September 30, 2019, the Company had no material operating or finance leases that had not yet commenced.
6. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition and Disaggregation of Revenue
The Company derives the majority of its revenue from subscription fees paid for access to and usage of its SaaS solutions for a specified period of time, typically one year. A portion of the subscription fee is typically fixed and is based on a specified minimum amount of gross merchandise value ("GMV") or advertising spend that a customer expects to process through the Company's platform over the contract term. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMV or advertising spend processed through the Company's platform in excess of the customer's specified minimum GMV or advertising spend amount. In addition to subscription fees, contracts with customers may include implementation fees for launch assistance and training. Fixed subscription and implementation fees are billed in advance of the subscription term and are due in accordance with contract terms, which generally provide for payment within 30 days. Variable fees are subject to the same payment terms, although they are generally billed the month after they are incurred. The Company also generates revenue from its solutions that allow brands to direct potential consumers from their websites and digital marketing campaigns to authorized resellers. The Company's contracts typically have a one year term. The Company's contractual arrangements include performance, termination and cancellation provisions, but do not provide for refunds. Customers do not have the contractual right to take possession of the Company's software at any time. Sales taxes collected from customers and remitted to government authorities are excluded from revenue.
The following table summarizes revenue disaggregation by product for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019


 
2018 (1)


 
2019


 
2018 (1)


Marketplaces
$
23,348

 
$
23,965

 
$
70,466

 
$
71,631

Digital Marketing
4,771

 
4,577

 
13,943

 
13,427

Other
3,559

 
3,782

 
10,775

 
11,371

 
$
31,678

 
$
32,324

 
$
95,184

 
$
96,429

(1) Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no impact on the reported total revenue for the period.
Marketplaces and Digital Marketing - The Company's Marketplaces module connects customers to third-party e-commerce marketplaces and provides access to advertising programs and advanced competitive features on major marketplaces. The Company's Digital Marketing module allows customers to create and optimize advertisements on multiple online shopping channels. Customers may subscribe to each of these modules on a self-service or managed-service basis. Self-service subscriptions allow the customer to manage their own activity on the platform. Launch services are also available, although they are not required for the customer to access the platform. Revenue from self-service subscriptions, including fixed subscription fees and fees associated with any elected launch services, is recognized ratably over the subscription term, which is typically one year, beginning on the date the customer has access to the platform. Managed-service subscriptions offer the

12


customer an outsourced, managed platform experience. Implementation services are included with managed-service subscriptions and are necessary to launch on the platform. Revenue from managed-service subscriptions, including fixed subscription fees and fees associated with implementation services, is recognized ratably over the subscription term, which is typically one year, beginning once implementation services are complete.
As noted above, customers incur variable fees when the GMV processed through Marketplaces, or the GMV or advertising spend processed through Digital Marketing, exceeds the GMV or advertising spend included in their subscriptions. In general, revenue from variable fees is recognized in the period in which the related GMV or advertising spend is processed through the platform.
Other - Other product offerings include the Company's Where to Buy and Product Intelligence solutions, which provide current information on resellers and product availability and insights on product assortment, gaps, and pricing trends. These solutions are only available on a managed-service basis and include implementation services. The Company also enters into integration agreements with certain marketplaces or channels under which the business partner engages the Company to integrate the platform with their marketplace or channel. Revenue from these product offerings is recognized ratably over the subscription term beginning on the date the implementation or integration is complete.
Contracts with Multiple Performance Obligations
Customers may elect to purchase a subscription to multiple modules, multiple modules with multiple service levels, or, for certain of the Company's solutions, multiple brands or geographies. The Company evaluates such contracts to determine whether the services to be provided are distinct and accordingly should be accounted for as separate performance obligations. If the Company determines that a contract has multiple performance obligations, the transaction price, which is the total price of the contract, is allocated to each performance obligation based on a relative standalone selling price method. The Company estimates standalone selling price based on observable prices in past transactions for which the product offering subject to the performance obligation has been sold separately. As the performance obligations are satisfied, revenue is recognized as discussed above in the product descriptions.
Transaction Price Allocated to Future Performance Obligations
As the Company typically enters into contracts with customers for a twelve-month subscription term, substantially all of its performance obligations that have not yet been satisfied as of September 30, 2019 are part of a contract that has an original expected duration of one year or less. For contracts with an original expected duration of greater than one year, the aggregate transaction price allocated to the unsatisfied performance obligations was $26.5 million as of September 30, 2019, of which $15.7 million is expected to be recognized as revenue over the next twelve months.
Deferred Revenue
Deferred revenue represents the unearned portion of subscription and implementation fees. Deferred revenue is recorded when cash payments are received in advance of performance. Deferred amounts are generally recognized within one year. Deferred revenue is included in the accompanying condensed consolidated balance sheets under "Total current liabilities," net of any long-term portion that is included in "Other long-term liabilities." The following table summarizes deferred revenue activity for the nine months ended September 30, 2019 (in thousands):
 
Balance, beginning of period
 
Net additions
 
Revenue recognized
 
Balance, end of period
Deferred revenue
$
24,708

 
92,666

 
(95,184
)
 
$
22,190

Of the $95.2 million of revenue recognized in the nine months ended September 30, 2019, $21.5 million was included in deferred revenue at January 1, 2019.
Costs to Obtain Contracts
The Company capitalizes sales commissions and a portion of other incentive compensation costs that are directly related to obtaining customer contracts and that would not have been incurred if the contract had not been obtained. These costs are included in the accompanying condensed consolidated balance sheets and are classified as "Prepaid expenses and other current assets," net of any long-term portion that is included in "Deferred contract costs, net of current portion." Deferred contract costs are amortized to sales and marketing expense over the expected period of benefit, which the Company has determined to be

13


five years based on the estimated customer relationship period. The following table summarizes deferred contract cost activity for the nine months ended September 30, 2019 (in thousands):
 
Balance, beginning of period
 
Additions
 
Amortized costs (1)
 
Balance, end of period
Deferred contract costs
$
15,209

 
6,044

 
(3,559
)
 
$
17,694

(1) Includes contract costs amortized to sales and marketing expense during the period and the impact from foreign currency exchange rate fluctuations.
7. STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation expense using the accelerated attribution method, net of estimated forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche.
Stock-based compensation expense is included in the following line items in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019 (1)
 
2018
 
2019 (1)
 
2018
Cost of revenue
$
169

 
$
298

 
$
745

 
$
607

Sales and marketing

 
1,003

 
1,773

 
2,483

Research and development
454

 
581

 
1,696

 
1,585

General and administrative
178

 
1,092

 
2,786

 
3,348

 
$
801

 
$
2,974

 
$
7,000

 
$
8,023

(1) Stock-based compensation expense for the three and nine months ended September 30, 2019 decreased compared to the prior year periods due primarily to changes in executive management.
During the nine months ended September 30, 2019, the Company granted the following share-based awards:
 
Number of Shares Underlying Grant
 
Weighted Average Grant Date Fair Value
Stock options
554,545

 
$
4.51

Restricted stock units ("RSUs")
1,281,826

 
$
9.90

Total share-based awards
1,836,371

 
$
8.27

8. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of shares of common stock outstanding for the period. Diluted net income per share is calculated giving effect to all potentially dilutive shares of common stock, including stock options and restricted stock units (RSUs). The dilutive effect of outstanding awards is reflected in diluted earnings per share by application of the treasury stock method.
The following table summarizes the calculation of basic and diluted net income (loss) per share (in thousands, except share and per share data):

14


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Basic:
 
 
 
 
 
 
 
Net income (loss)
$
1,729

 
$
(2,287
)
 
$
(1,938
)
 
$
(8,208
)
Weighted average common shares outstanding, basic
28,049,199

 
27,294,134

 
27,824,696

 
27,073,332

Basic net income (loss) per share
$
0.06

 
$
(0.08
)
 
$
(0.07
)
 
$
(0.30
)
Diluted:
 
 
 
 
 
 
 
Net income (loss)
$
1,729

 
$
(2,287
)
 
$
(1,938
)
 
$
(8,208
)
Weighted average common shares outstanding, basic
28,049,199

 
27,294,134

 
27,824,696

 
27,073,332

Dilutive effect of:
 
 
 
 
 
 
 
Stock options
169,354

 

 

 

Unvested RSUs
536,126

 

 

 

Weighted average common shares outstanding, diluted
28,754,679

 
27,294,134

 
27,824,696

 
27,073,332

Diluted net income (loss) per share
$
0.06

 
$
(0.08
)
 
$
(0.07
)
 
$
(0.30
)
The following equity instruments have been excluded from the calculation of diluted net income (loss) per share because the effect is anti-dilutive:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Stock options
1,923,938

 
2,289,910

 
2,341,209

 
2,289,910

RSUs
269,552

 
2,312,407

 
2,206,636

 
2,312,407

9. INCOME TAXES
At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods.
The Company's effective tax rate was 11.0% and (9.0)% for the three months ended September 30, 2019 and 2018, respectively, and (41.9)% and (5.6)% for the nine months ended September 30, 2019 and 2018, respectively. The tax expense for each of the periods was based on state, local and foreign taxes. The Company’s effective tax rate for these periods is lower than the U.S. federal statutory rate of 21% primarily due to operating losses which are subject to a valuation allowance. The Company cannot recognize the tax benefit of operating loss carryforwards generated in certain jurisdictions due to uncertainties relating to future taxable income in those jurisdictions in terms of both its timing and its sufficiency, which would enable the Company to realize the benefits of those carryforwards. The change in the effective tax rate for the three months ended September 30, 2019 compared with the same period in the prior year is primarily due to the shift from pre-tax loss for the three month period in 2018 to pre-tax income for the three month period in 2019. The change in the effective tax rate for the nine months ended September 30, 2019 compared with the same period in the prior year is primarily due to the decrease in pre-tax loss from the nine month period in 2018 to the nine month period in 2019. In addition, the change in the effective tax rate for both the three and nine month periods was partially due to a tax benefit recorded in 2018 attributable to the reduction of a "hanging" deferred tax liability for an indefinite-lived intangible asset. The Company utilized the "hanging" deferred tax liability to recognize a portion of the deferred tax asset for the indefinite-lived U.S. federal operating loss carryforward generated in the 2018 tax year, with the balance of the U.S. federal operating loss carryforward deferred tax asset being offset by a valuation allowance.
The Tax Cuts and Jobs Act of 2017 ("Tax Act"), which went into effect on December 22, 2017, significantly revises the Internal Revenue Code of 1986, as amended. The Tax Act contains, among other things, significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), repeal of the alternative minimum tax, limitation of the deduction for net operating losses to 80% of current year taxable income, indefinite net operating loss carryforward period and elimination of net operating loss carrybacks, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, creation of the base erosion anti-abuse tax, the global intangible low taxed income inclusion,

15


which the Company accounts for as a period cost, the foreign derived intangible income deduction and modification or repeal of many business deductions and credits.
As of September 30, 2019, the IRS is still in the process of issuing guidance to taxpayers to address changes enacted in the Tax Act. The Company has prepared the income tax provision for the three and nine months ended September 30, 2019 based on available guidance. However, if final guidance is issued that modifies the existing temporary guidance issued by the IRS or if the final guidance contradicts positions taken by the Company in the absence of any IRS guidance, this could have a material impact on the Company's consolidated financial statements.
10. RESTRUCTURING
In the third quarter of 2019, the Company implemented a plan ("2019 Actions") to reduce its expenses and align its operations with evolving business needs. As part of this strategic initiative, the Company reduced its global workforce by approximately 10% and discontinued its physical operations in China. As a result of the implementation of the 2019 Actions, the Company recognized severance and related costs of $1.0 million during the three and nine months ended September 30, 2019.

11. SEGMENT AND GEOGRAPHIC INFORMATION
Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker ("CODM") for purposes of allocating resources and evaluating financial performance. The Company's CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company's operations constitute a single operating segment and one reportable segment.
Substantially all assets were held in the United States during the nine months ended September 30, 2019 and the year ended December 31, 2018. The following table summarizes revenue by geography for the three and nine months ended September 30, 2019 and 2018 (in thousands). The Company categorizes domestic and international revenue from customers based on their billing address.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Domestic
 
$
23,551

 
$
24,476

 
$
71,120

 
$
74,013

International
 
8,127

 
7,848

 
24,064

 
22,416

Total revenue
 
$
31,678

 
$
32,324

 
$
95,184

 
$
96,429


16


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions, or the negative of such words or phrases, are intended to identify "forward-looking statements." We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. These forward-looking statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II – Item 1A, "Risk Factors," and our other filings with the Securities and Exchange Commission. Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, 2018, which are included in our Annual Report on Form 10-K for fiscal 2018.
We are a leading provider of software-as-a-service, or SaaS, solutions and our mission is to connect and optimize the world's commerce. Our proprietary e-commerce cloud platform, which is accessed through a standard web browser, helps brands and retailers worldwide improve their online performance by expanding sales channels, connecting with consumers around the world, optimizing their operations for peak performance and providing actionable analytics to improve competitiveness. More specifically, our suite of solutions allows our customers to manage their product listings, inventory availability, pricing optimization, search terms, orders and fulfillment, and other critical functions across these channels. Our customers utilize our platform to connect with new and existing sources of demand for their products through channels such as Amazon, eBay, Facebook, Google and Walmart. Our fulfillment solution makes it easier for customers to connect to their supply chain, which could include distributors, manufacturers and third-party logistics providers. We also offer solutions that allow brands to send their web visitors or digital marketing audiences directly to authorized resellers and to gain insight into consumer behavior. Overall, our platform delivers significant breadth, scalability and flexibility.
We serve customers across a wide range of industries and geographies. Our customers include the online businesses of brands and retailers, as well as advertising agencies that use our solutions on behalf of their clients.
EXECUTIVE OVERVIEW
 
 
 
 
 
 
 
 
 
 
FINANCIAL RESULTS
Total revenue of $31.7 million and $95.2 million for the three and nine months ended September 30, 2019 decreased 2.0% and 1.3%, respectively, from the comparable prior year periods;
Average revenue per customer of $47,005 for the twelve months ended September 30, 2019 increased 2.0% compared with $46,073 for the twelve months ended September 30, 2018;
Revenue was comprised of 81.5% and 18.5% fixed and variable subscription fees, respectively, for the three months ended September 30, 2019 compared with fixed and variable subscription fees of 79.5% and 20.5%, respectively, for the three months ended September 30, 2018;
Revenue was comprised of 80.9% and 19.1% fixed and variable subscription fees, respectively, for the nine months ended September 30, 2019 compared with fixed and variable subscription fees of 77.2% and 22.8%, respectively, for the nine months ended September 30, 2018;

17


Revenue derived from customers located outside of the United States as a percentage of total revenue was 25.7% and 25.3% for the three and nine months ended September 30, 2019, respectively, compared with 24.3% and 23.2%, respectively, for the comparable prior year periods;
Gross margin of 77.1% and 77.0% for the three and nine months ended September 30, 2019, respectively, improved by 60 basis points and declined by 30 basis points, respectively, compared with 76.5% and 77.3% for the comparable prior year periods;
Operating margin of 5.6% and (2.0)% for the three and nine months ended September 30, 2019, respectively, improved by 1250 and 640 basis points, respectively, compared with (6.9)% and (8.4)% for the comparable prior year periods;
Net income (loss) of $1.7 million and $(1.9) million for the three and nine months ended September 30, 2019, respectively, improved compared with net loss of $(2.3) million and $(8.2) million, respectively, for the comparable prior year periods;
Adjusted EBITDA, a non-GAAP measure, of $5.2 million and $10.8 million for the three and nine months ended September 30, 2019, respectively, increased 124.2% and 145.1%, respectively, compared with adjusted EBITDA of $2.3 million and $4.4 million for the comparable prior year periods;
Cash and cash equivalents was $48.2 million at September 30, 2019 compared with $47.2 million at December 31, 2018;
Operating cash flow was $7.5 million for the nine months ended September 30, 2019 compared with $1.1 million for the nine months ended September 30, 2018; and
Free cash flow, a non-GAAP measure, was $4.8 million for the nine months ended September 30, 2019 compared with $(1.1) million for the nine months ended September 30, 2018.
TRENDS IN OUR BUSINESS
The following trends have contributed to the results of our consolidated operations, and we anticipate that they will continue to impact our future results:
Growth in Online Shopping. Consumers continue to move more of their retail spending from offline to online retail. The continuing shift to online shopping and overall growth has contributed to our historical growth and we expect that this online shift will continue to benefit our business.
Product Offering Expansion. As online shopping evolves, we continue to expand our product offerings to reflect the needs of companies seeking to attract consumers. We continue to enhance our product offering by increasing online shopping channel integrations, including marketplace and first-party retail programs, providing capabilities that allow customers to be more competitive, including support for advertising, advanced repricing and machine learning based demand forecasting and improving our analytics capabilities, fulfillment features and user experience.
Growth in Mobile Usage. We believe the shift toward mobile commerce will increasingly favor aggregators such as Amazon, eBay, Google and Walmart, all of which are focal points of our platform. These systems understand the identity of the buyer, helping to reduce friction in the mobile commerce process, while offering a wide selection of merchandise in a single location. The growth in mobile commerce may result in increased revenue for us.
Shift to Larger Customers Through Our Direct Sales Channel. We believe that the growth in online shopping increasingly favors larger enterprises. This move impacts our business both in longer sales cycles as well as increased average revenue per customer.
Evolving Fulfillment Landscape. Consumers have been conditioned to expect fast, efficient delivery of products. We believe that determining and executing on a strategy to more expeditiously receive, process and deliver online orders, which we refer to collectively as fulfillment, is critical to success for online sellers. Therefore, it will be increasingly important for us to facilitate and optimize fulfillment services on behalf of our customers, which in turn may result in additional research and development investment.
Focus on Employees. We strive to provide competitive compensation and benefits programs to help attract and retain employees who are focused on facilitating the success of our customers.
Seasonality. Our revenue fluctuates as a result of seasonal variations in our business, principally due to the peak consumer demand and 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 due to increased GMV processed through our platform, resulting in higher variable subscription fees.

18


OPPORTUNITIES AND RISKS
Dynamic E-commerce Landscape. We need to continue to innovate in the face of a rapidly changing e-commerce landscape if we are to remain competitive.
Brands and Retailers. As consumer preferences potentially shift from smaller retailers, we need to continue to add brands and large retailers as profitable customers. These customers generally pay a lower percentage of GMV as fees to us based on the relatively higher volume of their GMV processed through our platform. To help drive our future growth, we have made significant investments in our sales force and allocated resources focused on growing our customer base of brands and large retailers. We continue to focus our efforts on increasing value for our customers to support higher rates.
Strategic Partnerships. Our business development team's mission is to expand our sales and market opportunities through strategic partner relationships. We plan to continue to invest in initiatives to expand our strategic partnership base to further enhance our offerings for brands and retailers.
Increasing Complexity of E-commerce. Although e-commerce continues to expand as brands and retailers continue to increase their online sales, it is also becoming more complex due to the hundreds of channels available to brands and retailers and the rapid pace of change and innovation across those channels. In order to gain consumers' attention in a more crowded and competitive online marketplace, an increasing number of brands and many retailers sell their merchandise through multiple online channels, each with its own rules, requirements and specifications. In particular, third-party marketplaces are an increasingly important driver of growth for a number of brands and large online retailers. As a result, we need to continue to support multiple channels in a variety of geographies in order to support our targeted revenue growth.
Global Growth in E-commerce. We believe the growth in e-commerce globally presents an opportunity for brands and retailers to engage in international sales. However, country-specific marketplaces are often the market share leaders in their regions, as is the case for Alibaba in Asia. In order to help our customers capitalize on this potential market opportunity, and to address our customers’ needs with respect to cross-border trade, we intend to continue to invest in our international operations. Doing business overseas involves substantial challenges, including management attention and resources needed to adapt to multiple languages, cultures, laws and commercial infrastructure, as further described in this report under the caption "Risks Related to our International Operations."
Our senior management continuously focuses on these and other trends and challenges, and we believe that our culture of innovation and our 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.


19


KEY FINANCIAL AND OPERATING METRICS
 
 
 
 
 
 
 
 
 
 
chart-b055ca59500951abb49.jpg
The average revenue generated per customer is a primary determinant of our revenue. We calculate this metric by dividing our revenue for a particular period by the average monthly number of customers during the period, which is calculated by taking the sum of the number of 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 customer in absolute dollars on a trailing twelve-month, or TTM, basis, but we may also calculate percentage changes in average revenue per customer on a quarterly basis in order to help us evaluate our period-over-period performance. For purposes of this metric and the number of customers metric described below, we include all customers who subscribe to at least one of our solutions, as well as strategic partners from which we receive revenue.
chart-2a519d1ea234584e972.jpg
The number of customers decreased as of the third quarter of 2019 compared to the third quarter of 2018. We continue our focus on obtaining brands and large retailers as customers, which may represent a smaller number of total customers, but a potentially larger source of predictable or sustainable recurring revenue.

 
chart-6f719f7999145a30807.jpg
Adjusted EBITDA represents our earnings before interest (income) expense, income tax expense and depreciation and amortization, adjusted to eliminate stock-based compensation expense, which is a non-cash item, and, for the three and nine months ended September 30, 2019 only, non-recurring severance and related costs. We believe that adjusted EBITDA provides useful information to management and others in understanding and evaluating our operating results. However, adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with U.S. 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. Please refer to "Adjusted EBITDA" below for a discussion of the limitations of adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most comparable U.S. GAAP measurement.


20


Adjusted EBITDA
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 U.S. GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;
adjusted EBITDA does not reflect interest or income tax payments that may represent a reduction in cash available to us; and
other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider adjusted EBITDA together with U.S. GAAP-based financial performance measures, including various cash flow metrics, net loss and our other U.S. GAAP results. The following table presents a reconciliation of net income (loss) to adjusted EBITDA for each of the periods indicated (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
1,729

 
$
(2,287
)
 
$
(1,938
)
 
$
(8,208
)
Adjustments:

 

 
 
 
 
Interest (income) expense, net
(205
)
 
(120
)
 
(599
)
 
(351
)
Income tax expense
213

 
188

 
572

 
435

Depreciation and amortization expense
1,664

 
1,550

 
4,806

 
4,509

Total adjustments
1,672

 
1,618

 
4,779

 
4,593

EBITDA
3,401

 
(669
)
 
2,841

 
(3,615
)
Stock-based compensation expense
801

 
2,974

 
7,000

 
8,023

Non-recurring severance and related costs
965

 

 
965

 

Adjusted EBITDA
$
5,167

 
$
2,305

 
$
10,806

 
$
4,408



21


RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
The following tables set forth our condensed consolidated statement of operations data and such data expressed as a percentage of revenues for each of the periods indicated.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Period-to-Period Change 
 
Period-to-Period Change 
 
2019
 
2018
 
2019
 
2018
 
Q3 2019 to Q3 2018
 
YTD 2019 to YTD 2018
(dollars in thousands)
 
 
 
 
Revenue
$
31,678

 
$
32,324

 
$
95,184

 
$
96,429

 
$
(646
)
(2.0
)%
 
$
(1,245
)
(1.3
)%
Cost of revenue
7,251

 
7,606

 
21,876

 
21,934

 
(355
)
(4.7
)
 
(58
)
(0.3
)
Gross profit
24,427

 
24,718

 
73,308

 
74,495

 
(291
)
(1.2
)
 
(1,187
)
(1.6
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
12,403

 
14,921

 
40,808

 
45,785

 
(2,518
)
(16.9
)
 
(4,977
)
(10.9
)
Research and development
4,803

 
5,350

 
15,161

 
16,989

 
(547
)
(10.2
)
 
(1,828
)
(10.8
)
General and administrative
5,440

 
6,688

 
19,272

 
19,847

 
(1,248
)
(18.7
)
 
(575
)
(2.9
)
Total operating expenses
22,646

 
26,959

 
75,241

 
82,621

 
(4,313
)
(16.0
)
 
(7,380
)
(8.9
)
Income (loss) from operations
1,781

 
(2,241
)
 
(1,933
)
 
(8,126
)
 
4,022

179.5

 
6,193

76.2

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
205

 
120

 
599

 
351

 
85

70.8

 
248

70.7

Other income (expense), net
(44
)
 
22

 
(32
)
 
2

 
(66
)
*

 
(34
)
*

Total other income (expense)
161

 
142

 
567

 
353

 
19

13.4

 
214

60.6

Income (loss) before income taxes
1,942

 
(2,099
)
 
(1,366
)
 
(7,773
)
 
4,041

192.5

 
6,407

82.4

Income tax expense
213

 
188

 
572

 
435

 
25

13.3

 
137

31.5

Net income (loss)
$
1,729

 
$
(2,287
)
 
$
(1,938
)
 
$
(8,208
)
 
$
4,016

175.6
 %
 
$
6,270

76.4
 %
* Not meaningful

22


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(as a percentage of revenue)

 
(as a percentage of revenue)

Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue
22.9

 
23.5

 
23.0

 
22.7

Gross profit
77.1

 
76.5

 
77.0

 
77.3

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
39.2

 
46.2

 
42.9

 
47.5

Research and development
15.2

 
16.6

 
15.9

 
17.6

General and administrative
17.2

 
20.7

 
20.2

 
20.6

Total operating expenses
71.5

 
83.4

 
79.0

 
85.7

Income (loss) from operations
5.6

 
(6.9
)
 
(2.0
)
 
(8.4
)
Other income (expense):
 
 
 
 
 
 
 
Interest income (expense), net
0.6

 
0.4

 
0.6

 
0.4

Other income (expense), net
(0.1
)
 
0.1

 
0.0

 
0.0

Total other income (expense)
0.5

 
0.4

 
0.6

 
0.4

Income (loss) before income taxes
6.1

 
(6.5
)
 
(1.4
)
 
(8.1
)
Income tax expense
0.7

 
0.6

 
0.6

 
0.5

Net income (loss)
5.5
 %
 
(7.1
)%
 
(2.0
)%
 
(8.5
)%
Depreciation and Amortization
Depreciation and amortization expense is included in the following line items in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Cost of revenue
$
1,046

 
$
919

 
$
2,947

 
$
2,671

Sales and marketing
205

 
224

 
607

 
658

Research and development
94

 
92

 
277

 
280

General and administrative
319

 
315

 
975

 
900

Total depreciation and amortization expense
$
1,664

 
$
1,550

 
$
4,806

 
$
4,509



23


REVENUE
chart-a9bed853deb25c6cb27.jpg



 
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 or advertising spend 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 or advertising spend processed through our platform in excess of the customer's specified minimum GMV or advertising spend amount. In most cases, the specified percentage of excess GMV or advertising spend 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 generally contain both fixed and variable pricing components, changes in GMV between periods do not translate directly or linearly into changes in our revenue. We use customized pricing structures for each of our customers depending upon the individual situation of the customer. For example, some customers may commit to a higher specified minimum GMV amount per month in exchange for a lower fixed percentage fee on that committed GMV. In addition, the percentage fee assessed on the variable GMV in excess of the committed minimum for each customer is typically higher than the fee on the fixed, committed portion. As a result, our overall revenue could increase or decrease even without any change in overall GMV between periods, depending on which customers generated the GMV. In addition, changes in GMV from month to month for any individual customer that are below the specified minimum amount would have no effect on our revenue from that customer, and each customer may alternate between being over the committed amount or under it from month to month. For these reasons, while GMV is an important qualitative and long-term directional indicator, we do not regard it as a useful quantitative measurement of our historic revenues or as a predictor of future revenues.

chart-6e4f353f00f05f428c2.jpg

 
We recognize fixed subscription fees and implementation fees ratably over the contract period beginning on the date the customer has access to the software. In determining the amount of revenue to be recognized, we apply the following steps:
Identify the promised services in the contract;
Determine whether the promised services are performance obligations, including whether they are distinct in the context of the contract;
Determine the transaction price;
Allocate the transaction price to the performance obligations based on estimated selling prices; and
Recognize revenue as we satisfy each performance obligation.
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.
In general, we invoice and recognize revenue from the variable portion of subscription fees in the period in which the related GMV or advertising spend is processed.


24


Comparison of Q3 2019 to Q3 2018
Revenue decreased by 2.0%, or $0.6 million, to $31.7 million for the three months ended September 30, 2019 compared with $32.3 million for the prior year period. The change was primarily due to a $0.8 million decline in variable revenue, primarily associated with strategic partners, some of which have moved partially to a fixed pricing model. This decrease was partially offset by a $0.1 million increase in fixed revenue, primarily from our Digital Marketing solution.
On a trailing three-month basis, average revenue per customer increased by 2.1% to $11,717 for the three months ended September 30, 2019 compared with $11,472 for the three months ended September 30, 2018. The increase in average revenue per customer was primarily driven by our continued focus on obtaining brands and large retailers as customers, which may represent a smaller number of total customers, but a potentially larger source of predictable or sustainable recurring revenue.
Comparison of YTD 2019 to YTD 2018
Revenue decreased by 1.3% or $1.2 million, to $95.2 million for the nine months ended September 30, 2019 compared with $96.4 million for the prior year period. The change was primarily due to a $3.8 million decline in variable revenue, primarily associated with strategic partners, some of which have moved partially to a fixed pricing model. This decrease was partially offset by a $2.5 million increase in fixed revenue from our Digital Marketing solution.
On a trailing nine-month basis, average revenue per customer increased by 2.1% to $34,736 for the nine months ended September 30, 2019 compared with $34,034 for the nine months ended September 30, 2018. The increase in average revenue per customer was primarily driven by our continued focus on obtaining brands and large retailers as customers, which may represent a smaller number of total customers, but a potentially larger source of predictable or sustainable recurring revenue.

COST OF REVENUE
chart-8eb986834ad05e389fa.jpg
 
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;
Co-location facility costs for our data centers;
Infrastructure maintenance costs; and
Fees we pay to credit card vendors in connection with our customers' payments to us.
Comparison of Q3 2019 to Q3 2018
Cost of revenue decreased by 4.7%, or $0.4 million, to $7.3 million for the three months ended September 30, 2019 compared with $7.6 million for the prior year period. The change was comprised primarily of (decreases) increases of:
$(0.6) million in compensation and employee-related costs, including stock-based compensation expense, due to reductions in headcount, primarily as a result of the 2019 Actions; partially offset by
$0.2 million in non-recurring severance and related costs in connection with the 2019 Actions.
Comparison of YTD 2019 to YTD 2018
Cost of revenue decreased by 0.3%, or $0.1 million, to $21.9 million for the nine months ended September 30, 2019 compared with $21.9 million for the prior year period. The change was comprised primarily of (decreases) increases of:
$(0.4) million in compensation and employee-related costs due to reductions in headcount, primarily as a result of the 2019 Actions; partially offset by
$0.2 million in non-recurring severance and related costs in connection with the 2019 Actions.

25


OPERATING EXPENSES
SALES AND MARKETING EXPENSE
chart-2f3014600dbe5504876.jpg
 
Sales and marketing expense consists primarily of:
Salaries and personnel-related costs for our sales and marketing and customer support employees, including benefits, bonuses and stock-based compensation;
Amortization of capitalized sales commissions and related incentive payments over their expected term of benefit;
Marketing, advertising and promotional event programs; and
Corporate communications.
Comparison of Q3 2019 to Q3 2018
Sales and marketing expense decreased by 16.9%, or $2.5 million, to $12.4 million for the three months ended September 30, 2019 compared with $14.9 million for the prior year period. The change was comprised primarily of (decreases) increases of:
$(2.6) million in compensation and employee-related costs, including stock-based compensation expense, due to reductions in headcount, primarily as a result of the 2019 Actions; partially offset by
$0.4 million in non-recurring severance and related costs in connection with the 2019 Actions.
Comparison of YTD 2019 to YTD 2018
Sales and marketing expense decreased by 10.9%, or $5.0 million, to $40.8 million for the nine months ended September 30, 2019 compared with $45.8 million for the prior year period. The change was comprised primarily of (decreases) increases of:
$(3.6) million in compensation and employee-related costs, including stock-based compensation expense, due to reductions in headcount, primarily as a result of the 2019 Actions; and
$(1.4) million in our promotional event programs, marketing and advertising and travel, primarily due to reductions in costs associated with our annual e-commerce conference; partially offset by
$0.4 million in non-recurring severance and related costs in connection with the 2019 Actions.
RESEARCH AND DEVELOPMENT EXPENSE
chart-b762aa1bb8ea56d9af0.jpg
 
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; and
Costs related to the development, quality assurance and testing of new technology and enhancement of our existing platform technology.

Comparison of Q3 2019 to Q3 2018
Research and development expense decreased by 10.2%, or $0.5 million, to $4.8 million for the three months ended September 30, 2019 compared with $5.4 million for the prior year period. The change was comprised primarily of
(decreases) increases of:

26


$(0.4) million in compensation and employee-related costs, mainly due to an increase in capitalized employee-related costs attributable to software development to support the enhancement of our product offerings; and
$(0.4) million in compensation and employee-related costs, including stock-based compensation expense, due to reductions in headcount, primarily as a result of the 2019 Actions; partially offset by
$0.1 million in non-recurring severance and related costs in connection with the 2019 Actions.

Comparison of YTD 2019 to YTD 2018
Research and development expense decreased by 10.8%, or $1.8 million, to $15.2 million for the nine months ended September 30, 2019 compared with $17.0 million for the prior year period. The change was comprised primarily of (decreases) increases of:
$(1.4) million in compensation and employee-related costs, mainly due to an increase in capitalized employee-related costs attributable to software development to support the enhancement of our product offerings; and
$(0.6) million in compensation and employee-related costs due to reductions in headcount, primarily as a result of the 2019 Actions; partially offset by
$0.1 million in non-recurring severance and related costs in connection with the 2019 Actions.
GENERAL AND ADMINISTRATIVE EXPENSE
chart-33a07e3feea75c15955.jpg

 
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;
Consulting and professional fees;
Insurance;
Bad debt expense; and
Costs associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies.
Comparison of Q3 2019 to Q3 2018
General and administrative expense decreased by 18.7%, or $1.2 million, to $5.4 million for the three months ended September 30, 2019 compared with $6.7 million for the prior year period. The change was comprised primarily of (decreases) increases of:
$(1.3) million in compensation and employee-related costs, including stock-based compensation expense, due to reductions in headcount, primarily as a result of the 2019 Actions; partially offset by
$0.2 million in non-recurring severance and related costs in connection with the 2019 Actions.
Comparison of YTD 2019 to YTD 2018
General and administrative expense decreased by 2.9%, or $0.6 million, to $19.3 million for the nine months ended September 30, 2019 compared with $19.8 million for the prior year period. The change was comprised primarily of (decreases) increases of:
$(0.6) million in compensation and employee-related costs, including stock-based compensation expense, due to reductions in headcount, primarily as a result of the 2019 Actions; and
$(0.5) million in professional fees in connection with the assessment by our independent auditors of the effectiveness of our internal control over financial reporting, which was required for the first time as part of our Annual Report on Form 10-K for fiscal 2018, and our implementation of the new revenue recognition standard in 2018; partially offset by
$0.5 million in executive severance costs in connection with changes in management; and
$0.2 million in non-recurring severance and related costs in connection with the 2019 Actions.

27


GROSS AND OPERATING MARGINS
chart-7855d5179f965607997.jpg    chart-e1fa06ea14725f9cb2b.jpg
Comparison of Q3 2019 to Q3 2018
Gross margin improved by 60 basis points to 77.1% during the three months ended September 30, 2019 compared with 76.5% for the prior year period as a result of the decrease in cost of revenue, noted above, which exceeded the rate of the decrease in revenue.
Operating margin improved by 1250 basis points to 5.6% during the three months ended September 30, 2019 compared with (6.9)% for the prior year period due to decreases in operating expenses and cost of revenue of 16.0% and 4.7%, respectively. Our improved operating margin was a result of the 2019 Actions and our continuing strategic efforts to scale our business operations while managing costs.
Comparison of YTD 2019 to YTD 2018
Gross margin declined by 30 basis points to 77.0% during the nine months ended September 30, 2019 compared with 77.3% for the prior year period as a result of the decrease in revenue which exceeded the decrease in cost of revenue, noted above.
Operating margin improved by 640 basis points to (2.0)% during the nine months ended September 30, 2019 compared with (8.4)% for the prior year period due to decreases in operating expenses and cost of revenue of 8.9% and 0.3%, respectively. Our improved operating margin was a result of the 2019 Actions and our continuing strategic efforts to scale our business operations while managing costs.


28


CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
 
 
 
 
 
 
 
 
 
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, and to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Except for our adoption of ASC 842, during the nine months ended September 30, 2019, there were no material changes to our critical accounting policies and use of estimates, which are disclosed in our audited consolidated financial statements for the year ended December 31, 2018 included in our Annual Report on Form 10-K for fiscal 2018. Refer to Note 5, "Leases," to our condensed consolidated financial statements included in this report for a description of changes to our lease accounting policies as a result of our adoption of ASC 842 as of January 1, 2019.
Recent Accounting Pronouncements
Refer to Note 2, "Significant Accounting Policies," to our condensed consolidated financial statements included in this report for a full description of recent accounting pronouncements.
LIQUIDITY AND CAPITAL RESOURCES
 
 
 
 
 
 
 
 
 
 
We derive our liquidity and operating capital primarily from cash flows from operations. Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities and our existing cash balances will be sufficient to meet our cash requirements for at least the next twelve months.
CASH FLOWS
chart-ab9b6f6f39d45aff910.jpgchart-a88e7cca691d500e831.jpgchart-00711d4be8205ad58bd.jpg
Free Cash Flow
We view free cash flow as an important financial metric as it demonstrates our ability to generate cash and can allow us to pursue opportunities that enhance shareholder value. Free cash flow is a non-U.S. GAAP financial measure that should be considered in addition to, not as a substitute for, measures of our financial performance prepared in accordance with U.S. GAAP. The following table presents a reconciliation of cash provided by operating activities, the most directly comparable U.S. GAAP measure, to free cash flow for each of the periods indicated (in thousands):

29


 
Nine Months Ended September 30,
 
2019
 
2018
Cash and cash equivalents provided by operating activities

$
7,514

 
$
1,102

Less: Purchases of property and equipment
(755
)
 
(1,586
)
Less: Payment of software development costs
(1,972
)
 
(579
)
Free cash flow
$
4,787

 
$
(1,063
)
Free cash flow increased by $5.9 million to $4.8 million for the nine months ended September 30, 2019 compared with $(1.1) million for the prior year period. The increase in free cash flow was a result of lower operating expenses, primarily related to the 2019 Actions, improved cash collections and changes in assets and liabilities, which are further described below.
Operating activities cash flows are largely driven by:
The amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business;
The amount and timing of customer payments;
The seasonality of our business, as noted above, which results in variations in the timing of invoicing and the receipt of payments from our customers;
In 2018, the amount we paid in settlement of a sales tax audit; and
In 2019, the amount we paid in non-recurring severance and related costs in connection with the 2019 Actions.
Investing activities cash flows are largely driven by:
Capitalized expenditures to create internally developed software and implement software purchased for internal use; and
Purchases of property and equipment to support the expansion of our infrastructure and acquisitions.
Financing activities cash flows are largely driven by:
Proceeds from the exercises of stock options;
Payments on finance lease obligations; and
Tax withholdings related to the net-share settlement of restricted stock units.
YTD 2019
Operating Activities
Our cash provided by operating activities consisted of a net loss of $1.9 million adjusted for certain non-cash items totaling $13.3 million, which consisted of stock-based compensation expense, depreciation and amortization expense, bad debt expense and other non-cash items.
The net decrease in cash resulting from changes in assets and liabilities of $(3.8) million primarily consisted of:
a $2.7 million increase in deferred contract costs consisting of sales commissions and a portion of other incentive compensation that is deferred and amortized to expense over the expected period of benefit;
a $2.3 million decrease in deferred revenue as a result of the timing of revenue recognition for managed-service contracts; and
a $2.1 million decrease in accounts payable and accrued expenses driven by the timing of payments to our vendors during the period and payments for certain customer arrangements for which we collect and remit monthly activity-based fees incurred for specific channels on behalf of our customers (referred to as "agency of record" activities). These decreases in cash were partially offset by increases in cash due to
a $2.3 million decrease in prepaid expenses and other assets, primarily related to agency of record receipts (we record the amounts due from customers as a result of these arrangements as other receivables); and
a $1.0 million decrease in accounts receivable as a result of increased cash collections during the period.
Investing Activities
Our cash used in investing activities consisted of:
$2.0 million of capitalized software development costs; and
$0.8 million of capital expenditures primarily related to the purchase of computer equipment.

30


Financing Activities
Our cash used in financing activities consisted of:
$2.4 million used for the repayment of finance leases; and
$2.1 million used for the payment of taxes related to the net-share settlement of restricted stock units; partially offset by
$1.0 million in cash received upon the exercise of stock options.
YTD 2018
Operating Activities
Our cash provided by operating activities consisted of a net loss of $8.2 million adjusted for certain non-cash items totaling $13.3 million, which consisted of stock-based compensation expense, depreciation and amortization expense, bad debt expense and other non-cash items.
The net decrease in cash resulting from changes in assets and liabilities of $(4.0) million primarily consisted of:
an $11.2 million decrease in accounts payable and accrued expenses driven by the timing of payments to our vendors during the period and a $1.0 million payment in 2018 to settle a sales tax audit;
a $5.3 million increase in deferred contract costs consisting of sales commissions and a portion of other incentive compensation that is deferred and amortized to expense over the expected period of benefit; and
a $2.5 million net decrease in deferred revenue as a result of our adoption of ASC 606 and the timing of revenue recognition for managed-service contracts. These decreases in cash were partially offset by increases in cash due to
a $10.6 million decrease in prepaid expenses and other assets, primarily related to agency of record receipts (we record the amounts due from customers as a result of these arrangements as other receivables); and
a $4.5 million decrease in accounts receivable as a result of increased cash collections during the period.
Investing Activities
Our cash used in investing activities consisted of:
$1.6 million of capital expenditures primarily related to the purchase of computer equipment; and
$0.6 million of capitalized software development costs.
Financing Activities
Our cash used in financing activities consisted of:
$2.1 million used for the repayment of finance leases; and
$2.1 million used for the payment of taxes related to the net-share settlement of restricted stock units; partially offset by
$1.1 million in cash received upon the exercise of stock options.
Off-Balance Sheet Arrangements
As of September 30, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Securities and Exchange Commission, or SEC, Regulation S-K.

31



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
 
 
 
 
 
 
 
Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We are exposed to market risk related to changes in foreign currency exchange rates. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we may enter into exchange rate hedging arrangements to manage foreign currency exchange risk. During the nine months ended September 30, 2019, there were no material changes to our market risks from those disclosed in our Annual Report on Form 10-K for fiscal 2018.
ITEM 4. CONTROLS AND PROCEDURES
 
 
 
 
 
 
 
 
 
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